Fluor Corporation (FLR) Q3 2010 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Fluor Corporation Third Quarter 2010 Conference Call. [Operator Instructions] A replay of today's conference call will be available at approximately 8:30 p.m. Eastern time today, accessible on Fluor's website at www.fluor.com. The web replay will be available for 30 days. A telephone replay will also be available through 8:30 p.m. Eastern time on November 10 at the following telephone number: (888) 203-1112. The passcode is 3923484 will be required. At this time, for opening remarks, I would like to turn the call over to Ken Lockwood, Vice President of Investor Relations. Please go ahead, Mr. Lockwood.

Thanks very much, operator. Welcome, everyone to Fluor's Third Quarter 2010 Conference Call. With us today are Alan Boeckmann, Fluor's Chairman and CEO; David Seaton, Fluor's Chief Operating Officer; and Mike Steuert, Fluor's Chief Financial Officer. Our earnings announcement was released this afternoon after the market closed, and we have posted a slide presentation on our website, which we will reference while making prepared remarks. Before getting started, I'd like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on Slide 2. During today's call and slide presentation, we will be making forward-looking statements, which reflect our current analysis of existing trends and information, and there is an inherent risk that actual results and experience could differ materially. You can find a discussion of those risk factors in our 10-K, which was filed on February 25 of 2010. During this call, we may discuss certain non-GAAP financial measures. Reconciliations of these amounts with the comparable GAAP measures are reflected in our earnings release and are posted in the Investor Relations section of our website at investor.fluor.com. And with that, I'd like to turn the call over to Alan Boeckmann, Fluor's Chairman and CEO.

Thank you, Ken. Good afternoon, everybody, and thank you for joining us. Today, we'll be reviewing our financial results for the third quarter and updating our outlook for the balance of 2010. We'll also then discuss our initial EPS guidance for 2011. But before I begin, I'd like to address another announcement that we issued this afternoon. And specifically the announcement naming David Seaton to succeed me as CEO effective February 3, 2011. I think you should know that I am extremely pleased that the Board of Directors confirmed this decision. I will stay on as a non-executive Chairman of the Board, and will certainly continue to dedicate myself to Fluor and David and the team in that role. David, some of you know him, but you'll get to know him. He's an exceptional choice given his vast experience and this significant talents. He has the respect of the whole organization and I am absolutely confident that the company will be in great hands. On a personal note, I couldn't be happier that his appointment now becomes an integral part of my legacy to this company. So David, maybe it'd be appropriate if I turn it over to you for a remark or two.

Well, and thank you. I can't tell you on the phone how honored I am to be leading the Fluor team of professionals that make this company great. I think we've got a legacy of excellence and executing projects all over the globe, and it's that team and collection of talents that our company has that makes that possible. We clearly understand the duty we have to our shareholders and the investment that they have in our company. Alan's leadership is apparent in the performance that we've enjoyed over the last decade, and we only hope to continue to build on that legacy, Alan, and continue that legacy of excellence. So I appreciate the confidence that you and the Board have in me, and I look forward to the next chapter in Fluor's history. Alan?

