mdr-10q_20170630.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 June 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.)

 

 

 

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 July 21, 2017 was 283,975,398.

 

 


 

McDERMOTT INTERNATIONAL, INC.

INDEX—FORM 10-Q

 

 

 

PAGE

PART I—FINANCIAL INFORMATION

 

1

Item 1—Consolidated Financial Statements

 

1

Consolidated Statements of Operations

 

1

Consolidated Statements of Comprehensive Income

 

2

Consolidated Balance Sheets

 

3

Consolidated Statements of Cash Flows

 

4

Consolidated Statements of Stockholders’ Equity

 

5

Notes to the Consolidated Financial Statements

 

6

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 3—Quantitative and Qualitative Disclosures about Market Risk

 

37

Item 4—Controls and Procedures

 

39

PART II—OTHER INFORMATION

 

40

Item 1—Legal Proceedings

 

40

Item 6—Exhibits

 

41

SIGNATURES

 

42

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands, except share and per share amounts)

 

Revenues

 

$

788,673

 

 

$

706,627

 

 

$

1,308,104

 

 

$

1,435,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

 

650,449

 

 

 

595,343

 

 

 

1,079,039

 

 

 

1,211,345

 

Research and development expenses

 

 

821

 

 

 

99

 

 

 

1,301

 

 

 

130

 

Selling, general and administrative expenses

 

 

50,022

 

 

 

52,075

 

 

 

86,609

 

 

 

90,403

 

Other operating (income) expenses, net

 

 

182

 

 

 

2,122

 

 

 

(2,029

)

 

 

40,800

 

Total costs and expenses

 

 

701,474

 

 

 

649,639

 

 

 

1,164,920

 

 

 

1,342,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

87,199

 

 

 

56,988

 

 

 

143,184

 

 

 

92,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(21,204

)

 

 

(12,655

)

 

 

(38,910

)

 

 

(23,893

)

Other non-operating expense, net

 

 

(2,491

)

 

 

(2,851

)

 

 

(1,877

)

 

 

(6,242

)

Total other expense, net

 

 

(23,695

)

 

 

(15,506

)

 

 

(40,787

)

 

 

(30,135

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

63,504

 

 

 

41,482

 

 

 

102,397

 

 

 

62,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

22,918

 

 

 

19,804

 

 

 

33,689

 

 

 

39,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income (loss) from Investments in Unconsolidated Affiliates

 

 

40,586

 

 

 

21,678

 

 

 

68,708

 

 

 

23,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from Investments in Unconsolidated Affiliates

 

 

(4,127

)

 

 

127

 

 

 

(8,054

)

 

 

(4,351

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

36,459

 

 

 

21,805

 

 

 

60,654

 

 

 

19,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

 

46

 

 

 

1,148

 

 

 

2,325

 

 

 

876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to McDermott International, Inc.

 

$

36,413

 

 

$

20,657

 

 

$

58,329

 

 

$

18,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to McDermott International, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.09

 

 

$

0.22

 

 

$

0.08

 

Diluted

 

$

0.13

 

 

$

0.07

 

 

$

0.21

 

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in the computation of net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

282,660,314

 

 

 

240,338,540

 

 

 

262,438,822

 

 

 

239,739,204

 

Diluted

 

 

284,982,270

 

 

 

284,909,414

 

 

 

284,122,560

 

 

 

283,132,238

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

1


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Net income

 

$

36,459

 

 

$

21,805

 

 

$

60,654

 

 

$

19,361

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

20

 

 

 

12

 

 

 

39

 

 

 

17

 

Gain on derivatives

 

 

8,504

 

 

 

4,621

 

 

 

10,639

 

 

 

35,412

 

Foreign currency translation

 

 

(231

)

 

 

(4,027

)

 

 

8

 

 

 

(7,370

)

Other comprehensive income, net of tax

 

 

8,293

 

 

 

606

 

 

 

10,686

 

 

 

28,059

 

Total comprehensive income

 

 

44,752

 

 

 

22,411

 

 

 

71,340

 

 

 

47,420

 

Less: Comprehensive income attributable to noncontrolling interests

 

 

82

 

 

 

1,140

 

 

 

2,343

 

 

 

855

 

Comprehensive income attributable to McDermott International, Inc.

 

$

44,670

 

 

$

21,271

 

 

$

68,997

 

 

$

46,565

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

2


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands, except share and per share amounts)

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

393,726

 

 

$

595,921

 

Restricted cash and cash equivalents

 

 

15,154

 

 

 

16,412

 

Accounts receivable—trade, net

 

 

331,327

 

 

 

334,384

 

Accounts receivable—other

 

 

40,239

 

 

 

36,929

 

Contracts in progress

 

 

619,164

 

 

 

319,138

 

Other current assets

 

 

38,047

 

 

 

29,599

 

Total current assets

 

 

1,437,657

 

 

 

1,332,383

 

Property, plant and equipment

 

 

2,617,382

 

 

 

2,586,179

 

Less accumulated depreciation

 

 

(939,651

)

 

 

(898,878

)

Property, plant and equipment, net

 

 

1,677,731

 

 

 

1,687,301

 

Accounts receivable—long-term retainages

 

 

92,797

 

 

 

127,193

 

Investments in Unconsolidated Affiliates

 

 

12,138

 

 

 

17,023

 

Deferred income taxes

 

 

18,748

 

 

 

21,116

 

Other assets

 

 

52,377

 

 

 

37,214

 

Total assets

 

$

3,291,448

 

 

$

3,222,230

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

13,807

 

 

$

48,125

 

Accounts payable

 

 

434,954

 

 

 

173,203

 

Accrued liabilities

 

 

340,613

 

 

 

277,584

 

Advance billings on contracts

 

 

66,148

 

 

 

192,486

 

Income taxes payable

 

 

26,786

 

 

 

17,945

 

Total current liabilities

 

 

882,308

 

 

 

709,343

 

Long-term debt

 

 

526,692

 

 

 

704,395

 

Self-insurance

 

 

17,734

 

 

 

16,980

 

Pension liabilities

 

 

19,043

 

 

 

19,471

 

Non-current income taxes

 

 

60,341

 

 

 

60,870

 

Other liabilities

 

 

124,834

 

 

 

115,703

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

  issued 292,469,416 and 249,690,281 shares, respectively

 

 

292,469

 

 

 

249,690

 

Capital in excess of par value

 

1,656,231

 

 

 

1,695,119

 

Accumulated deficit

 

 

(168,438

)

 

 

(226,767

)

Accumulated other comprehensive loss

 

 

(56,191

)

 

 

(66,895

)

Treasury stock, at cost: 8,494,018 and 8,302,004 shares, respectively

 

 

(96,244

)

 

 

(94,957

)

Stockholders' Equity—McDermott International, Inc.

 

 

1,627,827

 

 

 

1,556,190

 

Noncontrolling interest

 

 

32,669

 

 

 

39,278

 

Total equity

 

 

1,660,496

 

 

 

1,595,468

 

Total liabilities and equity

 

$

3,291,448

 

 

$

3,222,230

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

3


 

 

McDERMOTT INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

60,654

 

 

$

19,361

 

Non-cash items included in net income:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

49,685

 

 

 

48,929

 

Impairment loss

 

 

-

 

 

 

32,311

 

Stock-based compensation charges

 

 

11,838

 

 

 

9,242

 

Loss from investments in Unconsolidated Affiliates

 

 

8,054

 

 

 

4,351

 

Other non-cash items

 

 

12,375

 

 

 

4,948

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

37,453

 

 

 

(30,835

)

Contracts in progress, net of Advance billings on contracts

 

 

(410,678

)

 

 

67,698

 

Accounts payable

 

 

260,091

 

 

 

(65,212

)

Accrued and other current liabilities

 

 

68,722

 

 

 

(45,523

)

Other assets and liabilities, net

 

 

(8,011

)

 

 

30,520

 

Total cash provided by operating activities

 

 

90,183

 

 

 

75,790

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(80,922

)

 

 

(170,674

)

Proceeds from asset dispositions

 

 

55,391

 

 

 

388

 

Investments in Unconsolidated Affiliates

 

 

(1,300

)

 

 

(4,105

)

Total cash used in investing activities

 

 

(26,831

)

 

 

(174,391

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of debt

 

 

(230,509

)

 

 

(88,845

)

Payment of debt and letter of credit issuance cost

 

 

(18,784

)

 

 

(8,211

)

Acquisition of NCI

 

 

(10,652

)

 

 

-

 

Repurchase of common stock

 

 

(7,020

)

 

 

(2,572

)

Total cash used in financing activities

 

 

(266,965

)

 

 

(99,628

)

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash, cash equivalents and restricted cash

 

 

160

 

 

 

(601

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(203,453

)

 

 

(198,830

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

612,333

 

 

 

781,645

 

Cash, cash equivalents and restricted cash at end of period

 

$

408,880

 

 

$

582,815

 

 

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

 

 

-

 

 

 

-

 

 

 

58,329

 

 

 

-

 

 

 

-

 

 

 

58,329

 

 

 

2,325

 

 

 

60,654

 

Other comprehensive income (loss), net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,704

 

 

 

-

 

 

 

10,704

 

 

 

(18

)

 

 

10,686

 

Common stock issued

 

 

43,584

 

 

 

(43,584

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation charges

 

 

-

 

 

 

8,519

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,519

 

 

 

-

 

 

 

8,519

 

Purchase of treasury shares

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,020

)

 

 

(7,020

)

 

 

-

 

 

 

(7,020

)

Retirement of common stock

 

 

(805

)

 

 

(4,928

)

 

 

-

 

 

 

-

 

 

 

5,733

 

 

 

-

 

 

 

-

 

 

 

-

 

Acquisition of NCI

 

 

-

 

 

 

2,121

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,121

 

 

 

(8,896

)

 

 

(6,775

)

Other

 

 

-

 

 

 

(1,016

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,016

)

 

 

(20

)

 

 

(1,036

)

Balance at June 30, 2017

 

$

292,469

 

 

$

1,656,231

 

 

$

(168,438

)

 

$

(56,191

)

 

$

(96,244

)

 

$

1,627,827

 

 

$

32,669

 

 

$

1,660,496

 

 

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

Note 2—Revenue Recognition

 

9

Note 3—Use of Estimates

 

9

Note 4—Restructuring

 

12

Note 5—Cash, Cash Equivalents and Restricted Cash

 

12

Note 6—Accounts Receivable

 

13

Note 7—Contracts in Progress and Advance Billings on Contracts

 

13

Note 8—Sale Leaseback

 

13

Note 9—Debt

 

14

Note 10—Pension and Postretirement Benefits

 

17

Note 11—Derivative Financial Instruments

 

17

Note 12—Fair Value Measurements

 

18

Note 13—Stockholders’ Equity

 

19

Note 14—Earnings Per Share

 

21

Note 15—Commitments and Contingencies

 

21

Note 16—Segment Reporting

 

22

 

 

 

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 June 30, 2017

Stock Compensation—In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2017-07, 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.

7


 

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”).

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.

 

 

8


 

NOTE 2—REVENUE RECOGNITION

Unapproved Change Orders

As of June 30, 2017, total unapproved change orders included in our estimates at completion aggregated approximately $94 million, of which approximately $13 million was included in backlog. As of June 30, 2016, total unapproved change orders included in our estimates at completion aggregated approximately $122 million, of which approximately $24 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 June 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 six months ended June 30, 2017 and 2016.  

