McDermott International Inc MDR
Q4 2010 Earnings Call Transcript
Transcript Call Date 03/02/2011

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the McDermott International's Fourth Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company's prepared remarks, we will conduct a question-and-answer session, and instructions will be given at that time.

I would now like to turn the call over to your host, Mr. Jay Roueche, McDermott's Treasurer and Vice President of Investor Relations. Please go ahead.

John E. Roueche, III - VP, Treasury and IR: Thank you, Towanda, and good morning, everyone. We appreciate you joining us today to discuss McDermott's fourth quarter financial results, which we reported after the markets closed yesterday. Joining me on the call this morning are Steve Johnson, McDermott's President and Chief Executive Officer as well as Perry Elders, Senior Vice President and Chief Financial Officer.

Before I turn the call over, let me remind you that this event is being recorded and a replay will be available for a limited time on our website. In addition, some of our comments this morning will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties and they reflect management's views as of March 2, 2011.

Please refer to our filings with the Securities and Exchange Commission, which are available on our website, included in our recently filed Form 10-K for the year ended December 31, 2010 for a discussion of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations and please note that except to the extent required by applicable law, McDermott undertakes no obligation to update any of these forward-looking statements.

Also throughout our comments today references to Company records, Company history or other past comparisons relate to our continuing operations only which are typically represented by the former Offshore Oil & Gas Construction segment.

With that I will now turn the call over to Steve Johnson McDermott's President and CEO for his remarks on the operational and business environment.

Stephen M. Johnson - President and CEO: Thanks Jay, and good morning everyone. We appreciate you joining us today and look forward to your questions later on in the call.

I am very pleased with the results that McDermott delivered in the fourth quarter of 2010 which finished out a very strong year. In the final quarter of the year we set an all time record for bookings at nearly $2 billion of new awards, which helped deliver year-over-year backlog growth of 54%, and grew backlog to a level that exceeds $5 billion for only the fourth time in our Company's history.

I'll speak about bookings and the marketplace in greater detail in a moment, but the irony of this great quarter in new awards is that it had a negative impact on the revenues and profits we recorded during the fourth quarter, creating a timing issue.

To try to explain this circumstance, about half of our bookings this quarter were change orders, and these additions to existing contracts lowered the percentage completion on primarily two projects in our Asia Pacific segment, which caused us to recognize less revenues and profits for this period only.

The simple arithmetic to explain the condition is that the denominator increased in the percentage of completion calculation, which is good news, but despite this one quarter impact, these projects are now larger in size, they had more expected profit associated with them, and our productivity on these jobs during the fourth quarter was actually ahead of schedule. So, we are getting the work done.

Taking all of these conditions together, this is even more good news. We are prepared to explain the details of the accounting in the Q&A period, but oddities like this are one of the many reasons that in good times and in softer ones, I also remind investors not to read too much into a 90-day result.

So, with that as a backdrop, revenues in the fourth quarter were $540 million, down substantially compared to the quarter a year ago, the sequential quarter and our September 30th backlog roll off expectation. As discussed, the shortfall was primarily due to the sizable change orders we recorded in the Asia Pacific segment. This impact had the effect of deferring about $170 million in revenue recognition during the quarter, as well as the associated gross profit.

Even with the loss of leverage that these revenues would have provided we were still able to deliver operating margins of 11%, which splits the 10% to 12% range we discussed in the past and led to an EPS from continuing operations of $0.19 per share. As I mentioned, our activity levels were pretty much as anticipated.

In our major construction facilities we worked a total of about 4.7 million man hours during the quarter, which was an increase from both the 2010 third quarter and the 2009 fourth quarter. Once again, virtually all of the fab work took place in our Middle East and Asia Pacific facilities, while the Caspian and Atlantic regions remained underutilized similar to the last few years.

It's likely that during 2011 we'll see fewer man hours in the strong regions that we realized in 2010 even though we'll remain pretty busy, but a partial offset is, we should see some uptick in the Atlantic region.

As we mentioned previously, keeping our construction vessels working was the major challenge in 2010 largely as a result of a softer work cycle in 2008 and 2009 combined with new capacity coming out of the ship yards. However, our utilization during the 2010 fourth quarter was pretty much in-line with what we've averaged throughout the year.

In 2010, our vessels worked about 55% of their standard days and we achieved 53% in the fourth quarter, clearly, keeping our major construction vessels utilized remains one of the largest needle moving opportunities we have.

While the market is still soft for marine-only work, we're going to see what we can do to make something out of this. Here is the good news; we already have about as many major work barge days booked in backlog for 2011 as we recognized in total during the full year of 2010. So, that's a good start, and of course, we're also adjusting our approach to the market as well.

I mentioned on our last call that we were in the process of moving the DB50 out of the Atlantic market, and it's currently in transit to the Asia Pacific region, where we expect to get some work in before it spends the second half of the year in dry dock, and I might add, at a lower cost than it was available in the Atlantic region.

The more recent move is our decision to cold stack the DB16, another Atlantic vessel. We're still pursuing work for it, but until we can string together a handful of jobs, we're planning for it to remain in this low cost position. We believe both of these decisions are better alternatives for 2011 as we work to take advantage of marker improvements.

While I'm pleased that our operations and productivity have generally been very efficient in our challenging businesses, there are always some rough patches. During the fourth quarter for example, we encountered very challenging weather in the Bass Straits of Australia, which resulted in damage to one of our vessels. Downtime and repair due to weather is covered by the contracts, so it's not our economic issue, just a reminder of the challenging offshore work we do on a daily basis.

