Attached files

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EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INCmdr-ex311_6.htm
EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INCmdr-ex322_8.htm
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INCmdr-ex321_9.htm
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INCmdr-ex312_10.htm
EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INCmdr-ex121_7.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 September 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 November 5, 2015 was 238,972,816.

 

 

 

 

 

 


 

McDERMOTT INTERNATIONAL, INC.

INDEX—FORM 10-Q

 

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1.

Unaudited Consolidated Financial Statements

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

(Unaudited)

 

 

(In thousands, except share and per share amounts)

 

Revenues

$

805,857

 

 

$

414,595

 

 

$

2,402,857

 

 

$

1,494,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

720,961

 

 

 

370,271

 

 

 

2,121,942

 

 

 

1,394,062

 

Selling, general and administrative expenses

 

44,664

 

 

 

51,681

 

 

 

144,133

 

 

 

157,089

 

Loss (gain) on disposal of assets

 

(100

)

 

 

(4,818

)

 

 

1,443

 

 

 

(46,362

)

Impairment loss (recovery)

 

-

 

 

 

-

 

 

 

6,808

 

 

 

(10,664

)

Restructuring expenses

 

6,346

 

 

 

4,724

 

 

 

32,126

 

 

 

12,112

 

Total costs and expenses

 

771,871

 

 

 

421,858

 

 

 

2,306,452

 

 

 

1,506,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Investments in Unconsolidated Affiliates

 

(4,526

)

 

 

(3,448

)

 

 

(18,748

)

 

 

(5,647

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

29,460

 

 

 

(10,711

)

 

 

77,657

 

 

 

(17,395

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(13,015

)

 

 

(11,847

)

 

 

(38,179

)

 

 

(50,531

)

Gain (loss) on foreign currency, net

 

(1,373

)

 

 

(2,397

)

 

 

(898

)

 

 

143

 

Other income (expense), net

 

1,556

 

 

 

473

 

 

 

1,100

 

 

 

(104

)

            Total other expense

 

(12,832

)

 

 

(13,771

)

 

 

(37,977

)

 

 

(50,492

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

16,628

 

 

 

(24,482

)

 

 

39,680

 

 

 

(67,887

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

9,094

 

 

 

1,464

 

 

 

30,504

 

 

 

9,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

7,534

 

 

 

(25,946

)

 

 

9,176

 

 

 

(77,628

)

Less: net income attributable to noncontrolling interest

 

3,868

 

 

 

4,306

 

 

 

8,491

 

 

 

6,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

3,666

 

 

$

(30,252

)

 

$

685

 

 

$

(84,169

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.02

 

 

$

(0.13

)

 

$

-

 

 

$

(0.35

)

Diluted

$

0.01

 

 

$

(0.13

)

 

$

-

 

 

$

(0.35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

238,594,178

 

 

 

237,429,394

 

 

 

238,128,962

 

 

 

237,262,044

 

Diluted:

 

280,797,155

 

 

 

237,429,394

 

 

 

279,025,262

 

 

 

237,262,044

 

 

See accompanying notes to the Consolidated Financial Statements.

3


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

(in thousands)

 

Net income (loss)

 

$

7,534

 

 

$

(25,946

)

 

$

9,176

 

 

$

(77,628

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

(27

)

 

 

(7

)

 

 

(11

)

 

 

-

 

Foreign currency translation adjustment

 

 

(9,333

)

 

 

(1,454

)

 

 

(16,319

)

 

 

(2,714

)

Gain (loss) on derivatives

 

 

(701

)

 

 

(32,930

)

 

 

9,973

 

 

 

(17,664

)

Other comprehensive loss, net of tax

 

 

(10,061

)

 

 

(34,391

)

 

 

(6,357

)

 

 

(20,378

)

Total comprehensive income (loss)

 

 

(2,527

)

 

 

(60,337

)

 

 

2,819

 

 

 

(98,006

)

Less: comprehensive income attributable to non-controlling interests

 

 

3,868

 

 

 

4,290

 

 

 

8,411

 

 

 

6,494

 

Comprehensive loss attributable to McDermott International, Inc.

 

$

(6,395

)

 

$

(64,627

)

 

$

(5,592

)

 

$

(104,500

)

 

See accompanying notes to the Consolidated Financial Statements.

4


 

  

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

(In thousands, except shares and par value data)

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

631,385

 

 

$

665,309

 

Restricted cash and cash equivalents

 

 

135,816

 

 

 

187,585

 

Accounts receivable – trade, net

 

 

123,183

 

 

 

143,370

 

Accounts receivable  – other

 

 

61,058

 

 

 

79,915

 

Contracts in progress

 

 

515,418

 

 

 

357,617

 

Deferred income taxes

 

 

8,298

 

 

 

7,514

 

Other current assets

 

 

41,782

 

 

 

46,071

 

Total Current Assets

 

 

1,516,940

 

 

 

1,487,381

 

Property, Plant and Equipment

 

 

2,464,319

 

 

 

2,487,815

 

Less Accumulated depreciation

 

 

(860,011

)

 

 

(830,467

)

Net Property, Plant and Equipment

 

 

1,604,308

 

 

 

1,657,348

 

Accounts Receivable – Long-Term Retainages

 

 

146,361

 

 

 

137,468

 

Investments in Unconsolidated Affiliates

 

 

29,022

 

 

 

38,186

 

Deferred Income Taxes

 

 

11,953

 

 

 

17,313

 

Investments

 

 

729

 

 

 

2,216

 

Other Assets

 

 

74,896

 

 

 

76,967

 

Total Assets

 

$

3,384,209

 

 

$

3,416,879

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

27,749

 

 

$

27,026

 

Accounts payable

 

 

303,790

 

 

 

219,384

 

Accrued liabilities

 

 

377,663

 

 

 

369,749

 

Advance billings on contracts

 

 

97,371

 

 

 

199,865

 

Deferred income taxes

 

 

17,492

 

 

 

19,753

 

Income taxes payable

 

 

14,547

 

 

 

25,165

 

Total Current Liabilities

 

 

838,612

 

 

 

860,942

 

Long-Term Debt

 

 

823,485

 

 

 

837,443

 

Self-Insurance

 

 

19,589

 

 

 

17,026

 

Pension Liability

 

 

16,729

 

 

 

18,403

 

Non-current Income Taxes

 

 

49,669

 

 

 

49,229

 

Other Liabilities

 

 

83,282

 

 

 

94,722

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, par value $1.00 per share, authorized

 

 

 

 

 

 

 

 

400,000,000 shares; issued 246,774,167 and 245,209,850 shares, respectively

 

 

246,774

 

 

 

245,210

 

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

 

1,685,395

 

 

 

1,676,815

 

Accumulated Deficit

 

 

(242,216

)

 

 

(239,572

)

Treasury stock, at cost: 7,810,046 and 7,400,027 shares, respectively

 

 

(92,294

)

 

 

(96,441

)

Accumulated other comprehensive loss

 

 

(104,085

)

 

 

(97,808

)

Stockholders' Equity - McDermott International, Inc.

 

 

1,493,574

 

 

 

1,488,204

 

Noncontrolling interest

 

 

59,269

 

 

 

50,910

 

Total Equity

 

 

1,552,843

 

 

 

1,539,114

 

Total Liabilities and Equity

 

$

3,384,209

 

 

$

3,416,879

 

 

See accompanying notes to the Consolidated Financial Statements.

5


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

Nine Month Ended September 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,176

 

 

$

(77,628

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

75,982

 

 

 

68,655

 

Drydock amortization

 

 

13,910

 

 

 

15,567

 

Stock-based compensation charges

 

 

12,991

 

 

 

14,387

 

Loss from investments in unconsolidated affiliates

 

 

18,748

 

 

 

5,647

 

Loss (gain) on asset disposals

 

 

1,443

 

 

 

(46,362

)

Impairment loss (recovery)

 

 

6,808

 

 

 

(10,664

)

Restructuring expense (gain)

 

 

11,954

 

 

 

(2,235

)

Deferred taxes

 

 

2,315

 

 

 

(4,175

)

Other non-cash items

 

 

3,164

 

 

 

5,210

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11,294

 

 

 

44,368

 

Net contracts in progress and advance billings on contracts

 

 

(260,317

)

 

 

10,353

 

Accounts payable

 

 

98,552

 

 

 

(99,588

)

Accrued and other current liabilities

 

 

(7,269

)

 

 

(16,200

)

Pension liability and accrued postretirement and employee benefits

 

 

(1,319

)

 

 

1,180

 

Other assets and liabilities

 

 

(2,778

)

 

 

(20,813

)

TOTAL CASH USED IN OPERATING ACTIVITIES

 

 

(5,346

)

 

 

(112,298

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(66,118

)

 

 

(216,526

)

Restricted cash and cash equivalents

 

 

51,769

 

 

 

(215,663

)

Purchases of available-for-sale securities

 

 

-

 

 

 

(1,997

)

Sales and maturities of available-for-sale securities

 

 

3,175

 

 

 

12,903

 

Investments in unconsolidated affiliates

 

 

(6,960

)

 

 

-

 

Proceeds from asset dispositions

 

 

10,669

 

 

 

70,252

 

Other

 

 

417

 

 

 

(5,076

)

TOTAL CASH USED IN INVESTING ACTIVITIES

 

 

(7,048

)

 

 

(356,107

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

-

 

 

 

1,337,500

 

Repayment of debt

 

 

(18,004

)

 

 

(289,542

)

Debt issuance cost

 

 

-

 

 

 

(46,914

)

Distribution to noncontrolling interest

 

 

(24

)

 

 

(5,002

)

Other

 

 

(928

)

 

 

(1,537

)

TOTAL CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

(18,956

)

 

 

994,505

 

 

 

 

 

 

 

 

 

 

EFFECTS OF EXCHANGE RATE CHANGES ON CASH

 

 

(2,574

)

 

 

(851

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(33,924

)

 

 

525,249

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

665,309

 

 

 

118,702

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

631,385

 

 

$

643,951

 

 

 

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

 

-

 

 

 

-

 

 

 

-

 

 

 

685

 

 

 

-

 

 

 

-

 

 

 

685

 

 

 

8,491

 

 

 

9,176

 

Other comprehensive income (loss), net of tax

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,277

)

 

 

-

 

 

 

(6,277

)

 

 

(80

)

 

 

(6,357

)

Exercise of stock options

 

196,340

 

 

 

196

 

 

 

(7,274

)

 

 

(3,329

)

 

 

-

 

 

 

11,085

 

 

 

678

 

 

 

-

 

 

 

678

 

Share vesting

 

1,400,735

 

 

 

1,401

 

 

 

(1,401

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation charges

 

-

 

 

 

-

 

 

 

17,207

 

 

 

-

 

 

 

-

 

 

 

(5,357

)

 

 

11,850

 

 

 

-

 

 

 

11,850

 

Purchase of common stock

 

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,614

)

 

 

(1,614

)

 

 

-

 

 

 

(1,614

)

Other

 

(32,758

)

 

 

(33

)

 

 

48

 

 

 

-

 

 

 

-

 

 

 

33

 

 

 

48

 

 

 

(52

)

 

 

(4

)

Balance at September 30, 2015

 

246,774,167

 

 

$

246,774

 

 

$

1,685,395

 

 

$

(242,216

)

 

$

(104,085

)

 

$

(92,294

)

 

$

1,493,574

 

 

$

59,269

 

 

$

1,552,843

 

 

 

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

Debt—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 guidance in ASU 2015-03 does not affect the recognition and measurement of debt issuance costs. Therefore, the amortization of debt issuance costs will continue to be calculated using the interest method and reported as interest expense.

In August 2015, the FASB issued ASU 2015-15, InterestImputation of Interest—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies guidance within ASU 2015-03 and establishes that debt issuance costs related to line-of-credit arrangements should be deferred and presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Retrospective application of those ASUs are required for public entities for annual and interim periods beginning on or after December 15, 2015, and early adoption is permitted. We adopted ASU 2015-03 and ASU 2015-15 in the first quarter and the third quarter of 2015, respectively. 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). Costs associated with line-of-credit arrangements continue to be reported as Other Assets. All comparable periods presented have been revised to reflect this change.

