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EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MCDERMOTT INTERNATIONAL INCex31-1.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER - MCDERMOTT INTERNATIONAL INCex32-2.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MCDERMOTT INTERNATIONAL INCex32-1.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - MCDERMOTT INTERNATIONAL INCex31-2.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

(Mark One)
                        F O R M 1 0-Q

X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to______________

Commission File No. 001-08430

McDERMOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

REPUBLIC OF PANAMA
72-0593134
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
   
777 N. ELDRIDGE PKWY.
 
HOUSTON, TEXAS
77079
(Address of Principal Executive Offices)
(Zip Code)

Registrant's Telephone Number, Including Area Code: (281) 870-5901

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ü]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 Yes [ü]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ü]                                                                                      Accelerated filer [   ]
Non-accelerated filer   [   ] (Do not check if a smaller reporting company)           Smaller reporting company [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [  ]     No [P]

The number of shares of the registrant's common stock outstanding at October 30, 2009 was 230,171,481.
 
 





I N D E X  -  F O R M   1 0 - Q

 
PAGE



 
September 30, 2009 and December 31, 2008
4
     
 
Three and Nine Months Ended September 30, 2009 and 2008
 
6
 
 
Three and Nine Months Ended September 30, 2009 and 2008
 
7
 
 
Nine Months Ended September 30, 2009 and 2008
8
     
 
Nine Months Ended September 30, 2009 and 2008
9
     
 
10









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McDERMOTT INTERNATIONAL, INC.




FINANCIAL INFORMATION









McDERMOTT INTERNATIONAL, INC.


ASSETS

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
   
(In thousands)
 
             
             
Current Assets:
           
Cash and cash equivalents
  $ 784,463     $ 586,649  
Restricted cash and cash equivalents (Note 1)
    64,050       50,536  
Investments
    16       131,515  
Accounts receivable – trade, net
    650,350       712,055  
Accounts and notes receivable – unconsolidated affiliates
    4,461       1,504  
Accounts receivable – other
    86,241       139,062  
Contracts in progress
    503,420       311,713  
Inventories (Note 1)
    116,195       128,383  
Deferred income taxes
    90,824       97,069  
Other current assets
    62,932       58,499  
                 
Total Current Assets
    2,362,952       2,216,985  
                 
Property, Plant and Equipment
    2,440,113       2,234,050  
Less accumulated depreciation
    1,250,990       1,155,191  
                 
Net Property, Plant and Equipment
    1,189,123       1,078,859  
                 
Investments
    241,908       319,170  
                 
Goodwill
    292,369       298,265  
                 
Deferred Income Taxes
    278,563       335,877  
                 
Investments in Unconsolidated Affiliates
    86,031       70,304  
                 
Other Assets
    284,698       282,233  
                 
TOTAL
  $ 4,735,644     $ 4,601,693  

 
 
See accompanying notes to condensed consolidated financial statements.



McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS


LIABILITIES AND STOCKHOLDERS' EQUITY

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
   
(In thousands)
 
             
             
Current Liabilities:
           
Notes payable and current maturities of long-term debt
  $ 5,288     $ 9,021  
Accounts payable
    531,398       551,435  
Accrued employee benefits
    237,054       205,521  
Accrued liabilities – other
    194,667       217,486  
Accrued contract cost
    127,857       97,041  
Advance billings on contracts
    708,086       951,895  
Accrued warranty expense
    122,904       120,237  
Income taxes payable
    69,855       55,709  
                 
Total Current Liabilities
    1,997,109       2,208,345  
                 
Long-Term Debt
    5,828       6,109  
                 
Accumulated Postretirement Benefit Obligation
    106,255       107,567  
                 
Self-Insurance
    84,465       88,312  
                 
Pension Liability
    674,047       682,624  
                 
Other Liabilities
    142,842       192,223  
                 
Commitments and Contingencies (Note 3)
               
                 
Stockholders’ Equity:
               
Common stock, par value $1.00 per share, authorized 400,000,000 shares; issued 236,495,637 and 234,174,088 shares at September 30, 2009 and
December 31, 2008, respectively
    236,496       234,174  
Capital in excess of par value
    1,287,764       1,252,848  
Retained earnings
    852,945       564,591  
Treasury stock at cost, 6,103,951 and 5,840,314 shares at September 30, 2009 and December 31, 2008, respectively
    (67,773 )     (63,026 )
Accumulated other comprehensive loss
    (590,565 )     (672,415 )
   Stockholders’ Equity – McDermott International, Inc.
    1,718,867       1,316,172  
   Noncontrolling interest
    6,231       341  
Total Stockholders’ Equity
    1,725,098       1,316,513  
                 
TOTAL
  $ 4,735,644     $ 4,601,693  
 
 
See accompanying notes to condensed consolidated financial statements.