Thank you, David. I'd like to now turn and to put focus and some attention and give you some additional background on the charges that we preannounced. First, let me talk about the Greater Gabbard Wind project. This is beginning on Slide 3. As we indicated, during the third quarter, the project experienced a variety of execution challenges. Those included material delivery issues and reduced productivity, which primarily related to the installation of wind turbine generators and subsea cabling. Following the evaluation of third quarter performance, the project developed a revised estimate to include substantial cost for additional marine vessels and other subcontractor costs that were associated with the material installation. There also are repairs and the estimated schedule impact, which has been exacerbated by weather-related delays. On this project, there are five primarily associated activities, including fabrication and installation of the monopiles and transition pieces, installation of the wind turbine generators, installation of the inter-array cabling, installation of the ocean-based substations, and then installation and conductivity of that cabling to the onshore substation. The first primary activity is effectively complete with all the 140 monopiles and transition pieces installed. While we're making progress on the wind turbine generator installations with 54 installed to date, a variety of factors have slowed progress and reduced expected productivity levels. We've encountered another significant issue, which has been the rate of progress on the installation of the inter-array cables. Due to numerous factors, and one of the major ones are those included exceptionally poor weather in this period. To date, we have laid about 1/3 of the roughly 150 underwater inter-array cables. There have also been issues with the performance of certain electrical components when energizing these ocean-based substations. The project has addressed these challenges and is currently in the process of commissioning the two offshore substations. The final primary activity is the installation of the export cables required to bring the electricity onshore. The first of these 355-kilometer export cables is installed and is energized. We're currently waiting for a good weather window to complete installation of the second export cable. And then the last one will be installed in 2011. All total, these various issues have caused substantial schedule delays and added significant additional cost for the vessels, the work crews and the equipment. We have included cost estimates for a number of mitigation actions in the current project forecast, and an assumption for additional weather-related work delays based on our experience today. The overall project is scheduled for completion in early 2012. And as our announcement indicated, we have recorded a charge of $163 million or $0.90 per diluted share in the third quarter. Lastly, as you are aware, we have a claim for additional compensation for schedule and cost impacts that arose from the delays in the fabrication of monopiles and transition pieces. We will continue to pursue the recovery of claim amounts under our contract with the client. Now I'd like to shift to a discussion of the recent legal development on the SR-125 highway project. As you may recall, this project was effectively complete and it opened for traffic in 2007. It was a 50-50 joint venture in which as a partner and Fluor along with its partner has been pursuing claims against the client for several years now. And in fact, we have recorded the mechanics lien against certain properties of the client, which it believed would maintain its priority status despite the clients' bankruptcy filing on March 22 of this year. The joint venture continue to pursue our claims against the client through the bankruptcy court. Last Thursday evening, Fluor received notice by the ruling of the bankruptcy court with regard to the priority of claims made by the project joint venture against the bankrupt client entity. The judge ruled against our position, finding that the mechanics lien did not have priority over the senior lenders. And while there has been no adjudication of the merits of the joint venture's actual claim, this court decision impairs the JV's ability to collect any potential award. And as a result, Fluor then recorded a charge for previously recognized claim revenue and other amounts due to the company. As our press release indicated, the charge totaled approximately $95 million or $0.32 per diluted share. We continue to believe that the joint venture's claims have merit, but the adverse ruling of the court impairs the collectibility of any potential award. We will continue to evaluate potential options for recovery of claim amounts and may incur additional legal expenses associated with the dispute resolution process. Now let's talk about the results for the third quarter, and I'm on Slide 4 now. Including the charges that I have just discussed, Fluor incurred a net loss of $54 million, and that compared with net earnings attributable to Fluor of $162 million a year ago. This resulted in a loss of $0.30 per diluted share, which compares to earnings of $0.89 per diluted share in the same period last year. Third quarter results include also previously announced charges as we've discussed of $163 million or $0.90 per diluted share on Greater Gabbard and approximately $95 million or $0.32 per diluted share on the highway project. Segment profit for the quarter was $38 million, including the impact of the charges mentioned above, and that compares to $300 million a year ago. As I move to Slide 5, you'll note that new project awards for the third quarter were very strong at $7.6 billion, and that compares very favorably to the $2.9 billion a year ago. The awards in the quarter included $3 billion in Industrial & Infrastructure projects, $2.9 billion in oil and gas awards and $1.2 billion of government awards. Obviously, we are very encouraged by the strength of new awards in this quarter, which has allowed us to grow our backlog for the second consecutive quarter. And our consolidated backlog now at the end of third quarter rose to $33 billion, which is a $2.8 billion increase over the last quarter and an impressive 18% increase from a year ago. Now let me turn the call over to Mike Steuert, to review some details on our segment operating performance and our corporate financial metrics, as well as talking about our financial outlook for 2010 and '11. Mike?

Thank you, Alan, and good afternoon. Let's start by going over a recap of results for each operating segment. Please refer to Slide 6 of the presentation. Fluor's Oil and Gas unit reported a segment profit of $75 million for the quarter, which was down from $189 million in the third quarter of 2009. Revenue for the quarter was $1.7 billion, down from $2.9 billion in the third quarter of 2009. Results reflected lower levels of new awards over the last two years, compounded by a more competitive business environment. New awards for this segment totaled $2.9 billion, as Alan mentioned, including a major release for work scope, on an oil sands project in Canada and the gas oil project for Shell in Malaysia. Pending backlog rose to $1.5 billion over the last quarter to a total of $11.7 billion. Moving on to Slide #7. Segment profit for Fluor's Industrial & Infrastructure group was a loss of $147 million, including the previously disclosed charges for Greater Gabbard and SR-125. These two charges more than offset the positive contributions from other projects in the segment, and overshadow what was otherwise a very strong quarterly performance for the segment. Results for the quarter reflected growth in the Mining and Infrastructure business lines, including contribution from fees earned at the financial closing of a road project and the final closeout of adjustments and approved change orders on other infrastructure projects. Revenue for this segment nearly doubled to $2.2 billion in the quarter. New Industrial & Infrastructure awards for the quarter was $3 billion, including $1.7 billion for the Eagle P3 commuter rail project in Denver, and approximately $850 million for new mining awards. Pending backlog rose to $17.3 billion, up 78% from $9.7 billion a year ago. As of the third quarter, the company have recorded $171 million of claim revenue for cost incurred to date relating to the Greater Gabbard claim. This recognized claim revenue amount declined from last quarter as a result of our ongoing review of activities and associated cost of scheduled impacts of the project. The Government group posted segment profit of $35 million, up 47% from last year's $24 million. Contributions from LOGCAP IV and Savannah River continue to drive strong results in this segment. Revenue for the quarter was up 46%, $793 million. New awards in the quarter were $1.2 billion, including approximately $500 million for LOGCAP IV task orders and approximately $400 million for the annual funding of the Savannah River contract. The backlog at the end of the quarter was essentially at $1 billion, down from $1.3 billion a year ago, and the segment was awarded approximately $600 million incremental multiyear funding at Savannah River, associated with the American Recovery and Reinvestment Act. Now turning to Slide 8. Segment profit for Global Services was $35 million in the quarter. This compares with a loss of $5 million a year ago and the company recorded a $45 million provision for a collection issue on the paper mill revamp. Revenue for the quarter was $419 million, which compares with $439 million in the third quarter last year. New awards were $478 million, increasing backlog to $2.2 billion at the end of the third quarter, which is up from $1.7 billion a year ago. Fluor's Power segment reported a 20% decrease and segment profit to $40 million in the third quarter, reflecting reduced contributions from various projects that are nearing completion, and the impact of lower new award levels due to reduced demand for new power generation. Segment revenue was $383 million, which is down 6% from last year. New awards for the quarter were $47 million and backlog was $855 million. As Alan mentioned, Fluor's consolidated backlog increased to $33 billion at the end of the third quarter. Percentage of fixed-price backlog declined to 21% with 29% of total backlog in the U.S. and 71% outside of the U.S. Let me now move on to the corporate items as shown on Slide 9. G&A expense for the quarter was $40 million, which compares to $50 million last year. The decrease was primarily due to overhead cost-reduction efforts. As a result of the low run rate to date, we have reducing our full year outlook for G&A expense to a range of about $155 million to $165 million. The unusually high income tax rate for the quarter is primarily due to the fact that the Greater Gabbard charge was a foreign loss with no immediate tax benefit. The company is analyzing the viability of various tax planning strategies that may provide a future tax benefit from the company's foreign operations, including the loss attributable to the Greater Gabbard project. We continue to expect our effective tax rate on a normalized basis to average approximately 34% to 36%. Let me now shift to the balance sheet. Consolidated cash from marketable securities is $2.5 billion, which is up from $2.1 billion last quarter. Cash flow from operations was strong during the quarter, particularly in the Government and Industrial & Infrastructure segments. As a reminder, we generally fund a number of programs, including pensions and insurance premiums during the fourth quarter. So the cash balance is expected to come down somewhat at year end. Capital expenditures for the quarter were $88 million, compared to $54 million last year. Finally, earlier today, Fluor announced as Board of Directors approved an increase in the company's share repurchase program of approximately 7.2 million shares, bringing the total number of shares available to repurchase 12 million shares. We expect to use this increased authorization to reduce our share base beginning in the fourth quarter and continuing to early next year. Let me conclude my comments by talking about our outlook for 2010 on our initial guidance for 2011, which is shown on Slide #10. We are maintaining the outlook for 2010 earnings at the previously indicated range of $1.90 to $2.20 per share, including the impact of the charges related to Greater Gabbard and to SR-125. Looking ahead to 2011, the company expects its growing backlog to drive increased revenues, while there are early signs of recovery in oil and gas markets, recent new awards have been primarily driven by substantial mining awards, which have lower margin profile. The company's initial 2011 earnings guidance is in the range of $3 to $3.40 per share, and reflects the changing margin mix in the overall portfolio of backlog. Operator, with that, we are ready to take questions.

