News Column

BABCOCK & WILCOX CO - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 26, 2014

Statements we make in the following discussion, which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the headings "Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors" in Items 1 and 1A of Part I of this report. GENERAL In general, we operate in capital-intensive industries and rely on large contracts for a substantial amount of our revenues. We are currently exploring growth strategies across our segments through acquisitions to expand and complement our existing businesses. As we pursue these opportunities, we expect they would be funded by cash on hand, external financing, including debt, equity or some combination thereof. We operate in five business segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. Prior to 2013, we reported four segments: Power Generation, Nuclear Operations, Technical Services and Nuclear Energy. Our small modular nuclear reactor business previously included in our Nuclear Energy segment is now being reported as a separate segment, mPower. The change in our reportable segments had no impact on our previously reported consolidated results of operations, financial condition or cash flows.



Outlook

Power Generation

We expect the backlog of our Power Generation segment of approximately $2.1 billion at December 31, 2013 to produce revenues of approximately $0.8 billion in 2014, not including any change orders or new contracts that may be awarded during the year. Through this segment, we are actively bidding on and, in some cases, beginning preliminary work on projects that we expect will be awarded to us in 2014 subject to successful contract negotiations. These projects are not currently reflected in backlog. Our Power Generation segment's overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. As such, customer demand is heavily affected by the variations in customers' business cycles, costs of fuel and by the overall economies of the countries in which they operate. The Environmental Protection Agency ("EPA") issued proposed final environmental regulations concerning Mercury and Air Toxics Standards and rules concerning implementation of the Cross State Air Pollution Rule ("CSAPR") in 2011. On December 30, 2011 the U.S. Court of Appeals for the District of Columbia Circuit (the "Court") stayed the CSAPR rules and reinstated EPA regulations from 2005. Oral arguments were held in April 2012. In August 2012, the Court ruled CSAPR, which set stricter limits on sulfur dioxide and nitrogen oxide emissions from power plants in 28 states, violated the Clean Air Act. The ruling leaves CSAPR's predecessor, the Clean Air Interstate Rule, in place. In October 2012, the EPA appealed the Court's decision, and in June 2013, the U.S. Supreme Court determined that it would consider the appeal during its next term, and a decision is expected sometime in 2014. While MATS remains in effect, we believe it could take one to two years for any regulatory response to develop in response to the Court's ruling on CSAPR. Uncertainty concerning environmental final rules and regulations could impact our Power Generation segment. For example, instead of adding environmental equipment, some of our customers may decide to close down their least efficient coal-fired boilers. 42 -------------------------------------------------------------------------------- Future decisions to retire boilers would impact our business in a variety of ways, including the servicing and retrofitting of operating power plants. The need to replace retired generating capacity with cleaner technologies would also create business opportunities for us. To generate energy while minimizing the emission of greenhouse gasses, we are actively researching and developing a range of products, including:



• non-carbon technologies, such as nuclear power plants and solar receivers

for concentrating solar power plants; • low-carbon technologies that enable clean use of fossil fuels, such as



oxy-fuel combustion and regenerable solvent absorption technologies to

scrub carbon dioxide from exhaust gases; and



• carbon-neutral technologies, such as biomass-fueled boilers and gasifiers,

which can use a renewable resource where the growing biomass re-absorbs

the carbon dioxide emitted during energy production.

Changes and the uncertainties described above regarding the regulatory landscape, low natural gas prices and continued uncertainty in the economy have dampened the medium-term expected rate of growth of our environmental business within this segment and will likely result in a near-term decline in environmental revenues. Utilities continue to operate coal-fired plants that require the environmental equipment and services that our Power Generation segment provides. However, we now expect that the timeframe over which such projects will be spread will be longer than our original timeframe of three to four years. Subject to further clarification of environmental regulations in the U.S., we now expect the current environmental cycle to extend through the end of the decade, during which we anticipate a more competitive landscape in the near to medium term. Nuclear Operations We expect the backlog of our Nuclear Operations segment of approximately $2.4 billion at December 31, 2013 to produce revenues of approximately $0.9 billion in 2014, not including any change orders or new contracts that may be awarded during the year. Awards expected to be received in the first quarter of 2014 totaling approximately $700 million, which were delayed from the fourth quarter of 2013 due to events associated with the government shutdown and budget approval delays, will generate additional revenues in 2014. The revenues of our Nuclear Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, we are a significant participant in the defense industry and have not been negatively impacted by sequestration or federal budget reductions to date. We believe many of our programs are well aligned with national defense and other strategic priorities, and we supply high-end equipment for submarines and aircraft carriers for the U.S. Navy. However, it is possible that reductions in federal government spending and sequestration could have an adverse impact on the operating results and cash flows of our Nuclear Operations and Technical Services segments in the future.



Technical Services

A significant portion of this segment's operations are conducted through joint ventures, which typically earn fees and we account for them following the equity method of accounting. See Note 3 to our consolidated financial statements included in this report for financial information on our equity method investments. As a result, this segment reports minimal backlog and revenues. With our specialized capabilities of full life-cycle management of special nuclear materials, facilities and technologies, our Technical Services segment is well-positioned to continue to participate in the continuing cleanup, operation and management of the nuclear sites and weapons complexes maintained by the DOE and the U.K. Nuclear Decommissioning Authority. Contracts for two projects under B&W led management teams, Y-12 and Pantex, ended in 2010 but were extended while the NNSA conducted a contract re-compete process. In addition, the NNSA determined it would be advantageous to combine the management of Y-12 and Pantex into a single management contract. On January 8, 2013, we were notified that our joint venture, Nuclear Production Partners, LLC ("NP2"), was not selected to lead the NNSA's combined Management and Operating contract for the Y-12 National Security Complex and Pantex Plant. Since then, we have filed multiple protests with the GAO in relation to the selection decision. On November 1, 2013 we received notification that NP2 was not selected by NNSA in the re-affirmed procurement decision. On November 20, 2013, we 43

-------------------------------------------------------------------------------- filed our third and latest protest with the GAO encompassing concerns identified previously and through information received during the NNSA debriefing process. We will continue to manage these sites under existing contracts through our joint ventures and during any transition period, which has yet to be determined.



