Chicago Bridge & Iron NV (CBI) Philip K. Asherman on Q2 2016 Results - Earnings Call Transcript

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Chicago Bridge & Iron Co. NV (NYSE:CBI)

Q2 2016 Earnings Call

July 27, 2016 5:00 pm ET

Executives

W. Scott Lamb - Vice President-Investor Relations, Chicago Bridge & Iron Co. NV

Philip K. Asherman - President & Chief Executive Officer

Daniel M. McCarthy - Executive Vice President & President-Technology

Michael S. Taff - Chief Financial Officer & Executive Vice President

Analysts

John Bergstrom Rogers - D. A. Davidson & Co.

Chad Dillard - Deutsche Bank Securities, Inc.

Steven Michael Fisher - UBS Securities LLC

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Matt Tucker - KeyBanc Capital Markets, Inc.

Chase A. Jacobson - William Blair & Co. LLC

Jamie L. Cook - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Operator

Greetings and welcome to the CB&I Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Scott Lamb, Vice President, Investor Relations for CB&I. Thank you. Mr. Lamb, you may begin.

W. Scott Lamb - Vice President-Investor Relations, Chicago Bridge & Iron Co. NV

Thank you, Holly. Good afternoon, everyone, and welcome to the CB&I second quarter earnings call. Thanks for joining us today. This afternoon, you'll hear from Phil Asherman, President and Chief Executive Officer; Daniel McCarthy, Executive VP and President of the Technology Group; and Mike Taff, Executive VP and Chief Financial Officer. Phil will offer commentary on the results for the quarter. Dan will offer some comments on our technology business. And Mike will go through a detailed discussion of the financials. After that, we'll open the call for your questions.

Before beginning today's call, the company would like to caution you regarding forward-looking statements. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding the company's future plans and expected performance, are forward-looking statements that are based on assumptions the company believes are reasonable but are subject to a range of uncertainties and risks that are summarized in the company's press release and our SEC filing. While forward-looking statements represent management's best current judgment as to what may occur in the future, the actual outcome or results may differ materially from what is expressed or implied in any such statements.

I'll now turn the call over to Phil.

Philip K. Asherman - President & Chief Executive Officer

Thank you, Scott. Good afternoon and thank you for joining us as we report Chicago Bridge & Iron's results for the second quarter of 2016. Safety is always first. So briefly, we've executed 52 million man-hours year-to-date, with a lost time incident rate of 0.02. In addition to our comprehensive and predictive safety programs, we have also redoubled our efforts on situational awareness and have implemented 100% corrective actions on the incidents that fall into that category and led to the tragic fatalities earlier this year. Nonetheless, our overall safety record continues to be among the best in the industry, and our employees' safety is always the top priority.

On our financial performance, good news on operating cash flow, which was $177 million or 1.4 times our net income for the quarter, a significant improvement from a year ago. If we look at operating cash for the six months and include the large advanced payment we received in quarter one from a large joint venture project, then the figure is $440 million or 1.9 times our net income for the first half of the year.

In terms of capital allocation priorities, we continue to make significant progress in reducing our total debt. As of the end of the quarter two, we have reduced our total debt by about $250 million or about 10% from where it was at the end of 2015. This improvement is even greater, if you look at the change in net debt, which has decreased by more than $300 million over the same period.

Our share repurchase program resumed earlier this month. We'll spend approximately $200 million to purchase stock. And since resuming this program on July 1, we've repurchased approximately 3.6 million shares. Our consolidated financial performance for the second quarter, resulted in income from operations of $202 million, revenue of $2.7 billion, and net income of $123.8 million or $1.17 per diluted share.

As a result of our continual focus on efficiency, we decreased our overhead costs in the quarter while maintaining the head count of over 40,000 employees. New awards for the quarter were over $1.7 billion, but the continued delay in the final capital decisions in most of our markets has caused us to revise our expectations for the year. Mike will expand on this in his comments.

But the new awards for the second quarter included two gas turbine power projects in the U.S. worth approximately $500 million, scope increases on major projects, power plant services in the U.S., refinery maintenance work in the U.S. and Canada, alkylation licensing in North America and China, petrochemical licensing in the Asia-Pacific region and China as well as catalyst awards and a variety of storage and pipe fabrication awards throughout the world.

Now, before I discuss the operating groups, I'd like to take a moment to address the complaint we've filed last week against Toshiba's Westinghouse in the Court of Chancery in Delaware. As outlined in the complaint, we took this action to enforce the contractual bargain set out in the October 2015 purchase agreement, under which CB&I would sell its nuclear business to Westinghouse.

Six months after closing, Westinghouse is now making a bad faith attempt to undo this bargain by abusing the provision of the agreement that provides us for a true-up, by either company for changes in working capital between signing and closing. Now let me be clear, Westinghouse's allegations are without merit. CB&I invested significantly in the projects before closing and any true-up is actually in our favor. We'll protect the company and our stockholders from Westinghouse's claim and we'll vigorously pursue this matter in court to enforce our rights under the agreement.

Now, I'll briefly discuss highlights from our operating groups for the quarter and provide some perspectives on our outlook. For Engineering & Construction in the U.S., we continue to advance physical projects on a number of large projects currently under construction, including our LNG export terminals for Cameron and Freeport LNG, and our petrochemical plants for OxyChem, Shintech and Axiall-Lotte.

During the quarter, we also added two additional power plants to the three combined cycle power plants we already have under construction. With the continuing reduction of coal-fired power plants and the sustained low cost of natural gas, we're confident of a steady flow of capital investments in combined cycle plants well into next year and beyond.

The backlog distribution of our Engineering & Construction business is concentrated in three primary end markets. LNG is nearly 50% of the backlog, petrochemical is 30%, 15% is power, and the remainder is refining and underpinning work.

