Original Source: FD (FAIR DISCLOSURE) WIRE
BRUCE WILKINSON, CHAIRMAN AND CEO, MCDERMOTT INTERNATIONAL INC.: Ladies and gentlemen please take your seats. We're about to begin. Welcome. We appreciate your being here. I know it's the middle of the day, during the trading hours and many of you have also come from outside of the city. And we appreciate your being here.
[Let] me first introduce the speakers that will be with us today. I'm Bruce Wilkinson, the Chairman and CEO of McDermott. With me is John Fees, President of BWX Technologies; Bob Deason, President of J. Ray McDermott; David Keller, President of Babcock & Wilcox Company and Frank Kalman, Executive Vice President and CFO. We also have John Nesser, Executive Vice President, General Counsel with us today, Jay Roueche, Vice President, Investor Relations, [Bobby Belamy and Andrea McNitt].
Each of you are -- we're going to -- take different segments. There is no [inaudible] break. So if anybody feels the need to go check their Blackberry or go to the restroom, just come and go at your will and that will include the speakers when they're not speaking. We'll try to get through it in an orderly fashion, so as to give you time to ask questions. Also, there is a little deck of cards on your desk there, and at the end of the presentation there'll be a pop quiz and we'll see how well you listened.
First, let me remind you that we will be using forward-looking statements. And to consider this presentation when everyone goes on today in the context of our filings with the SEC [Qs, Ks] and otherwise. First, let me tell you that we believe that McDermott viewed in its proper context is an engineering and construction company with specialty manufacturing capabilities. Large, [repeatable] projects are our strength. We have deep long term and diverse client relationships, and we have a strong emphasis on project building and execution.
Some things that make us unique and unlike other E&C companies is first of all we're a pure play on energy. We're focused on coal, nuclear, offshore oil and gas projects. [Inaudible] or other types of infrastructure. We also have more value added services in our business that separate us from [peer] E&C companies. We like to say that we've been more [inaudible] and we keep more of the value chain within our family of companies.
Additionally, McDermott has assets. We have fabrication and manufacturing facilities, marine vessels for offshore oil and gas construction and we have considerable patented and unpatented technology, proprietary technology that we proselytize and we don't simply mechanically apply others' technologies.
We're leaders in our markets. And we have a strong technology and experienced workforce. The management team is conservative. The E&C business is [inaudible] and often unpredictable, and we operate on the percent of completion basis of accounting. The quarters will be quarters that we view -- the way to look at this trending is more annually and even multi-annually. And we do not and have no current intention of changing our plan of [not] providing investor guidance.
We have the three well-known franchise names -- energy companies that we've described to you before. We've described them in their separate states, and today they have to share some of the common themes of the strength in the entire current company and not simply through the individual business units. Bring you up to date on the Babcock & Wilcox Company. I think most of you know that it was deconsolidated from McDermott due to an asbestos to Chapter 11 bankruptcy in 2000. For six years they were in bankruptcy and last August -- 2005 -- we made a revised settlement with the ACC that would allow us to retain the ownership of the company
And on February 22, 2006, six years to the day of filing for bankruptcy, that settlement became effective. And McDermott now still is advocating the passage of the FAIR Act. Were it to pass, it would reduce our settlement costs by about $580 million. During 2006 you will see 10 months of a consolidated result [going] through include the B&W company.
Looking back at this past year, on the consolidated GAAP earnings, we made about $225 million, $2.72 a share. And on a non-GAAP basis if we were to [inaudible] after asbestos charges of B&W, there was about a $300 million operating income on a non-GAAP basis. Some investor highlights [pinpoint] we believe we're a leading worldwide energy services company. We're diversified by [inaudible][source] and we're a leader in our key markets. The multiyear turnaround that we've been through, we've deemed it now over, and we're beginning to think about growth again. We are positioned for growth and I believe we have put together a very strong management team that's committed to building and growing shareholder value.
As a leading worldwide energy services company, we provide engineering, construction, procurement and installation. We have specialty manufacturing operations. We've had services and parts, repetitive businesses [into] our markets and we had a strong facilities management and operations business within BWXT. Looking at the diversification across the energy spectrum, if you look back at 2005 on a revenue basis, again on a non-GAAP basis, putting B&W back into it, you can see about 30% each oil and gas, and coal.