This segment produced $58.2 million of operating income in 2013. We expect operating income attributable to this segment to be lower in 2014 based on the new ownership fee structure for the combined Y-12/Pantex contract or the eventual loss of the contract resulting from an unsuccessful protest.

Nuclear Energy

We expect the backlog of our Nuclear Energy segment of approximately $142 million at December 31, 2013 to produce revenues of approximately $92 million in 2014, not including any change orders or new contracts that may be awarded during the year. The revenues in this segment primarily depend on the demand and competitiveness of nuclear energy. The activity of this segment depends on capital expenditures and maintenance spending of nuclear utilities. A significant portion of this segment's activities is generated from the Canadian nuclear market, which could cause variability in our financial results depending on the level of maintenance and capital spending of Canadian utilities in a given year. mPower The development, general and administrative and capital costs to develop and commercialize our B&W mPower™ technology will require a substantial amount of investment over a period of years, and the funding requirements may vary significantly from period to period. We intend to continue with our plan to seek third party funding and/or participation to pursue the development and commercialization of this technology. On November 13, 2013, we announced that we have accelerated our search for additional equity partner(s) with intentions of the additional equity partner(s) collectively owning a majority equity interest in GmP. If such transaction is consummated, GmP may no longer be a consolidated subsidiary of B&W. We have been selected to receive funding and have signed a Cooperative Agreement with the DOE under its Funding Program, which is expected to provide financial assistance initially totaling at least $150 million for SMR design engineering and licensing activities supporting a planned commercial operating date for the first mPower Plant by 2022. The Funding Program is a cost-sharing award that requires us to use the DOE funds to cover first-of-a-kind engineering costs associated with SMR design certification and licensing efforts. The DOE will provide cost reimbursement for up to 50%, subject to the overall size of the award, of qualified expenditures incurred from April 1, 2013 to March 31, 2018. The DOE has authorized $99.3 million of funding for this award program as of December 31, 2013. Congress has allocated and designated an additional $85 million from the 2014 budget to the Cooperative Agreement; however, the DOE has not yet obligated those funds to us. The Cooperative Agreement also provides for reimbursement of pre-award costs incurred from October 1, 2012 to March 31, 2013. During the year ended December 31, 2013, we recognized $78.4 million of the cost-sharing award, including $21.5 million of pre-award cost reimbursement, as a reduction of research and development costs on our consolidated statements of income. Of the total pre-award cost reimbursement, $9.7 million relates to research and development costs incurred in the year ended December 31, 2012.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe the following are our most critical accounting policies that we apply in the preparation of our financial statements. These policies require our most difficult, subjective and complex judgments, often as a result of the need to make estimates of matters that are inherently uncertain. 44 -------------------------------------------------------------------------------- Contracts and Revenue Recognition. We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours or a cost-to-cost method, as applicable to the product or activity involved. We recognize estimated contract revenue and resulting income based on costs incurred to date as a percentage of total estimated costs. Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for materials and major third-party subcontractors, if it appears that such exclusion would result in a more meaningful measurement of actual contract progress and resulting periodic allocation of income. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. We routinely review estimates related to our contracts, and revisions to profitability are reflected in the quarterly and annual earnings we report. In the years ended December 31, 2013, 2012 and 2011, we recognized net favorable changes in estimate related to long-term contracts accounted for on the percentage-of-completion basis that increased operating income by approximately $21.9 million, $93.1 million and $33.1 million, respectively. The 2013 amount includes contract losses totaling $35.6 million for additional estimated costs to complete a project in our Power Generation segment. This is in addition to approximately $16.9 million of contract losses, net of claims, recorded on this project in 2012. The 2011 amount includes approximately $61.8 million ($50.7 million in our Nuclear Energy segment and $11.1 in our Nuclear Operations segment) to complete certain projects attributable to unfavorable changes in estimate due to productivity and scheduling issues. The projects in 2011 are now complete. For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical except to assure that no loss will be incurred as deferred profit recognition contracts. We did not enter into any contracts that we have accounted for as deferred profit recognition contracts during 2013, 2012 or 2011. Our policy is to account for fixed-price contracts under the completed-contract method if we believe that we are unable to reasonably forecast cost to complete at start-up. For example, if we have no experience in performing the type of work on a particular project and are unable to develop reasonably dependable estimates of total costs to complete, we would follow the completed-contract method of accounting for such projects. Generally, our management's policy is not to enter into fixed-price contracts without an accurate estimate of cost to complete. However, it is possible that in the time between contract execution and the start of work on a project, we could lose confidence in our ability to forecast cost to complete based on intervening events, including, but not limited to, experience on similar projects, civil unrest, strikes and volatility in our expected costs. In such a situation, we would use the completed-contract method of accounting for that project. We did not enter into any contracts that we have accounted for under the completed-contract method during 2013, 2012 or 2011.



For parts orders and certain aftermarket services activities, we recognize revenues as goods are delivered and work is performed.