Also, we had the engines temporarily fail on the Secunda vessel, fortunately, while it was already on its trip to a scheduled dry dock for maintenance. We're also carefully watching the events in the Middle East. While we haven't been affected by any of the events in the hot spot such as Egypt or Tunisia, we do have a vessel in Bahrain for service. With our major facilities and vessels in the Middle East coupled with a sizable backlog, and most importantly, a large percentage of our workforce, we'll continue to stay abreast of the situation in the region and to the best of our ability in order to keep our people and assets safe and out of harm's way.

Following our record quarterly bookings, our backlog at year end grew to over $5 billion. This level is up about 54% from a year ago and an increase of 40% sequentially from the September 30th level of $3.6 billion.

One of our goals that we articulated throughout 2010 was our need to win work to help fill out 2011. Although we still have some capacity both in fab and marine, we have successfully added significant revenue visibility, not only for 2011, but also for 2012.

At year-end 2010, we had $3.1 billion of expected revenues from backlog for 2011, which is the highest amount we've ever expected to earn from backlog for the following calendar year. In addition, our backlog is currently expected to deliver almost $1.7 billion in revenue for 2012, which is another really good position to build upon.

With a book-to-bill ratio of about 3.6, we did exceptionally well bringing in work in Q4. As I mentioned earlier, about half of the nearly $2 billion of new work came from change orders on existing projects. Although, we've been limited in our ability to press release many of the quarter's results, some of the major new projects include an EPCI contract to supply water injection facilities in the Middle East, a pipeline and diving services contract in the Caspian, the Gorgon subsea fabrication job, a marine project in Sakhalin, as well as the Arena Riker's Gulf of Mexico prospect and also the Noble Alen project for West Africa.

Of course, as a project oriented Company the business model always requires bringing in new projects. So, even with the strong bookings and benefit of increased visibility we're still pushing hard for even more.

In that regard, we're reasonably optimistic that the market will remain strong. At December 31, we had about $1.7 billion of bids and change orders outstanding. This bid amount is down compared to 2010 third quarter which is logical as you'd expect after a quarter where we had record level of bookings.

However, at December 31, and beyond bids our list of target projects that we see coming to market over the next five quarters has increased materially to almost $13 billion, so if you take our backlog, our bids, change orders and our target list, this generates a revenue pipeline potential close to $20 billion.

To be sure, competition remains tough in every market in which we operate, but there appear to be plenty of opportunities available that we just need to win our fair share. While we are very pleased with the projects we've been awarded and the confidence our customers have in us it's also far to say that over the last few months McDermott has indeed lost some main projects that a few in the financial community were tracking and have since enquired about.

Let me just say this, some of the best projects are actually those you don't win, it's not uncommon than in heated price sensitive competitions, project winners have certainly been known that have winners remorse. While like almost everyone we value a sizable backlog. We also remain stead fast that our future work is profitable as well and I can assure that McDermott will remain committed to our disciplines. Not only the economics but contract terms and conditions as well.

We can certainly improve upon our historic 25% to 35% win rate if we wanted to, but we believe our shareholders benefit from our long-term more disciplined approach. We've talked for sometime about the majority of our current backlog and target projects continuing to be in the Middle East and Asia Pacific segments. However, it's interesting that at year-end the Atlantic segment actually had the most bids outstanding and we've seen recent progress in that market.

After winning (indiscernible) a year ago over the last couple of months we added two projects for our Morgan City facility in the fourth quarter that also included marine scope. Additionally during the first quarter of 2011 we were pleased on numerous fronts to awarded the subsea project in Brazil using the Agile. Since it hits many of our strategic fronts it adds work for the Atlantic segment, it expands our subsea presence and it build on our emerging relationship with Petrobras.

Although the financial results in our Atlantic segment have been disappointing of late we have recently taken significant steps to improve our performance over the next several quarters and over the next several quarters we see – we expect to see some noticeable improvement. Between our efforts in installing a new management team, delivering cost reductions and adding new work I believe we can get there as we continue our focus on this segment.

Let me begin to wrap up with a few words about our full year of 2010. I've been in this seat now for a little over a year, and I'm exceptionally proud of what the leadership team and all our employees have accomplished together.

From a financial perspective, 2010 was our second best year ever in terms of operating income, and that includes about $46 million of impairments. It is also one of the top years in terms of bookings, which led to our highest ever year-end backlog. These results were achieved even as a lot of management time, attention and effort were devoted to preparing McDermott as a standalone entity, following our spin-off of B&W, and I believe all-in-all, that transaction and our activity sense have been very successful. As pleased as I am with our achievements in 2010, I'm even more enthusiastic about the years ahead.

I'll turn the call over to Perry now, but to summarize, we are very pleased with our quarterly results and our full year performance. We have improved visibility for the coming year and we're still looking to add quality work, both to fill up capacity as well as to position us for the out years. As always, our major focus remains on the excellent execution of the projects and backlog. We continue to maintain a strong balance sheet which provides financial flexibility, but recognizing our responsibility is to be the best stewards of shareholders' capital as possible.

With that, I'll turn the call over to Perry to go over the details of our financial results. Perry?

Perry L. Elders - SVP and CFO: Thanks, Steve, and good morning, everyone. Starting at the top, as Steve mentioned, total revenues for the fourth quarter were affected by the significant change orders we booked during the quarter.

The POC impact of the change orders kept about $170 million in revenues and associated profits from being recognized in the quarter, which instead will be recognized in 2011 and beyond. As such, fourth quarter revenues of 2010 were $540 million, down about 30% from a year ago and 26% compared to the 2010 third quarter. In addition to the lower percentage of completion progress in the Asia Pacific region, we also had slightly lower levels of marine activities in the Middle East segment.