None of the claims included in our estimates at completion at June 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.”

As of June 30, 2017, KJO Hout, an EPCI project in our MEA segment, was in an estimated overall $9 million loss position. The project is expected to be substantially completed in the second half of 2017.

As of June 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.

 

 

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 six months ended June 30, 2017 and 2016.

Three months ended June 30, 2017

Segment operating income for the three months ended June 30, 2017 was positively impacted by net favorable changes in estimates totaling approximately $32 million, primarily in our MEA and ASA segments.

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.  

9


 

Middle East Segment (“MEA”)This segment was positively impacted by net favorable changes in estimates aggregating approximately $20 million, primarily due to:

 

productivity improvements and associated cost savings during a marine hookup campaign and benefits from a change in estimate to complete a project in the Middle East;  

 

cost savings associated with productivity improvements on multiple Saudi Aramco projects, none of which were individually material; and

 

changes in estimate to complete a large pipeline repair project in the Middle East.

Those favorable net changes were partially offset by:

 

higher fabrication costs on a lump-sum EPCI project under the second Saudi Aramco Long-Term Agreement (“LTA II”); and

 

increases in costs to complete the 9 Jackets Saudi Aramco project due to weather downtime, including increased vessel demobilization and mobilization costs.

Asia Segment (“ASA”)This segment was positively impacted by net favorable changes in estimates aggregating approximately $16 million, primarily due to the change in estimates associated with efficient project execution and productivity improvements on multiple projects which were individually not material.

In addition, during the second quarter of 2017, on the Ichthys project in Australia, we commenced replacing the supplier-provided subsea-pipe connector components, and the diving intervention was completed on July 7, 2017. Residual work is planned for the second half of 2017. The current estimated costs to replace the supplier-provided subsea-pipe connector components, at the completion of the project, is less than our December 31, 2016 estimate of $34 million, which has been reflected in the project’s total estimated costs at completion. Furthermore, we took action to mitigate the risk of possible additional increases in these costs. We expect the project to remain in an overall profitable position.

Six months ended June 30, 2017

Segment operating income for the six months ended June 30, 2017 was positively impacted by net favorable changes in estimates totaling approximately $79 million across all segments.

AEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $1 million on multiple projects, none of which individually were material. 

MEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $36 million, primarily due to:

 

productivity improvements and associated cost savings during a 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, which were partially offset by higher fabrication costs on a lump-sum EPCI project under the LTA II;

 

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

 

cost savings associated with productivity improvements on multiple Saudi Aramco projects, none of which were individually material.

Those favorable net changes in estimates were partially offset by increases in costs to complete the 9 Jackets Saudi Aramco project, due to weather downtime, including increased vessel demobilization and mobilization costs.

ASAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $42 million, primarily due to changes in estimates driven by productivity improvements and associated cost savings and agreement on outstanding change orders on active and completed projects.

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

10


 

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, and we commenced offshore replacement in June 2017. As of June 30, 2017, the work under the remediation plan has progressed well, and the diving intervention was completed on July 7, 2017. Residual work is planned for the second half of 2017. The current estimated costs to replace the supplier-provided subsea-pipe connector components, at the completion of the project, is less than our December 31, 2016 estimate. Furthermore, we took action to mitigate the risk of possible additional increases in these costs. We expect the project to remain in an overall profitable position.

Three months ended June 30, 2016

Operating income for the three months ended June 30, 2016 was positively impacted by net favorable changes in estimates totaling approximately $28 million across all segments.

AEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $7 million, primarily attributable to productivity improvement and associated cost savings related to our DB 50 and NO 102 vessels’ marine campaigns undertaken in the Gulf of Mexico in the second quarter of 2016.

MEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $10 million, primarily due to:

 

productivity improvements and associated cost savings related to the Intermac 406 and DB 27 vessels, both associated with Saudi Aramco projects; and

 

other miscellaneous projects, which individually were not material.

ASAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $11 million which were primarily driven by productivity improvements and associated cost savings and agreement on outstanding change orders on our active projects.

Six months ended June 30, 2016

Operating income for the six months ended June 30, 2016 was positively impacted by net favorable changes in estimates totaling approximately $68 million across all segments.

AEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $23 million, primarily due to:

 

successful execution and close-out improvements on two significant projects, PB Litoral and Exxon Julia Subsea Tieback;

 

productivity improvement 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 extension of the PB Litoral project completion date.

Those changes were partially offset by net unfavorable changes, none of which were material individually. 

MEAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $17 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; and

 

other miscellaneous projects, none of which were material individually. 

ASAThis segment was positively impacted by net favorable changes in estimates aggregating approximately $28 million, primarily driven by productivity improvements and associated cost savings and agreement on outstanding change orders on active and completed projects.

 

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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.

The following table presents restructuring costs incurred in the second quarter of 2016 and from inception, by major cost type. No restructuring costs were incurred during 2017.

 

 

 

Three months ended

 

 

Six months ended

 

 

From  inception to

 

 

 

June 30, 2016

 

 

June 30, 2017

 

 

(in thousands)

 

Americas Restructuring

 

$

(1,500

)

 

$

(1,500

)

 

$

44,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

McDermott Profitability Initiative

 

 

 

 

 

 

 

 

 

 

 

 

Severance and other personnel-related costs

 

 

992

 

 

 

1,425

 

 

 

17,807

 

Asset impairment and disposal

 

 

-

 

 

 

-

 

 

 

7,471

 

Legal and other advisor fees

 

 

49

 

 

 

222

 

 

 

11,639

 

Other

 

 

1,541

 

 

 

2,436

 

 

 

10,045

 

 

 

 

2,582

 

 

 

4,083

 

 

 

46,962

 

Additional Overhead Reduction

 

 

 

 

 

 

 

 

 

 

 

 

Severance and other personnel-related costs

 

 

1,073

 

 

 

4,044

 

 

 

5,012

 

Legal and other advisor fees

 

 

240

 

 

 

1,968

 

 

 

2,768

 

Other

 

 

89

 

 

 

256

 

 

 

385

 

 

 

 

1,402

 

 

 

6,268

 

 

 

8,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total

 

$

2,484

 

 

$

8,851

 

 

$

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.  

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

393,726

 

 

$

595,921

 

Restricted cash and cash equivalents

 

 

15,154

 

 

 

16,412

 

Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows

 

$

408,880

 

 

$

612,333

 

 

A majority of our restricted cash balances serve as collateral for letters of credit, discussed in Note 9, Debt.

12


 

NOTE 6—ACCOUNTS RECEIVABLE

Accounts Receivable—Trade, Net―A summary of contract receivables is as follows:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(in thousands)

 

Contract receivables:

 

 

 

 

 

 

 

 

Contracts in progress

 

$

245,341

 

 

$

245,604

 

Completed contracts

 

 

24,755

 

 

 

40,345

 

Retainages

 

 

70,922

 

 

 

58,431

 

Unbilled(1)

 

 

4,303

 

 

 

4,303

 

Less allowances

 

 

(13,994

)

 

 

(14,299

)

Accounts receivabletrade, net

 

$

331,327

 

 

$

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.

Retainages—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:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(in thousands)

 

Retainages expected to be collected within one year

 

$

70,922

 

 

$

58,431

 

Retainages expected to be collected after one year

 

 

92,797

 

 

 

127,193

 

Total retainages

 

$

163,719

 

 

$

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:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Costs incurred less costs of revenue recognized

 

$

78,291

 

 

$

119,688

 

Revenues recognized less billings to customers

 

 

540,873

 

 

 

199,450

 

Contracts in Progress

 

$

619,164

 

 

$

319,138

 

 

 

 

 

 

 

 

 

 

Billings to customers less revenue recognized

 

$

161,083

 

 

$

42,637

 

Costs incurred less costs of revenue recognized

 

 

(94,935

)

 

 

149,849

 

Advance Billings on Contracts

 

$

66,148

 

 

$

192,486

 

 

NOTE 8—SALE LEASEBACK

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 (exercisable periodically over the charter term) to purchase the Amazon, at a predetermined value.  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.

13


 

NOTE 9—DEBT

The carrying values of our long-term debt obligations, net of unamortized debt issuance costs of $6 million and $14 million as of June 30, 2017 and December 31, 2016, respectively, are as follows:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Senior Notes

 

$

494,230

 

 

$

493,461

 

North Ocean 105 construction financing

 

 

28,595

 

 

 

31,877

 

Vendor equipment financing

 

 

15,686

 

 

 

-

 

Term Loan

 

 

-

 

 

 

212,070

 

Amortizing Notes

 

 

-

 

 

 

7,932

 

Other

 

 

1,988

 

 

 

7,180

 

 

 

 

540,499

 

 

 

752,520

 

Less: Amounts due within one year

 

 

13,807

 

 

 

48,125

 

Total long-term debt

 

$

526,692

 

 

$

704,395

 

 

Amended and Restated Credit Agreement

On June 30, 2017, we repaid all outstanding term loans, with an outstanding principal amount of approximately $217 million, under our credit agreement dated April 16, 2014 (the “Prior Credit Agreement”), and we amended and restated the Prior Credit Agreement by entering into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and letter of credit issuers, and Crédit Agricole Corporate and Investment Bank, as administrative agent and collateral agent.  All letters of credit outstanding under the Prior Credit Agreement were deemed issued under the Credit Agreement.

The Credit Agreement includes $810 million of commitments from the lenders, the full amount of which is available for the issuance of letters of credit, and $300 million of which is available for revolving loans. The senior secured credit facility established by the Credit Agreement is scheduled to mature in June 2022, unless we do not repay in full, by December 1, 2020, our $500 million second-lien notes due in April 2021, in which case the Credit Agreement will mature on December 1, 2020.

The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitment thereunder, subject to an aggregate maximum of $1 billion for all commitments under the Credit Agreement.  Any such increase in the commitments will not increase the $300 million sublimit for revolving loans.  

The 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 and certain other designated subsidiaries (collectively, the “Guarantors”). The obligations under the Credit Agreement are secured by first-priority liens on substantially all of our and the Guarantors’ assets, including certain vessels and bank accounts.

Other than mandatory commitment reductions and prepayments in connection with certain asset sales, casualty events, and incurrences of debt not permitted by the Credit Agreement, the Credit Agreement requires only periodic interest payments until maturity. We may prepay all revolving loans under the Credit Agreement at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.

Revolving loans under the Credit Agreement bear interest at our option at either the Eurodollar rate plus a margin ranging from 3.75% to 4.25% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the 30-day Eurodollar rate plus 1.0%, or the administrative agent’s prime rate) plus a margin ranging from 2.75% to 3.25% per year. The applicable margin varies depending on our leverage ratio (as defined in the Credit Agreement). We are charged a commitment fee of 0.50% per year on the daily amount of the unused portions of the commitments under the Credit Agreement.  Additionally, with respect to all letters of credit outstanding under the Credit Agreement, we are charged a fronting fee of 0.25% per year and a participation fee of (i) between 3.75% to 4.25% per year in respect of financial letters of credit and (ii) between 1.875% to 2.125% per year in respect of performance letters of credit, in each case depending on our leverage ratio. We also pay customary issuance fees and other fees and expenses in connection with the issuance of letters of credit under the Credit Agreement.

