Joining me this morning are Steve Johnson, McDermott's Chairman, President, and Chief Executive Officer; and Perry Elders, 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, considering we have yet to finalize our financial statements for the 2011 third quarter, most of our comments this morning will include forward-looking statements and estimates, including with regard to our preliminary 2012 outlook. These comments are subject to various risks and uncertainties, and they reflect management's view as of October 27, 2011. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our Form 10-K for the year ended December 31, 2010, subsequent Form 10-Qs and yesterday's 8-K, for a discussion of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. And please note that, except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statements. I will now turn the call over to Steve Johnson, McDermott's Chairman, President and CEO, for his remarks on the third quarter preview and the business and operational environment. Stephen M. Johnson Thanks, Jay. Good morning, everyone. Obviously, I wish we were speaking under different circumstances, but I do appreciate you joining us today, particularly on short notice to discuss the earnings preview we issued last night. My goal this morning is to be as open and direct with you as possible, to speak to the quarter's expected results with as much detail as we can and answer as many of your questions as time permits. As we indicated in the press release, the 2011 third quarter will be disappointing from an income statement perspective. While the vast majority of our projects and backlog performed very much in line with our expectations, we had a handful of challenges on certain marine projects that resulted in significant project charges for the quarter in the neighborhood of $50 million.
In addition, a few other projects had timing issues and revisions to their expected profitability at completion, which will result in gross margin recognized in the third quarter at a profit percentage below the gross margin we expect for the entire project. Without these charges and adjustments, we anticipate the quarter would have been much more in line with expectations.Of the challenges this quarter, each project had unique reasons for why the issues occurred or are expected to occur. While I don't plan to discuss each project specifically, let me start with some good news. Of the projects that contributed to the expected $50 million of project losses in the 2011 third quarter, all but one are now complete or expected to be complete by the first half of 2012. This should provide some confidence that we don't expect a bunch of problem projects lingering into the future. In addition, we believe that some of the project losses we expect to report this period may merit claims or change orders in the future from insurance, suppliers or customers. Despite this belief, however, as required, we will record the entire expected project losses in Q3, and should we recover monies at a later date, we would recognize those amounts then. Two projects I'll spend a little time on are in the Atlantic segment and represent about 75% of the expected $50 million charge. The first project relates to an upcoming multiyear vessel charter contract. I highlight it for 3 reasons: One, it will represent just over half of the expected $50 million charge; two, the marine operations under contract haven't begun yet; and three, since we're delayed in beginning the project, we've accrued liquidated damages. So let me start at the beginning on this project. In advance of beginning a multiyear charter in Brazil, our Agile vessel began a drydock and upgrade program at a shipyard in Holland in February of this year. After the program began and the ship was opened up, we discovered additional work that needed to be done beyond the original scope. In addition, we were receiving frequent updates on the customers' requirements for the vessel. This led to some cost overruns on the drydock upgrade program, as well as delays coming out of the shipyard. However, the vessel completed its sea trials in September and left the shipyard headed for South America thereafter.
A few days after leaving the shipyard in early October, the Agile began leaking fluids and had to turn around and go back into the shipyard, and is still there today undergoing repairs. We are currently expecting the vessel to leave the shipyard for the second time in early November and be on on-hire status in Brazil in January of 2012.Read the rest of this transcript for free on seekingalpha.com