Revenues in the second quarter of 2004 were $499.8 million, compared to $595.5 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 second quarter 2004 operating income was $35.7 million, which included $15.8 million of corporate qualified pension expense, compared to the second quarter 2003 operating loss and corporate qualified pension expense of $13.9 million and $18.0 million, respectively.
"Each of McDermott's segments reported significantly better operating results compared to last year's second quarter," said Bruce W. Wilkinson, chairman of the board and chief executive officer of McDermott. "BWXT produced record operating income and J. Ray returned to profitability. Additionally, unallocated corporate expense also improved in the quarter compared to a year ago. I am particularly pleased with J. Ray's positive cash flow performance during the 2004 second quarter, which was a substantial improvement compared to the prior four quarters and was well above our expectations."
The Company's other expense for the second quarter of 2004 was $10.8 million, compared to $42.0 million in the second quarter of 2003. The year-over-year improvement is due to a $35.0 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 quarter end price of McDermott's stock.
RESULTS OF OPERATIONS
2004 Second Quarter Compared to 2003 Second Quarter
Marine Construction Services Segment ("J. Ray")
Revenues in the Marine Construction Services segment were $359.3 million in the 2004 second quarter, a decrease of $108.6 million from a year ago. The year-over-year reduction resulted from decreased activity on fabrication and marine installation projects in the Middle East, southern Argentina and Asia Pacific regions, partially offset by increased activity in Azerbaijan and Morgan City, La.
Segment income for the 2004 second quarter was $22.1 million compared to a segment loss in the second quarter 2003 of $13.2 million. Major projects contributing operating income to the 2004 second quarter were the projects in Azerbaijan for AIOC, a pipelay project for Shell in the Gulf of Mexico, and the fabrication projects for BP in Morgan City, La. In addition, J. Ray recognized approximately $23.4 million of operating income in the second quarter 2004 from favorable contract cost adjustments relating to operating improvements and recoveries on projects which had incurred losses in previous quarters, partially offset by an aggregate of $10.7 million in charges related to severance costs, drydock costs, legal settlements and other items. J. Ray's second quarter 2003 operating results included a $39.9 million loss related to a marine construction project in southern Argentina. Selling, general and administrative expenses were $24.4 million in the 2004 second quarter, compared to $15.3 million in the 2003 second quarter. This increase was due to higher marketing, compliance, insurance and information systems expenses.
At June 30, 2004, J. Ray's backlog was $1.1 billion, which included an aggregate of $28.4 million related to uncompleted work on the Front Runner spar, the Belanak project and the Carina Aries project. J. Ray's backlog was $1.4 billion and $1.8 billion at Dec. 31, 2003 and June 30, 2003, respectively.
Government Operations Segment ("BWXT")
Revenues in the Government Operations segment increased $13.0 million to $140.5 million in the 2004 second quarter, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. government programs, and increased volumes from commercial nuclear environmental services.
Segment income increased $11.4 million to $31.9 million in the 2004 second quarter, primarily due to increased volume and margins from the manufacture of nuclear components, increased equity income from investees and approximately $4.4 million of aggregate benefit from various sales of assets, settlements and other items.
At June 30, 2004, BWXT's backlog was $1.6 billion, compared to backlog of $1.8 billion and $1.5 billion at Dec. 31, 2003 and June 30, 2003, respectively.
Unallocated corporate expenses were $20.0 million in the 2004 second quarter, a decrease of $1.2 million compared to the 2003 second quarter. Unallocated corporate expense in the second quarter of 2004 and 2003 included $15.8 million and $18.0 million, respectively, of qualified corporate pension expense.
Other Income and Expense
Net interest expense was $7.3 million in the 2004 second quarter compared to $3.3 million in the 2003 second quarter, due to the issuance of J. Ray's 11 percent senior secured notes in December 2003.
During the 2004 second quarter, revaluation of certain components of the estimated settlement cost related to the Chapter 11 proceedings involving B&W resulted in an increase in the estimated cost of the settlement to $129.3 million, resulting in the recognition of other pretax expense of $4.4 million ($4.0 million after tax). The increase in the second quarter 2004 estimated settlement cost is due primarily to an increase in the closing price of McDermott's common stock from $8.39 per share at March 31, 2004 to $10.16 per share at June 30, 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 second quarter of 2004 was $13.1 million, compared to $4.6 million during the second quarter of 2003. The Company's consolidated net provision for income taxes reflects the tax obligations in many of the jurisdictions in which it operates.
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 second quarter of 2003, the Company recorded income of $0.7 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 $357.3 million in the second quarter of 2004, an increase of $5.0 million compared to the second quarter of 2003. B&W's net income for the 2004 second quarter was $45.2 million, an increase of $97.0 million versus the corresponding period in 2003. The 2003 second quarter included a $70 million pretax charge for an increase in B&W's asbestos liability.
The Company, on a consolidated basis, and J. Ray, on a stand-alone basis, both produced positive cash flow in the second quarter of 2004. As of June 30, 2004, J. Ray's unrestricted cash balance was $93.3 million, a significant improvement compared to the previous expectations of management for the second quarter 2004.
During the 2004 second quarter, J. Ray and McDermott entered into a $25 million accounts receivable sales/purchase facility, which could provide J. Ray additional liquidity, if needed. There have not been any drawings to date under this facility.
In addition, since June 30, 2004, J. Ray has taken several steps which it believes will further enhance its liquidity, including:
On Aug. 4, 2004, J. Ray's available unrestricted cash had improved $21 million since the end of the 2004 second quarter, to approximately $114 million.
As a result of its improved liquidity position and current cash flow forecast, J. Ray has ceased negotiations on the new letter of credit facility it was pursuing. J. Ray believes that a $75-$100 million facility is not necessary to its near term liquidity. J. Ray will continue to cash collateralize letters of credit and will evaluate pursuing additional credit facilities, as the opportunity or need arises.
As of June 30, 2004, J. Ray's restricted cash balance was $134 million, which primarily consisted of approximately $77 million of cash collateral for letters of credit and foreign exchange, $19 million in escrow relating to the sale of the Oceanic 93, $16 million for captive insurance programs and $22 million of temporary interest reserve.
As previously disclosed, there continues to be substantial doubt about J. Ray's ability to continue as a going concern. As discussed in this section, however, J. Ray's outlook regarding its liquidity position has significantly improved since Dec. 31, 2003. In the remaining two quarters of 2004, excluding changes in letters of credit and further asset sales, J. Ray currently expects to incur a cash outflow of approximately $15 million, primarily due to the completion of the spar projects, the Carina Aries project and the Belanak project, for which substantial income statement expenses have already been recorded. The spar projects are now physically complete, and both the Carina Aries and Belanak projects are more than 97 percent complete, and J. Ray believes the risk of further costs overruns impacting its liquidity is significantly reduced.
Completion of these projects has and may continue to put a strain on J. Ray's liquidity. J. Ray intends to fund its negative cash flow anticipated for the remainder of 2004 with its unrestricted cash on hand, and if needed, utilization of the $25 million intercompany accounts receivable sales facility with McDermott. While J. Ray's cash flow was positive in the second quarter, further declines in backlog could have a negative impact on cash flows beyond 2004.
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