Now, despite the startup of the new plants in Australia and the U.S., the supply demand balance remains close until 2020, at which time, demand is predicted to outpace LNG supply based on committed project. What that means is we conservatively estimate that another 12 to 15 trains will be needed to meet demand. And with cycle time needing four to five years of development, preliminary work in FEED contracts will continue at a steady pace. Sempra hosted an Analyst Conference last week and reinforced this point with their positive comments on Cameron Train 4. They're planning Train 4 to reach an FID in the first quarter of 2017.

In the Middle East, we're well positioned to capitalize on the growing liquids cracker market. The integration of refining and petrochemicals and the resulting upgrade of low value liquids into high value petrochemicals provide attractive returns for our customers. In addition to the Middle East, we'll continue to pursue engineering, procurement or selective EPC scopes on liquid crackers in other parts of the world as opportunities arise.

Our joint venture with Chiyoda and Saipem continues to support the early works program for Anadarko's Mozambique LNG. We're confident that this project will continue to move forward towards reaching FID. As I mentioned, there will also be continued LNG in the U.S., but our revised expectations are not dependant on any significant LNG bookings for the remainder of 2016. The mix of awards we see for the remainder of the year is comprised primarily of refining, petrochemical and power opportunities and, of course, continuing underpinning work.

Fabrication Services achieved marked improvement in operating margin from the prior quarter. Each of our businesses within this group has a flexibility to collaborate on projects internally within CB&I, and they can also sell directly to the owners and other EPC contractors. This flexibility increases our sales channel and promotes cross-selling. For example, with fabrication and manufacturing's capacity to perform large projects globally, we position ourselves as a leader in pipe spool fabrication. By utilizing our know-how and expertise in pipe bending, we can then further differentiate ourselves from competitors.

In the second quarter, Fab Services continue to experience substantial headwinds from deferrals in new projects, particularly in our steel plates structures business. While this business is fairly quick book and burn, and does carry high win ratios, we reflected the current market conditions in our outlook for new awards.

The majority of our prospects are in the U.S. or Middle East. The U.S. market continues to be driven by natural gas liquids production, new petrochemical plants, LNG export terminals, and gas-fired power plants that will be replacing coal-fired units, also requiring large heaters, pipe spools and process modules. Refining revamps and new unit additions provide opportunities for our engineering products group. And in the Middle East, we see sustained opportunities in refining, liquid terminals, gas processing and petrochemical plants.

Turning to Capital Services, good project performance, combined with cost savings and labor utilization initiatives, contributed to operating margin improvement this quarter. Our operation and maintenance business performed a number of nuclear outages and refinery turnarounds during the quarter. This group continues to collaborate with our other operating groups to enhance the organization's overall competitive positioning.

Capital Services backlog forecast has been adjusted to reflect the announced closures of three nuclear facilities where we have the maintenance contracts. But with these closures, we believe our strong track record of performance in the nuclear operations and maintenance market positions us well for the decommissioning opportunities. We continue to see good prospects in the fossil and nuclear power maintenance business, emergency relief work opportunities in selective states, and industrial services. In federal services, our diverse backlog is performing well, but federal government spending trends will continue to present challenges.

Now, Dan will comment on technology. Dan?

Daniel M. McCarthy - Executive Vice President & President-Technology

Thank you, Phil, and good afternoon. In the second quarter, we achieved a number of significant milestones that position us for future growth. And I'm pleased to have the opportunity to describe these accomplishments. I will also cover our view of (11:10) refinery market trends impacting the technology business and CB&I overall.

Two of our new refining technologies achieved important milestones, gasoline alkylation and slurry resid hydrocracking. Our advanced gasoline alkylation technology addresses the strong demand for additional high octane gasoline blend stock. The alkylation market is just kicking off. In the second quarter, we were selected for three projects in different parts of the world: United States, Southeast Asia, China. We believe we will see this activity continue for the near future.

Our AlkyClean process, based on solid catalyst, is inherently safer and has low environmental impact because it eliminates corrosive liquid acid catalysts. In recognition of this innovation, CB&I was awarded the EPA's 2016 Presidential Green Chemistry Challenge Award. In the resid field, CLG's new LC-Slurry technology was selected by Beowulf to upgrade the resid from the Preem refinery in Sweden.

LC-Slurry is a unique resid hydrocracking technology based on a proprietary catalyst system. Leveraged off the well demonstrated LC-FINING reactive platform, it can achieve almost complete conversion of heavy resids. The LC-Slurry technology will be critical in addressing the shrinking heavy fuel oil market as crude oil consumption continues to grow.

We are also pleased to announce that our new polypropylene catalyst plant jointly built with Clariant in Louisville, Kentucky achieved mechanical completion in June, with production beginning in August. This strategic investment will produce larger volumes of higher productivity catalysts at lower cost. We can use this capacity to service our growing licensee base, as well as to broaden our penetration into the overall polypropylene catalyst market. The timing is excellent, as there is interest in adding new polypropylene capacity.

The fourth strategic investment is the NET Power joint venture with Exelon, 8 Rivers, and CB&I. The joint venture is commercializing a truly revolutionary power cycle, generating power from fossil fuels without CO2 emissions and without the cost penalty associated with previous clean energy endeavors. Many utilities are closely following our progress as are oil and gas production companies who are interested in CO2 for enhanced oil recovery.

As previously reported, we are building a 50-megawatt demonstration plant. In the second quarter, we entered the construction phase and are making great progress. Site preparation, underground, and civil work are essentially completed. Major equipment will be arriving at the site in the third and fourth quarter. We still plan to be ready for operation in 2017.

Now, let's take a look at the marketplace. We are all cognizant of the slowdown in capital investment over the last 18 months. The danger is that we assume this is the new norm. We recently held a five-day olefins technology seminar with 460 customers. To kick off the seminar, an expert from IHS addressed the status of the ethylene market, where are we in the cycle, do we need more capacity.