Extraordinary Items—In January 2015, the FASB issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items, 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.

Discontinued Operations—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 September 30, 2015

Consolidation—In February 2015, the FASB issued ASU 2015-02, Consolidation: 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.

Going Concern—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.

Revenue—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.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of ASU 2014-09 to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

We are currently evaluating the requirements of these ASUs and have not yet determined their impact on our future Consolidated Financial Statements and related disclosures.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

NOTE 2—REVENUE RECOGNITION

Unapproved Change Orders

As of September 30, 2015, total unapproved change orders included in our estimates at completion aggregated $146.1 million, of which approximately $22.5 million was included in backlog. As of September 30, 2014, total unapproved change orders included in our estimates at completion aggregated $352.3 million, of which approximately $168.9 million was included in backlog.

Claims Revenue

The amount of revenues and costs included in our estimates at completion associated with claims, all of which related to our MEA segment, was $9.8 million as of September 30, 2015 and $6.5 million as of September 31, 2014. In the accompanying Consolidated Financial Statements, for the three and nine months ended September 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 September 30, 2015 were the subject of any litigation proceedings.

Deferred Profit Recognition

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

Completed Contract Method

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

Loss Recognition

As of September 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 September 30, 2015 backlog, approximately $317 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 $86 million of backlog associated with an EPCI project, PB Litoral, in Mexico, which is expected to be completed in the first quarter of 2016, and $61 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 September 30, 2015 backlog amount also included $168 million relating to an EPCI project, KJO Hout, in our MEA segment, which 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 September 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 nine months ended September 30, 2015 and 2014.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Three months ended September 30, 2015

Operating income for the three months ended September 30, 2015 was impacted by net unfavorable changes in cost estimates totaling approximately $8 million.

The AEA segment deteriorated by a net $11 million due to changes in estimates during the three months ended September 30, 2015. Results for the third quarter of 2015 included $6 million due to changes in marine campaign execution plan on the PB Litoral EPCI project in Mexico and charges associated with a legal settlement as discussed in Note 14. The changes in the PB Litoral marine campaign execution plan were due to carryover of offshore scope and revised cost estimates for hookup campaign. These were partially offset by the extension of the project completion date on the PB Litoral project, which resulted in a $13 million reversal of liquidated damage reserves.

The MEA segment had net favorable changes in estimates aggregating approximately $6 million. Projects in Saudi Arabia were positively impacted by: (1) a $6 million favorable change order for vessel downtime; (2) productivity improvements and associated cost savings on a cable-lay project in Saudi Arabia totaling approximately $3 million; and (3) $1 million in net positive changes in estimates on multiple projects, which were not individually material. These net favorable changes were partially offset by a $4 million increase in pipelay cost estimates on a project in the U.A.E., primarily due to changes in the execution plan as a result of needing to substitute with a third party vessel and hookup associated issues.

The ASA segment had net unfavorable changes in estimates aggregating approximately $3 million. The deterioration was primarily due to $8 million of cost overruns and weather downtime on an installation project in Brunei, partially offset by $5 million of net positive changes in estimates on multiple projects, which were not individually material.

Nine months ended September 30, 2015

Operating income for the nine months ended September 30, 2015 was positively impacted by net favorable changes in cost estimates totaling approximately $21 million.

The AEA segment had net unfavorable changes in estimates aggregating approximately $1 million. For the nine months ended September 30, 2015, the AEA segment was positively impacted by: (1) $13 million reversal of liquidated damage reserves due to the extension of the PB Litoral project completion date; (2) $4 million due to productivity improvements on the Agile charter; and (3) $3 million each attributable to the Papa Terra project due to reduced cost estimates and to the North Ocean 105 vessel (the “NO 105”) due to reduced demobilization cost resulting from revised project plans. Those were partially offset by $6 million due to changes in the marine campaign execution plan on the PB Litoral project discussed above and charges associated with a legal settlement as discussed in Note 14. Other multiple projects experienced net positive changes in estimates of $1 million, which were not individually material.

The MEA segment had net favorable changes in estimates aggregating approximately $16 million. Three projects in Saudi Arabia were positively impacted by: 1) $11 million of changes in estimates mostly due to productivity improvements and associated cost savings on the Intermac 406, which was working on a cable-lay project; 2) $5 million of cost savings associated with revised cable lay scope; 3) $5 million as a result of an agreement with the customer on compensation for vessel downtime due to weather and standby delays; and 4) $4 million related to marine hook-up campaign savings. The KJO Hout project in the Neutral Zone was positively impacted by $7 million of changes in estimates driven by revenue recovery and cost savings resulting from customer-approved design optimization. These favorable changes were partially offset by: 1) $9 million increase in pipelay cost estimates on a U.A.E. project as a result of changes in our execution plan; 2) $5 million negative impact on another EPCI project in Saudi Arabia due to increases in cost estimates on onshore scope; and 3) $2 million of unfavorable changes in estimates on multiple projects, none of which were individually material.  

The ASA segment had net favorable changes in estimates aggregating approximately $6 million. Improvements were driven by $4 million due to productivity gains and improvements in cost estimates realized on the Gorgon MRU fabrication project, as well as $10 million in net improvements on multiple projects that were not individually material. Those improvements were partially offset by $8 million in cost overruns resulting from weather downtime on an installation project in Brunei.

Three months ended September 30, 2014

Operating income for the three months ended September 30, 2014 was positively impacted by changes in cost estimates relating to projects in each of our segments.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

The AEA segment improved by a net $1.5 million from changes in estimates on five projects. On Jack & St. Malo, a subsea project in the Gulf of Mexico completed during the period, project close-out savings on marine spread costs and increased cost recovery based on positive developments from the ongoing negotiations with the customer resulted in a reduction of project losses of $12.4 million. Two projects completed earlier in 2014 improved by an aggregate of approximately $4.8 million based on positive developments from ongoing project close-out negotiations with the customers.  These improvements were partially offset by negative changes of approximately $10.9 million on the PB Litoral project, primarily due to increased cost estimates to complete the project as a result of a revised fabrication execution plan, and reduced cost recovery of approximately $4.8 million on a fabrication project in Morgan City completed during 2013, based on an agreement in principle reached with the customer during the three months ended September 30, 2014, which resulted in lower than anticipated recoveries.

The MEA segment deteriorated by a net amount of approximately $5.4 million due to change in estimates during the three months ended September 30, 2014. On one EPCI project in Saudi Arabia, estimated costs to complete increased by $7.9 million, primarily as a result of vessel downtime due to weather and standby delays (some of which was recovered from the customer in 2015, but those recoveries were not recognizable at September 30, 2014). On two other EPCI projects in Saudi Arabia, estimated costs to complete increased by an aggregate of $6.7 million, as a result of revisions to project execution plans, primarily due to extended offshore hookup campaigns, increased vessel mobilization activities, and delays in the completion of onshore activities. On another EPCI project in Saudi Arabia, we increased our overall estimated costs to complete by approximately $8.6 million, reflecting the costs of an incremental mobilization and inefficiencies of executing out-of-sequence work due to a revised execution plan, which resulted from delayed access to the project site.  These negative changes were offset by an improvement of approximately $17.8 million on a pipelay project in the Caspian, primarily due to increased cost recovery estimates based on positive developments during the three months ended September 30, 2014 from the ongoing project close-out process with the customer. This project was completed earlier in 2014.

The ASA segment was positively impacted by favorable changes in estimates aggregating approximately $20.2 million from three projects. On a marine installation project in Brunei, reduction in estimated costs to complete from productivity improvements on marine vessels and offshore support activities resulted in a favorable change of approximately $10.8 million. On two previously completed projects, insurance claim collection and final project close-out adjustments resulted in a combined additional recovery of approximately $9.5 million during the three months ended September 30, 2014.  

Nine months ended September 30, 2014

Operating income for the nine months ended September 30, 2014 was positively impacted by changes in cost estimates relating to projects in each of our segments.

The AEA segment was negatively impacted by net unfavorable changes in estimates aggregating approximately $41.5 million associated with five projects. On the PB Litoral project we increased our estimated costs to complete by approximately $66.3 million due to: 1) liquidated damages and extended project management costs arising from unexpected project delays and projected fabrication cost increases reflecting reduced productivity and execution plan changes to mitigate further project delays; and 2) procurement and marine installation cost increases. This project is in a loss position and is estimated to be completed in the first quarter of 2016. On the Jack & St. Malo project, a subsea project in the Gulf of Mexico, we increased our estimated costs to complete by approximately $10.1 million, primarily due to increased costs from equipment downtime issues on the North Ocean 102 (the “NO 102”), our primary vessel working on the project, partially offset by project close-out savings on marine spread costs and increased cost recovery estimates based on positive developments from the ongoing negotiations with the customer. This project, which was in a loss position, was completed during the nine months ended September 30, 2014. On a fabrication project in Morgan City completed during 2013, we reduced our cost recovery estimates by approximately $7.8 million, mainly based on an agreement in principle reached with the customer during the nine months ended September 30, 2014, which resulted in lower than anticipated recoveries. These negative impacts were partially offset by $37.4 million of project close-out improvements on the Papa Terra project in Brazil, from marine cost reductions upon completion of activities and increased recoveries due to successful developments from ongoing approval process for additional weather-related compensation. We also recognized $5.2 million in cost reduction, mainly due to project close-out improvements on a marine installation project in the Gulf of Mexico.   

The MEA segment was negatively impacted by net unfavorable changes aggregating approximately $10.7 million due to changes in four projects. On two EPCI projects in Saudi Arabia, we increased our estimated costs at completion by approximately $42.4 million, primarily as a result of vessel downtime due to weather and standby delays (some of which was recovered from the customer in 2015, but those recoveries were not recognizable at September 30, 2014), reduced productivity levels and increased cost estimates to complete the onshore scope of one of the projects. On another EPCI project in the Neutral Zone, we increased our overall estimated costs to complete by approximately $15.2 million to reflect cost overruns related to: 1) the onshore work, which was substantially completed in July 2014; and 2) delays in completing the offshore work due to delayed access to the project site, resulting in a revised execution plan. The revised execution plan included the costs of an incremental mobilization and reflected inefficiencies of executing

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

out-of-sequence work. These negative changes were partially offset by approximately $46.9 million of increased cost recovery estimates on a pipelay project in the Caspian, based on positive developments during the nine months ended September 30, 2014 from the ongoing project close-out process with the customer. This project was substantially completed in June 2014.  

The ASA segment experienced net favorable changes in estimates aggregating approximately $53.5 million due to changes in estimates on four projects. Changes in estimates on the Siakap Subsea Development (“Siakap”), a subsea project in Malaysia, resulted in improvements of approximately $31.5 million during the nine months ended September 30, 2014, primarily related to productivity improvements on our marine vessels and offshore support activities, as well as project close-out savings. On a marine installation project in Brunei, a reduction in estimated costs to complete from productivity improvements on marine vessels and offshore support activities resulted in a favorable change of approximately $11.8 million. On two previously completed projects, insurance claim collections and final project close-out adjustments resulted in a combined additional recovery of approximately $10.3 million during the nine months ended September 30, 2014.

NOTE 4—ACCOUNTS RECEIVABLE

Accounts Receivable—Trade, Net

A summary of contract receivables is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(in thousands)

 

Contract receivables:

 

 

 

 

 

 

 

 

Contracts in progress

 

$

108,173

 

 

$

106,174

 

Completed contracts

 

 

21,128

 

 

 

34,698

 

Retainages

 

 

15,377

 

 

 

28,586

 

Unbilled

 

 

4,303

 

 

 

4,303

 

Less allowances

 

 

(25,798

)

 

 

(30,391

)

Accounts receivable-trade, net

 

$

123,183

 

 

$

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: