Kenneth H. Lockwood - Vice President of Corporate Finance & Investor Relations David T. Seaton - Chairman, Chief Executive Officer and Chairman of Executive Committee Biggs C. Porter - Chief Financial Officer and Executive Vice President.

Andrew Kaplowitz - Barclays Capital, Research Division Jerry David Revich - Goldman Sachs Group Inc., Research Division Michael S. Dudas - Sterne Agee & Leach Inc., Research Division Jamie L.

Cook - Crédit Suisse AG, Research Division Chad Dillard - Deutsche Bank AG, Research Division Sameer Rathod - Macquarie Research Steven Fisher - UBS Investment Bank, Research Division Tahira Afzal - KeyBanc Capital Markets Inc., Research Division Brian Konigsberg - Vertical Research Partners, LLC Robert V.

Connors - Stifel, Nicolaus & Company, Incorporated, Research Division Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division Justin Ward - Wells Fargo Securities, LLC, Research Division John B. Rogers - D.A. Davidson & Co., Research Division.

(888) 203-1112. The pass code of 9913193 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..

Thank you very much, operator. Welcome, everyone, to Fluor's Second Quarter 2014 Conference Call. With us today are David Seaton, Fluor's Chairman and Chief Executive Officer; and Biggs Porter, Fluor's Chief Financial Officer.

Our earnings announcement was released this afternoon after the market closed, and we've posted a slide presentation on our website, which we'll reference while making our prepared remarks this afternoon.

Before getting started, I would like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on Slide 2 of the slide presentation. During today's call and presentation, we'll be making forward-looking statements which do reflect our current analysis of existing trends and information.

There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors which could potentially contribute to such differences in the company's Form 10-Q, which was filed earlier today. 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 also posted in the Investor Relations section of our website at investor.fluor.com. So with that, let me turn the call over to David Seaton, Fluor's Chairman and CEO.

David?.

Thanks, Ken. Good afternoon and -- to everyone, and thank you for joining us. After today's market performance, I hope you're not joining us from a ledge somewhere, and those of you that are, I know who you are. On today's call, we'll review our results for the second quarter and discuss our outlook for the remainder of '14.

Now if you'll turn to Slide 3, I want to start by covering some of the highlights of the quarter. Our earnings for the quarter were in line with our expectations for a gradual increase as we moved through this year, with a stronger second half than the first half.

Net earnings attributable to Fluor from continuing operations were $163 million or $1.02 per diluted share, which compares with $161 million or $0.98 per diluted share a year ago. Consolidated segment profit for the quarter was $313 million, which was a 9% increase from $288 million 1 year ago.

Segment profit results were mainly driven by a 57% increase in oil and gas, reflecting very strong performance. Oil and gas margins rose again this quarter, resulting from a mix shift towards higher margin from FEED and engineering work, with a lower relative construction content.

Consolidated revenue for the quarter was $5.3 billion, which was down from our $7.2 billion a year ago, mainly due to a significantly lower revenue base in Mining business line. We expect revenues to go up from this point.

Importantly, Oil and Gas revenue is expected to increase once a number of the recently booked projects move into the field and construction gets underway. We got another solid quarter with strong cash flow from operations and continue to return cash to shareholders. To date, we've returned over $380 million through share repurchases and dividends.

We expect the trend of consistent positive cash flow generation to continue. New awards for the quarter were $5.9 billion, including $3.1 billion in government, $1.5 billion in oil and gas, $1.2 billion in Industrial & Infrastructure bookings. Consolidated backlog for the quarter rose to $40.3 billion, which is up 9% from $37 billion a year ago.

Our financial results are summarized on -- in the table on Slide 4, if you turn to that, and I'll continue my remarks on Slide 5.

For the quarter, oil and gas segment booking -- booked new awards of $1.5 billion, including a delayed coking unit for refinery in Belgium, additional work on the Santos gas processing facility in Australia, EPCM for a reverse osmosis project in Saudi Arabia and an LNG break bulk facility in The Netherlands.

Similar to last quarter, the group booked over 170 individual small- to medium-sized projects, which is indicative of a strong FEED pipeline within Oil and Gas. Ending backlog for Oil and Gas stood at $24.2 billion, which is up 29% from 1 year ago.

We continue to track a robust list of size -- sizable prospects in the United States, Canada, Mexico, the Middle East and Asia. Prospects in the United States, Canada and Mexico, an expected number of major FEED programs will convert to EPC awards as we move to the back half of this year and into '15. Please turn to Slide 6.

New awards were just over $1.2 billion in Industrial & Infrastructure, which included the engineering, procurement and construction management of a large manufacturing facility in the United States. Backlog at the end of the quarter was $9.2 billion, which was down from $16.2 billion 1 year ago.

Again, this decline continues to be driven by the lack of significant awards in the Mining & Metals business line. However, the Mining & Metals business line is showing some signs of return, and we could see modest awards for projects later this year, as well as into next year. We continue to pursue a number of prospects in infrastructure.