[Operator Instructions] And we will take our first question from Jamie Cook with Credit Suisse. Jamie Cook - Crédit Suisse AG: I'm not going to touch on Gabbard because I've been doing this too long to know who knows how that ends up. But one, similar to Forester today, you guys announced fairly aggressive share repos. It sounds like you're signaling more of the inflection point of order growth for the Oil and Gas business. So can you sort of talk about what -- am I reading that correctly in what you saw in the quarter to give you more confidence? And then, the second question, looking at your guidance and I sit here and I'm saying, if we x out the charges, you're basically $3.30. Your orders in the first nine months of the year are more than we did in the last 12 or more than what we did in 12 months last year. So how bad are the margins, I guess, for the year and is there just a level of conservatism there?

Jamie, let me just first of all make just a quick comment on Gabbard. Even though we both been in the game a while, I think I've been in longer than you have, no comparison. And that's why we're going through the succession here. It is time to move to the next generation of leadership here in Fluor. I'm very proud to be part of that. But on Gabbard, we have, in fact, estimated forward on the current productivity, which is the lesser productivity we were expecting. We included the cost of additional equipment and to achieve that, we've added some additional contingency on there. So while we can't say that we're absolutely confident we have it all we think we've done what's necessary to contain the cost and to take the charge. With respect to the share buyback, I think you can take two signals from that. First, we have been looking pretty hard at some significant acquisitions and have been unable to make one that we felt really added to the company strategy based on the price or the risk we might have to take. And while we're not giving up on that, we certainly are going to continue to look. We have a significant cash balance and we felt it was important to do something more than just sit on our balance sheet. And when you combine that with the fact that we are now looking at some fairly significant potential new awards, staying very strong in the mining side, but also looking at some very positive targets of opportunity in the upstream oil and gas, we felt that this is a good time to make that move. On the other issue of outlook, clearly, if you look at our second quarter with $7 billion of our $9 billion being in the mining, that is a very different margin profile than many of our other businesses. So as a result of that, and of the pace at which the projects will move out, we've given the range that we have. We've considered a number of factors in that range. We think it's a solid range that we will actually be able to performer within. And I think it signals a fairly level performance with last year, but I think it also signals that we've bottomed out and I think with the backlog going in the direction that it is. And I'd stick by my previous comment that we intend to continue to build backlog throughout the year.

We will take our next question from Michael Dudas with Jefferies. Michael Dudas - Jefferies & Company, Inc.: Just two questions. One, relative to the oil and gas side, maybe David can maybe chime on this. Maybe just give a little bit visibility of timing of some of these bigger, more visible upstream projects that you're looking at right now. Are we talking late fourth quarter or early first or more like second quarter spring, summer for some of that visibility or is it something second half of 2011 that we'll get some of these products to flow through?

