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McDermott International (NYSE:MDR)

Q1 2010 Earnings Call

May 11, 2010 10:00 am ET

Executives

Michael Taff - Chief Financial Officer and Senior Vice President

John Fees - Chief Executive Officer and Director

John Roueche - Vice President of Investor Relations & Corporate Communications

Analysts

Jamie Cook - Crédit Suisse

Tahira Afzal - KeyBanc Capital Markets Inc.

Roger Read - Natixis Bleichroeder Inc.

John Rogers - D.A. Davidson & Co.

Andy Kaplowitz - Barclays Capital

Will Gabrielski - Broadpoint AmTech, Inc.

Graham Mattison - Lazard Capital Markets LLC

Martin Malloy - Johnson Rice & Company, L.L.C.

Steven Fisher - UBS Investment Bank

Operator

Ladies and gentlemen, thank you for standing by, and welcome to McDermott International's First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Jay Roueche, McDermott's Vice President of Investor Relations. Please go ahead.

John Roueche

Thank you, Crystal, and good morning, everyone. We appreciate you joining us today to discuss McDermott's first quarter 2010 financial results, which we reported yesterday afternoon. Joining me on the call this morning are John Fees, McDermott's Chief Executive Officer; and Mike Taff, our Senior Vice President and Chief Financial Officer.

Before I turn the call over, let me remind you that this event is being recorded, and a replay will be available for a limited time on our website. In addition, some of our comments this morning will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties and reflect management's views only as of May 11, 2010. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, included in our Form 10-K for the year ended December 31, 2009, and our recently filed Form Q [10-Q] for a discussion of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. And please note, except to the extent required by applicable law, McDermott undertakes no obligation to update any of these forward-looking statements going forward.

In addition, I'd also like to note that certain numbers we'll be presenting today will be made on a non-GAAP basis. Further information regarding these non-GAAP figures including our presentation and reconciliation are included in yesterday's earnings release, which is available on the Investor Relations page at www.mcdermott.com.

I'll now turn the call over to Mike to discuss our results for the 2010 first quarter.

Michael Taff

Thanks, Jay, and good morning, everyone. Starting with the income statement. Total revenues were almost $1.2 billion, down about $300 million from a year ago on a consolidated basis. While Government Operations was essentially flat, the Offshore Oil & Gas Construction and Power Generation Systems segments were down about $190 million and $120 million, respectively.

Consolidated operating income was almost $92 million in the 2010 first quarter compared to about $131 million a year ago. However, in the 2010 period, McDermott incurred about $33 million of spin-off and other identified pretax costs that are included in our GAAP amounts. Since the spin-off-related costs generally don't receive a tax benefit, the after-tax effect of these charges was about $29.5 million or $0.13 per share.

Breaking it down by segment, Offshore Oil & Gas Construction at $82.8 million saw an 84% increase in segment income compared to a year ago. Power Generation Systems saw the most substantial reduction in segment income, down almost $49 million compared to the 2009 first quarter. Government Operations was down about $10 million but was essentially flat excluding the 2010 charges at our Nuclear Fuel Services subsidiary. John will discuss those operations and issues in greater detail shortly.

Below operating income, our results improved with a $5 million swing in the other income and expense line compared to the 2009 quarter, primarily as a result of a lower amount of non-cash foreign currency translation losses compared to the prior year's quarter.

With a strong performance in our foreign operations and lower results in the U.S., our overall consolidated tax rate declined from about 35.9% in 2009 to 22.4% in 2010. All in, net income prior to the income attributable to non-controlling interests fell only $10 million. However, income attributable to our joint venture partners worsened by about $7.5 million.

Taking it all to the bottom line, McDermott reported net income was $60 million or $0.26 per diluted share in the 2010 first quarter. Adding back the charges related to the spin-off and NFS' shutdown, non-GAAP EPS for 2010 was $0.38 per share. These figures compare to $77.7 million or $0.33 per share in the 2009 quarter. Overall, we believe the first quarter of 2010 will be the low point of the year on a consolidated segment income basis. The story is somewhat different in each segment. So let me review each in a little more detail.

Offshore Oil & Gas Construction reported a quarter with solid year-over-year growth in segment income, coming in at $82.8 million. This is a sizable increase over the $45 million quarter reported in 2009. Improvements in the Middle East was a primary driver, aided by better performance in the Asia-Pacific region.

During the quarter, we were able to record income on the projects we've historically referred to as zero margin as change orders and cost savings were realized on about $160 million of revenues. The lower revenues we experienced this quarter are expected to grow in future periods this year as we're forecasting almost $2 billion from the segment's backlog to be realized in the remainder of the year. All in all, we delivered very strong performance in this segment during the 2010 quarter and believe we're on a good pace for another good year.

Government Operations segment income improved sequentially for the second quarter in a row but was still down compared to the same period a year ago. Generally, our operations performed very well, and the equity income line item improved compared to the 2009 first quarter. The reason for the year-over-year decline is, again, primarily attributed to our NFS operations. We recognized about $9 million of expense related to the implementation of safety measures and the associated temporary shutdown of its Tennessee facility.

The good news is that the major operations of the facility are back up and running, and the down-blending activities are forecasted to come back online in June. So it's our expectation that the issues we've endured in NFS the last few quarters are now largely behind us. But as always, we'll continue to operate with a safety-first mentality in all our endeavors.

Turning to Power Generation Systems segment, which was down sequentially and year-over-year. It was the lowest level of profitability since we reconsolidated B&W in 2006. We've talked for some time about the challenges in the Power business. So our year-over-year decline off a strong 2009 results is not unexpected, but it was magnified by the higher R&D costs this quarter. The amount of the decline we experienced in the quarter, however, was substantial. The good news, as John will elaborate on, is that we believe this is a trough level for our Power business and that earnings will improve from here on out.

