Attached files

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EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INCmdr-ex121_8.htm
EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INCmdr-ex322_7.htm
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INCmdr-ex321_6.htm
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INCmdr-ex312_9.htm
EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INCmdr-ex311_11.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ

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

For the quarterly period ended June 30, 2015

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
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

757 N. ELDRIDGE PKWY
HOUSTON, TEXAS

 

77079

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (281) 870-5000

 

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  þ    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 þ    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

þ

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   þ

The number of shares of the registrant’s common stock outstanding at August 6, 2015 was 238,882,610.

 

 

 

 

 


 

McDERMOTT INTERNATIONAL, INC.

INDEX—FORM 10-Q

 

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

(Unaudited)

 

 

(In thousands, except share and per share amounts)

 

Revenues

$

1,046,537

 

 

$

476,083

 

 

$

1,597,000

 

 

$

1,079,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

925,522

 

 

 

432,298

 

 

 

1,400,981

 

 

 

1,023,791

 

Selling, general and administrative expenses

 

47,793

 

 

 

53,444

 

 

 

99,469

 

 

 

105,408

 

Loss (gain) on disposal of assets

 

1,910

 

 

 

(35,105

)

 

 

1,543

 

 

 

(41,544

)

Impairment loss (gain)

 

6,808

 

 

 

(10,664

)

 

 

6,808

 

 

 

(10,664

)

Restructuring expenses

 

15,391

 

 

 

1,263

 

 

 

25,780

 

 

 

7,388

 

Total costs and expenses

 

997,424

 

 

 

441,236

 

 

 

1,534,581

 

 

 

1,084,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Investments in Unconsolidated Affiliates

 

(7,481

)

 

 

(3,322

)

 

 

(14,222

)

 

 

(2,199

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

41,632

 

 

 

31,525

 

 

 

48,197

 

 

 

(6,684

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(12,985

)

 

 

(38,745

)

 

 

(25,164

)

 

 

(38,684

)

Gain on foreign currency, net

 

1,943

 

 

 

6,622

 

 

 

475

 

 

 

2,540

 

Other expense, net

 

(359

)

 

 

(312

)

 

 

(456

)

 

 

(577

)

            Total other expense

 

(11,401

)

 

 

(32,435

)

 

 

(25,145

)

 

 

(36,721

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes and noncontrolling interests

 

30,231

 

 

 

(910

)

 

 

23,052

 

 

 

(43,405

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

16,541

 

 

 

4,788

 

 

 

21,410

 

 

 

8,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

13,690

 

 

 

(5,698

)

 

 

1,642

 

 

 

(51,682

)

Less: net income attributable to noncontrolling interest

 

2,164

 

 

 

1,699

 

 

 

4,623

 

 

 

2,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to McDermott International, Inc.

$

11,526

 

 

$

(7,397

)

 

$

(2,981

)

 

$

(53,917

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to McDermott International, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.05

 

 

$

(0.03

)

 

$

(0.01

)

 

$

(0.23

)

Diluted

$

0.04

 

 

$

(0.03

)

 

$

(0.01

)

 

$

(0.23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in the computation of income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

238,332,012

 

 

 

237,395,580

 

 

 

237,918,366

 

 

 

237,178,369

 

Diluted:

 

289,689,981

 

 

 

237,395,580

 

 

 

237,918,366

 

 

 

237,178,369

 

 

See accompanying notes to the Consolidated Financial Statements.

3


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

(in thousands)

 

Net income (loss)

 

$

13,690

 

 

$

(5,698

)

 

$

1,642

 

 

$

(51,682

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

4

 

 

 

31

 

 

 

16

 

 

 

7

 

Foreign currency translation adjustment

 

 

(4,944

)

 

 

(939

)

 

 

(6,986

)

 

 

(1,260

)

Gain on derivatives

 

 

27,559

 

 

 

737

 

 

 

10,674

 

 

 

15,266

 

Other comprehensive income (loss), net of tax

 

 

22,619

 

 

 

(171

)

 

 

3,704

 

 

 

14,013

 

Total comprehensive income (loss)

 

 

36,309

 

 

 

(5,869

)

 

 

5,346

 

 

 

(37,669

)

Less: comprehensive income attributable to non-controlling interests

 

 

2,117

 

 

 

1,701

 

 

 

4,543

 

 

 

2,204

 

Comprehensive income (loss) attributable to McDermott International, Inc.

