MDR McDermott International Inc

McDermott International, Inc. (NYSE: MDR) (“McDermott” or the “Company”) today reported net income of $59.9 million, or $0.26 per diluted share, for the 2010 first quarter which includes approximately $33 million, pretax ($29.5 million, after-tax1) of combined costs related to the anticipated spin-off of The Babcock & Wilcox Company (“B&W”) and expenses related to safety initiatives at, and the associated temporary stand down of, B&W’s NFS operations. The results of the 2010 first quarter compare to $77.7 million, or $0.33 per diluted share, in the corresponding period of 2009. Weighted average common shares outstanding on a fully diluted basis were approximately 234.8 million and 232.6 million in the quarters ended March 31, 2010 and March 31, 2009, respectively.

McDermott’s revenues in the first quarter of 2010 were $1,181.9 million, compared to $1,493.3 million in the corresponding period in 2009. The year-over-year decrease was primarily due to a 26.7 percent decline, or $189.0 million, in the Offshore Oil & Gas Construction segment and a 22.5 percent decline, or $118.8 million, in the Power Generation Systems segment.

The Company’s operating income was $91.8 million in the 2010 first quarter, compared to $131.2 million in the 2009 first quarter. In Offshore Oil & Gas Construction, segment income increased approximately 84 percent, or $37.7 million, compared to the 2009 first quarter. Offsetting this improvement was a year-over-year decline of $48.9 million in the Power Generation Systems’ segment income and the $33 million of identified expenses, which was predominantly in the Government Operations and Corporate segments.

“McDermott’s results for the 2010 first quarter were adversely affected by the previously announced B&W spin-off and NFS-related expenses, but it was generally in-line with our expectations for a light quarter. We anticipate that operating income will improve from here during remaining quarters of 2010. The Power Generation Systems segment hit what we believe to be trough levels during the quarter, as it typically lags GDP, but we believe we are beginning to see a turn in the power marketplace. The Offshore Oil & Gas Construction segment had another outstanding quarter, despite lower revenues,” said John A. Fees, Chief Executive Officer of McDermott. “The Company is making excellent progress on the previously announced spin-off of The Babcock & Wilcox Company. We now believe McDermott is on course for the B&W separation to be complete as early as June 30, 2010.”

At March 31, 2010, the Company’s consolidated backlog was $8.9 billion, compared to $10 billion and $8.1 billion at March 31, 2009 and December, 2009, respectively.

RESULTS OF OPERATIONS

2010 First Quarter Compared to 2009 First Quarter

Offshore Oil & Gas Construction Segment

Revenues in the Offshore Oil & Gas Construction segment were $519.5 million in the 2010 first quarter, compared to $708.5 million for the same period a year ago. Increased revenues in the Asia Pacific region were more than offset by reduced levels in other regions.

Segment income for the 2010 first quarter was $82.8 million, compared to $45.0 million in the 2009 first quarter. Major areas contributing to first quarter 2010 segment income include the Middle East and Asia Pacific regions.

At March 31, 2010, segment backlog was $4.2 billion, compared to backlog of $5.0 billion and $3.4 billion at March 31, 2009 and December 31, 2009, respectively.

Power Generation Systems Segment

Revenues in the Power Generation Systems segment for the first quarter of 2010 were $409.7 million, compared to $528.6 million in the first quarter of 2009. The year-over-year decrease was predominantly due to reduced activity on customers’ major capital projects, including new power plant construction and retrofits of existing power plants.

Segment income for the 2010 first quarter was $9.3 million, compared to $58.2 million in the 2009 first quarter. Major activities contributing to first quarter 2010 segment income include the supply and construction of new boilers and environmental equipment, retrofit projects of existing facilities, inspection and maintenance, related aftermarket parts and services and equity income from investees. Included in the 2010 first quarter’s segment income was $17.0 million of research & development expenses, an increase of $7.6 million compared to the 2009 first quarter which is primarily associated with B&W’s mPowerTM modular nuclear reactor initiative.

At March 31, 2010, segment backlog was $2.0 billion, compared to backlog of $2.2 billion and $2.0 billion at March 31, 2009 and December 31, 2009, respectively.

Government Operations Segment

Revenues in the Government Operations segment were $253.3 million in the 2010 first quarter, compared to $257.1 million for the same period a year ago.

