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EX-32.2 - EX-32.2 - MCDERMOTT INTERNATIONAL INCmdr-ex322_9.htm
EX-32.1 - EX-32.1 - MCDERMOTT INTERNATIONAL INCmdr-ex321_10.htm
EX-31.2 - EX-31.2 - MCDERMOTT INTERNATIONAL INCmdr-ex312_7.htm
EX-31.1 - EX-31.1 - MCDERMOTT INTERNATIONAL INCmdr-ex311_11.htm
EX-12.1 - EX-12.1 - MCDERMOTT INTERNATIONAL INCmdr-ex121_6.htm
EX-4.1 - EX-4.1 - MCDERMOTT INTERNATIONAL INCmdr-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.

 


 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands, except share and per share amounts)

 

Revenues

 

$

958,531

 

 

$

558,543

 

 

$

2,266,635

 

 

$

1,994,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

127,072

 

 

 

43,055

 

 

 

270,256

 

 

 

136,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(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.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(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.

 

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

(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

 

 

-

 

 

 

-

 

 

 

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


 

 

 

 

 

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”), 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.

 

 

NOTE 2—REVENUE RECOGNITION

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


 

 

NOTE 3—USE OF ESTIMATES

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;

 

marine campaign cost savings and benefits from favorable weather conditions, which were partially offset by higher fabrication costs and marine equipment downtime on a lump-sum EPCI project under the second Saudi Aramco Long-Term Agreement (“LTA II”);

 

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.

AEAThis segment was impacted by net unfavorable changes in estimates aggregating approximately $3 million on multiple projects, none of which individually were material. 

MEAThis 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.

ASAThis 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.

AEAThis segment was positively impacted by net favorable changes in estimates, aggregating approximately $6 million, none of which individually were material.

MEAThis 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.

ASAThis 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.

AEAThis 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


 

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 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. 

 

 

NOTE 4—RESTRUCTURING

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