 

$

34,192

 

 

$

(7,570

)

 

$

803

 

 

$

(39,873

)

 

See accompanying notes to the Consolidated Financial Statements.

4


 

  

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

(In thousands, except shares and par value data)

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

576,575

 

 

$

665,309

 

Restricted cash and cash equivalents

 

 

194,427

 

 

 

187,585

 

Accounts receivable – trade, net

 

 

287,264

 

 

 

143,370

 

Accounts receivable  – other

 

 

67,727

 

 

 

79,915

 

Contracts in progress

 

 

400,720

 

 

 

357,617

 

Deferred income taxes

 

 

10,398

 

 

 

7,514

 

Other current assets

 

 

43,837

 

 

 

46,071

 

Total Current Assets

 

 

1,580,948

 

 

 

1,487,381

 

Property, Plant and Equipment

 

 

2,455,604

 

 

 

2,487,815

 

Less Accumulated depreciation

 

 

(837,739

)

 

 

(830,467

)

Net Property, Plant and Equipment

 

 

1,617,865

 

 

 

1,657,348

 

Accounts Receivable – Long-Term Retainages

 

 

140,867

 

 

 

137,468

 

Investments in Unconsolidated Affiliates

 

 

28,849

 

 

 

38,186

 

Deferred Income Taxes

 

 

13,713

 

 

 

17,313

 

Investments

 

 

1,056

 

 

 

2,216

 

Other Assets

 

 

101,241

 

 

 

76,967

 

Total Assets

 

$

3,484,539

 

 

$

3,416,879

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

27,690

 

 

$

27,026

 

Accounts payable

 

 

326,765

 

 

 

219,384

 

Accrued liabilities

 

 

428,149

 

 

 

369,749

 

Advance billings on contracts

 

 

113,086

 

 

 

199,865

 

Deferred income taxes

 

 

17,822

 

 

 

19,753

 

Income taxes payable

 

 

24,921

 

 

 

25,165

 

Total Current Liabilities

 

 

938,433

 

 

 

860,942

 

Long-Term Debt

 

 

826,472

 

 

 

837,443

 

Self-Insurance

 

 

18,793

 

 

 

17,026

 

Pension Liability

 

 

17,253

 

 

 

18,403

 

Non-current Income Taxes

 

 

48,602

 

 

 

49,229

 

Other Liabilities

 

 

82,180

 

 

 

94,722

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, par value $1.00 per share, authorized

 

 

 

 

 

 

 

 

400,000,000 shares; issued and outstanding 246,682,747 and 245,209,850 shares, respectively

 

 

246,683

 

 

 

245,210

 

Capital in excess of par value (including prepaid common stock purchase contracts)

 

1,684,395

 

 

 

1,676,815

 

Accumulated Deficit

 

 

(242,553

)

 

 

(239,572

)

Treasury stock, at cost: 7,802,013 and 7,400,027 shares, respectively

 

 

(97,076

)

 

 

(96,441

)

Accumulated other comprehensive loss

 

 

(94,024

)

 

 

(97,808

)

Stockholders' Equity - McDermott International, Inc.

 

 

1,497,425

 

 

 

1,488,204

 

Noncontrolling interest

 

 

55,381

 

 

 

50,910

 

Total Equity

 

 

1,552,806

 

 

 

1,539,114

 

Total Liabilities and Equity

 

$

3,484,539

 

 

$

3,416,879

 

 

See accompanying notes to the Consolidated Financial Statements.