Well, I think the message I'd like to send is we've got a pretty strong prospect list, primarily in upstream that I think we'll start to see new awards as early as the fourth quarter, with hopefully, with Santos. We've announced the FEED that we want. And hopefully, that will move into the EPC values still this year and are in discussions with the customer now. But I think we've employed a strategy of making sure that we are with the right customers and in the right locations to take advantage of the upstream market. And I think that's starting to pay dividends and there's many projects that are out there that I think will have a pretty robust new award target within that segment over all of next year. I feel pretty good about where we stand there. Michael Dudas - Jefferies & Company, Inc.: And my second question is looking out the next couple of years, do you still see significant opportunities in the mining sector given what's happened with metals and commodity prices, especially helped up by Federal Reserve Chairman yesterday? And given the outlook in oil and gas and mining, when you allocate capital or talent, will the margin issues or return issues play into that and could we see ramping up energy more than mining because of the potential return or margin opportunities as we move through the cycle, or is that just going to whatever happens flows onto your business can flow in .

Let me give you one answer and I think I'd like David to follow up because he is the one that has really been focused on that and will obviously continue to be. One of the things that I've been extremely proud of in my ten years, we have really put together an organization -- the organizational boundaries are there for accountability for marketing and execution. But the boundaries do not exist for the transfer of personnel, and we have looked at all the opportunities. And margin doesn't really enter into the strategic importance of a project or the ability for it to add to our bottom line. As you know, one of the things that you guys have heard me say many times, there's different types of margin and what we really look at is the absolute incremental earnings that the project adds to our backlog and the return on assets employed that it generates. And we actually can staff these mining projects with fairly large revenues with a smaller staff than we typically do on our oil and gas projects. So from a human resource return, they actually still are not bad. We have made a very significant thrust in that market. I think David, you can address what you see in the potential market in mining.

Well, I think, first off, I think, Alan's right, we look at each individual market on it's own merits and allocate overhead or investment funds as we call them in the different markets as they present themselves to us so that we're fleet of foot enough to take advantage of markets when they arise. So that value of the diversity of our company, both market and region, I think plays very well. So we don't really starve one to feed another. We look at the individual markets as they present themselves and look at it from a longer-term investment perspective. I think in mining specifically, we've clearly seen a significant uptick in their capital spend. And I think it'll still continue to be a major part of our business, but maybe not at the clip that we've seen over the last two years. But it's not where one we're going to ignore mining in deference to another market and they'll continue to be a very vibrant part of the portfolio, that diverse portfolio that we enjoy .

Mike, another way to summarize this is, we are neither capital nor resource constraint in terms of people.

We will take our next question from Will Gabrielski with Gleacher. Will Gabrielski - Gleacher & Company, Inc.: One, can you walk through the Denver rail project and your expectations there? I'm sure you're not going to get too granular on margins but I'm just -- you highlighted P3 as a big margin opportunity internally and I just wondered how that might compare to say, your general I&I margin we've seen over the past year or what we were expecting going forward?

I think that when you look at the profile, one of the benefits of being in that market is being part of the development side of that. And obviously, that feeds into that profit profile and we certainly see upside there as we go through the project. It's obviously, early in the stages that it's in. But there's several other projects that we're chasing that have the same profile in that market space that we feel very confident on. So that will continue to I think be a very positive part of the portfolio going forward.

Historically, within the Industrial & Infrastructure segment, Transportation Infrastructure business has been the highest margin within the segment and at times, the highest margin within the company. So traditionally, these projects have very attractive margins. Will Gabrielski - Gleacher & Company, Inc.: And then just in terms of the mines that right now of oil and gas customers, I mean, so we've heard from a few companies already. And I'm wondering if now, I mean whether it's Q2 or inflation concerns or whatever it is, but I mean the price of oil has sustainably held at these levels now. And we had heard a few months ago about the lack of confidence in that going forward there's a lot of the NOCs were a little bit concerned and still a little bit guarded about releasing projects even on the smaller projects sizes, I guess. Are you guys seeing a shift in that behavior yet?

I think we've seen, obviously, trepidation and lack of spending on the refining side and in some cases, on petrochemicals, which or tend to be more cyclical. But I would categorize the upstream spend as constant even over the last two or three years. And there's a lot of major programs that are going to be released in the next two to three years that fit into our capability quite nicely, some of which I think will come to light in the next -- during '11. Will Gabrielski - Gleacher & Company, Inc.: Lastly, on the buyback, I mean, I think we can all appreciate that you increased the buyback, but I mean, it's still a pretty small percentage of what we might consider detachable cash and I guess any updates on where you are in the M&A process, and whether or not the CEO transition might delay anything you're looking at or accelerate it, for that matter?

I don't think it would do either, Will. I guess what we're saying is we don't have an active one in the mill, and we still have the priorities for strategic standpoint that we're looking at and that would be infrastructure, design, offshore, oil and gas, as our two primary targets. But I don't think there's one that we're currently working on that would be -- would come to fruition over the next several quarters.

We'll take our next question from Andy Kaplowitz with Barclays Capital.