Segment income for the 2010 first quarter was $36.0 million, compared to $45.8 million in the 2009 first quarter. Major items contributing to first quarter 2010 segment income include the manufacture of nuclear components for certain U.S. Government programs and the management and operations of various U.S. Government sites. During the 2010 first quarter, approximately $9 million in expenses were recognized primarily related to the temporary suspension of certain operations and the implementation of various enhanced safety controls and processes at the Nuclear Fuel Services, Inc. Erwin, Tennessee manufacturing facility. The Company restarted the major components of the production line in April 2010 and expects the down-blending facility to be fully operational in June 2010, while we continue to expect the restart of the last and smaller line in early 2011.

At March 31, 2010, segment backlog was $2.8 billion, compared to backlog of $2.7 billion and $2.8 billion at March 31, 2009 and December 31, 2009, respectively.

Corporate & Other Income and Expense

Unallocated corporate expenses were $36.2 million in the 2010 first quarter, compared to $17.7 million in the 2009 first quarter. The year-over-year increase was largely due to the approximately $24 million of costs in connection with the proposed spin-off of The Babcock & Wilcox Company.

The Company’s other expense for the first quarter of 2010 was $3.9 million, compared to $8.9 million in the first quarter of 2009. The reduced expense was due to lower foreign currency exchange losses.

Research & Development Expense

Research & Development expense, net, was $17.1 million in the 2010 first quarter, compared to $10.2 million in the 2009 first quarter. Charged to cost of operations and primarily in McDermott’s Power Generation Systems segment, this expense includes costs related to B&W’s mPowerTM modular and scalable nuclear reactor initiative, and the continued development of carbon capture and sequestration technologies.

Upcoming Investor Events

McDermott plans to host an analyst day on the morning of June 2, 2010 at the Grand Hyatt in New York City. Management participating in the day’s presentations will include John Fees, Steve Johnson (Chief Executive Officer of J. Ray McDermott, S.A.) and Brandon Bethards (Chief Executive Officer of B&W), as well as other senior level management.

In addition, the Company will participate in two investor conferences later this week in New York City. On May 13, 2010, members of McDermott’s management will participate in Macquarie Capital’s Industrials Conference 2010. On the following day, May 14, 2010, the Company will also participate in the 5th Annual CLSA Energy Forum 2010.

The presentations to be used during these various meetings will be available for a limited time over the internet at www.mcdermott.com in the investor relations section on the morning of the respective events.

Non-GAAP Information

1 – Footnote 1 references a $29.5 million after-tax impact ($0.124 per share) relating to the combined costs of the B&W spin-off ($24 million pre- and after-tax) and the NFS safety initiatives and temporary stand-down ($9 million pretax), which is a non-GAAP calculation. In the accompanying consolidated statement of income, the B&W spin-off costs received no tax benefit while the NFS safety initiative and temporary stand-down pretax expenses received an approximate 39 percent tax benefit. Thus, the $29.5 million after-tax impact of these two charges is calculated by adding $24 million to $5.5 million, which is the product of $9 million multiplied by 0.61 (i.e. 1-0.39). To calculate the per share amount, the $29.5 million is added to the GAAP net income, the sum of which is divided by the number of fully diluted shares outstanding (234.8 million). Management believes this calculation is meaningful to allow investors to fully understand the impact of these charges on McDermott’s net income and earnings per share.

OTHER INFORMATION

About the Company

McDermott is an engineering and construction company, with specialty manufacturing and service capabilities, focused on energy infrastructure. McDermott’s customers are predominantly utilities and other power generators, major and national oil companies, and the United States Government. With its global operations, McDermott operates in over 20 countries with more than 25,000 employees.

Forward Looking Statements

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 about backlog, to the extent backlog may be viewed as an indicator of future revenues, our belief regarding the timing to complete the previously announced spin-off of B&W, our expectation of improved operating results in 2010, our belief that our Power Generation Systems segment hit trough levels during the 2010 first quarter and our belief that we are beginning to see a turn in the power market. 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 adverse changes in the markets in which we operate or credit markets and our inability to successfully execute on contracts in backlog. 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 and quarterly filings with the Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q. This news release reflects management’s views as of the date hereof. Except to the extent required by applicable law, McDermott undertakes no obligation to update or revise any forward-looking statement.