Although we continually strive to improve our ability to estimate our contract costs and profitability, adjustments to overall contract costs due to unforeseen events could be significant in future periods. We recognize claims for extra work or for changes in scope of work in contract revenues, to the extent of costs incurred, when we believe collection is probable and can be reasonably estimated. We recognize income from contract change orders or claims when formally agreed with the customer. We regularly assess the collectability of contract revenues and receivables from customers. 45 -------------------------------------------------------------------------------- Property, Plant and Equipment. We carry our property, plant and equipment at depreciated cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business segments and result in future asset impairments. We depreciate our property, plant and equipment using the straight-line method, over estimated economic useful lives of eight to 33 years for buildings and three to 28 years for machinery and equipment. We expense the costs of maintenance, repairs and renewals, which do not materially prolong the useful life of an asset, as we incur them. Investments in Unconsolidated Affiliates. We use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50%, unless significant economic or governance considerations indicate that we are unable to exert significant influence, in which case the cost method is used. The equity method is also used for affiliates in which our investment ownership is greater than 50% but we do not have a controlling interest. Currently, all of our material investments in affiliates that are not included in our consolidated results are recorded using the equity method. Affiliates in which our investment ownership is less than 20% and where we are unable to exert significant influence are carried at cost. Self-Insurance. We have a wholly owned insurance subsidiary that provides employer's liability, general and automotive liability and workers' compensation insurance and, from time to time, builder's risk insurance within certain limits to our companies. We may also have business reasons in the future to have our insurance subsidiary accept other risks that we cannot or do not wish to transfer to outside insurance companies. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience and trend lines, projected growth patterns, inflation and exposure forecasts. The assumptions we make with respect to each of these factors represent our judgment as to the most probable cumulative impact of each factor on our future obligations. Our calculation of self-insurance liabilities requires us to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. We engage the services of an actuarial firm to assist us in the calculation of our liabilities for self-insurance. While the actual outcome of insured claims could differ significantly from estimated amounts, these loss estimates and accruals recorded in our financial statements for claims have historically been reasonable in light of the actual amount of claims paid. Provisions for exposure to self-insurance claims and the related payments of claims have historically not had a material adverse impact on our consolidated financial position, results of operations and cash flows, and we do not expect these provisions to have a material impact on our self-insurance programs in the future. Pension Plans and Postretirement Benefits. We estimate income or expense related to our pension and postretirement benefit plans based on actuarial assumptions, including assumptions regarding discount rates and expected returns on plan assets. We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. Based on historical data, market projections and discussions with our actuary, we determine our expected return on plan assets based on the expected long-term rate of return on our plan assets and the market-related value of our plan assets. Our pension plan assets can include assets that are difficult to value. Changes in these assumptions can result in significant changes in our estimated pension income or expense and our consolidated financial condition. We revise our assumptions on an annual basis based upon changes in current interest rates, return on plan assets and the underlying demographics of our workforce. These assumptions are reasonably likely to change in future periods and may have a material impact on future earnings. We immediately recognize actuarial gains and losses into earnings in the fourth quarter of each year as a component of net periodic benefit cost. 46

-------------------------------------------------------------------------------- Loss Contingencies. We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such probable loss is not reasonably estimable. We are currently involved in some significant litigation, as discussed in Note 11 to our consolidated financial statements included in this report. We have accrued our estimates of the probable losses associated with these matters. However, our losses are typically resolved over long periods of time and are often difficult to estimate due to the possibility of multiple actions by third parties. Therefore, it is possible that future earnings could be affected by changes in our estimates related to these matters. Goodwill. In accordance with FASB Topic Intangibles - Goodwill and Other, we perform periodic testing of goodwill for impairment. We may elect to perform a qualitative test when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform the two-step quantitative impairment test. In all other circumstances, we utilize the two-step quantitative impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. Each year, we evaluate goodwill at each reporting unit to assess recoverability and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. We determined that both the income and market valuation approaches provide inputs into the estimate of the fair value of our reporting units, which would be considered by market participants. Under the income valuation approach, we employ a discounted cash flow model to estimate the fair value of each reporting unit. This model requires the use of significant estimates and assumptions regarding future revenues, costs, margins, capital expenditures, changes in working capital, terminal year growth rate and cost of capital. Our cash flow models are based on our forecasted results for the applicable reporting units. Actual results could differ from our projections. Under the market valuation approach, we employ the guideline publicly traded company method, which indicates the fair value of the equity of each reporting unit by comparing it to publicly traded companies in similar lines of business. After identifying and selecting guideline companies, we analyze their business and financial profiles for relative similarity. Factors such as size, growth, risk and profitability are analyzed and compared to each of our reporting units. We have completed our annual review of goodwill for each of our reporting units for the year ended December 31, 2013, which indicated that we had no impairment of goodwill. The fair value of our reporting units was substantially in excess of carrying value, with the exception of our Nuclear Energy reporting unit. The fair value of the Nuclear Energy reporting unit exceeded its carrying value by approximately 22% based on our step one quantitative test. The Nuclear Energy reporting unit had goodwill totaling $14.0 million at December 31, 2013. Asset Retirement Obligations and Environmental Clean-up Costs. We accrue for future decommissioning of our nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a requirement of our licenses from the NRC. In accordance with the FASB Topic Asset Retirement and Environmental Obligations, we record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. In estimating fair value, we use present value of cash flows expected to be incurred in settling our obligations. To the extent possible, we perform a marketplace assessment of the cost and timing of performing the retirement activities. We apply a credit-adjusted risk-free interest rate to our expected cash flows in our determination of fair value. When we initially record such a liability, we capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of a liability, we will settle the obligation for its recorded amount or incur a gain or loss. This topic applies to environmental liabilities associated with assets that we currently operate and are obligated to remove from service. For environmental liabilities associated with assets that we no longer operate, we have accrued amounts based on the estimated costs of clean-up activities, net of the anticipated effect of any applicable cost-sharing arrangements. We adjust the estimated costs as further information develops or circumstances change. An exception to this accounting treatment relates to the work we perform for two facilities for which the U.S. Government is obligated to pay substantially all the decommissioning costs. 47 -------------------------------------------------------------------------------- Income Taxes. Income tax expense for federal, foreign, state and local income taxes are calculated on pre-tax income based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess deferred taxes and the adequacy of the valuation allowance on a quarterly basis. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of provision for income taxes on our consolidated statements of income. Warranty. We accrue estimated expense included in cost of operations on our consolidated statements of income to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions when we expect the actual warranty costs to significantly differ from the accrued estimates. Factors that impact our estimate of warranty costs include prior history of warranty claims and our estimates of future costs of materials and labor. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. Stock-Based Compensation. We account for stock-based compensation in accordance with FASB Topic Compensation - Stock Compensation. Under the fair value recognition provisions of this statement, the cost of employee services received in exchange for an award of equity instruments is measured at the grant date based on the fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. We use a Black-Scholes model to determine the fair value of certain share-based awards, such as stock options and stock appreciation rights. The determination of the fair value of a share-based payment award using an option-pricing model requires the input of highly subjective assumptions, such as the expected life of the award and stock price volatility. For liability-classified awards, such as cash-settled restricted stock units and performance units, fair values are determined at grant date using the closing price of our common stock and are remeasured at the end of each reporting period through the date of settlement. Business Combinations. We account for acquisitions in accordance with FASB Topic Business Combinations. This topic broadens the fair value measurements and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations. It also provides disclosure requirements to assist users of the financial statements in evaluating the nature and financial effects of business combinations.