Consistent with our view, IHS forecasts that based on the most optimistic estimate of ethylene capacity, worldwide ethylene supply will be insufficient in 2020. In a more realistic case, taking into account outages and stalled projects, the pinch will occur in 2019. Since a stage gated project will take about four years to complete, we are on a path that will lead to a supply crunch that will drive up prices and spur new plant investment.

So where will consumers invest? In our view, the most attractive location is North America where abundant supplies of low cost ethane produces a cash cost of production advantage. Total is currently developing such an investment with us, and a number of other companies are evaluating U.S. projects. As you know, in the U.S., technology and EPC almost always go hand-in-hand, so these projects give us the opportunity to participate in a broad way, EPC, pipe and module fabrication, tankage, engineered products, and environmental support.

A second large market is the Middle East where there's strong interest in converting liquid feedstocks into petrochemicals. Importantly, a strategy gaining traction is to process crude oil to petrochemicals bypassing any transportation fuel production. This strategy essentially requires a simplified hydroprocessing refinery integrated within an olefins plant. This configuration fits our portfolio perfectly because CLG has the hydroprocessing technology and CB&I has a strong track record of processing these crack feedstocks in the methylone plant.

In addition, CB&I has the required technologies for C4 processing, hydrogen production and sulfur recovery. I think we can see some of these projects mobilized in early 2017, providing CB&I EPC opportunities shortly thereafter.

Now let's take a quick look at refining where we have a very complete and innovative portfolio. Overall, the refining market looks somewhat sluggish but refining margins are reasonable, resulting in important pockets of activity. In China, significant new crude capacity is being added. We see strong interest in our alkylation, hydrocracking and resid upgrading positions.

In addition to the alkylation project already mentioned, we were awarded two hydrocrackers in China in the second quarter. We believe at least one additional refining complex will go forward in 2016. The rest of the refining market will focus on three major trends: alkylation, gasoline desulfurization and middle distillate production. I've already covered alkylation.

Gasoline desulfurization is driven by U.S. and European regulations that require sulfur and gasoline to be reduced to 10 ppm. This requires refiners to undertake revamps and expansions to accommodate additional catalysts needed to achieve the specification. Our renowned CDHydro and CDHDS technologies address this by challenge by reducing sulfur levels in cracked gasoline, while maintaining – while maximizing octane retentions. These revamp projects also fit well into our engineered products and capital service target markets.

Finally, hydroprocessing is required to meet increased demands for diesel fuel and petrochemical feedstocks while simultaneously reducing heavy oil production. CLG's world-leading hydroprocessing portfolio ideally positions us for this work, which we believe will be concentrated in Asia.

It is important to note that the Engineering & Construction operating group is very active in the Middle East. We are currently executing two large projects based on our technology in Oman and Kuwait, and are pursuing EPC opportunities in Oman, Abu Dhabi and Bahrain. These prospects should be decided in the next nine months. Therefore, we believe we're well positioned for the oil to chemical projects, as well as the emerging hydroprocessing projects.

In summary, we assert that our technology portfolio addresses the market correctly and feel we achieved some important milestones that will be enable CB&I to address future market requirements. We also believe there is a resilience in the industry. The one thing that I've learned in my many years in licensing is that, when the time is right, the industry moves fast and without warning.

Now, I'll turn it back to Phil.

Philip K. Asherman - President & Chief Executive Officer

Thanks, Dan. Well, now I'll turn it over to Mike to report the financials for the second quarter.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Thanks, Phil, and good afternoon, everyone. CB&I delivered very sound results for the second quarter of 2016, highlighted by impressive operating cash flow, reduced debt levels, decreased sales and administrative expense, continued systematic progress in the lowering of our effective tax rate, and an encouraging rebound in new awards in our Technology Group, which can be a leading indicator to subsequent large EPC awards.

Revenue of $2.7 billion, and earnings per share of $1.17 were both up modestly as compared to the adjusted second quarter of 2015, which excludes the results of our former nuclear construction business. Our new awards increased sharply from the Q1 levels, but were still relatively light at $1.8 billion and that led to a slight sequential quarter decline in total backlog, which came in at $19.6 billion. We believe this is a reflection of the broader market dynamics, specifically regarding clients who are deferring final investment decisions on new projects.

Gross margin was 10.9% of revenue, which was down from the second quarter of 2015 due largely to lower revenue volume in our higher margin technology group and a lower margin mix. For the quarter, selling and administrative expense was $83 million or 3.1% of revenue. That represents a $10 million improvement from the first of 2016 and is also slightly better than the expense level of the year ago quarter. The improvement in selling and administrative expense is due to lower incentive compensation cost.

Our operating income for the second quarter of 2016 increased more than 7% sequentially, as Fabrication Services Group rebounded nicely from its Q1 performance. That translated into a noteworthy improvement in operating income margin for the company as a whole which came in at 7.5% versus 7% in Q1.

Now for a few remarks on each of the operating groups. E&C Group revenue for the first quarter was $1.5 billion, essentially unchanged from Q1 of this year, but up 14% as compared to the year-ago adjusted revenue due mainly to increased activity in our LNG export facility projects. E&C Group operating income for the second quarter of 2016 was $96 million, which is down as compared to the preceding quarter and the adjusted year ago quarter, due to minor net cost increases on various projects and a lower margin mix. And these factors also account with the declines in the operating profit margins in the E&C Group, both sequentially and in comparison to the year-ago quarter.

Fabrication Services revenues for the second quarter of 2016, came in at $527 million, which is a slight uptick from Q1, but a decline as compared to the year-ago quarter. The decline is relative to the year-ago period, was due to the wind down of various storage tank projects and delays in timing of new awards.

Fabrication Services reported excellent execution in the second quarter of 2016, with operating income rebounding sharply to $67 million from the $38 million they reported in Q1, when the group had taken charges on two tank projects. The Q2 operating income was 20% above the year-ago quarter and that was largely due to solid execution and net savings on various projects across the board. Fabrication Services' Q2 strong performance was also evident in the robust 12.7% operating margin, well above Q1 and the year-ago period.

