McDermott International, Inc. Q2 2008 Earnings Call Transcript

Aug.12.08 | About: McDermott International, (MDR)

McDermott International, Inc. (NYSE:MDR)

Q2 FY08 Earnings Call

August 12, 2008, 10:00 AM ET

Executives

Jay Roueche - VP of IR

Michael S. Taff - Sr. VP and CFO

Bruce Wilkinson - Chairman and CEO

Analysts

Andrew Kaplowitz - Lehman Brothers

Stephen Gengaro - Jefferies & Company

Roger Read - Natexis Bleichroeder

John Rogers - D.A. Davidson

Martin Malloy - Johnson Rice & Company

Tahira Afzal - KeyBanc Capital Markets

Chase Becker - Credit Suisse

Joe Gibney - Capital One Southcoast

Operator

Ladies and gentlemen, thank you for standing by, and welcome to McDermott International's Second Quarter 2008 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the conference over to our host, Mr. Jay Roueche, McDermott's Vice President of Investor Relation. Please go ahead.

Jay Roueche - Vice President of Investor Relations

Thanks, Lacy, and good morning, everyone. We appreciate your participation in McDermott's second quarter 2008 earnings conference call to discuss the financial results which we reported yesterday. With me on the call this morning are Bruce Wilkinson, Chairman and CEO of McDermott and Mike Taff, Senior Vice President and Chief Financial Officer.

Before turning the call over to Mike, let me remind you that today's event has been recorded and a replay will be available for a limited time on our website. In addition, some of the comments today will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our recently filed Form 10-Q, as well as our Form 10-K for the year ended December 31, 2007 for a discussion of the factors that may cause actual results to differ from management's projections, forecasts, estimates, and expectations.

I'll now turn the call over to Mike for the financial overview.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Thanks, Jay, and good morning, everyone. In the 2008 second quarter, McDermott set an all-time record in terms of consolidated net income, operating income, and revenues for a quarter during which the company reported net income of $177.5 million or $0.77 per diluted share. This amount is almost 19% above last year's $149.4 million or $0.66 per share, which included approximately $50 million in one-time benefits from contract cancellations and settlements in our Power business.

Looking at the top line, revenues were almost $1.8 billion, approximately 26% above a year ago. This increase came predominantly from the Offshore Oil and Gas Construction segment where revenues were up 50% or almost $300 million. In addition, our other segments, Power Generation Systems and Government Operations also reported revenue growth adding a combined $82 million to a year ago levels.

McDermott's operating income was $231.1 million in the second quarter of 2008 compared to $181.8 million a year ago. Strong increases in segment income at Power Generation Systems and Government Operations led the way representing approximately 88% of the consolidated improvement while Offshore Oil and Gas Construction improved more modestly.

Our provision for income tax increased about $22 million compared to the second quarter a year ago, reflecting both the $50 million increase in pre-tax income and an unfavorable shift to higher tax jurisdictions. Anyone who follows McDermott knows that forecasting our provision for income tax is challenging because we operate in many different tax and jurisdictions, forecasting where McDermott will makes its money is just as important as how much for tax purposes. In the 2008 second quarter, since our U.S. based subsidiaries posted record results, it brought our average tax rate up to over 26.4% from 21.9% in the second quarter a year ago.

While Bruce will cover most of the business items, I will give a quick overview of the components of McDermott's $231 million of operating income. Offshore Oil and Gas Construction had segment income of $98 million or about 44... 42% of our total, well above the weather affected first quarter of 2008, an improvement to a year ago. For the second consecutive quarter, Government Operations produced its highest segment income since inception with $42.5 million in the quarter. It was another strong quarter from our site management activities, which largely comes through as equity income, as well as higher volumes in the manufacture of nuclear components, both for commercial and government use, and we had some timing benefits on procurement contracts, which brought forward about $40 million in revenues.

Power Generation Systems reported an outstanding quarter as well at approximately a $106 million in segment income, clearly, its best in history. Improved profitability on existing contracts within our boiler and environmental retrofit project portfolio coupled with the associated percentage of completion effect and combined with a high level of parts and services work drove the quarter and its 15% margins. While, we wouldn't suggest this level of operating margin every quarter, we have increased our expectations for this segment now to the 7% to 10% operating margin range as it continues to demonstrate solid performance.

Now, turning quickly to the balance sheet. We ended the quarter with over $1.3 billion in cash and investments. Changes in working capital was the primary reason, cash and investments declined about $100 million sequentially as we are working off some of the advance billings we've built up. Despite the turmoil in the overall credit market, McDermott is well positioned from a liquidity standpoint.

In addition to our solid cash and investment position, we have several years left on our exiting credit facilities and we've recently were upgraded by both of the major credit rating agencies. Together, this provides a sound foundation to pursue McDermott's growth initiatives. In that regard, we've been active recently on the acquisition front. We've recently completed our announced plans for three transactions with a combined value in the $200 million range. We closed the acquisition of the Intech group of companies in July to expand B&W's capability in servicing the U.S. commercial nuclear service market strengthening its position in the Canadian nuclear service market and enhance its position in inspection of fossil plant customers. Much like our fossil power business, we want to keep coming back to the nuclear plants beyond just a period OEM offerings and Intech helps us accomplish that goal.

The largest proposed transaction of the three is our recently announced planned acquisition of Nuclear Fuel Services or NFS. This is a business that is part of the supply chain in our government component work and is a complement to our site management and operations activity for the department of Energy and combined it strengthens our advanced nuclear efforts. Bottom line, NFS is a really good fit for us.

The last purchase, which we closed last week is Delta Power. Delta Power provides operations and maintenance services to nine different power plants and we see this business as the platform to grow our ability to serve larger plants and there are a number of these opportunities on the horizon.

In addition, Delta Power provides the opportunity for follow through with our aftermarket sales of parts and service work while strengthening our biomass and waste-to-energy offerings and diversifying us into gas. Clearly, our game plan is to grow each of these three businesses. We are excited about each of them and are pleased to have them join McDermott.

Let me now turn the call over to Bruce for his business and operational update.

Bruce Wilkinson - Chairman and Chief Executive Officer

Thanks, Mike, and good morning, all. I am very pleased with McDermott's second quarter overall, but it's fair to say it played out differently than some of you might have expected. It's somewhat the nature of the engineering and construction business coupled with the vagaries of percentage of completion accounting. The most importantly it demonstrates the benefit of McDermott's diversified energy EMC business. So, there is a lot to talk about in our segments this morning. Let me jump into this specific, so there will be plenty of time at the end for your questions.

Beginning with Offshore Oil and Gas Construction, revenues of $872 million were a quarterly record for the segment, but it was about $115 million below the amount we had expected to roll off from backlog. Operating income of $90 million in the Offshore Oil and Gas Construction segment was largely in line with what we would expect all things considered. The total amount was lower than we anticipated due to the revenue shortfall, but the margin was right in the middle of the 10% to 12% range we've consistently suggested. Since we beat this target range throughout 2007, the obvious question may be why didn't we exceed it again this quarter, and there are a number of factors contributing to this.