For further discussion of recently adopted accounting standards, see Note 1 to our consolidated financial statements included in this report.

YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012

The Babcock & Wilcox Company

Consolidated revenues decreased 0.7%, or $22.2 million, to $3.27 billion in the year ended December 31, 2013 compared to $3.29 billion in 2012. Our Power Generation segment revenues decreased $18.3 million, or 1.0%, primarily attributable to decreased revenue in our new build steam generation systems and new build environmental equipment businesses, partially offset by increases in our aftermarket services business. Our Nuclear Operations segment experienced a $69.7 million, or 6.3%, increase in revenues, primarily attributable to increased activity in the manufacturing of nuclear components for U.S. Government programs and naval nuclear fuel and downblending activities. Our Technical Services segment revenues decreased $3.6 million, or 3.3%. In addition, our Nuclear Energy segment revenues decreased $41.8 million, or 12.8%, primarily attributable to decreased activity in our nuclear services and nuclear equipment businesses associated with the completion of several large contracts that were ongoing in 2012. 48

-------------------------------------------------------------------------------- Consolidated operating income increased $189.8 million to $536.4 million in the year ended December 31, 2013 from $346.6 million in 2012. Operating income includes actuarial gains and losses ("MTM charges") related to our pension and postretirement plans, which reflected a fourth quarter non-cash gain (loss) of $222.7 million and $(31.9) million in 2013 and 2012, respectively. In addition, operating income for the year ended December 31, 2013 includes special charges for restructuring activities totaling $39.6 million related to the Global Competitiveness Initiative ("GCI") we launched to enhance competitiveness, better position B&W for growth, and improve profitability. Excluding MTM charges and GCI charges, operating income of our reportable segments and unallocated corporate expenses decreased $25.3 million for the year ended December 31, 2013 compared to 2012. We experienced decreased operating income in our Power Generation segment of $27.6 million primarily due to additional estimated costs to complete a new build steam generation systems project experiencing unforeseen worksite conditions and fuel specification issues. Operating income in our Nuclear Operations segment increased by $11.6 million associated with the revenue growth discussed above. The Technical Services segment operating income decreased by $1.5 million, primarily due to lower award fees earned on its NNSA projects. The Nuclear Energy segment experienced a decrease in operating income totaling $42.0 million associated with the decline in revenues noted above, lower margins from project mix, and an $18.1 million project settlement realized in the prior period. We experienced increased operating income in our mPower segment totaling $32.2 million as the $78.4 million recognized under the DOE Cooperative Agreement more than offset increased research and development activities related to the continued development of the B&W mPower™ reactor.



Power Generation

Revenues decreased 1.0%, or $18.3 million, to $1,767.7 million in the year ended December 31, 2013, compared to $1,786.0 million in 2012. The net decrease is primarily attributable to a $56.9 million decrease in our new build steam generation systems business due to a lower level of activity on waste-to-energy and industrial boiler projects. We also experienced a $12.3 million decrease in our new build environmental equipment business principally driven by lower levels of engineering, procurement and construction activities as projects related to the previously enacted environmental rules and regulations near completion and uncertainties continue regarding the ultimate outcome of environmental regulations. These decreases were partially offset by an increase in revenues of $43.6 million in our aftermarket services business as increases in boiler-related construction and maintenance services more than offset a decrease in environmental retrofit activity. Operating income decreased $27.6 million to $155.8 million in the year ended December 31, 2013 compared to $183.4 million in 2012, due to contract losses totaling $35.6 million recorded for additional estimated costs to complete a new build steam generation systems project experiencing unforeseen worksite conditions and fuel specification issues. These losses are in addition to $16.9 million of contract losses, net of claims, recorded for this project during the fourth quarter of 2012. In addition to the lower revenues discussed above, we also experienced more competitive profit margins and a lower level of net favorable project close-outs compared to the prior period. These decreases in income were partially offset by decreased overhead costs and a $12.5 million reduction in selling, general and administrative expenses due to ongoing cost reduction initiatives. Nuclear Operations Revenues increased 6.3%, or $69.7 million, to $1,167.7 million in the year ended December 31, 2013 compared to $1,098.0 million in the corresponding period of 2012, primarily attributable to increased activity related to the manufacturing of nuclear components for U.S. Government programs totaling $55.9 million and increased activity in our naval nuclear fuel and downblending activities totaling $13.8 million as compared to the corresponding period of 2012. Operating income increased $11.6 million to $237.9 million in the year ended December 31, 2013 compared to $226.3 million in the corresponding period in 2012 primarily attributable to increased activity related to the manufacturing of nuclear components for U.S. Government programs totaling $9.6 million and increased activity in our naval nuclear fuel and downblending activities totaling $2.0 million. 49



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Technical Services

Revenues decreased 3.3%, or $3.6 million, to $104.3 million in the year ended December 31, 2013 compared to $107.9 million for the corresponding period of 2012, primarily attributable to lower reimbursable costs at our Naval Reactor decommissioning and decontamination project. Operating income decreased $1.5 million, to $58.2 million in the year ended December 31, 2013 compared to $59.7 million for the corresponding period of 2012. This decrease is principally due to net lower fees for NNSA projects totaling $2.7 million and lower income associated with a restructured contract totaling $3.7 million. These amounts were offset by lower selling, general and administrative expenses of $4.8 million compared to 2012 primarily due to timing of new proposals resulting in lower business development expenses.