McDERMOTT INTERNATIONAL, INC.

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
 
   
(In thousands, except share and per share amounts)
 
                         
                         
Revenues
  $ 1,675,678     $ 1,664,851     $ 4,733,940     $ 4,907,923  
                                 
Costs and Expenses:
                               
Cost of operations
    1,383,046       1,445,749       3,886,726       4,067,181  
Gains (losses) on asset disposals – net
    323       138       (333 )     (11,322 )
Selling, general and administrative expenses
    160,565       139,512       455,154       404,298  
Total Costs and Expenses
    1,543,934       1,585,399       4,341,547       4,460,157  
                                 
Equity in Income of Investees
    13,050       12,521       31,347       32,443  
                                 
Operating Income (Loss)
    144,794       91,973       423,740       480,209  
                                 
Other Income (Expense):
                               
Interest income – net
    2,179       5,151       9,023       23,792  
Other income (expense) – net
    (3,127 )     2,945       (24,098 )     848  
Total Other Income (Expense)
    (948 )     8,096       (15,075 )     24,640  
                                 
Income before Provision for Income Taxes
    143,846       100,069       408,665       504,849  
                                 
Provision for Income Taxes
    23,793       14,271       112,316       118,253  
                                 
Net Income
    120,053       85,798       296,349       386,596  
                                 
Less: Net Income Attributable to Noncontrolling Interest
    (1,946 )     (227 )     (7,995 )     (296 )
                                 
Net Income Attributable to McDermott International, Inc.
  $ 118,107     $ 85,571     $ 288,354     $ 386,300  
                                 
Earnings per Share:
                               
Basic:
                               
   Net Income Attributable to McDermott International, Inc.
  $ 0.51     $ 0.38     $ 1.26     $ 1.70  
Diluted:
                               
   Net Income Attributable to McDermott International, Inc.
  $ 0.50     $ 0.37     $ 1.24     $ 1.68  
                                 
Shares used in the computation of earnings per share (Note 8):
                               
Basic
    229,989,368       227,440,858       229,192,531       226,645,175  
Diluted
    234,314,619       230,463,651       233,335,605       230,328,423  

See accompanying notes to condensed consolidated financial statements.










McDERMOTT INTERNATIONAL, INC.

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
 
   
(In thousands)
 
                         
                         
Net Income
  $ 120,053     $ 85,798     $ 296,349     $ 386,596  
                                 
Other Comprehensive Income (Loss):
                               
Currency translation adjustments:
                               
Foreign currency translation adjustments
    8,927       (15,036 )     24,878       (8,832 )
Unrealized gains (losses) on derivative financial instruments:
                               
Unrealized gains (losses) on derivative financial instruments
    8,673       (18,923 )     13,438       (15,709 )
Reclassification adjustment for gains included in net income
    (1,306 )     1,058       (1,930 )     (2,692 )
Amortization of benefit plan costs
    15,918       5,275       44,340       18,304  
Unrealized gains (losses) on investments:
                               
Unrealized gains (losses) arising during the period
    1,737       (1,989 )     1,099       (7,611 )
Reclassification adjustment for net (gains) losses
included in net income
    147       (358 )     61       (1,460 )
                                 
Other Comprehensive Income (Loss)
    34,096       (29,973 )     81,886       (18,000 )
                                 
Total Comprehensive Income
    154,149       55,825       378,235       368,596  
                                 
Comprehensive Income Attributable to Noncontrolling Interest
    (1,947 )     (207 )     (8,031 )     (313 )
                                 
Comprehensive Income Attributable to
     McDermott International, Inc.
  $  152,202     $ 55,618     $  370,204     $ 368,283  

See accompanying notes to condensed consolidated financial statements.



McDERMOTT INTERNATIONAL, INC.

                     
Accumulated
                         
         
Capital In
         
Other
         
Stockholders’
   
Non-
   
Total
 
   
Common Stock
   
Excess of
   
Retained
   
Comprehensive
   
Treasury
   
Equity
   
Controlling
   
Stockholders’
 
   
Shares
   
Par Value
   
Par Value
   
Earnings
   
Income (Loss)
   
Stock
   
MII
   
Interest
   
Equity
 
         
(In thousands, except share amounts)
       
Balance December 31, 2008
    234,174,088     $ 234,174     $ 1,252,848     $ 564,591     $ (672,415 )   $ (63,026 )   $ 1,316,172     $ 341     $ 1,316,513  
                                                                         