5


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

Six Month Ended June 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,642

 

 

$

(51,682

)

Non-cash items included in net income (loss):

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

51,371

 

 

 

46,247

 

Drydock amortization

 

 

9,658

 

 

 

9,966

 

Stock-based compensation charges

 

 

9,891

 

 

 

10,352

 

Loss from investments in unconsolidated affiliates

 

 

14,222

 

 

 

2,199

 

Loss (gain) on asset disposals

 

 

1,543

 

 

 

(41,544

)

Impairment loss (gain)

 

 

6,808

 

 

 

(10,664

)

Restructuring expense (gain)

 

 

9,153

 

 

 

(982

)

Deferred taxes

 

 

(1,215

)

 

 

(4,375

)

Other non-cash items

 

 

(495

)

 

 

(2,868

)

Changes in assets and liabilities, net of effects from acquisitions and dispositions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(147,293

)

 

 

86,305

 

Net contracts in progress and advance billings on contracts

 

 

(129,932

)

 

 

(88,771

)

Accounts payable

 

 

120,586

 

 

 

(31,756

)

Accrued and other current liabilities

 

 

48,380

 

 

 

(9,706

)

Pension liability and accrued postretirement and employee benefits

 

 

(942

)

 

 

9,563

 

Other assets and liabilities

 

 

(19,443

)

 

 

(15,195

)

TOTAL CASH USED IN OPERATING ACTIVITIES

 

 

(26,066

)

 

 

(92,911

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(47,985

)

 

 

(154,957

)

Increase in restricted cash and cash equivalents

 

 

(6,842

)

 

 

(166,219

)

Purchases of available-for-sale securities

 

 

-

 

 

 

(1,997

)

Sales and maturities of available-for-sale securities

 

 

2,875

 

 

 

11,303

 

Investments in unconsolidated affiliates

 

 

(4,783

)

 

 

(2,370

)

Proceeds from asset dispositions

 

 

10,510

 

 

 

53,704

 

Other

 

 

(232

)

 

 

(2,706

)

TOTAL CASH USED IN INVESTING ACTIVITIES

 

 

(46,457

)

 

 

(263,242

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

-

 

 

 

1,337,500

 

Repayment of debt

 

 

(13,402

)

 

 

(285,705

)

Debt issuance cost

 

 

-

 

 

 

(45,521

)

Distribution to noncontrolling interest

 

 

(24

)

 

 

(3,754

)

Other

 

 

(1,437

)

 

 

(1,244

)

TOTAL CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

(14,863

)

 

 

1,001,276

 

 

 

 

 

 

 

 

 

 

EFFECTS OF EXCHANGE RATE CHANGES ON CASH

 

 

(1,348

)

 

 

209

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(88,734

)

 

 

645,332

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

665,309

 

 

 

118,702

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

576,575

 

 

$

764,034

 

 

 

See accompanying notes to the Consolidated Financial Statements.

 

 

 

6


 

 McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

in Excess

 

 

Accumulated

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

Noncontrolling

 

 

Total

 

 

Shares

 

 

Par Value

 

 

of Par Value

 

 

Deficit

 

 

Loss ("AOCI")

 

 

Stock

 

 

Equity

 

 

Interest ("NCI")

 

 

Equity

 

 

(Unaudited)

 

 

(In thousands, except shares)

 

Balance at December 31, 2014

 

245,209,850

 

 

$

245,210

 

 

$

1,676,815

 

 

$

(239,572

)

 

$

(97,808

)

 

$

(96,441

)

 

$

1,488,204

 

 

$

50,910

 

 

$

1,539,114

 

Net income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,981

)

 

 

-

 

 

 

-

 

 

 

(2,981

)

 

 

4,623

 

 

 

1,642

 

Other comprehensive income (loss), net of tax

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,784

 

 

 

-

 

 

 

3,784

 

 

 

(80

)

 

 

3,704

 

Exercise of stock options

 

196,340

 

 

 

196

 

 

 

484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

680

 

 

 

 

 

 

 

680

 

Share vesting

 

1,282,118

 

 

 

1,282

 

 

 

(1,282

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation charges

 

-

 

 

 

-

 

 

 

8,330

 

 

 

-

 

 

 

-

 

 

 

813

 

 

 

9,143

 

 

 

-

 

 

 

9,143

 

Acquisition of noncontrolling interest

 

-

 

 

 

-

 

 

 

48

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

48

 

 

 

(72

)

 

 

(24

)

Purchase of treasury shares

 

(5,561

)

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,448

)

 

 

(1,453

)

 

 

-

 

 

 

(1,453

)

Balance at June 30, 2015

 

246,682,747

 

 

$

246,683

 

 

$

1,684,395

 

 

$

(242,553

)

 

$

(94,024

)

 

$

(97,076

)

 

$

1,497,425

 

 

$

55,381

 

 

$

1,552,806

 

 

See accompanying notes to the Consolidated Financial Statements.