Nuclear Energy

Revenues decreased 12.8%, or $41.8 million, to $283.9 million in the year ended December 31, 2013 compared to $325.7 million in the corresponding period of 2012. The decrease in revenues is primarily attributable to decreased activity in our nuclear services and nuclear equipment businesses of $95.8 million associated with the completion of several large contracts that were ongoing in the prior period and $18.4 million of revenue recorded in the prior year related to the settlement agreement reached with Energy Northwest related to a condenser replacement project at Columbia Generating Station in 2011. This decline in revenue was partially offset by increased project activities associated with an ongoing long-term project in our nuclear projects business. Operating income decreased $42.0 million to $8.6 million in the year ended December 31, 2013 compared to $50.6 million in the corresponding period of 2012. This decrease is primarily attributable to the decline in revenues noted above, lower margins due to unfavorable project mix compared to the prior period, and $18.1 million (net of related expenses) recognized in 2012 associated with the Energy Northwest settlement agreement discussed above. These decreases were partially offset by $7.1 million of favorable warranty experience.



mPower

Operating income increased $32.2 million to a loss of $81.3 million in the year ended December 31, 2013 compared to a loss of $113.5 million in the corresponding period of 2012. Research and development activities related to the continued development of the B&W mPower™ reactor increased by $40.8 million, offset by the recognition of $78.4 million of the cost-sharing award from the DOE under the Cooperative Agreement as a reduction of research and development costs. The cost-sharing amount recognized includes $21.5 million of pre-award cost reimbursement for the period from October 2012 through March 2013. Selling, general, and administrative expenses increased by $5.0 million compared to the corresponding period of 2012 primarily due to increased business development activity. Corporate Unallocated corporate expenses decreased $2.0 million to $26.0 million in the year ended December 31, 2013, as compared to $28.0 million in 2012, due to GCI cost savings, partially offset by increased corporate development costs.



Other Income Statement Items

Other-net decreased $7.4 million to a loss of $17.5 million in the year ended December 31, 2013, as compared to a loss of $24.9 million for the corresponding period in 2012, primarily due to the impairment of the remainder of our USEC investment in 2013 totaling $19.1 million compared to a $27.0 million impairment of our USEC investment in 2012. 50



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Net Loss Attributable to Noncontrolling Interest

Net Loss Attributable to Noncontrolling Interest increased $3.4 million in the year ended December 31, 2013 compared to 2012, primarily attributable to noncontrolling interest recognition of losses incurred in connection with B&W mPowerTM reactor development efforts.



Provision for Income Taxes

For the year ended December 31, 2013, our provision for income taxes increased $82.7 million to $184.6 million, while income before provision for income taxes increased $197.8 million to $517.2 million. Our effective tax rate was approximately 35.7% for 2013, as compared to 31.9% for 2012. The increase in our effective tax rate is primarily related to the significant increase in income before provision for income taxes attributable to our mark to market pension adjustments and the effect that had on the overall jurisdictional mix of our pre-tax earnings in 2013 as compared to 2012, as well as the recognition of previously unrecognized tax benefits associated with the lapse in 2012 of applicable statutes of limitation. In addition, our provision for income taxes in 2013 was benefited by the American Taxpayer Relief Act of 2012, enacted on January 2, 2013 which retroactively extended the U.S. research & development tax credit for two years, offset by a change in our assertion with respect to some of our undistributed foreign earnings. Income before provision for income taxes, provision for income taxes and effective tax rates for our U.S. and non-U.S. jurisdictions were as shown below: Income before Provision for Provision for Income Taxes Income Taxes Effective Tax Rate 2013 2012 2013 2012 2013 2012 (In thousands) (In thousands) United States $ 399,263$ 222,840$ 153,404$ 78,868 38.4 % 35.4 % Non-United States 117,910 96,578 31,179 22,993 26.4 % 23.8 % Total $ 517,173$ 319,418$ 184,583$ 101,861 35.7 % 31.9 % We are subject to U.S. federal income tax at a statutory rate of 35% on our U.S. operations plus the applicable state income taxes on our profitable U.S. subsidiaries. Our non-U.S. earnings are subject to tax at various tax rates and under various tax regimes, including deemed profits tax regimes.



See Note 5 to our consolidated financial statements included in this report for further information on income taxes.

YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011

The Babcock & Wilcox Company

Consolidated revenues increased 11.5%, or $339.3 million, to $3.29 billion in the year ended December 31, 2012 compared to $2.95 billion in 2011. Our Power Generation segment revenues increased $244.5 million, or 15.9%, primarily attributable to increased revenue in our new build environmental equipment and new build steam generation systems businesses, partially offset by decreases in our aftermarket services business. Our Nuclear Operations segment experienced a $54.8 million, or 5.3%, increase in revenues, primarily attributable to increased activity in the manufacturing of nuclear components for U.S. Government programs and increased volume in our naval nuclear fuel and downblending activities. Our Technical Services segment revenues decreased $11.8 million, or 9.9%. In addition, our Nuclear Energy segment revenues increased $4.2 million, or 1.3%. 51

