Revenues in the third quarter of 2005 were $503.5 million, compared to $450.2 million in the corresponding period in 2004, reflecting increases at both consolidated segments. Operating income was $74.1 million in the 2005 third quarter, compared to $39.8 million in the 2004 third quarter. Operating income for the third quarter of 2005 included approximately $0.2 million of corporate qualified pension expense, compared to $14.1 million of corporate qualified pension expense in the third quarter of 2004. The reduction in corporate qualified pension expense reflects the previously announced spin-off of The Babcock & Wilcox Company ("B&W") pension plan and related expense, which was completed on January 31, 2005. In addition, beginning January 1, 2005, McDermott now allocates to its Government Operations segment the pension expense related to that segment.
"McDermott produced solid results from its two consolidated businesses during the third quarter of 2005, and we continue to expect that B&W will be reconsolidated in our results during early 2006," said Bruce W. Wilkinson, Chairman of the Board and Chief Executive Officer of McDermott. "This was an active quarter for the Company, including the activities associated with the currently proposed B&W settlement and the signing of approximately $1.0 billion of new awards at J. Ray."
As a result of the August 29, 2005 announcement, and the subsequent filing, of a currently proposed plan of reorganization for B&W's Chapter 11 settlement, beginning in the third quarter of 2005, McDermott has suspended recording the quarterly non-cash adjustment associated with B&W's previously negotiated settlement, as the previous plan is no longer considered probable. In the third quarter of 2004, McDermott recorded an after-tax revaluation expense of $1.1 million associated with the revaluation expense of the previously negotiated settlement.
RESULTS OF OPERATIONS 2005 Third Quarter Compared to 2004 Third Quarter
Marine Construction Services Segment ("J. Ray")
Revenues in the Marine Construction Services segment were $360.6 million in the 2005 third quarter, compared to $325.6 million for the same period a year ago. The year-over-year increase in revenues resulted primarily from increased project activity in worldwide marine, the Middle East and Caspian regions, partially offset by decreased fabrication activity on projects in Morgan City, Louisiana.
Segment income for the 2005 third quarter was $63.7 million, compared to $28.6 million in the 2004 third quarter. Major items contributing to operating income in the 2005 third quarter were international marine and fabrication projects. In addition, J. Ray recorded a net benefit to operating income of approximately $36.4 million, primarily related to contract change orders and close-outs of substantially completed projects. The 2004 third quarter included a net benefit of $20.7 million, in aggregate, from favorable contract cost adjustments on certain loss projects, gains on asset sales and other items.
At September 30, 2005, J. Ray's backlog was $1.7 billion, compared to backlog of $1.2 billion and $1.4 billion at December 31, 2004 and September 30, 2004, respectively. During the third quarter of 2005, J. Ray signed contracts for new awards with projected revenue totaling approximately $1.0 billion.
Government Operations Segment ("BWXT")
Revenues in the Government Operations segment increased $18.4 million, to $143.0 million, in the 2005 third quarter, compared to $124.6 million for the same period a year ago. The increase was primarily due to higher volumes in the manufacture of nuclear components for certain U.S. government programs and increased revenues from commercial nuclear environmental services, as well as other commercial work, including increased uranium downblending activity.
Segment income decreased $9.5 million, to $19.3 million, compared to the 2004 third quarter, primarily due to the corporate allocation to BWXT of $5.3 million related to qualified pension expense in the third quarter of 2005, which in 2004 and prior periods was recorded in the corporate segment. In addition, increased expenses related to facility oversight and stock-based compensation were recorded in the 2005 third quarter, partially offset by higher volumes in the manufacture of nuclear components and from commercial nuclear environmental services.
At September 30, 2005, BWXT's backlog was $1.5 billion, compared to backlog of $1.7 billion and $1.5 billion at December 31, 2004 and September 30, 2004, respectively.
Unallocated corporate expenses were $9.3 million in the 2005 third quarter, a decrease of $8.3 million compared to the 2004 third quarter. The decrease was primarily due to a reduction in qualified corporate pension expense during the third quarter of 2005 as a result of the BWXT pension allocation and the spin-off of B&W's pension assets and liabilities into a new B&W-sponsored pension plan.
Other Income and Expense
The Company's other expense for the third quarter of 2005 was $5.4 million, compared to $9.1 million in the third quarter of 2004, which included net interest expense of $3.8 million and $7.6 million in the respective quarters.
As mentioned above, during the 2005 third quarter, McDermott suspended the revaluation of certain components related to the previous settlement cost of the B&W Chapter 11 proceedings. McDermott expects that the currently proposed settlement will be recorded in McDermott's financial statements on the effective date of the currently proposed plan of reorganization. See McDermott's Form 10-Q for the period ending September 30, 2005 for additional information regarding the accounting for the currently proposed B&W settlement.
THE BABCOCK & WILCOX COMPANY
McDermott 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 the Company's financial results since B&W's Chapter 11 bankruptcy filing in February 2000. In accordance with the currently proposed settlement related to B&W's Chapter 11 proceedings, the Company currently expects that B&W will be reconsolidated in early 2006.
During the third quarter of 2005 on a deconsolidated basis, B&W's revenues were $373.1 million, an increase of $94.1 million compared to the third quarter of 2004. In the 2005 third quarter, B&W recorded an estimated net expense of $468.4 million related to the currently proposed Chapter 11 settlement announced on August 29, 2005. As a result of this expense, B&W's operating loss for the third quarter of 2005, prepared in accordance with generally accepted accounting principals ("GAAP"), was $441.6 million. Excluding the net expense related to the Chapter 11 settlement from B&W's GAAP operating income, B&W's non-GAAP operating income for the third quarter of 2005 was $26.7 million(1). During the third quarter of 2005, B&W recorded approximately $6.8 million of pension expense, which in prior years resided in the corporate segment. In the third quarter of 2004, B&W's operating income was $20.6 million.
At September 30, 2005, B&W's backlog was $1.6 billion, compared to backlog of $1.5 billion and $1.3 billion at December 31, 2004 and September 30, 2004, respectively.
(1) Reconciliation of B&W non-GAAP operating income: GAAP Operating Loss of $441.6 million, plus the currently proposed B&W Chapter 11 settlement expense of $468.4 million, for a result of $26.7 million.
About the Company
McDermott International, Inc. is a leading worldwide energy services company. The Company's subsidiaries provide engineering, fabrication, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy and power industries, including the U.S. Department of Energy.
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