In connection with the Credit Agreement we incurred approximately $21 million of debt issuance costs. On the Consolidated Balance Sheets, those costs are reflected as an asset.

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As of June 30, 2017, the applicable margin for revolving loans was 4.0% for Eurodollar-rate loans and 3.0% for base-rate loans, and the letter of credit fee for financial letters of credit was 4.0% and for performance letters of credit was 2.0%.

The Credit Agreement includes the following financial covenants, defined in the Credit Agreement, which will be tested on a quarterly basis and, in respect of the collateral coverage ratio described below, on both a quarterly basis and on any date that a mortgaged vessel is sold:  

 

the maximum permitted leverage ratio is (1) 3.50 to 1.00 for each fiscal quarter ending on or before December 31, 2019 and (2) 3.25 to 1.00 for each fiscal quarter ending after December 31, 2019;

 

the minimum fixed charge coverage ratio is 1.15 to 1.00; 

 

the minimum liquidity is $100 million;

 

the minimum collateral coverage ratio is 1.20 to 1.0; and 

 

the principal amount of revolving loans outstanding under the Credit Agreement cannot exceed the sum of 75% of our net trade accounts receivable plus the amount of our cash and cash equivalents subject to the control of the collateral agent under the Credit Agreement (this is also a condition to each revolving loan borrowing).

In addition, the Credit Agreement contains various covenants that, among other restrictions, limits our ability, and the ability of each of our subsidiaries, to: (1) incur or assume indebtedness; (2) grant or assume liens; (3) make acquisitions or engage in mergers; (4) sell, transfer, assign or convey assets; (5) make investments; (6) repurchase equity and make dividends and certain other restricted payments; (7) change the nature of our business; (8) engage in transactions with affiliates; (9) enter into burdensome agreements; (10) modify organizational documents; (11) enter into sale and leaseback transactions; (12) make capital expenditures; (13) enter into speculative hedging contracts; and (14) make prepayments on certain junior debt.

The Credit Agreement contains events of default that we believe are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to us occurs, all obligations under the Credit Agreement will immediately become due and payable. If any other event of default exists under the Credit Agreement, the lenders may accelerate the maturity of the obligations outstanding under the Credit Agreement and exercise other rights and remedies. In addition, if any event of default exists under the Credit Agreement, the lenders may commence foreclosure or other actions against the collateral.

If any default exists under the Credit Agreement, or if we are unable to make any of the representations and warranties in the Credit Agreement at the applicable time, we will be unable to borrow funds or have letters of credit issued under the Credit Agreement.

As of June 30, 2017, the aggregate amount of letters of credit issued and outstanding under the Credit Agreement was $333 million, included in which were $24 million of financial letters of credit, and there were no revolving loans outstanding under the Credit Agreement. As of December 31, 2016, under the Prior Credit Agreement, the aggregate amount of letters of credit issued and outstanding was $442 million.

The Credit Agreement 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 Agreement. As of June 30, 2017, we had bilateral arrangements to issue cash collateralized letters of credit of $175 million. As of June 30, 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. During the first six months of 2017, the maximum amount of cash collateral used to support bilateral letters of credit was $166 million.

As of June 30, 2017, we were in compliance with all of the financial covenants set forth in the Credit Agreement.

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

15


 

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 S&P Global Ratings 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.

North Ocean Financing

NO 105―On September 30, 2010, McDermott International Inc., as guarantor, and North Ocean 105 AS, in which we then had a 75% ownership interest, as borrower, entered into a financing agreement to pay 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. The financing agreement requires principal repayment in 17 consecutive semiannual installments, which commenced on October 1, 2012.

In the second quarter of 2017 we exercised our option under the North Ocean 105 AS joint venture agreement and purchased the 25% ownership interest of Oceanteam ASA (“Oceanteam”) in the vessel-owning company for approximately $11 million in cash. As part of that transaction, we also assumed the right to a $5 million note payable from North Ocean 105 AS to Oceanteam (which had been issued in connection with a dividend declared by North Ocean 105 AS in 2016). For further discussion, see Note 13, Stockholders’ Equity.

The Credit Agreement eliminated the Prior Credit Agreement’s requirement for us to prepay by July 20, 2017 the North Ocean 105 borrowing and to mortgage the NO 105 vessel in favor of the lenders.

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, which we repaid in full.

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 in April 2017. 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 six months of 2017, we sold approximately $2 million of receivables under the receivables purchase agreement.

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 June 30, 2017, the total borrowing outstanding under this facility was approximately $16 million.

16


 

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 $518 million and $359 million, as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, overall capacity under these arrangements totaled $625 million.

Surety Bonds

As of June 30, 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 $57 million and $79 million, respectively. As of June 30, 2017, overall uncommitted capacity under these arrangements totaled $300 million.

 

 

NOTE 10—PENSION AND POSTRETIREMENT BENEFITS

Net pension cost (benefit) recognized during each period presented relate to expected return on plan assets, net of interest costs, for our defined benefit pension plans.

Net periodic cost (benefit) for our 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”) was as follows:

 

 

Domestic Plans

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(In thousands)

 

Interest cost

$

4,991

 

 

$

5,293

 

 

$

9,982

 

 

$

10,552

 

Expected return on plan assets

 

(4,907

)

 

 

(5,001

)

 

 

(9,814

)

 

 

(10,004

)

Net periodic (benefit) cost

$

84

 

 

$

292

 

 

$

168

 

 

$

548

 

 

 

TCN Plan

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(In thousands)

 

Interest cost

$

290

 

 

$

338

 

 

$

580

 

 

$

676

 

Expected return on plan assets

 

(345

)

 

 

(397

)

 

 

(690

)

 

 

(794

)

Net periodic (benefit) cost

$

(55

)

 

$

(59

)

 

$

(110

)

 

$

(118

)

 

We recognize actuarial gains and losses on defined benefit plans in our Consolidated Statements of Operations in the fourth quarter of each year at our annual measurement date of December 31, unless earlier remeasurements are required.

 

 

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 June 30, 2017, the majority of our foreign currency forward contracts were designated as cash flow hedging instruments. In addition, we deferred approximately $14 million of net losses on those derivative financial instruments in AOCI, and we expect to reclassify approximately $8 million of deferred losses out of AOCI by June 30, 2018, as hedged items are recognized. The notional value of our outstanding derivative contracts totaled $270 million at June 30, 2017, with maturities extending through March 2019. Of

17


 

this amount, approximately $135 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 June 30, 2017, the fair value of these contracts was in a net asset 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  

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Derivatives Designated as Hedges:

 

 

 

 

 

 

 

 

Location:

 

 

 

 

 

 

 

 

Accounts receivable—other

 

$

3,543

 

 

$

2,631

 

Total derivatives asset

 

$

3,543

 

 

$

2,631

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,283

 

 

$

9,361

 

Other liabilities

 

 

24

 

 

 

4

 

Total derivatives liability

 

$

1,307

 

 

$

9,365

 

 

The Effects of Derivative Instruments on our Financial Statements

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Derivatives Designated as Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized in other comprehensive income (loss)

 

$

4,610

 

 

$

(10,304

)

 

$

10,212

 

 

$

10,230

 

(Loss) gain reclassified from AOCI to Cost of operations

 

 

784

 

 

 

14,932

 

 

 

(2,731

)

 

 

24,611

 

Ineffective portion and amount excluded from effectiveness testing: loss recognized in Other non-operating expense

 

 

(1,225

)

 

 

(344

)

 

 

(919

)

 

 

(1,549

)

 

 

NOTE 12—FAIR VALUE MEASUREMENTS

The following table presents the financial instruments outstanding as of June 30, 2017 and December 31, 2016 that are measured at fair value on a recurring basis and financial instruments that are not measured at fair value on a recurring basis.

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts

 

$

2,236

 

 

$

2,236

 

 

$

-

 

 

$

2,236

 

 

$

-

 

Non-recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

 

(540,499

)

 

 

(552,037

)

 

 

-

 

 

 

(505,310

)

 

 

(46,727

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts

 

$

(6,734

)

 

$

(6,734

)

 

$

-

 

 

$

(6,734

)

 

$

-

 

Non-recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

 

(752,520

)

 

 

(777,072

)

 

 

-

 

 

 

(728,072

)

 

 

(49,000

)

 

18


 

The carrying value of all non-derivative financial instruments included in current assets (including cash, cash equivalents and restricted cash and accounts receivable) and current liabilities (including accounts payable but excluding short-term debt) approximates the applicable fair value due to the short maturity of those instruments.

We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:

Short-term and long-term debt—The fair value of debt instruments valued using a market approach based on quoted prices for similar instruments traded in active markets is classified as Level 2 within the fair value hierarchy.

Quoted prices were not available for the NO 105 financing, vendor equipment financing or capital leases. The income approach was used to value these instruments based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms and are classified as Level 3 within the fair value hierarchy.

Forward contracts—The fair value of forward contracts is classified as Level 2 within the fair value hierarchy and is valued using observable market parameters for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value forward contracts, which discounts future cash flows based on current market expectations and credit risk.

Fair Value Disclosure of Non-financial Assets

During the first quarter of 2016, we impaired our Agile vessel upon termination of its then-current charter in May 2016, given the lack of opportunities for that vessel. In connection with that decision, we recognized a non-cash impairment charge of $32 million during the first quarter of 2016, which equaled the vessel’s carrying value, in accordance with ASC 360-10, Property, Plant and Equipment.

These are reported as a component of Other operating (income) expenses, net in our Consolidated Statements of Operations. Previously, Impairment loss was presented separately in our Consolidated Statements of Operations.

 

 

NOTE 13—STOCKHOLDERS’ EQUITY

The changes in the number of shares outstanding and treasury shares held by the Company are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Shares outstanding

 

 

 

 

 

 

 

 

Beginning balance

 

 

241,388,277

 

 

 

239,016,924

 

Common stock issued

 

 

43,584,281

 

 

 

2,206,027

 

Purchase of common stock

 

 

(997,160

)

 

 

(651,291

)

Ending balance

 

 

283,975,398

 

 

 

240,571,660

 

 

 

 

 

 

 

 

 

 

Shares held as Treasury shares

 

 

 

 

 

 

 

 

Beginning balance

 

 

8,302,004

 

 

 

7,824,204

 

Purchase of common stock

 

 

997,160

 

 

 

651,291

 

Retirement of common stock

 

 

(805,146

)

 

 

(400,701

)

Ending balance

 

 

8,494,018

 

 

 

8,074,794

 

 

 

 

 

 

 

 

 

 

Ordinary shares issued at the end of the period

 

 

292,469,416

 

 

 

248,646,454

 

 

During the second quarter of 2017, we delivered 40.8 million shares of our common stock to holders of the prepaid common stock purchase contracts comprising part of the TEUs, based on the settlement rate of 3.5496 shares per unit. For further discussion see Note 9, Debt.

 

19


 

Accumulated Other Comprehensive Income (Loss)

The components of AOCI included in stockholders’ equity are as follows:  

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Foreign currency translation adjustments ("CTA")

 

$

(42,074

)

 

$

(42,082

)

Net unrealized gain on investments

 

 

308

 

 

 

269

 

Net unrealized loss on derivative financial instruments

 

 

(14,425

)

 

 

(25,082

)

Accumulated other comprehensive loss

 

$

(56,191

)

 

$

(66,895

)

The following table presents the components of AOCI and the amounts that were reclassified during the periods indicated:

 

 

 

Foreign currency translation adjustments

 

 

Unrealized holding gain (loss) on investments

 

 

Gain (loss) on derivative (1)

 

 

TOTAL

 

For the Three Months Ended June 30, 2017

 

(In thousands)

 

Balance at April 1, 2017

 

$

(41,843

)

 

$

288

 

 

$

(22,929

)

 

$

(64,484

)

Other comprehensive income (loss) before reclassification

 

 

(231

)

 

 

20

 

 

 

4,610

 

 

 

4,399

 

Acquisition of NCI

 

 

-

 

 

 

-

 

 

 

2,284

 

 

 

2,284

 

Amounts reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

1,610

 

(2)

 

1,610

 

Net current period other comprehensive income

 

 

(231

)

 

 

20

 

 

 

8,504

 

 

 

8,293

 

Balance at June 30, 2017

 

$

(42,074

)

 

$

308

 

 

$

(14,425

)

 

$

(56,191

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

$

(42,082

)

 

$

269

 

 

$

(25,082

)

 

$

(66,895

)

Other comprehensive income before reclassification

 

 

8

 

 

 

39

 

 

 

10,212

 

 

 

10,259

 

Acquisition of NCI

 

 

-

 

 

 

-

 

 

 

2,284

 

 

 

2,284

 

Amounts reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

(1,839

)

(2)

 

(1,839

)

Net current period other comprehensive income

 

 

8

 

 

 

39

 

 

 

10,657

 

 

 

10,704

 

Balance at June 30, 2017

 

$

(42,074

)

 

$

308

 

 

$

(14,425

)

 

$

(56,191

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Balance at April 1, 2016

 

$

(33,268

)

 

$

252

 

 

$

(33,473

)

 

$

(66,489

)

Other comprehensive income (loss) before reclassification

 

 

(4,027

)

 

 

12

 

 

 

(10,304

)

 

 

(14,319

)

Amounts reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

14,933

 

(2)

 

14,933

 

Net current period other comprehensive income

 

 

(4,027

)

 

 

12

 

 

 

4,629

 

 

 

614

 

Balance at June 30, 2016

 

$

(37,295

)

 

$

264

 

 

$

(28,844

)

 

$

(65,875

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

$

(29,925

)

 

$

247

 

 

$

(64,277

)

 

$

(93,955

)

Other comprehensive income (loss) before reclassification

 

 

(7,370

)

 

 

17

 

 

 

10,230

 

 

 

2,877

 

Amounts reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

25,203

 

(2)

 

25,203

 

Net current period other comprehensive income

 

 

(7,370

)

 

 

17

 

 

 

35,433

 

 

 

28,080

 

Balance at June 30, 2016

 

$

(37,295

)

 

$

264

 

 

$

(28,844

)

 

$

(65,875

)

 

(1)

Refer to Note 11, Derivative Financial Instruments, for additional details.

(2)

Reclassified to Cost of operations and Other non-operating income (expense), net.

Noncontrolling Interest

North Ocean 105― In December 2010, J. Ray McDermott (Norway), AS (the “JRM”), one of our indirectly wholly owned subsidiaries, and Oceanteam entered into an Equity Owner’s Agreement (as amended to date, the “Equity Agreement”) to acquire a 75% interest in North Ocean 105 AS, the vessel-owning company. Under the Equity Agreement JRM was given an option to purchase Oceanteam ASA’s 25% ownership interest in the second quarter of 2017.

20


 

In the second quarter of 2017, we exercised our option under the Equity Agreement and purchased Oceanteam’s 25% interest in the vessel-owning company for approximately $11 million in cash. As part of that transaction, we also assumed the right to a $5 million note payable from North Ocean 105 AS to Oceanteam (which had been issued in connection with a dividend declared by North Ocean 105 AS in 2016). In connection with this acquisition, we recorded a $9 million decrease in noncontrolling interest and a $5 million decrease in note payable to Oceanteam and we recognized a $2 million gain in Capital-in-excess of par value in our Consolidated Financial Statements. 

 

NOTE 14—EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per common share:  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands, except share and per share amounts)

 

Net income attributable to McDermott International, Inc.

 

$

36,413

 

 

$

20,657

 

 

$

58,329

 

 

$

18,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock (basic)

 

 

282,660,314

 

 

 

240,338,540

 

 

 

262,438,822

 

 

 

239,739,204

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible equity units1

 

 

898,820

 

 

 

40,896,300

 

 

 

19,347,386

 

 

 

40,896,300

 

Stock options, restricted stock and restricted stock units

 

 

1,423,136

 

 

 

3,674,574

 

 

 

2,336,352

 

 

 

2,496,734

 

Potential dilutive common stock

 

 

284,982,270

 

 

 

284,909,414

 

 

 

284,122,560

 

 

 

283,132,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to McDermott International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

0.13

 

 

$

0.09

 

 

$

0.22

 

 

$

0.08

 

Diluted:

 

$

0.13

 

 

$

0.07

 

 

$

0.21

 

 

$

0.07

 

 

1

Represents weighted average TEUs outstanding for the three and six months periods ended June 30, 2017.

Approximately 1.7 million shares underlying outstanding stock-based awards for the three and six months ended June 30, 2017, respectively, and approximately 2 million shares underlying outstanding stock-based awards for the three and six months ended June 30, 2016, respectively, were excluded from the computation of diluted earnings per shares because inclusion of such shares would have been antidilutive in each of those periods. 

The common stock purchase contracts under the TEUs were settled in April 2017, see Note 9, Debt.

 

 

NOTE 15—COMMITMENTS AND CONTINGENCIES

Investigations and Litigation

We co-own interests in several entities (collectively, “FloaTEC”) with Keppel Corporation (including its subsidiaries, “Keppel”).  We have conducted an internal investigation in connection with allegations by a former Petrobras employee that Keppel’s agent made improper payments to secure project awards from Petrobras on a number of Keppel affiliated projects in Brazil, including a FloaTEC project on which we were also a subcontractor.  Keppel’s agent subsequently entered into a plea arrangement with the Brazilian authorities and admitted to having made improper payments on behalf of Keppel to former Petrobras employees on projects unrelated to FloaTEC.  We voluntarily contacted the U.S. Department of Justice (“DOJ”) to advise it of the preliminary results of our internal investigation, which identified no evidence to indicate any improper payments were made by us or FloaTEC or that any of our or FloaTEC’s employees authorized, had knowledge of, or direction or control over, any such payments.  We have responded to the DOJ’s requests for additional information.   If in the future, the DOJ determines that violations of applicable law have occurred involving us, we could be subject to civil or criminal sanctions, including monetary penalties, which could be material.   However, based on the preliminary results of our investigation, we do not expect this matter to have a material adverse effect on us or our operations. 

21


 

Additionally, due to the nature of our business, we and our affiliates are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including, among other things:

 

performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and

 

workers’ compensation claims, Jones Act claims, occupational hazard claims, including asbestos-exposure claims, premises liability claims and other claims.

Based upon our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows; however, because of the inherent uncertainty of litigation and other dispute resolution proceedings and, in some cases, the availability and amount of potentially applicable insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that resolution occurs.

Environmental Matters

We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of waste to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows in any given year.

In 2013, we established a $6 million environmental reserve in connection with our plan to discontinue the utilization of our Morgan City fabrication facility. We incurred approximately $4 million for remediation activities. Based on our completed remediation activities, as well as our internal assessment, we believe no environmental remediation liability exists with respect to the Morgan City site. As a result, in 2016, we reversed our remaining environmental remediation obligation accrual.  

Asset Retirement Obligations

Asset retirement obligations (“ARO”) are recorded at the present value of the estimated costs to retire the asset at the time the obligation is incurred.

At some sites, we are contractually obligated to decommission our fabrication facilities upon site exit. Currently, we are unable to estimate any ARO due to the indeterminate life of our fabrication facilities.  We regularly review the optimal future alternatives for our facilities. Any decision to retire one or more facilities will result in recording the present value of such obligations. As of June 30, 2017, no ARO is recorded.

Contracts Containing Liquidated Damages Provisions

Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under those provisions. Those contracts define the conditions under which our customers may make claims against us for liquidated damages. In many cases in which we have historically had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. As of June 30, 2017, we had approximately $20 million of potential liquidated damages exposure, however no liability is recorded in our Consolidated Financial Statements. We believe we will be successful in obtaining schedule extensions or other customer-agreed changes that should resolve the potential for these liquidated damages. However, we may not achieve relief on some or all of the issues involved and, as a result, could be subject to future liquidated damages.

 

 

NOTE 16—SEGMENT REPORTING

We disclose the results of each of our reportable segments in accordance with ASC 280, Segment Reporting. Each of the reportable segments is separately managed by a senior executive who is a member of our Executive Committee (“EXCOM”).  EXCOM is led by our Chief Executive Officer, who is the chief operating decision maker. Discrete financial information is available for each of the segments, and the EXCOM uses the operating results of each of the reportable segments for performance evaluation and resource allocation.

22


 

We manage reportable segments along geographic lines consisting of (1) AEA, (2) MEA and (3) ASA. We also report certain corporate and other non-operating activities under the heading “Corporate and Other.”

Corporate and Other primarily reflects corporate expenses, certain centrally managed initiatives (such as restructuring charges), impairments, year-end mark-to-market (“MTM”) 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.

We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reporting segments are measured based on operating income, which is defined as revenues reduced by total costs and expenses.

Summarized financial information is shown in the following tables:  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Revenues (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AEA

 

$

41,564

 

 

$

86,810

 

 

$

69,695

 

 

$

149,435

 

MEA

 

 

556,612

 

 

 

317,834

 

 

 

866,664

 

 

 

588,089

 

ASA

 

 

190,497

 

 

 

301,983

 

 

 

371,745

 

 

 

698,135

 

Total revenues:

 

$

788,673

 

 

$

706,627

 

 

$

1,308,104

 

 

$

1,435,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AEA

 

$

(11,302

)

 

$

13,861

 

 

$

(11,119

)

 

$

29,960

 

MEA

 

 

117,480

 

 

 

53,297

 

 

 

181,857

 

 

 

99,336

 

ASA

 

 

32,894

 

 

 

36,045

 

 

 

62,669

 

 

 

81,701

 

Segment operating income (loss)

 

 

139,072

 

 

 

103,203

 

 

 

233,407

 

 

 

210,997

 

Corporate and Other(2)

 

 

(51,873

)

 

 

(46,215

)

 

 

(90,223

)

 

 

(118,016

)

Total operating income

 

 

87,199

 

 

 

56,988

 

 

 

143,184

 

 

 

92,981

 

Interest expense, net

 

 

(21,204

)

 

 

(12,655

)

 

 

(38,910

)

 

 

(23,893

)

Other non-operating income (expense), net

 

 

(2,491

)

 

 

(2,851

)

 

 

(1,877

)

 

 

(6,242

)

Income before provision for income taxes

 

$

63,504

 

 

$

41,482

 

 

$

102,397

 

 

$

62,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AEA

 

$

10,074

 

 

$

941

 

 

$

15,325

 

 

$

3,526

 

MEA

 

 

4,779

 

 

 

2,469

 

 

 

10,631

 

 

 

4,703

 

ASA

 

 

2,224

 

 

 

134,567

 

 

 

5,736

 

 

 

161,575

 

Corporate and Other(3)

 

 

996

 

 

 

797

 

 

 

49,230

 

 

 

870

 

Total capital expenditures:

 

$

18,073

 

 

$

138,774

 

 

$

80,922

 

 

$

170,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AEA

 

$

7,395

 

 

$

9,406

 

 

$

11,408

 

 

$

19,725

 

MEA

 

 

13,762

 

 

 

6,562

 

 

 

21,665

 

 

 

11,908

 

ASA

 

 

5,372

 

 

 

6,289

 

 

 

12,947

 

 

 

12,907

 

Corporate and Other

 

 

1,775

 

 

 

2,130

 

 

 

3,665

 

 

 

4,389

 

Total depreciation and amortization:

 

$

28,304

 

 

$

24,387

 

 

$

49,685

 

 

$

48,929

 

 

(1)

Intersegment transactions included in revenues were not significant for either of the periods presented.