-------------------------------------------------------------------------------- Consolidated operating income increased $250.9 million to $346.6 million in the year ended December 31, 2012 from $95.7 million in 2011. Operating income includes actuarial gains and losses related to our pension and postretirement plans, which were fourth quarter non-cash losses totaling $31.9 million and $215.4 million in 2012 and 2011, respectively. Excluding these MTM charges, operating income of our reportable segments and unallocated corporate expenses increased $67.4 million for the year ended December 31, 2012 compared to 2011. We experienced increased operating income in our Nuclear Operations segment associated with the revenue growth discussed above totaling $31.9 million. Operating income for our Nuclear Energy segment increased $71.4 million, primarily attributable to project costs to complete the condenser replacement project at Columbia Generating Station recognized during 2011 that did not reoccur in 2012. These increases were partially offset by decreased operating income in our Technical Services segment totaling $10.2 million, primarily due to reduced award fees earned in 2012 and increased corporate expenses which totaled $7.6 million. We also experienced decreased operating income in our mPower segment totaling $17.4 million due to increased research and development activities related to the continued development of the B&W mPower™ reactor. Operating income in our Power Generation segment was relatively unchanged in 2012. Power Generation Revenues increased 15.9%, or $244.5 million, to $1,786.0 million in the year ended December 31, 2012, compared to $1,541.5 million in 2011, primarily attributable to a $210.7 million increase in our new build environmental equipment business and a $94.4 million increase in our new build steam generation systems business. In our new build environmental equipment business, the increase in revenues was principally driven by ongoing engineering, procurement and construction activities on projects as a result of new environmental rules and regulations. In our new build steam generation systems business, the main driver for this increase in revenues was a significant increase in activity on waste-to-energy and biomass boiler projects. These increases were partially offset by lower revenues of $53.1 million in our aftermarket services business primarily due to lower construction activities on boiler retrofit service projects and boiler replacement parts sales to existing power plants largely as a result of reduced demand from coal-fired power plants due to lower natural gas prices. The aftermarket services business did however experience an increase in aftermarket environmental parts, services and construction activities as customers invested to keep their existing environmental equipment in compliance with new environmental rules and regulations. Operating income was relatively unchanged at $183.4 million in the year ended December 31, 2012 compared to $184.0 million in 2011. The increases in revenues discussed above were partially offset by more competitive profit margins from the early market cycle of environmental projects along with a lower level of project improvements on project closeouts than experienced in the prior year period. We also experienced a decrease in equity in income of investees totaling $8.4 million, primarily attributable to lower production and project activities at our joint venture in China. In addition, we incurred increased research and development expenses totaling $1.6 million for the period in 2012 as compared to the same period in the prior year. Further, we experienced impairment charges totaling $3.2 million in 2012 and gains on asset disposals totaling $3.5 million in 2011. Nuclear Operations Revenues increased 5.3%, or $54.8 million, to $1,098.0 million in the year ended December 31, 2012 compared to $1,043.2 million in the corresponding period of 2011, primarily attributable to increased activity in the manufacturing of nuclear components for U.S. Government programs totaling $36.2 million and increased volume in our naval nuclear fuel and downblending activities totaling $18.6 million as compared to the corresponding period of 2011. Operating income increased $31.9 million to $226.3 million in the year ended December 31, 2012 compared to $194.4 million in the corresponding period in 2011, primarily due to improved contract performance for the manufacturing of nuclear components for U.S. Government programs totaling $23.4 million. Our naval nuclear fuel and downblending operating income also increased $8.5 million compared to 2011. Included in operating income for 2011 is a $10.9 million gain resulting from a favorable settlement with the previous owner of NFS. Contract performance associated with naval nuclear fuel and downblending activities improved $19.4 million compared to 2011. 52



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Technical Services

Revenues decreased 9.9%, or $11.8 million, to $107.9 million in the year ended December 31, 2012 compared to $119.7 million for the corresponding period of 2011. These decreases are primarily attributable to a decrease in our specialty manufacturing work scope associated with the American Centrifuge program totaling $8.9 million and a decrease in our international contract support services associated with the Fukushima event totaling $3.5 million, partially offset by an increase in environmental remediation services. Operating income decreased $10.2 million to $59.7 million in the year ended December 31, 2012 compared to $69.9 million in the corresponding period of 2011. This decrease is principally due to decreased award fees earned on our NNSA management contracts totaling $7.9 million, primarily attributable to our Oak Ridge, Tennessee and Los Alamos, New Mexico sites. We also experienced a decrease in operating income totaling $3.8 million associated with the decreased revenues from the American Centrifuge program discussed above and increased selling, general and administrative expenses totaling $3.3 million associated with higher bid and proposal activity. These amounts were offset by increased environmental remediation services income totaling $1.4 million and lower research and development expenses totaling $1.2 million.



Nuclear Energy

Revenues increased 1.3%, or $4.2 million, to $325.7 million in the year ended December 31, 2012 compared to $321.5 million in the corresponding period of 2011, primarily attributable to increased activity in our nuclear services and nuclear equipment businesses of $18.5 million principally due to timing of customer outage projects and execution of our long-term equipment manufacturing contracts. This revenue increase was partially offset by lower revenue in our nuclear projects business due to the completion of a major project in the prior year. For the year ended December 31, 2012, revenues in our nuclear projects business also included $18.4 million from the May 2012 claims settlement agreement reached with Energy Northwest related to a condenser replacement project at the Columbia Generating Station in 2011. Operating income increased $71.4 million to income of $50.6 million in the year ended December 31, 2012 compared to a loss of $20.8 million in the corresponding period of 2011, primarily due to $50.7 million of project costs to complete the condenser replacement project at Columbia Generating Station recognized during the year ended December 31, 2011 and $18.1 million income (net of related expenses) recognized in the year ended December 31, 2012 associated with the May 2012 settlement discussed above. In addition, operating income in our nuclear services and nuclear equipment businesses increased by $3.6 million associated with the increased revenue discussed above.



mPower

Operating income decreased $17.4 million to a loss of $113.5 million in the year ended December 31, 2012 compared to a loss of $96.1 million in the corresponding period of 2011. Research and development activities related to the continued development of the B&W mPower™ reactor increased by $12.1 million, including a $1.4 million increase in non-cash in-kind research and development services contributed by GmP's minority partner. Selling, general, and administrative expenses increased by $5.0 million compared to the corresponding period of 2011.



