Revenues in the first quarter of 2004 were $499.3 million, compared to $512.7 million in the corresponding period in 2003. The change in revenues is due to reduced activity at J. Ray McDermott, S.A. and its subsidiaries ("J. Ray"), partially offset by increased revenues at BWX Technologies Inc. ("BWXT").
The first quarter 2004 operating loss was $2.1 million, which included $15.3 million of corporate qualified pension expense, compared to first quarter 2003 operating income and corporate qualified pension expense of $13.9 million and $18.0 million, respectively.
"Our results in the first quarter of 2004 significantly improved sequentially from the fourth quarter 2003, but declined versus a year ago, as the reduced activity level at J. Ray resulted in fixed operating costs that weren't fully absorbed by our projects," said Bruce W. Wilkinson, chairman of the board and chief executive officer of McDermott. "We continue to be optimistic that the remaining projects in loss positions at J. Ray will soon be behind us, and we were pleased that there were no additional charges on these projects during the first quarter. Further, we expect that new projects will be added to J. Ray's backlog, and J. Ray will manage its costs to reflect an expected decrease in revenues in 2004. In addition, due to the various tax jurisdictions where we operate, approximately 45 percent of our total net loss related to provision for income taxes."
The Company's other expense for the first quarter of 2004 was $3.9 million, compared to other income of $22.7 million in the first quarter of 2003. The year-over-year decline is primarily due to a $21.7 million reduction, pretax, in the quarterly adjustment related to the estimated costs of the B&W Chapter 11 settlement. This revaluation will continue to fluctuate on a quarterly basis and is largely dependent on the quarterly price movement in McDermott's stock price. Provision for income taxes was $4.9 million in the first quarter 2004, compared to $7.0 million in the first quarter 2003.
RESULTS OF OPERATIONS
2004 First Quarter Compared to 2003 First Quarter
Marine Construction Services Segment ("J. Ray")
Revenues in the Marine Construction Services segment were $365.8 million in the 2004 first quarter, a decrease of $29.2 million from a year ago. The year-over-year reduction resulted from decreased activity on fabrication and marine installation projects in the Middle East and Asia Pacific regions.
Segment loss for the 2004 first quarter was $3.6 million compared to a segment income in the first quarter 2003 of $16.6 million. Major projects contributing income to the 2004 first quarter were the project in Azerbaijan for the AIOC, a pipelay project for Shell in the Gulf of Mexico, and fabrication projects for BP in Morgan City, La., offset by lower overall activity at J. Ray available to cover fixed operating costs. Selling, general and administrative expenses were $23.4 million, compared to $18.3 million in the 2003 first quarter.
At March 31, 2004, J. Ray's backlog of $1.3 billion included $69 million related to uncompleted work on the Front Runner spar, $14 million on the Belanak project and $19 million related to the Carina Aries project. J. Ray's backlog was $1.4 billion and $2.0 billion at Dec. 31, 2003 and March 31, 2003, respectively.
Government Operations Segment ("BWXT")
Revenues in the Government Operations segment increased $15.8 million to $133.5 million in the 2004 first quarter, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. government programs.
Segment income decreased $3.9 million to $19.7 million in the 2004 first quarter, primarily due to a $3.3 million benefit received during the first quarter of 2003 related to a contract settlement and an aggregate of $3.6 million in the first quarter of 2004 related to increased bid and proposal costs, higher selling, general and administrative costs and a reduction in equity income from investees.
"BWXT continues to produce strong operating and financial results," added Wilkinson. "Although the operating income in the 2004 quarter was down slightly compared to a year ago, we continue to expect BWXT to produce improved results year-over-year on a comparable basis."
At March 31, 2004, BWXT's backlog was $1.7 billion, compared to backlog of $1.8 billion and $1.6 billion at Dec. 31, 2003 and March 31, 2003, respectively.
