McDermott Reports Q4 Results, Pleased with Record Backlog

McDermott reported net income of $43.0 million, or $0.19 per diluted share, for the 2008 fourth quarter, compared to net income of $160.0 million, or $0.70 per diluted share, for the corresponding period in 2007. Fourth quarter 2008 net income included approximately $57 million, after-tax, of certain previously announced net expenses. Weighted average common shares outstanding on a fully diluted basis were approximately 230.6 million and 229.8 million in the quarters ended December 31, 2008 and December 31, 2007, respectively.

McDermott's revenues in the fourth quarter of 2008 were $1,664.5 million, an increase of 9.1 percent compared to $1,526.0 million in the corresponding period in 2007. The Company's $138.5 million growth in revenues was provided by a 15.7% and 13.1% increase in the Offshore Oil & Gas Construction and Government Operations segments, respectively.

The Company's operating income was $89.7 million in the 2008 fourth quarter, compared to $186.8 million in the 2007 fourth quarter. As previously announced, the 2008 fourth quarter included approximately $50 million of certain net expenses from the Offshore Oil & Gas Construction and Power Generation Systems segments.

"McDermott's fourth quarter results generally came in at the upper end of the Company's pre-announced range from early February," said John A. Fees, Chief Executive Officer of McDermott. "Although we’re not satisfied with our consolidated results for the second half of 2008, we are pleased that McDermott's backlog remained near record levels, the industries we serve have continued demand for our offerings, our liquidity position at year end provides continued financial flexibility and consolidated bookings and bids remained robust. While we recognize the overall business environment remains in flux, we believe McDermott remains well-positioned in the industries we serve."

At December 31, 2008, McDermott's consolidated backlog was $9.8 billion, compared to $9.8 billion and $9.4 billion at December 31, 2007 and September 30, 2008, respectively.

For the year-ended December 31, 2008, the Company reported consolidated revenues of $6.6 billion, producing operating income of $569.9 million and net income of $429.3 million, or $1.86 per diluted share, the second best year for net income in McDermott's history.

RESULTS OF OPERATIONS

2008 Fourth Quarter Compared to 2007 Fourth Quarter

Offshore Oil & Gas Construction Segment

Revenues in the Offshore Oil & Gas Construction segment were $848.3 million in the 2008 fourth quarter, compared to $733.3 million for the same period a year ago. The year-over-year growth in revenues resulted from increased activities in the Middle East, Asia Pacific and Americas regions, partially offset by reduced activities in the Caspian region.

Segment income for the 2008 fourth quarter was $14.9 million, compared to $100.0 million in the 2007 fourth quarter. As previously disclosed, the 2008 fourth quarter includes approximately $70 million of incurred and expected cost increases recognized during the period on certain Middle East pipeline projects and other procured items, partially offset by a $36 million benefit from the resolution of an outstanding claim.

At December 31, 2008, segment backlog was $4.5 billion, compared to backlog of $4.8 billion and $5.0 billion at December 31, 2007 and September 30, 2008, respectively.

Power Generation Systems Segment

Revenues in the Power Generation Systems segment for the fourth quarter of 2008 were $605.5 million, compared to $608.0 million in the fourth quarter of 2007.

Segment income for the 2008 fourth quarter was $48.7 million, compared to $65.9 million in the 2007 fourth quarter. Major activities contributing to fourth quarter 2008 segment income include the supply and construction of new boilers and environmental equipment, retrofit projects of existing facilities, and related parts and services. In addition, the 2008 fourth quarter included approximately $15 million of the write-down of certain inventories and increased warranty reserves.

At December 31, 2008, segment backlog was $2.5 billion, compared to backlog of $3.3 billion and $2.8 billion at December 31, 2007 and September 30, 2008, respectively.

Government Operations Segment

Revenues in the Government Operations segment were $212.2 million in the 2008 fourth quarter, compared to $187.7 million for the same period a year ago. The improvement was primarily due to increased volumes in the manufacture of nuclear components for certain U.S. Government programs and for a commercial uranium enrichment project.

Segment income for the 2008 fourth quarter was $35.2 million, compared to $33.3 million in the 2007 fourth quarter. Major items contributing to fourth 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 December 31, 2008, segment backlog was $2.9 billion, compared to backlog of $1.8 billion and $1.6 billion at December 31, 2007 and September 30, 2008, respectively.

Corporate & Other Income and Expense

Unallocated corporate expenses were $9.2 million in the 2008 fourth quarter, compared to $12.4 million in the 2007 fourth quarter. The Company's other expense for the fourth quarter of 2008 was $7.1 million, compared to other income of $7.3 million in the fourth quarter of 2007, due to a year-over-year decline in interest income and an approximate $10 million non-cash foreign currency translation expense.

Balance Sheet Items

At December 31, 2008, total assets were approximately $4.6 billion, a 4.3% increase from year-end 2007. McDermott had approximately $1.1 billion in cash, restricted cash, cash equivalents and investments at year-end 2008, approximately $440 million below year-end 2007 levels as a result of approximately $450 million spent on capital expenditures and acquisitions as well as an almost $500 million reduction in current liabilities during the 2008 year. Long-term debt, notes payable and current maturities ended 2008 at approximately $15 million, with over $750 million of credit capacity also available at December 31, 2008. McDermott's pension liability increased approximately $380 million from year-end 2007, primarily resulting from a nearly 20% full-year decline in the market value of pension assets, which will result in approximately $135 million of pension expense expected for 2009, a $90 million increase from 2008. Shareholder's equity increased approximately $150 million during 2008, to end the year at $1.3 billion.
 

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