However, it's a highly competitive marketplace, which remains a challenge. We have had some recent success in Europe, where Fluor -- a Fluor-led consortium was recently selected as the preferred bidder on the A9 PPP-financed highway project in The Netherlands.

The project will go into backlog at a future date, after the contract and financing agreements are concluded. Now turning to Slide 7.

Fluor's government group posted its share -- sorry, posted substantial new awards in the quarter of $3.1 billion, which include Fluor's portion at $2.2 billion for the Magnox multi-year nuclear decommissioning project in the U.K. and approximately $820 million for the LOGCAP IV Task Order program.

Ending backlog rose to $5.2 billion, including unfunded backlog amounts from $2.6 billion 1 quarter ago. I'm also pleased to announce that last week, we were selected as the preferred bidder on the Paducah deactivation and shutdown contract. This approximately $420 million project will be booked in the third quarter.

The Paducah contract is a great example of taking our decade -- decades-long nuclear remediation experience to provide safe, cost-effective solutions to the Department of Energy. In the Power segment, the new awards were modest, reflecting a limited opportunity set and highly competitive market environment.

Ending backlog was $1.7 billion, which compares to $1.6 billion 1 year ago. We will continue to bid for new gas-fired opportunities in North America this year and expect a slate of prospects to improve as we get into 2015. This quarter, we also executed a cooperative agreement with the DOE on the cost-sharing structure for the NuScale funding.

This is an important milestone for our investment, and we believe this catalyst will help us attract additional investors, manufacturers and other supply chain partners.

Before I get Biggs to discuss the details of our quarter's -- quarterly operating performance, I want to spend just a moment talking about the progress and frankly, momentum behind the recent organizational realignment actions that we took in the first quarter.

Fluor's always been known as a company that can build large complex projects for our clients anywhere in the world. The execution of these projects under the typical EPCM model has served us well. What we see today, however, is an increasing demand for our firm to partner with our customers and provide an integrated solution, not just services.

What's this mean for Fluor? It means that we can better serve our clients by taking more of an enterprise-wide mindset.

And over the past year, we've made progress in a number of these areas, including increasing the amount and capability of our self-perform construction on projects, expanding our global fabrication facilities and leveraging our expertise in third-gen modularization design tool that we have developed, as well as using our procurement and supply chain network to win new work.

As part of this initiative, we have undertaken steps to realign and flatten the organization to better facilitate integration and cooperation across the company at lower cost. I'm confident that these initiatives will improve execution and drive additional capital efficiency and project certainty for our customers.

Most importantly, this, along with applying what we're calling our One Fluor mindset across the enterprise, will help drive improvements to our bottom line. With that, I'll now turn it over to Biggs to review some of the details of our operating performance and core financial metrics for the quarter.

Biggs?.

Thanks, David. Good afternoon, everyone. Please turn to Slide 8 of the presentation. I'll start by providing a few comments on our second quarter performance then move to the balance sheet. As expected, overall revenue for the quarter was down fairly significantly year-over-year, mainly due to the continued falloff in mining activity.

Oil and Gas revenue was flat compared to last year but increased modestly over the first quarter. As David mentioned, we continue to execute a substantial amount of FEED and engineering activity in oil and gas, which, combined with strong performance on projects in the quarter, is contributing to higher margins.

As construction work starts to increase as a proportion of the project mix, revenue will increase. But as a result, we expect the margin percentage to moderate in the second half of the year. Industrial & Infrastructure revenue continued to contract.

This contraction, along with successful project closeouts on both the Mining & Metals and Infrastructure business lines, contributed to strong margins in the quarter.

In Power, results for the quarter improved from a year ago, mainly due to the accrual of approximately $17 million for FOA cost-sharing of NuScale expenses from the last 3 quarters, which largely offset NuScale R&D expenses of $21 million in the second quarter.

Corporate G&A expense for the second quarter was $57 million, up from $32 million a year ago. The increase was primarily due to higher stock-based compensation expense, as well as organizational realignment expenses, including severance costs associated with some of the actions David described. Please turn to Slide 9 to continue.

The effective tax rate in the second quarter was approximately 32%, and we expect our tax rate for the remainder of the year to be between 32% and 33%.

During the quarter, we recorded an after-tax loss from discontinued operations of $85 million or $0.54 per diluted share relating to an opinion from the Missouri Court of Appeals regarding the Doe Run lead business that was sold 20 years ago, in 1994.

Both parties have filed motions for rehearing, and we will continue to take steps to enforce the indemnification provided by the buyer of the lead business. Depending on the ultimate resolution of the matter, this legal ruling may result in cash outflows in the future.

For more background on the Doe Run issue, please refer to the Form 8-K that we filed on June 17, 2014. Shifting to the balance sheet on Slide 10. Cash plus current and noncurrent marketable securities totaled $2.7 billion. As you know, the balance at any day can be heavily influenced by the timing of large receipts.

During the quarter, the company generated $239 million of positive cash flow from operating activities, repurchased approximately $132 million worth of Fluor shares and paid $34 million in dividends to shareholders. David gave the stats for the year-to-date cash return to shareholders.