 

 

 

7


 

 

 

 

 

8


McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

 

NOTE 1—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

McDermott International, Inc. (“MII”), a corporation incorporated under the laws of the Republic of Panama in 1959, is an engineering, procurement, construction and installation (“EPCI”) company focused on designing and executing complex offshore oil and gas projects worldwide. Providing fully integrated EPCI services, we deliver fixed and floating production facilities, pipeline installations and subsea systems from concept to commissioning. Operating in approximately 20 countries across the Americas, Europe, Africa, the Middle East and Asia, our integrated resources include a diversified fleet of marine vessels, fabrication facilities and engineering offices. We report our financial results under three reporting segments, consisting of the Americas, Europe and Africa (“AEA”) segment, the Middle East (“MEA”) segment and the Asia (“ASA”) segment. We support our activities with comprehensive project management and procurement services, while utilizing our fully integrated capabilities in both shallow water and deepwater construction. Our customers include national, major integrated and other oil and gas companies, and we operate in most major offshore oil and gas producing regions throughout the world. We execute our contracts through a variety of methods, principally fixed-price, but also including cost reimbursable, cost-plus, day-rate and unit-rate basis or some combination of those methods. In these notes to our accompanying unaudited Consolidated Financial Statements, unless the context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated subsidiaries.

Basis of Presentation

The accompanying Consolidated Financial Statements are unaudited and have been prepared from our books and records in accordance with Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of our management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of results of operations for a full year. These Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and notes thereto included in MII’s Current Report on Form 8-K filed with the SEC on May 11, 2015.

Classification

During the quarter ended September 30, 2014, we committed to a plan to sell certain vessel equipment, including dynamic positioning thrusters and a deepwater pipelay winch system.  These assets were classified as held for sale in subsequent quarterly and annual financial statements.  In June 2015, we reclassified these assets as held for use in Property, Plant and Equipment in our Consolidated Balance Sheet. The decision to reclassify these assets was based on our determination not to proceed with a sale and to explore alternative uses for these assets within our vessel fleet instead, which we expect to be economically advantageous compared to a sale in the current environment.

Our Consolidated Financial Statements classify current derivative financial instrument assets as a component of Other current assets and current derivative financial instrument liabilities as a component of Accrued liabilities. In 2014, $1.2 million of current derivative financial instrument assets and $32.4 million of derivative financial instrument liabilities were reported in Accounts receivable–other and Accounts payable, respectively.

Recently Issued and Adopted Accounting Guidance

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The new guidance does not affect the recognition and measurement of debt issuance costs. Therefore, the amortization of debt issuance costs will be calculated using the interest method and be reported as interest expense. Retrospective application of this ASU is required for public entities for annual and interim periods beginning on or after December 15, 2015, and early adoption is permitted. We adopted this ASU in the first quarter of 2015. As a result, our accompanying Consolidated Financial Statements reflect debt issuance costs related to long-term debt as components of Long-term debt. These costs were previously reported by us as Other Assets (see Note 7). All comparable periods presented have been revised to reflect this change.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

In January 2015, the FASB issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates the concept of extraordinary items. Under this new guidance, entities will no longer be required to separately classify, present and disclose extraordinary events and transactions. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted. We adopted this ASU in the second quarter of 2015. Our adoption of this ASU did not have any impact on the accompanying Consolidated Financial Statements.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment—Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation by raising the threshold for a disposal to qualify as discontinued operations. ASU 2014-08 also requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The pronouncement is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. The application of this ASU did not have any impact on the accompanying Consolidated Financial Statements.