Our gross margins for the fourth quarter were 21.9%, down slightly from the 22.7% we recorded in the 2010 third quarter. However, this quarter's gross margin is well above the 18.8% we achieved in the 2009 quarter.

SG&A expense was up modestly on a sequential basis to $56.9 million, and as compared to a year ago. However, the full year 2010 SG&A was down slightly as compared to the full year 2009. As indicated last quarter, we continue to expect SG&A to run about $60 million a quarter.

Consolidated operating income of $59.3 million this quarter generated an operating margin, as Steve said, of 11%, which is in the middle of our guidance range and strong considering the lower levels of revenues.

Our results this quarter were essentially driven by the Middle East region, where strong operational performance, change orders, closeouts and cost savings combined to generate strong results.

The low operating income, the other expense, which is primarily interest income, interest expense and foreign currency expense was $5.4 million, flat with the $5.5 million we reported a year ago.

With virtually all of McDermott's income being generated from our foreign operations, our provision for income taxes this quarter was only $6 million or about 11% of pretax income, compared to tax provision of $16.5 million or 19.3% in the 2009 fourth quarter.

Despite several recent quarters with lower than expected tax rate, I continue to suggest you expect mid-teens to low 20s tax rate over the next year.

In particular we're working on working to restructure our Saudi operations where we currently have about $190 million in cash that's restricted. Once the restructuring is complete which we expect in the first half of 2011, the cash will become largely available but we expect to pay higher tax going forward for our work in that country which should bring the consolidated rate into the range we've just mentioned.

Net income attributable to non-controlling interest primarily our minority interest partners in Indonesia and the North Ocean 102 entity was $2.4 million which is in line with our expectations with this level of significant swing as compared to a year ago when this line item generated $4.5 million of income which we would not expect to recur.

So at the bottom line the reported net income attributable to McDermott from continuing operations was $45.5 million for the quarter or $0.19 per diluted share. Please let me add just a few comments about the full year.

During the year we generated revenues of $2.4 billion, a sharp decline from $3.3 billion in 2009. Since we did not have significant zero margin revenues like we did in 2009 and in fact we had significant recovery in 2010 on those same contracts. Operating income increased from $279 million in 2009 to $350 million in 2010 and as Steve mentioned that included $46 million of non-cash impairment charges.

2010 is the second best year in terms of operating income that we've ever delivered. As we look to 2011, I also am encouraged that just from backlog we're expecting about $3.1 billion to be recognized in revenues.

Our backlog overall has been growing and therefore by definition younger and less mature or said in other way our average percentage complete is at the lower end. So, we continue to believe that operating margins in the 10% to 12% range is the level to expect. While we may benefit from the increased leverage associated with higher revenues there will be less opportunity for change orders, close outs and harvesting contingencies, since we won't have as many projects nearing completion in 2011.

Turning to the balance sheet, our financial position remained strong. Our cash position which includes cash and equivalents as well as investments ended the year at $886 million which is up slightly from September 30, primarily due to customer advances.

In addition, we had about $650 million available under our credit facilities. Looking beyond credit and cash our working capital which is current asset less current liabilities remained strong at around $420 million although it was down slightly from Q3 and the total equity as a percentage of total assets also declined a bit to 58% as assets grew faster than equity. We continue to maintain an essentially unlevered balance sheet with debt of only $55 million.

To finish out with a couple of other quick items, during 2010 McDermott invested just under $200 million in capital expenditures to keep our vessels and facilities well maintained and in pursuit of growth initiatives which was essentially the same amount spent in 2009.

We would expect this level to increase in 2011 as we will have several new initiatives start in earnest such as the DB50 upgrade during dry dock, adding a Flex-Lay system in crane to the NO102 and ongoing construction on North Ocean 105 as well as selected investments in our fabrication facilities.

To speak briefly to our pension, as you know most of our underfunded pension was spun off with B&W and we substantially funded the remaining pension plan which has been frozen, with no new accruals and no (interest). We have seen a number of companies recently eliminate the practice of amortizing prior losses and gains related to their pension assets, and instead, marking to market at the end of each year. We have just started analysis to discern the pros and cons of such a move, but I mention it now largely just to let you know that it's something under consideration and we should reach a conclusion in the near-term.

Finally, turning to the upcoming Investor Relations activities, we have a number of items on the calendar. Next week we'll take part in Morgan Stanley's Investor Event here in Houston. In the middle of March, we'll participate in the UBS E&C One-on-One Conference in Boston. In late March, we expect to present at the Howard Weil Energy Conference in New Orleans. Then in early April, we're scheduled to be at the BB&T Industrial Conference. In addition, we'll host a number of office and field visits with several regions to choose from on the near-term itinerary, we hope to see many of you at one of these venues.

This concludes our prepared comments, but following the Q&A session, if you have any additional questions regarding the quarter or the Company, I encourage you to call Jay or Robby in our Investor Relations department.

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

Transcript Call Date 03/02/2011

Operator: Andy Kaplowitz, Barclays Capital.

Andy Kaplowitz - Barclays Capital: Steve, so you talked about the large target list and then the bids outstanding, and obviously, you had a very good quarter in bookings. As you go into 2011, what is the confidence in backlog continuing to grow given the target list that it seems given still pretty good competition across the world.

Stephen M. Johnson - President and CEO: Andy, thanks for the question it's an interesting one. I think you know and a lot of the callers. This is a business that does have significant competition both in fab and marine and to some degree in the epic type programs that we perform around the world. I would say this in direct response to your question. We like the prospect lift. We are comfortable that those items that are in our target list are those that we can perform and perform well. We have to be mindful of the occasional irrational bidder. We've seen that in recent times. We have to be careful and be disciplined around our contract terms and conditions and be faithful to those and we have to be faithful to our commercial terms. With that as a backdrop I would say I am no less confident than I was going into last year. I have got a larger prospect list. I would leave it at that and tell you that we are just going slog it out as we go through. We feel good about some of the projects in the shorter term and we'll see how we fare in.