I would like to further point out that over the last 4 quarters, we returned approximately $650 million in cash to shareholders through share repurchases and dividends. This compares to operating cash flow of $972 million and free cash flow of $657 million over that period. Free cash flow being operating cash flow less CapEx.

Moving to Slide 11, as previously mentioned, Fluor's consolidated backlog at quarter end was $40.3 billion. The percentage of fixed price contracts in our overall backlog remained at 20%, and the mix by geography was 30% U.S. and 70% non-U.S. I will conclude my remarks by providing an update on our outlook for 2014, which is on Slide 12.

Results for the first 6 months were consistent with our expectation for lower overall revenue offset by improved margins. Looking ahead, the company expects that improved bottom line results primarily attributable to the continuing strength in oil and gas will drive stronger EPS in the second half of the year.

As a result, the company is maintaining its full year guidance range for 2014 EPS from continuing operations at $4.10 to $4.45 per diluted share. With that, operator, we're ready to take questions..

[Operator Instructions] We'll take our first question from Andrew Kaplowitz with Barclays..

David, so there's been mixed messages about the cycle. I'm listening to your competitors, which I'm sure you've heard. Some guys have done well; some guys, maybe not so much. You seem pretty confident in your backlog and the potential for your backlog over the next couple of quarters and then into 2015.

But maybe you can talk about where we sit today versus 3 months ago and last year and the potential of the backlog to improve here in the second half of the year and in 2015..

Andy, I don't think it's changed at all, or at least my opinion of it. We do a really good job of choosing carefully the projects we want to chase. We're conservative in how we take them in, and those projects are holding to the schedules that we expected.

We really haven't seen, aside from mining, any change in the decision-making process of our customers over the last little while. Some things are moving quarter -- like this quarter to next quarter and next quarter to fourth quarter. But FID decisions are still being made in pretty much the timely manner that we anticipated.

I still feel pretty positive about what I've said for the last year that the efforts that we took last year and the efforts in changing the way we're kind of doing our work has put us in a very good position to really look at the capital efficiency of these assets. And I think we're -- our offering has been accepted by our customers readily.

And in the same vein, I think we've become more cost competitive and hopefully continue to improve margins along the way..

So if we're sitting here next year at this time, David, backlog should be higher than it is today, in your opinion?.

Yes, I think so. I think the real issue is how quickly these projects really move forward. There's some big projects to come, but I would be disappointed if it wasn't a bigger number as we talk next year..

Okay, great. And then obviously, you put up a very strong operating margin in Oil and Gas. You knew everybody was going to ask about that.

Is this margin really a result of the Gulf Coast project starting to ramp up? And then stepping back, how do we think about the evolution of revenue and earnings in oil and gas? I mean, you did say in your prepared remarks that you see revenue will increase in the second half of '14.

But should we see more meaningful sequential increases than we saw in 2Q? And when you say margin will moderate, what does that mean? Does it mean not going under 5% or can we see it lower? I know there's a few questions in there, but it's all one point to another..

I'll do my best. No, I think it's interesting. It's exactly where we thought it would be in E&C. And the reason is a couple-fold.

One, as I mentioned early -- in earlier quarters, we're seeing improved margin going in the backlog, and that's a testament of what I said a minute ago about the way we are changing things to become more effective and the fact that we're being able to show that efficiencies to our customers. So that's point #1.

Point #2 is we are -- there is a mix change in E&C -- or not a change, it's where we expect it to be relative to the EPC side of these projects.

It's not really -- in part, it's due to the Gulf Coast but not really because in the case of CPChem, in the case of the Dow projects and in the case of Sasol, it's really in the early stages where it's engineering-only, and we haven't seen the CFM or the construction scopes go in, which typically attract a little bit lower margin.

When you look at our revenue overall, it is basically what we expected because of the significant decrease in the mining business. And if you remember back 1 year ago or 1.5 years ago, a huge portion of that revenue is coming from mining. So we're kind of seeing a little bit of a shift in market.

We're seeing the timing change of engineering versus construction, specifically in E&C. When I -- I don't want to give you a specific number but it is going to moderate in E&C, but I don't think it's going to drop significantly. That's probably as far as I'm going to go.

So Jamie, that gives you kind of how to figure out how you're going to ask the next question..

Okay, that's great. And David, just a very quick cleanup.

Can you tell us how much the severance costs were in the quarter, by any chance?.

It's minimal. Well, I'd say it's minimal. It was a little more than $6 million..

And we'll take our next question from Jerry Revich with Goldman Sachs..

David, can you say more about the realignment, just flesh that out, which businesses maybe it impacts more. Maybe we're talking about a shared service concept there. Can you just say more about that? And you folks have certainly been very successful in your bid win rate.

So can you just flesh out why the realignment at this point, given the success that you folks have had?.

Well, there's not a shared services model, that's for sure. But I think what we did is we flattened the organization. And we've put some really talented people in business lines that are closer to our markets, closer to our customers and in a better position to be more fleet of foot and answer -- be more responsive to our customers.

And I think that's resonating. And I think that's -- that, by and large, is the reason why we're seeing the win rates that we are because we're listening better. And we're tailoring those offerings specifically to what the clients need. But I think rapid response to those customer needs is really what's driving the success.

