MDR McDermott International Inc

McDermott International, Inc. (NYSE:MDR) ("McDermott" or the "Company") today reported net income of $80.9 million, or $1.12 per diluted share, for the 2005 second quarter, compared to net income of $11.8 million, or $0.17 per diluted share, for the corresponding period in 2004. Weighted average common shares outstanding on a fully diluted basis were approximately 72.2 million and 67.5 million for June 30, 2005 and June 30, 2004, respectively. The second quarter 2005 results referenced above includes two items which McDermott does not believe represents customary business operations: a $50.4 million benefit from decreasing the valuation allowance associated with McDermott's deferred tax assets and an expense of $7.4 million after-tax from the revaluation of the liability associated with The Babcock & Wilcox Company's ("B&W") Chapter 11 settlement. Excluding these two items, McDermott's Non-GAAP net income was $38.0 million, or $0.53 per fully diluted share. In comparison, McDermott's second quarter 2004 Non-GAAP net income was $15.8 million, or $0.23 per fully diluted share. Please see the table titled "McDermott's Non-GAAP Earnings Reconciliation" below for the reconciliation between McDermott's reported net income prepared in accordance with GAAP and the Non-GAAP net income and net income per share amounts stated above. Revenues in the second quarter of 2005 were $515.1 million, compared to $499.8 million in the corresponding period in 2004. Operating income was $54.8 million in the 2005 second quarter, compared to $35.7 million in the 2004 second quarter. The second quarter 2005 operating income included approximately $0.2 million of corporate qualified pension expense, compared to $15.8 million in the second quarter 2004. The year-over-year reduction in corporate qualified pension expense reflects the previously announced spin-off of the B&W pension plan and related expense which was completed on January 31, 2005. In addition, beginning January 1, 2005, McDermott now allocates to its Government Operations segment the pension expense related to that segment. "McDermott produced strong results in the second quarter of 2005," said Bruce W. Wilkinson, Chairman of the Board and Chief Executive Officer of McDermott. "Our businesses performed very well, and were aided in particular by J. Ray's marine operations as well as some timing benefits, including certain contract close-outs and settlements. There continues to be strong bidding activity occurring in most regions for J. Ray, and site management opportunities for BWXT, and we remain confident that we will convert some of these bids into backlog in the near future." RESULTS OF OPERATIONS 2005 Second Quarter Compared to 2004 Second Quarter Marine Construction Services Segment ("J. Ray") Revenues in the Marine Construction Services segment were $355.2 million in the 2005 second quarter, compared to $359.3 million for the same period a year ago. The slight year-over-year reduction in revenues resulted primarily from the 2004 completion of several large EPIC projects and decreased fabrication activity on projects in Morgan City, Louisiana, partially offset by increased revenues from the worldwide marine division and fabrication projects in the Middle East region. Segment income for the 2005 second quarter was $30.9 million, compared to $22.1 million in the 2004 second quarter. Major items contributing to operating income in the 2005 second quarter were projects in the Middle East and Caspian regions, and international marine projects. In addition, J. Ray recorded a net benefit of approximately $9.2 million to operating income from other items including certain contract close-outs and settlements. The 2004 second quarter included a net benefit of $12.7 million, in aggregate, from favorable contract cost adjustments and other items. At June 30, 2005, J. Ray's backlog was $0.9 billion, compared to backlog of $1.2 billion and $1.1 billion at December 31, 2004 and June 30, 2004, respectively. Government Operations Segment ("BWXT") Revenues in the Government Operations segment increased $19.4 million, to $159.9 million, in the 2005 second quarter, compared to $140.5 million for the same period a year ago. The increase was primarily due to higher volumes in the manufacture of nuclear components for certain U.S. government programs, and increased revenues from commercial nuclear environmental services and other commercial work, including increased uranium downblending activity. Segment income decreased $2.2 million, to $29.7 million, compared to the 2004 second quarter, primarily due to the corporate allocation to BWXT related to qualified pension expense of $5.3 million in the second quarter 