If I'm doing my math right, in I&I, if you exclude the charges and the $40 million that you called them in the Q and closed those benefits in infrastructure. It still looks like margins went over 3% in the quarter. You've been doing sort of mid- to high twos for a while and comes with a revenue pickup as well. So I'm just thinking as you go forward here, I know you don't want to give specific margin guidance but your revenues in I&I are now higher than your revenues in oil and gas. So I think it matters a lot. Can we look forward to better than 3% margins as these mining projects ramp up?

Andy, I think as we disclosed, some of the Tractor margin we had in the quarter was due to our success we had in closing the Denver project. That certainly helped margins. That's not reflected in the Mining margin. That's a onetime event. It certainly helped to close additional projects going forward. But that boosted Mining -- we had, I think we also mentioned in the Q that we had successful close outs on some other infrastructure jobs. So I think it's more reasonable to expect that our margins in II [I&I] will be 3% plus or minus as opposed to what we showed in the quarter.

But I was just saying, if you exclude that $40 million in benefits, it still seems you'll likely get above 3%, but we can follow up on that. Alan, if I could ask you about Gabbard again in the context of, as you know, I mean, these projects kind of once they have a problem, they continue to have a problem. And I know, we can't say for sure that it's going to go way. But we entered the winter months here in a difficult area, so is there any sort of additional commentary we can make to talk about the conservatism around this charge that makes us feel more comfortable or can we not do that?

And again, as we all appreciate, I can't sit here and say that we're not going to have any additional charges. I can tell you unequivocally, it is not our intent. And we have looked at this project and taken the forward charges with the intent of not having to do it again. One thing that, though, that you need to appreciate is when the project was planned and as we planned our going-forward activities, we've always known that you have limited access to do work in the winter. So there's less work planned during that time and its activities are more associated with that. The real major progress that we'll start to see again will be as we approach the spring and summer months of 2011.

And Alan, if I just look at Gabbard in the context of history of Fluor, it seems like you guys have operated very well except for when you've done these sort of first-of-a-kind projects for you. We can argue that the embassies you sort of inherited and they change the scopes on you and stuff, but it was still something new for you. So I guess what is sort of the process of approaching these projects and have you learned anything from Gabbard as you go forward here that we wouldn't have this kind of issue again in something new? Even another wind project, for instance, I think investors are going to be scared that you're be taking another wind project, for instance.

I can understand that. To answer your question directly is yes, we have absolutely taken learnings on this project. The most significant issue and the word new that you used, I'll use that as kind of the red flag. We did not estimate properly the productivity, particularly the wind turbine generator installations and the subsea cabling. And that's the primary driver of the charges that we are taking. But it's more than that because on this type of project, when you have that kind of a productivity issue, it comes along with the Marine spread charges that come with it and the extension of leases and such for the Marine equipment to do the installation. So there is some learnings there. The learnings come in a number of forms, but they're all around that subject. It has to do with contractual learnings with the procurement process learnings and with just old good-fashioned [good old-fashioned] estimating.

So you feel -- if you're talking into investors, investors should feel better about if you were to go take another wind project like this going forward, that you would put in additional contingency compared to what you did on Gabbard?

The answer is yes. I think the experience of having done this project while painful to be sure, we do have some very significant experiences that I think make us a very viable installer and contractor on the next round. Now for investors, they would be asking the natural question that you posed, absolutely, we will have some different approaches with respect to how we contract it, how we cost out the risk and how we approach, even in some cases, from an execution standpoint.

And Alan, one more question along those lines. Up until a little while ago, it didn't seem like the management team had thought there were any issues on this project and then it sort of came out of the blue. And so why is that? Why do you think it just sort of cropped up? I mean, why wasn't there more on the first-of-a kind project more oversight?

Well, the oversight has been there. That's not been the problem, quite candidly. I think the team on this project, they have actually done an extremely good job. What hit us was, and I mentioned the fact that there were five stages of this project. We've completed the first two even notwithstanding the claims and so forth in extremely good fashion. When we started on the productivity curves and the labor, we caught up with them and surpass the productivity curves. And so when we got into third quarter, we started the third quarter with only about 8% complete on these other activities. That's when we ran into the installation problems. And also when we encountered some extremely nonstatistical weather, that's really hampered us. So it was -- and then the September was the worst month for that. So when we got through September, look at where we were on the progress, we really felt we had to knowledge that our productivity would be lower for the entire activity. And then for GAAP, we had to take the charge now rather than, as you know, during the other quarters.

We will take our next question from Joe Ritchie with Goldman Sachs.

Just one more question on Gabbard, I think Andy asked most of them. But on the productivity issue, that we understand it is there were the weather issue, but was there also a labor productivity issue? And if so, can you may be give us some examples of what was happening on the labor side?

Well, without getting too granular into the project, I wouldn't call it labor. It was productivity of the activity. The cable layings, in particular, and the mounting and installation of the turbines took us more per unit than what we had estimated. We thought that we might be able to then climb the learning curve on that, but we encountered a number of issues. The biggest of which was the weather that hit us during September. And so again, back on how you approach these from a project standpoint, we now are sufficiently into that activity where we can't really with confidence predict that we will gain on that productivity. And so we had to forecast that for the duration of the project. That's what we've done.

Is it fair to assume that productivity is actually going to decrease from here and would that imply...