Turning to the balance sheet. Our liquidity ended the quarter with about $1.1 billion in cash equivalents, restricted stock and investments on hand. I am pleased that last week, we closed the two new credit facilities for B&W and J. Ray. So this pre-spin item is now complete. We now have two facilities with revolving credit capacity of $700 million for B&W and $900 million for J. Ray. So McDermott's financial position remains an overall strength to the company. And from a financing standpoint, we are ready for the transaction.

That pretty well covers our financials for the first quarter of 2010. I'll now turn the call over for John for his remarks on the operational and business environment.

John Fees

Thanks for the summary, Mike, and thank you all for joining us today. Before I begin my commentary on the quarter, I just want to ask that everyone keep the people in the Gulf Coast region in your thoughts and prayers as we are doing at McDermott. The tragic accident that occurred in the Mississippi Canyon and the challenges facing our colleagues at BP, Transocean and others in the offshore marketplace are an unfortunate reminders of significant undertaking required to meet the world's energies needs. McDermott and all participants in the offshore industry express condolences to the families who lost loved ones, and our support for those whose lives have been and will be impacted by this event.

Now turning to our results. As Mike mentioned, we anticipated that the first quarter would be the low point of the year, excluding transaction-related expenses. And we continue to believe that we will see improvement from here. I'm particularly pleased with the progress that we've made on the upcoming spin-off of our subsidiary, The Babcock & Wilcox Company and how those subsidiaries are preparing to be standalone entities.

We've accelerated our time schedule and are now expecting to complete the transaction as early as June 30, 2010, pending certain government approvals. Later in the call, I'll elaborate in greater detail on our efforts in this transaction. Although the spin-off is taking significant time and effort from many of our senior global employees, we continue to focus on our customers' projects and marketplaces that we serve, and delivering value for our shareholders remains our top priority.

Every quarter, I always remind investors not to get overly excited in either direction about 90-day results, since there are always sizable puts and takes. Once again, we had special charges that amounted to about $0.13 per share that muted the reported $0.26 per share. In total, we identified over $33 million of pretax expenses and as Mike indicated, $29.5 million after-tax in yesterday's press release. These charges were primarily related to spin-off expenses, as well as the NFS charges. And we're largely in line with the levels we discussed on the fourth quarter conference call.

The strength of the 2010 first quarter was that we saw a significant improvement in new awards. In fact, the total amount of new work booked in the period exceeded any quarter of 2009. And we saw consolidated backlog grow after four consecutive quarter decline. In total, we had new bookings approaching $2 billion this quarter for our book to bill, among those too. Probably and most importantly, we're increasing our workload for next year and beyond.

Looking at our segments, our Offshore Oil & Gas Construction operation delivered strong profitability from its revenues, and our Government Operations returned to more normalized levels. The Power Generation Systems segment had a very soft quarter in terms of revenues and earnings. However, we don't expect this to continue as we're beginning to see a turn in the marketplace.

So each of our segments serve a unique industry, and the market dynamics are different. Let me dive into some segment specifics. Starting with the Oil & Gas Construction segment. It generated most revenues and income of our three segments and started the year on a strong note.

As we previously discussed, revenues in this segment were expected to be light in the first quarter relative to our expectations for the rest of the year, and they were. The primary reason was the modest utilization of our vessels, which we expect to be better during the remaining quarters of 2010.

However, the earnings delivered by this segment were solid, including profit from jobs that were previously deemed zero-margin jobs. The profit was derived from recognition of the change orders and cost savings that we achieved. While there's still potential for liquidated damages, we continue to believe that the vast majority of that exposure is unlikely to be incurred. In the next few months, this project should exit our vernacular.

On it's other work, the J. Ray team also delivered. This was the first quarter in some time where every major project contributed positively to the segment's gross profit. The majority of our current workload remains in the Middle East and Asia-Pacific markets. And as our recent awards suggest, the Eastern Hemisphere continues to contain our most active markets.

With over $1.3 billion in new work, the first 90 days of 2010 was among the best level of quarterly bookings ever in this segment. While new awards drove growth and building backlog are always welcome, our focus remains to be selective on projects and avoid work that has limited margin or excessive risks.

Our other awards in the segment, Aramco's Safaniya project in the Middle East market was the largest. But we also received some nice work in Vietnam, including a standalone Subsea Project. And we were also pleased to finally sign Papa Terra as well. Last week, we also announced the good-sized award on the massive Gorgon Project, but that's a second quarter booking.

Looking out, I'll continue to suggest that you think of margins in the 10% to 12% margin range that we've discussed in the past, recognizing that quarter-to-quarter results can be lumpy. We believe 2010 will be one of the better years financially within this segment. Our efforts continue to remain on booking EPCI projects for future years and working to fill as many marine days as possible that we have available in the current year. And we are very gratified by our first quarter results in this segment.

Probably the biggest macro question for the Offshore business right now is what impact does the oil spill in the Gulf of Mexico have on our industry and our company specifically? While Wall Street and the media are very engaged right now, in realtime, the effect on the industry will be determined more in the future. And to everyone understands why the environmental safety measures on the drilling rig failed, no one can say with certainty what will change.

However, as a reminder, over 90% of our segment's backlog is in the Middle East and Asia-Pacific regions. These are generally shallow water, fixed platform and pipeline markets and would be what I consider very traditional work or what I described in the past as the big metal market in this industry. As a result, I don't really expect any negative material fallout from the American disaster on these types of projects.

However, as many of you know, we have been indicating for some time that we see the Gulf of Mexico coming back. There have been a number of significant discoveries that are now prudent reserves waiting for the infrastructure or fill development phase. And we continue to expect that these projects will move forward. Although, the timing is now probably more difficult to predict. Some customers may accelerate projects, others may delay. It just remains to be seen.

There are a lot of differing opinions in the industry recently, but what most people agree is that the near-term impact will be primarily on the activities before our work, mainly lease sales and exploratory drilling of deepwater prospects. This type of activity in American deepwater will likely take a pause until a full investigation of the incident is complete. And I believe everyone involved in the offshore market is supportive of any improvements that can be made to ensure this doesn't happen again. Since I spent a fair amount of time here, let me move quickly through the rest of our segments.