(2)

Corporate and Other operating results for the first half of 2017 and 2016 include a $3 million gain on sale of assets and $32 million impairment charge related to our Agile vessel, respectively.

(3)

Corporate and Other capital expenditures in the first half of 2017 include the purchase of the Amazon, a pipelay and construction vessel. Following the purchase we sold this vessel to an unrelated third party and simultaneously entered into an 11-year bareboat charter agreement, see Note 8, Sale Leaseback.

23


 

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Segment assets(1):

 

 

 

 

 

 

 

 

AEA

 

$

626,524

 

 

$

727,328

 

MEA

 

 

1,530,971

 

 

 

907,936

 

ASA

 

 

750,650

 

 

 

976,470

 

Corporate and Other

 

 

383,303

 

 

 

610,496

 

Total assets

 

$

3,291,448

 

 

$

3,222,230

 

 

(1)

Our marine vessels are included in the area in which they were located as of reporting date.

24


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean McDermott International, Inc. and its consolidated subsidiaries.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords. This information should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto included in Item 1 of this report and the audited Consolidated Financial Statements and the related Notes and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Current Report on Form 8-K filed with the SEC on April 25, 2017 (the “April 25 Form 8-K”).

From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the scope, execution, timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “forecast,” “believe,” “expect,” “anticipate,” “plan,” “seek,” “goal,” “could,” “may,” or “should” or other words that convey the uncertainty of future events or outcomes. Sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

In addition, various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. Those forward-looking statements appear in the Notes to our Consolidated Financial Statements in Item 1 and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this report, and in Legal Proceedings in Item 1 of Part II of this report and elsewhere in this report.

These forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:

 

future levels of revenues, operating margins, income from operations, cash flows, net income or earnings per share;

 

the outcome of project awards and scope, execution and timing of specific projects, including timing to complete and cost to complete these projects;

 

future project activities, including the commencement and subsequent timing of marine or installation campaigns on specific projects, and the ability of projects to generate sufficient revenues to cover our fixed costs;

 

estimates of percentage of completion and contract profits or losses;

 

anticipated levels of demand for our products and services;

 

global demand for oil and gas and fundamentals of the oil and gas industry;

 

expectations regarding offshore development of oil and gas;

 

market outlook for the engineering, procurement, construction and installation (“EPCI”) market;

 

expectations regarding cash flows from operating activities;

 

expectations regarding backlog;

 

future levels of capital, environmental or maintenance expenditures;

 

the success or timing of completion of ongoing or anticipated capital or maintenance projects;

 

the adequacy of our sources of liquidity and capital resources;

 

interest expense;

 

the effectiveness of our derivative contracts in mitigating foreign currency risk;

 

results of our capital investment program;

 

expectations regarding the acquisition or divestiture of assets;

 

our ability to dispose of assets held for sale in a timely manner or for a price at or above net realizable value;

25


 

 

the potential effects of judicial or other proceedings on our business, financial condition, results of operations and cash flows; and

 

the anticipated effects of actions of third parties such as competitors, or regulatory authorities, or plaintiffs in litigation.

These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:

 

general economic and business conditions and industry trends;

 

general developments in the industries in which we are involved;

 

volatility of oil and gas prices;

 

decisions about offshore developments to be made by oil and gas companies;

 

the highly competitive nature of our industry;

 

our ability to appropriately bid, estimate and effectively perform projects on time, in accordance with the schedules established by the applicable contracts with customers;

 

changes in project design or schedule;

 

changes in scope or timing of work to be completed under contracts;

 

cancellations of contracts, change orders and other modifications and related adjustments to backlog and the resulting impact from using backlog as an indicator of future revenues or earnings;

 

the collectability of amounts reflected in change orders and claims relating to work previously performed on contracts;

 

the capital investment required to construct new-build vessels and maintain and/or upgrade our existing fleet of vessels;

 

the ability of our suppliers and subcontractors to deliver raw materials in sufficient quantities and/or perform in a timely manner;

 

volatility and uncertainty of the credit markets;

 

our ability to comply with covenants in our credit agreement, indentures and other debt instruments and availability, terms and deployment of capital;

 

the unfunded liabilities of our pension plans, which may negatively impact our liquidity and, depending upon future operations, may impact our ability to fund our pension obligations;

 

the continued availability of qualified personnel;

 

the operating risks normally incident to our lines of business, including the potential impact of liquidated damages;

 

natural or man-caused disruptive events that could damage our facilities, equipment or our work-in-progress and cause us to incur losses and/or liabilities;

 

equipment failure;

 

changes in, or our failure or inability to comply with, government regulations;

 

adverse outcomes from legal and regulatory proceedings;

 

impact of potential requirements to significantly limit or reduce greenhouse gas and other emissions in the future;

 

changes in, and liabilities relating to, existing or future environmental regulatory matters;

 

changes in tax laws;

 

rapid technological changes;

 

the consequences of significant changes in interest rates and currency exchange rates;

26


 

 

difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions;

 

the risks associated with integrating acquired businesses and forming and operating joint ventures;

 

the risk we may not be successful in updating and replacing current information technology and the risks associated with information technology systems interruptions and cybersecurity threats;

 

social, political and economic situations in countries where we do business;

 

the risks associated with our international operations, including local content or similar requirements;

 

interference from adverse weather or sea conditions;

 

the possibilities of war, other armed conflicts or terrorist attacks;

 

the effects of asserted and unasserted claims and the extent of available insurance coverages;

 

our ability to obtain surety bonds, letters of credit and financing;

 

our ability to maintain builder’s risk, liability, property and other insurance in amounts and on terms we consider adequate and at rates that we consider economical;

 

the aggregated risks retained in our captive insurance subsidiary; and

 

the impact of the loss of insurance rights as part of the Chapter 11 Bankruptcy settlement concluded in 2006 involving several of our former subsidiaries.

We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this quarterly report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in our 2016 Annual Report on Form 10-K filed with the SEC on February 21, 2017. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report and in our 2016 Annual Report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

 

 

Business Segments and Results of Operations

Business Segments

We manage reportable segments along geographic lines consisting of (1) Americas, Europe and Africa (“AEA”), (2) the Middle East (“MEA”) and (3) Asia (“ASA”). We also report certain corporate and other non-operating activities under the heading “Corporate and Other.”

Segment operations

We use Operating income (loss) as our measure of profitability for segment reporting purposes. For additional financial information related to our reporting segments, as well as a reconciliation of segment operating income to income before provision for income taxes, as defined by generally accepted accounting principles (“GAAP”), see Note 16, Segment Reporting, to the accompanying Consolidated Financial Statements.

Our segment operating results are frequently influenced by the resolution of change orders, project close-outs and settlements, which generally can cause operating margins to improve during the period in which these items are approved or finalized. While we expect change orders, close-outs and settlements to continue as part of our normal business activities, the period in which they are recognized is largely driven by the finalization of agreements with customers and suppliers and, as a result, is difficult to predict. Additionally, the future margin increases or decreases associated with these items are difficult to predict, due to, among other items, the difficulty of predicting the timing of recognition of change orders, close-outs and settlements and the timing of new project awards.

 


27


 

Three months ended June 30, 2017 vs three months ended June 30, 2016

Revenues

 

 

Three Months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

(In thousands)

 

 

Percentage

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     AEA

$

41,564

 

 

$

86,810

 

 

$

(45,246

)

 

 

(52

)

%

     MEA

 

556,612

 

 

 

317,834

 

 

 

238,778

 

 

 

75

 

 

     ASA

 

190,497

 

 

 

301,983

 

 

 

(111,486

)

 

 

(37

)

 

Total revenues

$

788,673

 

 

$

706,627

 

 

$

82,046

 

 

 

12

 

%

Revenues increased by 12%, or $82 million, in the second quarter of 2017 compared to the second quarter of 2016.

AEARevenues decreased by 52%, or $45 million, primarily due to a reduction in active projects in the second quarter of 2017 compared to the second quarter of 2016.

In the second quarter of 2017, a variety of projects and activities contributed to revenues, as follows:

 

fabrication activity progress on the Abkatun-A2 platform, a turnkey EPCI project in the Gulf of Mexico, which was awarded in the second quarter of 2016; and

 

commencement of fabrication activity on BP Angelin, an EPCI gas field project off the east coast of Trinidad and Tobago, awarded in June 2017.

In the second quarter of 2016, a variety of projects and activities contributed to revenues, as follows:

 

fabrication, spooling and installation of jumpers and control umbilicals at the Jack St. Malo project in the Gulf of Mexico, which was completed in the second quarter of 2016;

 

transportation, installation and marine campaigns undertaken by our DB 50 and NO 105 vessels on the EOG Sercan project in Trinidad, which was completed in the fourth quarter of 2016;

 

the Agile charter marine campaign, which was terminated in the second quarter of 2016; and

 

fabrication activity on the Ayatsil-C jacket replacement and deck installation project at our Altamira facility.

MEARevenues increased by 75%, or $239 million, in the second quarter of 2017 compared to the second quarter of 2016.

In the second quarter of 2017, a variety of projects and activities contributed to revenues, as follows:

 

higher engineering, fabrication and marine activities on the lump-sum EPCI project under the second Saudi Aramco Long-Term Agreement (“LTA II”);

 

increased fabrication and marine activities undertaken on the Saudi Aramco Marjan power system replacement project;

 

near completion of fabrication activities and the commencement of installation activities on the Saudi Aramco nine jackets project;

 

completion of valve skid installation and significant marine activities on a pipeline, spool and risers for a flow assurance project in the Middle East;

 

near completion of fabrication activities and commencement of jackets installation activities on two Saudi Aramco EPCI projects;

 

increased marine activities to complete the Saudi Aramco Safaniya pipeline project;

 

increased pipelay associated hookup activities on the KJO Hout project in the Divided Zone; and

 

commencement of a Saudi Aramco four jackets and three observation platform project, which was awarded in the fourth quarter of 2016.

28


 

In the second quarter of 2016, a variety of projects and activities with Saudi Aramco contributed to revenues, as follows:

 

fabrication and marine activities on the Marjan power system replacement project;

 

fabrication and installation progress on a 12 jackets supply project, completed in the fourth quarter of 2016; and

 

engineering activities on a lump-sum EPCI project under the LTA II.