First, as we discussed in the last call, our 2008 backlog has more procured items and higher number of less risky cost plus and unit rate components in our contracts. Meaning that the portfolio of projects has changed. Secondly, we have been outstanding in managing material escalation like steel, but there have been inflationary effects felt elsewhere, namely fuel, labor, and subcontractors, which have eaten somewhat into our contingency that a year ago, we were consistently harvesting to profit and now more of it is becoming cost.

Third, we are positioning our offshore construction business for long-term growth, which means we are incurring cost today which are really longer-term investments, such as starting of new facilities in Mexico, China, Kazakhstan, and expanding our subsea construction business. Additionally, the benefits from change orders and other closeouts have declined thus far year-over-year and at the same time, our SG&A has increased in the higher overall workload. Project closeouts do have their regular timing.

Finally, some of the project delays we have encountered have added cost to certain projects, such as extra marine gains and also it potentially exposed us to penalties on some contracts otherwise known as liquidated damages. You probably noted we have recorded about $4 million of these penalties in the second quarter of this year. The accounting for liquidated damages often increases the already lumpy nature of the E&C business. Frequently customers tell you verbally they do not find to assess any penalty, our history will indicate they don't enforce the charge. We also may have an offset to LD claims, such as contractually excusable delays.

However, unless we get agreements in riding which customers are normally reluctant to provide until the project is complete, accounting rules usually require we record the expense once contractually incurred, often only to reverse the charge down the road. Typically though customers want an operational solution on delayed projects rather than simply charging liquidated damages. So, while there have been changes and various challenges occurring as I described, Bob Deason and his team have not been sitting idly by. The group is actively addressing current execution issues, pursuing operational improvement initiatives for some of our projects, and working with customers to limit schedule driven penalties, pursuing growth opportunities, and adding new work.

We are far from alone and dealing with cost increases in scheduled delays, but in spite of this we are still leading the margin pack. And truthfully, most companies in our peer group would relish having what I say may sound like challenging problems, if they could have our segments at 11% operating margins this quarter while continuing to position for growth. I want to assure you that eyes are clearly on the ball, the market remains strong and I believe our customers truly value our work product as evidenced by over $800 million in new awards we recorded this quarter in the Oil and Gas segment. We had just over $2 billion in bids outstanding at the end of June, and our focus list continues to grow now to over $12 billion. At the same time, the backlog in the segment remains robust at almost $5.3 billion, which is right at our all-time high and provides us good visibility for the coming periods.

We also have a number of projects we believe will be booked in the backlog soon like the second phase to Saudi Aramco's long-term agreement and there are also feed contracts in the backlog such as Barzan in Saudi that have significant future work scope opportunities, which we would hope to win. I've congratulated Bob and his team many times during these conference calls for the segment's outstanding performance. In this oil and gas environment which appears to have a long cycle ahead, I believe that future remains bright for Offshore Oil and Gas Construction business. Our praise of the results delivered by their team has been well deserved and I am confident you will hear more of it in the future. Speaking of praise, let me move on to the Power Generation Systems segment. This segment generated almost $700 million in revenues during the quarter reducing record operating income, which resulted in mere double-digit margins. They were truly hitting on all cylinders. There were a number of opportunities that we realized during the quarter including some project closeouts and settlements, improved contract performance with percentage of completion effect and timing benefits that makes this level of profitability and margin above what we believe should be annualized. Such results are very much real and part of our business.

As Mike indicated our Power segment's recent performance yet provides us the confidence to increase our expected target range for segment operating margins to the 7% to 10% range. Over this past year, you've heard me anticipate the operational efficiencies and potential for expense savings that would come from having the fossil and nuclear operating groups under a common management team. I believe this quarter we began to see the reality of my prediction. Certainly, mid-way through the year, our Power Generation's business is off to a very good start.

With bookings of over $500 million in the second quarter, backlog grew over $200 million compared to a year ago, but was down modestly on a sequential basis. However, we still have about 2.6 billion of bids outstanding in the Power segment. These bids include several boiler projects for coal, waste-to-energy, and biomass, as well as the sizable number of environmental projects plus numerous bids under the 25 million size typically in the parts and services business.

Customer decisions on some of these bids we believe were very close. We should be announcing soon at least two awards for the Canadian Tar Sands projects where we are assisting oil companies by providing steam systems that are needed for mining and oil extraction there. In addition, we expect to begin seeing an increased international award activity on the OEM retrofit and service side, which will be incremental to our strong North American market share.

Besides our segment's exceptional results, the other major news, which recently announced was that Washington D.C. federal appeals court overturned the Clean Air Interstate Rule known as CAIR. This rule has been a major driver behind our scrubber and SCR business and at first blush, it would be tempting to view the court vacating the rule as a negative. I don't really view at that way. United States has never taken a permanent step backwards in environmental regulations to my knowledge. If anything, history says we only become more stringent.

One of three events is likely now to take to occur. The EPA could appeal further to the Supreme Court, Congress could take up legislation and pass a lot of replaced care or the individual states will likely create their own rules. I believe that Congress will be the first to act considering the green move that most of the countries remains in, and I fully expect that congressional restrictions will affect more states rather than just the 28 existing ones and might include more emissions perhaps, including CO2 and mercury in addition to dealing with SO2 and NOx and will be more stringent than CAIR possibly without a cap and treat approach. And we will have a shorter implementation time lines in 2015. Between now and then it's possible that short-term uncertainties could cause some CAIR driven project delays, which is primarily from merchant plants in the deregulated states, but I don't believe there will be cancellations of projects, mid-streams since utilities also recognized that the rule was overturned primarily because it wasn't stringent enough and they recognize that a replacement law is coming. Many of our scrubber and SCR projects are driven by something other than CAIR such as the New Source Review issues or state regulation, which won't be effected by the appeals court decision. For instance in July, we received a limited notice to proceed on the scrubber and SCR project that could ultimately be a very significant award to us, which is being driven purely by state regulatory issues.

Additionally, projects in regulated markets where the owner is pretty well assured of a return on investment probably won't be impacted either. In total, I think in the not-too-distant future, we will be seeing an increase in our Power business as a result of new and more stringent environmental regulations. In the mean time, coal utilities continue running their older plants longer and harder. This is good news for our profitable parts and service offerings. Some of the plans that were previously forecast to be shut down in the near term are now likely to stay online as America needs the Power, which means additional retrofit opportunities become a future possibility for us. And I still believe that new generation utilizing our country's most abundant natural resources coal is inevitable.

Like Mike, I am excited about the two new acquisitions for this segment, Delta Power and Intech, and I welcome these employees to McDermott. Wrapping up the Power segment, I want to congratulate the leadership and employees in this business for again delivering outstanding results we achieved this quarter.

