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EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INCmdr-ex322_10.htm
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INCmdr-ex321_8.htm
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INCmdr-ex312_9.htm
EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INCmdr-ex311_6.htm
EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INCmdr-ex121_11.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 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

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      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      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

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  

The number of shares of the registrant’s common stock outstanding at October 21, 2016 was 241,339,574.

 

 

 

 

 


 

McDERMOTT INTERNATIONAL, INC.

INDEX—FORM 10-Q

 

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In thousands, except share and per share amounts)

 

Revenues

 

$

558,543

 

 

$

805,857

 

 

$

1,994,202

 

 

$

2,402,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

 

455,499

 

 

 

720,961

 

 

 

1,666,974

 

 

 

2,121,942

 

Selling, general and administrative expenses

 

 

46,983

 

 

 

44,664

 

 

 

137,386

 

 

 

144,133

 

Impairment loss

 

 

11,758

 

 

 

-

 

 

 

44,069

 

 

 

6,808

 

Loss (gain) on asset disposals

 

 

(588

)

 

 

(100

)

 

 

(950

)

 

 

1,443

 

Restructuring expenses

 

 

1,836

 

 

 

6,346

 

 

 

10,687

 

 

 

32,126

 

Total costs and expenses

 

 

515,488

 

 

 

771,871

 

 

 

1,858,166

 

 

 

2,306,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

43,055

 

 

 

33,986

 

 

 

136,036

 

 

 

96,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(17,431

)

 

 

(13,015

)

 

 

(41,324

)

 

 

(38,179

)

Gain (loss) on foreign currency, net

 

 

376

 

 

 

(1,373

)

 

 

(4,781

)

 

 

(898

)

Other income, net

 

 

4,861

 

 

 

1,556

 

 

 

3,776

 

 

 

1,100

 

Total other expense

 

 

(12,194

)

 

 

(12,832

)

 

 

(42,329

)

 

 

(37,977

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

30,861

 

 

 

21,154

 

 

 

93,707

 

 

 

58,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

15,976

 

 

 

9,094

 

 

 

55,110

 

 

 

30,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income (loss) from Investments in Unconsolidated Affiliates

 

 

14,885

 

 

 

12,060

 

 

 

38,597

 

 

 

27,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from Investments in Unconsolidated Affiliates

 

 

1,507

 

 

 

(4,526

)

 

 

(2,844

)

 

 

(18,748

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

16,392

 

 

 

7,534

 

 

 

35,753

 

 

 

9,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

 

284

 

 

 

3,868

 

 

 

1,160

 

 

 

8,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to McDermott International, Inc.

 

$

16,108

 

 

$

3,666

 

 

$

34,593

 

 

$

685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to McDermott International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

0.07

 

 

$

0.02

 

 

$

0.14

 

 

$

-

 

Diluted:

 

$

0.06

 

 

$

0.01

 

 

$

0.12

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in the computation of net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

240,899,888

 

 

 

238,594,178

 

 

 

240,093,169

 

 

 

238,128,962

 

Diluted:

 

 

283,907,353

 

 

 

280,797,155

 

 

 

283,132,920

 

 

 

279,025,262

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

1


 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Net income

 

$

16,392

 

 

$

7,534

 

 

$

35,753

 

 

$

9,176

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

(3

)

 

 

(27

)

 

 

14

 

 

 

(11

)

Gain (loss) on derivatives

 

 

3,566

 

 

 

(701

)

 

 

38,978

 

 

 

9,973

 

Foreign currency translation

 

 

(5,031

)

 

 

(9,333

)

 

 

(12,401

)

 

 

(16,319

)

Other comprehensive income (loss), net of tax

 

 

(1,468

)

 

 

(10,061

)

 

 

26,591

 

 

 

(6,357

)

Total comprehensive income (loss)

 

$

14,924

 

 

$

(2,527

)

 

$

62,344

 

 

$

2,819

 

Less: Comprehensive income attributable to non-controlling interests

 

 

273

 

 

 

3,868

 

 

 

1,128

 

 

 

8,411

 

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

 

$

14,651

 

 

$

(6,395

)

 

$

61,216

 

 

$

(5,592

)

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

2


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(In thousands, except share and per share amounts)

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

500,456

 

 

$

664,844

 

Restricted cash and cash equivalents

 

 

99,632

 

 

 

116,801

 

Accounts receivable—trade, net

 

 

274,700

 

 

 

208,474

 

Accounts receivable—other

 

 

43,140

 

 

 

66,689

 

Contracts in progress

 

 

301,736

 

 

 

435,829

 

Other current assets

 

 

37,253

 

 

 

34,641

 

Total current assets

 

 

1,256,917

 

 

 

1,527,278

 

Property, plant and equipment

 

 

2,566,534

 

 

 

2,467,352

 

Less accumulated depreciation

 

 

(876,010

)

 

 

(856,493

)

Property, plant and equipment, net

 

 

1,690,524

 

 

 

1,610,859

 

Accounts receivable—long-term retainages

 

 

125,941

 

 

 

155,061

 

Investments in Unconsolidated Affiliates

 

 

17,123

 

 

 

26,551

 

Deferred income taxes

 

 

6,932

 

 

 

18,822

 

Other assets

 

 

40,935

 

 

 

48,505

 

Total assets

 

$

3,138,372

 

 

$

3,387,076

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

50,046

 

 

$

24,882

 

Accounts payable

 

 

169,108

 

 

 

279,821

 

Accrued liabilities

 

 

297,745

 

 

 

330,943

 

Advance billings on contracts

 

 

84,280

 

 

 

164,773

 

Income taxes payable

 

 

26,359

 

 

 

23,787

 

Total current liabilities

 

 

627,538

 

 

 

824,206

 

Long-term debt

 

 

704,346

 

 

 

819,001

 

Self-insurance

 

 

16,284

 

 

 

18,653

 

Pension liability

 

 

23,774

 

 

 

24,066

 

Non-current income taxes

 

 

60,440

 

 

 

52,559

 

Other liabilities

 

 

109,687

 

 

 

101,870

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, par value $1.00 per share, authorized 400,000,000 shares;

 

 

 

 

 

 

 

 

  issued 249,628,949 and 246,841,128 shares, respectively

 

 

249,629

 

 

 

246,841

 

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

 

1,691,918

 

 

 

1,687,059

 

Accumulated deficit

 

 

(226,291

)

 

 

(260,884

)

Accumulated other comprehensive loss

 

 

(67,332

)

 

 

(93,955

)

Treasury stock, at cost: 8,289,375 and 7,824,204 shares, respectively

 

 

(94,892

)

 

 

(92,262

)

Stockholders' Equity—McDermott International, Inc.

 

 

1,553,032

 

 

 

1,486,799

 

Noncontrolling interest

 

 

43,271

 

 

 

59,922

 

Total Equity

 

 

1,596,303

 

 

 

1,546,721

 

Total Liabilities and Equity

 

$

3,138,372

 

 

$

3,387,076

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

3


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

35,753

 

 

$

9,176

 

Non-cash items included in net income:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

66,892

 

 

 

75,982

 

Drydock amortization

 

 

9,863

 

 

 

13,910

 

Impairment loss

 

 

44,069

 

 

 

6,808

 

Stock-based compensation charges

 

 

14,011

 

 

 

12,991

 

Loss from investments in unconsolidated affiliates

 

 

2,844

 

 

 

18,748

 

Loss (gain) on asset disposals

 

 

(950

)

 

 

1,443

 

Restructuring (gain) expense

 

 

(1,500

)

 

 

11,954

 

Deferred income taxes

 

 

11,889

 

 

 

2,315

 

Other non-cash items

 

 

(1,657

)

 

 

3,164

 

Changes in operating assets and liabilities that provided (used) cash:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(29,661

)

 

 

11,294

 

Contracts in progress, net of Advance billings on contracts

 

 

53,608

 

 

 

(260,317

)

Accounts payable

 

 

(110,196

)

 

 

98,552

 

Accrued and other current liabilities

 

 

(13,426

)

 

 

(7,269

)

Pension liability

 

 

(1,209

)

 

 

(1,319

)

Income taxes

 

 

10,453

 

 

 

(10,360

)

       Other assets and liabilities, net

 

 

34,816

 

 

 

7,582

 

Total cash provided by (used in) operating activities

 

 

125,599

 

 

 

(5,346

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(197,393

)

 

 

(66,118

)

Decrease in restricted cash and cash equivalents

 

 

17,169

 

 

 

51,769

 

Investments in unconsolidated affiliates

 

 

(4,105

)

 

 

(6,960

)

Proceeds from asset dispositions

 

 

1,123

 

 

 

10,669

 

Sales and maturities of available-for-sale securities

 

 

-

 

 

 

3,175

 

Other, net

 

 

-

 

 

 

417

 

Total cash used in investing activities

 

 

(183,206

)

 

 

(7,048

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of debt

 

 

(93,755

)

 

 

(18,004

)

Repurchase of common stock

 

 

(3,909

)

 

 

-

 

Payment of debt issuance costs

 

 

(8,256

)

 

 

-

 

Distribution to noncontrolling interest

 

 

-

 

 

 

(24

)

Other, net

 

 

-

 

 

 

(928

)

Total cash used in financing activities

 

 

(105,920

)

 

 

(18,956

)

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and cash equivalents

 

 

(861

)

 

 

(2,574

)

Net decrease in cash and cash equivalents

 

 

(164,388

)

 

 

(33,924

)

Cash and cash equivalents at beginning of period

 

 

664,844

 

 

 

665,309

 

Cash and cash equivalents at end of period

 

$

500,456

 

 

$

631,385

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

 

4


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

Stock Par Value

 

 

in Excess of Par Value

 

 

Accumulated Deficit

 

 

Comprehensive Loss

 

 

Treasury Stock

 

 

Stockholder’s

Equity

 

 

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 income

 

 

-

 

 

 

-

 

 

 

34,593

 

 

 

-

 

 

 

-

 

 

 

34,593

 

 

 

1,160

 

 

 

35,753

 

Other comprehensive income (loss), net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

26,623

 

 

 

-

 

 

 

26,623

 

 

 

(32

)

 

 

26,591

 

Common stock issued

 

 

3,235

 

 

 

(3,235

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation charges

 

 

-

 

 

 

8,329

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,329

 

 

 

-

 

 

 

8,329

 

Purchase of treasury shares

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,909

)

 

 

(3,909

)

 

 

-

 

 

 

(3,909

)

Retirement of common stock

 

 

(447

)

 

 

(832

)

 

 

-

 

 

 

-

 

 

 

1,279

 

 

 

-

 

 

 

-

 

 

 

-

 

Purchase of shares from NCI

 

 

-

 

 

 

597

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

597

 

 

 

(17,779

)

 

 

(17,182

)

Balance at September 30, 2016

 

$

249,629

 

 

$

1,691,918

 

 

$

(226,291

)

 

$

(67,332

)

 

$

(94,892

)

 

$

1,553,032

 

 

$

43,271

 

 

$

1,596,303

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

 

5


 

 

 

 

 

6


 

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. (“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 income and 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

Statement of Cash Flows—In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU clarifies how entities should classify certain cash receipts and cash payments in their statements of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. We adopted this ASU in the third quarter of 2016. Our retrospective adoption did not have a material impact on the presentation of our Consolidated Financial Statements.

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, earnings per share and classification in the statement of cash flows. We adopted this ASU in the second quarter of 2016. Our adoption did not have a material impact on the presentation of our Consolidated Financial Statements.

Income Tax—In November 2015, the FASB issued 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 a material impact on the presentation of our Consolidated Financial Statements. All comparable periods presented have been revised to reflect this change.

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ConsolidationIn 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.

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 a material impact on the accompanying Consolidated Financial Statements.

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. Under this ASU, we are 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 our management’s plan to alleviate any such substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter with early adoption permitted. We adopted this ASU in the third quarter of 2016. Except for the disclosures set forth in this paragraph, our adoption of the ASU did not impact the presentation of our Consolidated Financial Statements or the disclosures in the Consolidated Financial Statements.

Accounting Guidance Issued But Not Adopted as of September 30, 2016

Financial Instruments—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU will require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. A valuation account, allowance for credit losses, will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. This ASU is effective for interim and annual periods beginning after December 15, 2019. We are currently assessing the impact of this guidance 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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

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.

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 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.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarifying guidance for identifying performance obligations and the licensing implementation guidance. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for ASU 2014-09.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. The effective date and transition requirements for this ASU are the same as the 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.

 

 

NOTE 2—REVENUE RECOGNITION

Unapproved Change Orders

As of September 30, 2016, total unapproved change orders included in our estimates at completion aggregated approximately $139 million, of which approximately $21 million was included in backlog. As of September 30, 2015, total unapproved change orders included in our estimates at completion aggregated approximately $146 million, of which approximately $23 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 $10 million as of September 30, 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 September 30, 2016 and 2015.  

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

None of the claims included in our estimates at completion at September 30, 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 September 30, 2016, we have provided for our estimated costs to complete for 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 immediately in cost of operations in the Consolidated Statements of Operations.

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. The provision for estimated losses on all active uncompleted projects is a component of "Advance billings on contracts" in our Consolidated Balance Sheets.

As of September 30, 2016 and December 31, 2015 there were no active projects which were in a significant loss position.   

 

 

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, 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 and nine months ended September 30, 2016 and 2015.

Three months ended September 30, 2016

Operating income for the three months ended September 30, 2016 was positively impacted by net favorable changes in estimates totaling approximately $34 million across all segments.

Americas, Europe and Africa Segment (“AEA”)This segment was positively impacted by net favorable changes in estimates, aggregating approximately $6 million, none of which individually were material.

Middle East Segment (“MEA”)This segment was positively impacted by net favorable changes in estimates aggregating approximately $12 million, including changes due to productivity improvements and associated cost savings related to a Saudi Aramco project. The remaining changes attributable to other miscellaneous projects were not individually material.

Asia Segment (“ASA”)This segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million, which were primarily driven by cost savings associated with our vessel productivity improvements, as well as favorable changes in estimates at completion on several active projects. Those changes were partially offset by net unfavorable changes on an active project, which was not material. 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Nine months ended September 30, 2016

Operating income for the nine months ended September 30, 2016 was positively impacted by net favorable changes in estimates totaling approximately $101 million across all segments.

AEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $29 million, primarily due to (1) successful execution and close-out improvements on two significant projects, PB Litoral and Exxon Julia Subsea Tieback; and (2) productivity improvements and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico. Included in the change was a reversal of a $7 million provision for liquidated damages, due to an agreed additional extension of the PB Litoral project completion date. Those changes were partially offset by net unfavorable changes on multiple projects, none of which were individually material. 

MEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $29 million, primarily due to productivity improvements and associated cost savings related to the DB 27 and the Intermac 406 vessels, both associated with Saudi Aramco projects, due to improved execution. Those favorable changes in estimates were partially offset by marine equipment downtime due to weather on a project in Qatar.  

ASAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $43 million, primarily driven by cost savings associated with productivity improvements on our CSV 108 vessel activities and favorable agreement on outstanding change orders on active and completed projects during the 2016 period. Those changes were partially offset by net unfavorable changes on multiple projects, none of which were individually material. 

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.

AEAThis segment had net unfavorable changes in estimates aggregating approximately $11 million.  Results for the third quarter of 2015 included $6 million due to changes in the marine campaign execution plan on the PB Litoral EPCI project in Mexico and charges associated with a legal settlement. 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 changes were partially offset by the extension of the project completion date on the PB Litoral project, which resulted in a $13 million provision reversal for liquidated damages.

MEAThis segment was positively impacted by 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 favorable changes were partially offset by a $4 million increase in pipelay cost estimates on a U.A.E. project, primarily due to changes in execution plan as a result of needing to substitute with a third-party vessel and hookup associated issues.

ASAThis 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 estimates totaling approximately $21 million across all segments.

AEAThis 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 provision reversal for liquidated damages 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 changes were partially offset by $6 million due to changes in the marine campaign execution on the PB Litoral project discussed above and charges associated with a legal settlement.  Other multiple projects experience net positive changes in estimates of $1 million, which were not individually material.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

MEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million. The following four projects, in Saudi Arabia, were positively impacted: (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 due to changes in revenue recovery and cost savings resulting from customer-approved design optimization.  Those 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 an increase in cost estimates on onshore scope; and (3) $2 million of unfavorable changes in estimates on multiple projects, none of which were individually material.

ASAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $6 million.  Improvements were driven by $4 million of productivity gains and improvements in cost estimates realized on the Gorgon MRU fabrication project, as well as $10 million 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.

 

 

NOTE 4—RESTRUCTURING

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 previously announced move of our ASA regional headquarters from Singapore to Kuala Lumpur, along with additional sourcing initiatives, is substantially complete.  We completed the MPI restructuring during third quarter of 2016.

We continued our efforts to improve our cost structure by initiating the Additional Overhead Reduction program (“AOR”) during the fourth quarter of 2015. AOR actions, which have included personnel reductions affecting direct operating and selling, general and administrative expenses, were substantially complete as of September 30, 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.

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McDERMOTT INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

The following table presents amounts incurred during the three and nine months ended September 30, 2016 and 2015, as well as amounts incurred from the inception of our restructuring efforts up to September 30, 2016.  Amounts expected to be incurred in the fourth quarter of 2016 are not material.

 

 

Incurred in the three months ended September 30,

 

 

Incurred in the nine months ended September 30,

 

 

Incurred from  inception to

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

September 30, 2016

 

 

(in thousands)

 

Americas Restructuring

$

-

 

 

$

(27

)

 

$

(1,500

)

 

$

2,308

 

 

$

44,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Restructuring

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,601