McDermott International Inc. (MDR)
Q4 2009 Earnings Call Transcript
March 2, 2010 10:00 a.m. ET

Executives

Jay Roueche – Vice President of Investor Relations.
John A. Fees – Chief Executive Officer.
Michael S. Taff – Senior VP & Chief Financial Officer.

Analysts

Graham Mattison - Lazard Capital Markets
Richard Roy - Citigroup
Jamie Cook - Credit Suisse
William Gabrielski - Broadpoint AmTech
Andrew Kaplowitz - Barclays Capital
Martin Malloy - Johnson Rice & Company
Roger Read - Natixis Bleichroeder
Stephen Gengaro - Jefferies & Co.
Joseph Gibney – Capital One Southcoast

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to McDermott International’s fourth quarter 2009 earnings conference call. (Operator Instructions) At this time all participants are in a listen-only mode. Following the company’s prepared remarks we’ll conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to our host, Mr. Jay Roueche, McDermott’s Vice President of Investor Relations. Please go ahead, sir.

Jay Roueche – Vice President of Investor Relations

Thank you Marisol and good morning everyone. We appreciate you joining us to discuss McDermott’s fourth quarter 2009 financial results, which we reported yesterday afternoon and is available on our website. Joining me on the call this morning are John Fees, McDermott’s Chief Executive Officer; and Mike Taff, Senior Vice President and Chief Financial Officer.

Before I turn the call over, I’d like to remind you that today’s event is being recorded and a replay will be available for a limited time on our website. In addition, some of our comments this morning 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-K for the year ended December 31, 2009, for a discussion of the factors that may cause our actual results to differ from management’s projections, forecasts, estimates and expectations.

I’ll now turn the call over to Mike to discuss our results for the 2009 fourth quarter.

Michael S. Taff – Chief Financial Officer

Thanks Jay and good morning everyone. Starting with the income statement, total revenues were almost $1.5 billion, down about $200 million from a year ago on a consolidated basis. While Government Operations had a 20% increase in its top line, the Power Generation Systems segment was down about $170 million and Offshore Oil and Gas Construction was off by almost $80 million.

Consolidated operating income of nearly $123 million in the 2009 fourth quarter was a 37% increase compared to about $90 million a year ago even with a $40 million headwind from pension, research and development, and depreciation and amortization expenses during the 2009 quarter. Additionally we had about $7 million of spin off transaction expenses in our corporate expense in the 2009 quarter and this non-recurring expense will continue until completion of the separations.

Of our three segments, Offshore Oil and Gas Construction generated all of the increase in consolidated operating income. Power Generation Systems, with its reduced top line coupled with severance related one time charges and increased R&D expense saw the most substantial reduction in segment income. Government Operations was down modestly but it could have been much better if not for about $14 million of charges at our Nuclear Fuel Services subsidiary, which we acquired at year end 2008. John will discuss those operations and issues in greater detail shortly.

Below operating income, our results for the quarter were negatively impacted by a $2 million swing in the other income and expense line item compared to the 2008 quarter. Net interest income declined about $5 million. Lower interest rates earned on our cash and investment more than offset the improvement in the other expense, which is primarily a reduced amount of non-cash foreign currency translation losses compared to the prior year’s fourth quarter. All in, pretax income improved by about $32 million in the 2009 fourth quarter compared to the 2008 quarter. With the majority of our income derived from our lower tax international operations, our effective consolidated tax rate dropped to about 17% overall. Last year, the consolidated tax rate was closer to 50%, a combination of more domestic earnings and contract losses in jurisdictions where no tax benefit was received.

Taking it all to the bottom line, McDermott’s reported net income was $98.7 million or $0.42 per diluted share in the 2009 fourth quarter compared to $43 million or $0.19 per share in the 2008 quarter. In total, these results represent a 130% increase in net income over the final quarter of 2008.

Overall, we feel good about the earnings for the 2009’s quarter. Between the segments, however, our results were mixed, so let me review each in a little more detail. The Offshore Oil and Gas Construction segment reported another quarter of stronger than expected results coming in at $97.6 million. This is a huge improvement over the $15 million quarter reported in 2008. Capitalizing on a number of opportunities including contract improvements, a heavy workload throughout the year and the mitigation of risks really helped to drive the quarter. In addition, we benefited from our expectation of lower future costs as we’ve seen some deflation in the industry. All in all, we delivered a very strong performance in this segment. Further, the 12.5% operating margins were outstanding, especially considering about 20% of the segment’s revenues in the quarter were derived from lost contracts. Once again, the income story was in the Middle East and Asia Pacific regions.

Government Operations segment income improved sequentially in the fourth quarter of 2009, but was off modestly compared to the same period a year ago. We generally had strong performance in our site management work, which edged equity income higher compared to the 2008 fourth quarter. This segment also recognized about $17 million in additional pension expense and depreciation and amortization expense compared to the fourth quarter of 2008. And as I mentioned earlier, the ongoing safety enhancements and related stand down of operations resulted in about $14 million of expense that offset profits elsewhere in the segment.