Technology Group revenues for the second quarter of 2016 was $65 million, which is down as compared to the year ago period, due to lower catalyst and licensing volume, and the timing of new awards. The Technology Group operating income for the second quarter of 2016 was $23 million, which was down sequentially and down from the year-ago quarter. The decline versus the year-ago quarter was really driven by the corresponding decline in revenue. Although, the good news here is that the operating income margin in this business remains very healthy at 36% in the second quarter of 2016.

Capital Services revenues for the second quarter was $561 million relatively unchanged from the first quarter of 2016, but 4% below the year-ago quarter, partially reflecting the slower pace of new awards due to lower U.S. industrial and power services activity. Capital Services' operating income in the second quarter of 2016 was $17 million, up nicely from the $11 million we reported in Q1 of this year and modestly above the year-ago quarter. Operating income margin for Capital Services improved by 90 basis points sequentially and 30 basis points relative to the year-ago period due largely to mix.

Now, a quick recap of my favorite subjects, our balance sheet, cash flows and liquidity. We've been telling the investment community all year that a major element of the CBI story is operating cash flow and debt reduction. And I'm very happy to report that this story is continuing to play out as advertised.

Operating cash flow in the second quarter of 2016 amounted to $177 million, which is well above net income and 25% higher than the $142 million in Q1 of this year. It's also important to note that this cash flow was generated primarily from execution and was not driven by advance payments. This is consistent with our guidance and also is a dramatic improvement from the year-ago period. For operating cash flow in particular, I like to look at the year-to-date amount right off the cash flow statement, which is $319 million. If we include the advance payments we've received for our equity method investments in the first half of the year, then the six-month cash flow amount is about $440 million. That's a positive swing of $635 million as compared to the first half of 2015.

As a result of this continued robust cash flow, we ended the quarter with cash and cash equivalents of more than $600 million, up almost 10% since the end of 2015. We also continued to make significant progress in reducing our total debt. As of the end of Q2, we had reduced our total debt by $250 million, or 10%, from where we ended 2015.

Capital spending during the quarter was about $45 million, which brings us to about $65 million for the first six months of the year, including $40 million or so to fund our share of the Clariant plant. We expect full year CapEx of around $100 million. We returned in excess of $7 million to our shareholders in the form of common stock dividends during the second quarter of 2016.

As for the stock repurchase program, the pace of activity was limited in Q2, but it resumed earlier this month. We have purchased 3.6 million shares thus far in the third quarter, and we'll continue to be active in the market until we reach our $200 million limit.

In terms of our guidance for the full year of 2016, we are lowering our expectations due to the broader market factors because of the ongoing impact of the slippage in new orders. For revenues, we now expect to be in the range of $10.6 billion to $11 billion. You will recall that we had previously said that about 75% of our expected revenues for 2016 were already in backlog, which obviously meant that we were relying on book and burn business to fill the remaining 25% of our revenue pie.

Now I want to be perfectly clear that we are burning revenue from backlog as expected. There is no change in that part of the story. The shortfall in our expected full year revenue is due to the weakness in new orders, which we were depending on to make up the remaining 25% of our total revenue. We now expect to generate only about two-thirds of that work, and that translates to a shortfall in revenues of about $1 billion for the year. The midpoint of the new revenue guidance is $10.8 billion, which is approximately $1 billion below the midpoint of the previous revenue guidance.

With the reduction in revenue guidance, we are also lowering our EPS guidance to a range of $4.70 to $5 a share, where the midpoint is $4.85. This range assumes that our full year normalized effective tax rate will be approximately 26%, a rate that we expect to trend down even further on a longer-term basis. This range of $4.70 to $5 a share also assumes that we will have a one-time tax benefit in the fourth quarter equivalent to $0.35.

To put this in context, consider that the $1 billion of revenues is equivalent to about $0.75 a share. Here's a simple way to bridge the previous and revised EPS guidance. First, you recall that the midpoint of our previous earnings guidance was $5.25. So, $5.25 minus the $0.75 is $4.50. And then you add back the $0.35 to account for the favorable impact of the anticipated one-time Q4 tax item, you will get $4.85, which is now the midpoint of our new guidance.

Before I turn it back over to Phil, I'd like to once again remind you that we are following a detailed playbook to drive value at CB&I. That playbook has six clearly defined objectives: first, maintain our disciplined approach to margins and risk profiles in the pursuit of new awards; second, focus on organic growth opportunities; third, the successful execution of the current backlog; fourth, generate operating cash flows equal to or above net income; five, reduce total debt; and six, maintain a shareholder-friendly capital allocation program that incorporates reinvestment in the business, and the return of capital to our shareholders. Near-term, we believe this playbook will lead to improvement in our PE multiple. And longer-term, we believe it will drive sustained value for our shareholders, customers and employees.

With that, I'll turn it back over to Phil.

Philip K. Asherman - President & Chief Executive Officer

Thank you, Mike. We'll now open the call for your questions.

Question-and-Answer Session

Operator

Our first question will come from the line of John Rogers with D.A. Davidson.

Philip K. Asherman - President & Chief Executive Officer

Hello, John.

John Bergstrom Rogers - D. A. Davidson & Co.

Hi, good afternoon.

Philip K. Asherman - President & Chief Executive Officer

Good afternoon, John.

John Bergstrom Rogers - D. A. Davidson & Co.

I guess the first thing, Phil, could you talk a little bit about, with lower bookings activity, what are you seeing in terms of pricing on the prospects that are out there? I've heard some reports that owners are maybe trying to take advantage of the market to bring pricing down and are you seeing that?

Philip K. Asherman - President & Chief Executive Officer

Yeah. We're seeing some of that. As far as the as-sold pricing, there are a lot of ways to be competitive on fixed pricing without having to reduce your margins, obviously. Especially since we have such a long, detailed resume in most of the end markets that we serve, we can usually find ways to achieve the owners' cost objectives and the price of their plants and their schedule without having to reduce our margins so that we've been able to sustain our margins pretty well.