I think if you look at the older organization, which frankly, I was an architect of with my predecessor and frankly, created some silos that weren't healthy. There was not the One Fluor mindset of collaboration and working across those business groups and business lines.

And I'm pleased to see that -- say that we've made rapid change in how we, a, address the markets; and b, how we're collaborating and utilizing the entire asset of the company. So I'm pretty pleased with the changes we made and the people that are in those leadership roles..

And David, you highlighted high confidence in opportunities in Middle East and Asia for Oil and Gas, EPC conversion. I'm wondering, can you just touch on the competitive landscape in those regions? We're hearing from the Korean and Chinese contractors who are increasingly more aggressive, especially in those regions.

Are you seeing that at all? Or are these opportunities projects that are so significant that it's more of a Western competitive landscape?.

I think the first thing I would say is our offering and our success and hopefully, our future success is really based on the value proposition that we're developing. And I think we're doing a really good job of that, and that's why you're seeing where we are. Anecdotally, I don't believe the Asian contractors are being as aggressive.

You saw what happened to the Korean contractors, and I think that the new management team would like to keep their jobs for a while. So I think we've seen a little bit of a moderating attitude relative to some of their predatory pricing decisions. But look, it's a competitive marketplace.

And we continue to look for how we deal with the people we compete against and the projects we go after. So that selectivity sieve is alive and well within Fluor and I think it's paying dividends for us.

I will say that in some cases, we're actively partnering with many of the competitors that we've talked about in the past, and we're finding out how best to utilize their supply chain, how to better utilize some of their abilities around technologies.

And again, I think case in point is the Kuwait project that was awarded in the first quarter where you see us team with 2 Korean companies there. So I feel really good about the value proposition that we're developing and the ability for us to articulate such that our customers choose us over the competition..

Okay. And in Industrial & Infrastructure, can you just say more about what you're seeing out of U.S.

infrastructure projects? Any reason to get more constructive? Are you seeing bid opportunities for public-private partnerships? I know you characterize it as competitive from a landscape standpoint, but is the number of opportunities at least picking up?.

I'd say it's pretty stable right now. I wouldn't say it's picking up. And just about anything that's being done in the States is being done in some variation of a public-private partnership. It is a competitive landscape.

And I think one of the benefits of a Fluor is we have the ability to say no when some of these pricing circumstances happen and we don't have to take projects because that's the only market we chase. I think our diversity allows us to be selective. I think the recent action and reaction in Congress is, all in all, positive.

We'll see where we go, but I think a pretty robust, comprehensive infrastructure program by the U.S. government has to be part and parcel to the infrastructure remediation in the United States. Affordable energy and good infrastructure is the basis of good economic development.

And I'd say they're probably equal in value to that -- into that proposition. So I'm encouraged if we can actually get to something in Washington. And I think that you'll see some growth in that market, and I think we're well positioned to take advantage of, again, that value proposition we offer that market..

[Operator Instructions] We'll take our next question from Mike Dudas with Sterne Agee..

I may not be as optimistic about how things are going to get done in Washington as you are, David..

I didn't say I was optimistic. I said if it happens, it will be great..

Okay. I just want to make sure you clarify that.

In Industrial & Infrastructure, with the Mining business, are you finding the customers that are maybe starting to think about new projects or restarting older ones as prices improve? Are they looking to maybe do it themselves and go away from the EPC model? Or are the ones just waiting for their turn and then coming -- will come back to you and you'll start to maybe see some momentum in '15 and '16? How does that look?.

Well, I think that we are seeing a pickup. I think I talked about last quarter and again this quarter about increased study work and FEED work in mining, which is encouraging. But if you just stay on those normal schedules, you're kind of middle of next year before you start to see the EPC projects come back.

As far as them doing themselves, there may be some different models, but I don't -- none of the mining companies really invested in additional people to do what they have contractors doing in the last period of time. So I don't see that changing. I think you may see some different contractual terms.

I think you may see these projects in maybe a little bit different division of scope or division of responsibility perspective. But by and large, I think the industry relies on good partners like ourselves, and I think we're starting to see the light at the end of the tunnel, if you will, relative to mining..

I appreciate that. My follow-up, David, would be on the power side. There's been a little bit more clarity on the regulatory front on what's going to happen with coal and natural gas opportunities and maybe even some renewables.

Any more sense of an optimism that we could maybe see that market surprise to the upside in 2015 and '16 as these utilities have to start to come in with some of these orders?.

Guardedly so, Michael. I think that even if you look at the EPA rules, it's still 20 years before they have to comply, give or take, completely. And I think they're still going to take time to kind of rationalize what they have.

Most of our customers have to deal with a rate base, and going back to the rate base for additional money isn't something that they relish. So I think they're going to be very measured in how they go forward relative to not only the coal cleanup fees but also in terms of gas.

I do think that we've got the potential to maybe surprise a little bit, a little bit, in power as we go into next year..

We'll take our next question from Jamie Cook with Crédit Suisse..

