McDermott International Q1 2010 Earnings Call Transcript

McDermott International Q1 2010 Earnings Call Transcript
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McDermott International (MDR)

Q1 2010 Earnings Call

May 11, 2010 10:00 am ET

Executives

Michael Taff - Chief Financial Officer and Senior Vice President

John Fees - Chief Executive Officer and Director

John Roueche - Vice President of Investor Relations & Corporate Communications

Analysts

Jamie Cook - Crédit Suisse

Tahira Afzal - KeyBanc Capital Markets Inc.

Roger Read - Natixis Bleichroeder Inc.

John Rogers - D.A. Davidson & Co.

Andy Kaplowitz - Barclays Capital

Will Gabrielski - Broadpoint AmTech, Inc.

Graham Mattison - Lazard Capital Markets LLC

Martin Malloy - Johnson Rice & Company, L.L.C.

Steven Fisher - UBS Investment Bank

Presentation

Operator

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Previous Statements by MDR
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Ladies and gentlemen, thank you for standing by, and welcome to McDermott International's First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Jay Roueche, McDermott's Vice President of Investor Relations. Please go ahead.

John Roueche

Thank you, Crystal, and good morning, everyone. We appreciate you joining us today to discuss McDermott's first quarter 2010 financial results, which we reported yesterday afternoon. Joining me on the call this morning are John Fees, McDermott's Chief Executive Officer; and Mike Taff, our Senior Vice President and Chief Financial Officer.

Before I turn the call over, let me remind you that this event is being recorded, and a replay will be available for a limited time on our website. In addition, some of our comments this morning will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties and reflect management's views only as of May 11, 2010. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, included in our Form 10-K for the year ended December 31, 2009, and our recently filed Form Q [10-Q] for a discussion of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. And please note, except to the extent required by applicable law, McDermott undertakes no obligation to update any of these forward-looking statements going forward.

In addition, I'd also like to note that certain numbers we'll be presenting today will be made on a non-GAAP basis. Further information regarding these non-GAAP figures including our presentation and reconciliation are included in yesterday's earnings release, which is available on the Investor Relations page at www.mcdermott.com.

I'll now turn the call over to Mike to discuss our results for the 2010 first quarter.

Michael Taff

Thanks, Jay, and good morning, everyone. Starting with the income statement. Total revenues were almost $1.2 billion, down about $300 million from a year ago on a consolidated basis. While Government Operations was essentially flat, the Offshore Oil & Gas Construction and Power Generation Systems segments were down about $190 million and $120 million, respectively.

Consolidated operating income was almost $92 million in the 2010 first quarter compared to about $131 million a year ago. However, in the 2010 period, McDermott incurred about $33 million of spin-off and other identified pretax costs that are included in our GAAP amounts. Since the spin-off-related costs generally don't receive a tax benefit, the after-tax effect of these charges was about $29.5 million or $0.13 per share.

Breaking it down by segment, Offshore Oil & Gas Construction at $82.8 million saw an 84% increase in segment income compared to a year ago. Power Generation Systems saw the most substantial reduction in segment income, down almost $49 million compared to the 2009 first quarter. Government Operations was down about $10 million but was essentially flat excluding the 2010 charges at our Nuclear Fuel Services subsidiary. John will discuss those operations and issues in greater detail shortly.

Below operating income, our results improved with a $5 million swing in the other income and expense line compared to the 2009 quarter, primarily as a result of a lower amount of non-cash foreign currency translation losses compared to the prior year's quarter.

With a strong performance in our foreign operations and lower results in the U.S., our overall consolidated tax rate declined from about 35.9% in 2009 to 22.4% in 2010. All in, net income prior to the income attributable to non-controlling interests fell only $10 million. However, income attributable to our joint venture partners worsened by about $7.5 million.

Taking it all to the bottom line, McDermott reported net income was $60 million or $0.26 per diluted share in the 2010 first quarter. Adding back the charges related to the spin-off and NFS' shutdown, non-GAAP EPS for 2010 was $0.38 per share. These figures compare to $77.7 million or $0.33 per share in the 2009 quarter. Overall, we believe the first quarter of 2010 will be the low point of the year on a consolidated segment income basis. The story is somewhat different in each segment. So let me review each in a little more detail.

Offshore Oil & Gas Construction reported a quarter with solid year-over-year growth in segment income, coming in at $82.8 million. This is a sizable increase over the $45 million quarter reported in 2009. Improvements in the Middle East was a primary driver, aided by better performance in the Asia-Pacific region.

During the quarter, we were able to record income on the projects we've historically referred to as zero margin as change orders and cost savings were realized on about $160 million of revenues. The lower revenues we experienced this quarter are expected to grow in future periods this year as we're forecasting almost $2 billion from the segment's backlog to be realized in the remainder of the year. All in all, we delivered very strong performance in this segment during the 2010 quarter and believe we're on a good pace for another good year.

Government Operations segment income improved sequentially for the second quarter in a row but was still down compared to the same period a year ago. Generally, our operations performed very well, and the equity income line item improved compared to the 2009 first quarter. The reason for the year-over-year decline is, again, primarily attributed to our NFS operations. We recognized about $9 million of expense related to the implementation of safety measures and the associated temporary shutdown of its Tennessee facility.

The good news is that the major operations of the facility are back up and running, and the down-blending activities are forecasted to come back online in June. So it's our expectation that the issues we've endured in NFS the last few quarters are now largely behind us. But as always, we'll continue to operate with a safety-first mentality in all our endeavors.

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