But on some of the reimbursable work where the owners the throttle, have the control over contract, in most cases, we've seen a continued pressure on renegotiating of contracts and rates. That's why we saw a bit of dilution in our E&C business in this quarter because some of our reimbursable work. So that we're more susceptible to that then you would see on a fixed price contract so, yes, we are seeing the market. It's not just us. It's other suppliers, it's other vendors, it's other – it's drillers, it's everybody in the energy business. So there has been a quite a bit of that.

John Bergstrom Rogers - D. A. Davidson & Co.

Okay. And then just maybe for Mike what did – did you give us guidance for bookings for the year?

Philip K. Asherman - President & Chief Executive Officer

Well, let me, before Mike does, we haven't – we stopped giving guidance for the year, but I think we're seeing that probably coming anywhere from $8 billion to $10 billion, John.

John Bergstrom Rogers - D. A. Davidson & Co.

Okay.

Philip K. Asherman - President & Chief Executive Officer

Now let me just say that it's all dependent on timing. But we when we started off the year, we probably had a funnel of around $40 billion of kind of addressable market opportunities, that's down significantly than what we had seen in prior years as far as the awards that would be contracted this year. If you look at just a macro basis, capital spending in energy infrastructure was about a third of what it was the year before. But interestingly enough about a third of what we expect should be in 2017 and above. So, this has been a real trough this year in terms of what is being awarded.

So we're kind of still seeing ourselves about $8 billion ahead of us of projects that could be awarded but factoring timing as we've seen, that truly is risk. But it's not cancellations. They are jobs that have slid to the right. So, you can make assumptions in terms of 2017. They're good projects and they're all identified and most of them are approved. But we just – we're counting on the timing to get that. So it could be a homerun, but we're fairly cautious in our estimate.

John Bergstrom Rogers - D. A. Davidson & Co.

Okay. Thank you.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Thanks, Jim.

Operator

Your next question will come from the line of Chad Dillard with Deutsche Bank.

Chad Dillard - Deutsche Bank Securities, Inc.

Hi. Good afternoon.

Philip K. Asherman - President & Chief Executive Officer

Good afternoon.

Chad Dillard - Deutsche Bank Securities, Inc.

So, last quarter you mentioned that fabrication awards started pretty strongly in the quarter. But bookings suggested the momentum has faded. So, can you comment just on how the business evolve over the months during the quarter? And just what are you seeing in terms of activity in July? Just want to get a sense for whether we're seeing any stabilization here or there is still more room to a decline.

Philip K. Asherman - President & Chief Executive Officer

Well, we did see continuing deferral of some projects, particularly on our steel plate structure business. The fabrication of piping was pretty good, but particularly in our steel plate structures, we have seen some of those deferrals stabilized going the course of the year. But if you look at the risk that Mike talked about that 25% of our revenues were dependent on the new awards for this year, a lot of that is in that steel plate structure fabrication services. So, I think we're going to see some stabilization going into this next quarter and the remaining half of this year. We've got some very interesting projects in front us that I think we're going to be able to book and possibly burn quite a bit of it. So, I think you're going to see continuing stabilization.

The good news for us in Fabrication Services was that significant jump in operating margin. We had talked all along that really the pivot organization in our company right now was getting good margin performance out of that group because they have a combination of fairly substantial margins and good volume, and we're very pleased to see even with the pressure on new awards, really glad to see that increase, substantial increase in operating margin this quarter and we expect to sustain that going forward. So, that's really good news. So, if we get the new awards, sustain those margins, I think you're going to see a real jump in our performance.

Chad Dillard - Deutsche Bank Securities, Inc.

That's helpful. And then just a question on E&C margin, so did it historically increase sequentially in the second quarter and then continued along for the rest of the year? This year seems a little bit different. So, I just wanted to get a sense for what this implies for the second half of 2016 and then just early initial thoughts on the setup 2017 for margins in the E&C.

Philip K. Asherman - President & Chief Executive Officer

Well, I think we're holding on to our range of operating margins traditionally in this business, in E&C business between 4% and 7%. We've been outperforming that over the past year, in some cases by a percentage point or so, but I think we're still seeing that margin opportunity there. Some of that is dilution from some reimbursable work, some of that is just timing of our backlog where we haven't gotten to the higher revenue portion of the jobs. So, it's really a mix and timing, I think, issue more than anything else.

But I think most of the work that we see in front of us are going to be fixed price jobs, and I think we're going to be able to retain our as-sold margins on a historical basis. So, we're pretty confident that will continue to improve.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yes, Chad. And I think overall, you'll be able to see that kind of trends toward the upper end of that guidance range, where it's been historically.

Philip K. Asherman - President & Chief Executive Officer

Yeah. We've been pretty good as far as keeping it at the upper end of that range, and in some cases, have been able to exceed that, which we would like to do. But I think that if I were – when we model that, we keep that within a range for our projections.

Chad Dillard - Deutsche Bank Securities, Inc.

Got it. Thanks. I'll pass it along.

Philip K. Asherman - President & Chief Executive Officer

Okay.

Operator

Our next question will come from the line of Steven Fisher with UBS.

Philip K. Asherman - President & Chief Executive Officer

Steve, how are you?

Steven Michael Fisher - UBS Securities LLC

Good, Phil. How are you doing?

Philip K. Asherman - President & Chief Executive Officer

Good.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Hi, Steve.

Steven Michael Fisher - UBS Securities LLC

Hey, Mike. On the guidance, so you're reducing the revenue guidance by around 8% or so, but EPS by 14% using that $0.75 you mentioned excluding the tax benefit, so how should we think about the margin profile of the stuff that's been differed?

Michael S. Taff - Chief Financial Officer & Executive Vice President

It's similar to what we've had. I mean, the biggest reason for that delta is really to think about really Dan's Technology Group. I mean, that group is very high margin. So with him continuing to kind of be below prior year, that certainly is affecting that margin somewhat and that really equates to that 14%, but you're right. On that same number, I calculated when we're going through that was kind of on a real-time basis 8%, 14% respectively.