Corporate

Unallocated corporate expenses increased $7.6 million to $28.0 million in the year ended December 31, 2012, as compared to $20.4 million in 2011, mainly due to higher information technology costs, outside consultant costs and a decrease in operating results in our captive insurance company in 2012 compared to 2011.



Other Income Statement Items

Other - net decreased $26.9 million to a loss of $24.9 million in the year ended December 31, 2012, as compared to income of $2.0 million for the corresponding period in 2011, primarily due to the impairment of our USEC investment totaling $27.0 million, which we recognized in the three months ended September 30, 2012. 53



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Net Loss Attributable to Noncontrolling Interest

Net Loss Attributable to Noncontrolling Interest increased $2.4 million in the year ended December 31, 2012 compared to 2011, primarily attributable to noncontrolling interest recognition of losses incurred in connection with the B&W mPower™ reactor development efforts.



Provision for Income Taxes

For the year ended December 31, 2012, our provision for income taxes increased $78.0 million to $101.9 million, while income before provision for income taxes increased $224.9 million to $319.4 million. Our effective tax rate was approximately 31.9% for 2012, as compared to 25.3% for 2011. The increase in our effective tax rate was primarily attributable to a significant shift in jurisdictional mix of pre-tax earnings in 2012 as compared to 2011, and the temporary expiration in 2012 of the U.S. research & development tax credit, offset in part by a reduction of reserves for uncertain tax positions. Income before provision for income taxes, provision for income taxes and effective tax rates for our U.S. and non-U.S. jurisdictions were as shown below: Income before Provision for Provision for Income Taxes Income Taxes Effective Tax Rate 2012 2011 2012 2011 2012 2011 (In thousands) (In thousands) United States $ 222,840$ 39,417$ 78,868$ 17,172 35.4 % 43.6 % Non-United States 96,578 55,081 22,993 6,708 23.8 % 12.2 % Total $ 319,418$ 94,498$ 101,861$ 23,880 31.9 % 25.3 % We are subject to U.S. federal income tax at a statutory rate of 35% on our U.S. operations plus the applicable state income taxes on our profitable U.S. subsidiaries. Our non-U.S. earnings are subject to tax at various tax rates and under various tax regimes, including deemed profits tax regimes. The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. Some provisions of this law provide for retroactive changes to the 2012 tax year, which we did not consider in determining our effective tax rate for 2012. The impact of these retroactive changes was recorded in the first quarter of 2013.



See Note 5 to our consolidated financial statements included in this report for further information on income taxes.

ADJUSTED RESULTS OF OPERATIONS

In the results of operations discussion above, we have disclosed operating income changes excluding MTM charges and GCI charges which have been recorded in accordance with generally accepted accounting principles. We disclose this non-GAAP financial measure because we believe it provides an enhanced understanding of the relationship between our reported results of operations and our segment operating performance.



EFFECTS OF INFLATION AND CHANGING PRICES

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, using historical U.S. dollar accounting ("historical cost"). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the U.S. dollar, especially during times of significant and continued inflation. 54

-------------------------------------------------------------------------------- In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. However, there can be no assurance we will be able to cover all changes in cost using this strategy.



LIQUIDITY AND CAPITAL RESOURCES

Our overall liquidity position, which we generally define as our unrestricted cash and investments plus amounts available for borrowings under our credit facility, remained strong in 2013. Our liquidity position at December 31, 2013 decreased by approximately $120.3 million to $898.2 million from $1,018.5 million at December 31, 2012, mainly due to factors discussed below and due to the changes in our cash flows from operating, investing and financing activities. We experienced net cash generated from operations in each of the years ended December 31, 2013, 2012 and 2011. Typically, the fourth quarter has been the period of highest cash flows from operating activities, primarily attributable to payments received from the U.S. Government on accounts receivable retainages, cash dividends received from our joint ventures and strong working capital performance.



Credit Facility

On June 8, 2012, B&W entered into an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of lenders and letter of credit issuers, and Bank of America, N.A., as administrative agent, which amended and restated our previous Credit Agreement dated May 3, 2010. The Credit Agreement provides for revolving credit borrowings and issuances of letters of credit in an aggregate outstanding amount of up to $700 million, and is scheduled to mature June 8, 2017. The proceeds of the Credit Agreement are available for working capital needs and other general corporate purposes. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitment thereunder, subject to an aggregate maximum of $1.0 billion for all revolving loan and letter of credit commitments. The Credit Agreement is guaranteed by substantially all of B&W's wholly owned domestic subsidiaries. Obligations under the Credit Agreement are secured by first-priority liens on certain assets owned by B&W and the guarantors (other than subsidiaries comprising our Nuclear Operations and Technical Services segments). If the corporate family rating of B&W and its subsidiaries from Moody's is Baa3 or better (with a stable outlook or better), the corporate rating of B&W and its subsidiaries from Standard & Poor's is BBB- or better (with a stable outlook or better), and other conditions are met, the liens securing obligations under the Credit Agreement will be released, subject to reinstatement upon the terms set forth in the Credit Agreement. The Credit Agreement requires only interest payments on a periodic basis until maturity. We may prepay all loans under the Credit Agreement at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The Credit Agreement contains financial covenants relating to leverage and interest coverage and includes covenants that restrict, among other things, the level of debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt and mergers. At December 31, 2013, we were in compliance with all of the covenants set forth in the Credit Agreement. A comparison of the key financial covenants and current compliance at December 31, 2013 is as follows: Required Actual Less than Maximum leverage ratio 2.75 to 1.0 0.08 to 1.0 Greater than Minimum interest coverage ratio 4.0 to1.0 87.84 to 1.0 55