Andy Kaplowitz - Barclays Capital: I know you guys don't give guidance per se on '11 you have the $3.1 billion out there for 2011. May be you could just help us think about sort of the details in the sense that it seems like marine looks a little better for '11 and fab may be looks a little worse. Plus we are sitting here and we probably still have two more quarters to go where you can book work for '11. So is it fair to say that 3.1 is pretty conservative for what we are actually going to book in revenue and then when we think about margin interplay. Isn't it usually that marine may be had slightly better margins than fab or am I mistaken there?

Stephen M. Johnson - President and CEO: Last question first. You are accurate around marine margins generally higher than fab only or even or even at big margins. You are also accurate in speaking to the fact that we don't give guidance. So I'll simply say this, $3.1 billion is not in the bag, $3.1 billion is something that I feel pretty darn confident about, however, based upon the roll off. As I think about going north of that it's a binary kind of situation we find ourselves with the projects that are out there in short term that could contribute to revenue in 2011. There is some possibility for upside but I just simply couldn't handicap at it this time.

Operator: Jamie Cook, Credit Suisse.

Peter Chang - Credit Suisse: It's actually (Peter Chang) in for Jamie. Based on your current schedule work for your construction vessels in 2011, could you provide some kind of utilization rate expectations compared to the 55% in 2010? Then how much upside is there to that rate given that the DB50 is going to be dry-docked for the second half and that the DB16 is also in a low cost position right now?

Stephen M. Johnson - President and CEO: I think Perry has the answers to those questions Peter.

Perry L. Elders - SVP and CFO: You kind of answered your question there which is utilization will probably be in the neighborhood of where we were in '10 and with those two vessels tied up and as you said second half for the year for the DB50 and dry-docking the 16 we'll bring it out if we see enough work to justify coming out of a cold stack. The other vessels in the fleet you'll see we believe we've kind of got a normal level of work for them but not at our standard, so not significantly higher, so there is a little upside but not dramatic to that level of utilization.

Stephen M. Johnson - President and CEO: The real key going forward will be to try to continue to book short-term book and burn type work that's marine only in nature.

Perry L. Elders - SVP and CFO: I would add Peter as regards to the DB50 which was embedded in your question. I think we've mentioned but just to reinforce it, she should arrive at her destination in Asia Pacific actually to (bottom) around the 17th or the 18th of March. We have some work booked we are looking for some more. I think that will be very helpful to us because of the queen of the fleet getting some work before she goes into dry dock will be very helpful for the whole year in terms of marine barge days.

Peter Chang - Credit Suisse: One more question before I get back in queue. Sort of an extension to Andy's question on the bids outstanding and the target project list. So far total $16.7 billion and assuming you get your win rate or the midpoint of your win rate of 30%. I mean, that's $4.4 billion in awards over the next five quarters. Is that the right way I should be thinking about that or should I be thinking about that somehow differently given the competitive environment?

Stephen M. Johnson - President and CEO: I simply don't calculate it that way. The reason I don't calculate it that way is because these awards are really binary and you could pick the midpoint of the win range and get an answer, you could pick the low end and get a little bit different answer. I would just caution you that if we had a midpoint of that range that is a possibility but my guess is, it will vary significantly from that range on any given year and any given quarter. So, my view is that management should steer you guys to think in a conservative fashion, because these things are large, a lot of them are, and a lot of them are binary and the competition is not going away.

Operator: Steven Fisher, UBS.

Steven Fisher - UBS: On the execution side, when do you start to get into the offshore phase of Karan and Safaniya, and then how do you feel about the schedule and the outlook for those projects?

Stephen M. Johnson - President and CEO: Karan, I believe we're already in the offshore phase now. We're doing some work offshore now. Safaniya is in 2012 I believe before we actually hit the water. So, I can't be any more specific than that, but that's where we stand with those two.

Steven Fisher - UBS: Okay, and then so Karan proceeding as you expect?

Stephen M. Johnson - President and CEO: Yeah, it actually is. We feel good about our performance on Karan from an execution standpoint. We have very regular reviews, monthly, and on those types of projects you might imagine the region that overseas these projects have much more robust and regular oversight of those programs. I'm hearing no reports that would indicate concerns, if that's the sense of your question and in fact, I'm hearing the opposite on Karan. Safaniya, a little bit too early to tell. We got to get out probably another three or four quarters before we could comment.

Steven Fisher - UBS: Okay, and then on Papa Terra, can you just give us an update there?

Stephen M. Johnson - President and CEO: Yes, Papa Terra is going well. This program is one that we completed some initial milestones on, as you know, two to three quarters ago we completed the initial feed on the program. We expect, because of our internal policy, to not begin profit recognition until next year when we reach a 70% completion point, and the reason we took that approach was not because we had problems on the job, it's because it has some areas that are first of the kind; including first, TLWP for our FloaTEC joint venture, use of Brazilian suppliers, potential environmental conditions, et cetera. I feel comfortable with the program. It is a significant program. It has technical complexities. It has fabrication uniqueness and it has an offshore marine campaign which is not simplistic. But I'd say stay tuned on that So far so good. Our project management regimes will give us, I believe, an early warning into any upset conditions that may occur on those programs. It's not unusual to have some minor upset conditions. I believe we've got the visibility into that project, Steve.

Steven Fisher - UBS: Just one maintenance item. How much were the change orders in the Middle East this quarter?

Perry L. Elders - SVP and CFO: Most of the change orders were in Asia. So, the change orders in the Middle East were…

John E. Roueche, III - VP, Treasury and IR: Relatively modest.

Perry L. Elders - SVP and CFO: Relatively small.

Steven Fisher - UBS: Okay. But there was an outsized margin in the quarter or was that just sort of hyper utilization?

Perry L. Elders - SVP and CFO: Yeah. There were a number of project closeouts as well as contingency harvesting as we got near the end of jobs that allowed us to have particularly strong margins this quarter in that segment. Some smaller change orders, but they were not huge as a portion of the 2 billion they were small, but the ones that did come through came through straight to the bottom line. We had a little bit more of that cutter, we have been talking about that for the last few quarters. So as little bit of that came through, so although not a big percentage of the total bookings in the quarter, it did reduce the margins in the Middle East when you look at it just on that segment basis.

Operator: Will Gabrielski, Gleacher & Company.

Will Gabrielski - Gleacher & Company: The Atlantic margins were obviously a headwind again and I am just wondering if you had any updated thoughts about, what you can do to control cost there, and then second, I am sure you (talked of Island) booked a very big fabrication job for the Gulf of Mexico, what your bidding prospects may look for '11 there, because there should be a few more big programs up for bid?

Stephen M. Johnson - President and CEO: Okay, Will, all things Atlantic region, I think the first way to tackle that one is to tell you and just to reiterate your question around controlling cost, the first thing to do is to make sure that the marine fleet appended to the Atlantic region is dealt with. The DB50 we mentioned, she's headed to Asia, she's got about 2,600 nautical miles to go and we get her Batam and start work. The DB16 you heard me refer to her, she is cold stacked the next thing we've done is reduced headcount not only in the marine organization, but throughout the Atlantic region, in our Morgan City fabrication yard, we did pick up work on the Noble Alen project, so we got some revenue coming in. We're focused on positioning our Mexican fabrication yard in Altamira, near Tampico, Mexico for future deepwater developments. However, we're going to time that future investment around market demand. I would say this, we've put in a new management team under Dan Houser that I'm extremely pleased with. Our Chief Operating Officer, John Nesser. Dan Houser, the entire team are focused on two things one is cost management and the second is frankly selling ourselves out of this condition and I think they are doing an excellent job and they are reaching into the organization and pulling cost out at a pace that is absolutely in line with the plan we put together. Longer term the fundamentals in the Gulf of Mexico offshore I think will continue to be significant for this Company. You probably saw that a couple of days ago, one of the E&P company received deepwater drilling permit I think that bodes well. If you believe what the regulators are saying that should be and hopefully is beginning of others that are stacked up behind in and well I hope that's responsive to your question. I'll follow-up if you've more.

Will Gabrielski - Gleacher & Company: Then just want to follow-up for book-and-burn work, my calculation says you had virtually none of that in 2010 but you've more marine days or an equivalent amount of marine days already booked for 2011. You guys have always tell me marine work is correlated well with book-and-burn work for more marine days the more work you can pick up in those margins are usually a little bit better. Do you've any thoughts about the way your project set up for 2011 and some opportunities versus '10?

Perry L. Elders - SVP and CFO: You are right, we're set up I would just comment again reiterate on the DB16 and on the DB50 unlikely we got a lot more work on the DB50 because it doesn't get there until middle of March and goes into dry-dock second half of the year on the 16. If we can get some book-and-burn for the year which we hope to do and we're actively selling it; that would be additional to the 3.1. On the remainder of the fleet, that's in the – I think it's ,100 days out of the year that's already booked, we do have some capacity there for book and burn. So, it could help us out through the year on the other six major work barges.

Operator: Graham Mattison, Lazard Capital Markets.

Graham Mattison - Lazard Capital Markets: I was wondering, were there any charges in the quarter related to the stacking of the DB16, and then just in terms of that, I know you said you'd bring it out if you saw opportunities there. Is there a potential you could see those opportunities in 2011 or more likely that would be 2012 and beyond?

Stephen M. Johnson - President and CEO: I'm not aware of any charges and nothing significant for the 16. Look, what we're doing with the 16 is, it's kind of interesting, we can cold stack her, but we can also bring her out with a reasonable period of notice, and our approach is to not just bid on one-off projects for her. The approach is, if we bring her out, to make it cost efficient for us and effective for the customers and what we're really trying to do is to speak to our customers in a way that says, look, we'd like to give you the DB16 in a marine campaign, that would have two or three projects that, as we have said, we could string together. I'm hopeful that that can happen. If that happens, that's upside. I can't sit here and tell you that I have great visibility into that yet, but that is the effort and my belief is, our sales team and our marine folks will surprise us positively, I hope that's the case.

John E. Roueche, III - VP, Treasury and IR: And in terms of timing between '11 and '12, I think we're hopeful that this could occur in '11.

Stephen M. Johnson - President and CEO: Yes.

Operator: Marty Malloy, Johnson Rice.

Marty Malloy - Johnson Rice: Could you talk a little bit about opportunities offshore Brazil, and with that contract that you recently got for the Agile vessel, it looks like you are making some inroads there. Any help you can give us in terms of future opportunities there?

Stephen M. Johnson - President and CEO: We are very focused on Brazil in terms of making sure we understand the market, the pace of development of the market and some great – a great deal of granularity on the projects. I would say this to you; the award that you just spoke to in combination with the Papa Terra project gives us much better visibility and insight into the behaviors of Petrobras. It gets our name in front of them, and as we perform on both of these projects, I think we'll have more and more opportunities that we can respond to. You know that we are doing the project with Petrobras at Papa Terra in a joint venture with Keppel FELS. We may think about that project as a much more -- or that arrangement I should say, as a much more expansive arrangement as we think about fabrication in Brazil because of local content requirements. I don't want to signal that we have landed on specific strategies, but with Keppel FELS, with our Agile PSLV program, with our relationship with Petrobras and with the market visibility that the contractor, marine contractor community has down there, McDermott will be a player, and we feel very good about that. Timing is always an issue however.