Unallocated corporate expenses were $18.3 million in the 2004 first quarter, a decrease of $8.1 million compared to the 2003 first quarter, primarily due to a $2.7 million reduction in corporate qualified pension plan expense, reduced costs at all corporate cost centers and increased allocation of corporate costs to the operating segments.
Other Income and Expense
Net interest expense was $7.5 million in the 2004 first quarter compared to $2.7 million in the 2003 first quarter, due to the issuance of J. Ray's 11 percent senior secured notes in December 2003.
During the 2004 first quarter, revaluation of certain components of the estimated settlement cost related to the Chapter 11 proceedings involving B&W resulted in a decrease in the estimated cost of the settlement to $125.3 million, resulting in the recognition of other income of $2.4 million ($2.7 million after tax). The decrease in the first quarter 2004 estimated settlement cost is due primarily to a decrease in the trading price of McDermott's common stock from $11.95 per share at Dec. 31, 2003 to $8.39 per share at March 31, 2004. As discussed in the Company's annual report on Form 10-K for the year ended Dec. 31, 2003, 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.
Provision for income taxes during the first quarter of 2004 was $4.9 million, compared to $7.0 million during the first quarter of 2003. Despite the Company's consolidated pretax loss from operations, the Company recognized a net provision for income taxes, reflecting the tax obligations in many of the jurisdictions in which it operates, combined with its inability to recognize tax benefits in several jurisdictions where losses were incurred.
In August 2003, the Company completed the sale of Menck GmbH ("Menck"), formerly a component of the Marine Construction Services segment. Accordingly, the Company has reported the results of operations for Menck as discontinued operations. In the first quarter 2003, the Company recorded income of $2.2 million, after tax, associated with the operations of Menck.
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 $377.1 million in the first quarter of 2004, a decrease of $3.9 million compared to the first quarter of 2003. B&W's net income for the 2004 first quarter was $24.2 million, an increase of $10.8 million versus the corresponding period in 2003.
On a consolidated basis, the Company incurred negative cash flows for the first quarter of 2004. J. Ray expects to incur negative cash flow from operations during two of the remaining three quarters in 2004, due to the cash outflow on the three spar projects, the Carina Aries project and the Belanak project, for which substantial income statement expenses have already been recorded. The Company expects negative cash flow on a consolidated basis for one of the remaining three quarters in 2004, reflecting J. Ray's negative cash flow.
Completion of these projects has and will continue to put a strain on J. Ray's current liquidity. J. Ray intends to fund its negative cash flow in 2004 with cash on hand, including cash expected to be made available when it obtains a new letter-of-credit facility, as well as through sales of non-strategic assets.
In December 2003, J. Ray issued $200 million of 11 percent, senior secured notes due 2013, however over half of the proceeds from these notes are currently restricted, to collateralize letters of credit and a temporary interest reserve. J. Ray is currently negotiating a secured, $75 million letter-of-credit facility. This facility, if fully utilized, would enable J. Ray to replace most of the approximately $80 million of existing letters of credit which are currently cash collateralized.
J. Ray's ability to obtain a new letter-of-credit facility will depend on numerous factors, including market conditions, J. Ray's performance and the negotiation of acceptable terms and conditions. In addition, J. Ray's ability to use the proceeds from sales of assets to fund its working capital requirements is limited under the terms of the indenture governing its senior secured notes. If J. Ray is unable to obtain a new letter of credit facility or a sufficient amount of available proceeds from sales of non-strategic assets, J. Ray's ability to pursue additional projects, which often require letters of credit, and its liquidity, will be adversely impacted. These factors continue to cause substantial doubt about J. Ray's ability to continue as a going concern. As of May 6, 2004, J. Ray had approximately $68 million of unrestricted cash available.
As indicated in its March 1, 2004 press release, the Company believes that it has the opportunity to recover in future periods up to $25 million of the losses it recorded during 2003. McDermott is pleased to announce that since March 1, 2004, J. Ray has negotiated approximately $17 million of its potential recoveries. Approximately $5 million was included in its results for the first quarter 2004 and the remaining $12 million will be recorded in the appropriate future periods.
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