Conference Call to Discuss First Quarter 2010 Earnings Release

Date: Tuesday, May 11, 2010, at 10:00 a.m. ET (9:00 a.m. CT)

Live Webcast: Investor Relations section of Web site 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 March 31,

2010

 

2009

(Unaudited)

(In thousands, except shareand per share amounts)

  Revenues   $ 1,181,930     $ 1,493,263   Costs and Expenses: Cost of operations 934,851 1,228,622 (Gains) losses on asset disposals and impairments – net (2,093 ) 1,241 Selling, general and administrative expenses     167,952       141,394   Total Costs and Expenses     1,100,710       1,371,257     Equity in Income of Investees     10,588       9,200     Operating Income     91,808       131,206     Other Income (Expense): Interest income 680 2,813 Interest expense (381 ) (956 ) Other expense – net     (4,217 )     (10,770 ) Total Other Expense     (3,918 )     (8,913 )   Income before Provision for Income Taxes 87,890 122,293   Provision for Income Taxes     19,672       43,878     Net Income   $ 68,218     $ 78,415     Less: Net Income attributable to Noncontrolling Interest     (8,277 )     (723 )   Net Income Attributable to McDermott International, Inc.   $ 59,941     $ 77,692     Earnings per Share: Basic: Net Income Attributable to McDermott International, Inc. $ 0.26 $ 0.34 Diluted: Net Income Attributable to McDermott International, Inc.   $ 0.26     $ 0.33     Shares used in the computation of earnings per share Basic 230,824,301 228,314,785 Diluted     234,753,035       232,586,245    

McDERMOTT INTERNATIONAL, INC.

SELECTED SEGMENT INFORMATION

  Three Months Ended

3/31/10

 

3/31/09

 

(Unaudited); (In thousands)

REVENUES Offshore Oil and Gas Construction $ 519,545 $ 708,524 Government Operations 253,251 257,105 Power Generation Systems 409,731 528,573 Adjustments and Eliminations     (597 )     (939 ) TOTAL   $ 1,181,930     $ 1,493,263     SEGMENT INCOME Offshore Oil and Gas Construction $ 82,784 $ 45,038 Government Operations 35,953 45,752 Power Generation Systems     9,301       58,159       $ 128,038     $ 148,949   Corporate     (36,230 )     (17,743 ) OPERATING INCOME   $ 91,808     $ 131,206     EQUITY IN INCOME (LOSS) OF INVESTEES (1) Offshore Oil and Gas Construction $ (3,431 ) $ (1,145 ) Government Operations 9,478 8,702 Power Generation Systems     4,541       1,643   TOTAL   $ 10,588     $ 9,200  

PENSION EXPENSE (1)

Offshore Oil and Gas Construction $ 1,953 $ 2,177 Government Operations 11,684 12,158 Power Generation Systems 16,012 15,315 Corporate     4,698       4,598   TOTAL   $ 34,347     $ 34,248     DEPRECIATION & AMORTIZATION (1) Offshore Oil and Gas Construction $ 20,049 $ 19,760 Government Operations 10,707 11,243 Power Generation Systems 5,050 4,335 Corporate     1,056       684   TOTAL   $ 36,862     $ 36,022     RESEARCH & DEVELOPMENT, NET (1)   $ 17,127     $ 10,240  

CAPITAL EXPENDITURES

Offshore Oil and Gas Construction $ 47,544 $ 41,359 Government Operations 14,863 5,246 Power Generation Systems 3,252 12,333 Corporate     867       2,450   TOTAL   $ 66,526     $ 61,388     BACKLOG Offshore Oil and Gas Construction $ 4,191,814 $ 5,043,788 Government Operations 2,782,610 2,698,580 Power Generation Systems     1,969,362       2,220,517   TOTAL   $ 8,943,786     $ 9,962,885    

(1) Included in Segment Income Above

 

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

ASSETS

  March 31, December 31,

2010

2009

(Unaudited) (In thousands)     Current Assets: Cash and cash equivalents $ 775,980 $ 899,270 Restricted cash and cash equivalents 96,040 69,920 Investments 12 12 Accounts receivable – trade, net 550,275 642,995 Accounts and notes receivable – unconsolidated affiliates 9,614 5,806 Accounts receivable – other 66,211 68,035 Contracts in progress 408,479 400,831 Inventories 97,874 101,494 Deferred income taxes 107,236 100,828 Other current assets   72,132     68,730   Total Current Assets   2,183,853     2,357,921   Property, Plant and Equipment 2,655,474 2,608,740 Less accumulated depreciation   1,295,906     1,271,135   Net Property, Plant and Equipment   1,359,568     1,337,605   Investments   178,566     228,706   Goodwill   325,760     306,497   Deferred Income Taxes   265,971     275,567   Investments in Unconsolidated Affiliates   93,139     86,932   Other Assets   268,103     255,882   TOTAL $ 4,674,960   $ 4,849,110  