Concluding with our Government Operations segment, our revenues in this segment during the quarter were over $225 million, 34% increase above a year ago. This revenue level was elevated by about 40 million in procurement contracts executed during the quarter, which we do have time to time. Like the Power segment, I am very pleased with the quarter and year-to-date results for our Government Operations business. Although we lost a couple of high profile M&O competition this year where we held the minority interest in the bid, there is still a number of good growth opportunities on the horizon. With the high cost of petroleum fuels and the current requirement for the Navy to maintain an extensive supply chain for refueling ports, there is a lot of discussion in Washington about potentially increasing the number and types of vessels that are powered by nuclear plants.

As we previously discussed, Congress and the administration have authorized the procurement or second Virginia class submarine, which should increase our awards in 2008. The cruiser program is also receiving a lot of discussion and consideration for nuclear power. We think this makes a lot of sense and we are working with Washington to show how McDermott can support such an initiative. We remain on a number of upcoming opportunities for site management and operation offerings as well. Some of the sites are large and others are smaller but our goal remains to add to our experienced project, which make a difference. The outlook for this service offering remains strong.

Mike mentioned the planned acquisition of Nuclear Fuel Services, it's a prefect fit for our Government Operations segment. It is part of the supply chain of our nuclear component work. NFS maintains an NRC Category 1 license as do we. They have a number of Department of Energy M&O sites that don't overlap with ours. Typically, they are in especially nuclear operation support role to one of the larger players, and like us, we see increasing opportunities within the commercial nuclear market. It's a natural fit and we're looking forward to clearing the required approval processes and planning to close the transaction in late 2008. That wraps up my prepared remarks for operations.

In summary, the businesses continue to perform well. We have issues and opportunities within each of our segments, and our primary focus will continue to be on execution. A few words on the CEO search for my successor. McDermott's Board is actively engaged in this process. When I announced my intention to retire last February of this year, I stated that my expectation would be that it would be achieved before year-end. I still believe we will meet that target. Whoever my successor ultimately turns out to be, McDermott is an outstanding enterprise. Bench strength is strong and our 28,000 employees are, in my opinion, the best in the industry. Our activities with investors will get in the high gear again at the start of September. We are presenting at four conferences beginning right after Labor Day in September, running through mid-October, including twice in New York and ones each in San Francisco and New Orleans. With several geographic options to choose from, we hope to see many of you at one of these venues. I will now open the meeting up for your questions.

Question and Answer

Operator

[Operator Instructions]. And our first question will come from the line of Andrew Kaplowitz with Lehman Brothers. Please proceed.

Andrew Kaplowitz - Lehman Brothers

Good morning, guys.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Good morning.

Andrew Kaplowitz - Lehman Brothers

So, in the J. Ray business, you talked about, having to take some extra marine days on specific projects. Bruce, what are you doing to try and alleviate what look like some bottlenecks because you've had the ramp-up so quickly, is there anything that you could do over time to sort of ease the stress in the system?

Bruce Wilkinson - Chairman and Chief Executive Officer

There are a number of things, Andy, and we're working on all of them. First, I should characterize it as... it's really a lot of projects at the same time fortuitously in the same geography, primarily in the Mid-East. And so, in the Mid-East, historically, J. Ray had one permanent vessel, the DB27 and from time-to-time we would move in the KP1 or DB30 out of Asia. Now, we have all three of those, plus DB101, as well as some of the Secunda vessels, all in that one geography. And so, fortuitously earlier slippages on projects forced an inordinate amount of activity at one time in one place. We are working with the customers, which when you see things like revenues moving to the right or slippages, sometimes... and we have a number of projects where frankly we could stay the course and in the end, we might be late, but we would still be ahead of the onshore activity of the customer, for instance, at a LNG or GTL facility.

·

And so that being the case, in other words, to complete wellheads for which there is no terminal, it doesn't make sense for them or us. So, we are working with them in some cases to move them out of the quarter and in some cases out of the year. The other thing we have done in a couple of instances is [inaudible] the McDermott strategy has been to implement its projects through its owned assets and that is always been the way we've done it with the exception of cargo barges and things like that, but as far as the lay barges and heavy-lift barges it's essentially been through our own footprint. And so and that's not necessarily the way all companies do it. You can look at some marine contractors make a liberal use of chartered vessels, or if not so for instances Secunda vessels were chartered to some of our competitors from time to time. And so we've a couple of instances where we are looking at or have looked at or actually contracted someone else's barge on charter to bring in to alleviate some of the blockage.

So, we are working all the issues. We are not sitting idly by and hope it goes away, but it is... it does have some challenges; it does have some bottlenecks. One final comment I might make it's a longer term fix, it will hopefully began in '09, hopefully help one of the CapEx decisions that was recommended by J. Ray, approved by the Board was to go ahead and actually acquire a shallow water lay barge that would be used long term in the Mid-East because what happens is in much of this activity there it's not just offshore, it's close end of the beach. It's the beach falls, there is a lot of work in congested areas, and so that is, we have not typically... our barges are not typically suited to that.

We are more in the mid-to-deeper water and because we saw through the Saudi LTA opportunity and other projects that we think will have a continuum for years to come, we believe it was in our best interest to maybe go ahead and add something like that to the fleet, and that is ongoing as we speak today, but we'll be more of mid-to-late '09, it will come into the fleet there. So, essentially we are working it daily, and I think we will continue to improve the situation, but there is no question, we have a lot of activity in the water, and in some cases in the very same water. Is that--?

Andrew Kaplowitz - Lehman Brothers

Yeah, and that's definitely helpful, Bruce. Do we get more comp... or can we have more comps instead you will be able to reach your backlog burn estimates that we see for the rest of the year, I mean are we getting closer to where you've sort of figured out what things will be in 2008 and what things will not?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, I would say that we, certainly compared to the first quarter, the second quarter would indicate we are gaining on it, but we didn't get there, and I think it still has challenges. I would hope that we continue... I think it's... there's not any miracle overnight of fix, it just makes it next week to come out perfect. I think all those things I mentioned incrementally get us going in the right direction, and I believe we are getting there but it is a challenge.

Andrew Kaplowitz - Lehman Brothers

Got you...

Bruce Wilkinson - Chairman and Chief Executive Officer

What... Andy, I might say that if you... we give you these backlog roll-off numbers. And in reality, we started quarter with an expectation, we are talking. J. Ray has got about 25 or 30 projects, it is not an infinite number of things we are dealing with, it's some finite projects. And when we... and quite often the next 90 days if you look within backlog, it has an enormous change. It's not the same projects in the same state. For instance, that we... if we took a big chunk of backlog and in agreement with the customer moved into '09 and that backlog may have been, it may have been one that we talked about 90 days ago, but it's gone for the rest of the year and some new stuff came in. And so, it's a constantly moving thing, and so, I think you can assume it some through that plus the other fiscal assets were thrown at it. Over time, we will improve and begin to hit closer to the target, but it is definitely a crowded calendar.

Andrew Kaplowitz - Lehman Brothers

I understand. That's helpful. In Power Generation, obviously nice results on the quarter, but I noticed that your equity income from China swung to a modest loss in the quarter which you know it is material cost inflation in the Q. Will that continue or is there anything that you can do to sort of get the earnings back from the JV?

Bruce Wilkinson - Chairman and Chief Executive Officer

I thing we haven't refinanced to my understanding, and it's interesting over there, we don't have a lot of the risk that we have in this country because we don't do construction, we are really just a manufacturer of the pressure parts, but the fact is as we do have some risk on material there that we don't have here just because the way that the system works there, and China has had run-away costs, their inflation is highly publicized, we got caught by some of it. We also think there may be some potential recoveries that we can claim for that, we certainly are going to ask and try and believe we may have a real shot at that too so. I don't view that as an ongoing permanent issues to be concerned about.

Andrew Kaplowitz - Lehman Brothers

Great. And then one more question, if I could. Looking into cash on the balance sheet, it is just down a little bit, you mentioned work-off of advance payments, that's very reasonable. When you go forward, do you see... the cash balance starting to rise again as you book these projects because I know that there is a couple of costly contracts in progress that have to risk that up a bit. Is that just because you are doing a lot more contracts in the field nowadays and that's really what we are seeing?

Michael S. Taff - Senior Vice President and Chief Financial Officer

Andy, this is Mike, I think overall , I mean what you are seeing is just kind of the ebbs and flows of the types of contracts that we're booking. As we moved more to a unit rate type basis some of the J. Ray projects, we just tended to be a more of cash neutral type contracts and just was only bringing in our profit and depreciation. So in general it is just kind of... it depends on the kind of mix of the projects in the portfolio but it's nothing we are overly concerned about. I mean I think you will see... continues to see us invested in things we have invested in the past, which is CapEx working on our under funded pension position. We've announced the three acquisitions in that $200 million range. So we will be using those funds over the next two quarters. In addition, continued investing and some R&D efforts primarily at B&W.

Andrew Kaplowitz - Lehman Brothers

Great. Thank you. I'll get back in queue?

Operator

And our next question will come from the line of Stephen Gengaro with Jefferies. Please proceed.

Stephen Gengaro - Jefferies & Company

Thanks. Good morning, gentlemen.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Good morning, Stephen.

Stephen Gengaro - Jefferies & Company

I guess two things and the first is on the J. Ray side. Your backlog roll-off in the third quarter is kind of lower than it was three months ago and I am just... can you help us in more detail, trying to understand what went on exactly? I mean, the first quarter you had a lot of weather disruptions. In this quarter, it seemed like there were some other issues. I mean, did you just book too much work? Is there... just trying to get a grasp on kind of how to think about it in more detail and how to think about the margins going forward at J. Ray?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, I think and... weakly, I touched some of this with Andy's question. I think it's a... it looks like it happens all at once, but in fact, in reality, it sort of... it happens sequentially kind of step at a time and, in fact, some slippages on the contractor too, going all way back to '07 really what it... when it puts from an expected good weather window into an anticipated bad weather window, then you're suddenly confronted with the reality that's in the twelve-month cycle, some of the months are better than other months. So, it really is... again, if you think about every time when we bid the work, we look at the projects and we have a... just whether it's a fab work or marine work, we don't... we certainly don't bid work where we have no capacity to deliver it.

We bid it based upon existing known-schedule, other bids outstanding and win those where various work margins are open, and then the competitive marketplace when we price that. So, in a steady state, it's a perfect world on an ask-bid basis, but what we really described to you is in a full construction market like this, it is not a steady state, it is very, very dynamic, and there are constant shifts and changes. So, it's not a case of... I mean, the great irony is right now we... if you take our fab business, we have... I can count 12 to... 11 to 13 million man hours of under-utilized capacity as we sit here today in a very busy marketplace, as well as there are even some places where we have a few days here or there, where the marine margins are not fully utilized.

So, it is just in the various areas of world where we work, it's a constantly changing marketplace and we are trying to change with it. So, I think it just a... it's compounded, as I said, right in the Mid-East right now, and I think we working through it and it will improve.

Stephen Gengaro - Jefferies & Company

So, is it a contracting issue, is it an execution issue, is it both?

Bruce Wilkinson - Chairman and Chief Executive Officer

I don't think it's... again, I don't think it's a... I would consider it a contracting issue. If you price something too low, not enough margin, not enough contingency or when you are fully booked, that is clearly a contracting issue. None of that is happening or has happened. What it really is it's the construction industry is a challenge on any day and in the water it's more challenging than it is onshore. I think what we've had here is a case where certain slippages of projects actually were you then are ahead of the game in your onshore activities and you have a full fab yard over crowded with product ready to go and a need for all the barge activity to happen at once, which is sometimes fortuitously at the request of the customer to move the schedule and in some cases it has been execution as well. I mean there is no question, you have to execute perfectly to not have some of these issues today and being perfect is difficult in the offshore business as it is in gulf in my opinion. It is not... it's not a very forgiving world when you, the difference between six-foot sea state and four-foot sea state makes a huge difference in the way you do your welding for instance.

So, the fact is it's not a perfect static state out there and we have had challenges with it. We have mentioned that it is true on the last guy around it, I want to put blame on events like weather because I am always first to take blame where I feel like we have had blame to your reassess, but it is true that we've had extraordinary unusual weather conditions all at once, like kind of the opposite of year or so ago where everything worked perfectly. And it is also true that may not sound much to you but when we were beating the margin expectations that all of you had, our downtime... downtime in a project can be due to our own equipment or due to sub-contractors. And so when you... so again it all has to be perfect but going back a year or two years ago, we have reduced that downtime by investing in our own barges having more spare equipment, updating everything we could before we went out on a marine campaign.

We have reduced the downtime to call it 2%, 2.5%, that number is closer to 4% these days, which is partially what we can control but it's partially when you bring in once again in a full construction business environment. You bring in sometimes sub-contractors whose equipment itself is on the ragged edge and then you suffer that. So, this is a long way of telling you. It is a full market out there and everybody is working stressed to the help and it's not a game of perfect right now.

Stephen Gengaro - Jefferies & Company

This is the final follow-up. When you look at the work you are bidding on right now, are you asking for demand in getting better terms, better contingencies, and how are you going about bidding work in this kind of an environment, or you obviously have good visibility, you are pretty busy already obviously? I mean are you--?

Bruce Wilkinson - Chairman and Chief Executive Officer

Yeah, we are taking into account knowledge that's gained daily, for instance, we, everybody thinks that the $140 barrel of oil only affected the airlines and the travel industry. Well, the fact is it's... our barge is going to sell up to DB50, used to be maybe three quarters a million, it's probably a million quarter now just for fill-ups. So the fact is that even some of the big numbers that we most of these project were bid in... those are in the marine phase were bid most likely in '06 and went through the fab phase in '07, and are now in the marine phase, and so we put big numbers... we thought

they were pretty bullish numbers and yet we miss some of those, and we are... so we are taking that into account. We also are taking into account the reality of this downtime phenomenon I mentioned and we are trying to anticipate all that. So, but the fact is, we are sitting there still projecting that our fuel cost will be on the rise that it's been on in the last three weeks, it's certainly permitting [ph] the other ways, so we might pick some of that up. So, yeah, we, every day's experience gets reflected in our bids for the further going forward.