In Power Generation Systems, the segment had a low level of revenue and lower earnings in the 2010 first quarter. Virtually all areas of our Power business were challenged during the first three months of the year, but primarily the decline was due to a substantial drop off in revenues and profitability from large capital projects like new builds, environmental scrubbers and SCRs as compared to a year ago, reflecting the last two years of relatively few significant large awards.

While this quarter's operating income is not satisfactory for a recurring level, I'm also not letting a 90-day figure overly consuming. Since B&W will likely be a public company before McDermott reports earnings again, I will have clearly preferred that the segment's income was better for the first quarter.

But more importantly, to investors, I believe it will be better in the remaining quarters of this year. While my future at B&W will be as its Chairman of the Board, I can assure you that if our revenue stay at this level and if this income is the best we can deliver, then major changes will be pursued. However, I don't expect this to be our future outcome as significant management focus and commitment has already directed at improving these results.

The good news is we're beginning to see signs of improvement. During the quarter, even though we didn't see a large dollar level of new work, we were awarded a few larger projects, including a scrubber award in SCR and a waste energy project that comprise the $320 million or so of new bookings.

It's positive to see utilities again pursue some of these large capital projects. And we continue to believe that the administration, Congress and the EPA will be pursuing new legislation that should begin to accelerate environmental projects, which would spur growth in this area. While this regulation may also cause some old and dirties, as we call them, to cease operations, there may be a need to replace that generation source with an alternative. And we have a number of new irons in the new generation fire.

We continue to be pleased with the reception on the marketplace and by the regulators of our mPower modular nuclear reactor concept. We believe, even though this is likely a number of years before it becomes a significant revenue generator, that this alternative has the potential to be a significant option for electricity generation in the United States and worldwide. We have been particularly encouraged by the support that small modular reactors such as mPower have received from U.S. Secretary of Energy both in front of Congress, as well as his editorial recently in the Wall Street Journal.

Initially, we believe our waste-to-energy, biomass and solar technologies that we've discussed in the past also very much have a place in the power grid. Over the last 12 months, we've made significant strides in this area, and we expect some award activity later this year.

In pursuit of a changing power landscape, R&D remains a priority as evidenced by our almost $8 million increase compared to the 2009 first quarter. Niche bolt-on acquisitions are also important to our strategy during the current environment as we believe we can gain access to good businesses or technologies at attractive prices. As an example, during the first quarter, we signed a contract with GE Energy to acquire its Electrostatic Precipitator and Emissions Monitoring business units, which we believe is such an addition to our portfolio.

Beyond expanding our domestic options, we also intend to be competitive globally with our diversified fuel source offerings and utilizing our advanced technology to pave the way. In this regard, during the 2010 first quarter, we announced the formation of a joint venture with Thermax Limited to build highly efficient, subcritical and supercritical boilers and pulverizers for the Indian utility boiler market. This JV will license our technology.

All in all, despite an unusual couple of years in the power marketplace where modest bookings have added pressure on the business, I continue to believe that fundamentals for this segment remain very positive and promising over the long term. While it will now be more challenging to reach the low end of our 7% to 10% operating margin target on a full year basis for 2010, it continues to be our goal. And this range remains our objective for the business going forward.

B&W has evolved with the power industry over time. And we are fortunate to have a solid mix of recurring and project-oriented work. The combination of aging plants, a growing population and environmental focus and most importantly, signs of recovery and economic conditions, that's the domestic story and an improving footprint in new and emerging regions adds the international growth plan. I'm excited about all these opportunities looking ahead.

Finishing with the Government Operations segment, I think this business continues to head in the right direction. While segment income was up compared to the two preceding quarters, it was down compared to the 2009 first quarter, largely due to charges associated with the safety initiatives, the temporary shutdown that we discussed in last quarter's call. But we expect that incremental charges associated with the operation's suspension to be substantially behind us at this point. And importantly, we restarted the major component of the production line in 2010, and we expect the down-blending facility to be back up by the spin-off date.

And only -- we'll have much smaller commercial development line that remains to be restarted in this plant. We have the right team on it, and we expect improved results. As many of you who have followed us for some time already know, our Government Operations segment has a strong reputation for performance and has produced outstanding results in recent years.

Integrating and changing the culture at NFS proved to be a larger challenge than we originally anticipated, but I think we've made significant progress and are largely there. Recognize we have a safety-first culture, which has led to the quality and quantity of profitable work we enjoy in this segment.

Excluding the financial impact of these expenses, the rest of our Government Operations performed very well in the 2010 first quarter, and equity income improved from our sites compared to a year ago. Recently, the government's National Nuclear Security Administration, or NNSA, came out with this procurement approach for our two largest M&O sites, Y-12 and Pantex. In an effort to continue to enhance performance and reduce costs, two M&O contracts will be combined to one.

We are pleased with the NNSA's approach and believe that as the incumbent at both sites where we just received record fee awards in 2009 that we are well positioned for this rebid. Obviously, nothing is guaranteed, but we're excited about the opportunity. Even though the contracts at both sites officially expire in the fall of this year, considering the timing, it would not be uncommon to see the government issue temporary extensions during the procurement process, and I would expect it in this case.

During our nine-plus-year tenure at both sites, we're very proud of our accomplishments and the successes we have delivered, and we truly believe we continue to add value for our customer. After a year of uncharacteristic positive and negative swings in the Government Operations segment, particularly due to the assimilation of NFS and temporary suspension, I believe the remainder of this year will be a solid one for this segment.

Returning to a consolidated McDermott view as I mentioned earlier, we are making good progress on the spin-off of The Babcock & Wilcox Company. We have filed the initial Form 10 with the SEC in March, received the commission's comments and filed a revised version in April. We've been working with the IRS and are optimistic that the government entities will be able to support our timeline. We're all very pleased to be near the finishing line, although it remains just a busy time for us all around right now. When completed, we will have two well-capitalized companies that are pure plays in comparison to our current structure.