Accounting Guidance Issued But Not Adopted as of June 30, 2015

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends and changes the consolidation analysis currently required under U.S. GAAP. This ASU modifies the process used to evaluate whether limited partnerships and similar entities are variable interest entities or voting interest entities; affects the analysis performed by reporting entities regarding variable interest entities, particularly those with fee arrangements and related party relationships; and provides a scope exception for certain investment funds. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. We are currently assessing the impact of these amendments on our future Consolidated Financial Statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Currently, there is no guidance in effect under U.S. GAAP regarding management’s responsibility to assess whether there is substantial doubt about an entity’s ability to continue as a going concern. Under ASU 2014-15, we will be required to assess our ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about our ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter with early adoption permitted. We are currently assessing the impact of the adoption of ASU 2014-15 on our future Consolidated Financial Statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. It also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 will be effective for us for annual and interim reporting periods beginning after December 15, 2016, with early application not permitted. Retrospective and modified retrospective application is allowed. In July 2015, the FASB approved the proposal to defer the original effective date for one year until December 15, 2017. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our future Consolidated Financial Statements and related disclosures.

NOTE 2—REVENUE RECOGNITION

Unapproved Change Orders

As of June 30, 2015, total unapproved change orders included in our estimates at completion aggregated $158.7 million, of which approximately $37.6 million was included in backlog. As of June 30, 2014, total unapproved change orders included in our estimates at completion aggregated $297 million, of which approximately $44 million was included in backlog.

Claims Revenue

The amount of revenues and costs included in our estimates at completion (i.e., contract values) associated with claims, all of which related to our MEA segment, was $6.5 million as of June 30, 2015 and 2014. In the accompanying Consolidated Financial Statements, for the three and six months ended June 30, 2015 and 2014, no material claims were included in revenues or costs. None of the pending claims reflected in our estimates at completion as of June 30, 2015 were the subject of any litigation proceedings.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Deferred Profit Recognition

For the three and six months ended June 30, 2015 and 2014, we did not account for any projects under our deferred profit recognition policy.

Completed Contract Method

For the three and six months ended June 30, 2015 and 2014, we did not account for any contracts under the completed contract method.

Loss Recognition

As of June 30, 2015, we have provided for our estimated costs to complete on all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.

Of the June 30, 2015 backlog, approximately $364.8 million primarily related to three active projects that were in loss positions, as a result of which future revenues are expected to equal costs when recognized. Included in this amount was $117.4 million of backlog associated with an EPCI project, PB Litoral, in Mexico, which is expected to be completed in the fourth quarter of 2015, and $76.5 million of backlog pertaining to the five-year Agile vessel charter in Brazil, which is expected to be completed in the first quarter of 2017, both of which are managed by our AEA segment. The June 30, 2015 backlog amount also included $170.7 million relating to an EPCI project, KJO Hout, in our MEA segment, which is also in a loss position and is expected to be completed in the second quarter of 2017.  It is possible that our estimates of gross profit could increase or decrease based on changes in productivity, actual downtime and the resolution of change orders and claims with the customers.

NOTE 3—USE OF ESTIMATES

We use estimates and assumptions to prepare our financial statements in conformity with U.S. GAAP. Those estimates and assumptions affect the amounts we report in our consolidated financial statements and accompanying notes. Our actual results could differ from those estimates, and variances could materially affect our financial condition and results of operations in future periods. Changes in project estimates generally exclude change orders and changes in scope, but may include, without limitation, changes in cost recovery estimates, unexpected changes in weather conditions, changes in productivity, unidentified required vessel repairs, customer and vendor delays and other costs. We generally expect to experience a reasonable amount of unanticipated events, and some of those events can result in significant cost increases above cost amounts we previously estimated. As of June 30, 2015, we have provided for our estimated costs to complete on all our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract performance could result in material adjustments to operating results. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.

The following is a discussion of our most significant changes in estimates that impacted operating income for the three and six months ended June 30, 2015 and 2014.

Three months ended June 30, 2015

Operating income for the three months ended June 30, 2015 was positively impacted by net favorable changes in cost estimates totaling approximately $7.3 million across all segments.