No, I wouldn't think so. We've added some contingency in case we encounter additional problems. But I think we've pretty well got the worse behind us. We'll be able to track forward. We predicted the same, I would say, August, September productivity on a going-forward basis.

And then just shifting gears a little bit to Oil and Gas, I know that the margins in that business tends to be fairly lumpy. This quarter, they seem to be a little bit less than they were last quarter, 4.3%. Can you give us a sense on maybe the project that you booked in the Canadian oil sands or obviously the potential project that you're going to book with Santos, on what type of margins you're seeing on those project and whether you can see maybe a little bit more stability or an expansion from here in your Oil and Gas margins?

Well, Oil and Gas does have some of the higher margin profiles on an overall basis. It's been lumpy ever since I can remember. I mean, it does move around and it has to do with a lot of different parts of the activities. And on those projects, again, they will each be different. They'll each have their own cycles of what they do in terms of producing the margin. I know it doesn't answer your question, but the fact is it's just very difficult because there's so many moving pieces and parts to that in different phases of the project.

I guess asked another way, do you think that you're replacing -- you're still in the process of replacing some higher margin business that you booked historically with the projects that are currently coming in the backlog? And can we be confident that its kind of 4.3% margin is kind of a trough margin for your Oil and Gas business?

Well, I'll try to answer that. I think if you go back a couple of years, I think when we were in the boom, we had some very good margins primarily driven by the Downstream piece of our business. And I don't think we'll be replacing it going forward with the same level. But still, I think if you go back historically, I think we've got good projects in front of us that will continue to deliver what we expect from a return perspective.

But to the first part of your question, those projects are pretty much virtually complete. There's just some final phase of...

And we'll take our next question from Scott Levine from JPMorgan.

Actually, Rodney Clayton here for Scott. So looking at the Oil and Gas business, when you look at your guidance, I'm sure you have internal projections for now you expect that business to perform. When I look at your backlog for Oil and Gas, what percentage of your backlog do you think you already have booked that you need to burn off in 2011 to hit your numbers versus what you need to book and bill in the year?

I'm afraid I won't be able to answer that question specifically, but our planning process and how we execute to that plan has historically been pretty close.

Moving on to the Power business, the South Texas project, can you talk about the pace of work there so far? And maybe your thoughts on going forward on the time line there for getting out to permitting and heavy construction phase?

Well, that project has dramatically slowed down because of the curtailment of funding based on the waiting for the permit, for the loan guarantee, I should say.

Looking at the Downstream business, obviously, we know that, that remains under pressure in several markets, but have you seen, with recent improvement in crack spreads, have you seen any improvement in the project pipeline there? Or is it still a pretty dormant business at this point?

I think there's still great opportunity there. It's just not the megaprojects that we enjoyed over the last three or four years. They're still a pretty good market. In fact, I guess Valero announced that they're going to continue with their two projects at Port Arthur and Louisiana. We did the engineering and the procurement along lead items and now what's left is the construction. So we probably won't participate in the construction piece, but I think that's an indication that some of the capital spend is starting to loosen up in that sector. We continue to do feed work on both crude slate changes and on additional capacities around the globe. I just don't think we're going to see the $3 billion, $4 billion kind of downstream project in the near future.

And we'll take our next question from Barry Bannister from Stifel, Nicolaus. Barry Bannister - Stifel, Nicolaus & Co., Inc.: You've seen in our past work that in Oil and Gas, if we look at the last 40 quarters of data, there's been a 0.96 R square between the quarterly profit and the quarterly revenue in that segment, so that's pretty close to perfect. And if we do $1.75 billion of revenue in the third quarter, the margin should've been 5.3%, and it was 4.3%. So that's 100 basis points everybody's asking about. If we run up to a $2 billion run rat of revenues, the margin should stay at 5.5%. So is there anything structural that would prohibit you from getting back to those margins on an individual division level?

Clearly, we're in the transition right now in Oil and Gas. If you look at and track the backlog over the last two to three years, we've come down, I think low level, we started to come back up. It's going to take getting back into -- that unit is very, very sensitive to volume and I think as soon as we get back to higher levels of volume, I think you'll see the margins start to move back up. Barry Bannister - Stifel, Nicolaus & Co., Inc.: We're happy with that. We understand the volume efficiencies. We just wanted to make sure there wasn't some sort of a mix between technical services and fieldwork or a highly competitive environment that's permanently impaired pricing in the industry that might work out over a multi-year time span.

Obviously, the mix is always going to be there, and it'll will vary quarter-to-quarter. But I think David can talk about the fact we do have some other costs that hit us on each side of the cycle.

If you look at the cycle, we're finishing some very large projects in the downstream market and shifting into new awards in other areas. So you do have a little bit of a lag in the overhead associated with managing those projects before that actually shifted over. The other part of that is we have to continue to invest in the talents. We keep them employed so that we can deploy them on the future projects. So there's kind of an inflection point there that I think we've seen that explains part of that differential. Barry Bannister - Stifel, Nicolaus & Co., Inc.: And then a couple of quarters ago, there was a $50 million charge for a gas-fired power plant just north of Atlanta, Georgia that had run into some severe weather and other problems. What percent is that plant complete? Is it on budget versus your new expectations? And are there any other issues we should be watching for?

