McDermott International, Inc. (MDR)
Q2 2008 Earnings Call
August 12, 2008, 10:00 AM ET

Executives
Jay Roueche – Vice President of Investor Relations
Michael S. Taff - Senior Vice President and Chief Financial Officer
Bruce W. Wilkinson - Chairman and Chief Executive Officer

Analysts
Andrew Kaplowitz - Lehman Brothers
Stephen Gengaro - Jefferies & Company
Roger Read - Natexis Bleichroeder
John Rogers - D.A. Davidson
Martin Malloy - Johnson Rice & Company
Tahira Afzal - KeyBanc Capital Markets
Chase Becker - Credit Suisse
Joe Gibney - Capital One Southcoast

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to McDermott International''s Second Quarter 2008 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the conference over to our host, Mr. Jay Roueche, McDermott''s Vice President of Investor Relations. Please go ahead.

Jay Roueche

Thanks, Lacy, and good morning, everyone. We appreciate your participation in McDermott''s second quarter 2008 earnings conference call to discuss the financial results which we reported yesterday. With me on the call this morning are Bruce Wilkinson, Chairman and CEO of McDermott and Mike Taff, Senior Vice President and Chief Financial Officer.

Before turning the call over to Mike, let me remind you that today''s event has been recorded and a replay will be available for a limited time on our website. In addition, some of the comments today will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our recently filed Form 10-Q, as well as our Form 10-K for the year ended December 31, 2007 for a discussion of the factors that may cause actual results to differ from management''s projections, forecasts, estimates, and expectations.

I''ll now turn the call over to Mike for the financial overview.

Michael S. Taff

Thanks Jay and good morning everyone. In the 2008 second quarter, McDermott set an all-time record in terms of consolidated net income, operating income, and revenues for a quarter during which the Company reported net income of $177.5 million or $0.77 per diluted share. This amount is almost 19% above last year’s $149.4 million or $0.66 per share, which included approximately $50 million in one-time benefits from contract cancellations and settlements in our Power business.

Looking at the top line, revenues were almost $1.8 billion, approximately 26% above a year ago. This increase came predominantly from the Offshore Oil and Gas Construction segment where revenues were up 50% or almost $300 million. In addition, our other segments, Power Generation Systems and Government Operations also reported revenue growth adding a combined $82 million to a year ago levels.

McDermott''s operating income was $231.1 million in the second quarter of 2008 compared to $181.8 million a year ago. Strong increases in segment income at Power Generation Systems and Government Operations led the way representing approximately 88% of the consolidated improvement while Offshore Oil and Gas Construction improved more modestly.

Our provision for income tax increased about $22 million compared to the second quarter a year ago, reflecting both the $50 million increase in pre-tax income and an unfavorable shift to higher tax jurisdictions. Anyone who follows McDermott knows that forecasting our provision for income tax is challenging because we operate in many different taxing jurisdictions, forecasting where McDermott will makes its money is just as important as how much for tax purposes. In the 2008 second quarter, since our U.S.-based subsidiaries posted record results, it brought our average tax rate up to over 26.4% from 21.9% in the second quarter a year ago.

While Bruce will cover most of the business items, I will give a quick overview of the components of McDermott''s $231 million of operating income. Offshore Oil and Gas Construction had segment income of $98 million or about 44...42% of our total, well above the weather affected first quarter of 2008, an improvement to a year ago. For the second consecutive quarter, Government Operations produced its highest segment income since inception with $42.5 million in the quarter. It was another strong quarter from our site management activities, which largely comes through as equity income, as well as higher volumes in the manufacture of nuclear components, both for commercial and government use, and we had some timing benefits on procurement contracts, which brought forward about $40 million in revenues.

Power Generation Systems reported an outstanding quarter as well at approximately a $106 million in segment income, clearly its best in history. Improved profitability on existing contracts within our boiler and environmental retrofit project portfolio coupled with the associated percentage of completion effect and combined with a high level of parts and service work drove the quarter and its 15% margins. While we wouldn''t suggest this level of operating margin every quarter, we have increased our expectations for this segment now to the 7% to 10% operating margin range as it continues to demonstrate solid performance.

Now turning quickly to the balance sheet. We ended the quarter with over $1.3 billion in cash and investments. Changes in working capital was the primary reason, cash and investments declined about $100 million sequentially as we are working off some of the advance billings we''ve built up. Despite the turmoil in the overall credit market, McDermott is well positioned from a liquidity standpoint. In addition to our solid cash and investment position, we have several years left on our existing credit facilities and we recently were upgraded by both of the major credit rating agencies. Together this provides a sound foundation to pursue McDermott''s growth initiatives. In that regard, we''ve been active recently on the acquisition front. We recently completed our announced plans for three transactions with a combined value in the $200 million range. We closed the acquisition of the Intech group of companies in July to expand B&W''s capability in servicing the U.S. commercial nuclear service market strengthening its position in the Canadian nuclear service market and enhance its position in inspection of fossil plant customers. Much like our fossil power business, we want to keep coming back to the nuclear plants beyond just a peer OEM offering and Intech helps us accomplish that goal. The largest proposed transaction of the three is our recently announced planned acquisition of Nuclear Fuel Services or NFS. This is a business that is part of the supply chain in our government component work and is a complement to our site management and operations activity for the Department of Energy and combined it strengthens our advanced nuclear efforts. Bottom line, NFS is a really good fit for us.

The last purchase, which we closed last week, is Delta Power. Delta Power provides operations and maintenance services to nine different power plants and we see this business as the platform to grow our ability to serve larger plants and there are a number of these opportunities on the horizon. In addition, Delta Power provides the opportunity for follow through with our aftermarket sales of parts and service work while strengthening our biomass and waste-to-energy offerings and diversifying us into gas. Clearly, our game plan is to grow each of these three businesses. We are excited about each of them and are pleased to have them join McDermott.

Let me now turn the call over to Bruce for his business and operational update.