Attached files
file | filename |
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EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INC | mdr-ex322_7.htm |
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INC | mdr-ex312_9.htm |
EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex311_11.htm |
EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex121_8.htm |
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex321_6.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 March 31, 2016
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 |
|
|
|
757 N. ELDRIDGE PKWY |
|
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 May 3, 2016 was 240,357,706.
INDEX—FORM 10-Q
|
PAGE |
1 |
|
1 |
|
1 |
|
2 |
|
3 |
|
4 |
|
5 |
|
6 |
|
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
Item 3—Quantitative and Qualitative Disclosures about Market Risk |
33 |
35 |
|
36 |
|
36 |
|
37 |
|
39 |
See accompanying Notes to the Consolidated Financial Statements.
1
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
|
||||||||
(Unaudited) |
|
|||||||
|
|
|||||||
|
|
Three Months Ended March 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Net loss |
|
$ |
(2,444 |
) |
|
$ |
(12,048 |
) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Unrealized gain on investments |
|
|
5 |
|
|
|
12 |
|
Gain (loss) on derivatives |
|
|
30,791 |
|
|
|
(16,885 |
) |
Foreign currency translation |
|
|
(3,343 |
) |
|
|
(2,042 |
) |
Other comprehensive income (loss), net of tax |
|
|
27,453 |
|
|
|
(18,915 |
) |
Total comprehensive income (loss) |
|
$ |
25,009 |
|
|
$ |
(30,963 |
) |
Less: Comprehensive income (loss) attributable to non-controlling interests |
|
|
(285 |
) |
|
|
2,426 |
|
Comprehensive income (loss) attributable to McDermott International, Inc. |
|
$ |
25,294 |
|
|
$ |
(33,389 |
) |
See accompanying Notes to the Consolidated Financial Statements.
2
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
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||||||||
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|
|
|
|
|
|
|
|
|
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March 31, 2016 |
|
|
December 31, 2015 |
|
||
|
|
(In thousands, except share and per share amounts) |
|
|||||
|
|
(Unaudited) |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
696,103 |
|
|
$ |
664,844 |
|
Restricted cash and cash equivalents |
|
|
101,726 |
|
|
|
116,801 |
|
Accounts receivable—trade, net |
|
|
271,713 |
|
|
|
208,474 |
|
Accounts receivable—other |
|
|
55,350 |
|
|
|
66,689 |
|
Contracts in progress |
|
|
358,501 |
|
|
|
435,829 |
|
Other current assets |
|
|
46,716 |
|
|
|
34,641 |
|
Total current assets |
|
|
1,530,109 |
|
|
|
1,527,278 |
|
Property, plant and equipment |
|
|
2,432,169 |
|
|
|
2,467,352 |
|
Less accumulated depreciation |
|
|
(838,050 |
) |
|
|
(856,493 |
) |
Net property, plant and equipment |
|
|
1,594,119 |
|
|
|
1,610,859 |
|
Accounts receivable – long-term retainages |
|
|
160,515 |
|
|
|
155,061 |
|
Investments in unconsolidated affiliates |
|
|
26,844 |
|
|
|
26,551 |
|
Deferred income taxes |
|
|
13,657 |
|
|
|
18,822 |
|
Other assets |
|
|
46,314 |
|
|
|
48,505 |
|
Total assets |
|
$ |
3,371,558 |
|
|
$ |
3,387,076 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt |
|
$ |
25,298 |
|
|
$ |
24,882 |
|
Accounts payable |
|
|
298,297 |
|
|
|
279,821 |
|
Accrued liabilities |
|
|
299,277 |
|
|
|
330,943 |
|
Advance billings on contracts |
|
|
138,272 |
|
|
|
164,773 |
|
Income taxes payable |
|
|
21,541 |
|
|
|
23,787 |
|
Total current liabilities |
|
|
782,685 |
|
|
|
824,206 |
|
Long-term debt |
|
|
815,641 |
|
|
|
819,001 |
|
Self-insurance |
|
|
19,363 |
|
|
|
18,653 |
|
Pension liability |
|
|
24,025 |
|
|
|
24,066 |
|
Non-current income taxes |
|
|
55,121 |
|
|
|
52,559 |
|
Other liabilities |
|
|
104,735 |
|
|
|
101,870 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized 400,000,000 shares; |
|
|
|
|
|
|
|
|
issued 248,374,567 and 246,841,128 shares, respectively |
|
|
248,374 |
|
|
|
246,841 |
|
Capital in excess of par value (including prepaid common stock purchase contracts) |
|
1,685,061 |
|
|
|
1,687,059 |
|
|
Accumulated deficit |
|
|
(263,056 |
) |
|
|
(260,884 |
) |
Treasury stock, at cost: 8,020,427 and 7,824,204 shares, respectively |
|
|
(93,539 |
) |
|
|
(92,262 |
) |
Accumulated other comprehensive loss |
|
|
(66,489 |
) |
|
|
(93,955 |
) |
Stockholders' Equity—McDermott International, Inc. |
|
|
1,510,351 |
|
|
|
1,486,799 |
|
Noncontrolling interest |
|
|
59,637 |
|
|
|
59,922 |
|
Total Equity |
|
|
1,569,988 |
|
|
|
1,546,721 |
|
Total Liabilities and Equity |
|
$ |
3,371,558 |
|
|
$ |
3,387,076 |
|
See accompanying Notes to the Consolidated Financial Statements.