I believe it's in the mid 60s on a percentage complete basis and we are tracking against our new outlook. Barry Bannister - Stifel, Nicolaus & Co., Inc.: And weather has not been an issue?

Not since the initial problems.

We'll take our next question from Steven Fisher with UBS.

What is your overall fixed price mix in the backlog currently? And how is the change within Oil and Gas since the end of last year?

We're currently at 21% fixed price, and that's pretty consistent in general terms where we've been over the last little while .

Down very slightly.

And then how do you expect the expansion in Upstream over the next year to impact that fixed price mix?

I think it'll be marginally up. It won't impact it significantly.

And then can you talk about the risk profile of the Denver fast tracks? And what do you sense are the most complicated aspects of this project that you had to bake into the analysis?

I think the key aspect of dealing with the risk profile starts in the beginning when we choose our partners in that regard and their experiences. So I think when you look at what we've been able to bring in, I think we feel comfortable with the overall risk profile of it. Obviously, the schedule and labor components of that are always a concern, but I think that by and large, we've got a pretty good execution plan that mitigates a lot of the risk that you typically see in a fixed price project first and in an infrastructure project second. So I feel pretty comfortable about what the team's done to get ready for that.

And we very successfully completed a lump sum infrastructure project in the area several years ago so we know the market, we know the labor.

Shifting to the Upstream business, can you just talk about the competitive dynamics in the Upstream market right now? What are you experiencing? How does it compare to your expectation and maybe how it compares to some of the other oil and gas markets in the downstream?

One of the things that David mentioned earlier that I think is important to note, the projects that are coming up are quite large. They are, I would put them in the difficult category, both in terms of technology and in terms of locale and logistics. And as a result, when we get into those kind of projects, we really do reduce our competitive slate. And I think if you look at the Santos project that we hope to bring into backlog in the fourth quarter, there was just one other bidder for that. So I think you'll see those are going to be the kind of projects that we will be having as target of opportunities and then into backlog, as David said, during 2011.

So it sounds like a better profile than what you experienced in the Middle East over the last couple of years.

I would say so.

I would also say that competition is very fierce out there and I think as Alan said, we're looking at opportunities where we've got a competitive advantage because of our execution capability, and that clearly limits the slate quite dramatically. But we're seeing some pretty predator-type pricing in some markets that we are shying away from right now.

You mentioned the pace on South Texas project slowed down significantly. Is it fair to say that you don't have anything material baked into your guidance range for that should that project go away entirely?

I think it's important to note that we currently have no scope in backlog for that project, nor do we have anything baked into our outlook for 2011.

And we'll take our next question from John Rogers with D.A. Davidson. John Rogers - D.A. Davidson & Co.: Mike, I didn't quite hear what you said about in terms of the SG&A expenses for 2010, the range. Could you repeat that?

Sure, John. I gave a range of $155 million to $165 million for this year. John Rogers - D.A. Davidson & Co.: In terms of the outlook for 2011 and given what you're all seeing in the market, are you expecting kind of as -- and you've got various end markets here, but a steady improvement through the year, or are we sort of at the run rate where we expect to hold this now or the levels of market activity and then hopefully get better in 2012?

John, when you said run rate, are you talking revenue? John Rogers - D.A. Davidson & Co.: I'm sorry, in earnings or revenue, the way this year plays out or 2011 plays out.

John, you're right, we're in a number of different markets and at different points in those cycles. Obviously, we've got a growing backlog and investment infrastructure and we're going to continue to see very healthy run rates in investment infrastructure going into 2011. In terms of backlog, we've certainly hit an inflection point in Energy and Chemicals business and expect that some time through 2011 have an inflection point in earnings. The Power business, with lack of demand for new power generation, we're probably going to be at a fairly modest run rate in 2011 on the Power side of the house. And we do expect modest improvement in our Global Services business, probably the one that's most closely tied to the general economic performance through 2011. And our Government business should continue to perform strong with activity at LOGCAP and Savannah River really driving that, plus our new win at Portsmouth will be a real positive for Government in 2011. But each segment has its own different cycle.

We will take our next question from Justin Hauke with Robert W. Baird.

I just had one last question on the Power business, and just with the margins being elevated over the last several quarters as we've closed out these projects. Looking at the backlog now, it's, I think, the lowest since 2005. I'm assuming most of those are gone now. So we assume that margins kind of fall off a cliff from here as we don't get those earn out benefits or is it kind of a gradual tick down or how should we think about margins in that business in 2011?

Well, I think clearly with backlog now, you're going to see revenue come down fairly significantly as Mike said in 2011. And margins in this business really peak when you successfully close out a project. So I don't think, based on what we see in 2011, you'll see many quarters with a peak in it because we just don't have the current portfolio of projects that will be competed during the year. So I think that market is down. Reserve margins are pretty wide right now and there's still, I think, a fair amount of uncertainty in regulation. So I don't really think we're going to get a significant uptick in that market during 2011.

I'm not sure I described them as going off a cliff, but they will be lower into the single-digit level.

And then just one last clarification on the guidance with the share repurchases, do you have a time line for the repurchases there? And I guess maybe another way of asking it is what's the share count built into your 2011 guidance?

Well, we really haven't had a specific target there because it depends timing, it depends on the share price movements. But we will be buying during our open window at the end of this announcement. As the window opens, and then again at the end of the first quarter. That's our target periods.

