Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INC | mdr-ex322_6.htm |
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex321_7.htm |
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INC | mdr-ex312_8.htm |
EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex311_10.htm |
EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex121_9.htm |
Fsale
w
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 March 31, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth 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 |
☐ |
|
|
|
|
|
|
Emerging growth company |
☐ |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 April 21, 2017 was 283,862,194.
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 |
|
21 |
Item 3—Quantitative and Qualitative Disclosures about Market Risk |
|
30 |
|
31 |
|
|
32 |
|
|
32 |
|
|
33 |
|
|
35 |
Item 1. Consolidated Financial Statements
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
|
||||||||
(Unaudited) |
|
|||||||
|
|
Three months Ended March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands, except share and per share amounts) |
|
|||||
Revenues |
|
$ |
519,431 |
|
|
$ |
729,032 |
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
Cost of operations |
|
|
428,590 |
|
|
|
616,002 |
|
Research and development expenses |
|
|
480 |
|
|
|
31 |
|
Selling, general and administrative expenses |
|
|
36,587 |
|
|
|
38,328 |
|
Other operating (income) expenses |
|
|
(2,211 |
) |
|
|
38,678 |
|
Total costs and expenses |
|
|
463,446 |
|
|
|
693,039 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
55,985 |
|
|
|
35,993 |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(17,706 |
) |
|
|
(11,238 |
) |
Other non-operating income (expense), net |
|
|
614 |
|
|
|
(3,391 |
) |
Total other expense, net |
|
|
(17,092 |
) |
|
|
(14,629 |
) |
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
38,893 |
|
|
|
21,364 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
10,771 |
|
|
|
19,330 |
|
|
|
|
|
|
|
|
|
|
Income before loss from Investments in Unconsolidated Affiliates |
|
|
28,122 |
|
|
|
2,034 |
|
|
|
|
|
|
|
|
|
|
Loss from Investments in Unconsolidated Affiliates |
|
|
(3,927 |
) |
|
|
(4,478 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
24,195 |
|
|
|
(2,444 |
) |
|
|
|
|
|
|
|
|
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
2,279 |
|
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to McDermott International, Inc. |
|
$ |
21,916 |
|
|
$ |
(2,172 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to McDermott International, Inc.: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
|
$ |
(0.01 |
) |
Diluted |
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Shares used in the computation of net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
|
241,829,988 |
|
|
|
239,137,912 |
|
Diluted |
|
|
282,285,595 |
|
|
|
239,137,912 |
|
See accompanying Notes to the Consolidated Financial Statements.
1
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
|
||||||||
(Unaudited) |
|
|||||||
|
|
Three Months Ended March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(in thousands) |
|
|||||
Net income (loss) |
|
$ |
24,195 |
|
|
$ |
(2,444 |
) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Unrealized gain on investments |
|
|
19 |
|
|
|
5 |
|
Gain on derivatives |
|
|
2,135 |
|
|
|
30,791 |
|
Foreign currency translation |
|
|
239 |
|
|
|
(3,343 |
) |
Other comprehensive income, net of tax |
|
|
2,393 |
|
|
|
27,453 |
|
Total comprehensive income |
|
|
26,588 |
|
|
|
25,009 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests |
|
|
2,261 |
|
|
|
(285 |
) |
Comprehensive income attributable to McDermott International, Inc. |
|
$ |
24,327 |
|
|
$ |
25,294 |
|
See accompanying Notes to the Consolidated Financial Statements.
2
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(In thousands, except share and per share amounts) |
|
|||||
Assets |
|
(Unaudited) |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
623,538 |
|
|
$ |
595,921 |
|
Restricted cash and cash equivalents |
|
|
18,221 |
|
|
|
16,412 |
|
Accounts receivable—trade, net |
|
|
199,252 |
|
|
|
334,384 |
|
Accounts receivable—other |
|
|
45,660 |
|
|
|
36,929 |
|
Contracts in progress |
|
|
473,741 |
|
|
|
319,138 |
|
Other current assets |
|
|
38,555 |
|
|
|
29,599 |
|
Total current assets |
|
|
1,398,967 |
|
|
|
1,332,383 |
|
Property, plant and equipment |
|
|
2,599,623 |
|
|
|
2,586,179 |
|
Less accumulated depreciation |
|
|
(914,208 |
) |
|
|
(898,878 |
) |
Property, plant and equipment, net |
|
|
1,685,415 |
|
|
|
1,687,301 |
|
Accounts receivable—long-term retainages |
|
|
101,004 |
|
|
|
127,193 |
|
Investments in Unconsolidated Affiliates |
|
|
13,259 |
|
|
|
17,023 |
|
Deferred income taxes |
|
|
20,083 |
|
|
|
21,116 |
|
Other assets |
|
|
31,435 |
|
|
|
37,214 |
|
Total assets |
|
$ |
3,250,163 |
|
|
$ |
3,222,230 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt |
|
$ |
45,206 |
|
|
$ |
48,125 |
|
Accounts payable |
|
|
270,284 |
|
|
|
173,203 |
|
Accrued liabilities |
|
|
273,585 |
|
|
|
277,584 |
|
Advance billings on contracts |
|
|
89,703 |
|
|
|
192,486 |
|
Income taxes payable |
|
|
18,851 |
|
|
|
17,945 |
|
Total current liabilities |
|
|
697,629 |
|
|
|
709,343 |
|
Long-term debt |
|
|
720,225 |
|
|
|
704,395 |
|
Self-insurance |
|
|
17,013 |
|
|
|
16,980 |
|
Pension liabilities |
|
|
19,326 |
|
|
|
19,471 |
|
Non-current income taxes |
|
|
59,458 |
|
|
|
60,870 |
|
Other liabilities |
|
|
117,607 |
|
|
|
115,703 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized 400,000,000 shares; |
|
|
|
|
|
|
|
|
issued 251,489,592 and 249,690,281 shares, respectively |
|
|
251,490 |
|
|
|
249,690 |
|
Capital in excess of par value (including prepaid common stock purchase contracts) |
|
1,691,164 |
|
|
|
1,695,119 |
|
|
Accumulated deficit |
|
|
(204,851 |
) |
|
|
(226,767 |
) |
Accumulated other comprehensive loss |
|
|
(64,484 |
) |
|
|
(66,895 |
) |
Treasury stock, at cost: 8,447,797 and 8,302,004 shares, respectively |
|
|
(95,953 |
) |
|
|
(94,957 |
) |
Stockholders' Equity—McDermott International, Inc. |
|
|
1,577,366 |
|
|
|
1,556,190 |
|
Noncontrolling interest |
|
|
41,539 |
|
|
|
39,278 |
|
Total equity |
|
|
1,618,905 |
|
|
|
1,595,468 |
|
Total liabilities and equity |
|
$ |
3,250,163 |
|
|
$ |
3,222,230 |
|
See accompanying Notes to the Consolidated Financial Statements.
3
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
|
||||||||
(Unaudited) |
|
|||||||
|
|
Three Months Ended March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
24,195 |
|
|
$ |
(2,444 |
) |
Non-cash items included in net income (loss): |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
21,381 |
|
|
|
24,542 |
|
Impairment loss |
|
|
- |
|
|
|
32,311 |
|
Stock-based compensation charges |
|
|
4,637 |
|
|
|
1,484 |
|
Loss from investments in Unconsolidated Affiliates |
|
|
3,927 |
|
|
|
4,478 |
|
Other non-cash items |
|
|
2,990 |
|
|
|
2,466 |
|
Changes in operating assets and liabilities that provided (used) cash: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
161,321 |
|
|
|
(61,248 |
) |
Contracts in progress, net of Advance billings on contracts |
|
|
(241,700 |
) |
|
|
50,839 |
|
Accounts payable |
|
|
95,276 |
|
|
|
16,762 |
|
Accrued and other current liabilities |
|
|
1,869 |
|
|
|
(16,112 |
) |
Other assets and liabilities, net |
|
|
(25,444 |
) |
|
|
6,202 |
|
Total cash provided by operating activities |
|
|
48,452 |
|
|
|
59,280 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(62,849 |
) |
|
|
(31,900 |
) |
Proceeds from asset dispositions |
|
|
55,391 |
|
|
|
- |
|
Investments in Unconsolidated Affiliates |
|
|
- |
|
|
|
(4,105 |
) |
Total cash used in investing activities |
|
|
(7,458 |
) |
|
|
(36,005 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(5,167 |
) |
|
|
(4,752 |
) |
Repurchase of common stock |
|
|
(6,614 |
) |
|
|
(2,200 |
) |
Total cash used in financing activities |
|
|
(11,781 |
) |
|
|
(6,952 |
) |
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
213 |
|
|
|
(139 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
29,426 |
|
|
|
16,184 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
612,333 |
|
|
|
781,645 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
641,759 |
|
|
$ |
797,829 |
|
See accompanying Notes to the Consolidated Financial Statements.
4
McDERMOTT INTERNATIONAL, INC. |
|
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Par Value |
|
|
Capital in Excess of Par Value |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Loss ("AOCI") |
|
|
Treasury Stock |
|
|
Stockholders' Equity |
|
|
Noncontrolling Interest ("NCI") |
|
|
Total Equity |
|
||||||||
|
(in thousands) |
|
||||||||||||||||||||||||||||||
Balance at January 1, 2017 |
|
$ |
249,690 |
|
|
$ |
1,695,119 |
|
|
$ |
(226,767 |
) |
|
$ |
(66,895 |
) |
|
$ |
(94,957 |
) |
|
$ |
1,556,190 |
|
|
$ |
39,278 |
|
|
$ |
1,595,468 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
21,916 |
|
|
|
- |
|
|
|
- |
|
|
|
21,916 |
|
|
|
2,279 |
|
|
|
24,195 |
|
Other comprehensive income (loss), net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,411 |
|
|
|
- |
|
|
|
2,411 |
|
|
|
(18 |
) |
|
|
2,393 |
|
Common stock issued |
|
|
2,587 |
|
|
|
(2,587 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based compensation charges |
|
|
- |
|
|
|
3,463 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,463 |
|
|
|
- |
|
|
|
3,463 |
|
Purchase of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,614 |
) |
|
|
(6,614 |
) |
|
|
- |
|
|
|
(6,614 |
) |
Retirement of common stock |
|
|
(787 |
) |
|
|
(4,831 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,618 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance at March 31, 2017 |
|
$ |
251,490 |
|
|
$ |
1,691,164 |
|
|
$ |
(204,851 |
) |
|
$ |
(64,484 |
) |
|
$ |
(95,953 |
) |
|
$ |
1,577,366 |
|
|
$ |
41,539 |
|
|
$ |
1,618,905 |
|
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 |
|
8 |
|
|
9 |
|
|
10 |
|
|
11 |
|
|
11 |
|
Note 7—Contracts in Progress and Advance Billings on Contracts |
|
12 |
|
12 |
|
|
12 |
|
|
15 |
|
|
15 |
|
|
16 |
|
|
17 |
|
|
18 |
|
|
18 |
|
|
19 |
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”), front-end engineering and design (“FEED”) 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 our Current Report on Form 8-K filed with the SEC on April 25, 2016 (the “April 25 Form 8-K”).
Classification
Certain prior year amounts have been reclassified for consistency with the current year presentation. Previously reported Consolidated Financial Statements have been adjusted to reflect those changes.
In addition, in the first quarter of 2017, we implemented certain changes to our financial reporting structure. Corporate expenses, certain centrally managed initiatives (such as restructuring charges), impairments, year-end mark-to-market pension actuarial gains and losses, costs not attributable to a particular reportable segment, and unallocated direct operating expenses associated with the underutilization of vessels, fabrication facilities and engineering resources, are no longer apportioned to our reportable segments. Those expenses are reported under “Corporate and Other”. Previously reported segment financial information has been adjusted to reflect this change, see Note 16, Segment Reporting.
Accounting Guidance Issued But Not Adopted as of March 31, 2017
Pension and Postretirement Benefits—In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit. This ASU requires bifurcation of certain components of net pension and postretirement benefit cost (“benefit costs”) in the Consolidated Statements of Operations. The service cost components are required to be presented in operating income and the remaining components are required to be presented outside of operating income. This ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Upon future adoption of this guidance, benefit costs, excluding service costs component, will be included in Other non-operating income (expense), net in our Consolidated Statements of Operations. Currently, all components of benefit costs are reported in Selling, general and administrative expenses in our Consolidated Statements of Operations.
7
Income Taxes—In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The application of this amendment is not expected to have a material impact on our future Consolidated Financial Statements and related disclosures.
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.
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.
Revenue from Contracts with Customers (Topic 606)—In May 2014, the FASB issued a new standard related to revenue recognition which supersedes 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.
The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property, identifying performance obligations, reporting gross versus net revenue and narrow-scope improvements and practical expedients.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (“full retrospective method”), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (“modified retrospective application”).
We are currently assessing the impact of this ASU and the amendments on our future Consolidated Financial Statements and related disclosures. Adoption may affect the manner in which the company determines the unit of account for its projects and estimates revenue associated with unapproved change orders and claims. We intend to adopt the new standard on January 1, 2018 (the “initial application” date):
|
• |
using the modified retrospective application, with no restatement of the comparative periods presented and a cumulative effect adjustment as of the date of adoption; |
|
• |
applying the new standard only to those contracts that are in process at the date of initial application; and |
|
• |
disclosing the impact of the new standard on our 2018 Consolidated Financial Statements. |
This standard could have a significant impact on our Consolidated Financial Statements and related disclosures.
Unapproved Change Orders
As of March 31, 2017, total unapproved change orders included in our estimates at completion aggregated approximately $118 million, of which approximately $12 million was included in backlog. 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.
8
The amount of revenues included in our estimates at completion (i.e., contract values) associated with claims was $10 million and $16 million as of March 31, 2017 and 2016, 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, 2017 and 2016.
None of the claims included in our estimates at completion at March 31, 2017 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
For all ongoing contracts, we have provided for estimated costs to complete. If a current estimate of total contract cost indicates a loss, the projected loss is recognized in full immediately and reflected in cost of operations in the Consolidated Statements of Operations. 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 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. In our Consolidated Balance Sheets, the provision for estimated losses on all active uncompleted projects is included in “Advance billings on contracts”.
As of March 31, 2017, KJO Hout, an EPCI project in our MEA segment, was in an overall $7 million loss position. That project is expected to be complete in the second quarter of 2017.
As of March 31, 2016, two significant active projects in our AEA segment were in loss positions. PB Litoral, an EPCI project, in Mexico, which was completed in the first quarter of 2016, and the five-year Agile vessel charter project in Brazil which was terminated in the second quarter of 2016.
As of March 31, 2017 and December 31, 2016, the remaining provision for estimated losses, to be recognized, on all active uncompleted projects in our Consolidated Balance Sheets was not material.
The following is a discussion of our most significant changes in estimates that impacted segment operating income for the three months ended March 31, 2017 and 2016.
Three months ended March 31, 2017
Segment operating income for the three months ended March 31, 2017 was positively impacted by net favorable changes in estimates totaling approximately $47 million across all segments.
Americas, Europe and Africa Segment (“AEA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $5 million on multiple projects, none of which individually were material.
Middle East Segment (“MEA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million, primarily due to productivity improvements and associated cost savings on Saudi Aramco projects.
Asia Segment (“ASA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $26 million, primarily as a result of improved cost estimates associated with efficient project execution, including productivity improvements on our marine vessels and associated cost savings achieved, on our active projects.
At December 31, 2016, on our Ichthys project in Australia, we reported a $34 million increase in our estimated costs at completion and a $10 million possible additional increase due to a failure identified in a supplier-provided subsea-pipe connector component which we had previously installed. We discussed various options for replacing components with the customer and developed a
9
remediation plan. At March 31, 2017, we believe the increase in estimated costs at completion for the project, as a whole, to replace the components will be approximately $35 million. During the quarter, we began to mitigate this risk and now believe the range of reasonably possible additional increase in costs has decreased to $5 million as compared to $10 million at December 31, 2016. We expect the project to remain in an overall profitable position.
Three months ended March 31, 2016
Segment operating income for the three months ended March 31, 2016 was positively impacted by net favorable changes in estimates totaling approximately $40 million across all segments.
AEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million, primarily due to:
|
• |
successful execution and close-out improvements on two significant projects, PB Litoral and Exxon Julia Subsea Tieback, in the first quarter of 2016; and |
|
• |
a reversal of a $7 million provision for liquidated damages due to an agreed extension of the PB Litoral project completion date. |
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. |
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. |
Restructuring initiatives are driven and managed by our corporate management. These costs are not allocated to our reportable segments and are reported under Corporate and Other.
Restructuring expenses are reported as a component of Other operating (income) expenses in our Consolidated Statements of Operations. Previously, restructuring expenses were presented separately in our Consolidated Statements of Operations.
10
The following table presents restructuring costs incurred in the first quarter of 2016 and from inception, by major cost type. No restructuring costs were incurred in the first quarter of 2017.
|
|
Three months ended March 31, 2016 |
|
|
From inception to March 31, 2017 |
|
||
|
(in thousands) |
|
||||||
Americas Restructuring |
|
$ |
- |
|
|
$ |
44,194 |
|
|
|
|
|
|
|
|
|
|
McDermott Profitability Initiative |
|
|
|
|
|
|
|
|
Severance and other personnel-related costs |
|
|
433 |
|
|
|
17,807 |
|
Asset impairment and disposal |
|
|
- |
|
|
|
7,471 |
|
Legal and other advisor fees |
|
|
173 |
|
|
|
11,639 |
|
Other |
|
|
895 |
|
|
|
10,045 |
|
|
|
|
1,501 |
|
|
|
46,962 |
|
Additional Overhead Reduction |
|
|
|
|
|
|
|
|
Severance and other personnel-related costs |
|
|
2,971 |
|
|
|
5,012 |
|
Legal and other advisor fees |
|
|
1,728 |
|
|
|
2,768 |
|
Other |
|
|
167 |
|
|
|
385 |
|
|
|
|
4,866 |
|
|
|
8,165 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,367 |
|
|
$ |
99,321 |
|
NOTE 5—CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the totals of such amounts shown in the Consolidated Statements of Cash Flows.
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(in thousands) |
|
|||||
Cash and cash equivalents |
|
$ |
623,538 |
|
|
$ |
595,921 |
|
Restricted cash and cash equivalents |
|
|
18,221 |
|
|
|
16,412 |
|
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows |
|
$ |
641,759 |
|
|
$ |
612,333 |
|
A majority of our restricted cash balances serve as collateral for letters of credit, discussed in Note 9, Debt.
Accounts Receivable—Trade, Net
A summary of contract receivables is as follows:
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(in thousands) |
|
|||||
Contract receivables: |
|
|
|
|
|
|
|
|
Contracts in progress |
|
$ |
97,116 |
|
|
$ |
245,604 |
|
Completed contracts |
|
|
25,202 |
|
|
|
40,345 |
|
Retainages |
|
|
86,934 |
|
|
|
58,431 |
|
Unbilled(1) |
|
|
4,303 |
|
|
|
4,303 |
|
Less allowances |
|
|
(14,303 |
) |
|
|
(14,299 |
) |
Accounts receivable—trade, net |
|
$ |
199,252 |
|
|
$ |
334,384 |
|
(1) |
This amount relates to a project milestone billing for which we are awaiting the customer’s final acceptance certificate. We expect to receive the final acceptance certificate during 2017. |
11
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:
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(in thousands) |
|
|||||
Retainages expected to be collected within one year |
|
$ |
86,934 |
|
|
$ |
58,431 |
|
Retainages expected to be collected after one year |
|
|
101,004 |
|
|
|
127,193 |
|
Total retainages |
|
$ |
187,938 |
|
|
$ |
185,624 |
|
NOTE 7—CONTRACTS IN PROGRESS AND ADVANCE BILLINGS ON CONTRACTS
A detail of the components of contracts in progress and advance billings on contracts is as follows:
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(In thousands) |
|
|||||
Costs incurred less costs of revenue recognized |
|
$ |
61,019 |
|
|
$ |
119,688 |
|
Revenues recognized less billings to customers |
|
|
412,722 |
|
|
|
199,450 |
|
Contracts in Progress |
|
$ |
473,741 |
|
|
$ |
319,138 |
|
|
|
|
|
|
|
|
|
|
Billings to customers less revenue recognized |
|
|
188,238 |
|
|
|
42,637 |
|
Costs incurred less costs of revenue recognized |
|
|
(98,535 |
) |
|
|
149,849 |
|
Advance Billings on Contracts |
|
$ |
89,703 |
|
|
$ |
192,486 |
|
In January 2017, we purchased the pipelay and construction vessel, the Amazon, for a total cash consideration of approximately $52 million. Following the purchase, we sold the Amazon to an unrelated third party for total cash consideration of $52 million and simultaneously entered into an 11-year bareboat charter agreement with the purchaser. The bareboat charter agreement provides us with options to purchase the Amazon, at a predetermined value periodically over the charter term. We accounted for the transaction as a sale leaseback and are treating the bareboat charter agreement as an operating lease. As the proceeds from the sale equaled the carrying value of the vessel, no gain or loss was recognized. The annual charter obligation is $3 million through 2018, when it will increase to $8 million annually for the remainder of the charter term.
The carrying values of our long-term debt obligations, net of unamortized debt issuance costs of $11 million and $14 million as of March 31, 2017 and December 31, 2016, respectively, are as follows:
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(In thousands) |
|
|||||
Senior Notes |
|
$ |
493,845 |
|
|
$ |
493,461 |
|
Term Loan |
|
|
211,923 |
|
|
|
212,070 |
|
North Ocean 105 construction financing |
|
|
32,478 |
|
|
|
31,877 |
|
Amortizing Notes |
|
|
4,410 |
|
|
|
7,932 |
|
Vendor equipment financing |
|
|
15,686 |
|
|
|
- |
|
Other |
|
|
7,089 |
|
|
|
7,180 |
|
|
|
|
765,431 |
|
|
|
752,520 |
|
Less: Amounts due within one year |
|
|
45,206 |
|
|
|
48,125 |
|
Total long-term debt |
|
$ |
720,225 |
|
|
$ |
704,395 |
|
Letter of Credit Facility and Term Loan
In April 2014, we entered into a credit agreement (as amended to date, the “Credit Agreement”), which initially provided for a $400 million (subsequently amended to $450 million) first-lien, first-out three-year letter of credit facility (the “LC Facility”), scheduled to mature in 2019, and a $300 million first-lien, second-out five-year term loan (the “Term Loan”), scheduled to mature in 2019. The
12
indebtedness and other obligations under the Credit Agreement are unconditionally guaranteed on a senior secured basis by substantially all of our wholly owned subsidiaries, other than our captive insurance subsidiary (collectively, the “Guarantors”). The aggregate face amount of letters of credit issued under the LC Facility, as of March 31, 2017 and December 31, 2016, was $372 million and $442 million, respectively.
The LC Facility permits us to deposit up to $300 million with letter of credit issuers to cash collateralize letters of credit issued on a bilateral basis outside the credit facility. As of March 31, 2017 and December 31, 2016, we had an aggregate face amount of approximately $15 million and $16 million of such letters of credit outstanding supported by cash collateral. We have included the supporting cash collateral in restricted cash and cash equivalents in the accompanying Consolidated Balance Sheets.
The LC Facility is secured on a first-lien, first-out basis (with relative priority over the Term Loan) by pledges of the capital stock of all the Guarantors and mortgages on, or other security interests in, substantially all the tangible and intangible assets of our company and the Guarantors, subject to specific exceptions.
The LC Facility contains various customary affirmative covenants, as well as specific affirmative covenants, including specific reporting requirements. The LC Facility also requires compliance with various negative covenants, including limitations with respect to the incurrence of other indebtedness and liens, restrictions on acquisitions, capital expenditures and other investments, restrictions on sale leaseback transactions and restrictions on prepayments of other indebtedness.
The Term Loan is secured on a first-lien, second-out basis (with the LC Facility having relative priority over the Term Loan) by pledges of the capital stock of all the Guarantors and mortgages on, or other security interests in, substantially all tangible and intangible assets of our company and the Guarantors, subject to specific exceptions.
The Term Loan requires mandatory prepayments from: (1) the proceeds from the sale of assets, as well as insurance proceeds, in each case subject to certain exceptions, to the extent such proceeds are not reinvested in our business within 365 days of receipt; (2) net cash proceeds from the incurrence of indebtedness not otherwise permitted under the Credit Agreement; and (3) 50% of amounts deemed to be “excess cash flow,” subject to specified adjustments. The Term Loan requires $750,000 quarterly payments of principal.
The Term Loan requires compliance with various customary affirmative and negative covenants. We are required to maintain a ratio of “ownership adjusted fair market value” of marine vessels to the sum of (1) the outstanding principal amount of the Term Loan and (2) the aggregate principal amount of unreimbursed drawings and advances under the LC Facility of at least 1.75:1.00. As of March 31, 2017, the actual ratio was 5.53 to 1.0.
As of March 31, 2017 we were in compliance with all of the financial covenants under the Credit Agreement.
For additional information relating to the Credit Agreement, see Note 10, Debt, to the Consolidated Financial Statements included in the April 25 Form 8-K.
Senior Notes
In April 2014, we issued $500 million in aggregate principal amount of 8.00% senior secured notes due 2021 (the “Notes”) in a private placement in accordance with Rule 144A and Regulation S under the Securities Act of 1933, as amended. Interest on the Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2014. The Notes are scheduled to mature on May 1, 2021. The Notes are unconditionally guaranteed on a senior secured basis by the Guarantors, and the Notes are secured on a second-lien basis by pledges of capital stock of certain of our subsidiaries and mortgages and other security interests covering (1) specified marine vessels owned by certain of the Guarantors and (2) substantially all the other tangible and intangible assets of our company and the Guarantors, subject to exceptions for certain assets. The indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (1) incur or guarantee additional indebtedness or issue preferred stock; (2) make investments or certain other restricted payments; (3) pay dividends or distributions on capital stock or purchase or redeem subordinated indebtedness; (4) sell assets; (5) create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (6) create certain liens; (7) sell all or substantially all of our assets or merge or consolidate with or into other companies; (8) enter into transactions with affiliates; and (9) create unrestricted subsidiaries. Many of those covenants would become suspended if the Notes were to attain an investment grade rating from both Moody’s Investors Service, Inc. and Standard and Poor’s Ratings Services and no default has occurred. For additional information relating to the Notes, see Note 10, Debt, to the Consolidated Financial Statements included in the April 25 Form 8-K.
13
NO 105―On September 30, 2010, MDR, as guarantor, and North Ocean 105 AS, in which we have a 75% ownership interest, as borrower, entered into a financing agreement to finance a portion of the construction costs of the NO 105. Borrowings under the agreement are secured by, among other things, a pledge of all of the equity of North Ocean 105 AS, a mortgage on the NO 105, and a lien on substantially all of the other assets of North Ocean 105 AS. Under the current Credit Agreement, we are required to exercise our option under the North Ocean 105 AS joint venture agreement to purchase Oceanteam ASA’s 25% ownership interest in the vessel-owning company during the second quarter of 2017 and repay the outstanding NO 105 debt during the third quarter of 2017.
Tangible Equity Units (“TEUs”)
In April 2014, we issued 11,500,000 6.25% TEUs, each with a stated amount of $25. Each TEU consists of (1) a prepaid common stock purchase contract and (2) a senior amortizing note due April 1, 2017 (each an “Amortizing Note”) that had an initial principal amount of $4.1266 per Amortizing Note and bore interest at a rate of 7.75% per annum and had a final scheduled installment payment date of April 1, 2017.
The prepaid common stock purchase contracts were accounted for as capital in excess of par value totaling $240 million in our Consolidated Balance Sheets. Each prepaid common stock purchase contract automatically settled on or about April 3, 2017. On or about that date, we delivered 40.8 million shares of our common stock to holders of the TEU prepaid common stock purchase contracts, based on the settlement rate of 3.5496 shares per unit.
Receivables Factoring Facility
In February 2017, J. Ray McDermott de Mexico, S.A. de C.V. (“JRM Mexico”), one of our indirectly 100% owned subsidiaries, entered into a 364 day, $50 million committed revolving receivables purchase agreement which provides for the sale, at a discount rate of LIBOR plus an applicable margin of 4.25%, of certain receivables to a designated purchaser without recourse. The facility provides for customary representations and warranties and compliance with customary covenants. JRM Mexico’s obligations in connection with the receivables purchase agreement are guaranteed by McDermott International, Inc.
During the first quarter of 2017, we sold approximately $2 million of receivables.
Vendor Equipment Financing
In February 2017, JRM Mexico entered into a 21-month loan agreement for equipment financing in the amount of $47 million. Borrowings under the loan agreement bear interest at a fixed rate of 5.75%. JRM Mexico’s obligations in connection with this equipment financing are guaranteed by McDermott International Management, S. de RL., one of our 100% owned subsidiaries. The equipment financing agreement contains various customary affirmative covenants, as well as specific affirmative covenants, including the pledge of specific equipment. The equipment financing agreement also requires compliance with various negative covenants, including restricted use of the proceeds. At March 31, 2017, the total borrowing outstanding under this facility was approximately $16 million.
Unsecured Bilateral Lines of Credit
MDR has uncommitted lines of credit in place with Middle Eastern banks in support of our contracting activities in the Middle East. Bank guarantees issued under these agreements totaled $452 million and $359 million, as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017, overall capacity under these arrangements totaled $625 million.
Surety Bonds
As of March 31, 2017 and December 31, 2016, surety bonds issued under general agreements of indemnity in favor of surety underwriters in support of contracting activities of our subsidiaries JRM Mexico and McDermott, Inc. totaled $80 million and $79 million, respectively. As of March 31, 2017, overall uncommitted capacity under these arrangements totaled $300 million.
14
NOTE 10—PENSION AND POSTRETIREMENT BENEFITS
Net periodic cost (benefit) for our non-contributory qualified defined benefit pension plan and several of our non-qualified supplemental defined benefit pension plans (the “Domestic Plans”) and our J. Ray McDermott, S.A. Third Country National Employees Pension Plan (the “TCN Plan”) includes the following components:
|
Domestic Plans |
|
|
TCN Plan |
|
||||||||||
|
Three Months Ended March 31, |
|
|||||||||||||
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
(In thousands) |
|
|||||||||||||
Interest cost |
$ |
4,991 |
|
|
$ |
5,259 |
|
|
$ |
290 |
|
|
$ |
338 |
|
Expected return on plan assets |
|
(4,907 |
) |
|
|
(5,003 |
) |
|
|
(345 |
) |
|
|
(397 |
) |
Net periodic (benefit) cost |
$ |
84 |
|
|
$ |
256 |
|
|
$ |
(55 |
) |
|
$ |
(59 |
) |
NOTE 11—DERIVATIVE FINANCIAL INSTRUMENTS
We enter into derivative financial instruments primarily to hedge certain firm purchase commitments and forecasted transactions denominated in foreign currencies. We record these contracts at fair value on our Consolidated Balance Sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either: (1) deferred as a component of Accumulated Other Comprehensive Income (“AOCI”) until the hedged item is recognized in earnings; (2) offset against the change in fair value of the hedged firm commitment through earnings; or (3) recognized immediately in earnings. At inception and on an ongoing basis, we assess the hedging relationship to determine its effectiveness in offsetting changes in cash flows or fair value attributable to the hedged risk. We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. The ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in earnings. Gains and losses on derivative financial instruments that are immediately recognized in earnings are included as a component of Other non-operating income (expense), net in our Consolidated Statements of Operations.
As of March 31, 2017, the majority of our foreign currency forward contracts were designated as cash flow hedging instruments. In addition, we deferred approximately $23 million of net losses on those derivative financial instruments in AOCI, and we expect to reclassify approximately $5 million of deferred losses out of AOCI by March 31, 2018, as hedged items are recognized. The notional value of our outstanding derivative contracts totaled $294 million at March 31 2017, with maturities extending through February 2018. Of this amount, approximately $148 million is associated with various foreign currency expenditures we expect to incur on one of our ASA segment’s EPCI projects. These instruments consist of contracts to purchase or sell foreign-denominated currencies. As of March 31, 2017, the fair value of these contracts was in a net liability position totaling approximately $2 million. The fair value of outstanding derivative instruments is determined using observable financial market inputs, such as quoted market prices, and is classified as Level 2 in nature.
The following tables summarize our derivative financial instruments:
Asset and Liability Derivatives
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Derivatives Designated as Hedges: |
|
|
|
|
|
|
|
|
Location: |
|
|
|
|
|
|
|
|
Accounts receivable-other |
|
$ |
1,923 |
|
|
$ |
2,631 |
|
Other assets |
|
|
4 |
|
|
|
- |
|
Total derivatives asset |
|
$ |
1,927 |
|
|
$ |
2,631 |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,410 |
|
|
$ |
9,361 |
|
Other liabilities |
|
|
38 |
|
|
|
4 |
|
Total derivatives liability |
|
$ |
3,448 |
|
|
$ |
9,365 |
|
15
The Effects of Derivative Instruments on our Financial Statements
|
|
March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(in thousands) |
|
|||||
Derivatives Designated as Hedges: |
|
|
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income (loss) |
|
$ |
5,602 |