Marty Malloy - Johnson Rice: Can you give us an update, if there has been any movement in terms of the potential for fabricating modules for refineries in Iraq?

Stephen M. Johnson - President and CEO: All I can tell you about that, Marty, is that our most recent conversations with customers would indicate that, 2011 is most likely a year of level setting between the international oil companies, whether it's Exxon Mobil or BP or Shell or whatever have you and the Iraqi IOC. So, I would say 2011 is a timeframe, where there is a lot of sharing of how to go about doing these developments and putting this capital in place. So, I would say 2012, hopefully early in 2012, but I would say a year from now before we get any significant signal from any of our customers about capacity needs and maybe even capacity commitments, but as I've said before, our goal is to stay close to try to get some commitment from one or more of these customers as to capacity needs to build these smaller modules that could then be floated in and then trucked into the onshore locations for these refineries and we would fabricate those in Jebel Ali or in locations elsewhere in Middle East. I'd also tell you this, as you think about the Middle East, you didn't ask about Abu Dhabi, but in addition to Iraq, I would say and maybe even more short-term our opportunities in Abu Dhabi with ADNOC affiliates, ADMA-OPCO in particularly are very interesting to us. We've won our first project there. We are in very close association with them. If we win work in Abu Dhabi at a pace that is potentially there, we may have to build and expand our fabrication facilities in that region, absent the Iraq opportunities.

Operator: John Rogers, D.A. Davidson & Co.

John Rogers - D.A. Davidson & Co.: First of all, just in terms of inflation, particularly steel, fuel costs. You're pretty comfortable with how you are positioned there?

Perry L. Elders - SVP and CFO: The short answer is yes. Steel prices are as you may know and others may know have come out of the trough. We have to monitor how we bid and how we buy out those contracts, and I would say to you as I have said before, we've got a very good approach to that. Our means and methods around that give us a high degree of visibility and we have a short period of time between a prime contract award and buying out those contracts for steel supply to keep ourselves at a low risk position, but having said that, the market is changing and we are monitoring it very closely and I am speaking of steel primarily, John, because as, you know, that's probably the biggest commodity that we buy.

John Rogers - D.A. Davidson & Co.: Secondly, in terms of margins and potential for 2011 and beyond, and I understand your guidance range or what your expectations are, but in years past, goes back ways you had much higher margins at times, especially in very strong markets. What's the potential that we could see that low-teens, mid-teens type margins again?

Stephen M. Johnson - President and CEO: The only way to answer that question is to put a little bit of granularity and color around it. I think the first thing I would say to you is, margins are somewhat market driven. It's about capacity right? So, if the market moves in the positive direction that we and most of us in this industry expect, there is a data point. Second thing is, margins as you know in this Company, are somewhat driven by change orders, closeouts, settlements and the like. As Perry indicated earlier for 2011, we probably have less of those than we have had in years passed, so for the short-term, I wouldn't expect anything much different. Over the longer term, I think you got to look at the competition, and if you take the irrational bidders out of the equation and you say McDermott is not going to respond to an irrational bidder, we'll be just fine over the long-term, so that's a long way of not answering your question very well, but that's all I can tell you about it. Perry, do have anything you want to add to that?

Perry L. Elders - SVP and CFO: No, 10 to 12.

John Rogers - D.A. Davidson & Co.: Let me give try it this way; at close to $20 billion in market opportunity, are we getting close to a point where you're filling up industry capacity?

Stephen M. Johnson - President and CEO: Well, first of all, it's $20 billion of opportunity, it's not $20 billion of backlog, so all I can tell you is, we'll monitor it. The way we put together these bids is so much less about a bidding margin or an ask/bid margin and much more about how we can position ourselves to perform the work and get in a position to where we can grow the revenues and therefore grow the margins. The margins we assign at the time of bidding will float up depending upon capacity availability, but I haven't seen it just yet, John.

Operator: Matthew Tucker, KeyBanc

Matthew Tucker - KeyBanc: Just a follow-up on John's question, in terms of the competitive environment, have you seen really any change in the competitive environment versus the third quarter, when we heard from you on the third quarter call and are there certain regions maybe where you are seeing differences in the competitive environment where you might start to see pricing start to improve sooner than others?

Stephen M. Johnson - President and CEO: I'll give you one data point Matt that might add a little color to your question. In the third quarter call, I think we spoke to a situation in the Middle East where we had an Asian competitor take a project at what I would call, pretty low price, and we see that on occasion, and we maintain our disciplines and we won't follow them down. In a recent bid, in the fourth quarter, we saw just the opposite from actually the same category of bidder. So, what that might indicate although it's one data point, what that might indicate is that there may be some capacity fill up from some of those Asian bidders and maybe the irrational bidders are starting to float away from us and they won't happen in the upcoming quarters, but we'll just keep monitoring it. It tends to happen to us in the Middle East probably more in the recent quarters than it has elsewhere. In terms of margins and Asia Pacific; look, it's tough out there, and as far as I could see, I see no reason once again, and you can see it represented in our 11% in this quarter to guide people any differently than our 10 to 12.

Matthew Tucker - KeyBanc: I guess, based on that visibility that you currently have an expectation that activity is going to continue to ramp up going forward, I mean, do you have any kind of expectation in terms of timing when you couldn't really start to see things begin to improve more broadly, is it 2011 second half type of event or are you thinking more next year?

Stephen M. Johnson - President and CEO: I think 2012, I think as we've indicated earlier in the call, we're comfortable with our revenue projection of 3.1 for 2011. I would think about ramp ups in 2012 and going forward.

Matthew Tucker - KeyBanc: Thanks, and then just a couple of questions on Brazil, number one, I believe Petrobras just came out recently, lowered their CapEx over next few years because they said that they had seen some delays on some production projects. It sounds like your work there is pretty much on track, but if you could just confirm that. Then number two, some of your competitors in that market particularly on the deepwater side have indicated that Acergy Sub 7 – Subsea 7 merger has kind of created an opening for another kind of prominent competitor to fill that gap given that Petrobras likes to keep the market fairly competitive. Have you seen a – do you feel like you've seen a change in your competitive positioning as a result of that industry consolidation?

Stephen M. Johnson - President and CEO: I'll take the last one first, if that's okay. The answer is yes, because of Petrobras' I guess culture or buying behaviors. They would rather have a longer bid slate than a shorter bid slate and because of that merger between Acergy and Subsea 7, we have actually found and in one or two cases that we've been added to the bid list where we may not have been before. So, that's good news. We will see if that turns into revenue in future years if they continue that condition. Your first question around (Profitera) project is it in on track. Yes, it's on track. We are seeing as you have indicated, as we look at the roll-out of projects for us to bid on and we look at some projects under execution, we are seeing some delays there. It isn't at this juncture had any impact on our project in (Profitera). I don't know that it will, it's possible, but I see a little bit more of a delay in the roll-out of opportunities for us to bid on in Brazil, which is the reason I made that comment to another caller's question about timing.

Operator: Ole Slorer, Morgan Stanley.

Ole Slorer - Morgan Stanley: Even you mentioned the best projects are those that you sometimes don't win and I think that's something as we've seen in the industry has to be very true over the past decade. So, could you update us on how you screen projects right now, what you decide, wanted to walk away from and how do you – what's your strategy around bundling or fabrication capability and some of your assets in order to create an edge?

Stephen M. Johnson - President and CEO: Your comment was we've seen some of those conditions or projects you win that you hadn't, but you really didn't want to win over the last decade. I have seen it over the last 40 years and I've got a lot of scars from that.

Ole Slorer - Morgan Stanley: (Decades) over there.

Stephen M. Johnson - President and CEO: So, we agree on that. I would say this the discipline that we operate under is one of risk management, project risk management and bidding risk management. We look at contract risk, we look at pricing risk, we look at scope risk, and we look at the ability to execute, and we actually parse our thinking around those, when we make a decision to bid. As we bid, if we make a decision to bid we look at how we can get paid for the risk, while off the risk in the contract, mitigate the risk otherwise or lay it off in some fashion. So, you would find our bidding discipline, as well as our execution discipline fairly robust. It is a difficult tension between wanting to bring in revenue and wanting to bring in the right revenue. Cooler heads prevail and people with scars tend to be able to see and have more visibility into these bids than others. We've got a very experienced team in both sales and execution and in my view you have to have that in this business and I would say we are if not best-in-class, we're very close to being best-in-class in terms of risk identification, risk management at the bid level.

Ole Slorer - Morgan Stanley: So if you look at your Middle East fabrication capacity, I would probably say that, that's as far as I see it at least your biggest competitive advantage at the moment given what's going on in that part of the world. When it comes to the say, Arabiyah and Hasbah project is coming up in Saudi gas or the gas along -- as you mentioned in Abu Dhabi, there seems to be a debate at the moment whether to go for platform build out or extended reach drilling, but it's going to be a big push for gas anyway. So, how do you think about the co-bundling of your fabrication capability versus your offshore strategy when it comes to maximizing the profit on the opportunity in the Middle East?

Stephen M. Johnson - President and CEO: We prefer the EPCI model, which allows us to bid projects with all phases of capability of engineering, procurement, fabrication and marine installation. That is our preference. That's where we have the most opportunity in this company. We'll do marine-only; we'll do fab-only. I think the issue in the Middle East over the long-term and depending upon what the pace of these projects are in Abu Dhabi and with Saudi Aramco, and maybe even if Iraq comes forward in sometime next year, our issue is going to be capacity constraint, and I would say in the short-term, that is not the issue in Jabel Ali in the Middle East. Over the long-term, it could be, and our managers in that part of the region are able to flex that facility up and down, and if we hit the wall in terms of capability and capacity, we have plans to expand our fabrication capability in other places in the UAE or close thereby.

Ole Slorer - Morgan Stanley: How quickly can you do that?

Stephen M. Johnson - President and CEO: Well, it depends upon the nature and how you would lay out the fabrication yard and what its purpose is. If it's simply a small module fabrication yard, that would be needed, say, for these Iraqi modules, that's a shorter term story. It's a longer term story if you wanted to do something like replicate Jabel Ali, which is not our plan. So, I would say, we can do this in phases and you can be up and running in a matter of quarters, or over the long-term it's a matter of years, and I just wouldn't want to close in on it any more than that.

Ole Slorer - Morgan Stanley: Okay, in 2011 what's your capacity utilization?

Stephen M. Johnson - President and CEO: Let's see, if we got that one.

Perry L. Elders - SVP and CFO: Yeah, for the fab facilities we – and I would think of it in terms of maybe not the standard what we would normally say that the fab hours we can run through Batam and Jebel Ali, but think of it in terms of the peak. We were running at peak levels earlier in 2010 and in 2009 in those facilities and some of the flex that Steve was referring to is our ability to run above kind of what we would think as our normal. So, we expect to have some capacity in Jebel Ali under our normal standard, so we have the ability to flex up with additional labor there.

Ole Slorer - Morgan Stanley: So, would you be 80%, 85% of the throughput of what you had at the peak in 2009, '10 or lower?

Perry L. Elders - SVP and CFO: Well, I don't want to give a specific number, but you're in the range, but we do move a number of hours, I mean, if you think about order of magnitude across the companies from say, 15 million hours to 20 million hours, that's kind of the spread that you're looking at there, and that's across the whole Company not just Jebel Ali.

Ole Slorer - Morgan Stanley: Okay, thanks, and just one final one. The strategy for the Atlantic, you've highlighted that you want to maybe selectively go into the deepwater and flowline wiser installation market, but have you got any plan of expanding your Middle East to presence with the local content fabrication in, let's say, West Africa or Brazil for that matter but mainly West Africa?

Stephen M. Johnson - President and CEO: Well, if the question is specifically around our Atlantic region, and you think about deepwater, that's where the deepwater is primarily, West Africa, Gulf of Mexico, Brazil, and may be some North Sea stuff. The simple answer to the question is, yes, but in a measured way. We need to think about the conditions under which we would invest. We need to understand local content requirements in the countries of interest, including Brazil for fabrication and maybe even some countries in West Africa. We need to think about transportation distances and cost, and we need to think about marine fleet capability. We're thinking that in addition to the North Ocean 102, that is in our control today and the North Ocean 105, which comes out towards the end of the first quarter next year, we're thinking depending on how the market plays out, there are more deepwater vessels that maybe needed, so we're going through that process now. It could be a heavy lift vessel, could be something more along the lines of the North Ocean type vessels. So, both marine and fabrication we're looking at in terms of deepwater. It is all about win, it's not about if in our view for deepwater.

Operator: Jeffrey Spittel, Madison Williams.

Jeffrey Spittel - Madison Williams: I'm pretty sure I know the answer to this question, but I'm going to ask it anyway. Has there been any discernable reaction in the Middle East from some of your most important customers to the geopolitical events that are being going on there, with the understanding that any decisions they might make to accelerate stuff really wouldn't impact the physical market for several years.

Stephen M. Johnson - President and CEO: Yeah, I think you do know the answer. The short answer is no. We haven't seen anything along those lines. I'll tell you though, we monitor it not only for our people and our asset protection sake, but we're also monitoring it from a business interruption standpoint. We haven't seen anything. We have, because of the recent events in the Middle East, dusted off our thinking around response as well as our thinking around enterprise, market interruption. But I just don't see a signal that would indicate to me that there's any slowdown or any discussion of slowdown in our customers minds.

Jeffrey Spittel - Madison Williams: Okay. Then turning to the Caspian, it sounds like we booked some work in that $800 million package for the fourth quarter. Are you starting to see some signs or is this a good leading indicator that maybe we're finally starting to turn the corner there and this could open up the possibility of some larger scope of work for 2012?

Stephen M. Johnson - President and CEO: If the question is as regards to Caspian, I'd have to say, sadly, probably not. We are very pleased to have that award in the Caspian. I think we're many quarters, maybe several years out before we turn the corner Jeff.

Operator: Richard Roy, Citigroup.

Richard Roy - Citigroup: I just have a follow-up as it relates to the opportunities that – for the bids you mentioned that most of the bids were in the Atlantic segment, but in terms of the target list, can you also comment geographically where most of the opportunity is?

Stephen M. Johnson - President and CEO: Yeah, I think Perry is flipping through the page to give you some color on that.

Perry L. Elders - SVP and CFO: Yeah, in terms of the targets, a little over half of them are in Middle East and around a third of them are in Asia Pacific, and the remainder in the Atlantic. So, similar to kind of our backlog, a little bit more focused in the Atlantic than our current backlog is though.

Richard Roy - Citigroup: In terms of the Atlantic region, do you anticipate, I mean, it sounds like you would anticipate that becoming a larger part of the opportunity set over the next several quarters. Is that a fair comment?

Stephen M. Johnson - President and CEO: I would say there is an interstitial period there Richard. We have to manage our costs. We have to get the 50 through the dry dock and back to work, get the DB16 to work. So, I would say there is probably a four to six quarter kind of a swale in there, if I can use engineer speak here. There is probably some down quarters just in the Atlantic that would -- and what I mean by that is we won't be profitable, but hopefully we come out sometime in 2012.

Richard Roy - Citigroup: Just another question in terms of your marine fleet, I think in the past you mentioned that 70% utilization is where you would breakeven at. Is that the case, and if so, would the DB16 cold stack, does that change your potential breakeven utilization rate?

Perry L. Elders - SVP and CFO: No, I don't know breakeven. I am not sure I would express it that way.

Stephen M. Johnson - President and CEO: 70% will probably be closer to what our standards would be; 70% out of 365 days.

Perry L. Elders - SVP and CFO: So, on our major work barges, that's about 2,000 days a year, 500 days a quarter. So, like I said, we've been running a little over half. We have got a few vessels in both Asia Pacific and the Middle East that we could pick up some more work on, some book and burn during the year, but that's upside I guess I'd say.

Operator: That concludes the question and answer session. I would now like to turn the conference over to Mr. Jay Roueche for the closing remarks.

John E. Roueche, III - VP, Treasury and IR: Thank you all again for your participation and interest today. All-in-all, we're very pleased with our quarter and certainly for the full year. I want to remind you that today's call included forward-looking statements, and I encourage you to see our SEC filings and press release for more information on these. If you have any follow-up questions or need any clarification, please give us a call, and we look forward to seeing many of you over the coming months. Towanda, this concludes the call.

Operator: Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a wonderful day.