What I would always help of course is all the competition figures that out like we do because what you always worry about is the other clearly, it doesn't and it continues to be at something low when in fact the reality in the marketplace suggests it to be other way. So we are certainly trying to compensate forward in our thinking.

Stephen Gengaro - Jefferies & Company

Okay.

Bruce Wilkinson - Chairman and Chief Executive Officer

And I would say to that I think... the way to look at this is that the ask-bid, ask- margins, the ask-bid, the backlog, the way if you have looked at it on a year or two ago look at it now, there is really not any sea change at all in that. What is going on is the phenomenon that all of us have grown below is when we don't need the... when we estimate all the cost correctly we don' t need the contingency and the contingency becomes profit. And today we and everybody in this industry are finding that some of that contingency actually goes to cost, which is not uncommon and is more typical on a long... long look back at the industry.

Stephen Gengaro - Jefferies & Company

Okay thank you.

Bruce Wilkinson - Chairman and Chief Executive Officer

Sure.

Operator

And our next question will come from the line of Roger Read with Natexis. Please proceed.

Roger Read - Natexis Bleichroeder

Good morning.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning, Roger.

Roger Read - Natexis Bleichroeder

Bruce, it strikes to me the Offshore Construction piece has been hit pretty hard, so maybe let's talk about what's going really well in the power gen business?

Bruce Wilkinson - Chairman and Chief Executive Officer

[inaudible].

Roger Read - Natexis Bleichroeder

The 7 to10% margin, I mean obviously below what you got in the second quarter but above what we kind of thought of historically and I think which you indicated occurred back in the 70's and 80's. But what is about the second quarter that doesn't appear to be sustainable meaning was if you just kind of enlighten us a little bit there may be?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, it may be that just the timing on a few things... there is... 90 days in the 30-month construction project a 90-day period will always have some good stuff and sometimes or more good stuff and bad stuff and may be some of that. But, frankly we had been struggling with some of the cost overruns on our construction side in the fossil business and we... I believe that we have got that going in the right direction and the other thing we've commented on the last couple of quarters has been the de-risking of that type of works so that and if you go back two years ago, you would have probably 80% or 90% of the construction activity of B&W would have been of a lump sum nature. Today that's reversed and it's much more on a cost plus or a fee with target prices and incentives. So, I believe that is... we should... that is sustainable, that should continue. The other thing is we've been predicting, of course, that when you deny a reality and you don't add duke capacity in this country and you just run, run... run the most profitable plants the most of the time which is what we're doing with the coal plants that the parts and service business should be entering a golden era.

Certainly, the service company of B&W had a fabulous quarter. I don't have a reason to believe that that's going to change. I don't know it will all... it will be as fabulous every quarter, but the background conditions are such that it should continue. And finally too, I think it's settled there, but it's... the BMW enterprise across all of it, including the nuclear part of it, has an enormous amount of different things going through the income statement compared to J. Ray, that's may be 30 projects, and it's a game of interest. And it's a... and it's the place where we instituted in the nuclear businesses years ago, the Six Sigma discipline process and Lean Sigma.

I think it's being applied to the integration of the two businesses and that this quarter we began to reduce some of the unabsorbed operating expense. So, we are looking, I think, better at the system of where and how we do the manufacturing part of B&W, where we have unabsorbed expense and what we can do to change that. So, I think it's a day in day out betterment approach that's once you have one unified management team overseeing what for many years was two stand-alone separate businesses that had no reason to talk to one another almost, I think we're beginning to see some of that too.

So, I don't .. I'm not here to tell you that I don't want to suggest that it was just a one-off quarter that can never happen again. I think it is at the high end of the range, but we used to say six to eight and then we said seven to ten, that's more on the high side and one point. So, I think I have growing confidence that we really are hitting on more and more cylinders in that business.

So, the other thing too, unlike some of the other boiler businesses, we're not that dependent on big OEM projects. It's true we need them, we can't just not build major projects forever and be sustainable, we don't think that will happen. But the installed base of B&W is enormous, its system out there is huge and the array of parts and service and even just things down to the ash business, some of the tube cleaning business, Diamond Power, we have a lot of things growing for us that some of the others do not have.

So, basically I am pretty bullish about how they are performing and I think this margin was really on the high side, but I don't want to... I think by raising our expectations, it suggests that we think that a lot of it is sustainable.

Roger Read - Natexis Bleichroeder

Okay. Follow-up on, you mentioned the services work several different times. Are we seeing a reduction in the typical seasonality of the services and parts or but I think back to when you first reconsolidated B&W or power gen, how we had that one month in March that was so strong and you said don't annualize this, count down take this to the next quarter, clearly there was seasonality in that business, is that getting somewhat muted with the higher utilization?

Bruce Wilkinson - Chairman and Chief Executive Officer

It could be. It's clear that the shoulder months, the spring and fall are the preferred time to do that sort of work that's planned. I think what may be happening now is we've got more that's on the fly and unplanned and they are just greater pressure on the turnarounds. So I think customers will be trying to reduce the timeline of genealogist [ph] and it's not, they don't they're just losing a lot of money, every day they are not up and running. So I think there is more pressure on it and it could become, we could have the shoulder seasons get extended somewhat you might say.

Michael S. Taff - Senior Vice President and Chief Financial Officer

The other thing you're seeing, Roger, too is in that business just the average kind of ticket price that we're getting has been increased as a result of just more work needed to keep up these plants running.

Roger Read - Natexis Bleichroeder

Okay. And then my final question is still on the power gen segment, given the backlog has been relatively flat, revenue didn't change a whole lot sequentially here. Do you think this is a business that I don't know maybe it's still single-digit sort of top-line performer on a year-over-year basis or is there some sort of log game out there that we may see break... in maybe the business picks up. Obviously absent new cold boiler orders because that would be one thing that would truly kind of gets going?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, I think domestically, the, something that would be a big break out of the topside that shows a step change to the upside probably is somewhat dependent on getting the regulatory regime behind what we're doing in the energy policy sort of that. I think what you will see more of from be the B&W unrelated to that is success outside of the what you would expect us traditional market to be, we have more credentials and more activity in waste energy and biomass and people realize. We have a number of initiatives ongoing aggressing the international market the activity I alluded to in the Tar Sands small but clear example of that. So I think you will see the regime running the operation up there, more aggressive outside of the traditional North American market and because it is a huge and robust market in many places outside of North America. So I think of our own accord, you will see us take firmer grip on the range and try to drive the growth in some ways that are not just living within the current box so to speak.

Roger Read - Natexis Bleichroeder

Okay, thank you.

Bruce Wilkinson - Chairman and Chief Executive Officer

Sure.

Operator

And our next question will come from the line of John Rogers with D.A. Davidson. Please proceed

John Rogers - D.A. Davidson

Hi, good morning.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Hi, John.

John Rogers - D.A. Davidson

First of all, on with respect to the J. Ray side for a second, in terms of your China joint venture for the deepwater vessel, when might we hear something in terms of projects there, where you're already booking [inaudible]?

Bruce Wilkinson - Chairman and Chief Executive Officer

No. That's probably, I would say it's 2010. It's year and a half out that we're....

John Rogers - D.A. Davidson

It's from the bookings or revenues?

Bruce Wilkinson - Chairman and Chief Executive Officer

Both. I think that.... I think the belief there is that some of the first work would be booked, would be actually for the offshore market in China and the big picture, the big objective is for the FPSO market that sort of thing for export. But the reality is the... on the short term, while getting ourselves qualified for the big step, I think we would expect the Chinese partner to help deliver work into the joint venture that would be for the.... a more traditional offshore market in China first.

John Rogers - D.A. Davidson

Okay. On a little bit short-term basis, if you look--?

Bruce Wilkinson - Chairman and Chief Executive Officer

Yes. That would, I would see that as being a little bit like if you... the objectives that we have and down in Mexico longer term, I think many of you know is really to develop our facility that will go after the big deepwater offshore activity in all of the Gulf both U.S. and Mexican sectors, but it starts out with rather modest work with PEMEX doing traditional work in order to get the management team working on real things, and I think you'll see that sort of pattern likely develop with the Chinese joint venture as well.

John Rogers - D.A. Davidson

Okay. And on a little bit shorter-term basis, as you look at the rest of the year and in the first part of 2009 on the J. Ray business, are there any significant project closeout, if you... or timing issues that we should be thinking about?

Bruce Wilkinson - Chairman and Chief Executive Officer

If you're asking about the extraordinary numbers, either way, negative or positive. I don't know of any of that just hit me between the eyes, I think what happens is again if you take... when you take moving schedules, you move the time of closeout, you move the time of those events and so it could very well will be, I mean we've got a couple of big projects still going on in Asia that are going very well. I think there is some opportunity, but I don't think you should think of that as determinative one way or the other.

Michael S. Taff - Senior Vice President and Chief Financial Officer

And I think, John, those happen just depending on the timing of when those occur. It's hard to predict those exactly when those projects herein exactly wrap-up and we assess the overall profitability of the job and no matter continuous, it's remaining and how much is left and how much is needed, things like that and such things that we assess on a quarterly basis.

John Rogers - D.A. Davidson

But the delay in some of the work eliminate the probability of that?

Bruce Wilkinson - Chairman and Chief Executive Officer

No, I would say, it would, depending on the circumstances of delay which is, if it's really a percentage of completion, if it's POC issue only, then you still have the remaining part of the profit to recognize as well as any remaining upside of contingency if it's there.

-

John Rogers - D.A. Davidson

Yes.

Bruce Wilkinson - Chairman and Chief Executive Officer

It's just, simply saying that, if we start the year and you think, you've got X number of projects closing out in the year, but you've got 20% of the move to next year, then it affects all parts of the project.

John Rogers - D.A. Davidson

Okay, thank you.

Bruce Wilkinson - Chairman and Chief Executive Officer

Sure.

Operator

And our next question will come from the line of Martin Malloy with Johnson Rice. Please proceed.

Martin Malloy - Johnson Rice & Company

Good morning.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning, Marty.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Good morning, Marty.

Martin Malloy - Johnson Rice & Company

Could you talk a little bit about the timings... the potential timing of some of the awards for the marine construction segment, the bid... or the potential projects you're tracking keeps increasing, and yet we are not seeing a lot of awards press released?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, it's... I... we have this discussion all the time. We try to get you guys convinced this is not a 90-day ball game and yet you want to make it that, and I wish it were more orderly because $12 billion in focused project is a big number. But it's an array of things out there that we do track, which we believe we have reputation, skill set, assets, everything that it's something that we are competitive and, but it is definitely lumpy. It's... I think as recently as... must have been six months ago, I saw rumors out in the trade press, there were big articles that J. Ray awarded the Barzan project and that was just what the trade press said, but the reality is the project is still out in front of us and we just said that we are working on the feed part of it, and... but it will be what it will be.

So, it is just lumpy, Marty, I think clearly on the shorter term, we expect some more of the Saudi LTA work. We would have expected it in the second quarter, it didn't happen, but some of that likely to be in the third. And we have a number of other significant projects that if I added them all up, if they stay on track, you will be happy with the number. But again whether or not they are precisely in the third quarter and in the fourth quarter, or some went into the first quarter of next year, it's really hard to say right now.

It's just... the fact is that I think what want we know, that we see and live with every day, it's hard for the investing public to accept, and that is $140 oil does not make magically, everything happen quicker and a $100 oil won't make it magically happen slower. These are big complicated projects, heavily engineered, lots of logistics, and the last, these challenges that the industry is having, serving this full market are well known to the customers and the customers don't want to just put themselves into the buzz [ph] knowingly. So, they also will try to arrange it such that it is a more orderly like. And I think... so over time, some reduction of the oil price, I think is a positive, I think it will get... there will be greater consumption, the demand destruction if any that started in this country and Europe will subside and it will be a positive thing for us.

So, we're just dealing with typically the last phase of what started sometimes five years ago with initial discovery or something that is going to be very, very costly to put in and they just all have their own timing, frankly.

Martin Malloy - Johnson Rice & Company

Okay. And could you talk a little bit about the cash, you still have a fair amount of cash after the recent acquisitions and how given where the share price is, how share purchases might fit into your ranking as far the uses of the cash?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, first of all, we've announced three acquisitions, the largest of the three is one that we announced yesterday and that cash has not been spent. So, that which we've spent is really been the more modest ones of the three. And it's still... we discussed it actively at the Board meeting. I don't think there is a clear direction from the Board that it is the highest priority, we have not ruled anything out but the real fact is that we believe that in all our markets, the big energy markets we serve, there is nothing, the short term, the temporary reduction and the price of oil or any of that has not changed [inaudible] the long-term outlook and the opportunities that we have.

For instance the shallow water lay barge I mentioned, that's my recollection that's kind of a $90 million order of magnitude, I think. So and that's an investment for something that's '09 and beyond. So, I think we are still persuaded unless something changes fundamentally at investing in the footprint that we are already have and investing in our growth initiatives that are in our five-year plan is a higher and better use of the cash has been simply to reducing the shareholder cap.

And I think too what my own view right now if there is more of a steady state out there, we might take a more aggressive view on that. Right now, I think what's happening is there is a large rotation of the investor base, that range of commodity based investments like oil and those that serve the industry. Going to other places so to some extent the retreat from our industry has been sort of secular and needs to maybe run its course and you will see where it goes.

Martin Malloy - Johnson Rice & Company

Thank you.

Operator

And our next question will come from the line of Tahira Afzal with KeyBanc. Please proceed.

Tahira Afzal - KeyBanc Capital Markets

Hi, good morning gentlemen.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Good morning

Tahira Afzal - KeyBanc Capital Markets

A couple of questions, to start off, on the oil and gas side for J. Ray, if you look at your focus list historically, can you sort of estimate the potential win rate that you've seen there?

Bruce Wilkinson - Chairman and Chief Executive Officer

I think historically until recent past is we were sort of winning a quarter to a third of what we bid was and that's over the long span of time looking back. There was a period in probably late '06, early '07 where that hit rate went up and it was just timing of what was out there and where we were namely that that the biggest opportunities were in our backyard in the Mid-Eastern and South East Asia. So, that was what I would call maybe an anomaly at the time. So, I think we think in terms of the quarter to a third, ongoing is a reasonable way of thinking about it.

Tahira Afzal - KeyBanc Capital Markets

Right. And then if I look at your focus list, it's gone from around I think $7 billion in March to well close to double that amount. Is there a specific region that these opportunities are coming up in or is it fairly widespread?

Bruce Wilkinson - Chairman and Chief Executive Officer

Yes, it's... I would say, maybe unfortunately or fortuitously on the near term, it's a case of as I say, the rich get richer, it's clearly a continuum of what we've seen recently. The Mid-Eastern Asia would be on the near term by far, thus the larger component element of that $12 billion, you go further out 18 months, 24 months out, once you get out there, then it becomes much more balanced because you have, it would be higher expectation of what's likely to occur in the Gulf of Mexico and the Caspian by then which at the present or what we do are down at the absolute lowest end of the spectrum. So it will shift and what I would hope for is it does come more balanced, because clearly as they say, we're sitting here now, of productive capacity of fabrication of $11 million to $13 million man-hours under utilized and simply because we have an overloaded submarines and a dramatic under load in others.

Tahira Afzal - KeyBanc Capital Markets

In the past, when you've looked at operating, let's say full capacity on a broad-based level, has that positively impacted your operating leverage?

Bruce Wilkinson - Chairman and Chief Executive Officer

What I would say, up until last couple of years or so, what we found... yes is that on the marine side that if we have a standard costing system that assumes summary barge days a year, when we went beyond it, it definitely, the leverage hit the bottom line and it was discernible. We're struggling a little bit of that now, is that chronicle in the earlier questions because of... so much have it in one place and the crowded calendar. But, on an ongoing basis that should be the case.

On the fabrication side, what I saw historically is that until we started making the capital investments we've made over the last few years in places like Jebel Ali in Dubai and in Batam, historically if we have a 5 million man-hour yard and we went to 7 million, the opposite happened, we had a degradation productivity, we have to throw man-hours for... we have to throw more man-hours that something to get the same product... productive output.

What we're actually doing right now is running well beyond that capacity in a couple of these yards and without degradation in productivity, so we are managing that part of the business very well. So, I would hope that we can replicate that in the future with work getting spread back to the Caspian, back to the Gulf of Mexico as well.

Tahira Afzal - KeyBanc Capital Markets

Okay, great. And then if I look at the Middle East and for example, look at, let's say the money saw [ph] opportunity that unfortunately did not go your way, if you'd taken on and you'd won that, would you have had to subcontract that given that you are operating at a high-capacity level?

Bruce Wilkinson - Chairman and Chief Executive Officer

Are you talking about the fabrication business?

Tahira Afzal - KeyBanc Capital Markets

Yes, so the Manifa pipeline project?

Bruce Wilkinson - Chairman and Chief Executive Officer

Oh, the pipeline, is the question... we have subcontracted that.

Tahira Afzal - KeyBanc Capital Markets

Yes.

Bruce Wilkinson - Chairman and Chief Executive Officer

No, I think again, I think our business model... we are a fully integrated engineering procurement construction installation contractor that prefers to operate through our asset base, marine and fabrication. And so we have not knowingly in the past, I don't think we're contemplating now, bidding pipeline... pipe lay work or other things in the first instance using others' barges. It's simply is not what we have done, I talked about going to that as an alternative to get through a bottleneck because of this not in the rope service field.

Tahira Afzal - KeyBanc Capital Markets

Got it.

Michael S. Taff - Senior Vice President and Chief Financial Officer

And I think that was probably the job had we won, the engineering would have occurred primarily in '08, and the bulk of the pipeline work would occur in '09. So we had the schedule to make that work.

Tahira Afzal - KeyBanc Capital Markets

Got it. And I mean, does that go for the rest of your Middle East prospects of given you're working at a high capacity utilization rate, I mean, from what I understand the Barzan project would potentially be like a five-year huge project. Would you have enough capacity or would have to acquire some?

Bruce Wilkinson - Chairman and Chief Executive Officer

No, we think we would and we think we do, and that's additionally why when I talked about the shallow water lay barge, we basically would have a brand new barge dedicated exclusively to the Mid East market or certain... almost totally for Saudi work. And so, the belief is with a seven-year contract and a six-year renewal option on the end of it, the stream of work is such that it will huger pipeline of work there that suits us. But we would not... but we would want to execute it in our traditional mode of owned assets could be the approach.

Tahira Afzal - KeyBanc Capital Markets

Okay. And then if you look at your mix right now, as you've mentioned, it's moved, a little migrated little more to the offshore installation versus the onshore fabrication in a sense. As you look forward into 2009, do you see that mix shifting back or would you... do you expect it to be still a little more installation oriented?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well the mix shift begin to shift somewhat to the extent that we still... that we have moved some work, marine work into '09 that would still be there. But we've been awarded announcing new awards this year, one that was not too longer, that job in Australia, the SO job. So we... you would begin to see and we had [inaudible] which is the integration of the top sides on an FPSO. So you would begin to see the pickup in the fabrication work on some of those, particularly in our Asian operations, where we are right now, the fabrication work load even in our Batam yard is dramatically down from what it was this time a year ago. So we see that definitely on the rise before year-end and it should affect '09 as well.

Tahira Afzal - KeyBanc Capital Markets

I guess your risk levels which are associated with doing... what's you're currently doing right now more of would probably subside than you think in 2009?

Bruce Wilkinson - Chairman and Chief Executive Officer

Yes, we have more other recent work would be what we call under rates or a regime that is not the full scope EPCI lump sum that you've seen in some of the Mid-East work. So that profile is shifting, it's... and that should be effect '09 especially.

Tahira Afzal - KeyBanc Capital Markets

Okay. And just one last question and then I'll move back to the queue. Going back to the Barzan project, what I understand Technip withdrew from competing on that project. You still have a couple of I think local contractors that are still competing. Are you seeing the local contractors being favored in a sense by some of the nationalized oil companies or do you think it's a fairly level playing field?

Bruce Wilkinson - Chairman and Chief Executive Officer

I don't guess I want to comment, I don't really, I mean you're stating a premise that I'm not aware of and so I would really not even comment on the competitive profile I think, we have 35 years of working with Aramco, we are a known quantity. We... on from time-to-time there is always somebody cheaper of this with that, but I think if they look back and say who has delivered and who can they count on we are right at the top.

Tahira Afzal - KeyBanc Capital Markets

Great. Thank you very much, gentlemen.

Bruce Wilkinson - Chairman and Chief Executive Officer

Sure. Thank you.

Operator

And our next question will come from the line of Chase Becker with Credit Suisse. Please proceed.