The AEA segment was positively impacted by net favorable changes in estimates aggregating approximately $3.4 million, primarily due to reduced cost estimates attributable to the contract close-out process associated with the Papa Terra EPCI project in Brazil.

The MEA segment had net favorable changes in estimates aggregating approximately $0.6 million. A project in Saudi Arabia was positively impacted by $7 million due to productivity improvements and associated cost savings on the Intermac 406 vessel, which is working on a cable lay project. These favorable changes were partially offset by a $4.9 million increase in pipelay cost estimates on a U.A.E. project, primarily due to changes in execution plan, and $1.5 million of unfavorable change in estimates for multiple projects.

The ASA segment was positively impacted by net favorable changes in estimates and productivity bonuses earned totaling approximately $3.3 million, driven by multiple projects, none of the individual results of which were material.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Six months ended June 30, 2015

Operating income for the six months ended June 30, 2015 was positively impacted by net favorable changes in cost estimates totaling approximately $28.9 million across all segments.

The AEA segment was positively impacted by net favorable changes in estimates aggregating approximately $10.0 million. Improvements primarily related to reduced cost estimates of approximately $3.4 million attributable to the Papa Terra project, $3.8 million due to productivity improvements on the Agile charter and reduced cost estimates of $3.6 million attributable to a revised demobilization plan for one of our vessels, the North Ocean 105 (the “NO 105”), which is working on a subsea project in Brazil, partially offset by unfavorable impact of $0.8 million driven by multiple projects.

The MEA segment was positively impacted by net favorable changes in estimates aggregating approximately $9.7 million. One EPCI project in Saudi Arabia was positively impacted by $6.9 million due to changes in revenue recovery and cost savings based on agreement with a customer on design optimization. . Another project in the U.A.E. improved by $4.8 million as a result of an agreement with the customer on compensation for vessel downtime due to weather and standby delays. A project in Saudi Arabia was positively impacted by $7.4 million of changes mostly due to productivity improvements and associated cost savings on the Intermac 406, which is working on a cable lay project. We also had favorable changes of $1.3 million from multiple projects, none of the individual results of which were material. These favorable changes were partially offset by a $5.8 million negative impact on another EPCI project in Saudi Arabia, primarily due to increase in cost estimates, as a result of a change in marine execution plans, and a $4.9 million increase in pipelay cost estimates on a U.A.E. project, as a result of changes in execution plan.

The ASA segment experienced an improvement of approximately $9.2 million, driven by multiple projects, none of the individual results of which were material, primarily due to favorable changes in estimates.

Three months ended June 30, 2014

Operating income for the three months ended June 30, 2014 was positively impacted by $24.4 million of net favorable changes in cost estimates.

The AEA segment deteriorated by a net $13.4 million from changes in estimates on three projects. On the PB Litoral project, we increased our estimated costs to complete by approximately $20 million, primarily due to projected fabrication cost increases, reflecting reduced productivity and execution plan changes to mitigate further project delays, as well as procurement and marine installation cost increases. This project is in a loss position and is estimated to be completed in the fourth quarter of 2015. On Jack & St. Malo, a subsea project in the Gulf of Mexico, we increased our estimated costs to complete by approximately $23.3 million, primarily due to equipment downtime issues on the North Ocean 102 (the “NO102”), our primary vessel working on the project. This project was completed in the third quarter of 2014. These negative impacts were partially offset by approximately $30 million of project close-out improvements on the Papa Terra project, which was completed in 2014, from marine cost reductions and increased recoveries due to successful developments from an approval process for additional weather-related compensation.

The MEA segment experienced net favorable changes in estimates aggregating approximately $22 million, primarily due to increased cost recovery estimates of approximately $29.2 million on a pipelay project in the Caspian, which was completed in 2014. The increased cost recovery estimates were based on positive developments during the three months ended June 30, 2014 from a project close-out process with the customer. This improvement was partially offset by $7.2 million of increased estimated costs to complete an EPCI project in Saudi Arabia, mainly for the onshore scope of the project.

The ASA segment was positively impacted by net favorable changes in estimates aggregating approximately $15.8 million, mostly due to reduced cost estimates on the Siakap Subsea Development (“Siakap”), a subsea project in Malaysia, which was completed in 2014, of approximately $10.2 million during the three months ended June 30, 2014. Those reduced cost estimates were primarily related to project close-out savings on marine spread and procurement costs. In addition, completion of three smaller projects resulted in project close-out savings of approximately $5.6 million.

Six months ended June 30, 2014

Operating income for the six months ended June 30, 2014 was negatively impacted by $21.2 million of net unfavorable changes in cost estimates.

The AEA segment was negatively impacted by net unfavorable changes in estimates aggregating approximately $39.3 million associated with four projects. On the PB Litoral project, we increased our estimated costs to complete by approximately $55.4 million

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

due to liquidated damages and extended project management costs arising from project delays, projected fabrication cost increases reflecting reduced productivity and execution plan changes to mitigate further project delays, as well as procurement and marine installation cost increases. This project is in a loss position and is estimated to be completed in the fourth quarter of 2015. On the Jack & St. Malo project, we increased our estimated costs to complete by approximately $22.5 million, primarily due to equipment downtime issues on the NO102, our primary vessel working on the project. This project was completed in the third quarter of 2014. These negative impacts were partially offset by $33.7 million of project close out improvements on the Papa Terra project, from marine cost reductions upon completion of activities and increased recoveries due to successful developments from an approval process for additional weather-related compensation. We also recognized $4.9 million of cost reductions, mainly due to project close-out improvements on Tubular Bells Gulfstar, a marine installation project in the Gulf of Mexico.

The MEA segment was negatively impacted by net unfavorable changes aggregating approximately $12.7 million, due to changes in five projects in the region. On three EPCI projects in Saudi Arabia, we increased our estimated cost at completion by approximately $35.3 million, primarily as a result of vessel downtime due to weather and standby delays, reduced productivity levels and increased cost estimates to complete the onshore scope of one of the projects. On another EPCI project in Saudi Arabia, we increased our overall estimated costs to complete by approximately $6.6 million related to (1) the onshore work which was substantially completed in July 2014 and (2) delays in completing the offshore work, due to limited access to the project site, which was caused by schedule conflicts with another contractor. These negative changes were partially offset by approximately $29.1 million of increased cost recovery estimates on a pipelay project in the Caspian, based on positive developments during the six months ended June 30, 2014 from the project close-out process with the customer.

The ASA segment experienced net favorable changes in estimates aggregating approximately $30.8 million, mostly due to changes in estimates on the Siakap project, during the six months ended June 30, 2014. Those changes were primarily related to productivity improvements on our marine vessels and offshore support activities, as well as project close-out savings.

NOTE 4—ACCOUNTS RECEIVABLE

Accounts Receivable—Trade, Net

A summary of contract receivables is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(in thousands)

 

Contract receivables:

 

 

 

 

 

 

 

 

Contracts in progress

 

$

277,871

 

 

$

106,174

 

Completed contracts

 

 

15,934

 

 

 

34,698

 

Retainages

 

 

14,954

 

 

 

28,586

 

Unbilled

 

 

4,303

 

 

 

4,303

 

Less allowances

 

 

(25,798

)

 

 

(30,391

)

Accounts receivable-trade, net

 

$

287,264

 

 

$

143,370

 

 

Contract retainages generally represent amounts withheld by our customers until project completion, in accordance with the terms of the applicable contracts. The following is a summary of retainages on our contracts:

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(in thousands)

 

Retainages expected to be collected within one year

 

$

14,954

 

 

$

28,586

 

Retainages expected to be collected after one year

 

 

140,867

 

 

 

137,468

 

Total retainages

 

$

155,821

 

 

$

166,054

 

 

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

NOTE 5—CONTRACTS IN PROGRESS AND ADVANCE BILLINGS ON CONTRACTS

Components of contracts in progress and advance billings on contracts are as follows:

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(In thousands)

 

Costs incurred less costs of revenue recognized

 

$

107,199

 

 

$

90,191

 

Revenues recognized less billings to customers

 

 

293,521

 

 

 

267,426

 

Contracts in Progress

 

$

400,720

 

 

$

357,617