And within the coal, we've also included the commercial nuclear business that's within the B&W Company, primarily in Canada, so that's why we designate the red as coal and nuclear, with nuclear commercial. And then nuclear on the government side would be approximate 20% of revenue. [Inaudible] income without about 30 million charge of unallocated corporate costs, would have been about 330 million, but if you [inaudible] you remember the first quarter just on a backlog basis, it's essentially about a third, a third and a third when you look at it that way, just under 6 billion across the [three] major energy sources.
Part of the turnaround has really been about bringing in new leadership and some [molding] existing key systems that when within the company to give this company new executive leadership and the high grade positions and to institute a much more of a performance and accountability [structure]. In the organization chart, these are not [fix] direct reports, three are operating on the top [inaudible] below you have heard from [inaudible] of this group today.
Later I'll show you some dates when they -- [slathter] down as being part of this turnaround, in reality those dates actually designate when they got that title. So if I just tell you now that Bob Deason in 2003, actually they Dave Keller took over operations at B&W in February, March of '01 and simply got a larger title a year later. John Fees took over BWXT in September of '02 and got the larger title in '03, and likewise Lou Sannino head of HR, took over that role in early '02 and got a larger title later.
[Inaudible] the turnaround is the B&W settlement. We concluded that B&W is strategic to the future of the company, and that this negotiated settlement enables us to keep it. [Inaudible] counting down to the FAIR Act, whether it passes or not as of November 30th, we have already paid the $250 million in cash and if we had that legislation we would have about another $580 million to go. If we have legislation it's only $25 million more to go. Our lease payments are tax deductible, carried forward and carried back.
And we're assuming in our balance sheet in all presentations that there will be no FAIR Act. J. Ray is a spotty performer. There's some major project problems in the early part of -- the early 2000s. We concluded that the problem's more than just projects. They were systemic within the organization and we recruited Bob Deason and he apprehends another 150, 160 people from outside of J. Ray who are in all facets of the company. They've really turned this company around and got it going in the right direction as you can see from the last eight very profitable quarters.
BWXT was performing well, but at a fairly low level. And as I mentioned, John Fees was put in this role September of 2002. And since that time, we have dramatically built up our equity income, which is the [DOE] site business and has really grown the manufacturing businesses as well. And you can see we're achieving over 17% compounded annual growth rate. With B&W there's so many ways to count the revenues and income in [inaudible] simply to show you the buildup of [inaudible]. I mentioned Dave Keller [inaudible] in early 2002. In fact, he was named Executive Vice President and head of the business unit in 2001. And he too has done a great job in turning this business around.
On a capital restructuring basis, in 2003, each of our business units was separately financed. Our current ratings in Moody's and S&P is B plus B1. We have recently announced a tender offer for the $200 million senior secured notes [inaudible] and assuming success of that tender offer, the company will have no funded -- [no] significant funded debt. We will replace the J. Ray facility with a $500 million credit facility to provide [inaudible] and a revolver underneath that.
BWXT continues to operate under its $135 million revolver and [inaudible] facility. And recently earlier this year B&W came out of bankruptcy with a $650 million credit facility to provide uderpinning for its [inaudible] the future. We have done all of this without diluting shareholders with any new equity. Looking at the power generation market going forward, that's primarily the B&W and ultimately commercial nuclear, you see new coal [fired] power plants are on the horizon.
The environmental regulation will continue to drive considerable expenditures and the aging facilities [inaudible] oldest coal fleet of any major country in the world. And of course, high natural gas is good for J. Ray for its business but it's also good for B&W because it drives the utilities back to coal and looking at this chart on the lower right, is simply what the energy information agency and the nuclear energy institute would say that if we [inaudible] to 20/30 and we replicated the current mix of electricity generation, you can see it would be a massive building program. So we see a bright future in the power generation business.
High [inaudible] for the offshore oil and gas construction -- we have oil and natural gas at historic high prices, offshore E&C companies are accelerating expenditures. The existing reserves, particularly in the Gulf of Mexico, are declining and essentially, most of the [inaudible] production has been found and so there's more and more effort in the offshore sector including the deeper offshore -- all of which is good for J. Ray McDermott.
In the government nuclear business, national defense remains a priority. The DOE budgets remain strong. As John Fees will tell you, we are a significant player with the DOE sites, intend to continue growing that business and I think we have some unique technical and management skills that you'll hear more about later that keep us strong in the government nuclear business.
We think that there will be a renaissance in the commercial nuclear business. There are lots of theories about how soon and how big. The lower bar, I believe, represents the most modest scenario which is essentially that the only nuclear plants that would be built are those that have financial assistance provided by the last summer's Energy Act and that essentially there will be two or three and that'll be it. Probably a more realistic one is the middle assumption which would be closer to the earlier chart I referred to.
And so we believe it is coming back. B&W never left the commercial nuclear business in Canada -- continues to be a signficant player in that business which Dave Keller will outline for you. And recently we got back our so-called [inaudible] stamp at both [inaudible] facility and then in Mount Vernon, Indiana. And we believe it makes us really the only US based manufacturer of heavy pressure vessels with current [inaudible] stamps ready to go. We will look at other opportunities including the potential on the acquisition side, because we believe that this business will come back and we're just beginning to evaluate where and how to re-enter this industry.
During the turnaround, the focus was retaining as many assets as we could. In the end we retained them all. Today we're a strong company focused on growth and we will begin to look, not only from within on how to grow the business, but to the outside and consider acquisitions as well. I think the characteristics of any acquisition candidates would be that it stay right in the energy mix that we're in, nuclear, coal, oil and gas. And hopefully things that would reduce some of the cyclicality within those businesses and [smooth] the revenue stream.
McDermott today is a company of about 23,000 employees worldwide, I believe, there are about 135 of us [form] the corporate organization. It's a rather modest size group. But we operate really through four functions; the CEO, overseeing all activities of the business including strategy, leadership and vision. And working with the board. The CFO, covering all the functions you would expect. Office of General Counsel and head of HR and environmental safety and health.
It's a small group, but we operate in a way that provides common governance principles and synergies across the operating units. One of the things we're proudest of particularly starting at J. Ray and have been expanding into B&W, is a consistency on our project bidding discipline. Where we look at key financial metrics when we bid anything. That we be cash flow neutral, that there be appropriate returns for the assumed risk, and that we look at lot at what risks there are -- mitigation plans, some of which maybe can be mitigated simply with price and others have to be mitigated with specific strategies to overcome the contingency, were it to come to pass.
We bid with adequate contingencies and we are striving now to turn contingency into profit and not let it become cost. We have a strong change order management discipline. But it is still a lumpy business and month to month and quarter to quarter, that will be reflected.
So where does all this bring us? We have stated some internal goals for ourselves that I would call a vision. Or a stretch goals that we have committed to each other and to our board, looking out to 2010. First of all, we want to maintain our peer leading operating margins across all these businesses. And hope to achieve operating income level that's essentially double today's level of about 300 million on a non-GAAP basis, looking back at 2005 to get to the -- about 600 million by the year 2010. To do that we would be achieving about a 14 to 15% compound annual growth rate.
Coincident with that, we want during that same time frame to achieve a fully funded pension status to minimize the book charge earnings and the long term volatility on earnings I guess caused by the defined benefits pension plan. And we want to get there by maintaining a strong balance sheet and keeping a debt to book capitalization at 30% or below.
In order to get there, to achieve these financial objectives, we have multiple strategies. The first is to enhance existing assets to exploit the current business cycle. We believe the reality of the current mix of business and the reality of our assets and our people issues is we really can't get to the 600 million simply by running the businesses exactly the way they are, leaving them the same and in effect, milking the cow throughout that time frame.
So we will have to reinvest in these businesses and we've already begun that and you'll hear more about that particularly what Bob Deason and his team have done within J. Ray. We likewise will then need to expand the geographic presence of these businesses. And this is a particular strategy of both J. Ray McDermott and you'll hear some about that from John Fees about the nuclear business opportunities in the UK.