I have to say this is the first time, within Oil and Gas, an E&C company has surprised me on the positive on the margins side and not on the top line side.

But David -- but I guess, David, I've never seen in my years covering this, and I don't want to age myself, an E&C company posts such strong margins in the beginning of the cycle, and recognizing the mix factor, which I do feel you've never done this before.

So my question is, is there something more Fluor-specific? You're starting to talk about the changes that you're making, and maybe you don't want to go out yet and -- because it's early on.

But is there something more Fluor-specific here, whereas we think that margins over a cycle, they should increase sort of peak to peak? And then my second question as relates to the revenues. Because the revenues -- and I know Andy's sort of asked this, but the revenues on the Oil and Gas side, I think, continue to surprise people on the downside.

I'll take it because your profit dollars are there. But some other contractors have talked about projects not moving into the construction phase at the pace that they want it to.

Is any of that in your first half numbers? And how much of a risk is that to the second half?.

I'd say none of it, none of it. And I'd say very little is at risk in the out years. On the last -- in answer to the last question first, revenues were exactly where we expected for them to be in Oil and Gas. And I think they'll build from there. We've got some very large projects still to be awarded even this year and more next year.

So I believe that this cycle, as I've said before, will be larger than it was in the last cycle, which leads me to answer your first question. First, I'm not going to go into details because our competitors are pretty smart folks, and I don't want to give them the playbook. But we have made significant changes. I've talked about that in previous calls.

Some of the work that Peter Oosterveer and his team took on 3 years ago are starting to pay dividends. We are -- we have changed the way we are executing, and we're using some different tools and execution platforms that allow us to be much more competitive in the marketplace and at the same time return better margins to our shareholders.

So I think that we've really done some good work organizationally both in terms of oil and gas and what they've done, which relates to the margin that's there, but across the company. Some of the flattening that I spoke of and removing some of these silos that we're seeing tremendous progress in terms of that complete Fluor sale.

And I feel really good about where we're headed. Specifically about E&C, I would agree with you. It is ahead of what we saw in the last cycle. As I said, it will moderate a little bit as we go through this year. And I expect strong performance from that -- from those business lines over this cycle..

Okay. And then I guess just a follow-up question, just on Kitimat. Obviously, there's been a lot of news in -- on Kitimat and what's happening with Apache. And recognizing that there's only so much that you can say.

I mean, to what degree do you think there's risk that Kitimat has to be taken out of backlog, or that whatever you're assuming in terms of revenue burn isn't conservative enough? And then I'll get back in queue..

Jamie, Apache's announcement is absolutely no surprise to us. And we'll see where that goes. I defer to Chevron to really talk about where that is. But we've seen no actions that give us concern that there's a backlog issue. Clearly, if there's a sale, there might be some timing elements to it.

But I still think that, that project, from a business model perspective, from a regulatory perspective, is still very solid..

We'll take our next question from Vishal Shah with Deutsche Bank..

This is Chad, on the line for Vishal. Last quarter, you had mentioned that you are targeting a couple of LNG projects on the Gulf Coast.

Can you give us an update on where you are in the bidding process and expectations for timing?.

Early stages, probably not a '14 event..

Got it.

And then on the Power side, can you talk about where you are with finding a buyer for NuScale? Is there any progress to report or any timing that we should be thinking about?.

Well, I think signing -- finally signing that cooperative agreement with the government was a big step, because that basically was, in my opinion, the good housekeeping seal of approval on the technology and the fact that the DOE and the NRC see it as something that's very viable that they're willing to participate in.

That was behind our schedule, which retarded our ability to attract investors. Now that it's signed, sealed and delivered and we're moving down the road, we've seen an uptick in discussions with potential partners and manufacturing partners.

And I feel good about the prospects of bringing some people in as we probably close this year and get into next year..

We'll take our next question from Sameer Rathod with Macquarie..

Do you think this budding trend of exporting ethane could derail the U.S. pet chem cycle? It seems like a significant part of the ethane market, and it seems like a lot of it's going to be used for hot gas versus potential retrofit projects in Europe..

I don't, because most of -- well, the 3 crackers we're working on are specifically for downstream derivatives that fit their business model. And ethane for ethane purposes isn't what they're getting into. There could be a cracker built for export alone, but I think it's the whole value chain that our customers are looking at.

And as long as gas prices are kind of where they are, or a little bit up, a little bit down, the business models still work..

Right. I guess, just to clarify my question, the dynamic of exporting ethane, it seems like a huge part of the market. So you're not -- you don't think that will potentially derail future projects. Is that -- just to be clear..

No, I don't..

And we'll hear next from Steven Fisher with UBS..

In the release, you guys mentioned that you expect to see improvement in the number of businesses in the second half. So I guess if you could just talk a little bit about which businesses should see that ramp up in profit dollars as the year goes on and I guess why, specifically..

Well, I mean, obviously, Oil and Gas is the big engine right now. I think we will see improvement in Power. I think we will see improvement in our Industrial Services piece of our business. I think we'll see strong performance in Infrastructure.

