McDermott reports weaker profits on oil and gas services slump

Source: McDermott International

McDermott International, Inc. (MDR) 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-tax) 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. 

“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.” 

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.

 



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