The -- I mentioned we would hope to re-enter the commercial nuclear market. You'll hear a bit more about some of our early thoughts on that from both John Fees and Dave Keller. And I'd mention above that we also expect to make some acquisitions to expand the offering and dilute the cyclicality. And we have to achieve -- do all of this to achieve strong after-tax returns. So that's my overview.
And I will now turn it over to John Fees.
JOHN FEES, PRESIDENT, BWX TECHNOLOGIES: Good morning. BWXT considers itself to be a premiere manager of complex, high consequence nuclear national security operations. And what that means in general is it's must-work applications. If we're in a situation where we're supporting our Navy or we're in a situation where we're supporting the nuclear weapons complex, it's a set of circumstances by which President of the United States could call upon these things to work and they must work.
And so that brings us to become very disciplined operators in terms of what we do and how we produce what we manage. We manage some very complex national security facilities but we also manage facilities that we own and operate. As part of that we are very much a value deliverer. We're in circumstances where we're often competing with ourselves in terms of our ability to be able to reduce our cost and deliver more value -- delivering more value creates opportunities for us to expand and grow our business. And so we have a series of tools and techniques that we use to acquire that.
And in all cases, long term customer relationships and delivering confidence in the work that we do with our clients is very, very important to us as a company. We have been there since the beginning. You can go back to the Manhattan project. You can go back to the early days of [nuclear reactor]. Our work in this particular area goes back into the '40s. We were there when the Nautilus was launched. We were there when the first commercial nuclear reactor was deployed.
So we've been at this for quite some time and our history and our heritage goes back to that. But as this chart depicts, we have not been resting on our laurels. We have continued to build on our heritage and where we've been going as the commercial nuclear industry went into somewhat of a hiatus, post-PMI and went into the service business, we had fundamentally been building our business and been taking our business forward by advancing technology and doing other things.
You can see in the areas that are depicted at the bottom of this slide, we've been moving forward through advanced reactor technology, through [inaudible] site management programs and working ourselves into the NNSA, which is our code word for the nuclear weapons complex. At the top you can see the emergence of some commercial activities, going back into 1992 with the [inaudible] of the high and rich uranium, taking uranium out of nuclear weapon [floorheads] and building uranium that could be used for commercial power generation.
And recently we -- as Bruce indicated -- we had an announcement where we have gone off and recertified ourselves to be able to build ASME code pressure vessels for the nuclear industry and we're the only facility in the United States that has that capability and has those qualifications at this point in time. What that all leads us to is that we are a nuclear technology company. We consider ourselves out at the front edge of nuclear technology and where it's -- that is all going.
We have consistently used tools to be more cost-effective and more cost-efficient. We have a very broad-based support Six Sigma program within our operations and we do not have an operation that isn't -- hasn't not fully effectively implemented Six Sigma and has produced cost efficiencies under that [work]. We are a full life-cycle management company in nuclear. We deal with special nuclear materials, we have - we mangage [spent] fuel. We manage facilities, we do environmental work. So we are a full life-cycle nuclear in terms of our company and we are one of the largest suppliers to the Department of Energy.
We have about 3 -- in excess of 3,000 full time employees, but in addition to that we manage the government sites, typically through joint ventures and we assimilate a number of those people into these joint ventures. That assimilation, when you roll it all up, makes us a little bit over 11,000 people strong in terms of what we do and what we deploy.
We are organized into three operating units. The first operating unit is the nuclear products division. And that focuses on fuel and components. It also builds the research and test [reactor] fuel, that's used across the United States as well as overseas. We have done in that facility the ATU down blending. We've down blended enough ATU to run a typical 1,000 megawatt power reactor for nearly 50 years in a series of contracts that we've done and as I'll indicate there, some more material becoming available for that.
In the nuclear equipment division is the heavy [cache] nuclear cache as well as pressure vessel manufacturing facilities. We employ in excess of 600 people in those operations and we are a specialty designer and manufacturer in that particular area. And the services group does the managing operating contracts. These are the large contracts that we do for the government, where we operate their nuclear weapons infrastructure, some of their nuclear energy development activities as well as some of their national labs.
And we focus on safe [inaudible] and security, as well as commercial programs in those activities and we're …