I think we'll see kind of a bottoming out and from a profit perspective, starting to rise as we get into next year in Mining. Government's still got a little bit of headwind just simply because LOGCAP IV was so large and it is shrinking.

But I'm happy to say that our government guys have done a good job of starting to refill the bucket when you think about supreme -- sorry, the Strategic Petroleum Reserve win as well as Paducah. So they're acting on their strategy to fill that hole up, but that's a big hole to fill when you think about how large LOGCAP was.

So in general, I think there's some puts and takes, but at the end of the day, I see a pretty bright spot relative to the next couple of years..

And just to clarify, so the power ramp-up, is that the Dominion project starting to really get to a point where it's really ramped up? And is Infrastructure sort of Tappan Zee, where you're recognizing more profitability? What's the 2 things in those particular segments?.

Power is not Dominion. I think we're going to see some improvement in project intake and obviously, the profitability that comes from that. It's not going to be that much, but it is more, which is a good thing. Relative to the infrastructure, I mean, they got a lot of programs going on. They're still bidding a lot of programs.

But strong performance on Tappan Zee, the Horseshoe project, some of the stuff in Europe. I mean, it's a pretty broad business, and I'm not saying it's going to be hugely increasing, but it will be a strong part of the earnings stream of the company..

Okay. And then for Biggs, typically, cash flow tends to be back-end weighted. Is there anything different about this year? Obviously, it's been pretty solid in the first half.

But should we look forward to another good strong second half of the year as well?.

Well, I don't see anything different about this year, but it is challenging to predict where it's going to land in any given quarter. And remember, I had in my comments a statement that it's always influenced significantly by the timing of some major receipts, which was, in fact, the case for the second quarter.

We had some large receipts come in right before the end of the quarter. So whether or not those hit right before or after the end of the year have -- can have a big impact, so it's hard to be precise.

But if you kind of look through that, we expect the same kind of patterns overall this year and next and expect good strong operating cash flow performance as we go through time. I don't see a big change..

We'll hear next from Tahira Afzal with KeyBanc..

First question is, David, if you were to frame the restructuring and from what you've discussed on the call, does it sort of add flexibility and juice to what the industry refers to as A-team? Does it sort of expand the quality of the teams in a way?.

Well, I think it does. I think we've been successful. I mean, when you look at the last kind of wave, 2 of the main -- we were able to, in Mining, kind of leverage some of the talent from E&C in the last cycle. And we, in fact, had a couple of projects run by E&C project directors. And it allowed us to expand that market.

I think that one of the things that really makes me feel good is by becoming more efficient, I think we've been able to quicken the cycle time, if you will, in some of these projects, which frees up teams to do more projects more quickly.

So the bandwidth of the company expands, but also, I think the flexibility and agility of the company has improved because of the changes that we've made..

Got it, okay. And then my second question was in regards to a topic that doesn't get that much attention but would love an update from yourselves on the outlook, and that's really micro-LNG and maybe sort of more small scale GTLs.

And I know you guys presented recently at a GTL conference where you talked about integrated GTL, with refineries being potentially more economical. Would love to see if that's getting interest from your customers..

Well, I think they are interested, and we continue to kind of look at how we can improve the capital efficiency for those customers. I think it's early stages. But I mean, when you think back when they finally figured out that if you debottleneck a refinery and put an aromatics plant behind it, you can create more profitability. And that's decades-old.

So we continue to push on technologies, we continue to push on what that efficiency needs to be. But it's early stages. I mean, I think if you look at LNG, I think floating LNG is probably the next one to really move forward. But I still think that's going to take some time..

We'll hear next from Brian Konigsberg with Vertical Research..

Actually, just coming back to the petrochemical commentary. Maybe just give us a gauge as to how many crackers you anticipate will be built at this point. I know you gave numbers for floating out there, maybe 5, 6, maybe 1 or 2 more after that. But around that range, I think, was kind of the consensus.

Maybe if you'd give us an idea of where you see things standing today and maybe give us a snapshot of what you think the derivatives market looks like as well..

Well, I think the derivatives market will pick up. I think these 3 crackers are the ones that, obviously, had the tea leaves, right, if you will, relative to their business plan and timing. So I think we were very pleased that we were successful on those 3. The other ones, I think, are kind of on a slow roll.

You've seen some people pull back on their spending on a couple of them. I still think there's a couple more to be built in North America. But I think we're probably into '15 before any significant work's done on any of them..

That's on the second grouping into '15?.

Yes, 2 to 3..

Okay. 2 to 3. And then just separately. Just kind of on the guidance, so you kept the range. You're talking qualitatively that the oil and gas margin is going to say pretty healthy in this 5 range. Your I&I margins have been pretty solid, 6 and above. I'm not certain what -- if you made a comment about it being in the second half.

But it does seem like you're trending towards the high end if the profitability does stay at these levels, if not better. Maybe just give us a sense if there's some offsets we should be thinking about in the second half that might be offsetting the profitability of the revenue in H2..

I do think on I&I, the margins in the first half are higher than what we would expect for the second half. There is a -- there continues to be some opportunity for them to do better than their historic average. But they certainly have done just very well related to closeout of programs, particularly in the mining business in the first half.