Net income
    -       -       -       288,354       -       -       288,354       7,995       296,349  
Amortization of benefit plan costs
    -       -       -       -       44,340       -       44,340       -       44,340  
Unrealized gain on investments
    -       -       -       -       1,160       -       1,160       -       1,160  
Translation adjustments
    -       -       -       -       24,842       -       24,842       36       24,878  
Unrealized gain on derivatives
    -       -       -       -       11,508       -       11,508       -       11,508  
Exercise of stock options
    184,158       184       372       -       -       157       713       -       713  
Excess tax benefits on stock options
    -       -       (2,458 )     -       -       -       (2,458 )     -       (2,458 )
Contributions to thrift plan
    773,101       773       10,590       -       -       -       11,363       -       11,363  
Shares returned to treasury
    -       -       -       -       -       (4,904 )     (4,904 )     -       (4,904 )
Accelerated vesting
    1,364,290       1,365       (1,365 )     -       -       -       -       -       -  
Sale of subsidiary shares to
                                                                       
      noncontrolling interest
    -       -       2,086       -       -       -       2,086       (2,086 )     -  
Stock-based compensation charges
    -       -       25,691       -       -       -       25,691       -       25,691  
Distributions to noncontrolling interests
    -       -       -       -       -       -       -       (55 )     (55 )
Balance September 30, 2009
    236,495,637     $ 236,496     $ 1,287,764     $ 852,945     $ (590,565 )   $ (67,773 )   $ 1,718,867     $ 6,231     $ 1,725,098  
                                                                         
Balance December 31, 2007
    231,722,659     $ 231,723     $ 1,145,829     $ 135,289     $ (281,933 )   $ (63,903 )   $ 1,167,005     $ 373     $ 1,167,378  
                                                                         
Net Income
    -       -       -       386,300       -       -       386,300       296       386,596  
Amortization of benefit plan costs
    -       -       -       -       18,304       -       18,304       -       18,304  
Unrealized loss on investments
    -       -       -       -       (9,071 )     -       (9,071 )     -       (9,071 )
Translation adjustments
    -       -       -       -       (8,849 )     -       (8,849 )     17       (8,832 )
Unrealized loss on derivatives
    -       -       -       -       (18,401 )     -       (18,401 )     -       (18,401 )
Exercise of stock options
    1,435,135       1,436       (459 )     -       -       7,092       8,069       -       8,069  
Excess tax benefits on stock options
    -       -       6,404       -       -       -       6,404       -       6,404  
Contributions to thrift plan
    202,619       202       9,647       -       -       -       9,849       -       9,849  
Restricted stock issuances – net
    259,666       259       (259 )     -       -       -       -       -       -  
Purchase of treasury shares
    -       -       -       -       -       (6,234 )     (6,234 )     -       (6,234 )
Stock-based compensation charges
    -       -       30,550       -       -       -       30,550       -       30,550  
Distributions to noncontrolling interests
    -       -       -       -       -       -       -       (310 )     (310 )
Balance September 30, 2008
    233,620,079     $ 233,620     $ 1,191,712     $ 521,589     $ (299,950 )   $ (63,045 )   $ 1,583,926     $ 376     $ 1,584,302  
                                                                         

See accompanying notes to condensed consolidated financial statements.



McDERMOTT INTERNATIONAL, INC.
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
 
   
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Income
  $ 296,349     $ 386,596  
Non-cash items included in net income:
               
Depreciation and amortization
    118,871       95,059  
Income of investees, less dividends
    (11,458 )     (12,592 )
Gains on asset disposals – net
    (333 )     (11,322 )
Provision for deferred taxes
    43,264       87,512  
Amortization of pension and postretirement costs
    68,877       28,424  
Excess tax benefits from FAS 123(R) stock-based compensation
    2,458       (6,404 )
Other, net
    36,736       34,922  
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
               
Accounts receivable
    62,932       21,412  
Income tax receivable
    57,169       10,666  
Net contracts in progress and advance billings on contracts
    (442,373 )     (516,623 )
Accounts payable
    (22,099 )     19,544  
Income taxes
    10,571       (5,335 )
Accrued and other current liabilities
    (1,461 )     57,586  
Pension liability, accumulated postretirement benefit obligation and accrued employee benefits
    13,961       (201,109 )
Other, net
    (36,056 )     (95,421 )
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    197,408       (107,085 )
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Increase in restricted cash and cash equivalents
    (13,514 )     (3,731 )
Purchases of property, plant and equipment
    (190,207 )     (189,384 )
Acquisition of businesses, net of cash acquired
    (8,497 )     (33,731 )
Net decrease (increase) in available-for-sale securities
    208,435       (70,992 )
Proceeds from asset disposals
    2,724       12,023  
Other, net
    (2,676 )     (2,029 )
NET CASH USED IN INVESTING ACTIVITIES
    (3,735 )     (287,844 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment of long-term debt
    (5,652 )     (4,660 )
Increase in short-term borrowing
    1,606       2,920  
Issuance of common stock
    713       8,069  
Payment of debt issuance costs
    (56 )     (1,611 )
Excess tax benefits from FAS 123(R) stock-based compensation
    (2,458 )     6,404  
Other, net
    (109 )     -  
NET CASH (USED IN) PROVIDED BY  FINANCING ACTIVITIES
    (5,956 )     11,122  
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
    10,097       (3,239 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    197,814       (387,046 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    586,649       1,001,394  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 784,463     $ 614,348  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest (net of amount capitalized)
  $ 1,855     $ 5,967  
Income taxes (net of refunds)
  $ 93     $ 49,193  
 
 
See accompanying notes to condensed consolidated financial statements.