-------------------------------------------------------------------------------- Loans outstanding under the Credit Agreement bear interest at our option at either the Eurocurrency rate plus a margin ranging from 1.25% to 2.25% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the one month Eurocurrency rate plus 1.0%, or the administrative agent's prime rate) plus a margin ranging from 0.25% to 1.25% per year. The applicable margin for revolving loans varies depending on the credit ratings of the Credit Agreement. Under the Credit Agreement, we are charged a commitment fee on the unused portions of the Credit Agreement and that fee varies between 0.225% and 0.350% per year depending on the credit ratings of the Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.25% and 2.25% per year with respect to the amount of each financial letter of credit issued under the Credit Agreement and a letter of credit fee of between 0.80% and 1.25% per year with respect to the amount of each performance letter of credit issued under the Credit Agreement, in each case depending on the credit ratings of the Credit Agreement. We also pay customary fronting fees and other fees and expenses in connection with the issuance of letters of credit under the Credit Agreement. In connection with entering into the Credit Agreement, we paid upfront fees to the lenders thereunder, and arrangement and other fees to the arrangers and agents of the Credit Agreement. At December 31, 2013, there were no borrowings outstanding and letters of credit issued under the Credit Agreement totaled $163.0 million, resulting in $537.0 million available for borrowings or to meet letter of credit requirements. The applicable interest rate at December 31, 2013 under this facility was 3.75% per year for revolving loans. Based on the current credit ratings of the Credit Agreement, the applicable margin for Eurocurrency loans is 1.50%, the applicable margin for base rate loans is 0.50%, the letter of credit fee for financial letters of credit is 1.50%, the letter of credit fee for performance letters of credit is 0.875%, and the commitment fee for unused portions of the Credit Agreement is 0.25%. The Credit Agreement does not have a floor for the base rate or the Eurocurrency rate. The Credit Agreement generally includes customary events of default for a secured credit facility. If any default occurs under the Credit Agreement, or if we are unable to make any of the representations and warranties in the Credit Agreement, we will be unable to borrow funds or have letters of credit issued under the Credit Agreement. Other Arrangements Certain subsidiaries within our Power Generation segment have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees as of December 31, 2013 was $96.4 million. We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is more than adequate to support our existing project requirements for the next twelve months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of December 31, 2013, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $405.8 million. OTHER Foreign Operations Included in our total unrestricted cash and cash equivalents is approximately $198.0 million or 57.2% related to foreign operations and subsidiaries. In general, these resources are not available to fund our U.S. operations unless the funds are repatriated to the U.S., which would expose us to taxes we presently have not accrued in our results of operations. We presently have no plans to repatriate these funds to the U.S. as the liquidity generated by our U.S. operations is sufficient to meet the cash requirements of our U.S. operations. 56



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Cash, Cash Equivalents, Restricted Cash and Investments

In the aggregate, our cash and cash equivalents, restricted cash and cash equivalents and investments decreased by approximately $130.3 million to $410.0 million at December 31, 2013 from $540.3 million at December 31, 2012, primarily due to the items discussed below. Our working capital increased by approximately $68.4 million to $510.2 million at December 31, 2013 from $441.8 million at December 31, 2012, attributable primarily to a reduction in advance billings on contracts offset by a decline in investments. Our net cash provided by operating activities was approximately $137.9 million in the year ended December 31, 2013 compared to $184.9 million in the year ended December 31, 2012. This decrease was primarily attributable to changes in net contracts in progress and advance billings due to timing of project billings, offset by lower pension contributions. Our net cash used in investing activities decreased by approximately $131.5 million to cash provided by investing activities of approximately $20.1 million in the year ended December 31, 2013 from cash used in investing activities of approximately $111.4 million in the year ended December 31, 2012. This decrease in net cash used in investing activities was primarily attributable to sales and maturities of investments whose proceeds were utilized for corporate purposes rather than reinvested in available-for-sale securities. Our net cash used in financing activities increased by approximately $82.9 million to $190.9 million in the year ended December 31, 2013 as compared to $108.0 million in the year ended December 31, 2012. This increase in net cash used in financing activities was primarily attributable to the repurchase of common shares and the full year payment of dividends in 2013. At December 31, 2013, we had restricted cash and cash equivalents totaling $48.7 million, $3.9 million of which was held in restricted foreign cash accounts, $2.8 million of which was held for future decommissioning of facilities (which we include in other assets on our consolidated balance sheets), and $42.0 million of which was held to meet reinsurance reserve requirements of our captive insurer (in lieu of long-term investments).



At December 31, 2013, we had short-term and long-term investments with a fair value of $15.2 million. Our investment portfolio consists primarily of investments in government obligations and other highly liquid money market instruments.

Our investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of tax, reported as a component of other comprehensive income. Our net unrealized gain/loss on investments is currently in an unrealized gain position totaling approximately $0.2 million at December 31, 2013. At December 31, 2012, we had unrealized gains on our investments totaling approximately $0.6 million. Based on our analysis of these investments, we believe that none of our available-for-sale securities were permanently impaired as of December 31, 2013. Based on our liquidity position, we believe we have sufficient cash and letter of credit and borrowing capacity to fund our operating requirements for at least the next twelve months. 57



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CONTRACTUAL OBLIGATIONS

Our cash requirements as of December 31, 2013 under current contractual obligations were as follows: Less than 1-3 3-5 After Total 1 Year Years Years 5 Years (In thousands) Long-term debt principal (a) $ 4,896$ 4,671$ 225 $ - $ - Lease payments $ 39,449$ 10,814$ 13,787$ 9,243$ 5,605



We expect cash requirements totaling approximately $66.6 million for contributions to our pension plans in 2014. In addition, we anticipate cash requirements totaling approximately $9.4 million for contributions to our other postretirement benefit plans in 2014.

(a) Interest payments on these borrowings as of December 31, 2013 are not significant.

Our contingent commitments under letters of credit, bank guarantees and surety bonds currently outstanding expire as follows:

Less than 1-3 3-5 Total 1 Year Years Years Thereafter (In thousands) $665,188$ 210,821$ 391,155$ 62,556$ 656


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