And it's hard to say that, that's going to repeat at that kind of level. The -- I think -- so you get the big drivers of oil and gas. It is going to have revenue growth, margins will moderate.

Of course, we said that last quarter and they, in fact, moved it up this one, but we do expect it to move back down, because we think those revenues are going to come in and moderate that and then I&I will moderate. So I think it's a matter of balance overall between the moving parts. Global Services, we didn't talk a lot about.

David went through the various businesses. But they will be getting some headwinds from withdrawals from Afghanistan in the second half. That really hasn't hit them yet. They've been down on lower mining effort. But as the equipment gets repositioned in the third and fourth quarter, that will create some headwind for them..

Great. If I could just ask one more thing. Just on the DOE funding, so I just want to make sure, this is a matched funding agreement that you established, correct? So it's not going to reduce your spending on the program..

Yes, the net spending was about $50 million last year. We still expect it to be around that on a net expense basis this year. And I'll just add on to that.

I mean, the ability to reduce that further would come from us selling our interest down, which as David said, we might be able to get another investor in before the end of this year, one or more, but that wouldn't likely have a big effect on this year's spend. That would be more prospective..

We'll take our next question from Robert Connors with Stifel..

I was just wondering on the EPS effect if the reimbursement roughly offset the R&D expense and what that number was on an EPS line..

Well, the expense was, I believe, around $21 million, and the reimbursement, $17 million. So yes, it was pretty much an offset for our new scale for the quarter..

Okay. And there was also, just for housekeeping, a gain on sale in the quarter of about $12 million. Can you guys elaborate that? I saw that in the cash flow statement..

Well, we have gains on sale most every quarter. It's pretty frequent. Our Equipment business, when we take equipment off of lease or take it off of a project and dispose of it, typically, we have gains. That's a recurring kind of gain. There's no particular reason to focus on it that I could see..

Okay.

And qualitatively, David, can you give us an update just on where Sasol is? Do you still expect that sort of 4Q and Mozambique being -- I think last time -- last quarter was about a mid-2015 event? Were there any changes to that?.

No. That's about where we think..

We'll hear next from Andy Wittmann with Robert W. Baird..

I guess I want to dig in to the I&I segment a little bit more. Biggs, did you say that you expect the I&I segment to be up here in the back half of the year? Was that what you said? Was that sequentially or was that year-over-year? It sounded like [indiscernible]..

No, we don't expect it to have increasing EBIT in the second half of the year. What you've got is really strong performance in the first half based upon Mining coming down but having great margins. We do expect to have Mining continue to be a negative trend in the second half. Infrastructure specifically, however, could be improving in the second half.

But I wouldn't look for a big net move out of the combined elements..

For the quarter, the Q disclosed that there was closeouts, like you mentioned, in both Mining and Transportation.

Can you quantify for those so that we can get maybe a better sense of what the underlying margins were for the business?.

No, I think it gets way too finite to try to differentiate the progress of the projects and how much is closeout versus how much is normal run rate. We do want you to understand that it had a positive effect, but it gets really tough to start to quantify one set of circumstances versus another and have it produce real meaning for you..

Got you. And then, if I could, I wanted to dig in a little bit into the awards, clearly driven by the government awards this quarter.

With the accounting changes that you guys did on the backlog at the end of last year, can you tell us about how much of that is funded versus unfunded?.

Well, it is disclosed in the 10-Q, so I'd refer you to that. You can get all the proper details on unfunded versus funded. Right now, as of today, the Magnox isn't funded because of the way the funding mix business work in the U.K. But we expect that, that will become substantially funded in just a couple of months.

So the way they work through the legislative process, they award a contract, and then it becomes, in this case, funded in fairly short order..

And I'll remind you that we changed to be consistent with our competitors in how we take in government backlog. And also, I mentioned in my prepared remarks on Magnox, we only took our portion of that in..

And also, it's consistent with how we do commercial. So government and commercial are really lined up. It's just commercial doesn't have that same hard line you can draw between what's funded and unfunded, but it basically works the same way..

Yes, that'll make sense.

Just in terms of with some of these newer projects coming in and LOGCAP ramping down, what's your guys' outlook for the margins in that business? Is this something we've been, I guess, what 2.3% this quarter but should we expect that to head higher as we move into mobilization on these newer wins?.

Right now, the -- within government, you've got a number of moving forces. LOGCAP's coming down, which is actually higher margin than average business. But they're also spending quite a bit on bidding and proposal expenses, which has a negative effect on EBIT. So it's going to transition over time.

And I think it's premature to say what a new run rate is going to be for government. We have to watch it as the new business comes in and as it -- what's the nature of that business and what's the margin in each specific contract..

And we'll hear next from Justin Ward with Wells Fargo..

I just -- I wanted to delve into your new awards in Oil and Gas a little bit. Obviously, new awards, in general, always lumpy. But the swing from Q1 to Q2 was, by far, the largest you guys had ever had, either up or down. In this case, obviously, it's down.