McDERMOTT INTERNATIONAL, INC.
SEPTEMBER 30, 2009
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

We have presented our condensed consolidated financial statements in U.S. Dollars in accordance with the interim reporting requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Financial information and disclosures normally included in our financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and the notes in our annual report on Form 10-K for the year ended December 31, 2008.

We have included all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation.  These condensed consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled entities consistent with the Financial Accounting Standards Board (the “FASB”) Topic Consolidation. We use the equity method to account for investments in entities that we do not control, but over which we have significant influence. We generally refer to these entities as “joint ventures.”  We have eliminated all significant intercompany transactions and accounts.  We have reclassified certain amounts previously reported to conform to the presentation at September 30, 2009 and for the three and nine months ended September 30, 2009.  We have evaluated subsequent events through November 9, 2009, the date of issuance of this report.  We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.

McDermott International, Inc. (“MII”), incorporated under the laws of the Republic of Panama in 1959, is an engineering and construction company with specialty manufacturing and service capabilities and is the parent company of the McDermott group of companies, including J. Ray McDermott, S.A. (“JRMSA”) and The Babcock & Wilcox Company (“B&W”).  In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated subsidiaries.

We operate in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems, further described as follows:

·  
Our Offshore Oil and Gas Construction segment includes the business and operations of JRMSA, J. Ray McDermott Holdings, LLC and their respective subsidiaries.  This segment supplies services primarily to offshore oil and gas field developments worldwide, including the front-end design and detailed engineering, fabrication and installation of offshore drilling and production facilities and installation of marine pipelines and subsea production systems.  It also provides comprehensive project management and procurement services.  This segment operates in most major offshore oil and gas producing regions, including the United States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific.

·  
Our Government Operations segment includes the business and operations of BWX Technologies, Inc., Babcock & Wilcox Nuclear Operations Group, Inc., Babcock & Wilcox Technical Services Group, Inc. and their respective subsidiaries. This segment manufactures nuclear components and provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities, primarily within the nuclear weapons complex of the U.S. Department of Energy.

·  
Our Power Generation Systems segment includes the business and operations of Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”), Babcock & Wilcox Nuclear Power Generation Group, Inc. and their respective subsidiaries.  This segment supplies fossil-fired boilers, commercial nuclear steam generators and components, environmental equipment and components, and related services to customers in different regions around the world. It designs, engineers, manufactures, constructs and services large utility and industrial power generation systems, including boilers used to generate steam in electric power plants, pulp and paper making, chemical and process applications and other industrial uses.

Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the
consolidated financial statements and the related footnotes included in our annual report on Form 10-K for the year ended December 31, 2008.
 
Comprehensive Loss

The components of accumulated other comprehensive loss included in stockholders' equity are as follows:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
   
(In thousands)
 
Currency Translation Adjustments
  $ 11,800     $ (13,042 )
Net Unrealized Loss on Investments
    (7,818 )     (8,978 )
Net Unrealized Loss on Derivative Financial Instruments
    (1,730 )     (13,238 )
Unrecognized Losses on Benefit Obligations
    (592,817 )     (637,157 )
Accumulated Other Comprehensive Loss
  $ (590,565 )   $ (672,415 )

Inventories

The components of inventories are as follows:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
   
(In thousands)
 
Raw Materials and Supplies
  $ 85,493     $ 95,593  
Work in Progress
    7,277       12,157  
Finished Goods
    23,425       20,633  
Total Inventories
  $ 116,195     $ 128,383  

Restricted Cash and Cash Equivalents

At September 30, 2009, we had restricted cash and cash equivalents totaling $64.1 million, $51.1 million of which was held in restricted foreign accounts, $4.5 million was held in escrow pending final payment on a legal settlement, $3.6 million was held as cash collateral for letters of credit, $4.3 million was held for future decommissioning of facilities, and $0.6 million was held to meet reinsurance reserve requirements of our captive insurance companies.  It is possible that a significant portion of restricted cash at September 30, 2009 will not be released within the next twelve months.