2005, which in 2004 and prior periods was recorded in the corporate segment. The pension allocation was partially offset by higher volume and margins from the manufacture of nuclear components for certain U.S. government programs and increased commercial nuclear activity. At June 30, 2005, BWXT's backlog was $1.6 billion, compared to backlog of $1.7 billion and $1.6 billion at December 31, 2004 and June 30, 2004, respectively. Corporate Unallocated corporate expenses were $6.1 million in the 2005 second quarter, a decrease of $13.9 million compared to the 2004 second quarter. The decrease was primarily due to a reduction in qualified corporate pension expense during the second quarter of 2005 as a result of the BWXT pension allocation and the spin-off of B&W's pension assets and liabilities into a new B&W-sponsored pension plan. Other Income and Expense The Company's other expense for the second quarter of 2005 was $7.3 million, compared to $10.8 million in the second quarter of 2004, which included net interest expense of $3.4 million and $7.3 million in the respective quarters. During the 2005 second quarter, revaluation of certain components of the estimated settlement cost related to the B&W Chapter 11 proceedings generated an increase in the estimated cost of the settlement to $146.7 million, resulting in the recognition of other pretax expense of $6.4 million ($7.4 million after tax). The increase in the second quarter 2005 estimated settlement cost is due primarily to an increase in the closing price of McDermott's common stock from $18.93 per share at March 31, 2005, to $21.00 per share at June 30, 2005. In the second quarter of 2004, the revaluation of the estimated B&W settlement cost resulted in the recognition of other pretax expense of $4.4 million ($4.0 million after tax). As discussed in the Company's annual report on Form 10-K for the year ended December 31, 2004, the Company is required to revalue certain components of the estimated settlement cost quarterly and at the time the securities are issued, assuming the settlement is finalized. THE BABCOCK & WILCOX COMPANY The Company wrote off its remaining investment in B&W of $224.7 million during the second quarter of 2002 and has not consolidated B&W with McDermott's financial results since B&W's Chapter 11 bankruptcy filing in February 2000. B&W's revenues were $368.9 million in the second quarter of 2005, an increase of $11.6 million compared to the second quarter of 2004. Operating income for the second quarter of 2005 and 2004 was $10.8 million and $32.7 million, in the respective periods. During the second quarter of 2005, B&W recorded approximately $6.8 million of pension expense, which in prior years resided in the corporate segment, and also recorded an expense for its asbestos liability of $9.7 million, compared to a $3.0 million expense in the second quarter of 2004. At June 30, 2005, B&W's backlog was $1.5 billion, compared to backlog of $1.5 billion and $1.1 billion at December 31, 2004 and June 30, 2004, respectively. LIQUIDITY At June 30, 2005, McDermott's consolidated unrestricted cash balance was approximately $261 million, with J. Ray representing approximately $184 million of this total. In addition, McDermott's consolidated restricted cash balance was approximately $164 million at June 30, 2005, with J. Ray representing $133 million of the consolidated amount. In accordance with the indenture relating to J. Ray's senior secured notes issued in December 2003, commencing July 15, 2005, J. Ray announced an offer to purchase at par up to $36.5 million of its senior secured notes. The source of funds to purchase any properly tendered notes will be the remaining restricted cash available from certain asset sales, which previously was available for use on capital expenditures. As of July 26, 2005, the Company's unrestricted liquidity had improved approximately $40 million from the June 30, 2005 amounts, as a result of increased liquidity at J. Ray. OTHER INFORMATION About the Company McDermott International, Inc. is a leading worldwide energy services company. The Company's subsidiaries provide engineering, fabrication, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy and power industries, including the U.S. Department of Energy. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, McDermott cautions that statements in this press release, which are forward-looking and provide other than historical information, involve risks and uncertainties that may impact the Company's actual results of operations. These forward-looking statements include statements relating to the proposed settlement of the B&W Chapter 11 proceedings and optimism regarding the Company's ability to convert bids into backlog. Although we believe that the expectations reflected in those forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct. Those statements are made by using various underlying assumptions and are subject to numerous uncertainties and risks, including, but not limited to, risks that the B&W Chapter 11 settlement may not be finalized on the terms we have described, credit risks and J. Ray's ability to competitively bid on projects. If one or more of these risks materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected. For a more complete discussion of these and other risk factors, please see McDermott's annual report for the year ended December 31, 2004 and its 2005 quarterly reports filed with the Securities and Exchange Commission. In addition to the Company's results prepared in accordance with generally accepted accounting principals ("GAAP"), McDermott has provided Non-GAAP financial measures that present net income and net income per share for the three-months ended June 30, 2005 and June 30, 2004 on a basis that excludes certain income and expenses. Details of these excluded items are presented in the table below titled "Non-GAAP Earnings Reconciliation," which reconciles the GAAP results to Non-GAAP financial measures described above. -0- *T Conference Call to Discuss 2005 Second Quarter Earnings Release Date: Friday, August 5, 2005, at 10:00 a.m. EST (9:00 a.m. CST) Live Webcast: Investor Relations section of website at www.mcdermott.com Replay: Available for two weeks in the investor relations section of www.mcdermott.com McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Unaudited) (In thousands, except per share amounts) Revenues $515,136 $499,817 $954,251 $999,151 ---------------------------------------------------------------------- Costs and Expenses: Cost of operations 417,112 426,804 780,144 892,372 Selling, general and administrative expenses 50,657 45,526 95,935 89,118 ---------------------------------------------------------------------- 467,769 472,330 876,079 981,490 ---------------------------------------------------------------------- Equity in Income of Investees 7,398 8,197 17,269 15,940 ---------------------------------------------------------------------- Operating Income 54,765 35,684 95,441 33,601 ---------------------------------------------------------------------- Other Income (Expense): Interest income 5,494 872 8,408 1,820 Interest expense (8,923) (8,213) (18,619) (16,684) Increase in estimated cost of The Babcock & Wilcox Company bankruptcy settlement (6,355) (4,383) (5,887) (1,972) Other-net 2,528 912 5,298 2,115 ---------------------------------------------------------------------- (7,256) (10,812) (10,800) (14,721) ---------------------------------------------------------------------- Income before Provision for (Benefit from) Income Taxes 47,509 24,872 84,641 18,880 Provision for (Benefit from) Income Taxes (33,410) 13,087 (18,714) 17,962 ---------------------------------------------------------------------- Net Income $80,919 $11,785 $103,355 $918 ---------------------------------------------------------------------- Earnings per Common Share: Basic $1.20 $0.18 $1.54 $0.01 Diluted $1.12 $0.17 $1.45 $0.01 ---------------------------------------------------------------------- Weighted Average Shares Basic 67,602,303 65,524,948 67,188,271 65,398,526 Diluted 72,157,715 67,480,107 71,485,971 67,525,697 ---------------------------------------------------------------------- McDERMOTT INTERNATIONAL, INC. NON-GAAP EARNINGS RECONCILIATION (1) Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Unaudited) (In thousands, except per share amounts) Net Income $80,919 $11,785 $103,355 $918 ---------------------------------------------------------------------- Adjustments: Valuation allowance adjustment on Deferred tax asset (50,383) - (50,383) - Pre-tax B&W settlement revaluation 6,355 4,383 5,887 1,972 Tax on B&W settlement revaluation 1,085 (376) 953 (653) ---------------------------------------------------------------------- NON-GAAP NET INCOME $37,976 $15,792 $59,812 $2,237 ---------------------------------------------------------------------- Weighted Average Shares - Basic 67,602,303 65,524,948 67,188,271 65,398,526 Weighted Average Shares - Diluted 72,157,715 67,480,107 71,485,971 67,525,697 ---------------------------------------------------------------------- NON-GAAP Basic Earnings per Share $0.56 $0.24 $0.89 $0.03 NON-GAAP Diluted Earnings per Share $0.53 $0.23 $0.84 $0.03 ---------------------------------------------------------------------- (1) Presented above is a reconciliation between GAAP net income and certain non-GAAP financial measures. The non-GAAP measures are based upon our unaudited consolidated