That pretty well completes my prepared remarks for our operations. In summary, overall, McDermott's quarter was what we believed to be in trough of the year and generally in line with our expectations. But we're expecting improvement from this level in the remaining quarters. We had an outstanding level of bookings and group backlog for the first time in the year. We still are focused on new work, but the need is really to increase visibility in 2011 and beyond. The balance sheet and liquidity position remain solid, and we expect to be two public companies by the next earnings call.

In preparation for the spin, we are planning to host an Analyst Day in New York on June 2. Brandon Bethards, the CEO of B&W and Steve Johnson, the CEO of J. Ray McDermott will join me and provide a comprehensive overview of the businesses. Other corporate staff will be there as well. If you are interested in attending in person, please contact Jay Roueche at our Investor Relations Department. Likewise, the presentations and webcasts associated with the event will also be available on our website.

In addition to our Analyst Day, we will also be attending a few sell-side conferences. Later this week, Mike and Jay will be in New York for the Macquarie's Industrial Conference and CLSA's Energy Forum. And following our Analyst Day, we will be participating in Credit Suisse E&C Conference in New York on June 3. If you had any questions regarding the quarter or the company after today's call, I encourage you to call Jay Roueche.

And with that, operator, we'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Andrew Kaplowitz with Barclays Capital.

Andy Kaplowitz - Barclays Capital

So if you look at the Power business and I looked at the last few quarters, revenue really hasn't dropped off much but your margins have. So John, I guess the question is, I mean, the Chinese JV provided half of your income in the quarter. I know you said things will get better, but can you give us any more clarity on what's going on? Is it that you're holding engineers, for instance, in anticipation of work and it's not coming? Are there any problem projects that we need to worry about? Is there any more color that you can give us?

John Fees

Yes, Andy, if you take a look at the business, the business is performing on the work that it has reasonably well. We really have no problem projects. We have no underlying issues inside the business. It's just that the mix of the volume that we had in this particular quarter was lower than what we would have anticipated, particularly in the higher margin areas. And in addition to that, we did not have -- because of timing, any close-out, any major projects in this quarter -- and typically we have one or two or few, even at these levels, happening on a quarterly basis, which typically brings some amount of operating income to bear on the business. So a combination of all those factors led more to where we are. And really, any inherent issues with the business, I'm fairly happy that we're starting to see somewhat of an emerging buying trend on the part of utilities. We were able to secure a few good awards in the quarter. Looking out over the next, let's call it, 18 or so-odd months, we've got a target list of typical what we do in all of our businesses, of opportunities that we want to go ahead and pursue, a target list looks like about $7.5 billion worth of projects over 18 months. I think the real question is how much of that is going to come to market in the environment we're in. We've seen a lot over the last couple of years of projects being delayed and some projects being canceled. It looks like there's a little bit of a firming up, but right now, I would not predict that all of that $7.5 billion would come all the way to market in the next 18 months. And so how much of that moves and how much of that comes forward is going to be critical as we look out. But we are encouraged from what we saw in the first quarter. We've got the team on it. And I think we're structured from a cost standpoint to continue to execute well in the future. So right now, I'm not pessimistic about where we are in the business. I would have certainly liked for the mix of things and how the first quarter turned out to be stronger. But I'm not disappointed about the prospects for the future at this point.

Andy Kaplowitz - Barclays Capital

So John, can I characterize what you're saying as the margins in 2Q should be better than the margin in Q1 because the volume of work should start to get better, is that fair?

John Fees

I would anticipate that. Again, what we said in the prepared remarks is that we really haven't given up on the 7% to 10% range for the year. Obviously, we have to have better quarters in the first quarter to be able to produce that. But I would guide everybody to think more towards the lower end of that range, and we got some works to do to be able to get there.

Andy Kaplowitz - Barclays Capital

And then this is sort of the opposite question, if you look at the J. Ray margins in the quarter x the pipeline projects where you got good profitability on them in the quarter. You had margins that were a little bit higher than your 10% to 12% range, and your utilization was low in the quarter. So as we go forward, can we see as utilization rises, assuming nothing goes wrong, maybe a little better margins than that 10% to 12% range for the business?

John Fees

Andy, I'm still hanging in there, the 10% to 12% range for the business. I think it's a reasonable expectation. As we've seen in evidence of some of the circumstances in the Offshore Oil & Gas business that not everything is fundamentally in your control. I think the guys are doing a great job of executing right now. I really believe that we've kept our discipline in that area. We have not chased low-margin work in a down market. We have pursued projects that we feel good about and comfortable with, that we're going to be able to get that blend of projects and that's going to produce that 10% to 12% run rate margin. We still have our mind wrapped around that idea. Obviously, when you have a quarter like we've just had where you get some nice change orders and some nice settlements associated with it, that's going to bolster that. But recognize, too, that, that's inherent in the business as well. I mean, we see change orders and contingency going to profit as an ongoing month-to-month, day-to-day activity in the business. So if that can brighten, it's probably going to come more from that area than it's going to be how we really assimilate the projects, how we look at the family of projects that we're bidding, and what margin range that we think were really driving the business in. If you ask me that, it's going to be we're driving in that 10% to 12% range.

Andy Kaplowitz - Barclays Capital

Could we get more change orders from the pipeline projects or should we not fully expect that any more?

Michael Taff

Hey, Andy, it's Mike. I think there's potential there. We're still working with those customers. And so we got some LBs [lay barge] booked on those projects as well. So there could be some benefit. I mean, to my view on those projects, going out is the only direction they're going to do is they're going to brighten. I think we've got our bases covered. We feel good about the cost we have, and the remaining part of those contacts, which is, I think, we've only got about $120 million left in revenues to burn on those. And so from a color standpoint, we're in good shape. And I think it can only brighten from here on out.

Operator

Your next question comes from the line of Jamie Cook with Crédit Suisse.

Jamie Cook - Crédit Suisse

I guess, my first question again on the margins on the J. Ray side, can you comment to whether you saw any benefits potentially from material costs in the quarter, and whether that helped your J. Ray margins at all? And then John, I guess the thing I struggle with, with the split-up coming a couple of months from now, is your confidence that this is the best decision for investors, given the diversification of McDermott when you think about J. Ray relative to the Power business has really helped us, especially over the past several quarters when you think about just the cyclicality of the business or the execution issues that we had had? So sort of how you think about that in context of splitting the company up. And then my last question, just any update on Y-12 and Pantex and when that will go out for rebid?

John Fees

Let's try to take those in sequence. First, on the material side, we do have projects in our backlog where we bid them at a time, where we can take advantage of the procurement side of those projects and enhance or brighten those projects. We're certainly working on that. I would not characterize that as 100% consistent within the mix. But we did do have a few jobs where there are good opportunities, and the team is working to try to take advantage of that. Again, we've got to characterize that within the framework also of we're putting together not individual projects but a family of projects as we pursue our businesses around the world to try to drive ourselves in that 10% to 12% range. And so that's inherent and consistent with that philosophy. But we do have that in a few selected projects probably more substantially than in other places. I would say that, that opportunity probably diminishes a little bit in current environment. So it's more backward looking in the backlog.

Michael Taff

And, Jamie, I would add, I mean, I think from the margins, I think what John stated in his prepared remarks is really just great execution in this project when you look at the family of projects that we have out there. And that's really the way that we manage our business, not on one, each individual projects but the whole portfolio. And you had every one of those large projects producing positive margins. I mean, so we had some of these quarters, if you recall back in 2007's where we just had good execution across the board. And as John said, that's really the key to J. Ray's business, is execution and risk management. And when we can do both of those in a given quarter and plus absent changed orders and harvests of contingencies, that's where you see us exceeding that 10% to 12% range.

John Fees

Jamie, relative to the split, there are a number of drivers that work in our minds as the board made its decision to proceed forward with the split. Obviously, we had the issue with FAR and the inverted company issue offset a government contracting, but we also really feel that after the split, we think both companies will continue to blossom and continue to move forward. We've got them extremely well capitalized. And we've got some of the premier names, reputations and technologies in the business in each side of the company to be able to carry it forward. I think relative to investor diversification, I think investors can certainly own both stocks and diversify the current situation of McDermott by holding shares in both stocks or could make other decisions. And so I think it ultimately gives the investors some other level of flexibility relative to how they want to manage their holdings and work more in one, both, or some more pure play type of approach relative to their investments. And so again, I really think there's other fundamentals as well driving that, and I think investors certainly have the current opportunity in the future.

Jamie Cook - Crédit Suisse

But do you think when we think about the two businesses on a stand-alone basis, let's say they're split, that you will need to do more for each business whether it's acquisitions to further diversify the current businesses because this quarter would have looked much different if J. Ray was separate relative to the Power business. You know what I mean? So that we need you to diversify J. Ray, which has been fairly cyclical. The good news is one, the upside of that. But also on the Power business, too, with some of the issues we struggled on the margin front, whether it's in power gen or in government, so we shouldn't think of those two businesses on a stand-alone basis. We should think of those evolving into something else in order to best suit investors, I guess, the acquisitions or whatever it may be.

John Fees

Jamie, we haven't been standing still over the last couple of years. I mean, if you take a look at it, we've gone off and moved into other parts of the world and added elements to each one of these businesses over the last several years. And on the J. Ray side was the evolution that led to the joint venture in China for both the FPSOs and other structures. We're just on the front end of that. We think that's going to be a really great situation and opportunity for J. Ray going forward. We have some very unique vessels that we're able to capture in this kind of a market to bring those to bear on our work and our clients. We think those have already added substantial capability for the company. And if I look over to B&W, within the last several years, we brought forward thermal solar. We brought forward mPower and a new reactor technology, a new joint venture in India. So I don't think that the prior structure really inhibited that or controlled it in any fashion. And I think it has nothing more to do than to continue on that past path and maybe even blossom further in the future. So I really believe we're still oriented in that direction. Let me switch over to Y-12 and Pantex for a minute. Obviously, the government's come out with this procurement strategy to put those two sites together. We've had extremely good performance in both of those locations. We've had record performance relative to the financial rewards, as well as the ratings that the government gives us on our performance at those sites. As I indicated in the prepared remarks, the government's off on this procurement strategy. The contracts officially terminate in the fall. I don't see the timing lining up without some level of extension. That would be my expectation in the current environment. I really like our opportunities going forward. I can think back to when we took over those sites coming up on nine, 10 years ago and the critical changes that we've made in the overall productivity, quality and cost associated with those operations. I think we've got a great reputation in that business, in that industry. And I'm not really wary or afraid of competition there. I'm actually pretty excited about it. And I think we can do a great job moving forward on these procurements. The ultimate timing of that is really going to be dependent upon the cycles the government will run through in terms of getting the procurement done. But I think it's going to be extremely difficult from this point in time that we're at today, the procurement cycle they're in to be able to execute a procurement that large and have it stood up and operating by the fall this year. So that's where my comment comes from relative to the potential for extension side.

Operator

And your next question comes from the line of Martin Malloy with Johnson Rice.

Martin Malloy - Johnson Rice & Company, L.L.C.

I was wondering if you can give us an update on some of the growth strategies with J. Ray, that New York and China and Kazakhstan coming online, the timing of that and work potentially going through there? And also thoughts an additional vessels.

Michael Taff

Yes, Marty, there are number of growth strategies there. We haven't recently broke ground on the yard there in the northern part of the Caspian. I think at J. Ray, we still view the Caspian as a market that's going to be very robust for us as we look out into, say, the latter half of 2011 through 2015. A lot of good things happening there, so we would see a significant growth in that area, both from the northern part of the Caspian and the southern part of the Caspian coming back with some of the BP programs in the southern part there as well. The China JV, as John mentioned earlier, is just getting started. So we see that as a servicing that local market initially and then broadening to the rest of the world. Still looking at different opportunities in Brazil from a growth standpoint. Initially, that will come through our joint venture with Keppel FELS. And obviously, we're very pleased at the project with Papa Terra and see other potentials out there with partnering with Keppel there. Also, I think you'll see some nice growth at our J. Ray over the next I'd say one to five years related to the deepwater markets as we bring on the second ocean team vessel. And a lot of opportunities both in Brazil, West Africa and Atlantic Basin there for that as well. So I think in addition to the traditional markets, a number of growth strategies we have in our five-year strategic plan for J. Ray that will be crystallizing with Steve Johnson's in the team.

John Fees

Yes, Marty, one of the things that I would also comment on and I mentioned this in investor conferences and on this call, in fact I mentioned earlier on the call. Our focus with J. Ray over, at least my tenure as a CEO and somewhat prior to that, has been really looking at this big middle market that exists. We certainly never intended to move extremely far from our focus on shallow water basins and where we've been getting the majority of our work over the last five to seven years. But we wanted to move that big middle market to deeper water as we saw the opportunities in deeper water going forward. And with that came the investment strategy of getting some vessels that move us in that direction, getting some capability around the world that moves us in that direction. I think that's a really good strategy for J. Ray. Obviously, deepwater work was one of the growth areas in the industry. But it never really overtook shallow water. That was sort of the logic in and around that particular strategy. As I mentioned in the prepared remarks, we don't yet fully understand what the situation in the Gulf is going to do relative to implications on ultra deep water. But again, that's not our market. It's just a part of our market. And right now, it's a small minority of our market. So we were certainly looking towards Gulf of Mexico expansion, the Gulf of Mexico ultra deep and things as adding another cylinder that would be striking on J. Ray. And so I think right now that's created some amount of uncertainty. But it really doesn't take us off track with what we're doing in the 90-plus percent of the market.

Martin Malloy - Johnson Rice & Company, L.L.C.

And then on mPower, could you update us in terms of your thoughts on timing of a utility company placing an order for an mPower unit? And are you satisfied with the level of resources that the NRC's committing to design approval there right now?

John Fees

Yes. I can make a few comments in that area. Right now, we've been thinking about on mPower as 20-20 deployment or deployment that could accelerate from there earlier, several years, based upon outcomes that could potentially happen with initiatives that are being discussed in Washington. And so there is this discussion about bringing what's called SMRs, small modular reactors, forward, more aggressively in the marketplace with government initiatives in that particular area. We're certainly working that very hard. We've had a tremendous reception in the government. The Congress has allocated money for the NRC to go ahead and to put activities in place, and the NRC to be able to support SMRs. We have a project manager in the NRC assigned to our technology, the Babcock & Wilcox and our mPower technology. We're starting to submit what's called, topical papers into them, to describe certain elements of our design as we're proceeding on the design, sort of bringing the NRC along in parallel. They've been responsive, they've been helpful. Again, the reception of the Department of Energy has been very, very strong. And we've had a number of utilities that are showing a tremendous amount of interest, probably the strongest from the Tennessee Valley Authority. And there is the possibility of trying to bring that enthusiasm and some of those government programs that are coming up to try to move the technology forward a few years and get early deployment. And that's certainly on our radar screen, we're working it very hard. And myself, Brandon Bethards and Chris Mowry are altogether, focusing on that effort. And so I would say that there's an opportunity there that's probably a little bit more near-term than we would've thought about a year ago, but still remains to be seen. We still have quite a lot of work to do to get to the point where agreements are struck, contracts are signed and we're actively working with contract money as opposed to shareholder money moving the technology forward. So I would characterize it a very positive framework and making great design progress and -- but still a little further to go relative to bringing forward that level of participation.

Operator

[Operator Instructions] You're next question comes from the line of Steven Fisher with UBS.

Steven Fisher - UBS Investment Bank

Last quarter you mentioned, John, that there could be some upward pressure on the 10% to 12% J. Ray margin and now, it's kind of -- you made it pretty clear we should assume the 10% to 12%. So was that upward pressure just in anticipation of the change orders?

John Fees

Yes. Again, I think everybody needs to recognize the change orders, contingency, going to profit as an ongoing part of our business. We did feel that looking forward into the year that there would be some upward pressure on that. We saw evidence of that in the first quarter. And as Mike indicated, and as a supplemental comment to my remarks, we have a number of things that could potentially be positive on the business, looking out, probably more positives than negatives. But we're still hanging in that 10% to 12% range, it's where our mark is.

Steven Fisher - UBS Investment Bank

Just how to think about the run rate of the mPower R&D for the next few quarters?

Michael Taff

Steve, it's Mike. I would just think overall, kind of minor on the R&D total spend, and that $17 million to $20 million range on a quarterly basis for B&W consolidated.

Steven Fisher - UBS Investment Bank

Do you anticipate any partners sharing in that in the relative near term?

John Fees

That's being worked. I don't have anything to add to that today other than the fact that, that's being worked. And we're really trying to find the right kind of strategic relationships that are going to be meaningful to us and meaningful to our clients. And I would call that a active work in process.

Operator

And your next question comes from the line of Tahira Afzal with KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc.

I guess the couple of questions I did have were really to do with J. Ray again. You have these contingencies and as it starts exiting those problem projects next quarter or rather, I should say, this quarter. How do you see that playing out? There is a possibility some of the contingencies could reverse favorably once it's settled, is that still a possibility? And would that not be included in your margin guidance for J. Ray as of right now?

Michael Taff

Yes, Tahira, a couple of things there. One is that, I think that we mentioned in the last quarter, I don't know if we mentioned it this quarter, but that $115 million or so, we'll burn that over for the next three quarters, just a little bit in each quarter. So we tend to hold back some of these contingencies until we're totally done with the projects. But again, I think we have nothing but upside there on those projects either: A, related to harvesting a little bit of the contingencies left; B, reversal of some LBs that we currently have booked, that we've disclosed; and C, would be any potential closeout change orders for the customers as we wrap these projects up. So again, when we're giving the margin guidance, we're really giving it not on one project but on the total portfolio business. So it's really that $2 billion of revenues that we're going to execute over the next three quarters that we're focused on that 10% to 12% range.

Tahira Afzal - KeyBanc Capital Markets Inc.

Second, if you could just elaborate a bit perhaps, if possible, on the mPower early deployment, how much could that potentially be pull forward the schedule in terms of backlog opportunities for you potentially and in terms of revenue contribution?

John Fees

Tahira, it's totally depend upon a number of factors, and so I'm not going to really try to comment on it in any kind of great detail. And again, that's still being worked and that's being discussed. I would say though, it does have the potential of moving the 2020 date, that we were thinking for full deployment, up a couple of years on an early demonstration project. And so if you run that through your mind, we would potentially see revenues earlier than the 2012, 2013 timeframe we talked about before. But that's still a lot of uncertainty. I would not encourage anyone to try to take that to the bank at this particular point in time. But it is just an opportunity that's out in front us that we'll work on.

Tahira Afzal - KeyBanc Capital Markets Inc.

I did notice the DOE had talked about one demo project on the small nuclear site going forward. Would that be the mPower one then?

John Fees

That would be our plant, certainly. Obviously, there are some other competing technologies, and just like the other competing technologies, we believe we're superior. So we're working that and putting our best foot forward. And if there is one, we would certainly have the objective that it would be Babcock & Wilcox.

Tahira Afzal - KeyBanc Capital Markets Inc.

When you look at some of the small modular technologies out there that could be potentially competing with yourself, I believe, is it Hyperion that might have gotten support from a large sponsor like Microsoft or someone else? But would love to get your sense on who you do consider to be a viable competitor on the small nuclear site as well.

John Fees

I'm not going to comment on competitors at this point in time. I think we're a little different because we're a little bit more in the middle. A lot of the small reactors are down in the handful of megawatt ranges, we're out there, 400 megawatts thermal, 125 megawatts electric. And I think we have what I would consider to be a substantial plant and would not be in the small-megawatt category. And so I think there are some differences, and we would expect those differences to come to bear at the end of the day. And that's the reason that we put ourselves where we are relative to our technology. And so I think we do differentiate ourselves and I think we've got a great technology going forward. And so we'll see where all the chips fall. But again, I think if the government is going to move forward with a demonstration project, we would certainly want that to be Babcock & Wilcox.

Operator

You're next question comes from the line of Roger Read with Natixis.

Roger Read - Natixis Bleichroeder Inc.

Looking at the B&W segments, if you could elaborate a little bit on what you see in a way of kind of a CAIR act part two? And then if memory serves, when B&W was first reconsolidated in the business, the first quarter really surprised everybody, and it was due to, I think, memory maintenance type work within the Power business or within the Coal Plant business. I'm just wondering, did Q1 involve any sort of a mix issue here or was it really just a function of businesses slowing so much and it's hard to stay ahead of the curve on that, and then that's something we'll see improve as you go through the rest of the year tying into that 7% to 10% margin expectation?

John Fees

I think the first quarter is a little bit of both. Again, we did not really have any substantial contract closeouts in the first quarter, as well as we had a mix that did not enhance the profitability of the business. Certainly, we had a cold winter. There was not a lot of field work going on in the winter as well. That did not help things in the Northeast in that particular market either. But as the market has been bouncing around the bottom, we think it's at the bottom, that it does not necessarily exhibit linear behavior coming out. And I think we're seeing a little bit of evidence of that.

Roger Read - Natixis Bleichroeder Inc.

Does that fit into Q2, ought to be better, we ought to see more fieldwork just as a function of seasonality or enhanced seasonality in Q1, less so in Q2?

John Fees

Roger, it's going to be interesting because as I indicated, we do have a fairly robust look in that business. But the question in my mind as much as anything, is how much of that comes to market? If there is that economic news, delay in GDP, generation continues to stay down, what we'll see is very limited amounts of that will come to the market. And we've seen a little bit of behavior during this cycle where people are willing to take work at extremely aggressive, low or below contribution kind of levels in terms of margins. And that's really not our behavior as a business. I mean if you take a look at where we've been on the J. Ray side, we were through a very soft period in the market. We kept our discipline and I think it served us very well, and we have the same approach and the same attitude on the B&W side. So I think it's highly dependent on how much of this comes to market, really, over the next several quarters in terms of what we're going to see and how that mix is going to play out. Again, as I indicated, we are seeing somewhat of a buying pattern starting to emerge in utilities. We would hope that, that would continue. Let me go back to your question about CAIR. It's still our anticipation that there would be some replacement rule that would start making its way through government, and manifest itself in a set of rules that would bring business to us later this year. That's still the view we have. Obviously, the government can get distracted. It's a little bit of a surprise for me, personally, that this administration, with some of the people involved, have not been more aggressive, from an environmental regulation standpoint, to try to reinstitute these rules. But I know they're working on it and pending no major further distractions relative to the work of the Government, we would anticipate that, that would be available for us and for the market later on this year.

Operator

And your next question comes from the line of Graham Mattison with Lazard Capital.

Graham Mattison - Lazard Capital Markets LLC

Coming off of what would be a very strong bookings quarter on the J. Ray side, your outlook for additional bookings this year, is this going to be mostly sort of a back-half weighted or much towards the later part of the year? And then if you could just give us an update on sort of your target bids that you have outstanding -- the target list, the amount of target bids you have outstanding.

John Roueche

Just to answer the last first, if you look at the total number of bids outstanding, I think we've got about $7 billion at the moment, a little more weighted to oil and gas versus power, I think it's four and three. And then the focus list as we've described, kind of the opportunities over the next 12 months in oil and gas, came roughly $10.5 billion.