Warranty Expense

We generally accrue estimated expense to satisfy contractual warranty requirements of our Government Operations and Power Generation Systems segments when we recognize the associated revenue on the related contracts.  We generally include warranty costs associated with our Offshore Oil and Gas Construction segment as a component of our total contract cost estimate to satisfy contractual requirements, and we record the associated expense under the percent-of-completion method of accounting for long-term construction contracts.  In addition, we make specific provisions where we expect the actual warranty costs to significantly exceed the accrued estimates.  Such provisions could have a material effect on our consolidated financial condition, results of operations and cash flows.

The following summarizes the changes in our accrued warranty expense:

   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
 
   
(In thousands)
 
Balance at beginning of period
  $ 120,237     $ 101,330  
Additions and adjustments
    16,651       14,482  
Charges
    (13,984 )     (6,174 )
Balance at end of period
  $ 122,904     $ 109,638  

Research & Development Expense

Research and development activities are related to development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge to cost of operations the costs of research and development unrelated to specific contracts as incurred. Substantially all of these costs are in our Power Generation Systems segment and include costs related to the development of carbon capture and sequestration and our modular and scalable nuclear reactor business, mPower.  For the three months ended September 30, 2009 and 2008, our net research and development expense included in cost of operations totaled approximately $12.8 million and $9.9 million, respectively. For the nine months ended September 30, 2009 and 2008, our net research and development expense totaled approximately $33.9 million and $28.7 million, respectively. We expect to continue significant spending on research and development projects, as we continue development on our carbon capture and sequestration efforts and our commercial nuclear and mPower reactor projects.

Acquisitions

In September 2009, a subsidiary of B&W acquired certain assets of Instrumentation Y Mantenimiento De Caldersa, A.A. for approximately $12.3 million. In connection with this acquisition, we recorded goodwill of approximately $8.5 million, property, plant and equipment of approximately $3.1 million and other current assets of approximately $0.7 million.

In September 2009, we finalized our purchase price allocation for the Nuclear Fuel Services, Inc. acquisition, which we completed on December 31, 2008. The purchase price adjustments included a reduction in goodwill of approximately $16.2 million and an increase in property, plant and equipment of approximately $18.6 million.

Recently Adopted Accounting Standards

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168 – The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162. SFAS No. 168 made the FASB Accounting Standards Codification (the “Codification”) the single source of U.S. GAAP used by nongovernmental entities in preparation of financial statements, except for rules and interpretive releases of the Securities and Exchange Commission (the “SEC”) under authority of federal securities laws, which are the sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for us beginning July 1, 2009. Following SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. In the discussion that follows, references in “italics” relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate.

In May 2009, the FASB issued the Topic Subsequent Events. This section of the Codification incorporates specific accounting and disclosure requirements for subsequent events into U.S. generally accepted accounting principles. The adoption of these provisions did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued a revision to the Topic Business Combinations. This revision amends and clarifies the Topic Business Combinations to address subsequent measurement and accounting for, and disclosure of, assets and liabilities arising from contingencies in a business combination.  On January 1, 2009, we adopted the provisions of this update. The adoption of these provisions did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued a revision to the Topic Financial Instruments. This revision requires disclosures about fair value of financial instruments in notes to interim financial statements as well as annual financial statements.  The notes to our financial statements were updated for this revision.
 
In April 2008, the FASB issued a revision to the Topic Intangibles – Goodwill and Other. This revision requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in
 
renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewals or extensions as adjusted for the entity-specific factors in this topic. On January 1, 2009, we adopted this revision.  The adoption of these provisions did not have a material impact on our consolidated financial statements.

In March 2008, the FASB issued a revision to the Topic Derivatives and Hedging.  This revision requires enhanced disclosures about derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  On January 1, 2009, we adopted  this revision for our disclosures about derivative instruments and hedging activities. The notes to our financial statements were updated for this revision.

In December 2007, the FASB issued a revision to the Topic Consolidation. This revision establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of any retained  noncontrolling equity investment when a subsidiary is deconsolidated.  It also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  On January 1, 2009, we adopted this revision.  Noncontrolling interest has been presented as a separate component of stockholders’ equity for the current reporting period and prior comparative reporting period.

In December 2007, the FASB issued a revision to the Topic Business Combinations. This revision broadens the guidance of this Topic, extending its applicability to all transactions and events in which one entity obtains control over one or more other businesses.  It broadens the fair value measurements and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations.  It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of business combinations.  On January 1, 2009, we adopted the provisions of this revision. The adoption of these provisions did not have a material impact on our consolidated financial statements.

 Accounting Standards Not Yet Adopted

In June 2009, the FASB issued a revision to the topic Consolidation. This revision expands the scope of this topic and amends guidance for assessing and analyzing variable interest entities. This revision will be effective for fiscal years beginning after November 15, 2009. We do not expect this revision to have a material impact on our consolidated financial statements.