Chase Becker - Credit Suisse

Hi, good morning. It's Chase Becker in for Jamie.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Good morning.

Chase Becker - Credit Suisse

Most of my questions have been answered but I guess just getting back to the Power Generation segment, I mean I understand there is a lot of different moving parts with respect to the timing, the de-risking of the portfolio but when you think about your margin targets of 7% to 10%, given the last five quarters, you've been above that 10% four times, but this time you're significantly above that. So I guess is there just a sort of stuff, is there anything one time in nature that you would say or is there anyway you can quantify something that was impacting that segment or is that just kind of one of those J. Ray type segment quarters where the stars align and everything is perfect?

Bruce Wilkinson - Chairman and Chief Executive Officer

Well, if you, we even commented and if we went back a year ago, there was a $50 million number in there that we did characterize as certainly one time, and there is nothing in this quarter that I know that's of any huge order of magnitude that I mean it is not asset sales or anything like that. So, yeah, it's sort of interesting, I guess you just said that, you know, we said 10 to 12 for several years that J. Ray and everybody said Oh, man, you always beat it and then when we didn't, you know it's... what's wrong with you. I think, yes, we have been beating that. I'm confident that we're getting there incrementally that we are doing a lot of small right things everyday and improving our execution. So, I'm very hopeful for the long-term direction, if you will, of the whole B&W group, but I guess it's just my natural conservativism, I don't want to get all the way to the 15% for expectations for people immediately.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Well, and Chase, part of what we also had was longer-term projects that we now realize the cost to complete as much less than we've thought previously and as the profitability of those contracts improved as we mentioned on the call, we did have some percentage of completion true-up, if you will, and so that certainly helped the margins in this quarter.

Chase Becker - Credit Suisse

Anyway, to quantify how much that was besides just, do you have anything?

Michael S. Taff - Senior Vice President and Chief Financial Officer

The best way to look at it is, Chase, is that it was a great quarter by this group. There's nothing in there that we'd specifically point out the EBIT fag out, it's one of those things where you, when you hit the ball hard sometimes it goes over the fence and sometimes the outfielder catches it. And this is one of those times it went over the fence and they did a great job and executions, we had great execution, we had good, very good work out of our construction company. As Bruce mentioned earlier with that portfolio shifting more to... a rate type of base to... reimbursement, and we had great work out of the parts and service business.

Bruce Wilkinson - Chairman and Chief Executive Officer

I think the improvement that you've seen over the last few quarters is not accidental, I think it's real, I think it is directionally what I would have expected, but within a 90-day period, I always caution people that 90 days is not the whole story and... but the backdrop of the kind of things we do B&W is very good right now, a biased toward our higher margin work if you will in the marketplace. So if we execute well, I think we will continue to perform well and make us all happy.

Chase Becker - Credit Suisse

Sure, and then I guess it's my last question and following up on the share repurchase question. I understand that there is a lot of growth opportunities for you to invest internally in the business, but how recent had your conversation been with the Board, with respect to a share repurchase program? I mean, I think if you, just look at your stock I mean you've been off fairly substantial here in recent weeks, I'm just trying to figure it in another Board meeting coming up soon or where do we stand with this?

Bruce Wilkinson - Chairman and Chief Executive Officer

The discussions were actually very recent. We had a Board meeting last week. I think the question the discussion is around, what are we really trying to do here, I mean we can lean against a tide if indeed it's a sector shift, a lot of it, I mean the fact is today I mean some of you may not be happy campers, but the fact remains we just had the most profitable quarter in the history of McDermott in its 50 years as a New York Stock Exchange company. Okay?

And so two months ago, the stock was 30% higher than it is today and so in reality there are some things going on out there and some huge capital swings, the dollar is now rising, the price of oil is not falling, people are beginning to have a different view maybe of whether it is time to jump into the financials or not and so as a practical matter, we can opportunistically buy some stock from time to time, but I don't think we can redirect big capital swings with, yeah, we got billion or so dollars in cash but what you've seen to... the what we discussed earlier when you look at the balance sheet that over the last year or so had more like a $1.6 billion now it's more like $1.3 billion. It is we think a, it's all a working capital issue where a number of projects where we were ahead of the payment scheme on major projects have now where we caught up, where we are more parity and to the extent you de-risk a portfolio be it the B&W one or the J. Ray one and take more unit rate worth, you have less opportunity for big front end loaded projects that things would be more in parity, so I think you're going to see operating income, less CapEx be true free cash flow in a more normalized state, which is a positive, it's a positive one on here, but I guess as I look at it, I don't see a scenario where if you did something really substantial which should be... well beyond the few million here or there where the highest and best use would be just to buy the stock back, I mean, I think we'll... we are not going to rule out that, I'm an open minded, I'm openly discussing with the Board, but I guess we also in the same meeting discussed all these other opportunities that we see.

We have a five year plan that is aggressive and not only investing in the existing tummy but buying other things and we think that there are a lot of other things that fall into. Our's is the only one and it may present real opportunities for us... to invest for our five-year plan. So, yet, we discussed it openly and candidly, but in the larger context of our priorities and fearful that we can't lean against a... tied if it's really an sector shift to some extent here.

Chase Becker - Credit Suisse

All right, very helpful. I appreciate the color.

Bruce Wilkinson - Chairman and Chief Executive Officer

Sure.

Operator

And our final question will come from the line of Joe Gibney with Capital One Southcoast, please proceed.

Joe Gibney - Capital One Southcoast

Good morning, everybody.

Bruce Wilkinson - Chairman and Chief Executive Officer

Good morning, Joe.

Joe Gibney - Capital One Southcoast

Most of my questions have been answered. Mike, just wanted to circle back around the tax issue. I know it's a little bit like kind of throughout the dark board here relative to how things are trending, but any kind of help for how we are looking for 3Q and should we still be thinking about tax kind of in high teens to 20% run rate next year?

Michael S. Taff - Senior Vice President and Chief Financial Officer

You know, Joe, I think that's really predominantly as I've said in the calls kind of where we are making money, I think, from a longer term... we still think obviously that B&W results will still be in the 35% federal tax rate with some state tax, I mean I think 38%, 39% tax rate for B&W is appropriate, and J. Ray is just strictly contingent on where they make money. I mean some of the jurisdictions where we operate at our tax debt that in the 30%, 35% range and others are at zero. So, I think overall, I think we should take that in consideration, I think something is higher than obviously the high teens probably makes sense but, whether it's the mid 20% range or something like that I think will certainly be more prudent at this point than 18%.

Joe Gibney - Capital One Southcoast

All right. Thanks, guys. I'll turn it back.

Operator

And this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Jay Roueche for closing remarks.

Jay Roueche - Vice President of Investor Relations

Thanks, Lacy, and thank you all again for joining us today. Just a quick reminder that today's call included some forward-looking statements and for more information on these I encourage you to see our SEC filings. Please call Robby or me if you have any questions after the call or need any additional clarification, and we look forward to seeing many of you in the coming months at some of the conferences we'll be attending, and Lacy, this will conclude our call.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!