Nov 8 - Standard & Poor’s Ratings Services said today that its ratings and outlook on The Babcock & Wilcox Co. (B&W; BB+/Stable/--) are not affected by several recent announcements. The company has initiated a quarterly dividend (about $40 million annually) and has received authorization from its board of directors to repurchase up to $250 million of the company’s common stock. B&W plans to buyback approximately $100 million worth of stock by the end of first-quarter 2013 through market share repurchases. B&W’s credit measures are solid for the rating, with debt to EBITDA of 1.6x and funds from operations to total adjusted debt of about 53%.
As of Sept. 30, 2012, the company had sizable unrestricted cash and equivalents of about $340 million and more than $500 million of capacity under its $700 million revolving credit facility, which it uses for letters of credit. We don’t expect B&W to generate significant free operating cash flow in 2012, largely because of working capital swings resulting, in part, from changes in net contracts in progress and advance billings. However, B&W has elected to use the pension liability valuation option provided in the MAP-21 legislation to significantly lower required cash contributions to the pension plan for the next few years. The ratings are also not immediately affected by the company’s announcement of a $27 million noncash impairment charge in the third quarter of 2012 to reduce the book value of its investment in USEC Inc. (CCC/Negative/--) preferred stock. This noncash charge did not affect the company’s cash flow, and we had not assumed this investment would be a meaningful contributor to the company’s operating performance over the next year. The company has stated that its revaluation of investment in USEC does not reduce the company’s commitment to the American Centrifuge Program. B&W has also announced that effective Dec. 31, 2012, the company will change the accounting for its pension and postretirement plans to employ mark-to-market accounting. We do not anticipate this will impact our pension adjustments to B&W’s reported debt and cash flows. We already eliminate the amortization components of pension costs from our income statement measures when adjusting for pensions and other postretirement employee benefits (see Postretirement Employee Benefits/Deferred Compensation in “2008 Corporate Criteria: Ratios And Adjustments,” published April 15, 2008, on RatingsDirect).