Other than as described above, there have been no material changes to the recent pronouncements discussed in our annual report on Form 10-K for the year ended December 31, 2008.

NOTE 2 – PENSION PLANS AND POSTRETIREMENT BENEFITS

Components of net periodic benefit cost included in net income are as follows:

   
Pension Benefits
   
Other Benefits
 
   
Three Months Ended
   
Nine Months Ended
   
Three Months Ended
   
Nine Months Ended
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
 
   
(In thousands)
 
Service cost
  $ 9,824     $ 9,105     $ 29,000     $ 28,645     $ 234     $ 81     $ 696     $ 246  
Interest cost
    40,475       37,856       120,662       115,506       2,169       1,416       6,492       4,259  
Expected return on plan assets
    (37,334 )     (46,859 )     (111,259 )     (138,479 )     (377 )     -       (1,130 )     -  
Amortization of prior service cost
    955       517       2,342       2,054       17       18       49       56  
Amortization of transition obligation
    -       -       -       -       66       71       188       218  
Recognized net actuarial loss
    23,339       7,193       65,088       25,008       405       363       1,214       1,091  
Net periodic benefit cost
  $ 37,259     $ 7,812     $ 105,833     $ 32,734     $ 2,514     $ 1,949     $ 7,509     $ 5,870  


NOTE 3 – COMMITMENTS AND CONTINGENCIES

Other than as noted below, there have been no material changes during the period covered by this Form 10-Q in the status of the legal proceedings disclosed in Note 11 to the consolidated financial statements in Part II of our annual report on Form 10-K for the year ended December 31, 2008.
 
Investigations and Litigation

With regard to the matter of Donald F. Hall and Mary Ann Hall, et al., v. Babcock & Wilcox Company, et al. (the “Hall Litigation”), the parties entered into the final settlement agreement described in our annual report on Form 10-K for the year ended December 31, 2008 (our “2008 10-K”), and that settlement was approved by the United States District Court for the Western District of Pennsylvania (the “District Court”) in April 2009.  In May 2009, B&W PGG paid approximately $52.5 million pursuant to the terms of the final settlement agreement, which is within the amount we have accrued for these claims. Additionally, B&W PGG and Atlantic Richfield Company (“ARCO”), a former defendant in the Hall Litigation, entered into the final settlement agreement described in our 2008 10-K, relating to B&W PGG’s indemnity action against ARCO for any liability as a result of the Hall Litigation.  The indemnity settlement was also approved by the District Court in April 2009.  B&W PGG and Babcock & Wilcox Technical Services Group, Inc., formerly known as B&W Nuclear Environmental Services, Inc., have retained all insurance rights and are pursuing recovery from American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters (“ANI”) of the amounts paid in settlement of the Hall Litigation in the matter of The Babcock & Wilcox Company et al. v. American Nuclear Insurers et al. (the “ANI Litigation”), which is pending before the Court of Common Pleas of Allegheny County, Pennsylvania.  On September 14, 2009, the Court of Common Pleas held a hearing to determine the legal standard to be applied in determining ANI’s insurance coverage obligations with respect to the settlement of the Hall Litigation.  The Court has not yet issued its ruling.

The three separate purported class action complaints against MII, Bruce W. Wilkinson (MII’s former Chief Executive Officer and Chairman of the Board), and Michael S. Taff (the Chief Financial Officer of MII) described in our 2008 10-K have been consolidated. In April 2009, our motion to transfer the consolidated cases to the Southern District of Texas was granted. On May 22, 2009, the plaintiffs filed an amended consolidated complaint, which, among other things, added Robert A. Deason (JRMSA’s President and Chief Executive Officer) as a defendant in the proceedings. On July 1, 2009, MII and the other defendants filed a motion to dismiss the complaint. The plaintiffs filed two responses to the motion to dismiss: (1) a motion to convert the motion to dismiss to a motion for summary judgment and granting the plaintiffs leave to conduct discovery, which was filed on July 10, 2009; and (2) an opposition to the motion to dismiss, which was filed on August 3, 2009.  MII and the other defendants filed: (1) a response to the plaintiffs’ motion to convert on July 30, 2009; and (2) a reply in support of the defendants’ motion to dismiss on August 24, 2009.  On August 28, 2009, the Court denied the plaintiffs’ motion to convert, and, on September 4, 2009, the Court advised us that the motion to dismiss has been referred to a magistrate.  We
 
anticipate that the magistrate will make a recommendation to the Court as to whether to grant or deny the motion to dismiss and, thereafter, the Court will rule on the motion to dismiss.
 