The commencement in 2016 of a large pipeline-related project in the Middle East and offshore marine hookup campaign progress on a wellhead jacket and umbilical project in the Middle East also contributed to the 2016 second quarter revenue.

ASARevenues decreased by 37%, or $111 million, in the second quarter of 2017 compared to the second quarter of 2016, primarily due to the following:

 

reduced activity on the Ichthys EPCI project in Australia, as the project progresses through the installation phase;

 

completion of activities on the Yamal project in the beginning of the second quarter of 2017; and

 

completion of activities on the Bergading project during the second quarter of 2016.

Those decreases were partially offset by the following projects and activities:

 

major marine installation activities undertaken on the Vashishta subsea field infrastructure development EPCI project in India; and

 

commencement and substantial completion of the 2017 Brunei Shell Petroleum (“BSP”) marine campaign for transportation and installation of pipelines under a multi-year offshore installation project.

Segment Operating Income

 

 

Three Months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

(In thousands)

 

 

Percentage

Segment operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     AEA

$

(11,302

)

 

$

13,861

 

 

$

(25,163

)

 

 

(182

)

%

     MEA

 

117,480

 

 

 

53,297

 

 

 

64,183

 

 

 

120

 

 

     ASA

 

32,894

 

 

 

36,045

 

 

 

(3,151

)

 

 

(9

)

 

Total

$

139,072

 

 

$

103,203

 

 

$

35,869

 

 

 

35

 

%

 

Segment operating income increased by $36 million in the second quarter of 2017 compared to the second quarter of 2016.

AEA—Segment operating results decreased by $25 million in the second quarter of 2017 compared to the second quarter of 2016.

The decrease was primarily due to a reduction in the number of active projects, as both Jack St. Malo and PB Litoral were completed in 2016.

Those decreases were partially offset by:

 

fabrication activity progress on the Abkatun-A2 platform; and

 

fabrication activity commencement on the BP Angelin EPCI gas field project.

MEA—Segment operating income was $117 million and $53 million in the second quarter of 2017 and 2016, respectively.

In the second quarter of 2017, a variety of projects and activities contributed to the operating income as follows:

 

higher engineering, fabrication and marine activities on the lump-sum EPCI project under the LTA II;

 

increased fabrication and marine activities undertaken on the Saudi Aramco Marjan power systems replacement project;

 

completion of valve skid installation and significant marine campaign transpooling, umbilical installation and hook-up activities on pipeline, spool and risers for the flow assurance project in the Middle East; and

 

multiple Saudi Aramco projects, none which were individually material.

29


 

In the second quarter of 2016, a variety of projects and activities with Saudi Aramco contributed to operating income, as follows:

 

jacket fabrication and installation activity on the project to supply 12 jackets;

 

increased engineering and marine activities on the Marjan power systems replacement project;

 

engineering activity on the LTA II project; and

 

productivity improvements and associated cost savings related to the DB 27 and  Intermac 406 vessels.

The commencement in 2016 of: (1) a large pipeline-related project in the Middle East; and (2) progress on offshore marine hookup campaign for a wellhead jacket and umbilical project in the Middle East also contributed to our MEA segment operating income.

ASA— Segment operating income was $33 million and $36 million in the second quarter of 2017 and 2016, respectively.

The decrease in segment operating income was primarily due to reduced activity on our Ichthys project in Australia as the project progressed through the marine installation phase and provided lower operating income.

The decrease in operating income was partially offset by the 2017 BSP campaign for transportation and installation of pipelines under the multi-year offshore installation contract.

During the quarter ended June 30, 2017, the Vashishta project did not significantly contribute to our operating margin. The estimated revenue at completion of the project includes change orders which we believe will be resolved favorably.  As of June 30, 2017, we expect the project to remain in an overall profitable position.

Other items in Operating Income

Corporate and Other

 

 

Three Months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

(In thousands)

 

 

Percentage

Corporate and Other

$

(51,873

)

 

$

(46,215

)

 

$

(5,658

)

 

 

(12

)

%

Corporate and Other expenses were $52 million and $46 million in the second quarter of 2017 and 2016, respectively. The increase in Corporate and Other expenses was primarily due to lower cost recovery associated with certain vessels due to a reduction in active projects in our AEA and ASA segments compared to the 2016 period.

Corporate and Other expenses in the second quarter of 2016 included a $2 million restructuring charge, as discussed in Note 4, Restructuring, to the accompanying Consolidated Financial Statements, not repeated in 2017. The associated restructuring programs were substantially complete in 2016.

Other Non-operating Items

Interest expense, net—Interest expense, net was $21 million and $13 million in the second quarter of 2017 and 2016, respectively.  Increase in interest expense was primarily due to:

 

expensing of the remaining $4 million unamortized debt issuance costs associated with the repayment of the outstanding term loan under our Prior Credit Agreement (as defined below); and

 

lower interest capitalization in the second quarter of 2017 compared to the first quarter of 2016. The DLV 2000 vessel, which was previously under construction, was deployed to our fleet in the second quarter of 2016.

Provision for income taxes—For the three months ended June 30, 2017, the Company recognized income before provision for income taxes of $64 million, compared to $41 million in the three months ended June 30, 2016.  The provision for income taxes was $23 million for the three months ended June 30, 2017 and $20 million for the three months ended June 30, 2016.  The effective tax rate for the three months ended June 30, 2017 was 36%, as compared to 49% for the three months ended June 30, 2016.  The rate decrease was primarily driven by increased mix of income in favorable tax jurisdictions, which was partially offset by losses in certain jurisdictions where we did not recognize a tax benefit.  

30


 

Six months ended June 30, 2017 vs six months ended June 30, 2016

Revenues

 

 

Six Months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

(In thousands)

 

 

Percentage

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     AEA

$

69,695

 

 

$

149,435

 

 

$

(79,740

)

 

 

(53

)

%

     MEA

 

866,664

 

 

 

588,089

 

 

 

278,575

 

 

 

47

 

 

     ASA

 

371,745

 

 

 

698,135

 

 

 

(326,390

)

 

 

(47

)

 

Total revenues

$

1,308,104

 

 

$

1,435,659

 

 

$

(127,555

)

 

 

(9

)

%

Revenues decreased by 9%, or $128 million, in the six months ended June 30, 2017 compared to the six months ended June 30, 2017.

AEARevenues decreased by 53%, or $80 million, primarily due to a reduction in active projects in the 2017 period compared to the 2016 period.

In the first half of 2017, a variety of projects and activities contributed to revenues, as follows:

 

fabrication activity progress on the Abkatun-A2 platform, which was awarded in the second quarter of 2016; and

 

commencement of fabrication activity on the BP Angelin, EPCI gas field project, awarded in the second quarter of 2017.

In the first half of 2016, a variety of projects, which were complete or substantially complete in 2016, contributed to revenues, including the Jack St. Malo, PB Litoral, EOG Sercan, LLOG Otis Subsea-Tieback and Exxon Julia Subsea-Tieback projects.

Progress on jacket fabrication activity for the Ayatsil-C jacket replacement and deck installation project at our Altamira facility also contributed to 2016 period revenue.

MEA—Revenues increased by 47%, or $279 million, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

In the first half of 2017, a variety of projects and activities contributed to revenues, as follows:

 

higher fabrication and marine activities on the lump-sum EPCI project under the LTA II;

 

increased fabrication and marine activities undertaken on the Marjan power system replacement project;

 

near completion of fabrication activities and the commencement of the installation activities on the Saudi Aramco nine jackets project;

 

completion of valve skid installation and significant marine campaign transpooling, umbilical installation and hook-up activities on pipeline, spool and risers for the flow assurance project in the Middle East;

 

pipelay installation and hookup activities executed by our DB 27 vessel on the KJO Hout project in the Divided Zone;

 

near completion of fabrication activities and commencement of jacket installation activities on two Saudi Aramco EPCI projects;

 

marine hookup activities carried out during the shutdown of the TP-1 platform on the Saudi Aramco Karan-45 project; and

 

completion of the next phase of a large pipeline repair-related project in the Middle East.

In the first half of 2016, a variety of projects and activities contributed to revenues, as follows:

 

fabrication and installation progress on the 12 jackets supply project;

 

fabrication and marine activities on the Marjan power system replacement project;

31


 

 

engineering activities on the lump-sum EPCI project under the LTA II, all with Saudi Aramco; and

 

engineering and fabrication activity on the KJO Hout, a project in the Divided Zone;

Commencement in 2016 of the following projects also contributed to revenue in the first half of 2016:

 

a large pipeline-related project in the Middle East, which commenced and was completed in 2016;

 

offshore marine hookup campaign progress on a wellhead jacket and umbilical project in the Middle East;  and

 

the pipeline, spool and risers flow assurance project in the Middle East awarded in the third quarter of 2015.

ASA—Revenues decreased 47%, or $326 million, primarily due to:

 

reduced activity on our Ichthys EPCI project in Australia, as the project progresses through the installation phase;

 

completion of activities on the Yamal project in the beginning of the second quarter of 2017; and

 

completion of the Bergading offshore installation project in Malaysia in the second quarter of 2016.

This decrease was partially offset by the following projects and activities:

 

progress on marine installation activities on the Vashishta subsea field infrastructure development EPCI project in India; and

 

commencement and substantial completion of the 2017 campaign for transportation and installation of pipelines under the multi-year offshore installation contract with BSP.

Segment Operating Income

 

 

Six Months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

(In thousands)

 

 

Percentage

Segment operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     AEA

$

(11,119

)

 

$

29,960

 

 

$

(41,079

)

 

 

(137

)

%

     MEA

 

181,857

 

 

 

99,336

 

 

 

82,521

 

 

 

83

 

 

     ASA

 

62,669

 

 

 

81,701

 

 

 

(19,032

)

 

 

(23

)

 

Total

$

233,407

 

 

$

210,997

 

 

$

22,410

 

 

 

11

 

%

Segment operating income increased by $22 million in the first half of 2017 compared to the first half of 2016.

AEA—Segment operating income decreased by $41 million in the first half of 2017 compared to the first half of 2016.

The decrease in operating income was primarily due to a reduction in the number of active projects including the PB Litoral, the Jack St. Malo and Exxon Julia Subsea Tieback projects, both of which were completed in 2016.

Those decreases were partially offset by:

 

fabrication activity progress on the Abkatun-A2 platform;

 

commencement of fabrication activity on the BP Angelin EPCI gas field project; and

 

close-out improvements and recognition of approved change orders on certain completed projects.

MEA—Segment operating income was $182 million and $99 million in the first half of 2017 and 2016, respectively.

In the first half of 2017, a variety of projects and activities contributed to operating income, as follows:

 

higher engineering, fabrication and marine activities on the lump-sum EPCI project, under the LTA II;

 

increased fabrication and marine activities undertaken on the Marjan power systems replacement project; and

 

completion of valve skid installation and significant marine campaign transpooling, umbilical installation and hook-up activities on a pipeline, spool and risers for a flow assurance project in the Middle East;

32


 

 

multiple Saudi Aramco projects, none which were individually material;

 

marine hookup activities carried out during the shutdown of the TP-1 platform on our Saudi Aramco Karan-45 project; and

 

completion of the next phase of a large pipeline repair-related project in the Middle East.

In the first half of 2016, a variety of projects and activities contributed to operating income, as follows:

 

jacket fabrication and installation activity on a project to supply 12 jackets;

 

increased engineering and marine activities on the Marjan power systems replacement project;

 

productivity improvements and associated cost savings related to the DB 27 and  Intermac 406 vessels;

 

engineering activity on the LTA II lump sum EPCI project;

 

a large pipeline-related project in the Middle East, which was commenced and was completed in 2016; and

 

offshore marine hookup campaign progress on a wellhead jacket and umbilical project in the Middle East, which was completed in the second half of 2016.

ASA— Segment operating income was $63 million and $82 million in the second half of 2017 and 2016, respectively.

The decrease was primarily due to reduced activity on our Ichthys project in Australia as the project progressed through the marine installation phase and provided lower operating income.

This decrease in operating income was partially offset by the:

 

2017 marine campaign for transportation and installation of pipelines under the multi-year offshore installation contract with BSP; and

 

close-out improvements from our completed projects.

During the six months ended June 30, 2017, the Vashishta project did not significantly contribute to operating margin. The estimated revenue at completion of the project includes change orders which we believe will be resolved favorably.  As of June 30, 2017, we expect the project to remain in an overall profitable position.

The first half of 2016 operating income was attributable to:

 

improved productivity and project execution cost savings;

 

recognition of approved change orders on active projects; and

 

close out improvements from our 2015 pipeline-replacement campaign with BSP.

Other items in Operating Income

Corporate and Other

 

 

Six Months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

(In thousands)

 

 

Percentage

Corporate and Other

$

(90,223

)

 

$

(118,016

)

 

$

27,793

 

 

 

24

 

%

33


 

Corporate and Other expenses were $90 million and $118 million in the first half of 2017 and 2016, respectively. The decrease in Corporate and Other expenses was primarily due to:

 

a $32 million non-cash impairment charge related to our marine assets recorded in the first half of 2016, as discussed in Note 12, Fair Value Measurement, to the accompanying Consolidated Financial Statements, not repeated in 2017;

 

$9 million of restructuring expense recorded in the first half of 2016, as discussed in Note 4, Restructuring, to the accompanying Consolidated Financial Statements (the associated restructuring programs were substantially complete in 2016); and

 

a $3 million gain recognized on the asset sale in the first quarter of 2017.

Those decreases were partially offset by lower cost recovery associated with certain vessels due to a reduction in active projects in our AEA and ASA segments during 2017.

Other Non-operating Items

Interest expense, net—Interest expense, net was $39 million and $24 million in the second half of 2017 and 2016, respectively.  Increase in interest expense was primarily due to:

 

expensing of the remaining $4 million unamortized debt issuance costs associated with the repayment of the term loan under our Prior Credit Agreement (as defined below); and

 

lower interest capitalization in the first half of 2017 compared to the first half of 2016. The DLV 2000 vessel, which was previously under construction, was deployed to our fleet in the second quarter of 2016.

Provision for income taxes— For the six months ended June 30, 2017, we recognized income before provision for income taxes of $102 million, compared to $63 million in the six months ended June 30, 2016.  The provision for income taxes was $34 million and $39 million for the six months ended June 30, 2017 and June 30, 2016, respectively.  The effective tax rate for the six months ended June 30, 2017 was 33%, as compared to 62% for the six months ended June 30, 2016.  The rate decrease was primarily driven by increased mix of income in the favorable tax jurisdictions, which was partially offset by losses in certain jurisdictions where we did not recognize a tax benefit and the recognition of a $3 million tax benefit related to an uncertain tax position taken in prior periods associated with our activity in the Middle East.

Backlog

The following table summarizes changes to our backlog (in thousands):

 

Backlog at January 1, 2017

$

4,321,851

 

     Bookings from new awards

 

120,940

 

     Additions and reductions on existing contracts

 

162,904

 

     Less: Amounts recognized in revenues

 

1,308,104

 

Backlog at June 30, 2017(1)

$

3,297,591

 

 

(1)

At June 30, 2017, approximately 67% of this backlog revenue was attributable to Saudi Aramco.

Our backlog by segment was as follows:

 

 

June 30, 2017

 

 

(in approximate millions)

 

AEA

$

589

 

 

 

 

 

18

%

MEA

 

2,295

 

 

 

 

 

70

%

ASA

 

414

 

 

 

 

 

12

%

Total Backlog

$

3,298

 

 

 

 

 

100

%

 

Of the June 30, 2017 backlog, we expect to recognize revenues as follows:

 

 

2017

 

 

2018

 

 

Thereafter

 

 

(in approximate millions)

 

Total backlog

$

1,736

 

 

$

1,552

 

 

$

10

 

34


 

For the full year of 2017, we expect to recognize approximately $3 billion of revenue from the backlog existing at December 31, 2016.

Liquidity and Capital Resources

General—Our primary ongoing sources of liquidity are cash flows generated from operations and cash and cash equivalents on hand.  We regularly review our sources and uses of funds and may access capital markets to increase our liquidity position or to refinance our existing debt.  We plan to fund our ongoing working capital, capital expenditures, debt service and other funding requirements with cash on hand, cash from operating activities, proceeds from the issuance of debt, or a combination thereof.

We believe our anticipated future operating cash flow, capacity under our credit facilities and uncommitted bilateral lines of credit, along with access to surety bonds, will be sufficient to finance our capital expenditures, settle our commitments and contingencies and address our normal, anticipated working capital needs for the foreseeable future.

Credit Agreements

Amended and Restated Credit Agreement—In June 2017, we repaid all outstanding term loans under our credit agreement dated April 16, 2014 (the “Prior Credit Agreement”), and we amended and restated the Prior Credit Agreement by entering into an Amended and Restated Credit Agreement (“Credit Agreement”) with a syndicate of lenders and letter of credit issuers, and Crédit Agricole Corporate and Investment Bank, as administrative agent and collateral agent. All letters of credit outstanding under the Prior Credit Agreement were deemed issued under the Credit Agreement.

The Credit Agreement includes $810 million of commitments from the lenders, the full amount of which is available for the issuance of letters of credit, and $300 million of which is available for revolving loans. The senior secured credit facility established by the Credit Agreement is scheduled to mature in June 2022, unless we do not repay in full by December 1, 2020 our $500 million second-lien notes that are due in April 2021, in which case the Credit Agreement will mature on December 1, 2020. As of June 30, 2017, the aggregate amount of letters of credit issued under the Credit Agreement was $333 million, there were no revolving loans under the Credit Agreement, and we had $477 million of available commitments under the Credit Agreement.

As of June 30, 2017, we were in compliance with the financial and other covenants under the Credit Agreement, including those as shown below:

 

Ratios

 

Requirement

 

 

 

Actual

 

Minimum fixed charge coverage ratio

 

1.15x

 

 

 

2.19x

 

Maximum total leverage ratio

 

3.50x

 

 

 

1.65x

 

Minimum collateral coverage ratio

 

1.20x

 

 

 

1.95x

 

North Ocean Financing―In the second quarter of 2017, we exercised our option under the North Ocean 105 AS joint venture agreement and purchased the 25% ownership interest of Oceanteam ASA (“Oceanteam”) in the vessel-owning company for approximately $11 million in cash. As part of that transaction, we also assumed the right to a $5 million note payable from North Ocean 105 AS to Oceanteam (which had been issued in connection with a dividend declared by North Ocean 105 AS in 2016). For further discussion, see Note 13, Stockholders’ Equity. The Credit Agreement eliminated the Prior Credit Agreement’s requirement for us to prepay by July 20, 2017 the North Ocean 105 borrowing and to mortgage the NO 105 vessel in favor of the lenders.

Receivables Factoring Facility—In February 2017, J. Ray McDermott de Mexico, S.A. de C.V. (“JRM Mexico”), one of our indirect, wholly 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.  During the first half 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. At June 30, 2017, the total borrowings outstanding under this facility were approximately $16 million.

Tangible Equity Units (“TEUs”)—During April 2017, in connection with the mandatory settlement of the purchase contracts underlying our previously outstanding TEUs, 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.

35


 

Those TEUs were accounted for as capital in excess of par value totaling $240 million in our Consolidated Balance Sheets.

For additional information regarding our outstanding indebtness, see Note 9, Debt, to the accompanying Consolidated Financial Statements.

Cash, Cash Equivalents and Restricted Cash

As of June 30, 2017, we had $409 million of cash, cash equivalents and restricted cash compared to $612 million as of December 31, 2016. At June 30, 2017, we had $88 million of cash in jurisdictions outside the U.S., principally in Malaysia, Indonesia, the United Arab Emirates and Mauritius. Approximately 14% of our outstanding cash balance is held in countries that have established government imposed currency restrictions that could impede the ability of our subsidiaries to transfer funds to us.  

At June 30, 2017, we had restricted cash and cash equivalents totaling $15 million compared to $16 million as of December 31, 2016, collateralized to support letters of credits. During the first six months of 2017, the maximum amount of cash collateral used to support letters of credit was $166 million.

Cash Flow Activities

Operating activities―Our net cash provided by operating activities was $90 million in the six months ended June 30, 2017, as compared to $76 million provided in the six months ended June 30, 2016.

The cash provided by operating activities primarily reflected our net income (loss), adjusted for non-cash items and changes in components of our working capital—accounts receivable, contracts in progress net of advance billings on contracts, and accounts payable. Fluctuations in working capital are normal in our business. Working capital is impacted by the size of our projects and the achievement of billing milestones on backlog as we complete certain phases of the project.

In the six months ended June 30, 2017, net cash used by working capital was $113 million.

The components of working capital that used or provided cash were:

 

Contracts in progress, net of Advance billings on contracts increased by $411 million primarily due to progress on:

 

o

the Abkatun A-2 project in our AEA segment.

 

o

Saudi Aramco projects including the LTA II lump sum EPCI project, the Header 9 Facilities and the Marjan power system replacement projects, in our MEA segment; and

 

o

the Ichthys and Vashishta projects in our ASA segment.

Those increases were partially offset by:

 

Accounts receivables—collections across all segments reduced our accounts receivable by $37 million; and

 

Accounts payable—an increase of $260 million was driven by project progress across all segments.

Investing activities―Our net cash used in investing activities was $27 million in the six months ended June 30, 2017, compared to net cash used in investing activities of $174 million in the six months ended June 30, 2016. The cash uses in both periods primarily related to capital expenditures. Net cash used in investing activities in the first half of 2017 also included the sale lease back of the Amazon vessel discussed below.

Financing activities―Our net cash used in financing activities was $267 million in the six months ended June 30, 2017, as compared to net cash used in financing activities of $99 million in the six months ended June 30, 2016. Net cash used in the 2017 and 2016 periods was primarily attributable to:

 

$218 million and $77 million of repayments of the term loan during the six months ended June 30, 2017 and 2016, respectively;

 

$13 million and $12 million of repayments of other debts during the six months ended June 30, 2017 and 2016, respectively;

 

$19 million of debt issuance costs associated with the Credit Agreement, discussed in Note 9, Debt, to the accompanying Consolidated Financial Statements in June 2017; and, in the first half of 2016, $8 million of debt issuance costs associated with amendments to the Prior Credit Agreement;

36


 

 

$11 million for the acquisition of the North Ocean AS 105 noncontrolling interest; and

 

repurchases of common stock tendered by participants in our long-term incentive plans for payment of applicable withholding taxes upon vesting of awards under those plans.

Capital Expenditures

As part of our strategic growth program, our management regularly evaluates our marine vessel fleet and our fabrication yard construction capacity to ensure our fleet and construction capabilities are adequately aligned with our overall growth strategy. These assessments may result in capital expenditures to construct, upgrade, acquire or operate vessels or acquire or upgrade fabrication yards that would enhance or grow our technical capabilities, or may involve engaging in discussions to dispose of certain marine vessels or fabrication yards.

Capital expenditures for the six months ended June 30, 2017 were $81 million, as compared to $171 million for the six months ended June 30, 2016. Capital expenditures for the six months ended June 30, 2017 were primarily attributable to the purchase of the pipelay and construction vessel, the Amazon. Following the purchase, we sold the Amazon to an unrelated third party and simultaneously entered into an 11-year bareboat charter agreement with the purchaser. For additional information, see Note 8, Sale Leaseback, to the accompanying Consolidated Financial Statements.

Capital expenditures for the six months ended June 30, 2016 were primarily attributable to the construction of the DLV 2000 and were incurred as a result of the construction work reaching established milestones, including completion in the second quarter of 2016.

Critical Accounting Policies and Estimates

For a discussion of the impact of critical accounting policies and estimates on our Consolidated Financial Statements, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Current Report on Form 8-K filed with the SEC on April 25, 2017.

See Note 1, Basis of Presentation and Significant Accounting Policies, to the accompanying unaudited Consolidated Financial Statements for a discussion of the potential impact of new accounting standards on our unaudited Consolidated Financial Statements.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, our results of operations are exposed to certain market risks, primarily associated with fluctuations in currency exchange rates and interest rate risk. Our exposure to market risk from changes in interest rates relates primarily to cash equivalents and our investment portfolio, which primarily consists of investments in commercial paper and other highly liquid money market instruments denominated in U.S. dollars. We are averse to principal loss and seek to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. All of our investments in debt securities are classified as available-for-sale.

We have operations in many locations around the world, and, as a result, our financial results could be significantly affected by factors such as changes in currency exchange rates or weak economic conditions in foreign markets. In order to manage the risks associated with currency exchange rate fluctuations, we attempt to hedge those risks with foreign currency derivative instruments. Historically, we have hedged those risks with foreign currency forward contracts. In certain cases, contracts with our customers may contain provisions under which payments from our customers are denominated in U.S. dollars and in a foreign currency. The payments denominated in a foreign currency are designed to compensate us for costs that we expect to incur in such foreign currency. In these cases, we may use derivative instruments to reduce the risks associated with currency exchange rate fluctuations arising from differences in timing of our foreign currency cash inflows and outflows. Our operational cash flows and cash balances, though predominately held in U.S. dollars, may consist of different currencies at various points in time in order to execute our project contracts globally. Non-U.S. denominated asset and liability balances are subject to currency fluctuations when measured period to period for financial reporting purposes in U.S. dollars.

As of June 30, 2017, we had no material future earnings or cash flow exposures from changes in interest rates on our outstanding debt obligations, as substantially all of those obligations had fixed interest rates.

Our operational cash flows and cash balances, though predominately held in U.S. dollars, may consist of different currencies at various points in time in order to execute our project contracts globally. Non-U.S. denominated asset and liability balances are subject to currency fluctuations when measured period to period for financial reporting purposes in U.S. dollars.

37


 

Interest Rate Sensitivity

The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table below presents principal cash flows and related weighted-average interest rates by expected maturity dates as of June 30, 2017 (in thousands):

 

 

 

Years Ending December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Total

 

 

Fair Value at June 30, 2017

 

Long-term Debt — fixed rate

 

$

4,291

 

 

$

24,292

 

 

$

9,516

 

 

$

8,170

 

 

$

500,000

 

 

$

546,269

 

 

$

552,037

 

Average Interest Rate

 

 

7.68

%

 

 

7.76

%

 

 

7.87

%

 

 

7.96

%

 

 

8.00

%

 

 

 

 

 

 

 

 

 

Currency Exchange Rate Sensitivity

The following table provides information about our foreign currency forward contracts outstanding at June 30, 2017 and presents such information in U.S. dollar equivalents. The table presents notional amounts and related weighted-average exchange rates by expected (contractual) maturity dates and constitutes a forward-looking statement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. The average contractual exchange rates are expressed using market convention, which is dependent on the currencies being bought and sold under the forward contract.

Forward Contracts to Purchase Foreign Currencies in U.S. Dollars (in thousands):

 

Foreign Currency

 

Contract

Notional Value at

June 30, 2017

 

 

Contract

Fair Value at

June 30, 2017

 

 

Average Contractual Exchange Rate

 

Maturing in the Year Ending December 31, 2017

 

Australian Dollar

 

 

71,101

 

 

 

(720

)

 

 

0.7767

 

Danish Krone

 

 

8,635

 

 

 

28

 

 

 

6.5034

 

Euros

 

 

85,779

 

 

 

1,845

 

 

 

1.1216

 

Indian Rupee

 

 

8,138

 

 

 

659

 

 

 

70.5519

 

Norwegian Kroner

 

 

15,752

 

 

 

75

 

 

 

8.4030

 

Pound Sterling

 

 

12,709

 

 

 

86

 

 

 

1.2944

 

Singapore Dollar

 

 

488

 

 

 

2

 

 

 

1.3810

 

Swiss Frank

 

 

2,757

 

 

 

1

 

 

 

0.9574

 

Maturing in the Year Ending December 31, 2018

 

Australian Dollar

 

 

25,685

 

 

 

(3

)

 

 

0.7648

 

Euros

 

 

4,192

 

 

 

197

 

 

 

1.1045

 

Pound Sterling

 

 

3,440

 

 

 

61

 

 

 

1.2884

 

Singapore Dollar

 

 

847

 

 

 

7

 

 

 

1.3824

 

Maturing in the Year Ending December 31, 2019

 

Australian Dollar

 

 

3,105

 

 

 

(9

)

 

 

0.7641

 

Forward Contracts to Sell Foreign Currencies for U.S. Dollars (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Contract

Notional Value at

June 30, 2017

 

 

Contract

Fair Value at

June 30, 2017

 

 

Average Contractual Exchange Rate

 

Maturing in the Year Ending December 31, 2017

 

Australian Dollar

 

 

4,464

 

 

 

(1

)

 

 

0.7677

 

Euros

 

 

4,619

 

 

 

(103

)

 

 

1.1194

 

Mexican Peso

 

 

2,784

 

 

 

31

 

 

 

17.9612

 

Norwegian Kroner

 

 

15,311

 

 

 

81

 

 

 

8.3234

 

Pound Sterling

 

 

139

 

 

 

(1

)

 

 

1.2955

 

38


 

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2017 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management, including our principal executive and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

39


 

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding ongoing investigations and litigation, see Note 15 to our unaudited Consolidated Financial Statements in Part I of this report, which we incorporate by reference into this Item.

40


 

Item 6. Exhibits

 

Exhibit

Number

 

Description 

 

 

 

3.1*

 

McDermott International, Inc.’s Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-08430)).

 

 

 

3.2*

 

McDermott International, Inc.’s Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 1-08430)).

 

 

 

3.3*

 

Amended and Restated Certificate of Designation of Series D Participating Preferred Stock of McDermott International, Inc. (incorporated by reference to Exhibit 3.3 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)).

 

 

 

4.1*

 

Amended and Restated Credit Agreement, dated as of June 30, 2017, by and among McDermott International, Inc., a syndicate of lenders and letter of credit issuers, and Crédit Agricole Corporate and Investment Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 4.1 to McDermott International, Inc.’s Current Report on Form 8‑K filed on June 30, 2017 (File No. 1-08430)).

 

 

 

4.2*

 

Amended and Restated Pledge and Security Agreement, dated as of June 30, 2017, made by McDermott International, Inc. and the Guarantors referred to therein in favor of Crédit Agricole Corporate and Investment Bank, as collateral agent (incorporated by reference to Exhibit 4.2 to McDermott International, Inc.’s Current Report on Form 8‑K filed on June 30, 2017 (File No. 1-08430)).

 

 

 

10.1

 

Form of 2017 Non-Employee Director Restricted Stock Grant Letter.

 

 

 

12.1

 

Ratio of Earnings to Fixed Charges.

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.

 

 

 

32.1

 

Section 1350 certification of Chief Executive Officer.

 

 

 

32.2

 

Section 1350 certification of Chief Financial Officer.

 

 

 

101.INS XBRL

 

Instance Document.

 

 

 

101.SCH XBRL

 

Taxonomy Extension Schema Document.

 

 

 

101.CAL XBRL

 

Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB XBRL

 

Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE XBRL

 

Taxonomy Extension Presentation Linkbase Document.

 

 

 

101.DEF XBRL

 

Taxonomy Extension Definition Linkbase Document.

 

*

Incorporated by reference to the filing indicated.

 

 

41


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

July 25, 2017

 

 

 

 

 

 

 

McDERMOTT INTERNATIONAL, INC.

 

 

 

 

 

By:

 

/s/ CHRISTOPHER A. KRUMMEL 

 

 

 

 

Christopher A. Krummel

Vice President, Finance and Chief Accounting Officer

 

42


 

EXHIBIT INDEX

 

Exhibit

Number

 

Description 

 

 

 

3.1*

 

McDermott International, Inc.’s Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-08430)).

 

 

 

3.2*

 

McDermott International, Inc.’s Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 1-08430)).

 

 

 

3.3*

 

Amended and Restated Certificate of Designation of Series D Participating Preferred Stock of McDermott International, Inc. (incorporated by reference to Exhibit 3.3 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)).

 

 

 

4.1*

 

Amended and Restated Credit Agreement, dated as of June 30, 2017, by and among McDermott International, Inc., a syndicate of lenders and letter of credit issuers, and Crédit Agricole Corporate and Investment Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 4.1 to McDermott International, Inc.’s Current Report on Form 8‑K filed on June 30, 2017 (File No. 1-08430)).

 

 

 

4.2*

 

Amended and Restated Pledge and Security Agreement, dated as of June 30, 2017, made by McDermott International, Inc. and the Guarantors referred to therein in favor of Crédit Agricole Corporate and Investment Bank, as collateral agent (incorporated by reference to Exhibit 4.2 to McDermott International, Inc.’s Current Report on Form 8‑K filed on June 30, 2017 (File No. 1-08430)).

 

 

 

10.1

 

Form of 2017 Non-Employee Director Restricted Stock Grant Letter.

 

 

 

12.1

 

Ratio of Earnings to Fixed Charges.

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.

 

 

 

32.1

 

Section 1350 certification of Chief Executive Officer.

 

 

 

32.2

 

Section 1350 certification of Chief Financial Officer.

 

 

 

101.INS XBRL

 

Instance Document.

 

 

 

101.SCH XBRL

 

Taxonomy Extension Schema Document.

 

 

 

101.CAL XBRL

 

Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB XBRL

 

Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE XBRL

 

Taxonomy Extension Presentation Linkbase Document.

 

 

 

101.DEF XBRL

 

Taxonomy Extension Definition Linkbase Document.

 

*

Incorporated by reference to the filing indicated.

 

 

43