3
|
||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|||||||
(Unaudited) |
|
|||||||
|
|
|||||||
|
|
Three Months Ended March 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(In thousands) |
|
|||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,444 |
) |
|
$ |
(12,048 |
) |
Non-cash items included in net loss: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
20,602 |
|
|
|
25,327 |
|
Impairment loss |
|
|
32,311 |
|
|
|
- |
|
Drydock amortization |
|
|
3,940 |
|
|
|
5,272 |
|
Stock-based compensation charges |
|
|
1,484 |
|
|
|
4,278 |
|
Loss from investments in unconsolidated affiliates |
|
|
4,478 |
|
|
|
6,741 |
|
Restructuring expense |
|
|
- |
|
|
|
4,169 |
|
Deferred income taxes |
|
|
5,164 |
|
|
|
(5,341 |
) |
Other non-cash items |
|
|
(2,698 |
) |
|
|
(1,839 |
) |
Changes in assets and liabilities that provided (used) cash: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(61,248 |
) |
|
|
(69,214 |
) |
Contracts in progress net of advance billings on contracts |
|
|
50,839 |
|
|
|
(61,021 |
) |
Accounts payable |
|
|
16,762 |
|
|
|
110,785 |
|
Accrued and other current liabilities |
|
|
(16,112 |
) |
|
|
(5,723 |
) |
Pension liability |
|
|
(375 |
) |
|
|
(555 |
) |
Other assets and liabilities |
|
|
6,577 |
|
|
|
(19,370 |
) |
Total cash provided by (used in) operating activities |
|
|
59,280 |
|
|
|
(18,539 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(31,900 |
) |
|
|
(23,972 |
) |
(Increase) decrease in restricted cash and cash equivalents |
|
|
15,075 |
|
|
|
(12,179 |
) |
Sales and maturities of available-for-sale securities |
|
|
- |
|
|
|
1,775 |
|
Investments in unconsolidated affiliates |
|
|
(4,105 |
) |
|
|
(4,696 |
) |
Other investing activities |
|
|
- |
|
|
|
76 |
|
Total cash used in investing activities |
|
|
(20,930 |
) |
|
|
(38,996 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(4,752 |
) |
|
|
(4,706 |
) |
Repurchase of common stock |
|
|
(2,200 |
) |
|
|
(1,003 |
) |
Other |
|
|
- |
|
|
|
(320 |
) |
Total cash used in financing activities |
|
|
(6,952 |
) |
|
|
(6,029 |
) |
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash and cash equivalents |
|
|
(139 |
) |
|
|
(1,109 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
31,259 |
|
|
|
(64,673 |
) |
Cash and cash equivalents at beginning of period |
|
|
664,844 |
|
|
|
665,309 |
|
Cash and cash equivalents at end of period |
|
$ |
696,103 |
|
|
$ |
600,636 |
|
See accompanying Notes to the Consolidated Financial Statements.
4
McDERMOTT INTERNATIONAL, INC. |
|
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Par Value |
|
|
Capital in Excess of Par Value |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Stockholders' Equity |
|
|
Noncontrolling Interest ("NCI") |
|
|
Total Equity |
|
||||||||
|
(in thousands) |
|
||||||||||||||||||||||||||||||
Balance at January 1, 2016 |
|
$ |
246,841 |
|
|
$ |
1,687,059 |
|
|
$ |
(260,884 |
) |
|
$ |
(93,955 |
) |
|
$ |
(92,262 |
) |
|
$ |
1,486,799 |
|
|
$ |
59,922 |
|
|
$ |
1,546,721 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(2,172 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,172 |
) |
|
|
(272 |
) |
|
|
(2,444 |
) |
Other comprehensive income (loss) net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27,466 |
|
|
|
- |
|
|
|
27,466 |
|
|
|
(13 |
) |
|
|
27,453 |
|
Common stock issued |
|
|
1,907 |
|
|
|
(1,907 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based compensation charges |
|
|
- |
|
|
|
458 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
458 |
|
|
|
- |
|
|
|
458 |
|
Purchase of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,200 |
) |
|
|
(2,200 |
) |
|
|
- |
|
|
|
(2,200 |
) |
Retirement of common stock |
|
|
(374 |
) |
|
|
(549 |
) |
|
|
- |
|
|
|
- |
|
|
|
923 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance at March 31, 2016 |
|
$ |
248,374 |
|
|
$ |
1,685,061 |
|
|
$ |
(263,056 |
) |
|
$ |
(66,489 |
) |
|
$ |
(93,539 |
) |
|
$ |
1,510,351 |
|
|
$ |
59,637 |
|
|
$ |
1,569,988 |
|
See accompanying Notes to the Consolidated Financial Statements.
5
McDERMOTT INTERNATIONAL, INC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) TABLE OF CONTENTS
|
PAGE |
Note 1—Basis of Presentation and Significant Accounting Policies |
7 |
9 |
|
10 |
|
11 |
|
13 |
|
Note 6—Contracts in Progress and Advance Billings on Contracts |
13 |
14 |
|
16 |
|
16 |
|
17 |
|
18 |
|
19 |
|
20 |
|
20 |
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)
NOTE 1—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
McDermott International, Inc. (“MDR”), a corporation incorporated under the laws of the Republic of Panama in 1959, is a leading provider of integrated engineering, procurement, construction and installation (“EPCI”) and module fabrication services for upstream field developments worldwide. We deliver fixed and floating production facilities, pipeline installations and subsea systems from concept to commissioning for complex offshore and subsea oil and gas projects. Operating in approximately 20 countries across Americas, Europe, Africa, the Middle East, Asia and Australia, our integrated resources include a diversified fleet of marine vessels, fabrication facilities and engineering offices. 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 Consolidated Financial Statements, unless the context otherwise indicates, “we,” “us” and “our” mean MDR 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 MDR’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 22, 2016.
Classification
Certain prior year amounts have been reclassified for consistency with the current year presentation. Our Consolidated Financial Statements previously reported Loss from investment in unconsolidated affiliates as components of operating income. In the first quarter of 2016, we concluded that classification of loss from investments in unconsolidated affiliates after provision for income tax better reflected how the operations of our unconsolidated affiliates relate to our business as a whole.
Recently Issued and Adopted Accounting Guidance
Income Tax—In November 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under this ASU an entity shall classify deferred tax assets and liabilities as noncurrent. We adopted ASU 2015-17 in the first quarter of 2016. Our adoption of that ASU did not have material impact on the presentation of our Consolidated Financial Statements. All comparable periods presented have been revised to reflect this change.
Consolidation—In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment.
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.
7
McDERMOTT INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)
The amendments in ASUs 2015-16 and 2015-02 are effective for annual and interim periods beginning after December 15, 2015. Early adoption was permitted. We adopted these ASUs in the first quarter of 2016. Our adoption of these ASUs did not have material impact on the accompanying Consolidated Financial Statements.
Accounting Guidance Issued But Not Adopted as of March 31, 2016
Stock Compensation—In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The application of this ASU is not expected to have a material impact on our future Consolidated Financial Statements and related disclosures.
Derivatives—In March 2016, the FASB issued ASU 2016-06, Derivatives and hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This ASU clarifies that a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. We are currently assessing the impact of this guidance on our future Consolidated Financial Statements and related disclosures.
In March 2016, the FASB issued ASU 2016-05, Derivatives and hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria continue to be met. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The application of this ASU is not expected to have a material impact on our Consolidated Financial Statements.
Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU will require entities that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this ASU on our future Consolidated Financial Statements and related disclosures.
Financial Assets and Liabilities—In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Under this new guidance, entities will be required to measure all investments in equity securities that are not subject to equity method or consolidation accounting at fair value, with changes recognized in net income. Fair value changes related to instrument-specific credit risk in financial liabilities accounted for under the fair value option in Accounting Standards Codification 825 must be recorded in other comprehensive income instead of earnings. ASU 2016-01 also changes presentation and disclosure requirements for financial assets and liabilities. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption not permitted except related to changes in fair value for financial liabilities. 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 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 (Topic 606). 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
8
McDERMOTT INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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 (Topic 606): 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.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting revenue Gross versus Net), which improves the operability and understandability of the Topic 606 implementation guidance on principal versus agent considerations. Effective date and transition requirements for this ASU are the same as effective date and transition requirements for ASU 2014-09.
We are currently evaluating the requirements of these ASUs and have not yet determined their impacts on our future Consolidated Financial Statements and related disclosures.
Unapproved Change Orders
As of March 31, 2016, total unapproved change orders included in our estimates at completion aggregated approximately $122 million, of which approximately $20 million was included in backlog. As of March 31, 2015, total unapproved change orders included in our estimates at completion aggregated approximately $240 million, of which approximately $73 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 was $16 million and $7 million as of March 31, 2016 and 2015, respectively, all in our Middle East segment. These amounts are determined based on various factors, including our analysis of the underlying contractual language and our experience in making and resolving claims. Our unconsolidated joint ventures did not include any material claims revenue or associated costs in their financial results for the quarters ended March 31, 2016 and 2015.
None of the claims included in our estimates at completion at March 31, 2016 were the subject of any litigation proceedings. We continue to actively engage in negotiations with our customers on our outstanding claims. However, these claims may be resolved at amounts that differ from our current estimates, which could result in increases or decreases in future estimated contract profits or losses.
Loss Recognition
As of March 31, 2016, 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.
For loss projects, 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.
As of March 31, 2016, one significant active project, the Agile vessel charter project in Brazil, was in a loss position and, as a result, future revenues were expected to equal costs when recognized. The customer recently notified us that they would be terminating the contract in May 2016. As of March 31, 2016, the related backlog for the loss project was approximately $5 million.
9
McDERMOTT INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)
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 March 31, 2016, 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 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 months ended March 31, 2016 and 2015.
Three months ended March 31, 2016
Operating income for the three months ended March 31, 2016 was positively impacted by net favorable changes in cost estimates totaling approximately $40 million across all segments.
Americas, Europe and Africa Segment (“AEA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million, primarily attributable to successful execution and close-out improvements on two significant projects, PB Litoral and Exxon Julia Subsea Tieback, in the first quarter of 2016. Included in the change was a reversal of a $7 million provision for liquidated damages due to an agreed extension of the PB Litoral project completion date. Miscellaneous other projects also experienced net positive changes in estimate, which were individually not material.
Middle East Segment (“MEA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $7 million, primarily due to productivity improvements and associated cost savings related to the DB 27 vessel on a Saudi Aramco project and cost savings on miscellaneous other projects.
Asia Segment (“ASA”)—This segment had net favorable changes in estimates aggregating approximately $17 million driven by improved productivity and project execution cost savings on the Inpex Ichthys project, agreement on outstanding change orders on the Brunei Shell Petroleum pipeline replacement project and agreement on outstanding change orders and cost savings on miscellaneous other projects.
Three months ended March 31, 2015
Operating income for the three months ended March 31, 2015 was positively impacted by net favorable changes in cost estimates totaling approximately $22 million across all segments.
AEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $7 million, primarily due to $4 million in reduced cost estimates attributable to a revised demobilization plan for one of our vessels, the North Ocean 105 (the “NO 105”), which is currently working on a subsea project in Brazil.
MEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $9 million. Two EPCI projects in Saudi Arabia were positively impacted by $7 million of changes in revenue recovery and cost savings based on constructive discussions with the customer on design optimization and by $6 million for improvement in revenue recovery estimates and due to the favorable outcome of our discussions with the customer on compensation for vessel downtime due to weather and standby delays. These favorable changes were partially offset by the $5 million negative impact on an EPCI project in Saudi Arabia, primarily due to changes in cost estimates as a result of a change in marine execution plans.
ASA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $6 million, driven by multiple projects, none of the individual results of which were material.
10
McDERMOTT INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)
In 2014 we completed a major review of our cost structure, and subsequently implemented a plan, which we referred to as the McDermott Profitability Initiative (the “MPI”), to increase our profitability and flexibility through reduced fixed and variable costs. The plan included personnel reductions, centralization of operational activities, other cost reduction initiatives and certain asset impairments. The remaining activities for MPI are still progressing, and we expect to substantially complete the move from Singapore to Kuala Lumpur, along with additional sourcing initiatives, in the second quarter 2016.
We continued our efforts to improve our cost structure by initiating the Additional Overhead Reduction program (“AOR”) during fourth quarter 2015. AOR actions have included personnel reductions affecting direct operating expense and SG&A, and with additional opportunities for cost reductions identified in the first quarter of 2016, is now expected to be complete in the third quarter of 2016.
During 2013 and 2014, we implemented a restructuring of our Americas operations, which involved our Morgan City, Louisiana, Houston, Texas, New Orleans, Louisiana and some Brazil locations. The restructuring involved, among other things, reductions of management, administrative, fabrication and engineering personnel, and the discontinued utilization of the Morgan City facility.
We completed a Corporate restructuring during 2014. Costs associated with our Corporate restructuring activities primarily included severance, relocation and other personnel-related costs and costs for advisors, as well as costs for certain executive management changes that became effective during the fourth quarter of 2013.
11
McDERMOTT INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)
The following table presents amounts incurred during the three months ended March 31, 2016 and 2015, as well as amounts incurred from the inception of our restructuring efforts up to March 31, 2016 and amounts expected to be incurred in the future, by major type of cost and by segment.
|
Incurred in the three months ended March 31, |
|
|
Incurred from inception to |
|
|
Estimate of remaining amounts to be |
|
|
|
|
|
|||||||
|
2016 |
|
|
2015 |
|
|
March 31, 2016 |
|
|
incurred |
|
|
Total |
|
|||||
|
(in thousands) |
|
|||||||||||||||||
Americas Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments and write offs |
$ |
- |
|
|
$ |
- |
|
|
$ |
12,923 |
|
|
$ |
- |
|
|
$ |
12,923 |
|
Severance and other personnel-related costs |
|
- |
|
|
|
881 |
|
|
|
13,981 |
|
|
|
- |
|
|
|
13,981 |
|
Morgan City environmental reserve |
|
- |
|
|
|
- |
|
|
|
5,925 |
|
|
|
- |
|
|
|
5,925 |
|
Morgan City yard-related expenses |
|
- |
|
|
|
914 |
|
|
|
12,557 |
|
|
|
- |
|
|
|
12,557 |
|
Other |
|
- |
|
|
|
- |
|
|
|
158 |
|
|
|
- |
|
|
|
158 |
|
|
|
- |
|
|
|
1,795 |
|
|
|
45,544 |
|
|
|
- |
|
|
|
45,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Restructuring |
|
- |
|
|
|
- |
|
|
|
6,601 |
|
|
|
- |
|
|
|
6,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MPI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other personnel-related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AEA |
|
- |
|
|
|
1,252 |
|
|
|
6,646 |
|
|
|
- |
|
|
|
6,646 |
|
MEA |
|
- |
|
|
|
607 |
|
|
|
856 |
|
|
|
- |
|
|
|
856 |
|
ASA |
|
433 |
|
|
|
1,800 |
|
|
|
6,537 |
|
|
|
1,898 |
|
|
|
8,435 |
|
Corporate and other |
|
- |
|
|
|
719 |
|
|
|
1,611 |
|
|
|
- |
|
|
|
1,611 |
|
Asset impairment and disposal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
ASA |
|
- |
|
|
|
4,168 |
|
|
|
7,471 |
|
|
|
- |
|
|
|
7,471 |
|
Legal and other advisor fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
ASA |
|
- |
|
|
|
|
|
|
|
|
|
|
|
390 |
|
|
|
390 |
|
Corporate |
|
173 |
|
|
|
48 |
|
|
|
11,590 |
|
|
|
- |
|
|
|
11,590 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
AEA |
|
- |
|
|
|
- |
|
|
|
692 |
|
|
|
- |
|
|
|
692 |
|
ASA |
|
895 |
|
|
|
- |
|
|
|
6,829 |
|
|
|
2,327 |
|
|
|
9,156 |
|
Corporate and other |
|
- |
|
|
|
- |
|
|
|
983 |
|
|
|
- |
|
|
|
983 |
|
|
|
1,501 |
|
|
|
8,594 |
|
|
|
43,215 |
|
|
|
4,615 |
|
|
|
47,830 |
|
AOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other personnel-related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AEA |
|
2,186 |
|
|
|
- |
|
|
|
2,186 |
|
|
|
795 |
|
|
|
2,981 |
|
ASA |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
400 |
|
|
|
400 |
|
Corporate |
|
785 |
|
|
|
- |
|
|
|
785 |
|
|
|
472 |
|
|
|
1,257 |
|
Legal and other advisor fees |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Corporate |
|
1,728 |
|
|
|
- |
|
|
|
2,528 |
|
|
|
- |
|
|
|
2,528 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
AEA |
|
150 |
|
|
|
- |
|
|
|
150 |
|
|
|
- |
|
|
|
150 |
|
MEA |
|
17 |
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
17 |
|
Corporate |
|
- |
|
|
|
- |