        With regard to the matter of Iroquois Falls Power Corp. v. Jacobs Canada Inc., et al., described in our 2008 10-K, Iroquois Falls Power Corp. (“Iroquois”) filed a notice of appeal of the decision of the Superior Court of Justice which denied the request of Iroquois to amend its complaint and assert new claims against the defendants based on a breach of contractual warranty.   On June 25, 2009, the Court of Appeals for Ontario reversed the decision of the Superior Court sending the case back to the Superior Court for Iroquois to file an amended complaint on those new claims.  On September 21, 2009, we filed a notice to appeal the Court of Appeals’ decision with the Supreme Court of Canada; however, the Court has not scheduled a hearing on the appeal.
 
         For a detailed description of these and other proceedings, please refer to Note 11 to the consolidated financial statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2008.

Other

Some of our contracts contain penalty provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. In many cases in which we have had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers.  As of September 30, 2009, we have liquidated damage contingencies of approximately $100 million based on our failure to meet such specified contractual milestone dates, all in our Offshore Oil and Gas Construction segment, of which $14 million has been recorded in our financial statements.  We do not believe any additional claims for these potential liquidated damages are probable of being assessed. The trigger dates for these potential liquidated damages range from June of 2008 to September 30, 2009.  We are in active discussions with our customers on the issues giving rise to delays in these projects, and we believe we will be successful in obtaining schedule extensions that should resolve the potential for liquidated damages being assessed. However, we may not achieve relief on some or all of the issues.

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS

Our worldwide operations give rise to exposure to market risks from changes in foreign exchange rates.  We use derivative financial instruments (primarily foreign currency forward-exchange contracts) to reduce the impact of changes in foreign exchange rates on our operating results.  We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts and other cash flow exposures that are denominated in currencies other than our operating entities’ functional currencies.  We do not hold or issue financial instruments for trading or other speculative purposes.

We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies.  We record these contracts at fair value on our consolidated balance sheets.  Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either deferred in stockholders’ equity (deficit) as a component of accumulated other comprehensive loss, until the hedged item is recognized in earnings, or offset against the change in fair value of the hedged firm commitment through earnings.  The ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in earnings.  The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings.  Gains and losses on derivative financial instruments that require immediate recognition are included as a component of other income (expense) – net in our consolidated statements of income.

We have designated all of our forward contracts as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in spot exchange rates of forecasted transactions related to long-term contracts and certain capital expenditures.  We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates.  Ineffective portions of our forward contracts are recorded in other income (expense) – net on our Condensed Consolidated Statements of Income. At September 30, 2009, we had deferred approximately $1.7 million of net losses on these derivative financial instruments in accumulated other comprehensive loss. We expect to recognize substantially all of this amount in the next 12 months.
 
At September 30, 2009, all of our derivative financial instruments consisted of foreign currency forward-exchange contracts. The notional value of our forward contracts totaled $336.0 million at September 30, 2009, with maturities extending to December 2011. These instruments consist primarily of contracts to purchase or sell Euros or Canadian Dollars. The fair value of these contracts totaled $1.5 million, all of which are Level 2 in nature (See Note 5). We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. However, when possible, we enter into International Swaps and Derivative Association, Inc. agreements with our hedge counterparties to mitigate this risk.  We also attempt to mitigate this risk by using major financial institutions with high credit ratings and limit our exposure to hedge counterparties based on their credit ratings.  The counterparties to all of our derivative financial instruments are financial institutions included in our credit facilities described in Note 6 to the consolidated financial statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2008. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under these facilities.

The following tables summarize our derivative financial instruments at September 30, 2009 (unaudited):
         
 
Asset Derivatives
September 30, 2009
 
Liability Derivatives
September 30, 2009
 
 
Balance Sheet
Account
 
Fair
Value
 
Balance Sheet Account
 
Fair
Value
 
 
(Unaudited)
(In thousands)
 
Derivatives designated as hedging instruments:
               
     Foreign-exchange contracts
Accounts receivable-other
  $ 7,552  
Accounts payable
  $ 6,365  
                     
Derivatives not designated as hedging instruments:
                   
     Foreign-exchange contracts
Accounts receivable-other
  $ 920  
Accounts payable
  $ 593  

 
The Effect of Derivative Instruments on the Statements of Financial Performance
September 30, 2009
(Unaudited)
(In thousands)
 
   
Three Months
Ended
September 30,
2009
   
Nine Months
Ended
September 30,
 2009
 
Derivatives Designated as Hedges:
           
  Cash Flow Hedges:
           
    Foreign Exchange Contracts:
           
       Amount of gain (loss) recognized in
          other comprehensive income
  $ 10,454     $ 16,061  
                 
       Income (loss) reclassified from accumulated other
          comprehensive loss into income: effective portion
               
Location
               
       Revenues
  $ 507     $ 293  
       Cost of operations
  $ 1,000     $ 2,194  
       Other – net
  $ (95 )   $ 143  
                 