John Fees

And we don't give any kind of bookings guidance or anything like that. But I would say that my view would be that oil and gas is probably more near-term oriented, and power is probably more oriented to later in the year, in terms of its overall weight relative to what my anticipation would be for bookings. And again, projects have a tendency to move all over the place. They have more a tendency to move to the right and the left, and so we just have to see what the outcomes are. But that would be my general view, is that oil and gas is probably more near term and power is probably more in the future.

Operator

And your next question comes from the line of Will Gabrielski with Broadridge Capital.

Will Gabrielski - Broadpoint AmTech, Inc.

Yes, with Broadpoint. On the margins for J. Ray, are you guys essentially saying 10% to 12% of the range the upper bias is going to be the quarters like we just saw Q1, but it's not like we're going to see 5% quarter to average these out, right? We're going to be 10% to 12% in the upper bias that comes from the quarters of that side.

John Roueche

I think we're talking 10% to 12% on a quarterly basis. And if we have a few quarters like this, where we exceeded you might bring the whole year above our target range.

John Fees

For example, if we had -- and the way that, that would work in practice, if we have a lot of closeouts that happened in a particular quarter and we have very little that happened in the next, that might actually move some of that margin between the quarters, and we may see some behavior like that.

Will Gabrielski - Broadpoint AmTech, Inc.

And in terms of the Safaniya project, and in the piece you actually booked for FloaTEC, not the JV piece but the piece you put in backlog, commercial terms on those, any difference than what you may have seen 12 or 18 months prior and your expectation, I guess, on the as booked margin, everything there, anything materially different than what you may have seen in the different environment a year ago?

Michael Taff

Well, I don't think so. I mean, I think overall, I think when we look at our portfolio of margin in the J. Ray backlog, it's probably very similar to the margin we saw heading into the '07 type range here, same general amount of contingency. And I'd say as John mentioned and we continue to mention from a commercial terms, we were very -- we hold our guns on the T's and C's and the risk matrix. So from a risk standpoint, I think we feel very good about the jobs we booked recently and as well as the ones we're bidding.

Will Gabrielski - Broadpoint AmTech, Inc.

On the Gorgon contract, I guess, one, was it less competitive than a year ago or more competitive? I'm just wondering why you guys booked that work now. And then two, I guess there's still $20 billion of unaccounted for Gorgon work that may be awarded at some point. Are there opportunities there, any marine work possibly still?

John Fees

I think there are some opportunities for additional Gorgon work, particularly on the marine side.

Michael Taff

And as far as I think, again, we always talk about the competitive nature of our business. All markets are competitive. We have regional competitors in every market whether it's the Gulf, Middle East or Asia Pacific. The Gorgon work that we won was competitively bid. But we feel good about winning that job, and look forward to great execution delivered for Chevron and other jobs.

Will Gabrielski - Broadpoint AmTech, Inc.

Taking another shot at that question, I guess what I'm asking a year ago, say, you guys weren't actually actively looking to win that first round of Gorgon fab work with a green fab...

John Roueche

I think we were looking to win part of that work. We didn't want it all. And there was one competitor who bid aggressively on it.

John Fees

We were looking if we want, we would want it to be proud of the work that we won.

Will Gabrielski - Broadpoint AmTech, Inc.

The question I was asking, I guess was, as you bid this work, was it different? Was there somebody in the market that was competitive last year who may not have been as competitive on price this year, and is that may be indicative of those yards selling up a little bit more?

John Fees

It's hard to tell. Certainly, some of the work that went up into some of the yards sort of add a lot of volume there. It probably changed the perspective of how that was going. But I don't how big a factor that really was in the overall decision of the client towards the project. We put out what we thought was a reasonable price to be able to obtain that work, and we were successful. And so how much that other dynamic played in, I think it's pretty hard to tell.

Operator

And your last question of the day comes from John Rogers with McDermott.

John Rogers - D.A. Davidson & Co.

John Rogers with Davidson. Just want to follow up, in terms of corporate expenses, given it looks that the timelines maybe moved up a little, at least from what I was expecting as far as the spin goes. How much is left in terms of legal and other fees, and will those all be in the second quarter?

Michael Taff

John, this is Mike. I think most of them will be in the second quarter. I think we mentioned on the call last time that we expected total cost related to the spend to be in that $60 million to $80 million range, and there's about $25 million of non-cash. And so I mean, I still think we're going to be in that general range, probably towards the upper end of that range, once you roll in all of our advisor costs and severance and equity costs and things like that. So I would generally, still, think of total corporate spend related to the spend is in that $60 million to $80 million range. And then we've, obviously, still have our normal corporate expenses that was in the $15 million range or $10 million to $15 million range on a quarterly basis that we'll incur for the second quarter. And then basically what we're doing is taking that 130 employees that we have there at corporate, and they're going to the two respective groups. And so then they would be housed in the two respective companies starting in third quarter with some folks leaving the corporation.

John Rogers - D.A. Davidson & Co.

And you're pretty comfortable the $15 million covers everything just to be divided between the two entities?

Michael Taff

On a quarterly basis?

John Rogers - D.A. Davidson & Co.

Yes.

Michael Taff

Yes, I mean, well, that's the -- you have to take in the fact that we allocate -- there are some corporate costs that are allocated to the two businesses as well, probably in the range of $35 million or so. So I mean, I think you take that $15 million and you annualize it, and that's whatever that is, 60, and then plus what's allocated. I think historically, corporate was on a run rate of in the $75 million to $90 million range. And so I think you divide that by two and that's probably the corporate costs associated with the two companies as well on a go-forward basis.

Operator

And that concludes our question-and-answer session for today. I'd like to turn the call back to Mr. Roueche for closing comments.

John Roueche

Okay. Thank you all again for your participation and interest today. I want to remind you remind you that the call included some forward-looking statements and non-GAAP figures, and I encourage you to see our SEC filings and press release for more information on these.

I know some people were left in the queue, so if you didn't get an opportunity on this call or if you have any follow-up questions or need clarification, please call us afterwards. And we look forward to seeing many of you in New York over the coming month. Crystal, this concludes our call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect and have a great day.

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