Steven Michael Fisher - UBS Securities LLC

Okay. That's helpful. And then just on the Westinghouse, Phil, can you just talk about the legal process from here and how quickly you think you could get this thing resolved and then move behind you?

Philip K. Asherman - President & Chief Executive Officer

I can tell you what I have been advised and, typically, a declaratory judgment of that type takes somewhere between 45 and 60 days before a judge and it gives both parties a chance to argue their case. So, it's essentially – that's the process that we're in right now.

Steven Michael Fisher - UBS Securities LLC

Yeah, so...

Philip K. Asherman - President & Chief Executive Officer

And what that would mean is if ruled on our favor then we can settle the issue, but we don't – we haven't made real demands on Westinghouse. We just would like them to live up to their obligation and move on.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah. Steve, I think what the filing set was a September court date and then after that September 22 and then after that, hopefully, it gets resolved pretty quickly.

Steven Michael Fisher - UBS Securities LLC

Right. That's what I wanted to make sure. I mean, is that September date and that's what we should think about as the resolution date?

Michael S. Taff - Chief Financial Officer & Executive Vice President

Well, I think that's – not necessarily. I mean, obviously, the judge has got to listen to the arguments and go through a lot of information and all that, but at least it gets us in front of the judge pretty quickly.

Steven Michael Fisher - UBS Securities LLC

Okay. Thank you. I'll turn it over.

Philip K. Asherman - President & Chief Executive Officer

Thanks, Steve.

Operator

Your next question will come from the line of Andrew Kaplowitz with Citigroup.

Philip K. Asherman - President & Chief Executive Officer

Hey, Andy.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Good evening, guys.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Hey, Andy.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

So, when you look at the base of is $4.50 that you now have for 2016, can you talk about the puts and takes moving forward on that base, as you go into 2017? Look I know it's early for guidance and you don't want to give us guidance on 2017, but when we put it together, you've talked about share buybacks here, lower interest expense and free cash flow, maybe technology picks up as booking pick up, but that was coming down. So, how do we think about the potential for growth off the base and where does that growth come from?

Michael S. Taff - Chief Financial Officer & Executive Vice President

Well, I mean, overall, I mean, some of things just to think about is, some of the large projects will be kind of reaching their peak next year. So, a lot of projects, as Phil mentioned, especially on the Gulf Coast, those are all new projects. So that we still expect backlog that in the year in the $20 billion plus range and with a healthy amount next year?

Philip K. Asherman - President & Chief Executive Officer

Yeah, Andy, just remember that since the end of 2012, we've booked over $50 billion of new contract. And most of these backlog we still have on our books, goes well out into 2019-2020, and we're going to add to that. So it's not as if we're facing a backlog cliff coming out. I think what we're going to see is a kind of a transition in the market. We're going to see more spending on petrochemicals and less on large LNG exports for a few years, but we also see that demand returning probably around 2020.

So it's a good, as far organic growth opportunities, I think it's a good projection. But this year we're in a tough, but I think we're hopeful that I mentioned that Train 4 at Cameron should be get FID in the first quarter, and we can get started on that. I mean, that's a couple billion dollars of award there.

Anadarko had some very positive things to say in their earnings call today as far as their forward progress, but that's going to take a little time. We've seen ENI make some positive moves towards their investment in Africa, but I think overall, Andy, when you look around the world, I mean, the fact that there's great news on investments by big IOCs at (44:24) in East Africa. ExxonMobil and SABIC just talked about a new Gulf Coast petrochemical plant. This is great. This is not something we've seen in a while, and so there's a lot of movement out there in major markets around the world as well as a lot of interesting national company investments. So it's a very active market.

So again, it's all timing. But I think the one thing that we've been able to do is we've got a lot of different ways to make money. We aren't heavily dependent on the large mega projects for our backlog. And so, all-in-all, we're pretty optimistic and I think the market is going to continue to improve through 2017. You're right, it is premature to make any predictions but I think, as we get close to the year, we're going to see some increased activities.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah. And (45:15) where we've kind of heard loud and clear from the investment community is maintain our discipline, as Phil said in his comments. And then, really we're just focused on execution producing very strong cash flows, and then that capital allocation program that I mentioned earlier along with debt reduction.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And so, given we know timing is hard to pin down. If you look at the run rate of about $3 billion in bookings in the first half. Again, to get to your $8 billion to $10 billion for 2016, do you need a pick-up in larger projects? Is this coming from the petrochemical side? Is there anything else that we should focus on to get you there?

Philip K. Asherman - President & Chief Executive Officer

Yeah, I'll tell you, it's about half of that's coming from power and petrochemicals, and then the rest from refining and the miscellaneous across the board. LNG contributes very little to that $8 billion as I said, we're looking at for the remainder of 2016. The other interesting thing is that the vast majority of that is North America, particularly in the U.S, which is I think is good news. So, this is all – these are all end markets we're very strong in. So again, it's timing is our challenge but certainly, if the jobs get approved, we're in a great position to be able to win.

Michael S. Taff - Chief Financial Officer & Executive Vice President

And the one large project in the second half of the year that Dan mentioned in his prepared comments is the Total ethylene plant here in the U.S. where we sold the technology into and we're doing that and the feed work there.

Philip K. Asherman - President & Chief Executive Officer

Yeah. And that's the home run.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah. Yeah.

Philip K. Asherman - President & Chief Executive Officer

I mean, that's the big elephant. But if you look across the board, I mean, there's a bunch of doubles and triples out there around the world that add up to a significant amount of money. So, we're on it and I think these are all great projects and, again, if we get timing, if the timing works for us, this year is going to be better than what we anticipate. If not, 2017, I think, is going to be an outstanding year for us.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Okay. Thanks, guys.

Philip K. Asherman - President & Chief Executive Officer

Right. Thank you, Andy.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Thanks, Andy.

Operator

Your next question will come from the line of Andy Wittmann with Robert W. Baird.

Unknown Speaker

I couldn't do it, like I was going to...

Philip K. Asherman - President & Chief Executive Officer

What?

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

That was the other Andy there. I guess we noticed, yeah, I noticed the comment of $14 million of adjustments. Mike, I think you referred to it. You kind of made it sound like it's on a bunch of different projects here and there. But, should we think of those projects as complete or very nearly complete, or are these meaningful kind of profit adjustments that are going to impact the overall margins for the next couple of quarters?

Michael S. Taff - Chief Financial Officer & Executive Vice President

No. They should be projects that have simply been completed.

Philip K. Asherman - President & Chief Executive Officer

That's a number, Andy, that every quarter, we talk about we have movements up and down on projects. We've got 1,000 contracts out there around the world. So, we do have movement up and down, depending on what quarter it is. But nothing that's out there that gives us concern of any kind of material impact on our plan.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

We appreciate that you always disclose that. We wish others would continue to do that as well, frankly. Just a couple other, I guess, what I'd say technical questions here is, Mike, can you give us maybe a sense of the average price at which you bought – I mean it's a pretty good amount of stock, probably north of $100 million. So, can you give us a sense of what the average price has been here so far this month?

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah. Well, we started buying at the first of the month. So, I mean, I think during this month, it's kind of been in that – between $36 and $40 range, something like that, in the U.S. (48:48)

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Got you. Was there any FX impact to revenue, EBIT or backlog that's notable?

Michael S. Taff - Chief Financial Officer & Executive Vice President

No. It's very minor. I think full year, maybe I think FX is about $40 million of an impact on revenue, that's for the full year.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Got you. And then, just in terms of the tax rate underlying the gain in the fourth quarter, do you see this kind of 26%, 27% rate being the way to think about the company, the mix of business for the next year or two, that the new level, or is there other stuff that's benefiting you?

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah. I certainly do. I mean, I do think that, for the year, we'll be in that 26% range and I think there's other strategic moves that we can make to even drive that lower. But we've made good headwind in a short period of time, and 26% is kind of the new baseline, I think, and then going down from there.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Great. I'll leave it there. Thank you very much.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Thanks, Andy.

Philip K. Asherman - President & Chief Executive Officer

Thank you.

Operator

Your next question will come from the line of Matt Tucker with KeyBanc Capital Markets.

Philip K. Asherman - President & Chief Executive Officer

Hello, Matt.

Matt Tucker - KeyBanc Capital Markets, Inc.

Hi. Good evening, gentlemen. Thanks for taking my questions.

Philip K. Asherman - President & Chief Executive Officer

Sure.

Matt Tucker - KeyBanc Capital Markets, Inc.

Just looking at your backlog and awards, I'm calculating, on a net basis, bookings that are about $600 million lower than the awards, the $1.8 billion that you mentioned. Is that difference all or almost all due to the nuclear maintenance contracts that got cancelled, or are there any other significant scope reductions or cancellations in there?

Philip K. Asherman - President & Chief Executive Officer

No, there were no cancellations. When I look at cancellations, those are contracts in progress, or contracts that were just cancelled or not going forward. This was the closure of the nuclear jobs, and there were three nuclear jobs, and I think all totaled, it had a backlog impact of around $400 million.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah. So, yeah. So, you answered your own question. Yes, it's mainly the nuclear service contracts under the Capital Services segment.

Philip K. Asherman - President & Chief Executive Officer

But I don't know if you caught the nuance of my comments, but as those are – they also create decommissioning opportunities, which may actually be of better backlog value to us than the maintenance contracts.

Matt Tucker - KeyBanc Capital Markets, Inc.

That definitely – you preempted my next question. I was curious if you have any sense for the timing of those opportunities, and I guess the scope available to CBI on average?

Philip K. Asherman - President & Chief Executive Officer

Probably a little. I mean, first of all, our scope is all mechanical, electrical, dismantling, those type of things. When we talk about decommission, we don't go near the fuel rods or anything to do with that. We have nothing to do that. But, the rest of those plants, it's pretty substantial work. We've got a pretty good track record in that. So we know the projects, we know the plants, we know the owners. Chances are we'll be in pretty good position to get a lot of that work.

Matt Tucker - KeyBanc Capital Markets, Inc.

Great. And then...

Philip K. Asherman - President & Chief Executive Officer

That tends to be on a reimbursable basis.

Matt Tucker - KeyBanc Capital Markets, Inc.

Perfect. And then in terms of, Mike, I appreciated your explanation of the guidance change, I thought that was very clear and helpful. And with respect to the book and burn, we're coming in lighter than expected. Can you give us a sense of certain various types of works or end markets where it's been materially weaker than you thought?

Michael S. Taff - Chief Financial Officer & Executive Vice President

I think it's just been across the board. I mean I think – and when I say book and burn, it's not just the small projects. It's really – it's less about the underpinning work as it is just kind of some of the anticipated larger projects that we expected to get during the first three quarters of the year that would turn into some incremental revenue in the back half of the year. And so you're seeing that from a total booking standpoint of $3 billion in the first half of the year. That's really the shortfall. And so, as Phil said, those projects don't go away. It's just those revenues now will fall into 2017, 2018 and beyond.

Matt Tucker - KeyBanc Capital Markets, Inc.

Great, thanks, guys. I'll leave it there.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Thanks, Matt.

Philip K. Asherman - President & Chief Executive Officer

Thank you.

Operator

Your next question will come from the line of Chase Jacobson with William Blair.

Philip K. Asherman - President & Chief Executive Officer

Hello, Chase.

Chase A. Jacobson - William Blair & Co. LLC

Hi, good afternoon.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Hi, Chase.

