McDermott's Earnings Down in Third Quarter

McDermott International, Inc. has reported net income of $85.6 million, or $0.37 per diluted share, for the 2008 third quarter, compared to net income of $140.4 million, or $0.61 per diluted share, for the corresponding period in 2007. Weighted average common shares outstanding on a fully diluted basis were approximately 230.5 million and 228.9 million in the quarters ended September 30, 2008 and September 30, 2007, respectively.

McDermott's revenues in the third quarter of 2008 were $1,664.9 million, an increase of 25.7 percent compared to $1,324.0 million in the corresponding period in 2007. Each of McDermott's three segments grew revenues in the 2008 third quarter compared to the 2007 third quarter, led by a 39.9 percent increase in the Offshore Oil & Gas Construction segment.

The Company's operating income was $92.0 million in the 2008 third quarter, compared to $155.2 million in the 2007 third quarter. A $44.4 million combined improvement from the Government Operations and Power Generation Systems segments was more than offset by a $107.8 million decline in the Offshore Oil & Gas Construction segment, primarily as a result of increased costs experienced and expected on three marine pipeline installation projects in Qatar.

"While I am pleased with the strong performance of our Power Generation Systems and Government Operations segments, clearly the overall results for McDermott are disappointing this quarter," said John A. Fees, who became Chief Executive Officer of McDermott on October 1, 2008. "We have experienced continued deterioration, and are forecasting lower future productivity, on a number of Offshore Oil & Gas Construction contracts, primarily Middle East marine pipeline installation projects. We have spent significant time analyzing these projects, which is reflected in our revised project estimates. Our Offshore Oil & Gas Construction segment's profitability over the next year will be affected by these projects, as we now expect to generate segment margins in the 6-8% range over the next 4-5 quarters. However, the overall market for new offshore projects in the oil & gas industry remains solid."

At September 30, 2008, McDermott's consolidated backlog was $9.4 billion, compared to $9.3 billion and $9.8 billion at September 30, 2007 and June 30, 2008, respectively.

RESULTS OF OPERATIONS

2008 Third Quarter Compared to 2007 Third Quarter

Offshore Oil & Gas Construction Segment

Revenues in the Offshore Oil & Gas Construction segment were $814.7 million in the 2008 third quarter, compared to $582.2 million for the same period a year ago. The year-over-year increase in revenues resulted from increased activities in the Middle East and Asia Pacific regions, partially offset by reduced activities in the Caspian region.

Segment loss for the 2008 third quarter was $19.7 million, compared to segment income of $88.1 million in the 2007 third quarter. The 2008 third quarter loss is attributable to recognizing approximately $90 million of contract losses on the expected costs to complete various projects, primarily in the Middle East region. These losses derived from revised cost estimates due to lower experienced and forecasted productivity, combined with increased downtime and third-party costs, primarily on the Middle East marine pipeline installation projects.

At September 30, 2008, segment backlog was $5.0 billion, compared to backlog of $4.9 billion and $5.3 billion at September 30, 2007 and June 30, 2008, respectively.

Power Generation Systems Segment

Revenues in the Power Generation Systems segment for the third quarter of 2008 were $631.0 million, compared to $567.2 million in the third quarter of 2007. The increase in revenues resulted primarily from a higher level of retrofit activity on existing facilities, nuclear service activities, and replacement part sales.
Segment income for the 2008 third quarter was $84.4 million, compared to $49.4 million in the 2007 third quarter. Major activities contributing to third quarter 2008 segment income include the supply and construction of new boilers and environmental equipment, including contract improvements and close-outs, retrofit projects of existing facilities, and related parts and services.

At September 30, 2008, segment backlog was $2.8 billion, compared to backlog of $3.0 billion and $3.0 billion at September 30, 2007 and June 30, 2008, respectively.

Government Operations Segment

Revenues in the Government Operations segment were $222.4 million in the 2008 third quarter, compared to $177.2 million for the same period a year ago. The improvement was primarily due to increased volumes and procurement activity in the manufacture of nuclear components for certain U.S. Government programs, and higher levels of nuclear components for a commercial uranium enrichment project.

Segment income for the 2008 third quarter was $34.6 million, compared to $25.2 million in the 2007 third quarter. Major items contributing to third quarter 2008 segment income include the manufacture of nuclear components for certain U.S. Government programs, the manufacture of nuclear components for a commercial uranium enrichment project, and the management and operations of various U.S. Government sites.
At September 30, 2008, segment backlog was $1.6 billion, compared to backlog of $1.4 billion and $1.5 billion at September 30, 2007 and June 30, 2008, respectively.

Corporate & Other Income and Expense

Unallocated corporate expenses were $7.3 million in the 2008 third quarter, compared to $7.6 million in the 2007 third quarter. The Company's other income for the third quarter of 2008 was $7.9 million, compared to $13.6 million in the third quarter of 2007, due to a year-over-year decline in interest income.

Comments on Global Financial Markets

"McDermott is well-positioned in the current credit and financial markets and our end-markets remain active based upon the long-term worldwide demand for energy," continued Fees. "Our backlog does not appear to be contingent upon customers obtaining additional credit for their projects, and there have been no material discussions regarding customer delays or cancellations of existing projects. We are also not aware of any material customer, vendor or supplier that is unable to fulfill their obligations to us due to lack of credit availability. During this time, however, we view liquidity as paramount. We have a strong cash balance available to the Company and committed credit facilities with several years until maturity."
 

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