statements of operations for the periods shown, with certain adjustments. McDermott is providing the non-GAAP information to supplement the results provided in accordance with GAAP and it should not be considered superior to, or as a substitute for, the comparable GAAP measures. However, McDermott believes certain non-GAAP measures provide meaningful insight into the Company's ongoing operational performance and therefore uses the non-GAAP information internally to evaluate McDermott's operations for purposes of budget planning and performance goals. McDermott has chosen to provide this supplemental non-GAAP information to investors to enable them to perform additional comparisons of operating results and as a means to emphasize the results of ongoing operations absent income and expenses considered by management to be outside the Company's customary business. McDERMOTT INTERNATIONAL, INC. SELECTED SEGMENT INFORMATION Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Unaudited) (In thousands) REVENUES Marine Construction Services $355,228 $359,334 $641,831 $725,142 Government Operations 159,940 140,490 312,533 274,019 Power Generation Systems - - - - Adjustments and Eliminations (32) (7) (113) (10) -------------------------------------------------------------------- TOTAL $515,136 $499,817 $954,251 $999,151 -------------------------------------------------------------------- SEGMENT INCOME (LOSS) Marine Construction Services $30,899 $22,112 $59,980 $18,511 Government Operations 29,736 31,908 53,777 51,617 Power Generation Systems 262 1,660 385 1,771 -------------------------------------------------------------------- 60,897 55,680 114,142 71,899 Corporate (6,132) (19,996) (18,701) (38,298) -------------------------------------------------------------------- TOTAL $54,765 $35,684 $95,441 $33,601 -------------------------------------------------------------------- EQUITY IN INCOME (LOSS) FROM INVESTEES (1) Marine Construction Services $(175) $746 $(269) $1,909 Government Operations 7,092 7,180 16,715 13,427 Power Generation Systems 481 271 823 604 -------------------------------------------------------------------- TOTAL $7,398 $8,197 $17,269 $15,940 -------------------------------------------------------------------- DEPRECIATION & AMORTIZATION EXPENSE (1) Marine Construction Services $7,019 $6,537 $13,734 $11,747 Government Operations 3,109 2,945 6,257 6,036 Power Generation Systems - - - - Corporate 393 1,018 1,049 1,643 -------------------------------------------------------------------- TOTAL $10,521 $10,500 $21,040 $19,426 -------------------------------------------------------------------- CAPITAL EXPENDITURES Marine Construction Services $2,520 $2,121 $14,850 $3,870 Government Operations 2,424 2,333 7,777 4,239 Power Generation Systems - - - - Corporate 134 2 155 2 -------------------------------------------------------------------- TOTAL $5,078 $4,456 $22,782 $8,111 -------------------------------------------------------------------- BACKLOG Marine Construction Services $934,415 $1,082,386 $934,415 $1,082,386 Government Operations 1,613,593 1,592,926 1,613,593 1,592,926 -------------------------------------------------------------------- TOTAL $2,548,008 $2,675,312 $2,548,008 $2,675,312 -------------------------------------------------------------------- (1) Included in Segment Income (Loss) above. McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS June 30, Dec. 31, 2005 2004 ---- ---- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $261,378 $259,319 Restricted cash and cash equivalents 111,767 111,455 Investments 42,651 - Accounts receivable - trade, net 234,281 226,731 Accounts receivable from The Babcock & Wilcox Company 3,443 6,121 Accounts and notes receivable - unconsolidated affiliates 57,643 29,330 Accounts receivable - other 31,746 71,522 Contracts in progress 68,119 72,355 Deferred income taxes 18,813 9,813 Other current assets 15,318 13,277 ---------------------------------------------------------------------- Total Current Assets 845,159 799,923 ---------------------------------------------------------------------- Restricted Cash and Cash Equivalents 51,747 66,498 ---------------------------------------------------------------------- Property, Plant and Equipment 1,102,604 1,087,314 Less accumulated depreciation 796,262 780,225 ---------------------------------------------------------------------- Net Property, Plant and Equipment 306,342 307,089 ---------------------------------------------------------------------- Investments 60,069 41,884 ---------------------------------------------------------------------- Goodwill 12,926 12,926 ---------------------------------------------------------------------- Other Assets 212,327 158,612 ---------------------------------------------------------------------- TOTAL $1,488,570 $1,386,932 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' DEFICIT June 30, Dec. 31, 2005 2004 ---- ---- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $4,250 $12,009 Accounts payable 96,595 114,235 Accounts payable to The Babcock & Wilcox Company 38,890 55,180 Accrued employee benefits 62,474 79,362 Accrued liabilities - other 160,809 163,649 Accrued contract cost 76,831 81,591 Advance billings on contracts 255,739 217,053 U.S. and foreign income taxes payable 26,151 18,612 ---------------------------------------------------------------------- Total Current Liabilities 721,739 741,691 ---------------------------------------------------------------------- Long-Term Debt 260,175 268,011 ---------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 26,404 26,315 ---------------------------------------------------------------------- Self-Insurance 61,532 61,715 ---------------------------------------------------------------------- Pension Liability 214,493 328,852 ---------------------------------------------------------------------- Accrued Cost of The Babcock & Wilcox Company Bankruptcy Settlement 117,990 112,103 ---------------------------------------------------------------------- Deferred Liability Associated with Babcock & Wilcox Company Pension Plan Spin-Off ( See Note 8) 117,079 - ---------------------------------------------------------------------- Other Liabilities 109,112 109,688 ---------------------------------------------------------------------- Commitments and Contingencies. Stockholders' Deficit: Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 71,038,199 at June 30, 2005 and 69,560,726 at December 31, 2004 71,038 69,561 Capital in excess of par value 1,139,969 1,122,055 Accumulated deficit (957,553) (1,060,908) Treasury stock at cost, 2,231,860 shares at June 30, 2005 and 2,341,902 at December 31, 2004 (61,559) (64,625) Accumulated other comprehensive loss (331,849) (327,526) ---------------------------------------------------------------------- Total Stockholders' Deficit (139,954) (261,443) ---------------------------------------------------------------------- TOTAL $1,488,570 $1,386,932 ---------------------------------------------------------------------- McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2005 2004 ---- ---- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $103,355 $918 ---------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 21,040 19,426 Income or loss of investees, less dividends (6,261) (6,689) Gain on asset disposals and impairments - net (2,540) (2,953) Benefit from deferred taxes (50,065) (7,996) Increase in estimated cost of The Babcock & Wilcox Company bankruptcy settlement 5,887 1,972 Other 11,972 1,200 Changes in assets and liabilities, net of effects of acquisitions and divestitures: Accounts receivable 1,878 (4,633) Net contracts in progress and advance billings 42,822 (24,102) Accounts payable (33,919) 12,130 Accrued and other current liabilities (6,787) (7,332) Income taxes 7,539 13,748 Accrued employee benefits (16,852) (3,129) Other, net (3,808) (6,197) ---------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 74,261 (13,637) ---------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in restricted cash and cash equivalents 14,439 12,172 Purchases of property, plant and equipment (22,782) (8,111) Purchases of available-for-sale securities (194,307) (34,965) Sales of available-for-sale securities 2,450 5,140 Maturities of available-for-sale securities 131,545 30,025 Proceeds from asset disposals 8,690 6,601 Other (4,657) (1) ---------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (64,622) 10,861 ---------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (12,734) - Decrease in short-term borrowing - (36,750) Issuance of common stock 4,928 281 Debt issuance costs (940) - Other 1,210 (857) ---------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (7,536) (37,326) ---------------------------------------------------------------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH (44) 6 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,059 (40,096) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 259,319 174,790 ---------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $261,378 $134,694 ---------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $9,394 $16,939 Income taxes - net (1) $32,258 $24,428 ---------------------------------------------------------------------- (1) Income tax payments are gross amounts and do not include reimbursements received from The Babcock & Wilcox Company of $3.7 and $12.8 million, respectively, for the six months ended June 30, 2005 and 2004. *T