Chase A. Jacobson - William Blair & Co. LLC

Hi. So I think, in the Capital Services commentary, you were talking about stronger margin year-over-year because of a nuclear outage and refinery turnaround work. Were you seeing a pickup in those markets, aside from the projects got canceled or pushed?

Philip K. Asherman - President & Chief Executive Officer

Not necessarily a pickup. I mean, we have a good position in all of those markets. I think what I was trying to explain was that the margins really are due to increased efficiencies, reduced overhead and just running the business a little better. We are looking for higher margin opportunities, things where we can add values, not just labor and we're doing a better job at that. So that – what was it, 90 basis point?

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah.

Philip K. Asherman - President & Chief Executive Officer

That was really good news because that's tough business to get that on. But I think if we continue this discipline, that's going to be a great recurring revenue and earnings stream for us, never going to be really lights out kind of margin. But if you think about it maintenance, even on LNG and other projects that we provide, there's a collateral benefit there because when we have maintenance on a job that we perform, we've got warranty protection there, we've got ongoing work, we've got a technology guarantees. We have more control of any risk post construction than we would otherwise. We haven't been able to quantify, but that's an important thing to always remember. So, it's an important part of our business. And like I said, the margins we want it. The cash flows and the margins are what we focus on. And I was just very pleased to see a marked improvement this quarter.

Chase A. Jacobson - William Blair & Co. LLC

Okay. And then a question on the – another question on the margins in the E&C segment. Just I want to make sure that I'm clear here because this is the first quarter. It was a much lower this quarter than it had been for the last four quarters or five quarters. I think you've said part of it was mixed, but I think you also said that there were some charges there. Can you just kind of parse out for us what drove the lower margin in that business?

Philip K. Asherman - President & Chief Executive Officer

Yeah. The $14 million swing was companywide. That was the net effect. And some of that was in E&C, but nothing really material I would say. Some of that had to do with dilution on some reimbursement work. We're operating some fairly good revenue out of work in Australia, for example, that's a reimbursable job. We've added significant scope to that job. And that in itself is fairly dilutive to the overall margins for E&C. And other – it's really timing. Other quarters that wouldn't have been as significant, but because it was this quarter and other work was at certain phase in progress, that was a bigger part of our quarter than it might normally have been, but nothing that really alarms us. We think our overall E&C margins are going to continue at the top of the range, and our objective is push them higher than that. But going forward, we think our margin should be able to sustain itself.

Chase A. Jacobson - William Blair & Co. LLC

Okay. I think it's pretty clear here with the repurchases over the last month, but just want to be sure that this lawsuit has no impact on your capital allocation priorities as we look out over the next couple of years?

Philip K. Asherman - President & Chief Executive Officer

None. We've made special provision for that.

Chase A. Jacobson - William Blair & Co. LLC

Okay. Thank you.

Philip K. Asherman - President & Chief Executive Officer

Thank you.

Operator

And we have time for one final question. Your final question will come from the line of Jamie Cook with Credit Suisse.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Hi, good evening.

Philip K. Asherman - President & Chief Executive Officer

The best question of the day, Jamie. Okay. How are you?

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Good. How are you? I guess with the guidance reduction, Mike, can you just provide some comfort level on your ability to sustain the operating cash flow above net income? I think the number that you threw out historically would have been operating cash flow of about $600 million, so I'm just trying to get your comfort level there with the reduction and with the reduced awards. And also how we think about cash flow in a slow award environment because I know you still have some leverage targets that you want to meet?

And then, the second question for you, Phil, obviously, cash flow has been a concern with CBI, the Westinghouse lawsuit doesn't help the concern. My question is once this gets resolved, how soon could you get, I think, the $428 million or whatever that you've been talking about and how should we think about how you would use that cash?

Philip K. Asherman - President & Chief Executive Officer

Well, first thing we need to do is get it to the court and get Westinghouse to live up to their obligations in the agreement, then we can talk about what the true up is from there. We're not banking that money, but I mean if we did get any additional savings that we hadn't considered in our plan, we'd return that to the shareholders. But right now, let's just get this through the court. We'll get a quick resolution on this. We're pretty confident that we're going to prevail and we'll get this matter better behind us.

Michael S. Taff - Chief Financial Officer & Executive Vice President

Yeah and, Jamie, just to be clear, I mean, related to that matter, and then I'll answer your first question, the way the deal was structured, any additional cash coming to us would be well down the line to several years down the line as they make substantial progress on those jobs and that was the way it was awarded in the original purchase agreement.

Related to your first question, yeah, based on where we are through the first six months of the year at $440 million, we're pretty confident that we'll see operating cash flows for the year in that $650 range or above. So, I think well above net income this year. We made great progress and a lot of that will just continue to be what we did in Q2. Now, it's nice to have the large down payment in Q1, but otherwise we're really just focused on the basics, just focused on timely billings and reducing our DSO and improving – increasing the DPO and things like that. So, it's just a lot of basic blocking and tackling, hitting the milestones on the jobs and when we do timely billings and collections.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Great. I'll get back in queue. Thanks.

Philip K. Asherman - President & Chief Executive Officer

Thanks, Jamie.

Operator

Thank you. I'll turn the conference call back over to Mr. Asherman for closing comments.

Philip K. Asherman - President & Chief Executive Officer

Thank you. Well, before we conclude the call, I have a few remarks. Given the challenges and current volatility in the energy sector, we're pleased with the results our team has been able to deliver. We continue to delever the balance sheet, produce substantial operating cash flows. The backlog is producing very good margins and our integrated business model gives us opportunities on projects and in regions and markets, where our competition has difficulty to participate on scope beyond an EPC bid.

It's too early to predict 2017, but our position is good and I'm confident in our ability to respond to our customer's needs, while increasing our returns to our shareholders. Thank you for your questions, today and for your interest in Chicago Bridge & Iron.

Operator

Once again, we'd like to thank you for your participation on today's CB&I second quarter 2016 financial results conference call. You may now disconnect.

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