       Gain (loss) recognized in income: portion
          excluded from effectiveness testing
               
Location
               
       Other – net
  $ 671     $ (921 )
                 
Derivatives Not Designated as Hedges:
               
   Foreign Exchange Contracts:
               
       Gain (loss) recognized in income:
               
Location
               
       Other – net
  $ 375     $ (5,972 )

NOTE 5 – FAIR VALUE MEASUREMENTS

The following is a summary of our available-for-sale securities measured at fair value at September 30, 2009 (in thousands) (unaudited):
   
9/30/09
   
Level 1
   
Level 2
   
Level 3
 
Mutual funds
  $ 4,778     $ -     $ 4,778     $ -  
Certificates of deposit
    2,524       -       2,524       -  
U.S. Government and agency securities
    171,863       156,963       14,900       -  
Asset-backed securities and collateralized mortgage obligations
    10,214       -       3,076       7,138  
Corporate notes and bonds
    52,545       -       52,545       -  
Total
  $ 241,924     $ 156,963     $ 77,823     $ 7,138  

The following is a summary of our available-for-sale securities measured at fair value at December 31, 2008 (in thousands) (unaudited):
   
12/31/08
   
Level 1
   
Level 2
   
Level 3
 
Mutual funds
  $ 4,253     $ -     $ 4,253     $ -  
Commercial paper
    19,080       -       19,080       -  
Certificates of deposit
    36,014       -       36,014       -  
U.S. Government and agency securities
    285,420       242,204       43,216       -  
Foreign government bonds
    5,000       -       5,000       -  
Asset-backed securities and collateralized mortgage obligations
    11,375       -       3,919       7,456  
Corporate notes and bonds
    52,545       -       89,543       -  
Total
  $ 450,685     $ 242,204     $ 201,025     $ 7,456  
 
Changes in Level 3 Instrument

The following is a summary of the changes in our Level 3 instrument measured on a recurring basis for the period ended September 30, 2009 (in thousands):

Balance, beginning of the year
  $ 7,456  
Total realized and unrealized gains (losses):
       
Included in other income (expense)
    (1 )
Included in other comprehensive income
    1,476  
Purchases, issuances and settlements
    -  
Principal repayments
    (1,793 )
Balance, end of period
  $ 7,138  

Other Financial Instruments

We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments, as follows:

Cash and cash equivalents and restricted cash and cash equivalents.  The carrying amounts that we have reported in the accompanying consolidated balance sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values.

Long-term and short-term debt.  We base the fair values of debt instruments on quoted market prices.  Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms.

The estimated fair values of our financial instruments are as follows:

   
September 30, 2009
   
December 31, 2008
 
   
Carrying
Amount
   
Fair Value
   
Carrying
 Amount
   
Fair Value
 
   
(Unaudited)
 
   
(In thousands)
 
                         
Balance Sheet Instruments
                       
Cash and cash equivalents
  $ 784,463     $ 784,463     $ 586,649     $ 586,649  
Restricted cash and cash equivalents
  $ 64,050     $ 64,050     $ 50,536     $ 50,536  
Investments
  $ 241,924     $ 241,924     $ 450,685     $ 450,685  
Debt
  $ 11,116     $ 11,299     $ 15,130     $ 15,221  
Forward contracts
  $ 1,514     $ 1,514     $ (26,291 )   $ (26,291 )

NOTE 6 – STOCK-BASED COMPENSATION

Total stock-based compensation expense recognized for the three and nine months ended September 30, 2009 and 2008 was as follows:

   
Compensation
   
Tax
   
Net
 
   
Expense
   
Benefit
   
Impact
 
   
(Unaudited)
 
   
(In thousands)
 
                   
   
Three Months Ended September 30, 2009
 
Stock Options
  $ 900     $ (303 )   $ 597  
Restricted Stock
    1,160       (370 )     790  
Performance Shares
    3,945       (1,309 )     2,636  
Performance and Deferred Stock Units
    2,469       (817 )     1,652  
Total
  $ 8,474     $ (2,799 )   $ 5,675  
                         
   
Three Months Ended September 30, 2008
 
Stock Options
  $ 14     $ (5 )   $ 9  
Restricted Stock
    1,127       (305 )     822  
Performance Shares
    8,084       (2,578 )     5,506  
Performance and Deferred Stock Units
    (37 )     14       (23 )
Total
  $ 9,188     $ (2,874 )   $ 6,314  
                         
   
Nine Months Ended September 30, 2009
 
Stock Options
  $ 1,959     $ (658 )   $ 1,301  
Restricted Stock
    4,538       (1,098 )     3,440  
Performance Shares
    15,341       (5,203 )     10,138  
Performance and Deferred Stock Units
    6,347       (2,106