Why all of a sudden you're seeing lumpiness there? Should we just kind of write that off as lumpiness? Or is there something more we could read into that as a reflection of....

I think it's just the normal lumpiness. It is a bigger number than has been traditional, but there's no hidden meaning in that. I think projects are getting bigger. And because they're getting bigger, as I've said in the past, maybe some decisions move quarter-over-quarter.

We historically will see 1 or 2 big projects either move forward or move back in time relative to any given quarter. So it's nothing more than the normal lumpiness that we expect in that business..

Okay. And then just one on the reorg. It sounds like as you guys see the benefits kind of coming through here, it's getting pretty exciting.

And does that kind of motivate you to continue to push for more and more change? And is the transformation kind of a moving target and kind of what stage are we at in that transformation?.

Well, we've got a very specific plan of attack relative to transformation that started 3.5 years ago. And we are exactly on the schedule that I had put forth then, which did include some of the organizational realignment. We're right on time with that.

I think that some of the improvements that have been made in our execution delivery are clearly maturing. And I think that will only improve from there to make us, a, more competitive; b, more sure of our delivery in terms of cost and schedule; and c, they're absolutely aligned with what our customers are looking for relative to capital efficiencies.

But I would say that -- I wouldn't say that -- sometimes I use a baseball analogy and use innings. I would not suggest that, that applies to what we're doing because we're focused on a continuous performance improvement cycle, and we're going to continue to keep the pressure on the organization to continue to improve..

Okay, great. And then one more quick one. You touched on the pricing environment in the Middle East a little bit. There's been a lot of discussion about pricing may be a little bit more aggressive in North America from the Western competitors.

What are you guys seeing there?.

Well, I wasn't speaking specifically about the Middle East. I was more pointing towards the U.S. I mean, we've seen some really aggressive pricing in the power market and in the infrastructure market. And again, we've got the profit expectations built into what our offering is, and we'll let the chips fall where they may.

But I would say that we've seen an increased competitive landscape in North America..

And I guess does that apply to the Oil and Gas as well? Or is it mostly just Power and Infrastructure?.

It's all over the place. I mean, look guys, I mean, there's no time in my history in this company where I've seen the competition not fierce. And I think you will always be fierce in this business.

And that's just incumbent upon us to continue to improve and continue to be cost-effective, but at the same time, make sure that we're demanding the profitability that we need to return to the shareholders as they expect..

And we'll take our next question from John Rogers with D.A. Davidson..

David, I just want to follow up for a second.

What are you hearing from customers relative to peers around cost increases, either labor, materials? I mean, it seems like some of that pressure has gone away, but is there anything out there that they're talking about that might cause them to move forward with some of these projects a little bit quicker?.

Well, I think that some of that is built into what we think the FID dates are going to be because I think they are wary of escalation in terms of labor and materials, particularly engineered equipment. Labor on the craft side of North America is a challenge and will continue to be a challenge.

And I think we're taking the right steps to make sure we got the right answer both in terms of what the customer expects and more importantly, what we expect. When you look at the supply chain, it is robust. But frankly, on the engineered equipment items, there has been no investment in additional capacity. So I think the market is going to get tight.

And I think we're just helping our customers understand what that means and take that risk into account as we help them get to that spending decision. But I wouldn't say that, that's extraordinary today versus 1 year ago or 5 years ago. I think they are a little more attuned to it because you've heard them talk about capital efficiency.

And I'm glad to say that we're absolutely aligned with them in that regard..

But based on your experience and going back in the power cycles, I mean, it seems to me that generally, that fear of cost increases causes some of them to move forward a little more quickly or urgently. It doesn't sound like we're....

Yes, I mean, I think if you just take the United States and the Gulf Coast as an example, when you take Shell's GTL plant out of the equation and you delay Sasol's to they're saying 18 months behind the cracker, that's a huge relief valve.

Because those are big, big projects that are heavy in piping, which has welders and materials and pipe materials and spools and everything that goes with that, which are -- which could -- can be pinchpoints from a schedule standpoint. So you've seen the industry kind of moderate based on the sequencing of the projects and some of them going away.

So I think to your point, the customers have gotten a little more comfortable with some of the decisions. But it's based on that more than any other factor..

And you don't see that changing near term? Or I mean, the next 2 years?.

No..

And that concludes today's question-and-answer session. At this time, I would like to turn the conference back over to our speakers for any additional or closing remarks..

Thank you, operator, and thanks to all of you for participating on the call today. I think as evidenced by our results this quarter, you can see that our Oil and Gas group continues to perform very well and has good line of sight, and a lengthy size -- list of sizable prospects.

And Government is making progress and winning a number of new long-term programs that will, in part, stem the impact of continued LOGCAP Task Order reductions. While Power and Infrastructure award levels continue to disappoint, these markets represent, I think, a good growth potential over the long term.

With that, we greatly appreciate your interest in our company, as well as your confidence in Fluor. With that, I will bid you all a goodbye, and have a good day..

And again, this does conclude today's Fluor Corporation's Second Quarter Earnings Conference Call. We thank you again for your participation, and you may now disconnect..