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

  March 31, December 31,

2010

2009

(Unaudited) (In thousands)     Current Liabilities: Notes payable and current maturities of long-term debt $ 13,558 $ 16,270 Accounts payable 366,355 471,858 Accrued employee benefits 126,101 217,178 Accrued pension liability – current portion 213,188 173,271 Accrued contract cost 96,858 103,041 Advance billings on contracts 578,538 689,334 Accrued warranty expense 122,164 118,278 Income taxes payable 71,128 64,029 Accrued liabilities – other   176,882       155,773     Total Current Liabilities   1,764,772       2,009,032     Long-Term Debt   55,092       56,714     Accumulated Postretirement Benefit Obligation   106,461       105,605     Self-Insurance   89,044       87,222     Pension Liability   573,311       610,166     Other Liabilities   148,091       147,271     Contingencies and Commitments   Stockholders’ Equity:

Common stock, par value $1.00 per share, authorized 400,000,000 shares; issued 237,800,603and 236,919,404 shares at March 31, 2010 and December 31, 2009, respectively

237,801 236,919 Capital in excess of par value 1,323,712 1,300,998 Retained earnings 1,011,588 951,647

Treasury stock at cost, 6,435,903 and 6,168,705 shares at March 31, 2010 and December 31, 2009,respectively

(73,725 ) (69,370 ) Accumulated other comprehensive loss   (596,845 )     (612,997 ) Stockholders’ Equity – McDermott International, Inc. 1,902,531 1,807,197 Noncontrolling interest   35,658       25,903   Total Stockholders’ Equity   1,938,189       1,833,100     TOTAL $ 4,674,960     $ 4,849,110          

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

  Three Months Ended March 31,

2010

2009

(Unaudited)(In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income   $ 68,218         $ 78,415   Non-cash items included in net income: Depreciation and amortization 36,862 36,022 Income of investees, less dividends (5,327 ) (1,142 ) (Gains) losses on asset disposals and impairments – net (2,093 ) 1,241 Provision for deferred taxes 4,903 38,407 Amortization of pension and postretirement costs 22,859 21,970 Excess tax benefits from FAS 123(R) stock-based compensation (2,556 ) (134 ) Other, net 14,236 13,159 Changes in assets and liabilities, net of effects of acquisitions and divestitures: Accounts receivable 79,095 90,367 Net contracts in progress and advance billings on contracts (122,333 ) (208,063 ) Accounts payable (98,651 ) (85,830 ) Income taxes 8,591 (16,717 ) Accrued and other current liabilities 11,486 29,767 Pension liability, accumulated postretirement benefit obligation and accrued employee benefits (89,091 ) (43,281 ) Other, net     (4,794 )         18,906   NET CASH USED IN OPERATING ACTIVITIES     (78,595 )         (26,913 ) CASH FLOWS FROM INVESTING ACTIVITIES: Increase in restricted cash and cash equivalents (26,120 ) (8,490 ) Purchases of property, plant and equipment (66,526 ) (61,388 ) Net decrease in available-for-sale securities 51,147 49,007 Acquisition of businesses, net of cash acquired (9,612 ) - Proceeds from asset disposals 3,985 279 Other, net     -           (1,055 ) NET CASH USED IN INVESTING ACTIVITIES     (47,126 )         (21,647 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (2,325 ) (4,825 ) Issuance of common stock 620 160 Payment of debt issuance costs (683 ) (19 ) Excess tax benefits from FAS 123(R) stock-based compensation 2,556 134 Other     -           943   NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     168           (3,607 ) EFFECTS OF EXCHANGE RATE CHANGES ON CASH     2,263           (5,858 ) NET DECREASE IN CASH AND CASH EQUIVALENTS (123,290 ) (58,025 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     899,270           586,649   CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 775,980         $ 528,624   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 398 $ 1,124 Income taxes (net of refunds)   $ 15,099         $ 19,786