So it'll have almost a full year effect on 2011, the actions that we take.

We will take our next question from Guy Baber with Simmons & Company. Guy Baber - Simmons & Company: You all have done a good job with controlling costs, obviously, this year as SG&A has consistently come in better than we had expected. How should we be thinking about cost control through 2011? And what assumptions are implicit within the provided guidance for SG&A next year?

We have assumed modest increases in SG&A next year. You're right, we did a really good job of reducing our SG&A this year. It's not realistic to assume that we'll continue to reduce SG&A next year in terms of lower levels. So we do expect modest increases. Guy Baber - Simmons & Company: Going back to some brief comments that you already made, can you provide a little bit more commentary just with respect to how do you plan to approach risk management in the Australian LNG end market? Not sure if you can speak to Gladstone, specifically, but just broadly speaking. Is this an end market where you see yourself taking fixed-price risk? And how should we being think about your strategy for any risk tolerance there?

Well, there will be some fix priced work in that market. Again, I'll come back to my statement that it's in an environment of limited competitive slate on those particular projects. And in particular on Gladstone, there will be a portion of that project that will be lump sum, and it will be on a developed basis along with the client. That gives us an opportunity to work hand-in-hand with the client, getting major elements of risk out of the project for both of our sakes so that when we do put an estimate of the price there, it serves both of us. So we'll handle it on those projects in a fashion that really helps our bottom line. And I think the way we develop this with clients is it helps our overall returns as well.

We will take our next question from Avi Fisher from BMO Capital Markets.

I'm not sure if you can comment on this, but with Kerl seemingly under the belt, Santos pending those were two very much expected awards. Is there any way you can call out some future projects we could look to or anticipate to look for coming out of the pipeline?

It's very difficult. I don't get into individual projects per se, but I would say that in the Oil and Gas area, the geographies that we really expect to have a great opportunity in are in Australia continuing and also in the Mideast and the former Soviet Union as well.

Does that include like Kazakhstan?

That would include the Stans as well, yes.

And a general question for, David....

Unfortunately, David had to leave. He has just left about 30 seconds ago.

I just wanted to ask him, any sense of new directions or new markets, but I could pick that up some other time. Just on where he expects to take the company anywhere different. You can answer that of course, but...

I've been the CEO now for nine years and was the COO prior to that. And David is clearly going to put his stamp on the company. But I think he and I do think a lot alike. I've got a lot of confidence in his ability to set strategy and execute it. I think he's looking forward to the opportunity to get with each of you, both individually and collectively, and talk about where he sees the company headed. And we will endeavor to do that over the next several months and make some very specific opportunities for us to do that hand off in a seamless way.

We will take our next question from Richard Roy with Citigroup.

Just a quick follow up on greater group volume. I mean it seems to me that a first-in-kind and fixed price project is a cause for concern. How do you assess from a risk perspective? Are there simply fixed-price projects that you wouldn't price on?

Clearly, there's fixed price projects that we'd turned down the opportunity to bid on, on a probably regular basis. And on this one, when we put the estimate together, we put a lot of thought and effort into the strategy, and the structure and the risk elements. What we missed, again, is particularly the disruptions that we incurred on the cabling that weren't just linear in terms of their effect because of the cost of the marine spread that takes to install that. And that's the lesson that we take from this. Again, back to my earlier comments, I think we come out of this project with some hard-won lessons. But nonetheless, I think was a very strong base of experience on which to base our next project execution and estimate.

Throughout the call, there's been a lot said about the opportunities that you see throughout all your end markets. And obviously, you had two very good quarters of new awards. I mean, does the opportunities that support somewhere at that run rate? Or do you see some change in the near to medium term?

Again, of course, as far as we can see, we try to give color to the opportunities. And obviously, as you go out quarter-to-quarter from here, it gets a little hazier. But I would say that we expect, given what we can see, that we will again be able to build the backlog as we finish out this year. And we see, as David said, a number of significant projects in 2011 that should allow us to at least maintain, if not grow, based on how the markets develop. And we'll just have to see how those develop. And we're confident that we've got the capability to pursue them successfully.

Ladies and gentlemen, this will conclude today's question-and-answer session. Mr. Boeckmann, I would like to turn the call back over to you for any closing comments.

Operator, thank you very much. Let me take the opportunity to thank again all of you for participating on our call this afternoon. Clearly, we're really disappointed that the events during the quarter led to these two charges. And I hope that by providing additional detail on today's call, we've given you a better understanding of events that led to these situations and confidence in the fact that we are addressing them. We are absolutely encouraged by our recent success in booking sizable new awards, and we've been able to grow our backlog over the last two quarters and expect to continue that as we move into the fourth quarter. Based on our position, strategy and our forward look, we are committed to stock buyback in the next two windows. And on a personal note, again, I am extremely happy with the selection, and very proud of David being able to move into this role. I have had an opportunity to talk or meet almost all of you. I've absolutely enjoyed that interaction. You'll probably see me at least one more time again in my current role, as I hand off to David and we do that. But I'm continuing as the non-executive chairman of this company. And I have a very strong interest in continuing to add value from that role, and so I'm not totally going away. But again, I appreciate the interest in the company, your confidence in the company and the respect that you accorded me over these years. So again, thank you very much, and have a great day.

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation.