Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INC | mdr-ex322_9.htm |
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex321_10.htm |
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INC | mdr-ex312_7.htm |
EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex311_11.htm |
EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex121_6.htm |
EX-4.1 - EX-4.1 - MCDERMOTT INTERNATIONAL INC | mdr-ex41_439.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, 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.) |
|
|
|
4424 West Sam Houston Parkway North HOUSTON, TEXAS |
|
77041 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (281) 870-5000
757 N. Eldridge Pkwy Houston, Texas 77079
(Former Address of Principal Executive Offices)
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 October 30, 2017 was 284,008,760.
INDEX—FORM 10-Q
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PAGE |
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1 |
|
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1 |
|
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1 |
|
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2 |
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3 |
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4 |
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5 |
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6 |
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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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24 |
Item 3—Quantitative and Qualitative Disclosures about Market Risk |
|
39 |
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39 |
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40 |
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40 |
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41 |
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42 |
Item 1. Consolidated Financial Statements
McDERMOTT INTERNATIONAL, INC. |
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|||||||||||||||
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||||||||||||||||
(Unaudited) |
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|||||||||||||||
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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||||||||||
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2017 |
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2016 |
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2017 |
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|
2016 |
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||||
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(In thousands, except share and per share amounts) |
|
|||||||||||||
Revenues |
|
$ |
958,531 |
|
|
$ |
558,543 |
|
|
$ |
2,266,635 |
|
|
$ |
1,994,202 |
|
|
|
|
|
|
|
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Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of operations |
|
|
773,910 |
|
|
|
455,430 |
|
|
|
1,852,949 |
|
|
|
1,666,775 |
|
Research and development expenses |
|
|
1,657 |
|
|
|
69 |
|
|
|
2,958 |
|
|
|
199 |
|
Selling, general and administrative expenses |
|
|
55,671 |
|
|
|
46,983 |
|
|
|
142,280 |
|
|
|
137,386 |
|
Other operating (income) expenses, net |
|
|
221 |
|
|
|
13,006 |
|
|
|
(1,808 |
) |
|
|
53,806 |
|
Total costs and expenses |
|
|
831,459 |
|
|
|
515,488 |
|
|
|
1,996,379 |
|
|
|
1,858,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income |
|
|
127,072 |
|
|
|
43,055 |
|
|
|
270,256 |
|
|
|
136,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Interest expense, net |
|
|
(11,976 |
) |
|
|
(17,431 |
) |
|
|
(50,886 |
) |
|
|
(41,324 |
) |
Other non-operating income (expense), net |
|
|
803 |
|
|
|
5,237 |
|
|
|
(1,074 |
) |
|
|
(1,005 |
) |
Total other expense, net |
|
|
(11,173 |
) |
|
|
(12,194 |
) |
|
|
(51,960 |
) |
|
|
(42,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
115,899 |
|
|
|
30,861 |
|
|
|
218,296 |
|
|
|
93,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
19,532 |
|
|
|
15,976 |
|
|
|
53,221 |
|
|
|
55,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income (loss) from Investments in Unconsolidated Affiliates |
|
|
96,367 |
|
|
|
14,885 |
|
|
|
165,075 |
|
|
|
38,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from Investments in Unconsolidated Affiliates |
|
|
(3,441 |
) |
|
|
1,507 |
|
|
|
(11,495 |
) |
|
|
(2,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
92,926 |
|
|
|
16,392 |
|
|
|
153,580 |
|
|
|
35,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
(1,775 |
) |
|
|
284 |
|
|
|
550 |
|
|
|
1,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to McDermott International, Inc. |
|
$ |
94,701 |
|
|
$ |
16,108 |
|
|
$ |
153,030 |
|
|
$ |
34,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income per share attributable to McDermott International, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.33 |
|
|
$ |
0.07 |
|
|
$ |
0.57 |
|
|
$ |
0.14 |
|
Diluted |
|
$ |
0.33 |
|
|
$ |
0.06 |
|
|
$ |
0.54 |
|
|
$ |
0.12 |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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Shares used in the computation of net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
283,991,161 |
|
|
|
240,899,888 |
|
|
|
269,720,153 |
|
|
|
240,093,169 |
|
Diluted |
|
|
285,774,621 |
|
|
|
283,907,353 |
|
|
|
284,859,710 |
|
|
|
283,132,920 |
|
See accompanying Notes to the Consolidated Financial Statements.
1
McDERMOTT INTERNATIONAL, INC. |
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|||||||||||||||
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||||||||||||||||
(Unaudited) |
|
|||||||||||||||
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Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2017 |
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|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
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(in thousands) |
|
|||||||||||||
Net income |
|
$ |
92,926 |
|
|
$ |
16,392 |
|
|
$ |
153,580 |
|
|
$ |
35,753 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments |
|
|
38 |
|
|
|
(3 |
) |
|
|
77 |
|
|
|
14 |
|
Gain on derivatives |
|
|
9,266 |
|
|
|
3,566 |
|
|
|
19,905 |
|
|
|
38,978 |
|
Foreign currency translation |
|
|
(6,717 |
) |
|
|
(5,031 |
) |
|
|
(6,709 |
) |
|
|
(12,401 |
) |
Other comprehensive income (loss), net of tax |
|
|
2,587 |
|
|
|
(1,468 |
) |
|
|
13,273 |
|
|
|
26,591 |
|
Total comprehensive income |
|
|
95,513 |
|
|
|
14,924 |
|
|
|
166,853 |
|
|
|
62,344 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests |
|
|
(1,811 |
) |
|
|
273 |
|
|
|
532 |
|
|
|
1,128 |
|
Comprehensive income attributable to McDermott International, Inc. |
|
$ |
97,324 |
|
|
$ |
14,651 |
|
|
$ |
166,321 |
|
|
$ |
61,216 |
|
See accompanying Notes to the Consolidated Financial Statements.
2
McDERMOTT INTERNATIONAL, INC. |
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|||||||
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||||||||
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|
|
|
|
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|
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|
|
|
September 30, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(In thousands, except share and per share amounts) |
|
|||||
Assets |
|
(Unaudited) |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
416,352 |
|
|
$ |
595,921 |
|
Restricted cash and cash equivalents |
|
|
18,221 |
|
|
|
16,412 |
|
Accounts receivable—trade, net |
|
|
263,119 |
|
|
|
334,384 |
|
Accounts receivable—other |
|
|
47,237 |
|
|
|
36,929 |
|
Contracts in progress |
|
|
855,531 |
|
|
|
319,138 |
|
Other current assets |
|
|
38,049 |
|
|
|
29,599 |
|
Total current assets |
|
|
1,638,509 |
|
|
|
1,332,383 |
|
Property, plant and equipment |
|
|
2,630,228 |
|
|
|
2,586,179 |
|
Less accumulated depreciation |
|
|
(965,819 |
) |
|
|
(898,878 |
) |
Property, plant and equipment, net |
|
|
1,664,409 |
|
|
|
1,687,301 |
|
Accounts receivable—long-term retainages |
|
|
75,615 |
|
|
|
127,193 |
|
Investments in Unconsolidated Affiliates |
|
|
10,226 |
|
|
|
17,023 |
|
Deferred income taxes |
|
|
14,439 |
|
|
|
21,116 |
|
Other assets |
|
|
58,237 |
|
|
|
37,214 |
|
Total assets |
|
$ |
3,461,435 |
|
|
$ |
3,222,230 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt |
|
$ |
19,035 |
|
|
$ |
48,125 |
|
Accounts payable |
|
|
511,092 |
|
|
|
173,203 |
|
Accrued liabilities |
|
|
358,586 |
|
|
|
277,584 |
|
Advance billings on contracts |
|
|
42,793 |
|
|
|
192,486 |
|
Income taxes payable |
|
|
31,346 |
|
|
|
17,945 |
|
Total current liabilities |
|
|
962,852 |
|
|
|
709,343 |
|
Long-term debt |
|
|
521,642 |
|
|
|
704,395 |
|
Self-insurance |
|
|
18,014 |
|
|
|
16,980 |
|
Pension liabilities |
|
|
18,870 |
|
|
|
19,471 |
|
Non-current income taxes |
|
|
60,626 |
|
|
|
60,870 |
|
Other liabilities |
|
|
119,506 |
|
|
|
115,703 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Common stock, par value $1.00 per share, authorized 400,000,000 shares; |
|
|
|
|
|
|
|
|
issued 292,502,927 and 249,690,281 shares, respectively |
|
|
292,503 |
|
|
|
249,690 |
|
Capital in excess of par value |
|
1,660,114 |
|
|
|
1,695,119 |
|
|
Accumulated deficit |
|
|
(73,737 |
) |
|
|
(226,767 |
) |
Accumulated other comprehensive loss |
|
|
(53,604 |
) |
|
|
(66,895 |
) |
Treasury stock, at cost: 8,494,167 and 8,302,004 shares, respectively |
|
|
(96,245 |
) |
|
|
(94,957 |
) |
Stockholders' Equity—McDermott International, Inc. |
|
|
1,729,031 |
|
|
|
1,556,190 |
|
Noncontrolling interest |
|
|
30,894 |
|
|
|
39,278 |
|
Total equity |
|
|
1,759,925 |
|
|
|
1,595,468 |
|
Total liabilities and equity |
|
$ |
3,461,435 |
|
|
$ |
3,222,230 |
|
See accompanying Notes to the Consolidated Financial Statements.
3
McDERMOTT INTERNATIONAL, INC. |
|
|||||||
|
||||||||
(Unaudited) |
|
|||||||
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
(In thousands) |
|
|||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
153,580 |
|
|
$ |
35,753 |
|
Non-cash items included in net income: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
78,032 |
|
|
|
76,755 |
|
Impairment loss |
|
|
- |
|
|
|
44,069 |
|
Stock-based compensation charges |
|
|
19,543 |
|
|
|
14,011 |
|
Loss from investments in Unconsolidated Affiliates |
|
|
11,495 |
|
|
|
2,844 |
|
Other non-cash items |
|
|
17,525 |
|
|
|
7,782 |
|
Changes in operating assets and liabilities that provided (used) cash: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
119,623 |
|
|
|
(29,661 |
) |
Contracts in progress, net of Advance billings on contracts |
|
|
(673,420 |
) |
|
|
53,608 |
|
Accounts payable |
|
|
338,906 |
|
|
|
(110,196 |
) |
Accrued and other current liabilities |
|
|
79,866 |
|
|
|
(13,426 |
) |
Other assets and liabilities, net |
|
|
(9,648 |
) |
|
|
44,060 |
|
Total cash provided by operating activities |
|
|
135,502 |
|
|
|
125,599 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(97,106 |
) |
|
|
(197,393 |
) |
Proceeds from asset dispositions |
|
|
55,391 |
|
|
|
1,123 |
|
Investments in Unconsolidated Affiliates |
|
|
(2,769 |
) |
|
|
(4,105 |
) |
Total cash used in investing activities |
|
|
(44,484 |
) |
|
|
(200,375 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(230,715 |
) |
|
|
(93,755 |
) |
Payment of debt issuance cost |
|
|
(20,564 |
) |
|
|
(8,256 |
) |
Acquisition of Noncontrolling interest |
|
|
(10,652 |
) |
|
|
- |
|
Repurchase of common stock |
|
|
(7,126 |
) |
|
|
(3,909 |
) |
Total cash used in financing activities |
|
|
(269,057 |
) |
|
|
(105,920 |
) |
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
279 |
|
|
|
(861 |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
(177,760 |
) |
|
|
(181,557 |
) |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
612,333 |
|
|
|
781,645 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
434,573 |
|
|
$ |
600,088 |
|
See accompanying Notes to the Consolidated Financial Statements.
4
McDERMOTT INTERNATIONAL, INC. |
|
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
- |
|
|
|
- |
|
|
|
153,030 |
|
|
|
- |
|
|
|
- |
|
|
|
153,030 |
|
|
|
550 |
|
|
|
153,580 |
|
Other comprehensive income (loss), net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,291 |
|
|
|
- |
|
|
|
13,291 |
|
|
|
(18 |
) |
|
|
13,273 |
|
Common stock issued |
|
|
43,635 |
|
|
|
(43,635 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based compensation charges |
|
|
- |
|
|
|
13,046 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,046 |
|
|
|
- |
|
|
|
13,046 |
|
Purchase of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,126 |
) |
|
|
(7,126 |
) |
|
|
- |
|
|
|
(7,126 |
) |
Retirement of common stock |
|
|
(822 |
) |
|
|
(5,016 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,838 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Acquisition of NCI |
|
|
- |
|
|
|
2,121 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,121 |
|
|
|
(8,896 |
) |
|
|
(6,775 |
) |
Other |
|
|
- |
|
|
|
(1,521 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,521 |
) |
|
|
(20 |
) |
|
|
(1,541 |
) |
Balance at September 30, 2017 |
|
$ |
292,503 |
|
|
$ |
1,660,114 |
|
|
$ |
(73,737 |
) |
|
$ |
(53,604 |
) |
|
$ |
(96,245 |
) |
|
$ |
1,729,031 |
|
|
$ |
30,894 |
|
|
$ |
1,759,925 |
|
See accompanying Notes to the Consolidated Financial Statements.
5
McDERMOTT INTERNATIONAL, INC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) TABLE OF CONTENTS
|
|
PAGE |
Note 1—Basis of Presentation and Significant Accounting Policies |
|
7 |
|
9 |
|
|
10 |
|
|
12 |
|
|
13 |
|
|
13 |
|
Note 7—Contracts in Progress and Advance Billings on Contracts |
|
13 |
|
14 |
|
|
14 |
|
|
17 |
|
|
18 |
|
|
19 |
|
|
20 |
|
|
22 |
|
|
22 |
|
|
23 |
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 the Americas, Europe, Africa, 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, 2017 (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 September 30, 2017
Derivatives—In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. This guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective prospectively for annual periods beginning on or after December 15, 2018. Early adoption is permitted. We intend to adopt this guidance on January 1, 2019. We plan to apply this ASU to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach if an adjustment is required (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The adoption of this guidance is not expected to have a material impact on our future Consolidated Financial Statements or related disclosures.
7
Stock Compensation—In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The general model for modifications of share-based payment awards is to record the incremental value arising from a change as additional compensation cost. This guidance clarifies situations in which the existing award is not probable of vesting, and a modification gives rise to a new measurement date; no change in the total compensation cost recognized for an existing award will be required if there is no change to the fair value, vesting conditions and classification of the award. This ASU is effective prospectively for annual periods beginning on or 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 or related disclosures.
Pension and Postretirement Benefits—In March 2017, the FASB issued 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.
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”).
8
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 not substantially complete 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 2018 Consolidated Financial Statements and related disclosures.
Unapproved Change Orders
As of September 30, 2017, total unapproved change orders included in our estimates at completion aggregated approximately $98 million, of which approximately $9 million was included in backlog. 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.
Claims Revenue
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 September 30, 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 three and nine months ended September 30, 2017 and 2016.
None of the claims included in our estimates at completion at September 30, 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.”
KJO Hout, an EPCI project in our Middle East segment, is the only active project in a significant loss position as of September 30, 2017. The estimated overall loss on KJO Hout was $9 million. The project is substantially complete.
As of September 30, 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.
9
The following is a discussion of our most significant changes in estimates that impacted segment operating income for the three and nine months ended September 30, 2017 and 2016.
Three months ended September 30, 2017
Segment operating income for the three months ended September 30, 2017 was positively impacted by net favorable changes in estimates totaling approximately $36 million.
Americas, Europe and Africa Segment (“AEA”)—This segment was impacted by net unfavorable changes in estimates aggregating approximately $4 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 $36 million, primarily due to:
|
• |
cost savings associated with marine campaigns and changes in estimate at completion on multiple Saudi Aramco projects; |
|
|
|
|
• |
favorable changes in estimated costs at completion on various other projects, which individually were not material. |
Those net favorable changes in estimates were partially offset by higher marine campaign costs for the Berri platform, a Saudi Aramco EPCI project, and increases in costs on a project in the Neutral Zone.
Asia Segment (“ASA”)—This segment was positively impacted by net favorable changes in estimates aggregating approximately $4 million, primarily due to change in estimates associated with efficient project execution and productivity improvements on multiple active projects which were individually not material.
Those favorable changes in estimates were partially offset by higher marine campaign costs associated with the transportation and installation of pipelines under the multi-year Brunei Shell Petroleum (“BSP”) offshore installation contract.
As of September 30, 2017, the diving work to replace the failed supplier-provided subsea-pipe connector component on the Ichthys project in Australia was substantially complete. The costs to replace the supplier-provided subsea-pipe connector component, at the completion of the project, are expected to be less than our December 31, 2016 estimate of $34 million. The project remains in an overall profitable position.
Nine months ended September 30, 2017
Segment operating income for the nine months ended September 30, 2017 was positively impacted by net favorable changes in estimates totaling approximately $115 million, primarily in our MEA and ASA segments.
AEA—This segment was impacted by net unfavorable changes in estimates aggregating approximately $3 million on multiple projects, none of which individually were material.
MEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $72 million, primarily due to:
|
• |
productivity improvements and associated cost savings during the marine hookup campaign and reduction in estimated costs to complete two projects in the Middle East, including a Saudi Aramco project; |
|
• |
marine campaign cost savings associated with productivity improvements and favorable weather conditions, which were partially offset by higher fabrication costs on lump-sum EPCI projects under the LTA II; |
|
• |
productivity improvements and associated cost savings during the installation phase on the Saudi Aramco Marjan power system replacement project; |
|
• |
close-out improvements associated with the first phase of a large pipeline repair project in the Middle East, which was completed in 2016, and a change in estimate to complete the next phase of this project; and |
10
|
• |
cost savings associated with productivity improvements on multiple projects in the Middle East, none of which were individually material. |
ASA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $46 million, primarily due to changes in estimates driven by productivity improvements and associated cost savings and changes in estimated costs at completion on active and completed projects.
Those net favorable changes in estimates were partially offset by vessel and marine equipment downtime on our Vashishta EPCI project in India.
In addition, as of December 31, 2016, on the Ichthys project in Australia, we reported a $34 million increase in our estimated costs at completion due to a failure identified in a supplier-provided subsea-pipe connector component that we had previously installed, and we identified possible additional increases of up to $10 million, due to potential need for alternative installation methods. We investigated the cause of the failure and developed a remediation plan in conjunction with the customer. We commenced offshore replacement in June 2017 through a diving intervention method. As of September 30, 2017, the remediation work was substantially complete. The costs to replace the supplier-provided subsea-pipe connector component are expected to be less than our December 31, 2016 estimate of $34 million. The project remains in an overall profitable position.
Three months ended September 30, 2016
Segment 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.
AEA—This segment was positively impacted by net favorable changes in estimates, aggregating approximately $6 million, none of which individually were material.
MEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $12 million, primarily due to:
|
• |
productivity improvements and associated cost savings related to a Saudi Aramco project; and |
|
• |
other miscellaneous projects, which individually were not material. |
ASA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million, primarily due to:
|
• |
cost savings associated with our vessel productivity improvements; and |
|
• |
favorable changes in estimates at completion on several active projects. |
Those net favorable changes in estimates were partially offset by net unfavorable changes on an active project, which was not material.
Nine months ended September 30, 2016
Segment 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.
AEA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $29 million, primarily due to:
|
• |
successful execution and close-out improvements on two significant projects, PB Litoral and Exxon Julia Subsea Tieback; |
|
• |
productivity improvements and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico; and |
|
• |
a reversal of a $7 million provision for liquidated damages, due to an agreed additional extension of the PB Litoral project completion date. |
Those net favorable changes in estimates were partially offset by net unfavorable changes on multiple projects, none of which were individually material.
11
MEA—This 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.
ASA—This segment was positively impacted by net favorable changes in estimates aggregating approximately $43 million, primarily due to:
|
• |
cost savings associated with productivity improvements on our LV 108 vessel activities; and |
|
• |
favorable agreement on outstanding change orders on active and completed projects during the 2016 period. |
Those net favorable changes in estimates were partially offset by net unfavorable changes on multiple projects, none of which were individually material.
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, net in our Consolidated Statements of Operations. Previously, restructuring expenses were presented separately in our Consolidated Statements of Operations.
No restructuring costs were incurred in 2017. The restructuring costs incurred in 2016 and from inception to September 30, 2017, by major cost type is presented below.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
From Inception to |
|
|||
|
|
September 30, 2016 |
|
|
September 30, 2017 |
|
||||||
|
(in thousands) |
|
||||||||||
Americas Restructuring |
|
$ |
- |
|
|
$ |
(1,500 |
) |
|
$ |
44,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McDermott Profitability Initiative |
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other personnel-related costs |
|
|
1,165 |
|
|
|
2,590 |
|
|
|
17,807 |
|
Asset impairment and disposal |
|
|
- |
|
|
|
- |
|
|
|
7,471 |
|
Legal and other advisor fees |
|
|
- |
|
|
|
222 |
|
|
|
11,639 |
|
Other |
|
|
- |
|
|
|
2,436 |
|
|
|
10,045 |
|
|
|
|
1,165 |
|
|
|
5,248 |
|
|
|
46,962 |
|
Additional Overhead Reduction |
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other personnel-related costs |
|
|
556 |
|
|
|
4,600 |
|
|
|
5,012 |
|
Legal and other advisor fees |
|
|
- |
|
|
|
1,968 |
|
|
|
2,768 |
|
Other |
|
|
115 |
|
|
|
371 |
|
|
|
385 |
|
|
|
|
671 |
|
|
|
6,939 |
|
|
|
8,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,836 |
|
|
$ |
10,687 |
|
|
$ |
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.
|
|
September 30, 2017 |
|
|
December 31, 2016 |
|
||
|
|
(in thousands) |
|
|||||
Cash and cash equivalents |
|
$ |
416,352 |
|
|
$ |
595,921 |
|
Restricted cash and cash equivalents |
|
|