UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
(Mark
One)
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F O
R M 1 0 – K
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|
X
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2007
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
_____________ to ________________
Commission
File Number 001-08430
McDERMOTT
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
|
REPUBLIC
OF PANAMA
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72-0593134
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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777
N. ELDRIDGE PKWY.
|
|
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HOUSTON,
TEXAS
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77079
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (281)
870-5901
Securities
Registered Pursuant to Section 12(b) of the Act:
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Name
of each Exchange
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|
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Title
of each class
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on
which registered
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Common
Stock, $1.00 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [ü]No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.Yes
[ ]No [ü]
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
[ü] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ü ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ü] Accelerated
filer [ ] Non-accelerated filer
[ ] Smaller reporting company
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [P]
The aggregate market value of the
registrant’s common stock held by nonaffiliates of the registrant on the last
business day of the registrant’s most recently completed second fiscal quarter
(based on the closing sales price on the New York Stock Exchange on June 29,
2007) was approximately $9.3 billion.
The number of shares of the
registrant’s common stock outstanding at January 31, 2008 was 225,743,989.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with the registrant’s 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III of this report.
INDEX -
FORM 10-K
PART
I
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PAGE
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1
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2
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10
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11
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11
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11
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28
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28
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28
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28
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P A R
T I I
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28
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31
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32
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32
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34
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37
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40
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44
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44
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50
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52
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55
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59
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60
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61
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107
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107
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108
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108
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108
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109
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PART
III
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110
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110
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111
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111
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111
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PART
IV
Statements
we make in this Annual Report on Form 10-K which express a belief, expectation
or intention, as well as those that are not historical fact, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to various risks,
uncertainties and assumptions, including those to which we refer under the
headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk
Factors” in Items 1 and 1A of Part I of this report.
PART
I
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A.
|
McDermott International, Inc. (“MII”),
incorporated under the laws of the Republic of Panama in 1959, is an engineering
and construction company with specialty manufacturing and service capabilities
and is the parent company of the McDermott group of companies, including J. Ray
McDermott, S.A. (“JRMSA”) and The Babcock & Wilcox Company
(“B&W”). In this Annual Report on Form 10-K, unless the context
otherwise indicates, “we,” “us” and “our” mean MII and its consolidated
subsidiaries.
We
operate in three business segments: Offshore Oil and Gas Construction,
Government Operations and Power Generation Systems.
During
2007, we renamed, and in some cases restructured, many of the principal
operating companies within our Government Operations and Power Generation
Systems segments. One of the renamed companies, Babcock & Wilcox
Power Generation Group, Inc. (“B&W PGG”), was previously named The Babcock
& Wilcox Company. See the segment description below for the new
names of the other principal operating companies. In addition, we
changed the name of the parent company of our Government Operations and Power
Generation Systems subsidiaries to The Babcock & Wilcox
Company. As a result, The Babcock & Wilcox Company now refers to
the parent company of our subsidiaries comprising our Government Operations and
Power Generation Systems segments. As used in this Annual Report on
Form 10-K, the term B&W is a reference to the renamed The Babcock &
Wilcox Company.
Our
business segments are outlined as follows:
|
·
|
Offshore
Oil and Gas Construction includes the business and operations of JRMSA, J.
Ray McDermott Holdings, LLC and their respective
subsidiaries. This segment supplies services primarily to
offshore oil and gas field developments worldwide, including the front-end
design and detailed engineering, fabrication and installation of offshore
drilling and production facilities and installation of marine pipelines
and subsea production systems. This segment operates in
most major offshore oil and gas producing regions, including the United
States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia
Pacific.
|
|
·
|
Government
Operations includes the business and operations of BWX Technologies, Inc.,
Babcock & Wilcox Nuclear Operations Group, Inc., Babcock & Wilcox
Technical Services Group, Inc. and their respective subsidiaries. This
segment supplies nuclear components and provides various services to the
U.S. Government, including uranium processing, environmental site
restoration services and management and operating services for various
U.S. Government-owned facilities, primarily within the nuclear weapons
complex of the U.S. Department of Energy
(“DOE”).
|
|
·
|
Power
Generation Systems includes the business and operations of B&W PGG,
Babcock & Wilcox Nuclear Power Generation Group, Inc. and their
respective subsidiaries. This segment supplies fossil-fired
steam generating systems, replacement commercial nuclear steam generators,
environmental equipment and components, and related services to customers
around the world. It designs, engineers, manufactures and services large
utility and industrial power generation systems, including boilers used to
generate steam in electric power plants, pulp and paper making, chemical
and process applications and other industrial uses. On February
22, 2006, B&W PGG and three of its subsidiaries exited from their
asbestos-related Chapter 11 Bankruptcy proceedings (the “Chapter 11
Bankruptcy”), which were commenced on February 22,
2000.
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|
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Due
to the Chapter 11 Bankruptcy, we did not consolidate the results of
operations of these entities in our consolidated financial statements from
February 22, 2000 through February 22,
2006.
|
The
following tables summarize our revenues and operating income by business segment
for the years ended December 31, 2007, 2006 and 2005. See Note 18 to
our consolidated financial statements included in this report for additional
information about our business segments and operations in different geographic
areas.
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Year
Ended December 31,
|
||||||||||||
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2007
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2006(1)
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2005(1)
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||||||||||
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(In
millions)
|
||||||||||||
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REVENUES:
|
||||||||||||
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Offshore
Oil and Gas Construction
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$ | 2,445.7 | $ | 1,610.3 | $ | 1,238.9 | ||||||
|
Government
Operations
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694.0 | 630.1 | 601.0 | |||||||||
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Power
Generation Systems
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2,504.2 | 1,888.6 | - | |||||||||
|
Adjustments
and Eliminations
|
(12.3 | ) | (8.9 | ) | (0.2 | ) | ||||||
| $ | 5,631.6 | $ | 4,120.1 | $ | 1,839.7 | |||||||
|
OPERATING
INCOME:
|
||||||||||||
|
Segment
Operating Income (Loss):
|
||||||||||||
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Offshore
Oil and Gas Construction
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$ | 397.6 | $ | 214.1 | $ | 157.5 | ||||||
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Government
Operations
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90.0 | 82.7 | 68.0 | |||||||||
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Power
Generation Systems
|
219.7 | 101.9 | (0.9 | ) | ||||||||
| $ | 707.3 | $ | 398.7 | $ | 224.6 | |||||||
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Gain
(Loss) on Asset Disposals
|
||||||||||||
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and
Impairments – Net:
|
||||||||||||
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Offshore
Oil and Gas Construction
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$ | 6.8 | $ | (16.2 | ) | $ | 6.4 | |||||
|
Government
Operations
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1.6 | 1.1 | 0.1 | |||||||||
|
Power
Generation Systems
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- | 0.1 | - | |||||||||
| $ | 8.4 | $ | (15.0 | ) | $ | 6.5 | ||||||
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Equity
in Income (Loss) from Investees:
|
||||||||||||
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Offshore
Oil and Gas Construction
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$ | (3.9 | ) | $ | (2.9 | ) | $ | 2.8 | ||||
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Government
Operations
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31.3 | 27.8 | 31.3 | |||||||||
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Power
Generation Systems
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14.3 | 12.6 | 6.4 | |||||||||
| $ | 41.7 | $ | 37.5 | $ | 40.5 | |||||||
|
Unallocated
corporate
|
(41.2 | ) | (29.9 | ) | (39.9 | ) | ||||||
| $ | 716.2 | $ | 391.3 | $ | 231.7 | |||||||
|
(1) Results for
the principal operating subsidiaries of our Power Generation Systems
segment were not
consolidated
in our
financial
statements from February 22, 2000 through February 22, 2006, due to the
Chapter 11 Bankruptcy.
|
||||||||||||
The
Offshore Oil and Gas Construction segment’s business involves the front-end
design and detailed engineering, fabrication and installation of offshore
drilling and production facilities and installation of marine pipelines and
subsea production systems. This segment also provides comprehensive project
management and procurement services. This segment operates in most
major offshore oil and gas producing regions throughout the world, including the
United States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia
Pacific.
Through our Offshore Oil and Gas
Construction segment, we operate a fleet of marine vessels used in major
offshore construction. We currently own and operate one derrick vessel and six
combination derrick-pipelaying vessels. We also operate a pipelay
vessel and a dive support vessel owned by a subdivision of the state-owned oil
company of Azerbaijan. The lifting capacities of our derrick
and combination derrick-pipelaying vessels range from 660 to 4,400 tons. These
vessels range in length from 350 to 497 feet and are fully equipped with
revolving cranes, auxiliary cranes, welding equipment, pile-driving hammers,
anchor winches and a variety of additional equipment.
On July 27, 2007, we completed our
acquisition of substantially all the assets of Secunda International Limited,
including 14 harsh-weather, multi-functional vessels, with capabilities which
include subsea construction, pipelay, cable lay and dive support, as well as its
shore-based operations.
Seven of our owned and/or operated
major construction vessels are self-propelled. We also have a substantial
inventory of specialized support equipment for intermediate water and deepwater
construction and pipelay. In addition, we own or lease a substantial number of
other vessels, such as tugboats, utility boats, launch barges and cargo barges,
to support the operations of our major marine construction vessels.
The
following table sets forth certain information with respect to the major
construction vessels utilized to conduct our Offshore Oil and Gas Construction
business, including their location at December 31, 2007 (except where otherwise
noted, each of the vessels is owned and operated by us):
|
Location and Vessel Name
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Vessel Type
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Year
Entered Service/ Upgraded
|
Maximum Derrick
Lift (tons)
|
Maximum
Pipe Diameter (inches)
|
|
UNITED
STATES
|
||||
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DB
50 (1)
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Pipelay/Derrick
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1988
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4,400
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20
|
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DB
16 (1)
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Pipelay/Derrick
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1967/2000
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860
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30
|
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Thebaud
Sea (1)
(2)
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Multi-Service
Vessel
|
1999
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—
|
—
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|
MEXICO
|
||||
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Bold
Endurance (1)
(2)
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Multi-Service
Vessel
|
1979
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—
|
—
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MIDDLE
EAST
|
||||
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DB
101
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Semi-Submersible
Derrick
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1978/1984
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3,500
|
—
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|
DB
27
|
Pipelay/Derrick
|
1974/1984
|
2,400
|
60
|
|
DLB
KP1
|
Pipelay/Derrick
|
1974
|
660
|
60
|
|
Agile
(1)
(2)
|
Multi-Service
Vessel
|
1978
|
—
|
—
|
|
CASPIAN
SEA
|
||||
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Israfil
Husseinov (3)
|
Pipelay
|
1997/2003
|
—
|
60
|
|
Akademik
Tofiq Ismayilov (1)
(3)
|
Dive
Support Vessel
|
1987/2005
|
—
|
—
|
|
ASIA
PACIFIC
|
||||
|
DB
30
|
Pipelay/Derrick
|
1975/1999
|
3,080
|
60
|
|
DB
26
|
Pipelay/Derrick
|
1975
|
900
|
60
|
|
Emerald
Sea (1)
(2)
|
Multi-Service
Vessel
|
1996/2007
|
—
|
—
|
|
Intermac
600 (4)
|
Launch/Cargo
Barge
|
1973
|
—
|
—
|
|
Intermac
650 (5)
|
Launch/Cargo
Barge
|
1980/2006
|
—
|
—
|
|
(1)
|
Vessel
with dynamic positioning capability
|
|
(2)
|
Vessel
acquired from Secunda International Limited in July
2007
|
|
(3)
|
Operated
by us and owned by a subdivision of the State Oil Company of the
Azerbaijan Republic
|
|
(4)
|
The
dimensions of this vessel are 500’ x 120’ x 33’
|
|
(5)
|
The
overall dimensions of this vessel are 650’ x 170’ x
40’
|
Governmental
regulations, our insurance policies and some of our financing arrangements
require us to maintain our vessels in accordance with standards of seaworthiness
and safety set by governmental authorities or classification societies. We
maintain our fleet to the standards for seaworthiness, safety and health set by
the American Bureau of Shipping, Den Norske Veritas and other world-recognized
classification societies.
Our
principal fabrication facilities are located near Morgan City, Louisiana, in
Indonesia on Batam Island and in Dubai, U.A.E., and we are currently developing
a new fabrication facility on the east coast of Mexico in the Port of Altamira,
for which we are targeting to begin operations in the first quarter of
2008. We also operate a portion of the Baku Deepwater Jacket Factory
fabrication facility in Baku, Azerbaijan, which is owned by a subsidiary of the
State Oil Company of the Azerbaijan Republic. Our fabrication facilities are
equipped with a wide variety of heavy-duty construction and fabrication
equipment, including cranes, welding equipment, machine tools and robotic and
other automated equipment. We fabricate a full range of offshore structures,
from conventional jacket-type fixed platforms to intermediate water and
deepwater platform configurations employing spar, compliant-tower and tension
leg technologies, as well as floating, production, storage and offtake (“FPSO”)
technology.
Expiration
dates, including renewal options, of leases covering land for our fabrication
facilities at December 31, 2007 were as follows:
|
Morgan
City, Louisiana
|
Years
2008-2048
|
|
Dubai
(Jebel Ali), U.A.E.
|
Year
2015
|
|
Batam
Island, Indonesia
|
Years
2024-2038
|
|
Altamira,
Mexico
|
Year
2036
|
As a
result of renewal options on the various tracts comprising the Morgan City
fabrication facility, we have the ability, within our sole discretion, to
continue leasing almost all the land we are currently using for that facility
until 2048.
Our Offshore Oil & Gas Construction
segment participates in the ownership of several entities with third
parties. We generally refer to these entities as “joint ventures,”
and we account for our investments in them under the equity method of
accounting. These entities include:
|
·
|
Deepwater Marine Technology
LLC. We co-own this entity with Keppel FELS
Ltd. This joint venture expands our services related to the
solutions involving tension leg platforms (“TLPs”). A TLP is a vertically
moored floating structure normally used for the offshore production of oil
and gas and is particularly suited for water depth greater than 1,000
feet.
|
|
·
|
FloaTEC
LLC. We co-own this entity with Keppel FELS
Ltd. This joint venture designs, markets, procures and
contracts floating production systems to the deepwater oil and gas
industry. The deepwater solutions include TLPs, spars and production
semi-submersibles. A significant part of this entity’s strategy is to
build on the established presence, reputation and resources of its two
owners.
|
|
·
|
Spars International,
Inc. We co-own this entity with Technip
S.A. This joint venture primarily enters into engineering,
procurement, construction and installation customer contracts for spars.
Spars are single-hull floating columns designed to support offshore
drilling and production equipment and to store oil. This joint venture
assists our Offshore Oil and Gas Construction segment in the development
and deployment of deepwater spar solutions for the oil and gas industry.
Spars International, Inc. installed the first offshore spar platform in
the Gulf of Mexico in 1,930 feet of water in
1996.
|
|
|
Our
Offshore Oil and Gas Construction segment’s revenues, net of intersegment
revenues, and its segment income derived from operations located outside of the
United States, as well as the approximate percentages to our total consolidated
revenues and total consolidated segment income, respectively, for each of the
last three years were as follows (dollars in thousands):
|
Revenues
|
Segment
Income
|
|||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Year
ended December 31, 2007
|
$ | 2,170,596 | 39 | % | $ | 413,666 | 55 | % | ||||||||
|
Year
ended December 31, 2006
|
$ | 1,378,339 | 33 | % | $ | 217,181 | 52 | % | ||||||||
|
Year
ended December 31, 2005
|
$ | 1,051,547 | 57 | % | $ | 208,034 | 77 | % | ||||||||
See Note
18 to our consolidated financial statements included in this report for further
information on the geographic distribution of our revenues.
Our
Offshore Oil and Gas Construction segment’s customers are primarily oil and gas
companies, including several foreign government-owned companies. This segment’s
five largest customers, as a percentage of our total consolidated revenues,
during the years ended December 31, 2007 and 2006 were as follows:
|
Year
Ended December 31, 2007:
|
||||
|
Azerbaijan
International Operating Company
|
6.2 | % | ||
|
Shell
Oil
|
5.0 | % | ||
|
Aramco
Overseas Company BV
|
3.3 | % | ||
|
Woodside
Energy Limited
|
3.1 | % | ||
|
Qatar
Liquified Gas Company Limited II
|
2.6 | % | ||
|
Year
Ended December 31, 2006:
|
||||
|
Azerbaijan
International Operating Company
|
8.5 | % | ||
|
Aramco
Overseas Company BV
|
6.6 | % | ||
|
Dolphin
Energy Limited
|
3.1 | % | ||
|
Ras
Laffan Liquified Natural Gas Company Limited
|
1.9 | % | ||
|
Conoco
Indonesia, Inc.
|
1.3 | % | ||
The level
of engineering and construction services required by any one customer largely
depends upon the amount of that customer’s capital expenditure budget for
offshore construction services in any single year. Consequently, customers that
account for a significant portion of revenues in one year may represent an
immaterial portion of revenues in subsequent years.
We have
historically performed work on a fixed-price, cost-plus or day-rate basis or a
combination of these methods. Most of our long-term contracts have provisions
for progress payments. We attempt to cover anticipated increases in costs of
labor, material and service costs of our long-term contracts either through an
estimate of such charges, which is reflected in the original price, or through
price escalation clauses.
We
recognize our contract revenues and related costs on a percentage-of-completion
basis. Accordingly, we review contract price and cost estimates periodically as
the work progresses and reflect adjustments in income proportionate to the
percentage of completion in the period when we revise those estimates. To the
extent that these adjustments result in a reduction or an elimination of
previously reported profits with respect to a project, we would recognize a
charge against current earnings, which could be material.
Our
arrangements with customers frequently require us to provide letters of credit
or bid and performance bonds to secure bids or performance under contracts for
offshore construction services. While these letters of credit and bonds may
involve significant dollar amounts, historically, there have been no material
payments to our customers under these arrangements. These arrangements are
typical in the industry for projects outside the U.S. Gulf of
Mexico.
In the
event of a contract deferral or cancellation, we are generally entitled to
recover costs incurred, settlement expenses and profit on work completed prior
to deferral or termination. While we have not generally experienced
significant project cancellations, significant or numerous cancellations could
adversely affect our business, financial condition and results of
operations.
As of
December 31, 2007 and 2006, our Offshore Oil and Gas Construction segment’s
backlog amounted to approximately $4.8 billion and $4.1 billion,
respectively. This represents approximately 49% and 54% of our total
consolidated backlog at December 31, 2007 and 2006, respectively. Of
our December 31, 2007 backlog in this segment, we expect to recognize revenues
as follows (in approximate millions):
|
Amount
|
||||
|
Quarter
Ending:
|
||||
|
March
31, 2008
|
$ | 730 | ||
|
June
30, 2008
|
$ | 900 | ||
|
September
30, 2008
|
$ | 860 | ||
|
December
31, 2008
|
$ | 510 | ||
|
Year
Ending December 31, 2009
|
$ | 1,100 | ||
|
Thereafter
|
$ | 650 | ||
In
addition to our expected revenue recognition from ending backlog at December 31,
2007, our Offshore Oil and Gas Construction segment also realizes revenues from
orders received and completed in the same fiscal quarter.
Backlog
is not a measure recognized by generally accepted accounting principles. It is
possible that our methodology for determining backlog may not be comparable to
methods used by other companies. We generally include expected revenue in our
backlog when we receive written confirmation from our customers. It is possible
that backlog may not be indicative of future results, and projects in our
backlog may be cancelled, modified or otherwise altered by
customers.
Because
of the more conducive weather conditions in certain geographic regions, most
installation operations are conducted in the warmer months of the year in those
areas, and many of these contracts are awarded with only a short period of time
before the desired time of project performance.
Our
Offshore Oil and Gas Construction segment uses raw materials, such as carbon and
alloy steels in various forms, welding gases, paint, fuels and lubricants, which
are available from many sources. We generally purchase these raw
materials and components as needed for individual contracts. Although
shortages of some raw materials and fuels have existed from time to time, no
serious shortage exists at the present time. Our Offshore Oil and Gas
Construction segment does not depend on a single source of supply for any
significant raw materials.
We
believe we are among the few offshore construction contractors capable of
providing a full range of services in major offshore oil and gas producing
regions of the world. We believe that the substantial capital costs involved in
becoming a full-service offshore construction contractor create a significant
barrier to entry into the market as a global, fully integrated competitor. We
do, however, face substantial competition from regional competitors and
less
integrated
providers of offshore construction services, such as engineering firms,
fabrication facilities, pipelaying companies and shipbuilders.
A number
of companies compete with us in each of the separate marine pipelay and
construction and fabrication phases in various parts of the world. These
competitors include Allseas Marine Contractors S.A.; Daewoo Engineering &
Construction Co., Ltd.; Global Industries, Ltd.; NPCC (Abu Dhabi); Heerema
Group; Hyundai Heavy Industrial Co., Ltd.; Kiewit Offshore Services, Ltd.;
Nippon Steel Corporation; Saipem S.p.A.; Acergy S.A.; and Technip S.A. Contracts
are usually awarded on a competitive bid basis. Although we believe customers
consider, among other things, the availability and technical capabilities of
equipment and personnel, efficiency, condition of equipment, safety record and
reputation, price competition is normally the primary factor in determining
which qualified contractor with available equipment is awarded a contract. Major
construction vessels have few alternative uses and, because of their nature and
the environment in which they work, have relatively high costs whether or not
they are operating. See the discussion in Item 1A, “Risk Factors,”
for additional information on the competitive nature of the offshore oil and gas
construction business.
Our
Offshore Oil and Gas Construction segment’s activity depends mainly on the
capital expenditures for offshore construction services of oil and gas companies
and foreign governments for construction of development projects in the regions
we operate. Numerous factors influence these expenditures,
including:
|
·
|
oil
and gas prices, along with expectations about future
prices;
|
|
·
|
the
cost of exploring for, producing and delivering oil and
gas;
|
|
·
|
the
terms and conditions of offshore
leases;
|
|
·
|
the
discovery rates of new oil and gas reserves in offshore
areas;
|
|
·
|
the
ability of businesses in the oil and gas industry to raise capital;
and
|
|
·
|
local
and international political and economic
conditions.
|
See Item
1A, “Risk Factors,” for further information on factors affecting
demand.
Through
our Government Operations segment, we manage complex, high-consequence nuclear
and national security operations, and we are a principal supplier of nuclear
components and advanced energy products to the U.S.
Government. Through our operation of this segment, we have over 50
years of experience in the ownership and operation of large nuclear development,
production and reactor facilities. Principal areas of operation
include:
|
·
|
providing
precision manufactured nuclear components for U.S. Government defense
programs;
|
|
·
|
managing
and operating nuclear production
facilities;
|
|
·
|
managing
and operating environmental management
sites;
|
|
·
|
managing
spent nuclear fuel and transuranic waste for the
DOE;
|
|
·
|
providing
critical skills and resources for DOE sites;
and
|
|
·
|
developing
and deploying next generation technology in support of U.S. Government
programs.
|
Our
Government Operations segment’s principal manufacturing facilities are located
in:
|
·
|
Lynchburg,
Virginia;
|
|
·
|
Barberton,
Ohio;
|
|
·
|
Euclid,
Ohio; and
|
|
·
|
Mount
Vernon, Indiana.
|
|
|
Each
of these facilities is located on property we
own.
|
The
Lynchburg, Virginia facility, which is our Government Operations segment’s
primary manufacturing plant, is the nation’s largest commercial high-enriched
uranium processing facility. The facility resides on 437 acres
with
870,000
square feet of manufacturing area and comprises approximately 60 buildings and
trailers. The site is the recipient of the highest rating given by the Nuclear
Regulatory Commission for license performance. The performance review determines
the safe and secure conduct of operations of the facility. The site is also the
largest commercial International Atomic Energy Agency-certified facility in the
U.S.
Precision
components and products ranging in size from a few grams to hundreds of tons can
be accommodated in the Lynchburg facility. Modern multi-axis
machining centers use computer controls with direct links to distributed
computer-aided design and manufacturing networks. Computer-controlled
electron beam, plasma and tungsten inert gas welding are used for joining a
variety of special materials, including nuclear, refractory, superconducting
alloys, stainless steel, inconel, titanium and aluminum. Other facility
capabilities include:
|
·
|
advanced
heat treatment to optimize material properties of
components;
|
|
·
|
computerized
real-time accept/reject dimensional inspection coordinate measuring
systems for dimensional inspection, custom inspection gauging and
calibration, destructive/nondestructive testing, dye check, Zyglo
inspection, Cryogenic testing, ultrasonic inspection, magnetic particle
inspection and computer or direct numerical control machining and
inspection;
|
|
·
|
the
design and development of advanced nuclear fuels systems for space,
defense, research and commercial applications;
and
|
|
·
|
the
production of aluminum-clad uranium fuel elements of high and low
enrichments for research and test
reactors.
|
The other
manufacturing facilities for our Government Operations segment are the
Barberton, Ohio, Euclid, Ohio and Mount Vernon, Indiana facilities. The
Barberton facility includes 69 acres with 548,000 square feet of manufacturing
area and 119,000 square feet of office area. The Euclid facility
includes 26 acres with 240,000 square feet of manufacturing area and 90,000
square feet of office area. The Mount Vernon facility, located on the
Ohio River, includes 580,000 square feet of manufacturing space and 61,000
square feet of office space. The main manufacturing bay of the Mount
Vernon facility is serviced by two 500-ton cranes, which extend over a barge
dock on the Ohio River.
The
Barberton, Euclid and Mount Vernon facilities utilize multiple, full-contouring,
computer numerical control horizontal and vertical machining centers; large
gantry robotic welding centers; and state-of-the-art support equipment for
machining and welding.
We manage
and operate complex, high-consequence nuclear and national security operations
for the DOE and the National Nuclear Security Administration (“NNSA”), primarily
through corporations, limited liability companies and partnerships, which we
refer to as “joint ventures.” We account for our interests in some of
these entities under the equity method of accounting. In addition, we
provide a broad array of technical services in support of DOE and NNSA
operations and facilities.
We
provide operations, management and technical services in support of the
following U.S. Government facilities:
|
·
|
Pantex
Plant. Through Babcock & Wilcox Technical Services
Pantex, L.L.C., which we co-own with Honeywell International Inc. and
Bechtel National, Inc., we manage and operate the Pantex Plant. The Pantex
Plant is located on a 16,000-acre NNSA site located near Amarillo,
Texas. Key operations at this facility include evaluating,
retrofitting and repairing nuclear weapons; dismantling and sanitizing
nuclear weapons components; developing, testing and fabricating
high-explosive components; and handling and storing plutonium
pits.
|
|
·
|
Y-12 National Security Complex
(“Y-12 Complex”). Through Babcock & Wilcox Technical
Services Y-12, L.L.C, an entity we co-own with Bechtel National, Inc., we
manage the Y-12 Complex. The Y-12 Complex is located on an 811-acre NNSA
site located in Oak Ridge, Tennessee. Operations at the site
focus on the production, refurbishment and dismantlement of nuclear
weapons components, storage of nuclear material and the prevention of the
proliferation of weapons of mass
destruction.
|
|
·
|
Idaho National
Laboratory. Through Bechtel
BWXT Idaho, L.L.C., a limited liability corporation formed with Bechtel
National, we manage the nuclear and national security operations of this
site as a team member of the Battelle Energy Alliance, the
operator of the site. The Idaho National Laboratory is an 890
square mile DOE site near Idaho Falls, Idaho that serves nuclear, national
security and scientific research purposes. Operations at the
facility include processing and managing radioactive and hazardous
materials and nuclear reactor design, demonstration and
safety. The site includes 52 facilities, of which 12 are
classified as Hazard Category 2. A Hazard Category 2
designation is based on the quantities of radioactive materials at the
facility and specified levels of radioactive/hazardous material released
without mitigation.
|
|
·
|
Strategic Petroleum
Reserve. Since 1993, this facility has been managed and
operated by DynMcDermott Petroleum Operations Company, an entity we co-own
with DynCorp International, International-Matex Tank and Terminals and
Jacobs Engineering Group, Inc. The Strategic Petroleum Reserve stores an
emergency supply of crude oil stored at four sites in huge underground
salt caverns along the Texas and Louisiana Gulf
Coast.
|
|
·
|
Los Alamos National
Laboratory. Since 2006, as one of the owners of Los
Alamos National Security, LLC, we have been involved in the management and
operations of this facility. Previously, we acted as a
subcontractor to the University of California at this facility, providing
nuclear facility operations assessment, advisory and technical support
services. The Los Alamos National Laboratory is located in New
Mexico and is the DOE weapons laboratory with the largest number of
defense facilities and weapons-related activities. It is the foremost site
for the government’s ongoing research and development on the measures
necessary for certifying the safety and reliability of nuclear weapons
without the use of nuclear testing.
|
|
·
|
Oak Ridge National
Laboratory. This facility is managed and operated by
UT-Battelle, LLC for the DOE. As an integrated subcontractor to
UT-Battelle, LLC, we provide technical support in the areas of nuclear
facility management and operation. The Oak Ridge National Laboratory is a
multi-disciplined science and technology complex located on a 58-square
mile site near Oak Ridge,
Tennessee.
|
|
·
|
Lawrence Livermore National
Laboratory. Lawrence Livermore National Security, LLC is
a consortium comprised of the University of California, Bechtel National,
URS Corporation and us, which was awarded a contract in late 2007 to
manage the facility in Livermore, California. The laboratory
serves as a national resource in science and engineering, focused on
national security, energy, the environment and bioscience, with special
responsibility for nuclear weapons.
|
|
·
|
Clinch
River. Babcock & Wilcox Technical Services Clinch
River, LLC was awarded a contract from USEC, Inc. in 2007 to manufacture
classified metal parts for the American Centrifuge Program. The
initial phase includes equipment procurement and preparation of the
facility for manufacturing.
|
|
·
|
Savannah River
Site. As an integrated contractor at this site, we are
responsible for nuclear materials management and the startup and operation
of a facility to extract tritium, a radioactive form of hydrogen used in
the United States’ nuclear weapons program. In January 2008,
the management and operations contract for the site was awarded to a new
team, which does not include us. We are currently bidding on a
second contract at this site and expect the award to be announced in early
2008. The Savannah River Site is a 310-square mile DOE
industrial complex, located in Aiken, South Carolina, dedicated to the
processing and storing of nuclear materials in support of the national
defense and U.S. nuclear nonproliferation efforts. The site
also develops and deploys technologies to improve the environment and
treat nuclear and hazardous wastes.
|
|
·
|
Rocky Flats Environmental
Technology Site. Through Safe Sites of Colorado, L.L.C,
an entity we co-own with Westinghouse Government Environmental Services
Company L.L.C., we provide professional engineering and management
services in support of the closure project at the Rocky Flats
Environmental Technology Site. The closure project involves
decommissioning and decontamination activities to stabilize plutonium and
ship the waste to a storage facility. The activities at this site are
basically complete.
|
With
manufacturing facilities located in Barberton, Ohio, Euclid, Ohio, Mount Vernon,
Indiana, and Lynchburg, Virginia, we specialize in the design and manufacture of
close-tolerance and high-quality equipment for nuclear
applications. In addition, we are a leading manufacturer of critical
nuclear components, fuels and assemblies for government and commercial uses. We
have supplied nuclear components for DOE programs since the 1950s. In
addition, we are the largest domestic supplier of research reactor fuel elements
for colleges, universities and national laboratories. We also provide
uranium targets used for medical isotopes and converts or downblends
high-enriched uranium into low-enriched fuel for use in commercial reactors to
generate electricity. We also have over 100 years of experience in supplying
heavy fabrications for industrial use, including components for defense
applications.
We work
closely with the DOE supported non-proliferation program. Currently, this
program is assisting in the development of a high-density, low-enriched uranium
fuel required for high-enriched uranium test reactor conversions. In
addition, we have been a leader in the receipt, storage, characterization,
dissolution, recovery and purification of a variety of uranium-bearing
materials. All phases of uranium downblending and uranium recovery are provided
at our Lynchburg, Virginia site.
We have
an experienced staff of design and manufacturing engineers capable of performing
full scope, prototype design work coupled with manufacturing integration. Our
engineering capabilities include:
|
·
|
steam
separation equipment design and
development;
|
|
·
|
thermal-hydraulic
design of reactor plant components;
|
|
·
|
structural
component design for precision
manufacturing;
|
|
·
|
materials
expertise in high-strength, low-alloy steels, nickel-based materials and
others;
|
|
·
|
material
procurement of tubing, forgings, weld wire;
and
|
|
·
|
fully-equipped
metallographic and chemical analysis laboratory
facility.
|
We also
implement strong quality assurance programs for our Government Operations’
products.
The U.S.
Government is the primary customer of our Government Operations segment,
comprising 97% of segment revenues for the years ended December 31, 2007 and
2006.
The U.S.
Government accounted for approximately 12%, 15%, and 31% of our total
consolidated revenues for the years ended December 31, 2007, 2006, and 2005,
respectively, substantially all of which relates to nuclear
components.
Our
contracts with the federal government are subject to annual funding
determinations. In addition, contracts between the federal government
and its prime contractors usually contain standard provisions for termination at
the convenience of the government or the prime contractor. Upon
termination of such a contract, we are generally entitled to recover costs
incurred, settlement expenses and profit on work completed prior to
termination. While we have not generally experienced significant
project cancellations, significant or numerous cancellations could adversely
affect our business, financial condition and results of operations.
The
contracts for the management and operation of U.S. Government facilities are
generally structured as five-year contracts with five-year renewal options,
which are exercisable by the customer. These are cost-reimbursement contracts
with a U.S. Government credit line with little corporate-funded working capital
required. As a U.S. Government contractor, we are subject to federal regulations
under which our right to receive future awards of new federal contracts may be
unilaterally suspended or barred if we are convicted of a crime or indicted
based on allegations of a violation of specific federal
statutes.
As of
December 31, 2007 and 2006, our Government Operations segment’s backlog amounted
to approximately $1.8 billion and $1.3 billion, or approximately 18% and 17%,
respectively, of our total consolidated backlog. Of our December 31,
2007 backlog in this segment, we expect to recognize revenues as follows (in
approximate millions):
|
Amount
|
||||
|
Quarter
Ending:
|
||||
|
March
31, 2008
|
$ | 150 | ||
|
June
30, 2008
|
$ | 160 | ||
|
September
30, 2008
|
$ | 160 | ||
|
December
31, 2008
|
$ | 160 | ||
|
Year
Ending December 31, 2009
|
$ | 520 | ||
|
Thereafter
|
$ | 640 | ||
As of
December 31, 2007, this segment’s backlog with the U.S. Government was $1.8
billion (of which $13.7 million had not yet been funded), or approximately 18%
of our total consolidated backlog. We do not include the value of our
management and operating contracts in backlog.
During
the year ended December 31, 2007, the U.S. Government awarded new orders of
approximately $1.0 billion to this segment. The amount of new orders
awarded during the year ended December 31, 2007 does not include the acquired
U.S. Government backlog of Marine Mechanical Corporation of $149.8 million
recorded on the date of acquisition.
Backlog
is not a measure recognized by generally accepted accounting principles. It is
possible that our methodology for determining backlog may not be comparable to
methods used by other companies. We generally include expected revenue in our
backlog when we receive written confirmation from our customers. It is possible
that backlog may not be indicative of future results, and projects in our
backlog may be cancelled, modified or otherwise altered by
customers.
Our
Government Operations segment relies on several single-source suppliers for
materials used in its products. We believe these suppliers are
viable, and we and the U.S. Government expend significant effort to maintain the
supplier base.
Our
Government Operations segment is engaged in a highly competitive business
through its management and operation of U.S. Government facilities, in which
customer contracts are typically awarded through competitive bidding
processes. We compete with other general and specialty contractors,
primarily on price, reputation, value and quality of service. This
segment’s competitors in the delivery of goods and services to the U.S.
Government and the operation of U.S. Government facilities include Bechtel
National, Inc., URS Corporation, CH2M Hill, Inc., Fluor Corporation, Lockheed
Martin Corporation, Jacobs Engineering Group, Inc., EnergySolutions, Inc. and
Nuclear Fuel Services, Inc.
Our
Government Operations segment’s operations are
generally capital-intensive on the manufacturing side. This segment
may be impacted by U.S. Government budget restraints and delays.
The
demand for nuclear components for the U.S. Government comprises a substantial
portion of this segment’s backlog. We expect that orders for nuclear
components will continue to be a significant part of backlog for the foreseeable
future; however, such orders are subject to defense department budget
constraints.
See
Section 1A, “Risk Factors,” for further information on factors affecting
demand.
Our Power
Generation Systems segment is a leading supplier of fossil fuel-fired steam
generating systems, large replacement commercial nuclear steam generators and
components, environmental equipment and components and related services to
customers around the world. It designs, engineers, manufactures, constructs and
services large utility and industrial power generation systems, including
boilers used to generate steam in electric power plants, pulp and paper making,
chemical and process applications and other industrial uses. We also
have strategic licensing arrangements for our technology and
products.
The administrative offices for our
Power Generation Systems segment are located in Barberton, Ohio and Lynchburg,
VA. This segment’s principal manufacturing facilities are located
in:
|
·
|
West
Point, Mississippi;
|
|
·
|
Lancaster,
Ohio;
|
|
·
|
Cambridge,
Ontario, Canada;
|
|
·
|
Esbjerg,
Denmark;
|
|
·
|
Melville,
Saskatchewan, Canada; and
|
|
·
|
Jingshan,
Hubei, China.
|
We own
each of these facilities.
The
facility in West Point, Mississippi specializes in the fabrication of products
used in the power generation industry, including furnace wall panels, complete
cyclone furnace assemblies, longflow economizers and generating banks, heat
recovery steam generators, package boilers and related mechanical and structural
components. In addition, the products fabricated at this facility serve the
electric utility, pulp and paper, and other industries.
The
Lancaster, Ohio facility is the headquarters of Diamond Power International,
Inc. (“Diamond Power”), one of our wholly owned subsidiaries. Diamond Power is
the largest supplier of boiler-cleaning equipment in the world. This facility
supplies cleaning systems for heat transfer surfaces in boilers of all sizes and
for the burning of all fossil fuels.
The
Jingshan, Hubei, China facility is a leading supplier of boiler cleaning
equipment to China’s utility power market. In addition, it is also a supplier of
ash handling products and systems for domestic and export markets.
The
Cambridge, Ontario, Canada facility specializes in the production of steam
generation products and services for nuclear utilities, as well as Canadian
fossil fuel utility and industrial markets. The Cambridge facility encompasses
approximately 520,780 square feet of office and manufacturing space with plate,
machine, header, tube and boiler shops. In addition, the Cambridge facility
contains a 37,000-square foot nuclear assembly clean room built specifically for
the assembly of nuclear steam generators. The Cambridge facility houses a modern
Welding and Industrial Skills Training Service Center, a licensed private career
college and testing center.
The
Esbjerg, Denmark facility is the principal facility of Babcock & Wilcox
Volund. This facility is equipped with a wide variety of heavy-duty fabrication
equipment, including welding equipment, machine tools and other automated
equipment. The primary focus of this facility is on new plant equipment for
waste-to-energy plants.
The
Melville, Saskatchewan, Canada facility produces steam generation products and
custom engineering services for the Canadian fossil fuel utilities and
industrial markets in western Canada and the U.S. This plant
fabricates boiler components, including pressure parts, heater elements,
economizer tube elements, hoppers and ducts.
In
addition to the above, our Power Generation Systems segment has several smaller
facilities in different locations around the world and has a significant boiler
manufacturing joint venture in China. This joint venture was
established in 1986 and operates an 111,000 square meter facility, which is ISO
9001 certified and produces industrial and utility
boilers. It
operates the largest heavy drum shop in northern China. This shop is
equipped to handle welding activities, lifting heat treatment and
transportation, and it employs over 2,000 people.
Through
our Power Generation Systems segment, we:
|
·
|
provide
engineered-to-order services, products and systems for energy conversion
worldwide and related auxiliary equipment, such as burners, pulverizer
mills, soot blowers and ash
handlers;
|
|
·
|
manufacture
heavy-pressure equipment for energy conversion, such as boilers fueled by
coal, oil, bitumen, natural gas, solid municipal waste, biomass and other
fuels;
|
|
·
|
fabricate
steam generators and reactor heads for nuclear power
plants;
|
|
·
|
design
and supply environmental control systems, including both wet and dry
scrubbers for flue gas desulfurization, modules for selective catalytic
reduction of the oxides of nitrogen, equipment to capture particulate
matter, such as baghouses and electrostatic precipitators, and similar
devices;
|
|
·
|
construct
power plant equipment and provide related heavy mechanical erection
services;
|
|
·
|
support
operating plants with a wide variety of services, including the
installation of new systems and replacement parts, engineered upgrades,
construction, maintenance and field technical services, such as condition
assessments;
|
|
·
|
provide
inventory services to help customers respond quickly to plant
interruptions and construction crews to assist in maintaining and
repairing operating equipment; and
|
|
·
|
provide
power through cogeneration, refuse-fueled power plants and other
independent power-producing facilities and participate in this market as
contractors for engineer-procure-construct services, as equipment
suppliers, as operations and maintenance contractors and as an
owner.
|
We also
have investments in several unconsolidated entities. We account for
these entities under the equity method of accounting. Descriptions of
these entities are as follows:
|
·
|
Ebensburg Power Company &
Ebensburg Investors Limited Partnership. These entities were formed
by subsidiaries within our Power Generation Systems segment and ESI
Energy, Inc. for the purpose of arranging for engineering, constructing,
owning and operating a combined solid waste and cogeneration facility
located in Cambria County near Ebensburg, Pennsylvania. This facility uses
bituminous waste coal for its primary fuel and sells generated electricity
to a utility and steam to a hospital. Our Power Generation Systems segment
has a long history of selling its goods and services to power producers,
particularly those using fossil fuel-fired steam generating systems. These
entities were formed to hold our interest in a utility, which, at the
time, was part of the strategic plan for our power systems generation
business.
|
|
·
|
Halley & Mellowes Pty.
Ltd. Diamond Power owns an interest in this Australian
company. Halley & Mellowes Pty. Ltd. is complementary to Diamond Power
and has helped Diamond Power to become the largest supplier of
boiler-cleaning equipment in the world. Halley & Mellowes Pty. Ltd.
sells soot blowers, boiler cleaning equipment, valves and material
handling equipment all of which are complimentary to Diamond Power’s
product lines. In addition, Halley & Mellowes Pty. Ltd. shares the
same customer base as Diamond Power and is basically an extension of
Diamond Power’s operations.
|
|
·
|
Babcock & Wilcox Beijing
Company, Ltd. We own equal interests in this entity with
Beijing Jingcheng Machinery Electric Holding Company, Ltd. Babcock &
Wilcox Beijing Company, Ltd. is located in Beijing, China, and its main
activities are the design, manufacturing, production and sale of various
power plant and industrial boilers. We formed this entity to expand our
markets internationally and to provide additional capacity to our Power
Generation Systems segment’s existing boiler
business.
|
Our Power
Generation Systems segment’s revenues, net of intersegment revenues, and its
segment income derived from operations located outside of the United States, as
well as the approximate percentages to our total consolidated revenues and total
consolidated segment income, respectively, for the years ended December 31, 2007
and 2006 were as follows (dollars in thousands):
|
Revenues
|
Segment
Income
|
|||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Year
ended December 31, 2007
|
$ | 411,459 | 7 | % | $ | 49,122 | 6 | % | ||||||||
|
Year
ended December 31, 2006
|
$ | 415,995 | 10 | % | $ | 32,050 | 8 | % | ||||||||
Our Power
Generation Systems segment’s principal customers are government- and
investor-owned utilities and independent power producers, businesses in various
process industries, such as pulp and paper mills, petrochemical plants, oil
refineries and steel mills and other steam-using businesses and governmental
units. Customers normally purchase services, equipment or systems from our Power
Generation Systems segment after an extensive evaluation process based on
competitive bids.
Our Power
Generation Systems segment’s five largest customers, as a percentage of our
total consolidated revenues, during the years ended December 31, 2007 and 2006
were as follows:
|
Year
Ended December 31, 2007:
|
||||
|
American
Electric Power Company, Inc.
|
5.1 | % | ||
|
TXU
Corp.
|
4.1 | % | ||
|
Allegheny
Energy Incorporated
|
2.6 | % | ||
|
First
Energy Corporation
|
2.2 | % | ||
|
Bruce
Power Limited
|
1.9 | % | ||
|
Year
Ended December 31, 2006:
|
||||
|
American
Electric Power Company, Inc.
|
5.3 | % | ||
|
Duke
Energy Corporation
|
4.0 | % | ||
|
Bechtel
Power Group Incorporated
|
2.7 | % | ||
|
Bruce
Power Limited
|
2.6 | % | ||
|
First
Energy Corporation
|
1.5 | % | ||
Customers
that account for a significant portion of revenues in one year may represent an
immaterial portion of revenues in subsequent years.
We have
historically performed work on a fixed-price or cost-plus basis or a combination
of these methods. Most of our long-term contracts have provisions for progress
payments. We attempt to cover anticipated increases in costs of labor, material
and service costs of our long-term contracts, either through an estimate of such
charges, which is reflected in the original price, or through price escalation
clauses.
We
generally recognize our contract revenues and related costs on a
percentage-of-completion basis. Accordingly, we review contract price and cost
estimates periodically as the work progresses and reflect adjustments in income
proportionate to the percentage of completion in the period when we revise those
estimates. To the extent that these adjustments result in a reduction or an
elimination of previously reported profits with respect to a project, we would
recognize a charge against current earnings, which could be
material.
Our
arrangements with customers frequently require us to provide letters of credit,
bid and performance bonds or other guarantees to secure bids or performance
under contracts. While these letters of credit, bonds and other guarantees may
involve significant dollar amounts, historically, there have been no material
payments to our customers under these arrangements.
In the
event of a contract deferral or cancellation, we are generally entitled to
recover costs incurred, settlement expenses and profit on work completed prior
to deferral or termination. While we have not generally experienced
significant project cancellations, significant or numerous cancellations could
adversely affect our business, financial condition and results of
operations.
As of
December 31, 2007 and 2006, our Power Generation Systems segment’s backlog
amounted to approximately $3.3 billion and $2.2 billion,
respectively. This represents approximately 33% and 29% of our total
consolidated backlog at December 31, 2007 and 2006, respectively. Of the
December 31, 2007 backlog in our Power Generation Systems segment, we expect to
recognize revenues as follows (in approximate millions):
|
Amount
|
||||
|
Quarter
Ending:
|
||||
|
March
31, 2008
|
$ | 550 | ||
|
June
30, 2008
|
$ | 440 | ||
|
September
30, 2008
|
$ | 350 | ||
|
December
31, 2008
|
$ | 280 | ||
|
Year
Ended December 31, 2009
|
$ | 610 | ||
|
Thereafter
|
$ | 1,050 | ||
In
addition to our expected revenue recognition from ending backlog at December 31,
2007, our Power Generation Systems segment also realizes revenues from orders
received and completed in the same fiscal quarter, including significant
revenues from our parts and services business.
Backlog
is not a measure recognized by generally accepted accounting principles. It is
possible that our methodology for determining backlog may not be comparable to
methods used by other companies. We generally include expected revenue in our
backlog when we receive written confirmation from our customers. It is possible
that backlog may not be indicative of future results, and projects in our
backlog may be cancelled, modified or otherwise altered by
customers.
Our Power
Generation Systems segment uses raw materials, such as carbon and alloy steels
in various forms, including plates, forgings, structurals, bars, sheets, strips,
heavy wall pipes and tubes. We also purchase many components and accessories for
assembly. We generally purchase these raw materials and components as needed for
individual contracts. Although shortages of some raw materials have existed from
time to time, no serious shortage exists at the present time. Our Power
Generation Systems segment does not depend on a single source of supply for any
significant raw materials.
Our Power
Generation Systems segment primarily competes with:
|
·
|
a
number of domestic and foreign-based companies specializing in
steam-generating systems, equipment and services, including Alstom S.A.,
Doosan Babcock, Babcock Power, Inc., Foster Wheeler Ltd., Mitsubishi Heavy
Industries and Hitachi, Ltd.;
|
|
·
|
a
number of additional companies in the markets for environmental control
equipment and related specialized industrial equipment and in the
independent power-producing business;
and
|
|
·
|
other
suppliers of replacement parts, repair and alteration services and other
services required to retrofit and maintain existing steam
systems.
|
Our Power
Generation Systems segment’s overall activity depends mainly on the capital
expenditures of electric power generating companies and other steam-using
industries. Several factors influence these expenditures,
including:
|
·
|
prices
for electricity, along with the cost of production and
distribution;
|
|
·
|
prices
for coal and natural gas and other sources used to produce
electricity;
|
|
·
|
demand
for electricity, paper and other end products of steam-generating
facilities;
|
|
·
|
availability
of other sources of electricity, paper or other end
products;
|
|
·
|
requirements
for environmental improvements;
|
|
·
|
impact
of potential regional, state, national and/or global requirements to
significantly limit or reduce greenhouse gas emissions in the
future;
|
|
·
|
level
of capacity utilization at operating power plants, paper mills and other
steam-using facilities;
|
|
·
|
requirements
for maintenance and upkeep at operating power plants and paper mills to
combat the accumulated effects of wear and
tear;
|
|
·
|
ability
of electric generating companies and other steam users to raise capital;
and
|
|
·
|
relative
prices of fuels used in boilers, compared to prices for fuels used in gas
turbines and other alternative forms of
generation.
|
Our Power
Generation Systems segment’s products and services are capital intensive. As
such, customer demand is heavily affected by the variations in customer’s
business cycles and by the overall economies of the countries in which they
operate.
See
Section 1A, “Risk Factors,” for further information on factors affecting
demand.
We
currently hold a large number of U.S. and foreign patents and have numerous
patent applications pending. We have acquired patents and licenses
and granted licenses to others when we have considered it advantageous for us to
do so. Although in the aggregate our patents and licenses are
important to us, we do not regard any single patent or license or group of
related patents or licenses as critical or essential to our business as a
whole. In general, we depend on our technological capabilities and
the application of know-how, rather than patents and licenses, in the conduct of
our various businesses.
We
conduct our principal research and development activities through individual
business units at our various manufacturing plants and engineering and design
offices. Our research and development activities cost approximately $52.0
million, $45.2 million and $34.1 million in the years ended December 31, 2007,
2006 and 2005, respectively. Contractual arrangements for
customer-sponsored research and development can vary on a case-by-case basis and
include contracts, cooperative agreements and grants. Of our total research and
development expenses, our customers paid for approximately $16.5 million, $26.5
million and $30.8 million in the years ended December 31, 2007, 2006 and
2005, respectively.
We
maintain liability and property insurance in amounts we consider adequate for
those risks we consider appropriate to insure. Some risks are not
insurable or insurance to cover them is available only at rates that we consider
uneconomical. These risks include, but may not be limited to, war and
confiscation of property in some areas of the world, pollution liability, owned
aircraft liability, business interruption, liabilities related to occupational
health exposures (including asbestos) and liability related to risk of loss of
our work in progress and customer-owned materials in our care, custody and
control. Depending on competitive conditions and other factors, we
endeavor to obtain contractual protection against some uninsured risks from our
customers. Insurance or contractual indemnity protection, when obtained, may not
be sufficient or effective under all circumstances or against all hazards to
which we may be subject.
Coverage
to insure against liability and property damage losses resulting from nuclear
accidents at reactor facilities of our utility customers is not available in the
commercial insurance marketplace, but we do have some protection against claims
based on such losses. To protect against liability for damage to a
customer's property, we endeavor to obtain waivers of subrogation from the
customer and its insurer and are usually named as an additional insured under
the utility customer's nuclear property policy. We also attempt to
cap our overall liability in our contracts. To protect against
liability from claims brought by third parties, we are insured under the utility
customer's nuclear liability policies and have the benefit of the indemnity and
limitation of any applicable liability provision of the Price-Anderson
Act. The Price-Anderson Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of a certain amount. This amount is determined by the sum of
commercially available liability insurance plus certain retrospective premium
assessments payable by operators of commercial nuclear reactors. For
those sites where we provide environmental remediation services, we seek the
same protection from our customers as we do for our other nuclear
activities. The Price-Anderson Act, as amended, includes a sunset
provision and requires renewal each time that it expires. Contracts
that were entered into during a period of time that Price-Anderson was in full
force and effect continue to receive the benefit of the Price-Anderson Act’s
nuclear indemnity. The Price-Anderson Act is set to expire on
December 31, 2025. Our Government Operations segment currently has no
contracts involving nuclear materials that are not covered by and subject to the
nuclear indemnity provisions of the Price-Anderson Act.
Although
we do not own or operate any nuclear reactors, we have some coverage under
commercially available nuclear liability and property insurance for two
locations that are currently licensed to possess special nuclear
materials. These two locations are located at our Lynchburg,
Virginia site. These facilities are insured under a nuclear liability
policy that also insures the facility of AREVA Enterprises, Inc. (“AREVA”),
which we sold during the fiscal year ended March 31, 1993. The AREVA
facility and our facility share the same nuclear liability insurance limit, as
the commercial insurer would not allow AREVA to obtain a separate nuclear
liability insurance policy. Due to the type of contracts with the
U.S. Government, our facilities in Lynchburg have statutory indemnity and
limitation of liability under the Price-Anderson Act for public liability claims
related to nuclear incidents. However, we have some risk of loss for
nuclear material and are not able to buy insurance to insure against this
potential liability.
Through
two limited liability companies, our Government Operations segment has
management and operating agreements with the U.S. Government for the Pantex and
Y-12 facilities. Most insurable liabilities arising from these sites
are not protected in our corporate insurance program but rely on government
contractual agreements and certain specialized self-insurance programs funded by
the U.S. Government. The U.S. Government has historically fulfilled
its contractual agreement to reimburse for insurable claims, and we expect it to
continue this process during our administration of these two
facilities. However, in most of these situations in which the U. S.
Government is contractually obligated to pay, the payment obligation is subject
to the availability of authorized government funds.
In our
Power Generation Systems segment, principally through its manufacture of
heavy-pressure equipment for energy conversion, such as boilers, and its
fabrication of nuclear steam generators, we are subject to risks such as
accidents resulting in the loss of life or property and potential environmental
issues. While we attempt to obtain adequate insurance to cover these
risks, it is possible that insurance against these risks might be unavailable or
available only at rates we consider uneconomical. There is also
potential liability resulting from multi-jurisdictional disputes or liability in
jurisdictions that do not have adequate protections for the manufacturers or
suppliers to the nuclear power industry. See Note 11 to our
consolidated financial statements included in this report for additional
information.
Our
Offshore Oil and Gas Construction segment is subject to the many risks of
operations at sea, including accidents resulting in the loss of life or
property, pollution or other environmental mishaps, adverse weather conditions,
mechanical failures, collisions, property losses to our vessels, business
interruption due to damage to the equipment or political action in foreign
countries and labor stoppages. We have additional exposure because
this segment uses expensive construction equipment, sometimes under extreme
weather conditions, often in remote areas of the world. In many
cases, this segment also operates on or in proximity to existing offshore
facilities. These facilities are subject to damage that could result
in the escape of oil and gas into the sea. Litigation arising from any such
event may result in our being named as a defendant in lawsuits asserting large
claims. Depending on competitive conditions and other factors, we have
endeavored to obtain contractual protection against uninsured risks from our
customers. When obtained, such contractual indemnification protection may not in
all cases be supported by adequate insurance maintained by the customer. These
contractual protections are not available in many cases. In addition, in recent
years, we have been named as a defendant in litigation concerning exposure
to
lead-based
paint, silica, asbestos and welding rod fumes. While we are vigorously defending
these claims, it is possible that existing insurance will not be sufficient to
cover all potential exposure should these proceedings result in an adverse
decision for us. See Note 11 to our consolidated financial statements included
in this report for additional information on these issues.
We have
several wholly owned insurance subsidiaries that customarily provide workers
compensation, employer’s liability, commercial general liability, maritime
employer’s liability and automotive liability insurance to support our global
operations. These captives have, from time to time, in the past
provided builder’s risk and marine hull insurance to our
companies. We may also have business reasons in the future to have
these insurance subsidiaries accept other risks which we cannot or do not wish
to transfer to outside insurance companies. These risks may be considerable in
any given year or cumulatively. These insurance subsidiaries have not
provided significant amounts of insurance to unrelated
parties. Claims as a result of our operations could adversely impact
the ability of these captive insurers to respond to all claims
presented.
Additionally,
upon the February 22, 2006 effectiveness of the settlement relating to the
Chapter 11 Bankruptcy, we and most of our subsidiaries contributed substantial
insurance rights to the asbestos personal injury trust, including rights
to (1) certain pre-1979 primary and excess insurance coverages and (2) certain
of our 1979-1986 excess insurance coverage, which 1979-1986 excess policies had
an aggregate face value of available limits of coverage of approximately $1.15
billion. These insurance rights provided cover for, among other things, asbestos
and other personal injury claims, subject to the terms and conditions of the
policies. With the contribution of these insurance rights to the asbestos
personal injury trust, we may have underinsured or uninsured exposure for
non-derivative asbestos claims or other personal injury or other claims that
would have been insured under these coverages had the insurance rights not been
contributed to the asbestos personal injury trust.
At
December 31, 2007, we employed approximately 28,400 persons, compared with
27,800 at December 31, 2006. Approximately 8,300 of our employees were members
of labor unions at December 31, 2007, compared with approximately 11,100 at
December 31, 2006. Many of our operations are subject to union
contracts, which we customarily renew periodically. Currently, we
consider our relationships with our employees to be satisfactory.
General
Many
aspects of our operations and properties are affected by political developments
and are subject to both domestic and foreign governmental regulations, including
those relating to:
|
·
|
construction
and equipping of offshore production platforms and other offshore
facilities;
|
|
·
|
construction
and equipping of electric power and other industrial
facilities;
|
|
·
|
possessing
and processing special nuclear
materials;
|
|
·
|
marine
vessel safety;
|
|
·
|
workplace
health and safety;
|
|
·
|
currency
conversions and repatriation;
|
|
·
|
taxation
of foreign earnings and earnings of expatriate personnel;
and
|
|
·
|
protecting
the environment.
|
In
addition, we depend on the demand for our offshore construction services from
the oil and gas industry and, therefore, are affected by changing taxes, price
controls and other laws and regulations relating to the oil and gas industry
generally. The adoption of laws and regulations curtailing offshore exploration
and development drilling for oil and gas for economic and other policy reasons
would adversely affect our operations by limiting demand for our
services.
We are
required by various other governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to our operations. The
kinds of permits, licenses and certificates required in our operations depend
upon a number of factors.
The
exploration and development of oil and gas properties on the continental shelf
of the United States is regulated primarily under the U.S. Outer Continental
Shelf Lands Act and related regulations. These laws require the construction,
operation and removal of offshore production facilities located on the outer
continental shelf of the United States to meet stringent engineering and
construction specifications. Similar regulations govern the plugging and
abandoning of wells located on the outer continental shelf of the United States
and the removal of all production facilities. Violations of regulations issued
pursuant to the U.S. Outer Continental Shelf Lands Act and related laws can
result in substantial civil and criminal penalties, as well as injunctions
curtailing operations.
We cannot
determine the extent to which new legislation, new regulations or changes in
existing laws or regulations may affect our future operations.
Environmental
Our
operations and properties are subject to a wide variety of increasingly complex
and stringent foreign, federal, state and local environmental laws and
regulations, including those governing discharges into the air and water, the
handling and disposal of solid and hazardous wastes, the remediation of soil and
groundwater contaminated by hazardous substances and the health and safety of
employees. Sanctions for noncompliance may include revocation of permits,
corrective action orders, administrative or civil penalties and criminal
prosecution. Some environmental laws provide for strict, joint and several
liability for remediation of spills and other releases of hazardous substances,
as well as damage to natural resources. In addition, companies may be subject to
claims alleging personal injury or property damage as a result of alleged
exposure to hazardous substances. Such laws and regulations may also expose us
to liability for the conduct of or conditions caused by others or for our acts
that were in compliance with all applicable laws at the time such acts were
performed.
These
laws and regulations include the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act and similar
laws that provide for responses to, and liability for, releases of hazardous
substances into the environment. These laws and regulations also
include similar foreign, state or local counterparts to these federal laws,
which regulate air emissions, water discharges, hazardous substances and waste
and require public disclosure related to the use of various hazardous
substances. Our operations are also governed by laws and regulations
relating to workplace safety and worker health, primarily, in the United States,
the Occupational Safety and Health Act and regulations promulgated
thereunder.
We are
currently in the process of investigating and remediating some of our former
operating sites. Although we have recorded reserves in connection with certain
of these matters, due to the uncertainties associated with environmental
remediation, we cannot assure you that the actual costs resulting from these
remediation matters will not exceed the recorded reserves.
Our
compliance with U.S. federal, state and local environmental control and
protection regulations resulted in pretax charges of approximately $9.5 million
in the year ended December 31, 2007. In addition, compliance with existing
environmental regulations necessitated capital expenditures of $4.9 million in
the year ended December 31, 2007. We expect to spend another $6.9
million on such capital expenditures over the next five years. We cannot predict
all of the environmental requirements or circumstances that will exist in the
future but anticipate that environmental control and protection standards will
become increasingly stringent and costly. Based on our experience to date, we do
not currently anticipate any material adverse effect on our business or
consolidated financial position as a result of future compliance with existing
environmental laws and regulations. However, future events, such as changes in
existing laws and regulations or their interpretation, more vigorous enforcement
policies of regulatory agencies or stricter or different interpretations of
existing laws and regulations, may require additional expenditures by us, which
may be material. Accordingly, we can provide no assurance that we will not incur
significant environmental compliance costs in the future.
In
addition, offshore construction and drilling in some areas have been opposed by
environmental groups and, in some areas, have been restricted. To the extent
laws are enacted or other governmental actions are taken that prohibit or
restrict offshore construction and drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry in
general and the offshore construction industry in particular, our business and
prospects could be adversely affected.
We have
been identified as a potentially responsible party at various cleanup sites
under 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 wastes 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 position, results of operations or liquidity in
any given year.
Environmental
remediation projects have been and continue to be undertaken at certain of our
current and former plant sites. During the fiscal year ended March
31, 1995, one of our subsidiaries decided to close its nuclear manufacturing
facilities in Parks Township, Armstrong County, Pennsylvania (the "Parks
Facilities") and proceeded to decommission the facilities in accordance with its
then-existing license from the Nuclear Regulatory Commission (the
“NRC”). The facilities were subsequently transferred to another
subsidiary of ours in the fiscal year ended March 31, 1998, and, during the
fiscal year ended March 31, 1999, that subsidiary reached an agreement with the
NRC on a plan that provided for the completion of facilities dismantlement and
soil restoration by 2001 and license termination in 2003. An
application to terminate the NRC license for the Parks Township facility was
filed, and the NRC terminated the license in 2004 and released the facility for
unrestricted use. For a discussion of certain civil litigation we are
involved in concerning the Parks Facilities, see Note 11 to our consolidated
financial statements included in this report.
We
perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these
activities, we are subject to continuing reviews by governmental agencies,
including the Environmental Protection Agency and the NRC.
The NRC’s
decommissioning regulations require our Government Operations segment to provide
financial assurance that it will be able to pay the expected cost of
decommissioning its facilities at the end of their service lives. We
will continue to provide financial assurance aggregating $24.5 million during
the year ending December 31, 2008 with existing letters of credit for the
ultimate decommissioning of all its licensed facilities, except
one. This one facility, which represents the largest portion of our
eventual decommissioning costs, has provisions in its government contracts
pursuant to which all of its decommissioning costs and financial assurance
obligations are covered by the DOE.
The
demand for power generation services and products can be influenced by state and
federal governmental legislation setting requirements for utilities related to
operations, emissions and environmental impacts. The legislative
process is unpredictable and includes a platform that continuously seeks to
increase the restrictions on power producers. Potential legislation
limiting emissions from power plants, including carbon dioxide, could affect our
markets and the demand for our products and services in our Power Generation
Systems segment.
At
December 31, 2007 and 2006, we had total environmental reserves, including
provisions for the facilities discussed above, of $18.8 million and $18.6
million, respectively. Of our total environmental reserves at
December 31, 2007 and 2006, $7.0 million and $9.7 million, respectively, were
included in current liabilities. Inherent in the estimates of those
reserves and recoveries are our expectations regarding the levels of
contamination, decommissioning costs and recoverability from other parties,
which may vary significantly as decommissioning activities
progress. Accordingly, changes in estimates could result in material
adjustments to our operating results, and the ultimate loss may differ
materially from the amounts we have provided for in our consolidated financial
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.
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 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,”
“believe,” “expect,” “anticipate,” “plan,” “goal” or other words that convey the
uncertainty of future events or outcomes. In addition, 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 Annual Report on Form 10-K, 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 Item 1 – “Business” in Part I of this
report and in Item 7 – “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in the notes to our consolidated
financial statements in Item 8 of Part II of this report and elsewhere in this
report. 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;
|
|
·
|
decisions
about offshore developments to be made by oil and gas
companies;
|
|
·
|
decisions
on spending by the U.S. Government and electric power generating
companies;
|
|
·
|
the
highly competitive nature of most of our
businesses;
|
|
·
|
the
ability of our suppliers to deliver raw materials in sufficient quantities
and in a timely manner;
|
|
·
|
our
future financial performance, including compliance with covenants in our
credit agreements and other debt instruments and availability, terms and
deployment of capital;
|
|
·
|
the
continued availability of qualified
personnel;
|
|
·
|
the
operating risks normally incident to our lines of
business;
|
|
·
|
changes
in, or our failure or inability to comply with, government regulations and
adverse outcomes from legal and regulatory
proceedings;
|
|
·
|
impact
of potential regional, national and/or global requirements to
significantly limit or reduce greenhouse gas emissions in the
future;
|
|
·
|
changes
in, and liabilities relating to, existing or future environmental
regulatory matters;
|
|
·
|
rapid
technological changes;
|
|
·
|
the
realization of deferred tax assets, including through a reorganization we
completed in December 2006;
|
|
·
|
the
consequences of significant changes in interest rates and currency
exchange rates;
|
|
·
|
difficulties
we may encounter in obtaining regulatory or other necessary approvals of
any strategic transactions;
|
|
·
|
social,
political and economic situations in foreign countries where we do
business, including countries in the Middle East and Asia Pacific and the
former Soviet Union;
|
|
·
|
the
possibilities of war, other armed conflicts or terrorist
attacks;
|
|
·
|
the
effects of asserted and unasserted
claims;
|
|
·
|
our
ability to obtain surety bonds and letters of
credit;
|
|
·
|
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 insurance captives;
and
|
|
·
|
the
impact of the loss of insurance rights as part of the Chapter 11
Bankruptcy settlement.
|
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 report or
elsewhere by us or on our behalf. We have discussed many of these
factors in more detail elsewhere in this report. These factors are
not necessarily all the important factors that could affect
us. Unpredictable or unknown factors we have not discussed in this
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 important 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.
Our
website address is www.mcdermott.com. We
make available through the Investor Relations section of this website under “SEC
Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, statements of beneficial ownership of
securities on Forms 3, 4 and 5 and amendments to those reports as soon as
reasonably practicable after we electronically file those materials with, or
furnish those materials to, the Securities and Exchange Commission (the
“SEC”). You may read and copy any materials we file with the SEC at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
You may obtain information regarding the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. We have also posted on
our website our: Corporate Governance Guidelines; Code of Ethics for our Chief
Executive Officer and Senior Financial Officers; Board of Directors Conflicts of
Interest Policies and Procedures; Officers, Board Members and Contact
Information; By-laws; and charters for the Audit, Governance, Compensation and
Finance Committees of our Board.
Our
Offshore Oil and Gas Construction segment derives substantially all its revenues
from companies in the oil and gas exploration and production industry, a
historically cyclical industry with levels of activity that are significantly
affected by the levels and volatility of oil and gas prices.
The
demand for offshore construction services has traditionally been cyclical,
depending primarily on the capital expenditures of oil and gas companies for
construction of development projects. These capital expenditures are
influenced by such factors as:
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·
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prevailing
oil and gas prices;
|
|
·
|
expectations
about future prices;
|
|
·
|
the
cost of exploring for, producing and delivering oil and
gas;
|
|
·
|
the
sale and expiration dates of available offshore
leases;
|
|
·
|
the
discovery rate of new oil and gas reserves in offshore
areas;
|
|
·
|
domestic
and international political, military, regulatory and economic
conditions;
|
|
·
|
technological
advances; and
|
|
·
|
the
ability of oil and gas companies to generate funds for capital
expenditures.
|
Prices
for oil and gas have historically been extremely volatile and have reacted to
changes in the supply of and demand for oil and natural gas (including changes
resulting from the ability of the Organization of Petroleum Exporting Countries
to establish and maintain production quotas), domestic and worldwide economic
conditions and political instability in oil producing countries. We
anticipate prices for oil and natural gas will continue to be volatile and
affect the demand for and pricing of our offshore construction services. A
material decline in oil or natural gas prices or activities over a sustained
period of time could materially adversely affect the demand for our offshore
construction services and, therefore, our results of operations and financial
condition.
Our
Power Generation Systems segment derives substantially all its revenues from
electric power generating companies and other steam-using industries, with
demand for its services and products depending on capital expenditures in these
historically cyclical industries.
The
demand for power generation services and products depends primarily on the
capital expenditures of electric power generating companies, paper companies and
other steam-using industries. These capital expenditures are influenced by such
factors as:
|
·
|
prices
for electricity, along with the cost of production and
distribution;
|
|
·
|
prices
for natural resources such as coal and natural
gas;
|
|
·
|
demand
for electricity, paper and other end products of steam-generating
facilities;
|
|
·
|
availability
of other sources of electricity, paper or other end
products;
|
|
·
|
requirements
for environmental improvements, including potential carbon dioxide
(“CO2”)
legislation;
|
|
·
|
level
of capacity utilization at operating power plants, paper mills and other
steam-using facilities;
|
|
·
|
requirements
for maintenance and upkeep at operating power plants and paper mills to
combat the accumulated effects of wear and
tear;
|
|
·
|
ability
of electric generating companies and other steam users to raise capital;
and
|
|
·
|
relative
prices of fuels used in boilers, compared to prices for fuels used in gas
turbines and other alternative forms of
generation.
|
A
material decline in capital expenditures by electric power generating companies,
paper companies and other steam-using industries over a sustained period of time
could materially and adversely affect the demand for our power generation
services and products and, therefore, our results of operations and financial
condition.
War,
other armed conflicts or terrorist attacks could have a material adverse effect
on our business.
The war
in Iraq and subsequent terrorist attacks and unrest have caused instability in
the world’s financial and commercial markets, have significantly increased
political and economic instability in some of the geographic areas in which we
operate and have contributed to high levels of volatility in prices for oil and
gas. The continuing instability and unrest in Iraq, as well as
threats of war or other armed conflict elsewhere, may cause further disruption
to financial and commercial markets and contribute to even higher levels of
volatility in prices for oil and gas. In addition, the continued
unrest in Iraq could lead to acts of terrorism in the United States or
elsewhere, and acts of terrorism could be directed against companies such as
ours. Also, acts of terrorism and threats of armed conflicts in or
around various areas in which we operate, such as the Middle East and Indonesia,
could limit or disrupt our markets and operations, including disruptions from
evacuation of personnel, cancellation of contracts or the loss of personnel or
assets. Armed conflicts, terrorism and their effects on us or our
markets may significantly affect our business and results of operations in the
future.
We
are subject to risks associated with contractual pricing in our industries,
including the risk that, if our actual costs exceed the costs we estimate on our
fixed-price contracts, our profitability will decline, and we may suffer
losses.
Because
of the highly competitive nature of the industries in which our Offshore Oil and
Gas Construction and Power Generation Systems segments perform, these segments
have a substantial number of their projects on a fixed-price
basis. We attempt to cover increased costs of anticipated changes in
labor, material and service costs of long-term contracts, either through
estimates of cost increases, which are reflected in the original contract price,
or through price escalation clauses. Despite these attempts, however,
the cost and gross profit we realize on a fixed-price contract could vary from
the estimated amounts because of changes in job conditions, variations in labor
and equipment productivity and increases in the cost of raw materials,
particularly steel, over the term of the contract. These variations
and the risks generally inherent in these industries may result in actual
revenues or costs being different from those we originally estimated and may
result in reduced profitability or losses on projects.
In
addition, we recognize revenues under our long-term contracts in our segments on
a percentage-of-completion basis. Accordingly, we review contract
price and cost estimates periodically as the work progresses and reflect
adjustments proportionate to the percentage of completion in income in the
period when we revise those estimates. To the extent these
adjustments result in a reduction or an elimination of previously reported
profits with respect to a project, we would recognize a charge against current
earnings, which could be material. Our current estimates of our
contract costs and the profitability of our long-term projects could change, and
adjustments to overall contract costs may continue to be significant in future
periods.
Our
backlog is subject to unexpected adjustments and cancellations and is,
therefore, an uncertain indicator of our future earnings.
There can
be no assurance that the revenues projected in our backlog will be realized or,
if realized, will result in profits. Because of changes in project scope and
schedule, we cannot predict with certainty when or if backlog will be performed.
In addition, even where a project proceeds as scheduled, it is possible that
contracted parties may
default
and fail to pay amounts owed to us. Material delays, cancellations or payment
defaults could materially affect our financial condition, results of operations
and cash flows.
Reductions
in our backlog due to cancellation or modification by a customer or for other
reasons may adversely affect, potentially to a material extent, the revenues and
earnings we actually receive from contracts included in our backlog. Many of the
contracts in our backlog provide for cancellation fees in the event customers
cancel projects. These cancellation fees usually provide for reimbursement of
our out-of-pocket costs, revenues for work performed prior to cancellation and a
varying percentage of the profits we would have realized had the contract been
completed. However, we typically have no contractual right upon cancellation to
the total revenues reflected in our backlog. Projects may remain in our backlog
for extended periods of time. If we experience significant project terminations,
suspensions or scope adjustments to contracts reflected in our backlog, our
financial condition, results of operations, and cash flows may be adversely
impacted.
We
face risks associated with investing in foreign subsidiaries and joint ventures,
including the risk that we may be restricted in our ability to access the cash
flows or assets of these entities.
We
conduct some operations through foreign subsidiaries and joint
ventures. We do not manage all of these entities. Even in
those joint ventures that we manage, we are often required to consider the
interests of our joint venture partners in connection with decisions concerning
the operations of the joint ventures. Arrangements involving these
subsidiaries and joint ventures may restrict us from gaining access to the cash
flows or assets of these entities. In addition, these foreign
subsidiaries and joint ventures sometimes face governmentally imposed
restrictions on their abilities to transfer funds to us.
Our
international operations are subject to political, economic and other
uncertainties not encountered in our domestic operations.
We derive
a significant portion of our revenues from international operations, including
customers in the Middle East. Our international operations are
subject to political, economic and other uncertainties not generally encountered
in our U.S. operations. These include:
|
·
|
risks
of war, terrorism and civil unrest;
|
|
·
|
expropriation,
confiscation or nationalization of our
assets;
|
|
·
|
renegotiation
or nullification of our existing
contracts;
|
|
·
|
changing
political conditions and changing laws and policies affecting trade and
investment;
|
|
·
|
overlap
of different tax structures;
|
|
·
|
risk
of changes in foreign currency exchange rates;
and
|
|
·
|
risks
associated with the assertion of foreign sovereignty over areas in which
our operations are conducted.
|
Our
Offshore Oil and Gas Construction segment may be particularly susceptible to
regional conditions that may adversely affect its operations. Its
major marine construction vessels typically require relatively long periods of
time to mobilize over long distances, which could affect our ability to withdraw
them from areas of conflict.
Various
foreign jurisdictions have laws limiting the right and ability of foreign
subsidiaries and joint ventures to pay dividends and remit earnings to
affiliated companies. Our international operations sometimes face the
additional risks of fluctuating currency values, hard currency shortages and
controls of foreign currency exchange.
Our
operations are subject to operating risks and limits on insurance coverage,
which could expose us to potentially significant liability costs.
We are
subject to a number of risks inherent in our operations, including:
|
·
|
accidents
resulting in injury to or the loss of life or
property;
|
|
·
|
environmental
or toxic tort claims, including delayed manifestation claims for personal
injury or loss of life;
|
|
·
|
pollution
or other environmental mishaps;
|
|
·
|
hurricanes,
tropical storms and other adverse weather
conditions;
|
|
·
|
mechanical
failures;
|
|
·
|
collisions;
|
|
·
|
property
losses;
|
|
·
|
business
interruption due to political action in foreign countries or other
reasons; and
|
|
·
|
labor
stoppages.
|
We have
been, and in the future we may be, named as defendants in lawsuits asserting
large claims as a result of litigation arising from events such as
these. We rely heavily on certain items of equipment,
including vessels and heavy manufacturing equipment and our
fabrication locations, to execute the work we are hired to perform. If these
items became unavailable to us for any reason, including for loss or
damage, political or terrorist event or otherwise, we may not be
able to timely meet the requirements of our customer contracts and may be
in default of our contractual obligations for one or more customers, subjecting
us to delay damage claims, including for loss of profits. Insurance
against some of the risks inherent in our operations is either unavailable or
available only at rates that we consider uneconomical. Also,
catastrophic events, such as the September 11, 2001 terrorist attacks and the
hurricane losses of 2005, customarily result in decreased coverage limits, more
limited coverage, additional exclusions in coverage, increased premium costs and
increased deductibles and self-insured retentions. Risks that are
difficult to insure include, among others, the risk of war and confiscation of
property in some areas of the world, losses or liability resulting from acts of
terrorism, certain risks relating to construction and pollution liability,
property located in certain areas of the world and business
interruption. Depending on competitive conditions and other factors,
we endeavor to obtain contractual protection against certain uninsured risks
from our customers. When obtained, such contractual indemnification
protection may not be as broad as we desire or may not be supported by adequate
insurance maintained by the customer. Such insurance or contractual
indemnity protection may not be sufficient or effective under all circumstances
or against all hazards to which we may be subject. A successful claim
for which we are not fully insured could have a material adverse effect on
us.
Additionally,
upon the February 22, 2006 effectiveness of the settlement relating to the
Chapter 11 Bankruptcy, we and most of our subsidiaries contributed substantial
insurance rights to the asbestos personal injury trust, including rights to (1)
certain pre-1979 primary and excess insurance coverages and (2) certain of our
1979-1986 excess insurance coverage, which 1979-1986 excess policies had an
aggregate face value of available limits of coverage of approximately $1.15
billion. These insurance rights provided cover for, among other things,
asbestos and other personal injury claims, subject to the terms and conditions
of such policies. With the contribution of these insurance rights to the
asbestos personal injury trust, we may have underinsured or uninsured exposure
for asbestos claims or other personal injury or other claims against
subsidiaries not debtors in the Chapter 11 Bankruptcy, for which we would have
had insurance rights under these coverages if the insurance rights had not been
contributed to the asbestos personal injury trust.
Through
two of limited liability companies, our Government Operations segment has
management and operating agreements with the U.S. Government for the Y-12 and
Pantex facilities. Most insurable liabilities arising from these
sites are not protected in our corporate insurance program but rely on
government contractual agreements and certain specialized self-insurance
programs funded by the U.S. Government. The U. S. Government has
historically fulfilled its contractual agreement to reimburse for insurable
claims, and we expect it to continue this process during our administration of
these two facilities. However, it should be noted that, in most situations, the
U. S. Government is contractually obligated to pay, subject to the availability
of authorized government funds.
We have
captive insurers which provide certain coverages for our subsidiary entities and
related coverages. Claims as a result of our operations, could
adversely impact the ability of these captive insurers to respond to all claims
presented.
We
depend on significant customers, including the U.S. Government.
Our three
segments derive a significant amount of their revenues and profits from a
relatively small number of customers in a given year. The inability
of these segments to continue to perform services for a number of their large
existing customers, if not offset by contracts with new or other existing
customers, could have a material adverse effect on our business and
operations.
Our
significant customers include federal government agencies, utilities and major
oil and gas companies. In particular, our Government Operations
segment derives substantially all its revenue from the U.S.
Government. Some
of our
large multi-year contracts with the U.S. Government are subject to annual
funding determinations. U.S. Government budget restraints and other
factors affecting these governments may adversely affect our
business.
We
may not be able to compete successfully against current and future
competitors.
Most
industry segments in which we operate are highly competitive. Some of our
competitors or potential competitors have greater financial or other resources
than we have. Our operations may be adversely affected if our current
competitors or new market entrants introduce new products or services with
better features, performance, prices or other characteristics than those of our
products and services. This factor is significant to our segments’
businesses where capital investment is critical to our ability to
compete.
The
loss of the services of one or more of our key personnel, or our failure to
attract, assimilate and retain trained personnel in the future, could disrupt
our operations and result in loss of revenues.
Our
success depends on the continued active participation of our executive officers
and key operating personnel. The unexpected loss of the services of
any one of these persons could adversely affect our operations.
Our
operations require the services of employees having the technical training and
experience necessary to obtain the proper operational results. As a
result, our operations depend, to a considerable extent, on the continuing
availability of such personnel. If we should suffer any material loss
of personnel to competitors or be unable to employ additional or replacement
personnel with the requisite level of training and experience to adequately
operate our equipment, our operations could be adversely
affected. While we believe our wage rates are competitive and our
relationships with our employees are satisfactory, a significant increase in the
wages paid by other employers could result in a reduction in our workforce,
increases in wage rates, or both. If either of these events occurred
for a significant period of time, our financial condition and results of
operations could be adversely impacted.
A
substantial number of our employees are members of labor
unions. Although we expect to renew our current union contracts
without incident, if we are unable to negotiate acceptable new contracts with
our unions in the future, we could experience strikes or other work stoppages by
the affected employees, and new contracts could result in increased operating
costs attributable to both union and non-union employees. If any such
strikes or other work stoppages were to occur, or if our other employees were to
become represented by unions, we could experience a significant disruption of
our operations and higher ongoing labor costs.
Our
business strategy includes acquisitions to continue our
growth. Acquisitions of other businesses can create certain risks and
uncertainties.
We may
pursue growth through the acquisition of businesses or assets that will enable
us to strengthen or broaden the types of projects we execute and also expand
into new markets. We may be unable to implement this growth strategy
if we cannot identify suitable businesses or assets, reach agreement on
potential strategic acquisitions on acceptable terms or for other
reasons. Moreover, an acquisition involves certain risks,
including:
|
·
|
difficulties
relating to the assimilation of personnel, services and systems of an
acquired business and the assimilation of marketing and other operational
capabilities;
|
|
·
|
challenges
resulting from unanticipated changes in customer relationships subsequent
to acquisition;
|
|
·
|
additional
financial and accounting challenges and complexities in areas such as tax
planning, treasury management, financial reporting and internal
controls;
|
|
·
|
assumption
of liabilities of an acquired business, including liabilities that were
unknown at the time the acquisition transaction was
negotiated;
|
|
·
|
diversion
of management’s attention from day-to-day
operations;
|
|
·
|
failure
to realize anticipated benefits, such as cost savings and revenue
enhancements;
|
|
·
|
potentially
substantial transaction costs associated with business combinations;
and
|
|
·
|
potential
impairment resulting from the overpayment for an
acquisition.
|
Future
acquisitions may require us to issue additional equity or obtain debt financing,
which may not be available on attractive terms. Moreover, to the
extent an acquisition transaction financed by non-equity consideration results
in goodwill, it will reduce our tangible net worth, which might have an adverse
effect on potential credit and bonding capacity.
Additionally,
an acquisition may bring us into businesses we have not previously conducted and
expose us to additional business risks that are different than those we have
traditionally experienced.
We
are subject to government regulations that may adversely affect our future
operations.
Many
aspects of our operations and properties are affected by political developments
and are subject to both domestic and foreign governmental regulations, including
those relating to:
|
·
|
construction
and equipping of production platforms and other offshore
facilities;
|
|
·
|
marine
vessel safety;
|
|
·
|
currency
conversions and repatriation;
|
|
·
|
oil
exploration and development;
|
|
·
|
clean
air and other environmental protection
legislation;
|
|
·
|
taxation
of foreign earnings and earnings of expatriate personnel;
and
|
|
·
|
use
of local employees and suppliers by foreign
contractors.
|
In
addition, our Offshore Oil and Gas Construction segment depends on the demand
for its services from the oil and gas industry and, therefore, is affected by
changing taxes, price controls and other laws and regulations relating to the
oil and gas industry generally. The adoption of laws and regulations
curtailing offshore exploration and development drilling for oil and gas for
economic and other policy reasons would adversely affect the operations of our
Offshore Oil and Gas Construction segment by limiting the demand for its
services.
Our Power
Generation Systems segment depends primarily on the demand for its services from
electric power generating companies and other steam-using
customers. The demand for power generation services and products can
be influenced by state and federal governmental legislation setting requirements
for utilities related to operations, emissions and environmental
impacts. The legislative process is unpredictable and includes a
platform that continuously seeks to increase the restrictions on power
producers. Potential legislation limiting emissions from power
plants, including carbon dioxide, could affect our markets and the demand for
our products and services in our Power Generation Systems segment.
We cannot
determine the extent to which our future operations and earnings may be affected
by new legislation, new regulations or changes in existing
regulations.
Environmental
laws and regulations and civil liability for contamination of the environment or
related personal injuries may result in increases in our operating costs and
capital expenditures and decreases in our earnings and cash flow.
Governmental
requirements relating to the protection of the environment, including solid
waste management, air quality, water quality, the decontamination and
decommissioning of former nuclear manufacturing and processing facilities and
cleanup of contaminated sites, have had a substantial impact on our
operations. These requirements are complex and subject to frequent
change. In some cases, they can impose liability for the entire cost
of cleanup on any responsible party without regard to negligence or fault and
impose liability on us for the conduct of others or conditions others have
caused, or for our acts that complied with all applicable requirements when we
performed them. Our compliance with amended, new or more stringent
requirements, stricter interpretations of existing requirements or the future
discovery of contamination may require us to make material expenditures or
subject us to liabilities that we currently do not anticipate. Such
expenditures and liabilities may adversely affect our business, results of
operations or financial condition. See Section H in Item 1 above for
further information. In addition, some of our operations and the
operations of predecessor owners of some of our properties have exposed us to
civil claims by third parties for liability resulting from contamination of the
environment or personal injuries caused by releases of hazardous substances into
the environment. For a discussion of legal proceedings of this nature
in which we are currently involved, see Note 11 to our consolidated financial
statements included in this report.
U.S.
coal-fired power plants have been scrutinized by environmental groups and
government regulators over the emissions of potentially harmful
pollutants. In addition to recent legislation at the state level, the
U.S. Congress is considering legislation that would limit greenhouse gas
emissions, including CO2. In April
2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency
has some authority to regulate greenhouse gases under
the Clean
Air Act. Some plans for coal-fired power plants have recently been cancelled or
suspended in several states, although more new coal-fired power plants are being
planned to meet the predicted increase in electricity demand. Also, in February
2008, three of the nation’s largest investment banks announced new environmental
standards to ensure lenders evaluate risks associated with investments in
coal-fired power plants. Such standards could make it potentially more difficult
for new U.S. coal-fired power plants to secure financing.
Our internal controls may not be
sufficient to achieve all stated goals and objectives.
Our
internal 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 internal 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.
We
are subject to other risks including legal proceedings that we discuss in other
sections of this annual report.
For
discussions of various factors that affect the demand for our products and
services in our segments, see the discussions under the heading “Factors
Affecting Demand” in each of Sections B, C, and D of Item 1
above. For a discussion of our insurance coverages and uninsured
exposures, see Section G of Item 1 above. For discussions of various
legal proceedings in which we are involved, in addition to those we refer to
above, see Note 11 to our consolidated financial statements included in this
report. In addition to the risks we describe or refer to above, we
are subject to other risks, contingencies and uncertainties, including those we
have referred to under the heading “Cautionary Statement Concerning
Forward-Looking Statements” in Section J of Item 1 above.
None
For a
description of our significant properties, see Item 1, Section B., “Offshore Oil
and Gas Construction – Vessels and Properties,” Section C., “Government
Operations – Properties,” and Section D., “Power Generation Systems –
Properties.” We consider each of our significant properties to be suitable for
its intended use.
The
information set forth under the heading “Investigations and Litigation” in Note
11, “Contingencies and Commitments,” to our consolidated financial statements
included in this report is incorporated by reference into this
Item 3.
We did
not submit any matter to a vote of security holders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 2007.
P
A R T I I
Our
common stock is traded on the New York Stock Exchange. In accordance
with Section 303A.12(a) of the New York Stock Exchange Listed Company’s Manual,
we submitted the Annual CEO Certification to the New York Stock Exchange in
2007. Additionally, we filed certifications of the Chief Executive
Officer and Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 as Exhibits 32.1 and 32.2, respectively, included as
exhibits to this report.
High and
low stock prices by quarter in the years ended December 31, 2007 and 2006, as
adjusted for the two-for-one stock split effected in September 2007 and the
three-for-two stock split effected in May 2006, were as follows:
|
YEAR
ENDED DECEMBER 31, 2007
|
||||||||
|
SALES PRICE
|
||||||||
|
QUARTER ENDED
|
HIGH
|
LOW
|
||||||
|
March
31, 2007
|
$ | 27.99 | $ | 22.16 | ||||
|
June
30, 2007
|
$ | 42.41 | $ | 23.96 | ||||
|
September
30, 2007
|
$ | 55.30 | $ | 34.32 | ||||
|
December
31, 2007
|
$ | 62.78 | $ | 45.69 | ||||
|
YEAR
ENDED DECEMBER 31, 2006
|
||||||||
|
SALES PRICE
|
||||||||
|
QUARTER ENDED
|
HIGH
|
LOW
|
||||||
|
March
31, 2006
|
$ | 18.77 | $ | 14.87 | ||||
|
June
30, 2006
|
$ | 24.67 | $ | 18.00 | ||||
|
September
30, 2006
|
$ | 25.68 | $ | 19.22 | ||||
|
December
31, 2006
|
$ | 26.68 | $ | 18.85 | ||||
We have
not paid cash dividends on MII’s common stock since the second quarter of 2000
and do not currently have plans to reinstate a cash dividend at this
time. Our Board of Directors will evaluate our cash dividend policy
from time to time.
As of
January 31, 2008, there were approximately 3,025 record holders of our common
stock.
The
following table provides information on our equity compensation plans as of
December 31, 2007:
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options and
rights
|
Weighted-average
exercise price
of outstanding
options and rights
|
Number
of securities remaining available for future issuance
|
|||||||||
|
Equity
compensation plans
approved by security
holders
|
2,381,449 | $ | 5.49 | 7,397,650 | ||||||||
|
Equity
compensation plans not
approved by security
holders
(1)
|
747,243 | $ | 3.38 | - | ||||||||
|
Total
|
3,128,692 | $ | 4.98 | 7,397,650 | ||||||||
|
(1) Reflects
information on our 1992 Senior Management Stock Plan, which is our only
equity compensation plan that has not been approved by our stockholders
and that has any outstanding awards that have not been exercised. We
are no longer authorized to grant new awards under our 1992 Senior
Management Stock Plan.
|
||||||||||||
The
following graph provides a comparison of our five-year, cumulative total
shareholder return from December 2002 through December 2007 to the return of
S&P 500, our current peer group and our peer group in effect at December 31,
2006. The 2006 Custom Peer Group was used in the presentation of the
performance graph we included in our Annual Report on Form 10-K for the year
ended December 31, 2006. The 2007 Custom Peer Group is a new group of
companies we selected in order to provide a better representation of engineering
and construction companies similarly situated to us.
The peer
groups used for the five-year comparison were comprised of the following
companies:
2007
Custom Peer Group
|
·
|
Cal
Dive International, Inc.
|
|
·
|
Chicago
Bridge & Iron Company N.V.
|
|
·
|
Fluor
Corporation
|
|
·
|
Foster
Wheeler, Ltd.
|
|
·
|
Jacobs
Engineering Group, Inc.
|
|
·
|
KBR,
Inc.
|
|
·
|
Oceaneering
International, Inc.
|
|
·
|
The
Shaw Group, Inc.
|
|
·
|
URS
Corporation
|
2006
Custom Peer Group
|
·
|
Acergy
S.A.
|
|
·
|
Alliant
Techsystems, Inc.
|
|
·
|
Fluor
Corporation
|
|
·
|
Global
Industries, Ltd.
|
|
·
|
GlobalSantaFe
Corporation
|
|
·
|
Goodrich
Corporation
|
|
·
|
Halliburton
Company
|
|
·
|
Jacobs
Engineering Group, Inc.
|
|
·
|
Rockwell
Collins, Inc.
|
|
·
|
The
Shaw Group, Inc.
|
|
·
|
Technip
|
|
·
|
Washington
Group International, Inc.
|
|
For
the Years Ended
|
||||||||||||||||||||
|
2007
|
2006(2)
|
2005(3)
|
2004(3)
|
2003
(3)
|
||||||||||||||||
|
(In
thousands, except for per share amounts)
|
||||||||||||||||||||
|
Revenues
|
$ | 5,631,610 | $ | 4,120,141 | $ | 1,839,740 | $ | 1,912,910 | $ | 2,329,486 | ||||||||||
|
Income
(Loss) from Continuing Operations before Cumulative Effect of Accounting
Change (1)
|
$ | 607,828 | $ | 317,621 | $ | 205,583 | $ | 63,123 | $ | (84,082 | ) | |||||||||
|
Income
(Loss) before Cumulative Effect of Accounting Change
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | $ | 59,919 | $ | (94,597 | ) | |||||||||
|
Net
Income (Loss)
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | $ | 59,919 | $ | (90,887 | ) | |||||||||
|
Basic
Earnings (Loss) per Common Share(4):
|
||||||||||||||||||||
|
Income
(Loss) from Continuing Operations before Cumulative Effect of Accounting
Change
|
$ | 2.72 | $ | 1.46 | $ | 1.00 | $ | 0.32 | $ | (0.44 | ) | |||||||||
|
Income
(Loss) before Cumulative Effect of Accounting Change
|
$ | 2.72 | $ | 1.52 | $ | 1.00 | $ | 0.30 | $ | (0.49 | ) | |||||||||
|
Net
Income (Loss)
|
$ | 2.72 | $ | 1.52 | $ | 1.00 | $ | 0.30 | $ | (0.47 | ) | |||||||||
|
Diluted
Earnings (Loss) per Common Share(4):
|
||||||||||||||||||||
|
Income
(Loss) from Continuing Operations before Cumulative Effect of Accounting
Change
|
$ | 2.66 | $ | 1.39 | $ | 0.94 | $ | 0.31 | $ | (0.44 | ) | |||||||||
|
Income
(Loss) before Cumulative Effect of Accounting Change
|
$ | 2.66 | $ | 1.45 | $ | 0.94 | $ | 0.29 | $ | (0.49 | ) | |||||||||
|
Net
Income (Loss)
|
$ | 2.66 | $ | 1.45 | $ | 0.94 | $ | 0.29 | $ | (0.47 | ) | |||||||||
|
Total
Assets
|
$ | 4,411,486 | $ | 3,633,762 | $ | 1,709,962 | $ | 1,419,788 | $ | 1,271,091 | ||||||||||
|
Current
Maturities of Long-Term Debt
|
$ | 6,599 | $ | 257,492 | $ | 4,250 | $ | 12,009 | $ | 37,217 | ||||||||||
|
Long-Term
Debt
|
$ | 10,609 | $ | 15,242 | $ | 207,861 | $ | 268,011 | $ | 279,682 | ||||||||||
|
(1) Cumulative
effect of accounting change is due to the adoption of Statement of
Financial Accounting Standards No. 143, “Accounting for Asset Retirement
Obligations” during the year ended December 31, 2003.
|
||||||||||||||||||||
|
(2) Results
for the year ended December 31, 2006 include approximately ten months for
the principal operating subsidiaries of our Power Generation Systems
segment, which were reconsolidated into our results effective February 22,
2006. We did not consolidate the results of operations of these
entities in our consolidated financial statements from February 22, 2000
through February 22, 2006 due to the Chapter 11 Bankruptcy. See Note
21 to our consolidated financial statements included in this report for
information on the Chapter 11 Bankruptcy. Additionally, the results for
the year ended December 31, 2006 have been restated to reflect the impact
of the change in accounting for drydocking costs, as discussed in Note 1
to our consolidated financial statements included in this
report.
|
||||||||||||||||||||
|
(3) Financial
data for the years ended December 31, 2005, 2004 and 2003 have been
restated to reflect the impact of discontinued operations, as discussed in
Note 3 to our consolidated financial statements included in this report,
and to reflect the impact of the change in accounting for drydocking
costs, as discussed in Note 1 to our consolidated financial statements
included in this report.. Also, we did not consolidate the results of
operations of the principal operating subsidiaries of our Power Generation
Systems segment in our consolidated financial statements from February 22,
2000 through February 22, 2006 due to the Chapter 11 Bankruptcy. See
Note 21 to our consolidated financial statements included in this report
for information on the Chapter 11 Bankruptcy.
|
||||||||||||||||||||
|
(4) Per
share amounts for the years ended December 31, 2006, 2005, 2004 and 2003
have been restated to reflect the stock splits effected during the years
ended December 31, 2007 and 2006, as discussed in Note 9 to our
consolidated financial statements included in this report.
|
||||||||||||||||||||
Results for the year ended
December 31, 2005 include the reversal of a federal deferred tax valuation
allowance adjustment totaling approximately $50.4 million.
Results
for the year ended December 31, 2004 include a before- and after-tax gain on the
settlement of our U.K. pension plan of $27.7 million.
Results
for the year ended December 31, 2003 include losses on three spar contracts in
our Offshore Oil and Gas Construction segment, the Carina Aries project and the
Belanak FPSO project
totaling approximately $120 million.
Statements
we make in the following discussion which express a belief, expectation or
intention, as well as those that are not historical fact, are forward-looking
statements that are subject to risks, uncertainties and
assumptions. Our actual results, performance or achievements, or
industry results, could differ materially from those we express in the following
discussion as a result of a variety of factors, including the risks and
uncertainties we have referred to under the headings “Cautionary Statement
Concerning Forward-Looking Statements” and “Risk Factors” in Items 1
and 1A of Part I of this report.
In
general, our business segments are composed of capital-intensive businesses that
rely on large contracts for a substantial amount of their
revenues. Each of our business segments is financed on a stand-alone
basis. Our debt covenants limit using the financial resources of or the movement
of excess cash from one segment for the benefit of the other. For
further discussion, see “Liquidity and Capital Resources,” below.
We are
currently exploring growth strategies across our segments through acquisitions
to expand and complement our existing businesses. As we pursue these
opportunities, we expect they would be funded by cash on hand, external
financing, equity or some combination thereof. It is our policy to
not comment on any potential acquisition/transaction until a definitive
agreement has been reached.
Offshore
Oil and Gas Construction Segment – Recent Operating Results and
Outlook
Our
Offshore Oil and Gas Construction segment produced strong financial results in
2007. We expect the backlog of approximately $4.8 billion at December
31, 2007 to produce revenues for 2008 of approximately $3.0 billion, not
including any change orders or new contracts that may be awarded during the
year. Our Offshore Oil and Gas Construction segment is actively bidding on and,
in some cases, beginning preliminary work on projects that we expect will be
awarded to it in 2008, subject to successful contract negotiations, which are
not currently in backlog.
The
demand for our Offshore Oil and Gas Construction segment’s products and services
is dependent primarily on the capital expenditures of the world’s major oil and
gas producing companies and foreign governments for construction of development
projects in the regions in which we operate. In recent years, the worldwide
demand for energy, along with high prices for oil and gas, has led to strong
levels of capital expenditures by the major oil and gas companies and foreign
governments. This activity contributed to the strong financial results our
Offshore Oil and Gas Construction segment has produced in the recent years. We
believe these trends will continue in 2008 and will be a major contributor to
our expected 2008 results.
The
decision-making process for oil and gas companies in making capital expenditures
on offshore construction services for a development project differs depending on
whether the project involves new or existing development. In the case of new
development projects, the demand for offshore construction services generally
follows the exploratory drilling and, in some cases, initial development
drilling activities. Based on the results of these activities and evaluations of
field economics, customers determine whether to install new platforms and new
infrastructure, such as subsea gathering lines and pipelines. For existing
development projects, demand for offshore construction services is generated by
decisions to, among other things, expand development in existing fields and
expand existing infrastructure.
Government
Operations Segment – Recent Operating Results and Outlook
Our
Government Operations Segment produced strong financial results in
2007. We expect the backlog of approximately $1.8 billion at December
31, 2007 to produce revenues for 2008 of approximately $630 million, not
including any change orders or new contracts that may be awarded during the
year.
The
revenues of our Government Operations segment are largely a function of defense
spending by the U.S. Government. As a supplier of major nuclear
components for certain U.S. Government programs, this segment is a significant
participant in the defense industry. With its unique capability of
full life-cycle management of special nuclear materials, facilities and
technologies, our Government Operations segment is well positioned to continue
to participate in the continuing cleanup, operation and management of the
nuclear sites and weapons complexes maintained by the U.S. Department of Energy
(the “DOE”).
Power
Generation Systems Segment – Recent Operating Results and Outlook
Our Power
Generation Systems segment produced strong financial results in
2007. We expect the backlog of approximately $3.3 billion at December
31, 2007 to produce revenues for 2008 of approximately $1.6 billion, not
including any change orders or new contracts that may be awarded during the
year. Our Power Generation Systems segment is actively bidding on
and, in some cases, beginning preliminary work on projects that we expect will
be awarded to it in 2008, subject to successful contract negotiations, which are
not currently in backlog.
In June
2006, our Power Generation Systems segment was awarded separate contracts to
supply eight supercritical, coal-fired boilers and selective catalytic reduction
(“SCR”) systems as part of TXU Corp.’s solid-fuel power generation program in
Texas. Subsequently, we received notice from TXU to suspend activity on five of
the eight boilers and SCR systems. We did not include the value of these eight
units in our backlog at December 31, 2006 due to their uncertainty.
The five
suspended contracts were formally cancelled by execution of a termination and
settlement agreement dated April 13, 2007. During the year ended December 31,
2007, we received cash payments totaling $124 million from TXU, which completed
the $243 million termination settlement obligation from TXU. Of the total $243
million settlement, we recognized $178 million as revenue during the year ended
December 31, 2007 and $65 million as revenue during the year ended December 31,
2006.
TXU’s
payments totaling $243 million completed the obligations between our Power
Generation Systems segment and TXU for the cancelled units; therefore, we do not
expect the termination of the five cancelled contracts to have a material impact
on our results of operations or cash flows in future periods, including related
amounts accrued for costs incurred and owed to various subcontractors and
vendors. Backlog in our Power Generation Systems segment at December 31, 2007 is
higher compared to June 30, 2006, which was the period in which we originally
recorded all eight TXU contracts in our backlog. Our liquidity position for this
segment remains strong, and we expect it to remain so throughout 2008 and
2009.
Our Power
Generation Systems segment continues to fulfill its contracts to supply the
three units not covered by the termination and settlement agreement with TXU.
The value of these units in our backlog totaled approximately $315 million at
December 31, 2007, and we will continue to recognize revenue and costs on these
contracts under percentage-of-completion accounting. We expect that our
execution of these remaining contracts will produce positive operating margins,
comparable to other projects of a similar nature in this segment, as they are
completed over the next 12 to 48 months.
Our Power
Generation Systems segment’s overall activity depends mainly on the capital
expenditures of electric power generating companies and other steam-using
industries. This segment’s products and services are capital
intensive. As such, customer demand is heavily affected by the variations in
customer’s business cycles and by the overall economies of the countries in
which they operate.
U.S.
coal-fired power plants have been scrutinized by environmental groups and
government regulators over the emissions of potentially harmful
pollutants. In addition, the U.S. Congress is considering legislation
that would limit greenhouse gas emissions, including CO2. In April
2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency
has some authority to regulate greenhouse gases under the Clean Air Act. Some
plans for coal-fired power plants have recently been cancelled or suspended in
several states, although more new coal-fired power plants are being planned to
meet the predicted increase in electricity demand. Also, in February 2008, three
of the nation’s largest investment banks announced new environmental standards
to ensure lenders evaluate risks associated with investments in coal-fired power
plants. Such standards could make it potentially more difficult for new U.S.
coal-fired power plants to secure financing.
According
to the International Energy Agency, consumption of electricity worldwide is
expected nearly to double in the next quarter century. While we cannot predict
what impact potential future legislation and regulations concerning CO2 and other
emissions will have on our results of operations, it is possible such
legislation could favorably impact the environmental retrofit and service
businesses of our Power Generation Systems segment.
Other
At
December 31, 2007, in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans,” and SFAS No. 87, “Employers’ Accounting for
Pensions,” the underfunded status of our defined benefit plans improved by
approximately $146.0 million from 2006. This improvement was primarily due to
increasing our discount rate in 2007 to 6.25% from 6.0% for three of our major
qualified plans, additional contributions of $132.2 million in 2007 and return
on plan assets.
We
believe the following are our most critical accounting policies that we apply in
the preparation of our financial statements. These policies require
our most difficult, subjective and complex judgments, often as a result of the
need to make estimates of matters that are inherently uncertain.
Contracts and Revenue
Recognition. We determine the appropriate accounting method for each
of our long-term contracts before work on the project begins. We generally
recognize contract revenues and related costs on a percentage-of-completion
method for individual contracts or combinations of contracts under the
guidelines of the Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), issued by
the American Institute of Certified Public Accountants. The use of
this method is based on our experience and history of being able to prepare
reasonably dependable estimates of the cost to complete our
projects. Under this method, we recognize estimated contract revenue
and resulting income based on costs incurred to date as a percentage of total
estimated costs. Total estimated costs, and resulting contract income, are
affected by changes in the expected cost of materials and labor, productivity,
scheduling and other factors. Additionally, external factors such as
weather, customer requirements and other factors outside of our control, may
affect the progress and estimated cost of a project’s completion and, therefore,
the timing of revenue and income recognition. We routinely
review estimates related to our contracts, and revisions to profitability are
reflected in the quarterly and annual earnings we report. SOP 81-1
provides that the use of percentage-of-completion accounting requires the
ability to make reasonably dependable estimates.
For
contracts as to which we are unable to estimate the final profitability except
to assure that no loss will ultimately be incurred, we recognize equal amounts
of revenue and cost until the final results can be estimated more
precisely. For these deferred profit recognition contracts, we
recognize revenue and cost equally and only recognize gross margin when probable
and reasonably estimable, which we generally determine to be when the contract
is approximately 70% complete. We treat long-term construction
contracts that contain such a level of risk and uncertainty that estimation of
the final outcome is impractical except to assure that no loss will be incurred
as deferred profit recognition contracts.
Fixed-price
contracts are required to be accounted for under the completed-contract method
if we are unable to reasonably forecast cost to complete at start-up. For
example, if we have no experience in performing the type of work on a particular
project and were unable to develop reasonably dependable estimates of total
costs to complete, we would follow the completed-contract method of accounting
for such projects. Our management’s policy is not to enter into fixed-price
contracts without an accurate estimate of cost to complete. However,
it is possible that in the time between contract execution and the start of work
on a project, we could lose confidence in our ability to forecast cost to
complete based on intervening events, including, but not limited to, experience
on similar projects, civil unrest, strikes and volatility in our expected
costs. In such a situation, we would use the completed-contract
method of accounting for that project. No such contracts were
executed during the years ended December 31, 2007 and 2006.
For all
contracts, if a current estimate of total contract cost indicates a loss on a
contract, the projected loss is recognized in full when
determined.
Although
we continually strive to improve our ability to estimate our contract costs and
profitability, adjustments to overall contract costs due to unforeseen events
could be significant in future periods. We recognize claims for extra
work or for changes in scope of work in contract revenues, to the extent of
costs incurred, when we believe collection is probable and can be reasonably
estimated. We recognize income from contract change orders or claims
when formally agreed with the customer. We reflect any amounts not
collected as an adjustment to earnings. We regularly assess the
collectibility of contract revenues and receivables from customers.
Property, Plant and
Equipment. We carry our property, plant and equipment at
depreciated cost, reduced by provisions to recognize economic impairment when we
determine impairment has occurred. Factors that impact our
determination of impairment include forecasted utilization of equipment and
estimates of cash flow from projects to be performed in future
periods. Our estimates of cash flow may differ from actual cash flow
due to, among other things, technological changes, economic conditions or
changes in operating performance. Any changes in such factors may
negatively affect our business segments and result in future asset
impairments.
Except
for major marine vessels, we depreciate our property, plant and equipment using
the straight-line method, over estimated economic useful lives of eight to 40
years for buildings and two to 28 years for machinery and
equipment. We depreciate major marine vessels using the
units-of-production method based on the utilization of each vessel. Our
depreciation expense calculated under the units-of-production method may be less
than, equal to or greater than depreciation expense calculated under the
straight-line method in any period. The annual depreciation based on
utilization of each vessel will not be less than the greater of 25% of annual
straight-line depreciation and 50% of cumulative straight-line
depreciation.
We
expense the costs of maintenance, repairs and renewals, which do not materially
prolong the useful life of an asset, as we incur them, except for drydocking
costs. We recognize drydocking costs for our marine fleet as a
prepaid asset when incurred and amortize the expense over the period of time
between drydockings, generally three to five years. We adopted this
accounting policy for our drydocking costs, commonly referred to as the deferral
method, effective January 1, 2007, as more fully discussed in Note 1 to our
consolidated financial statements included in this report.
Self-Insurance. We have
several wholly owned insurance subsidiaries that provide workers compensation,
employer’s liability, general and automotive liability and workers’ compensation
insurance and, from time to time, builder’s risk within certain limits and
marine hull to our companies. We may also have business reasons in the future to
have these insurance subsidiaries accept other risks which we cannot or do not
wish to transfer to outside insurance companies. Reserves related to
these insurance programs are based on the facts and circumstances specific to
the insurance claims, our past experience with similar claims, loss factors and
the performance of the outside insurance market for the type of risk at issue.
The actual outcome of insured claims could differ significantly from estimated
amounts. We maintain actuarially determined accruals in our consolidated balance
sheets to cover self-insurance retentions for the coverage discussed above.
These accruals are based on certain assumptions developed utilizing historical
data to project future losses. Loss estimates in the calculation of these
accruals are adjusted as required based upon actual claim settlements and
reported claims. These loss estimates and accruals recorded in our financial
statements for claims have historically been reasonable in light of the actual
amount of claims paid.
Pension Plans and Postretirement
Benefits. We estimate income or expense related to our pension
and postretirement benefit plans based on actuarial assumptions, including
assumptions regarding discount rates and expected returns on plan
assets. We determine our discount rate based on a review of published
financial data and discussions with our actuary regarding rates of return on
high-quality fixed-income investments currently available and expected to be
available during the period to maturity of our pension
obligations. Based on historical data and discussions with our
actuary, we determine our expected return on plan assets based on the expected
long-term rate of return on our plan assets and the market-related value of our
plan assets. Changes in these assumptions can result in
significant changes in our estimated pension income or expense and our
consolidated financial position. We revise our assumptions on an
annual basis based upon changes in current interest rates, return on plan assets
and the underlying demographics of our workforce. These assumptions
are reasonably likely to change in future periods and may have a material impact
on future earnings. Effective December 31, 2006, we adopted SFAS No.
158, “Employers’
Accounting
for Defined Benefit Pension and Other Postretirement Plans,” which resulted in
the recognition of the funded status of our defined benefit pension plans and
postretirement plans in our consolidated
balance
sheets included in this report. See Note 7 to our consolidated
financial statements included in this report for additional information related
to SFAS No. 158.
Loss
Contingencies. We estimate liabilities for loss contingencies
when it is probable that a liability has been incurred and the amount of loss is
reasonably estimable. We provide disclosure when there is a
reasonable possibility that the ultimate loss will exceed the recorded provision
or if such loss is not reasonably estimable. We are currently
involved in some significant litigation, as discussed in Note 11 to our
consolidated financial statements included in this report. We have
accrued our estimates of the probable losses associated with these
matters. However, our losses are typically resolved over long periods
of time and are often difficult to estimate due to the possibility of multiple
actions by third parties. Therefore, it is possible future earnings could be
affected by changes in our estimates related to these matters.
Goodwill. SFAS No.
142, “Goodwill and Other Intangible Assets,” requires us to perform periodic
testing for impairment. It requires a two-step impairment test to
identify potential goodwill impairment and measure the amount of a goodwill
impairment loss. The first step of the test compares the fair value
of a reporting unit with its carrying amount, including goodwill. If
the carrying amount of a reporting unit exceeds its fair value, the second step
of the goodwill impairment test is performed to measure the amount of the
impairment loss, if any. Both steps of goodwill impairment testing
involve significant estimates.
Asset Retirement Obligations and
Environmental Clean-up Costs. We accrue for future
decommissioning of our nuclear facilities that will permit the release of these
facilities to unrestricted use at the end of each facility's life, which is a
requirement of our licenses from the Nuclear Regulatory
Commission. In accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations,” we record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When we
initially record such a liability, we capitalize a cost by increasing the
carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon
settlement of a liability, we will settle the obligation for its recorded amount
or incur a gain or loss. SFAS No. 143 applies to environmental
liabilities associated with assets that we currently operate and are obligated
to remove from service. For environmental liabilities associated with
assets that we no longer operate, we have accrued amounts based on the estimated
costs of clean-up activities, net of the anticipated effect of any applicable
cost-sharing arrangements. We adjust the estimated costs as further
information develops or circumstances change. An exception to this
accounting treatment relates to the work we perform for one facility, for which
the U.S. Government is obligated to pay all the decommissioning
costs.
Deferred Taxes. We
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We believe that the
deferred tax asset recorded as of December 31, 2007 is realizable through
carrybacks, future reversals of existing taxable temporary differences and
future taxable income. If we were to subsequently determine that we
would be able to realize deferred tax assets in the future in excess of our net
recorded amount, an adjustment to deferred tax assets would increase earnings
for the period in which such determination was made. We will continue
to assess the adequacy of the valuation allowance on a quarterly
basis. Any changes to our estimated valuation allowance could be
material to our consolidated financial condition and results of
operations. Effective January 1, 2007, we adopted the provision of
Financial Accounting Standards Board (the “FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), as more fully discussed
in Notes 1 and 5 to our consolidated financial statements included in this
report.
Warranty. We
account for warranty costs to satisfy contractual warranty requirements as a
component of our total contract cost estimate on the related contracts for our
Offshore Oil and Gas Construction segment or as an accrued estimated expense
recognized in conjunction with the associated revenue on the related contracts
for our Government Operations and Power Generation Systems
segments. In addition, we make specific provisions where we expect
the actual warranty costs to significantly exceed the accrued
estimates. In our Offshore Oil and Gas Construction segment, warranty
periods are generally limited, and we have had minimal warranty cost in prior
years. Factors that impact our estimate of warranty costs include
prior history of warranty claims and our estimates of future costs of materials
and labor. Our future warranty provisions may vary from what we
have experienced in the past.
Stock-Based
Compensation. Effective January 1, 2006, we adopted the provisions
of the revised SFAS No. 123, “Share-Based Payment” (“SFAS No. 123(R)”), on a
modified prospective application basis. Under the provisions of SFAS
No. 123(R) and using the modified prospective application method, we recognize
stock-based compensation, net of an estimated forfeiture rate, for all
share-based awards granted after December 31, 2005 and granted prior to, but not
yet vested as of, December 31, 2005 on a straight-line basis over the requisite
service periods of the awards, which is generally equivalent to the vesting
term.
For
further discussion of recently adopted accounting standards, see Note 1 to our
consolidated financial statements included in this report.
McDermott
International, Inc. (Consolidated)
Consolidated
revenues increased approximately 37%, or $1.5 billion, to $5.6 billion for year
ended December 31, 2007, compared to $4.1 billion for the year ended December
31, 2006. Our Offshore Oil and Gas Construction segment generated a 52% increase
in its revenues in the year ended December 31, 2007 compared to the year ended
December 31, 2006, primarily attributable to its Middle East and Asia Pacific
regions. In addition, our Power Generation Systems segment revenues increased
approximately 33% in the year ended December 31, 2007, as compared to the year
ended December 31, 2006, primarily attributable to 2006 including approximately
ten months of revenues from B&W PGG and its subsidiaries, compared to 12
months for 2007, and the recognition of revenues of approximately $178 million
during 2007 from our termination and settlement agreement executed with TXU on
the cancellation of five contracts to supply TXU supercritical, coal-fired
boilers and SCR’s, as described above. Our Government Operations segment
revenues increased approximately 10% in the year ended December 31, 2007, as
compared to the year ended December 31, 2006.
Consolidated
segment operating income, which, for purposes of this discussion and the segment
discussions that follow, is before equity in income (losses) of investees and
gains (losses) on asset disposals and impairments – net, increased $308.5
million from $398.8 million in the year ended December 31, 2006 to $707.3
million in the year ended December 31, 2007. The segment operating income of
each of our Offshore Oil and Gas Construction and Power Generation Systems
segments improved substantially in the year ended December 31, 2007, as compared
to the year ended December 31, 2006. Our Government Operations
segment operating income increased slightly in the year ended December 31, 2007,
as compared to the year ended December 31, 2006.
Offshore
Oil and Gas Construction
Revenues
increased approximately 52%, or $835.4 million, to $2.4 billion for
the year ended December 31, 2007, compared to $1.6 billion for the year ended
December 31, 2006, primarily due to increased activities in our Middle East
($393.6 million) and Asia Pacific ($226.0 million) regions. Our revenues are
principally derived from capital expenditures of major offshore oil and gas
construction projects for oil and gas companies and foreign governments in the
regions in which we operate and the successful execution of engineering,
construction and installation projects. We experienced increases in
our fabrication man-hours and our major marine barge days of 37% and 50%,
respectively, in the year ended December 31, 2007, as compared to 2006. In
addition, we experienced an increase in revenues totaling approximately $34.7
million attributable to the assets we acquired from Secunda International
Limited in July 2007.
Segment
operating income increased $183.5 million from $214.1 million in the
year ended December 31, 2006 to $397.6 million in the year ended December 31,
2007. This increase is primarily attributable to higher fabrication activities,
productivity improvements and cost savings in projects in our Middle East and
Asia Pacific regions. In addition, our Caspian region improved due to
contract change orders and agreements, which were finalized as part of our
contract close-out process on projects, and our Americas region improved due to
increased fabrication activities. These increases were partially
offset by higher general and administrative expenses, including an increase in
our stock-based compensation expense attributable to the increase in our stock
price, in the year ended December 31, 2007, as compared to the year ended
December 31, 2006.
Gain
(loss) on asset disposals and impairments – net increased $23.0 million from a
loss of $16.2 million in the year ended December 31, 2006 to a gain of $6.8
million in the year ended December 31, 2007. This change was
primarily attributable to a non-cash impairment of $16.4 million in the year
ended December 31, 2006 associated with our former joint venture in
Mexico. Also contributing to the increase was the recognition during
the year ended December 31, 2007 of a deferred gain of approximately $5.4
million related to the sale of our DB17 vessel to this same joint venture in
Mexico. We sold the DB17 in September 2004; however, due to this
joint venture’s liquidity problems, we deferred recognition of the gain until
payment was received on our accounts and notes receivable. Final
settlement of the receivables occurred during the year ended December 31,
2007.
Equity in
losses of investees increased $1.0 million to $3.9 million in the year
ended December 31, 2007, primarily attributable to our share of expenses in a
deepwater solutions joint venture.
Government
Operations
Revenues
increased approximately 10%, or $63.9 million, to $694.0 million in the year
ended December 31, 2007, compared to $630.1 million in the year ended December
31, 2006, primarily attributable to higher volumes in the manufacture of nuclear
components for certain U.S. Government programs totaling $85.7 million,
including additional volume from our acquisition of Marine Mechanical
Corporation in Euclid, Ohio.
Segment
operating income increased $7.3 million to $90.0 million in the year ended
December 31, 2007, compared to $82.7 million in the year ended December 31,
2006, primarily attributable to additional volume from the manufacturing of
nuclear components due to contract productivity improvements, along with
additional volume from the acquisition of Marine Mechanical
Corporation.
Equity in
income of investees increased $3.5 million to $31.3 million in the year ended
December 31, 2007, primarily due to the termination of our joint venture
research and development program and increases in fees at joint ventures in
Texas and Tennessee. These increases were partially offset by
decreased scope at our joint venture in Idaho.
Power
Generation Systems
Revenues
increased approximately 33%, or $615.6 million, to $2.5 billion in the year
ended December 31, 2007, compared to $1.9 billion in the year ended December 31,
2006. Due to the Chapter 11 Bankruptcy, our results for the year
ended December 31, 2006 included approximately ten months of revenues from
B&W PGG and its subsidiaries, compared to 12 months for the year ended
December 31, 2007. In addition, we recognized revenue totaling $178
million during the year ended December 31, 2007 from our termination and
settlement agreement executed with TXU on the cancellation of five contracts to
supply TXU supercritical, coal-fired boilers and SCR’s, as described
above. Also, in the year ended December 31, 2007, we experienced
increases in revenues from our replacement parts business ($36.3 million), our
industrial boiler activity ($14.7 million) and our utility steam and system
fabrication business ($222.0 million). These increases were partially offset by
lower revenues from our replacement nuclear steam generator business ($10.8
million), a reduction in our field service revenues ($4.5 million) and a
decrease in revenues from our fabrication, repair and retrofit of existing
facilities ($8.8 million).
Segment
operating income increased $117.8 million to $219.7 in the year ended December
31, 2007, compared to $101.9 million in the year ended December 31, 2006,
primarily attributable to significant benefits recognized in the second and
third quarter of 2007 resulting from contract terminations and a variety of
settlements. In addition, we experienced increases in segment operating income
attributable to higher volumes from our replacement parts business, an increase
in margins from our fabrication, repair and retrofit of existing facilities and
higher margins on our replacement nuclear steam generator business. We also
experienced lower pension plan expense in the year ended December 31, 2007
compared to the year ended December 31, 2006, primarily attributable to the
performance of our pension plan assets and a change in our discount rate during
the year ended December 31, 2007. These factors were partially offset by higher
selling, general and administrative expenses and higher stock-based compensation
expense attributable to the increase in our stock price during the year ended
December 31, 2007. Also, segment operating income from our construction business
decreased during the year ended December 31, 2007 as compared to the year ended
December 31, 2006, primarily attributable to losses incurred on several
contracts during 2007.
The year
ended December 31, 2006 also included a $27 million provision for warranty,
insurance and the settlement of litigation we concluded in early
2007.
Equity in
income of investees increased $1.7 million to $14.4 million in the year ended
December 31, 2007, primarily attributable to our joint venture in
China.
Corporate
Unallocated
Corporate expenses increased $11.3 million in the year ended December 31, 2007
from $29.9 million to $41.2 million, primarily attributable to higher
departmental expenses and an increase in our stock-based compensation expense
due to the improvement in our stock price. These increases were partially offset
by lower pension plan expense in the year ended December 31, 2007 compared to
the year ended December 31, 2006, primarily attributable to the performance of
our pension plan assets and a change in our discount rate during the year ended
December 31, 2007.
Other
Income Statement Items
Interest
income increased by $8.4 million to $62.0 million in the year ended December 31,
2007, primarily due to an increase in average cash equivalents and investments
and prevailing interest rates.
Interest
expense decreased by $7.8 million to $22.5 million in the year ended December
31, 2007, primarily due to lower average levels of debt outstanding during the
year ended December 31, 2007 as compared to the year ended December 31, 2006,
partially offset by higher interest and associated amortization and costs on our
credit facilities.
We
recorded a reduction in interest expense during the year ended December 31, 2006
totaling approximately $13.2 million attributable to a settlement we reached
with U.S. and Canadian tax authorities related to transfer pricing
issues. Additionally, during the year ended December 31, 2006, we
recorded an increase in interest expense totaling approximately $7.5 million for
potential U.S. tax deficiencies. These activities resulted in a net
U.S. tax-related interest expense adjustment of approximately $5.7 million for
the year ended December 31, 2006.
On June
6, 2006, we completed a tender offer and used cash on hand to purchase $200
million in aggregate principal amount of the 11% senior secured notes due 2013
issued by JRMSA (the “Secured Notes”) for approximately $249.0 million,
including accrued interest of approximately $10.9 million. As a
result of this early retirement of debt, we recognized $49.0 million of expense
during the year ended December 31, 2006. In addition, in December
2006, B&W PGG retired its $250 million promissory note issued in 2005, as
part of the Chapter 11 Bankruptcy. As a result of this retirement, we recognized
approximately $4.7 million of expense.
Other-net
expense decreased by $3.6 million to $10.2 million in the year ended December
31, 2007, primarily due to higher currency exchange losses incurred during the
year ended December 31, 2006 and higher bad debt expense during the year ended
December 31, 2007.
|
Provision
for Income Taxes
|
For the
year ended December 31, 2007, our provision for income taxes increased $102.4
million to $137.6 million, while income before provision for income taxes
increased $392.6 million to $745.5 million. Our effective tax rate
was approximately 18% for the year ended December 31, 2007, as compared to 10%
for the year ended December 31, 2006. The increase in the effective
tax rate was primarily attributable to a tax benefit of $78.1 million recorded
during the year ended December 31, 2006, which resulted from the U.S. legal
entity reorganization completed on December 31, 2006, as more fully described in
the comparative analysis of results for the year ended December 31, 2006 to
results for the year ended December 31, 2005.
Income
(loss) before provision for income taxes, provision for (benefit from) income
taxes and effective tax rates for our U.S. and non-U.S. jurisdictions are as
shown below:
|
Income
(loss) from Continuing Operations
before
Provision for
Income
Taxes
|
Provision
for
(Benefit
from)
Income
Taxes
|
Effective
Tax Rate
|
||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||
|
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||
|
United
States
|
$ | 266,984 | $ | 89,910 | $ | 84,251 | $ | (8,446 | ) | 31.56 | % | (9.39 | )% | |||||||||||
|
Non-United
States
|
478,481 | 262,906 | 53,386 | 43,641 | 11.16 | % | 16.60 | % | ||||||||||||||||
|
Total
|
$ | 745,465 | $ | 352,816 | $ | 137,637 | $ | 35,195 | 18.46 | % | 9.98 | % | ||||||||||||
We are
subject to U.S. federal income tax at a rate of 35% on our U.S. operations plus
the applicable state income taxes on our profitable U.S.
subsidiaries. Our non-U.S. earnings are subject to tax at various tax
rates and different tax regimes, such as a deemed profits tax
regime.
Effective
January 1, 2007, we adopted the provisions of FIN 48. As a result of
this adoption, we recognized a charge of approximately $12.0 million to our
accumulated earnings component of stockholders’ equity. As of the
adoption date, our unrecognized tax benefits, excluding tax-related interest and
penalties, were approximately $70.4 million. As part of the adoption
of FIN 48, we began to recognize interest, net of tax, and penalties related to
unrecognized tax benefits in income tax expense. As of the adoption
date, we recorded a liability of approximately $27.3 million for the payment of
tax-related interest and penalties.
During
the year ended December 31, 2007, we recorded a reduction in FIN 48 liabilities
of approximately $10.4 million, including estimated tax-related interest and
penalties.
See Note
5 to our consolidated financial statements included in this report for further
information on income taxes.
McDermott
International, Inc. (Consolidated)
Revenues
increased approximately 124.0%, or $2.3 billion, to $4.1 billion for year ended
December 31, 2006, compared to $1.8 billion for the year ended December 31,
2005. Our Offshore Oil and Gas Construction segment generated a 30% increase in
its revenues in the year ended December 31, 2007 compared to the year ended
December 31, 2006, primarily attributable to its Middle East and Asia Pacific
regions. Our Government Operations segment revenues increased approximately 5%
in the year ended December 31, 2006, as compared to the year ended December 31,
2005.
Segment
operating income increased $174.2 million from $224.6 million in the year ended
December 31, 2005 to $398.8 million in the year ended December 31, 2006. The
segment operating income of our Offshore Oil and Gas Construction segment
improved substantially in the year ended December 31, 2007, as compared to the
year ended December 31, 2006. Our Government Operations segment
operating income increased slightly in the year ended December 31, 2006, as
compared to the year ended December 31, 2005.
Our Power
Generation Systems segment consisted primarily of B&W PGG and its
subsidiaries, which were not consolidated in the year ended December 31, 2005.
The revenues and segment operating income of this segment for the year ended
December 31, 2006 were substantially all attributable to B&W PGG and its
subsidiaries, which were reconsolidated into our results effective February 22,
2006 and include approximately ten months’ results in the year ended December
31, 2006.
Offshore
Oil and Gas Construction
Revenues
increased 30.0%, or $371.4 million, to $1.6 billion in 2006, primarily
due to increased activities in our Middle East region, an increase in offshore
projects worldwide and increased activities in our Asia Pacific region. These
increases were partially offset by a decrease in activities in the Caspian
region and a decrease in fabrication activities in our Americas
region.
Segment
operating income increased $56.6 million from $157.5 million in 2005 to
$214.1 million in 2006. Approximately $15.0 million of this increase
is attributable to profit deferred since the inception of a project with Dolphin
Energy Ltd., which we accounted for under our deferred profit recognition
policy, as discussed above. As of December 31, 2006, the project was
substantially complete, and the profit earned since inception to date was
recognized. In addition, segment operating income increased in the
year ended December 31, 2006 compared to the year ended December 31, 2005 due to
increased activities in our Middle East and Asia Pacific regions, increased
offshore projects worldwide and higher margins from the Caspian and Asia Pacific
regions. These increases were partially offset by a decrease in
fabrication activities in our Americas region and a decrease in all other
operations. In addition, general and administrative expenses
increased in the year ended December 31, 2006 due to increases in departmental
expenses.
Gains
(losses) on asset disposals and impairments – net decreased $22.6 million to a
loss of $16.2 million in the year ended December 31, 2006 from a gain of $6.4
million in the year ended December 31, 2005. This reduction was
primarily attributable to an impairment of $16.4 million associated with our
terminated joint venture in Mexico in the year ended December 31, 2006 and gains
on sales of various non-strategic assets in the year ended December 31,
2005.
Equity in
income (loss) of investees decreased $5.7 million from a gain of $2.8 million in
the year ended December 31, 2005 to a loss of $2.9 million in the year ended
December 31, 2006, primarily attributable to our share of expenses in our
deepwater solutions joint venture.
Government
Operations
Revenues
increased approximately 4.8%, or $29.0 million, to $630.1 million in the year
ended December 31, 2006, primarily due to higher volumes in the manufacture of
nuclear components for certain U.S. Government programs along with higher
volumes from our other government operations producing fuel for research test
reactors and DOE fuel development for commercial reactors. Also,
contributing to this increase was higher volume from our management and
operating contract for U.S. Government-owned facilities in New Mexico, along
with higher volumes in commercial nuclear environmental services work including
additional environmental engineering work at our Pennsylvania
location. These increases were partially offset by lower commercial
downblending work due to the completion of our contract to downblend 50 metric
tons of highly enriched uranium to low enriched uranium. We also
experienced lower revenues in the year ended December 31, 2006 from our fuel
cell development project, which we terminated in 2006.
Segment
operating income increased $14.8 million to $82.8 million in the year ended
December 31, 2006, primarily attributable to cost and efficiency improvements
resulting from our consolidation of two operating divisions into a Nuclear
Operations Division and continued productivity improvements. In addition, we
experienced an increase in volumes and margins of our other government
operations producing fuel for research test reactors and DOE fuel development
for commercial reactors. We also experienced an increase in our commercial
nuclear environmental services activity, including additional environmental
engineering work, and improved performance from our environmental labs. Also,
contributing to this increase was lower spending on research and development
activity in the year ended December 31, 2006 and increased fees for a management
and operating contract for U.S. Government-owned facilities in New Mexico. These
increases were partially offset by lower fees from subcontracting activity at a
DOE site cleanup in Ohio and lower commercial downblending work due to the
completion of our contract, as discussed above. In addition, we experienced
higher pension expense, higher selling, general and administrative expenses and
an increase to our provision for an environmental liability in Pennsylvania in
the year ended December 31, 2006.
Gains on
asset disposals and impairments – net increased $1.0 million in the year ended
December 31, 2006, attributable to the sale of noncore machinery.
Equity in
income of investees decreased $3.5 million to $27.8 million in the year ended
December 31, 2006, primarily due to our decision to terminate our research and
development joint venture, along with decreased scope at our joint venture in
Idaho. These decreases were partially offset by improved fees at our sites in
Tennessee and Texas in the year ended December 31, 2006.
Power
Generation Systems
Our Power
Generation Systems segment consisted primarily of B&W PGG and its
subsidiaries, which were not consolidated in the year ended December 31, 2005.
The revenues and segment operating income of this segment for the year ended
December 31, 2006 were substantially all attributable to B&W PGG and its
subsidiaries, which were reconsolidated into our results effective February 22,
2006 and include approximately ten months’ results in the year ended December
31, 2006. B&W PGG’s revenues and segment operating income in the
year ended December 31, 2006 resulted primarily from utility steam system
fabrication, fabrication and construction of plant enhancement projects,
replacement parts, boiler cleaning equipment, nuclear services and replacement
nuclear steam generators.
Equity in
income of investees increased $6.2 million to $12.6 million in the year ended
December 31, 2006, primarily due to income recognized from a joint venture in
China, which was placed on the equity method of accounting during the year ended
December 31, 2006.
Corporate
Unallocated
Corporate expenses decreased $10.0 million in the year ended December 31, 2006
from $39.9 million to $29.9 million, primarily attributable to lower legal
expenses related to the Chapter 11 Bankruptcy in 2006 compared to 2005. This
decrease was partially offset by higher qualified pension plan expense in 2006
compared to 2005. We also experienced lower departmental expenses in 2006, and
we recorded a favorable adjustment related to the settlement of prior-year
litigation in 2006. In addition, we experienced favorable results
from our captive insurers in the year ended December 31, 2006, compared to the
year ended December 31, 2005.
Other
Income Statement Items
Interest
income increased by $32.5 million to $53.6 million in the year ended December
31, 2006, primarily due to an increase in average cash equivalents and
investments and higher interest rates, as well as settlement from the Canadian
taxing authorities with respect to audit issues.
Interest
expense decreased by $1.5 million to $30.3 million in the year ended December
31, 2006, primarily due to the retirement of the Secured Notes in
June 2006, partially offset by higher interest and associated amortization and
costs on our credit facilities.
We
recorded other income from a U.S. federal tax-related interest expense
adjustment for the year ended December 31, 2006, totaling approximately $13.2
million, attributable to a settlement we reached with U.S. and Canadian tax
authorities related to transfer pricing issues. This income was
partially offset by an increase in interest expense during the year ended
December 31, 2006 totaling approximately $7.5 million for potential U.S. tax
deficiencies.
On June
6, 2006, we completed a tender offer and used current cash on hand to purchase
the entire $200 million in aggregate principal amount outstanding of the Secured
Notes for approximately $249.0 million, including accrued interest of
approximately $10.9 million. As a result of this early retirement of
debt, we recognized $49.0 million of expense during the year ended December 31,
2006. In addition, in December 2006, B&W PGG retired its $250
million promissory note issued in 2006, as part of the Chapter 11 Bankruptcy
settlement. This note was recorded in Accrued Cost of The Babcock & Wilcox
Company Bankruptcy Settlement on our consolidated balance sheets at its fair
value of approximately $245.3 million. As a result of this retirement, we
recognized approximately $4.7 million of expense.
Other-net
expense increased by $13.1 million to $13.8 million in the year ended December
31, 2006, primarily due to currency exchange losses in 2006, compared to gains
in 2005.
|
Provision
for Income Taxes
|
For the
year ended December 31, 2006, our provision for income taxes increased $26.4
million to $35.2 million, while income before provision for income taxes
increased $138.4 million to $352.8 million. Our effective tax rate
for the year ended December 31, 2006 was approximately 10%, which was primarily
due to the valuation allowance adjustment discussed below.
For the
year ended December 31, 2006, we reversed $78.1 million of the deferred tax
asset valuation allowance recorded against various deferred tax
assets. SFAS No. 109 provides that a valuation allowance must be
established for deferred tax assets when it is more likely than not that the
assets will not be realized. SFAS No. 109 also provides that all positive and
negative evidence must be evaluated in determining the need for a valuation
allowance. As a result of the reorganization of our U.S. legal
entities discussed more fully below, we have reevaluated all the positive and
negative evidence available to us and have determined that we no longer require
a federal deferred tax asset valuation allowance. Accordingly, under
the guidelines of SFAS No. 109, we reversed the majority of the federal deferred
tax asset valuation allowance, discussed above, through current period earnings
in 2006 by recording a credit to our provision for income taxes.
We
completed a reorganization of our U.S. tax groups of U.S. legal entities into a
single consolidated U.S. group effective December 31, 2006. This reorganization
provides us with administrative efficiencies, the opportunity to increase the
flexibility of our financial structure and returns us to a more tax-efficient
legal structure. Prior to 1995, substantially all of the operations of our
U.S. offshore oil and gas construction business were combined with our other
U.S. subsidiaries in a single consolidated U.S. group. In 1995, substantially
all our offshore oil and gas construction assets were acquired by our Offshore
Oil and Gas Construction segment in conjunction with its acquisition of Offshore
Pipelines, Inc. (“OPI”). As a result of the acquisition of OPI, MII’s
ownership interest in the common stock of JRMSA was reduced to approximately
64%, with the remaining 36% being publicly traded. The results of our Offshore
Oil and Gas Construction segment’s U.S. subsidiaries were consequently no longer
part of our consolidated U.S. group. In 1999, MII acquired all of the remaining
publicly held common stock of JRMSA, such that MII owned 100%. A restructuring
to achieve the reconsolidation of the U.S. subsidiaries of our Offshore Oil and
Gas Construction segment and our other U.S. subsidiaries was not feasible until
2006, attributable in part to long-running asbestos liability claims against
B&W PGG, which ultimately led B&W PGG to file for Chapter 11 bankruptcy
protection. In February 2006, B&W PGG emerged from Chapter 11 bankruptcy
protection and was reconsolidated into our results. Subsequent to B&W PGG’s
emergence from bankruptcy, action was taken to recombine our U.S. subsidiary
groups, with the final reorganization being completed effective December 31,
2006. Although we will continue to file a separate U.S. tax return for each U.S.
group for the year ended December 31, 2006, our current earnings reflect a tax
benefit, as a result of the reorganization. Beginning with the taxable
period commencing January 1, 2007, the results of the former separate U.S.
groups will be consolidated, and a single U.S. tax return will be
filed.
As more
fully disclosed in Part II of our annual report on Form 10-K for the year ended
December 31, 2005, for the year ended December 31, 2005, we reversed our federal
deferred tax asset valuation allowance totaling approximately $50.4 million,
which eliminated a federal deferred tax asset valuation allowance associated
with our minimum pension liability. This adjustment recorded for the
year ended December 31, 2005 resulted in a benefit in our provision for income
taxes of $50.4 million.
We have
provided for income taxes based on the tax laws and rates in the countries in
which we conduct our operations. MII is a Panamanian corporation that
has earned all of its income outside of Panama. As a result, MII is
not subject to income tax in Panama. MII and its subsidiaries operate
in the United States taxing jurisdiction and various other taxing jurisdictions
around the world. Each of these jurisdictions has a regime of
taxation that varies from the others. The taxation regimes vary not
only with respect to nominal rates but also with respect to the allowability of
deductions, credits and other benefits and tax bases (for example, revenue
versus income). These variances, along with variances in our mix of
income from these jurisdictions, contribute to variability in our effective tax
rate.
Income
(loss) from continuing operations before provision for (benefit from) income
taxes, provision for (benefit from) income taxes and effective tax rates for
MII’s major subsidiaries are as follows:
|
Income
(loss) from Continuing Operations
before
Provision for
Income
Taxes
|
Provision
for
(Benefit
from)
Income
Taxes
|
Effective
Tax Rate
|
||||||||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
|||||||||||||||||||
|
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||
|
Primarily
United States:
|
||||||||||||||||||||||||
|
McDermott
Incorporated
|
$ | 169,674 | $ | 67,114 | $ | 84,594 | $ | (17,666 | ) | 49.86 | % | (26.32 | )% | |||||||||||
|
J.
Ray McDermott Holdings, LLC
|
(79,764 | ) | (10,364 | ) | (93,040 | ) | 1,699 | 116.64 | % | (16.39 | )% | |||||||||||||
|
Subtotal
|
89,910 | 56,750 | (8,446 | ) | (15,967 | ) | (9.39 | %) | (28.14 | )% | ||||||||||||||
|
Non-United
States:
|
||||||||||||||||||||||||
|
International
Subsidiaries
|
262,906 | 157,660 | 43,641 | 24,794 | 16.60 | % | 15.73 | % | ||||||||||||||||
|
Total
|
$ | 352,816 | $ | 214,410 | $ | 35,195 | $ | 8,827 | 9.98 | % | 4.12 | % | ||||||||||||
Our U.S.
subsidiaries are subject to U.S. federal income tax at a rate of
35%. The effective tax rate is primarily affected by applicable state
income taxes on our profitable U.S. subsidiaries, as well as the items discussed
below. In the year ended December 31, 2006, we reached a settlement
in a tax dispute with U.S. and Canadian tax authorities, primarily related to
transfer pricing matters, resulting in an adjustment to the tax liability and
associated accrued interest established for the disputed item. This
favorably impacted our income before income taxes and provision for income taxes
by $13.2 million and $4.7 million, respectively. In addition,
offsetting tax adjustments related to open years for federal and certain state
tax jurisdictions were recorded in the year ended December 31, 2006, along with
approximately $4.9 million of related interest expense. Approximately
$18 million in tax expense was recorded for the expiration of certain foreign
tax credits and via an increase in valuation allowance for foreign credit
carryforwards that may expire in the future prior to being
utilized. We also recorded a net provision for income taxes in the
year ended December 31, 2006 of approximately $9 million associated with
potential U.S. income tax issues.
The
effective tax rate for the year ended December 31, 2005 was impacted by the
Chapter 11 Bankruptcy settlement adjustment recorded in that period, which
generated little or no associated U.S income tax effect, and the valuation
allowance adjustment discussed above.
See Note
5 to our consolidated financial statements included in this report for further
information on income taxes.
Our
financial statements are prepared in accordance with generally accepted
accounting principles in the United States, using historical U.S. dollar
accounting (“historical cost”). Statements based on historical cost,
however, do not adequately reflect the cumulative effect of increasing costs and
changes in the purchasing power of the dollar, especially during times of
significant and continued inflation.
In order
to minimize the negative impact of inflation on our operations, we attempt to
cover the increased cost of anticipated changes in labor, material and service
costs, either through an estimate of those changes, which we reflect in the
original price, or through price escalation clauses in our
contracts.
Offshore
Oil and Gas Construction
On June
6, 2006, one of our subsidiaries, J. Ray McDermott, S.A. entered into a senior
secured credit facility with a syndicate of lenders (the “JRMSA Credit
Facility”). During July 2007, the JRMSA Credit Facility was amended
to, among other things, (1) increase the revolving credit facility by $100
million to $500 million and
eliminate
a synthetic letter of credit facility, (2) reduce the commitment fees and
applicable margins for revolving loans and letters of credit and (3) eliminate
the limitation on revolving credit borrowings. The JRMSA Credit
Facility now consists of a five-year, $500 million revolving credit facility
(under which all of the credit capacity may be used for the issuance of letters
of credit and revolver borrowings), which matures on June 6,
2011. The proceeds of the JRMSA Credit Facility are available for
working capital needs and other general corporate purposes of our Offshore Oil
and Gas Construction segment.
JRMSA’s
obligations under the JRMSA Credit Facility are unconditionally guaranteed by
substantially all of our wholly owned subsidiaries comprising our Offshore Oil
and Gas Construction segment and secured by liens on substantially all the
assets of those subsidiaries (other than cash, cash equivalents, equipment and
certain foreign assets), including their major marine vessels. JRMSA is
permitted to prepay amounts outstanding under the JRMSA Credit Facility at any
time without penalty. Other than customary mandatory prepayments on
certain contingent events, the JRMSA Credit Facility requires only interest
payments on a quarterly basis until maturity. Loans outstanding under
the JRMSA Credit Facility bear interest at either the Eurodollar rate plus a
margin ranging from 1.00% to 1.75% per year or the base rate plus a margin
ranging from 0.00% to 0.75% per year. If there had been borrowings
under this facility, the applicable interest rate at December 31, 2007 would
have been 6.35% per year. The applicable margin for revolving loans
varies depending on credit ratings of the JRMSA Credit
Facility. JRMSA is charged a commitment fee on the unused portions of
the JRMSA Credit Facility, and that fee varies between 0.25% and 0.375% per year
depending on credit ratings of the JRMSA Credit
Facility. Additionally, JRMSA is charged a letter of credit fee of
between 1.00% and 1.75% per year with respect to the amount of each letter of
credit issued under the JRMSA Credit Facility depending on credit ratings of the
JRMSA Credit Facility. An additional 0.125% annual fee is charged on
the amount of each letter of credit issued under the JRMSA Credit
Facility.
The JRMSA
Credit Facility contains customary financial covenants relating to leverage and
interest coverage and includes covenants that restrict, among other things, debt
incurrence, liens, investments, acquisitions, asset dispositions, dividends,
prepayments of subordinated debt, mergers, transactions with affiliates and
capital expenditures. A comparison of the key financial covenants and
current compliance at December 31, 2007 is as follows:
|
Required
|
Actual
|
||
|
(In
millions, except ratios)
|
|||
|
Maximum
leverage ratio
|
2.50
|
0.05
|
|
|
Minimum
interest coverage ratio
|
3.50
|
72.49
|
|
|
Limitation
on capital expenditures: general
|
$125
|
$99.1
|
|
|
Limitation
on capital expenditures: fab yards
|
$45
|
$45.0
|
|
At
December 31, 2007, JRMSA was in compliance with all of the covenants set forth
in the JRMSA Credit Facility.
At
December 31, 2007, there were no borrowings outstanding and letters of credit
issued under the JRMSA Credit Facility totaled $279.2 million. In addition,
JRMSA and its subsidiaries had $172.8 million in outstanding unsecured letters
of credit under separate arrangements with financial institutions at December
31, 2007. At December 31, 2007, there was $220.8 million available
for borrowings or to meet letter of credit requirements under the JRMSA Credit
Facility.
In
December 2005, JRMSA, as guarantor, and its subsidiary, J. Ray McDermott Middle
East, Inc. (“JRM Middle East”), entered into a $105.2 million unsecured
performance guarantee issuance facility with a syndicate of commercial banking
institutions to provide credit support for bank guarantees issued in connection
with three major projects. The outstanding amount under this facility is
included in the $172.8 million outstanding referenced above. On
February 3, 2008, JRM Middle East entered into a new $88.8 million unsecured
performance guarantee issuance facility to replace the $105.2 million facility,
which it terminated on February 14, 2008. This new facility continues
to provide credit support for bank guarantees for the duration of the three
projects. On an annualized basis, the average commission rate of the new
facility is less than 1.5%, compared to less than 4.5% for the former
facility. JRMSA is also a guarantor of the new facility.
On July
27, 2007, we completed our acquisition of substantially all of the assets of
Secunda International Limited, including 14 harsh-weather, multi-functional
vessels, with capabilities which include subsea construction,
pipelay,
cable lay
and dive support, as well as its shore-based operations, for approximately $263
million in cash and recognition of approximately $10 million of liabilities,
including approximately $4 million related to deferred income
taxes. We recorded goodwill of approximately $29 million in
connection with this acquisition, none of which will be deductible for tax
purposes. In addition to the goodwill, we recorded identifiable
intangible assets of approximately $12 million related to contractual customer
relationships, which have a weighted-average amortization period of 3.6
years.
Based on
the liquidity position of our Offshore Oil and Gas Construction segment, we
believe this segment has sufficient cash and letter of credit and borrowing
capacity to fund its operating requirements for at least the next 12
months.
Government
Operations
On
December 9, 2003, one of our subsidiaries, BWX Technologies, Inc. entered into a
senior unsecured credit facility with a syndicate of lenders (the “BWXT Credit
Facility”), which is currently scheduled to mature March 18, 2010. On
October 29, 2007, the BWXT Credit Facility was amended to reduce the applicable
margins for revolving loans and letters of credit. This facility
provides for borrowings and issuances of letters of credit in an aggregate
amount of up to $135 million. The proceeds of the BWXT Credit Facility are
available for working capital needs and other general corporate purposes of our
Government Operations segment.
The BWXT
Credit Facility requires BWXT to comply with various financial and nonfinancial
covenants and reporting requirements. The financial covenants require
maintenance of a maximum leverage ratio, a minimum fixed charge coverage ratio
and a maximum debt to capitalization ratio within our Government Operations
segment. A comparison of the key financial covenants and current
compliance at December 31, 2007 is as follows:
|
Required
|
Actual
|
||
|
Maximum
leverage ratio
|
2.0
|
0.27
|
|
|
Minimum
fixed charge coverage ratio
|
1.1
|
8.92
|
|
|
Maximum
debt to capitalization
|
0.4
|
0.00
|
At
December 31, 2007, BWXT was in compliance with all of the covenants set forth in
the BWXT Credit Facility.
Loans
outstanding under the BWXT Credit Facility bear interest at either the
Eurodollar rate plus a margin ranging from 1.25% to 1.75% per year or the base
rate plus a margin ranging from 0.25% and 0.75% per year. The
applicable margin for revolving loans varies depending on the leverage ratio of
our Government Operations segment as of the last day of the preceding fiscal
quarter. If there had been borrowings under this facility, the
applicable interest rate at December 31, 2007 would have been 5.85% per
year. BWXT is charged an annual commitment fee of 0.375%, which is
payable quarterly. Additionally, BWXT is charged a letter of credit
fee of between 1.25% and 1.75% per year with respect to the amount of each
letter of credit issued, depending on the leverage ratio of our Government
Operations segment as of the last day of the preceding fiscal
quarter. An additional 0.125% per year fee is charged on the amount
of each letter of credit issued.
At
December 31, 2007, there were no borrowings outstanding and letters of credit
issued under the BWXT Credit Facility totaled $48.0 million. At
December 31, 2007, there was $87.0 million available for borrowings or to meet
letter of credit requirements under the BWXT Credit Facility.
On May 1,
2007, we completed our stock acquisition of Marine Mechanical Corporation for
approximately $72 million in cash and recognition of liabilities in excess of
the liabilities directly assumed from Marine Mechanical Corporation of
approximately $16 million, primarily related to deferred income
taxes. We recorded goodwill of approximately $39 million in
connection with this acquisition, none of which will be deductible for tax
purposes.
Based on
the liquidity position of our Government Operations segment, we believe this
segment has sufficient cash and letter of credit and borrowing capacity to fund
its operating requirements for at least the next 12 months.
Power
Generation Systems
On
February 22, 2006, one of our subsidiaries, Babcock & Wilcox Power
Generation Group, Inc. entered into a senior secured credit facility with a
syndicate of lenders (the “B&W PGG Credit Facility”). During July 2007, the
B&W PGG Credit Facility was amended to, among other things, (1) increase the
revolving credit facility by $200 million to $400 million and eliminate a
synthetic letter of credit facility and (2) reduce the commitment fees and
applicable margins for revolving loans and letters of credit. The
entire credit availability under the B&W PGG Credit Facility may be used for
the issuance of letters of credit or for borrowings to fund working capital
requirements for our Power Generation System segment. The B&W PGG
Credit Facility also originally included a commitment by certain of the lenders
to loan up to $250 million in term debt to refinance the $250 million promissory
note payable to a trust under the Chapter 11 plan of
reorganization. On November 30, 2006, B&W PGG drew down $250
million on this term loan under the B&W PGG Credit Facility. On
April 12, 2007, the $250 million term loan was retired without
penalty. This payment was made using cash on hand, including the $272
million federal tax refund received on April 12, 2007.
B&W
PGG’s obligations under the B&W PGG Credit Facility are unconditionally
guaranteed by all of our domestic subsidiaries included in our Power Generation
Systems segment and secured by liens on substantially all the assets of those
subsidiaries, excluding cash and cash equivalents.
Loans
outstanding under the revolving credit subfacility bear interest at either the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. If there had
been borrowings under this facility, the applicable interest rate at December
31, 2007 would have been 5.85% per year. The applicable margin for
revolving loans varies depending on credit ratings of the B&W PGG Credit
Facility. B&W PGG is charged a commitment fee on the unused
portion of the B&W PGG Credit Facility, and that fee varies between 0.25%
and 0.375% per year depending on credit ratings of the B&W PGG Credit
Facility. Additionally, B&W PGG is charged a letter of credit fee
of between 1.00% and 1.75% per year with respect to the amount of each letter of
credit issued under the B&W PGG Credit Facility. An additional
0.125% per year fee is charged on the amount of each letter of credit issued
under the B&W PGG Credit Facility.
The
B&W PGG Credit Facility only requires interest payments on a quarterly basis
until maturity. Amounts outstanding under the B&W PGG Credit
Facility may be prepaid at any time without penalty.
The
B&W PGG Credit Facility contains customary financial covenants within our
Power Generation Systems segment, including maintenance of a maximum leverage
ratio and a minimum interest coverage ratio, and covenants that, among other
things, restrict the ability of this segment to incur debt, create liens, make
investments and acquisitions, sell assets, pay dividends, prepay subordinated
debt, merge with other entities, engage in transactions with affiliates and make
capital expenditures. The B&W PGG Credit Facility also contains customary
events of default. A comparison of the key financial covenants and
current compliance at December 31, 2007 is as follows:
|
Required
|
Actual
|
||
|
(In
millions, except ratios)
|
|||
|
Maximum
leverage ratio
|
3.25
|
0.03
|
|
|
Minimum
interest coverage ratio
|
3.25
|
19.88
|
|
|
Limitation
on capital expenditures
|
$45
|
$34.5
|
|
At
December 31, 2007, B&W PGG was in compliance with all of the covenants set
forth in the B&W PGG Credit Facility.
As of
December 31, 2007, there were no outstanding borrowings and letters of credit
issued under the B&W PGG Credit Facility totaled $225.2
million. At December 31, 2007, there was $174.8 million available for
borrowings or to meet letter of credit requirements under the B&W PGG Credit
Facility.
Based on
the liquidity position of our Power Generation Systems segment, we believe this
segment has sufficient cash and letter of credit and borrowing capacity to fund
its operating requirements for at least the next 12 months.
OTHER
One of
our Canadian subsidiaries has received notice of a possible warranty claim on
one of its projects on a contract executed in 1998. This situation relates to
technical issues concerning components associated with nuclear steam
generators. Data
collection and analysis, which can only be performed at specific time periods
when the power plant is scheduled to be off-line for maintenance, is continuing.
The next outage of this facility is scheduled for the spring of 2008 when
additional testing will be performed. These tests require detailed engineering
study and comprehensive analysis. This project included a
limited-term performance bond totaling approximately $140 million for which we
entered into an
indemnity arrangement with the surety underwriters. At this time, our subsidiary
continues to analyze the facts and circumstances surrounding this issue. It is
possible that our subsidiary may incur warranty costs in excess of amounts
provided for as of December 31, 2007. It is also possible that a claim could be
initiated by our subsidiary’s customer against the surety underwriter should
certain events occur. If such a claim were successful, the surety
could seek to recover from our subsidiary the costs incurred in satisfying the
customer claim. If the surety seeks recovery from our subsidiary, we believe
that our subsidiary would have adequate liquidity to satisfy its obligations.
However, the ultimate resolution of this possible claim is uncertain, and an
adverse outcome could have a material adverse impact on our consolidated
financial position, results of operations and cash flows.
We are
continuing to review the funded status of our various domestic defined benefit
pension plans with the stated objective of fully funding these plans by 2010. We
are exploring various alternatives, including potential additional contributions
and liability driven investment strategies such as annuitization of certain plan
liabilities and asset/liability duration matching. Some of these alternative
strategies could have a significant impact on our consolidated financial
position and operating cash flow.
In July
2007, we and our rated subsidiaries received upgraded ratings from both major
corporate credit rating services, Standard & Poor’s Rating Services
(“S&P”) and Moody’s Investors Service (“Moody’s”). Included among
these ratings actions, our corporate credit rating at S&P was raised to BB
from B+, with a stable outlook, and our corporate family rating at Moody’s was
raised to Ba3 from B1, also with a stable outlook. As a result of
recent improved operating performance, stronger liquidity and now higher credit
ratings, we were able to amend the JRM Credit Facility and the B&W PGG
Credit Facility, as mentioned above, to, among other things, reduce fees and
expenses.
At
December 31, 2007, we had total restricted cash and cash equivalents of $64.8
million. The restricted cash and cash equivalents include the
following: $0.7 million, which is required to meet reinsurance
reserve requirements of our captive insurance companies, and $64.1 million,
which is held in restricted foreign accounts.
Certain
of our subsidiaries are restricted in their ability to transfer funds to
MII. Such restrictions principally arise from debt covenants,
insurance regulations, national currency controls and the existence of minority
shareholders. We refer to the proportionate share of net assets,
after intercompany eliminations, that may not be transferred to MII as a result
of these restrictions as “restricted net assets.” At December 31,
2007, the restricted net assets of our consolidated subsidiaries were
approximately $596 million.
At
December 31, 2007 and December 31, 2006, our balance in cash and cash
equivalents on our consolidated balance sheets included approximately $20.2
million and $18.0 million, respectively, in adjustments for book overdrafts,
with a corresponding increase in accounts payable for these
overdrafts.
Our
working capital, excluding restricted cash and cash equivalents, increased
approximately $410.7 million from a negative $414.5 million at December 31,
2006 to a negative $3.8 million at December 31, 2007, primarily attributable to
the collection of approximately $274 million of income taxes receivable, which
was classified as long-term at December 31, 2006, and an overall increase in net
operating activities in the year ended December 31, 2007, as discussed
below. These increases were partially offset by the cash we used to
fund the acquisition of substantially all the assets of Secunda International
Limited and our acquisition of Marine Mechanical Corporation.
Our net
cash provided by operations was approximately $1,316.9 million for the year
ended December 31, 2007, compared to approximately $228.1 million for the year
ended December 31, 2006. This increase was primarily attributable to higher net
income, receipt of the TXU settlement and receipt of $274 million of income tax
refunds during the year ended December 31, 2007. Additionally, during
the year ended December 31, 2006, we made payments in connection with the
Chapter 11 plan of reorganization, which reduced our net cash provided by
operations for that year.
Our net
cash provided by (used in) investing activities changed by approximately $989.1
million to net cash used in investing activities of $678.7 million for the year
ended December 31, 2007, compared to net cash provided by investing activities
of $310.4 million for the year ended December 31, 2006. This change was
primarily attributable to the Marine Mechanical Corporation and Secunda
International Limited acquisitions, increased capital expenditures and an
increase in our net activity for available-for-sale securities for the year
ended December 31, 2007. Also contributing to the change was the cash
acquired from our reconsolidation of several subsidiaries in our Power
Generation Systems segment during the year ended December 31, 2006.
Our net
cash provided by (used in) financing activities changed by approximately $287.0
million to net cash used in financing activities of $243.3 million in the year
ended December 31, 2007, compared to net cash provided by financing activities
of $43.7 million in the year ended December 31, 2006, primarily attributable to
the retirement of the $250 million term loan in April 2007.
At
December 31, 2007, we had investments with a fair value of $462.2
million. Our investment portfolio consists primarily of investments
in government obligations and other highly liquid money market
instruments. As of December 31, 2007, we had pledged approximately
$31 million fair value of these investments to secure a letter of credit in
connection with certain reinsurance agreements.
CONTRACTUAL
OBLIGATIONS
Our cash
requirements as of December 31, 2007 under current contractual obligations are
as follows:
|
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
After
5
Years
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Long-term
debt
|
$ | 17,208 | $ | 6,599 | $ | 5,060 | $ | 4,810 | $ | 739 | ||||||||||
|
Operating
leases
|
$ | 47,597 | $ | 17,660 | $ | 16,868 | $ | 8,088 | $ | 4,981 | ||||||||||
|
Vessel
charters
|
$ | 10,227 | $ | 10,227 | $ | - | $ | - | $ | - | ||||||||||
|
Take-or-pay
contract
|
$ | 3,600 | $ | 1,800 | $ | 1,800 | $ | - | $ | - | ||||||||||
|
Insurance
premium adjustment
|
$ | 1,250 | $ | 1,250 | $ | - | $ | - | $ | - | ||||||||||
We have
interest payments on our long-term debt obligations above as follows: less than
one year, $0.8 million; one to three years, $0.6 million; three to five years,
$0.2 million; and after five years, zero, for a total of $1.6 million. These
obligations are based on the debt outstanding at December 31, 2007 and the
stated interest rates. In addition, we expect to contribute
approximately $156.1 million to our domestic pension plans, which includes
approximately $77.4 million for our Power Generation Systems segment, $62.8
million for our Government Operations segment, $2.2 million for our Offshore Oil
and Gas Construction segment and $13.7 million for Corporate, respectively, and
$13.0 million to our other postretirement benefit plans in 2008.
Our
contingent commitments under letters of credit currently outstanding expire as
follows:
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
Thereafter
|
||||||||||||||
|
(In
thousands)
|
||||||||||||||||||
| $ | 725,094 | $ | 468,097 | $ | 161,981 | $ | 88,439 | $ | 6,577 | |||||||||
As
discussed in Note 5 to our consolidated financial statements included in this
report, effective January 1, 2007, the company adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109.” At December 31, 2007, the company had
a liability for
unrecognized
tax benefits and an accrual for the payment of related interest and penalties
totaling $85 million, of which between $6 million and $8 million is expected to
be paid within one year. For the remaining liability, due to the uncertainties
related to these tax matters, we are unable to make a reasonably reliable
estimate as to when cash settlement with a taxing authority will
occur.
Our
exposure to market risk from changes in interest rates relates primarily to our
cash equivalents and our investment portfolio, which is primarily comprised of
investments in U.S. Government obligations and highly liquid money market
instruments denominated in U.S. dollars. We are averse to principal
loss and ensure the safety and preservation of our invested funds by limiting
default risk, market risk and reinvestment risk. All our investments
in debt securities are classified as available-for-sale.
We have
exposure to changes in interest rates on the JRM Credit Facility, the BWXT
Credit Facility and the B&W PGG Credit Facility (see Item 7 – “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources”). At December 31, 2007, we had no
outstanding borrowings under any of these credit facilities. We have
no material future earnings or cash flow exposures from changes in interest
rates on our other long-term debt obligations, as substantially all of these
obligations have fixed interest rates.
We have
operations in many foreign locations, and, as a result, our financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in those foreign
markets. In order to manage the risks associated with foreign
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. We have recently
hedged some of those risks with foreign currency option contracts. We
do not enter into speculative derivative positions.
Interest
Rate Sensitivity
The
following tables provide information about our financial instruments that are
sensitive to changes in interest rates. The tables present principal
cash flows and related weighted-average interest rates by expected maturity
dates.
|
Principal
Amount by Expected Maturity
|
||||||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||||||
|
At
December 31, 2007:
|
Fair
Value at
|
|||||||||||||||||||||||||||||||
|
Years
Ending December 31,
|
December
31,
|
|||||||||||||||||||||||||||||||
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
2007
|
|||||||||||||||||||||||||
|
Investments
|
$ | 392,353 | $ | 59,444 | $ | 219 | $ | - | $ | - | $ | 9,161 | $ | 461,177 | $ | 462,161 | ||||||||||||||||
|
Average
Interest Rate
|
4.95 | % | 4.61 | % | 2.58 | % | - | - | 5.18 | % | ||||||||||||||||||||||
|
Long-term
Debt – Fixed Rate
|
$ | 4,250 | $ | 4,250 | $ | - | $ | - | $ | - | $ | - | $ | 8,500 | $ | 8,604 | ||||||||||||||||
|
Average
Interest Rate
|
6.80 | % | 6.80 | % | - | - | - | - | ||||||||||||||||||||||||
|
At
December 31, 2006:
|
Fair
Value at
|
|||||||||||||||||||||||||||||||
|
Years
Ending December 31,
|
December
31
|
|||||||||||||||||||||||||||||||
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
2006
|
|||||||||||||||||||||||||
|
Investments
|
$ | 276,385 | $ | 8,286 | $ | - | $ | 1,233 | $ | - | $ | 7,651 | $ | 293,555 | $ | 294,085 | ||||||||||||||||
|
Average
Interest Rate
|
4.86 | % | 4.75 | % | - | 2.58 | % | - | 5.52 | % | ||||||||||||||||||||||
|
Long-term
Debt –Fixed Rate
|
$ | 4,250 | $ | 4,250 | $ | 4,250 | $ | - | $ | - | $ | 225 | $ | 12,975 | $ | 13,168 | ||||||||||||||||
|
Average
Interest Rate
|
6.80 | % | 6.80 | % | 6.80 | % | - | - | 10.0 | % | ||||||||||||||||||||||
Exchange
Rate Sensitivity
The
following table provides information about our foreign currency forward
contracts outstanding at December 31, 2007 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)
|
||||||||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2008
|
December
31, 2007
|
Exchange
Rate
|
|||||||||
|
Euros
|
$ | 140,918 | $ | 4,826 | 1.4200 | |||||||
|
Pound
Sterling
|
$ | 20,895 | $ | (278 | ) | 2.0302 | ||||||
|
Pound
Sterling (selling Euros)
|
$ | 15,144 | $ | (1,075 | ) | 0.6896 | ||||||
|
Canadian
Dollars (selling Pound Sterling)
|
$ | 13,115 | $ | 810 | 2.0988 | |||||||
|
Canadian
Dollars
|
$ | 7,193 | $ | 378 | 1.0418 | |||||||
|
Swedish
Krona
|
$ | 5,872 | $ | 162 | 6.7034 | |||||||
|
Japanese
Yen (selling Canadian Dollars)
|
$ | 2,863 | $ | 164 | 118.0932 | |||||||
|
Pound
Sterling (selling South African Rand)
|
$ | 797 | $ | (4 | ) | 13.6965 | ||||||
|
Thai
Baht
|
$ | 785 | $ | 24 | 31.5276 | |||||||
|
Danish
Krone
|
$ | 546 | $ | 2 | 5.1495 | |||||||
|
Euros
(selling South African Rand)
|
$ | 126 | $ | 1 | 10.2250 | |||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2009
|
December
31, 2007
|
Exchange
Rate
|
|||||||||
|
Canadian
Dollars
|
$ | 38,336 | $ | 336 | 1.0047 | |||||||
|
Euros
|
$ | 21,747 | $ | 394 | 1.4247 | |||||||
|
Pound
Sterling
|
$ | 7,046 | $ | (220 | ) | 2.0058 | ||||||
|
Danish
Krone
|
$ | 504 | $ | 17 | 5.3160 | |||||||
|
Pound
Sterling (selling Euros)
|
$ | 375 | $ | (28 | ) | 0.6918 | ||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2010
|
December
31, 2007
|
Exchange
Rate
|
|||||||||
|
Canadian
Dollars
|
$ | 47,351 | $ | 182 | 1.0093 | |||||||
|
Japanese
Yen (selling Canadian Dollars)
|
$ | 5,278 | $ | (147 | ) | 101.8480 | ||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2011
|
December
31, 2007
|
Exchange
Rate
|
|||||||||
|
Canadian
Dollars
|
$ | 34,612 | $ | 138 | 1.0139 | |||||||
|
Japanese
Yen (selling Canadian Dollars)
|
$ | 5,184 | $ | (146 | ) | 98.3035 | ||||||
To the
Board of Directors and Stockholders of McDermott International,
Inc.:
We have
audited the accompanying consolidated balance sheets of McDermott International,
Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated statements of income, comprehensive income, stockholders'
equity (deficit), and cash flows for the years then ended. Our audits
also included the 2007 and 2006 financial statement schedules listed in the
Index at Item 15(2). These financial statements and financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our
audits. The consolidated financial statements and financial statement
schedules of the Company for the year ended December 31, 2005, before the
effects of the retrospective adjustments for the discontinued operations
discussed in Note 3, the change in accounting for drydocking costs described in
Note 1, and the two-for-one and three-for-two common stock splits discussed in
Note 9 to the consolidated financial statements, were audited by other auditors
whose report, dated February 28, 2006, expressed an unqualified opinion on those
statements and schedules.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such 2007 and 2006 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2007 and 2006, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, such 2007 and 2006
financial statement schedules, when considered in relation to the basic
consolidated financial statements as a whole, present fairly, in all material
respects, the financial information set forth therein.
As
discussed in Notes 1 and 21 to the consolidated financial statements, on
February 22, 2000, The Babcock & Wilcox Company (“B&W”), a wholly owned
subsidiary of the Company, filed a voluntary petition with the U.S. Bankruptcy
Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. On
January 17, 2006 the United States District Court for the Eastern District of
Louisiana issued an order confirming B&W’s Chapter 11 Joint Plan of
Reorganization and associated settlement agreement and on February 22, 2006
B&W emerged from Chapter 11. B&W and its subsidiaries’
results of operations have been included in the consolidated financial
statements of the Company effective February 22, 2006. As further
discussed in Notes 1 and 21, due to the Chapter 11 proceedings, B&W and its
subsidiaries’ results of operations were not included in the consolidated
financial statements of the Company from February 22, 2000 through February 22,
2006.
We have
also audited the retrospective adjustments to the 2005 consolidated financial
statements for the operations discontinued in 2006 discussed in Note 3, the
change in accounting in 2007 for drydocking costs described in Note 1, and the
two-for-one and three-for-two common stock splits in 2007 and 2006,
respectively, discussed in Note 9 to the consolidated financial
statements. Our procedures included (1) obtaining the Company’s
underlying accounting analysis from management of the retrospective adjustments
for discontinued operations and drydocking costs and comparing the
retrospectively adjusted amounts per the 2005 financial statements to such
analysis, (2) comparing previously reported amounts to the previously issued
financial statements for 2005, (3) testing the mathematical accuracy of the
accounting analysis, (4) on a test basis, comparing the adjustments to
retrospectively adjust the financial statements for discontinued operations and
drydocking costs to independent supporting documentation, (5) comparing the
amounts shown in the earnings per share disclosures for 2006 and 2005 to the
Company’s underlying accounting analysis obtained from management, (6) comparing
the previously reported shares outstanding and income statement amounts per the
Company's accounting analysis to the previously issued financial statements, and
(7) recalculating the additional shares to give effect to the stock splits and
testing the mathematical accuracy of the underlying analysis. In our
opinion, such retrospective adjustments are appropriate and have been properly
applied. However, we were not engaged to audit, review or apply any
procedures to the 2005 consolidated financial statements and financial statement
schedules of the Company other than with respect to
the
retrospective adjustments and, accordingly, we do not express an opinion or any
other form of assurance on the 2005 consolidated financial statements and
financial statement schedules taken as a whole.
As
discussed in Note 5 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” as of January 1, 2007. As discussed
in Note 1 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based
Payment” as of January 1, 2006 and SFAS No. 158, “Employee Accounting for
Defined Benefit Pension and Other Postretirement Plans” as of December 31,
2006.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 27, 2008 expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/
DELOITTE & TOUCHE LLP
Houston,
Texas
February
27, 2008
Report of Independent Registered
Public Accounting Firm
To the
Board of Directors and Shareholders of McDermott International,
Inc.:
In our
opinion, the consolidated statements of income, comprehensive income,
shareholders’ deficit and cash flows for the year ended December 31, 2005,
before the effects of the adjustments to retrospectively reflect the change in
accounting for drydock costs described in Note 1, the adjustments to
retrospectively reflect the discontinued operations described in Note 3 and the
adjustments to retrospectively reflect the three-for-two and two-for-one stock
splits described in Note 9, present fairly, in all material respects, the
results of operations and cash flows of McDermott International, Inc. and its
subsidiaries (the "Company") for the year ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America
(the 2005 consolidated financial statements before the effects of the
adjustments discussed in Notes 1, 3 and 9 are not presented
herein). In addition, in our opinion, the financial statement
schedule for the year ended December 31, 2005 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements referred to above. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audit. We conducted our audit, before the effects of the adjustments
described above, of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
We were
not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively reflect the change in accounting for drydock costs described in
Note 1, the adjustments to retrospectively reflect the discontinued operations
described in Note 3 and the adjustments to retrospectively reflect the
three-for-two and two-for-one stock splits described in Note 9 and accordingly,
we do not express an opinion or any other form of assurance about whether such
adjustments are appropriate and have been properly applied. Those
adjustments were audited by other auditors.
As
discussed in Notes 1, 20 and 22 to the consolidated financial statements
included in the 2005 Form 10-K (not separately presented herein), on February
22, 2000, The Babcock & Wilcox Company ("B&W"), a wholly owned
subsidiary of the Company, filed a voluntary petition with the U.S. Bankruptcy
Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. On January 17,
2006 the United States District Court for the Eastern District of Louisiana
issued an order confirming B&W’s Chapter 11 Joint Plan of Reorganization and
associated settlement agreement and on February 22, 2006, B&W’s Plan and
associated settlement agreement became effective and B&W emerged from
Chapter 11.
/s/
PricewaterhouseCoopers LLP
Houston,
Texas
February
28, 2006
McDERMOTT
INTERNATIONAL, INC.
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,001,394 | $ | 600,843 | ||||
|
Restricted
cash and cash equivalents (Note 1)
|
64,786 | 106,674 | ||||||
|
Investments
(Note 15)
|
300,092 | 172,171 | ||||||
|
Accounts
receivable – trade, net
|
770,024 | 668,310 | ||||||
|
Accounts
and notes receivable – unconsolidated affiliates
|
2,303 | 29,825 | ||||||
|
Accounts
receivable – other
|
71,162 | 48,041 | ||||||
|
Contracts
in progress
|
194,292 | 230,146 | ||||||
|
Inventories
(Note 1)
|
95,208 | 77,769 | ||||||
|
Deferred
income taxes
|
160,783 | 180,234 | ||||||
|
Other
current assets
|
97,456 | 39,461 | ||||||
|
Total
Current Assets
|
2,757,500 | 2,153,474 | ||||||
|
Property,
Plant and Equipment
|
2,004,138 | 1,525,187 | ||||||
|
Less
accumulated depreciation
|
1,090,400 | 1,011,693 | ||||||
|
Net
Property, Plant and Equipment
|
913,738 | 513,494 | ||||||
|
Investments
(Note 15)
|
162,069 | 121,914 | ||||||
|
Goodwill
|
158,533 | 89,226 | ||||||
|
Deferred
Income Taxes
|
134,292 | 260,341 | ||||||
|
Long-Term
Income Tax Receivable
|
8,745 | 299,786 | ||||||
|
Investments
in Unconsolidated Affiliates
|
62,241 | 52,801 | ||||||
|
Other
Assets
|
214,368 | 142,726 | ||||||
|
TOTAL
|
$ | 4,411,486 | $ | 3,633,762 | ||||
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Notes
payable and current maturities of long-term debt
|
$ | 6,599 | $ | 257,492 | ||||
|
Accounts
payable
|
455,659 | 407,094 | ||||||
|
Accrued
employee benefits
|
343,812 | 246,182 | ||||||
|
Accrued
liabilities – other
|
175,557 | 185,762 | ||||||
|
Accrued
contract cost
|
93,281 | 110,992 | ||||||
|
Advance
billings on contracts
|
1,463,223 | 1,116,118 | ||||||
|
Accrued
warranty expense
|
101,330 | 79,077 | ||||||
|
Income
taxes payable
|
57,071 | 58,557 | ||||||
|
Total
Current Liabilities
|
2,696,532 | 2,461,274 | ||||||
|
Long-Term
Debt
|
10,609 | 15,242 | ||||||
|
Accumulated
Postretirement Benefit Obligation
|
96,253 | 100,316 | ||||||
|
Self-Insurance
|
82,525 | 84,704 | ||||||
|
Pension
Liability
|
188,748 | 372,504 | ||||||
|
Other
Liabilities
|
169,814 | 156,621 | ||||||
|
Commitments
and Contingencies (Note 11)
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
stock, par value $1.00 per share, authorized 400,000,000 shares; issued
231,722,659 and 227,794,618 at December 31, 2007 and 2006,
respectively
|
231,723 | 227,795 | ||||||
|
Capital
in excess of par value
|
1,145,829 | 1,100,384 | ||||||
|
Accumulated
earnings (deficit)
|
135,289 | (458,886 | ) | |||||
|
Treasury
stock at cost, 5,852,248 and 6,025,418 at December 31, 2007 and 2006,
respectively
|
(63,903 | ) | (60,581 | ) | ||||
|
Accumulated
other comprehensive loss
|
(281,933 | ) | (365,611 | ) | ||||
|
Total
Stockholders’ Equity
|
1,167,005 | 443,101 | ||||||
|
TOTAL
|
$ | 4,411,486 | $ | 3,633,762 | ||||
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands, except shares and per share amounts)
|
||||||||||||
|
Revenues
|
$ | 5,631,610 | $ | 4,120,141 | $ | 1,839,740 | ||||||
|
Costs
and Expenses:
|
||||||||||||
|
Cost
of operations
|
4,500,897 | 3,362,758 | 1,436,107 | |||||||||
|
Gains
on settlements and curtailments of pension plans
|
- | - | (1,390 | ) | ||||||||
|
(Gains)
losses on asset disposals and impairments – net
|
(8,371 | ) | 15,042 | (6,554 | ) | |||||||
|
Selling,
general and administrative expenses
|
464,611 | 388,524 | 220,380 | |||||||||
| 4,957,137 | 3,766,324 | 1,648,543 | ||||||||||
|
Equity
in Income of Investees
|
41,724 | 37,524 | 40,523 | |||||||||
|
Operating
Income
|
716,197 | 391,341 | 231,720 | |||||||||
|
Other
Income (Expense):
|
||||||||||||
|
Interest
income
|
61,980 | 53,562 | 21,046 | |||||||||
|
Interest
expense
|
(22,520 | ) | (30,348 | ) | (31,820 | ) | ||||||
|
IRS
interest expense adjustment
|
- | 5,719 | - | |||||||||
|
Loss
on Babcock & Wilcox Power Generation Group, Inc. bankruptcy
settlement
|
- | - | (5,887 | ) | ||||||||
|
Loss
on early retirement of debt
|
- | (53,708 | ) | - | ||||||||
|
Other
expense – net
|
(10,192 | ) | (13,750 | ) | (649 | ) | ||||||
| 29,268 | (38,525 | ) | (17,310 | ) | ||||||||
|
Income
from Continuing Operations before Provision for Income
Taxes
|
745,465 | 352,816 | 214,410 | |||||||||
|
Provision
for Income Taxes
|
137,637 | 35,195 | 8,827 | |||||||||
|
Income
from Continuing Operations
|
607,828 | 317,621 | 205,583 | |||||||||
|
Income
from Discontinued Operations
|
- | 12,894 | 104 | |||||||||
|
Net
Income
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | ||||||
|
Earnings
per Common Share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
from Continuing Operations
|
$ | 2.72 | $ | 1.46 | $ | 1.00 | ||||||
|
Income
from Discontinued Operations
|
$ | 0.00 | $ | 0.06 | $ | 0.00 | ||||||
|
Net
Income
|
$ | 2.72 | $ | 1.52 | $ | 1.00 | ||||||
|
Diluted:
|
||||||||||||
|
Income
from Continuing Operations
|
$ | 2.66 | $ | 1.39 | $ | 0.94 | ||||||
|
Income
from Discontinued Operations
|
$ | 0.00 | $ | 0.06 | $ | 0.00 | ||||||
|
Net
Income
|
$ | 2.66 | $ | 1.45 | $ | 0.94 | ||||||
|
Shares
used in the computation of earnings per share (Note 20):
|
||||||||||||
|
Basic
|
223,511,880 | 217,752,454 | 205,137,664 | |||||||||
|
Diluted
|
228,742,522 | 227,718,784 | 218,337,530 | |||||||||
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
Income
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | ||||||
|
Other
Comprehensive Income (Loss):
|
||||||||||||
|
Currency
translation adjustments:
|
||||||||||||
|
Foreign
currency translation adjustments
|
13,924 | 10,607 | (2,233 | ) | ||||||||
|
Reclassification
adjustment for impairment of investment
|
- | 16,438 | - | |||||||||
|
Reconsolidation
of Babcock & Wilcox Power Generation Group, Inc.
|
- | 15,833 | - | |||||||||
|
Unrealized
gains (losses) on derivative financial instruments:
|
||||||||||||
|
Unrealized
gains (losses) on derivative financial instruments
|
15,658 | 10,600 | (6,889 | ) | ||||||||
|
Reclassification
adjustment for (gains) losses included in net income
|
(4,226 | ) | (30 | ) | 3,491 | |||||||
|
Reconsolidation
of Babcock & Wilcox Power Generation Group, Inc.
|
- | (269 | ) | - | ||||||||
|
Unrecognized
gains on benefit obligations:
|
||||||||||||
|
Unrecognized
gains arising during the period
|
32,272 | - | - | |||||||||
|
Amortization
of losses included in net income
|
24,892 | - | - | |||||||||
|
Amortization
of losses included in retained earnings
|
704 | - | - | |||||||||
|
Minimum
pension liability adjustment:
|
||||||||||||
|
Minimum
pension liability adjustment
|
- | 98,371 | (86,953 | ) | ||||||||
|
Reconsolidation
of Babcock & Wilcox Power Generation Group, Inc.
|
- | 15,578 | - | |||||||||
|
Unrealized
gains (losses) on investments:
|
||||||||||||
|
Unrealized
gains (losses) arising during the period
|
629 | 1,326 | (747 | ) | ||||||||
|
Reclassification
adjustment for net (gains) losses included in net income
|
(175 | ) | (7 | ) | 5 | |||||||
|
Other
Comprehensive Income (Loss)
|
83,678 | 168,447 | (93,326 | ) | ||||||||
|
Comprehensive
Income
|
$ | 691,506 | $ | 498,962 | $ | 112,361 | ||||||
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
|
Accumulated
|
Total
|
|||||||||||||||||||||||||||
|
Capital
In
|
Accumulated
|
Other
|
Stockholders’
|
|||||||||||||||||||||||||
|
Common
Stock
|
Excess
of
|
Earnings
|
Comprehensive
|
Treasury
|
Equity
|
|||||||||||||||||||||||
|
Shares
|
Par
Value(1)
|
Par
Value(1)
|
(Deficit)
|
Loss
|
Stock
|
(Deficit)
|
||||||||||||||||||||||
|
(In
thousands, except for share amounts)
|
||||||||||||||||||||||||||||
|
Balance
December 31, 2004, as reported
|
208,682,178 | $ | 208,682 | $ | 982,934 | $ | (1,060,908 | ) | $ | (327,526 | ) | $ | (64,625 | ) | $ | (261,443 | ) | |||||||||||
|
Change
in accounting principle (Note 1)
|
- | - | - | 58,795 | - | - | 58,795 | |||||||||||||||||||||
|
Balance
December 31, 2004, as adjusted
|
208,682,178 | 208,682 | 982,934 | (1,002,113 | ) | (327,526 | ) | (64,625 | ) | (202,648 | ) | |||||||||||||||||
|
Net
income
|
- | - | - | 205,687 | - | - | 205,687 | |||||||||||||||||||||
|
Minimum
pension liability, net of tax
|
- | - | - | - | (86,953 | ) | - | (86,953 | ) | |||||||||||||||||||
|
Unrealized
loss on investments
|
- | - | - | - | (742 | ) | - | (742 | ) | |||||||||||||||||||
|
Translation
adjustments
|
- | - | - | - | (2,233 | ) | - | (2,233 | ) | |||||||||||||||||||
|
Unrealized
loss on derivatives
|
- | - | - | - | (3,398 | ) | - | (3,398 | ) | |||||||||||||||||||
|
Exercise
of stock options
|
11,431,596 | 11,432 | 49,514 | - | - | - | 60,946 | |||||||||||||||||||||
|
Vesting
of deferred stock units
|
15,000 | 15 | (10 | ) | - | - | - | 5 | ||||||||||||||||||||
|
Restricted
stock issuances – net
|
1,535,958 | 1,536 | (938 | ) | - | - | - | 598 | ||||||||||||||||||||
|
Contributions
to thrift plan
|
731,544 | 732 | 5,031 | - | - | - | 5,763 | |||||||||||||||||||||
|
Issuance
of treasury shares
|
(822,510 | ) | (823 | ) | (5,035 | ) | - | - | 8,129 | 2,271 | ||||||||||||||||||
|
Stock-based
compensation charges
|
- | - | 3,911 | - | - | - | 3,911 | |||||||||||||||||||||
|
Balance
December 31, 2005
|
221,573,766 | 221,574 | 1,035,407 | (796,426 | ) | (420,852 | ) | (56,496 | ) | (16,793 | ) | |||||||||||||||||
|
Net
income
|
- | - | - | 330,515 | - | - | 330,515 | |||||||||||||||||||||
|
Cumulative
adjustment for conversion to equity method (Note 4)
|
- | - | - | 7,025 | - | - | 7,025 | |||||||||||||||||||||
|
Minimum
pension liability, net of tax
|
- | - | - | - | 113,949 | - | 113,949 | |||||||||||||||||||||
|
Unrealized
gain on investments
|
- | - | - | - | 1,319 | - | 1,319 | |||||||||||||||||||||
|
Translation
adjustments
|
- | - | - | - | 42,878 | - | 42,878 | |||||||||||||||||||||
|
Unrealized
gain on derivatives
|
- | - | - | - | 10,301 | - | 10,301 | |||||||||||||||||||||
|
Exercise
of stock options
|
5,367,176 | 5,367 | 13,726 | - | - | 2,410 | 21,503 | |||||||||||||||||||||
|
Restricted
stock issuances – net
|
34,530 | 35 | (20 | ) | - | - | (38 | ) | (23 | ) | ||||||||||||||||||
|
Contributions
to thrift plan
|
473,860 | 474 | 8,693 | - | - | - | 9,167 | |||||||||||||||||||||
|
Purchase
of treasury shares
|
253,920 | 254 | 2,758 | - | - | (5,596 | ) | (2,584 | ) | |||||||||||||||||||
|
Stock-based
compensation charges
|
- | - | 39,161 | - | - | - | 39,161 | |||||||||||||||||||||
|
Reclassification
of forfeited shares
|
91,366 | 91 | 770 | - | - | (861 | ) | - | ||||||||||||||||||||
|
Cash
in lieu of fractional shares resulting from stock split (Note
9)
|
- | - | (111 | ) | - | - | - | (111 | ) | |||||||||||||||||||
|
Adoption
of SFAS No. 158 (Note 7)
|
- | - | - | - | (113,206 | ) | - | (113,206 | ) | |||||||||||||||||||
|
Balance
December 31, 2006
|
227,794,618 | 227,795 | 1,100,384 | (458,886 | ) | (365,611 | ) | (60,581 | ) | 443,101 | ||||||||||||||||||
|
Net
income
|
- | - | - | 607,828 | - | - | 607,828 | |||||||||||||||||||||
|
Adoption
of FIN 48 (Note 5)
|
- | - | - | (11,965 | ) | - | - | (11,965 | ) | |||||||||||||||||||
|
Adoption
of SFAS No. 158 (Note 7)
|
- | - | - | (1,688 | ) | 704 | - | (984 | ) | |||||||||||||||||||
|
Amortization
of benefit plan costs
|
- | - | - | - | 24,892 | - | 24,892 | |||||||||||||||||||||
|
Unrecognized
gains on benefit obligations
|
32,272 | 32,272 | ||||||||||||||||||||||||||
|
Unrealized
gain on investments
|
- | - | - | - | 454 | - | 454 | |||||||||||||||||||||
|
Translation
adjustments
|
- | - | - | - | 13,924 | - | 13,924 | |||||||||||||||||||||
|
Unrealized
gain on derivatives
|
- | - | - | - | 11,432 | - | 11,432 | |||||||||||||||||||||
|
Exercise
of stock options
|
3,565,266 | 3,565 | 10,575 | - | - | 1,079 | 15,219 | |||||||||||||||||||||
|
Restricted
stock issuances – net
|
28,836 | 29 | (25 | ) | - | - | - | 4 | ||||||||||||||||||||
|
Contributions
to thrift plan
|
333,939 | 334 | 11,178 | - | - | - | 11,512 | |||||||||||||||||||||
|
Purchase
of treasury shares
|
- | - | - | - | - | (4,401 | ) | (4,401 | ) | |||||||||||||||||||
|
Stock-based
compensation charges
|
- | - | 23,717 | - | - | - | 23,717 | |||||||||||||||||||||
|
Balance
December 31, 2007
|
231,722,659 | $ | 231,723 | $ | 1,145,829 | $ | 135,289 | $ | (281,933 | ) | $ | (63,903 | ) | $ | 1,167,005 | |||||||||||||
(1) Amounts
have been restated to reflect the stock splits effected in September 2007 and
May 2006. See Note 9 for additional information.
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | ||||||
|
Non-cash
items included in net income:
|
||||||||||||
|
Depreciation
and amortization
|
95,989 | 61,000 | 44,266 | |||||||||
|
(Income)
loss of investees, net of dividends
|
120 | 1,644 | (4,714 | ) | ||||||||
|
(Gains)
losses on asset disposals and impairments – net
|
(8,371 | ) | 15,042 | (6,554 | ) | |||||||
|
Gain
on sale of business
|
- | (13,786 | ) | - | ||||||||
|
Premium
on early retirement of debt
|
- | 37,438 | - | |||||||||
|
Provision
for (benefit from) deferred taxes
|
89,624 | 179,467 | (47,557 | ) | ||||||||
|
Amortization
of pension and postretirement costs
|
50,957 | - | - | |||||||||
|
Loss
on Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”)
bankruptcy settlement
|
- | - | 5,887 | |||||||||
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
(877 | ) | (20,113 | ) | - | |||||||
|
Other,
net
|
21,726 | 14,660 | 20,324 | |||||||||
|
Changes
in assets and liabilities, net of effects from acquisition and
divestitures:
|
||||||||||||
|
Accounts
receivable
|
(82,105 | ) | (49,858 | ) | 2,568 | |||||||
|
Income
taxes receivable
|
255,165 | (284,494 | ) | - | ||||||||
|
Accounts
payable
|
40,384 | 65,157 | (46,664 | ) | ||||||||
|
Net
contracts in progress and advance billings
|
382,184 | 330,996 | 96,010 | |||||||||
|
Income
taxes
|
(13,216 | ) | 139,497 | (14,570 | ) | |||||||
|
Accrued
and other current liabilities
|
(14,305 | ) | 81,060 | (52,390 | ) | |||||||
|
Pension
liability and accrued postretirement and employee benefits
|
(74,365 | ) | (119,114 | ) | 46,803 | |||||||
|
Payment
of the B&W PGG bankruptcy settlement
|
- | (605,000 | ) | - | ||||||||
|
Other,
net
|
(33,790 | ) | 64,031 | 5,851 | ||||||||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
1,316,948 | 228,142 | 254,947 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Decrease
in restricted cash and cash equivalents
|
41,888 | 48,298 | 22,981 | |||||||||
|
Purchases
of property, plant and equipment
|
(233,289 | ) | (132,704 | ) | (67,595 | ) | ||||||
|
Acquisition
of businesses, net of cash acquired
|
(334,457 | ) | - | - | ||||||||
|
Net
(increase) decrease in available-for-sale securities
|
(159,350 | ) | 212,082 | (457,270 | ) | |||||||
|
Proceeds
from asset disposals
|
11,223 | 21,712 | 17,223 | |||||||||
|
Cash
acquired from the reconsolidation of B&W PGG
|
- | 164,200 | - | |||||||||
|
Other,
net
|
(4,696 | ) | (3,193 | ) | (6,095 | ) | ||||||
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(678,681 | ) | 310,395 | (490,756 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Issuance
of long-term debt
|
- | 250,000 | - | |||||||||
|
Payment
of long-term debt
|
(255,749 | ) | (238,615 | ) | (66,984 | ) | ||||||
|
Payment
of debt issuance costs
|
(3,625 | ) | (10,170 | ) | (949 | ) | ||||||
|
Issuance
of common stock
|
15,219 | 19,647 | 60,951 | |||||||||
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
877 | 20,113 | - | |||||||||
|
Other,
net
|
4 | 2,718 | 2,779 | |||||||||
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(243,274 | ) | 43,693 | (4,203 | ) | |||||||
|
EFFECTS
OF EXCHANGE RATE CHANGES ON CASH
|
5,558 | (650 | ) | (44 | ) | |||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
400,551 | 581,580 | (240,056 | ) | ||||||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
600,843 | 19,263 | 259,319 | |||||||||
|
CASH
AND CASH EQUIVLENTS AT END OF PERIOD
|
$ | 1,001,394 | $ | 600,843 | $ | 19,263 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest
(net of amount capitalized)
|
$ | 28,066 | $ | 28,588 | $ | 37,720 | ||||||
|
Income
taxes (net of refunds)
(1)
|
$ | (208,194 | ) | $ | 63,357 | $ | 44,961 | |||||
|
(1)
|
Income
tax payments are gross amounts and do not include reimbursements received
from B&W PGG of $3.7 million for the year ended December 31,
2005.
|
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
DECEMBER
31, 2007
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
We have
presented our consolidated financial statements in U.S. Dollars in accordance
with accounting principles generally accepted in the United States
(“GAAP”). These consolidated financial statements include the
accounts of McDermott International, Inc. and its subsidiaries and controlled
entities consistent with Financial Accounting Standards Board (“FASB”)
Interpretation No. 46(R), “Consolidation of Variable Interest Entities (revised
December 2003).” We use the equity method to account for investments
in entities that we do not control, but over which we have significant
influence. We generally refer to these entities as “joint
ventures.” We have eliminated all significant intercompany transactions and
accounts. We present the notes to our consolidated financial
statements on the basis of continuing operations, unless otherwise
stated. In these notes to consolidated financial statements, unless the
context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated
subsidiaries.
McDermott
International, Inc. (“MII”), incorporated under the laws of the Republic of
Panama in 1959, is an engineering and construction company with specialty
manufacturing and service capabilities and is the parent company of the
McDermott group of companies, including J. Ray McDermott, S.A. (“JRMSA”) and The
Babcock & Wilcox Company (“B&W”).
We
operate in three business segments: Offshore Oil and Gas Construction,
Government Operations and Power Generation Systems.
During
2007, we renamed, and in some cases restructured, many of the principal
operating companies within our Government Operations and Power Generation
Systems segments. One of the renamed companies, Babcock & Wilcox
Power Generation Group, Inc. (“B&W PGG”), was previously named The Babcock
& Wilcox Company. See the segment description below for the new
names of the other principal operating companies. In addition, we
changed the name of the parent company of our Government Operations and Power
Generation Systems subsidiaries to The Babcock & Wilcox
Company. As a result, The Babcock & Wilcox Company now refers to
the parent company of our subsidiaries comprising our Government Operations and
Power Generation Systems segments.
Our
business segments are outlined as follows:
|
·
|
Offshore
Oil and Gas Construction includes the business and operations of JRMSA, J.
Ray McDermott Holdings, LLC and their respective
subsidiaries. This segment supplies services primarily to
offshore oil and gas field developments worldwide, including the front-end
design and detailed engineering, fabrication and installation of offshore
drilling and production facilities and installation of marine pipelines
and subsea production systems. This segment operates in
most major offshore oil and gas producing regions, including the United
States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia
Pacific.
|
|
·
|
Government
Operations includes the business and operations of BWX Technologies, Inc.,
Babcock & Wilcox Nuclear Operations Group, Inc., Babcock & Wilcox
Technical Services Group, Inc. and their respective subsidiaries. This
segment supplies nuclear components and provides various services to the
U.S. Government, including uranium processing, environmental site
restoration services and management and operating services for various
U.S. Government-owned facilities, primarily within the nuclear weapons
complex of the U.S. Department of Energy
(“DOE”).
|
|
·
|
Power
Generation Systems includes the business and operations of B&W PGG,
Babcock & Wilcox Nuclear Power Generation Group, Inc. and their
respective subsidiaries. This segment supplies fossil-fired
steam generating systems, replacement commercial nuclear steam generators,
environmental equipment and components, and related services to customers
around the world. It designs, engineers, manufactures and services large
utility and industrial power generation systems, including boilers used to
generate steam in electric power plants, pulp and paper making, chemical
and process applications and other industrial uses. On February
22, 2006, B&W PGG and three of its subsidiaries exited from their
asbestos-related Chapter 11
|
|
|
bankruptcy
proceedings (the “Chapter 11 Bankruptcy”), which were commenced on
February 22, 2000. Due to the Chapter 11 Bankruptcy, we did not
consolidate the results of operations of these entities in our
consolidated financial statements from February 22, 2000 through February
22, 2006. See Note 21 to our consolidated financial statements
included in this report for more information on the Chapter 11
Bankruptcy.
|
Use
of Estimates
We use
estimates and assumptions to prepare our financial statements in conformity with
GAAP. These estimates and assumptions affect the amounts we report in
our financial statements and accompanying notes. Our actual results
could differ from these estimates. Variances could result in a
material effect on our results of operations and financial position in future
periods.
Earnings
Per Share
We have
computed earnings per common share on the basis of the weighted average number
of common shares, and, where dilutive, common share equivalents, outstanding
during the indicated periods.
Investments
Our
investments, primarily government obligations and other highly liquid money
market instruments, are classified as available-for-sale and are carried at fair
value, with the unrealized gains and losses, net of tax, reported as a component
of accumulated other comprehensive loss. We classify investments
available for current operations in the balance sheet as current assets, while
we classify investments held for long-term purposes as noncurrent
assets. We adjust the amortized cost of debt securities for
amortization of premiums and accretion of discounts to maturity. That
amortization is included in interest income. We include realized
gains and losses on our investments in other income (expense). The
cost of securities sold is based on the specific identification
method. We include interest on securities in interest
income.
Foreign
Currency Translation
We
translate assets and liabilities of our foreign operations, other than
operations in highly inflationary economies, into U.S. Dollars at current
exchange rates, and we translate income statement items at average exchange
rates for the periods presented. We record adjustments resulting from
the translation of foreign currency financial statements as a component of
accumulated other comprehensive loss. We report foreign currency
transaction gains and losses in income. We have included in other
income (expense) transaction gains (losses) of $0.7 million, ($6.3) million and
$2.1 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
Contracts
and Revenue Recognition
We
generally recognize contract revenues and related costs on a
percentage-of-completion method for individual contracts or combinations of
contracts based on work performed, man hours, or a cost-to-cost method, as
applicable to the product or activity involved. Some of our contracts
contain a risk-and-reward element, whereby a portion of total compensation is
tied to the overall performance of several companies working under alliance
arrangements. We include revenues and related costs so recorded, plus
accumulated contract costs that exceed amounts invoiced to customers under the
terms of the contracts, in contracts in progress. We include in
advance billings on contracts billings that exceed accumulated contract costs
and revenues and costs recognized under the percentage-of-completion
method. Most long-term contracts contain provisions for progress
payments. We expect to invoice customers for all unbilled
revenues. We review contract price and cost estimates periodically as
the work progresses and reflect adjustments proportionate to the
percentage-of-completion in income in the period when those estimates are
revised. For all contracts, if a current estimate of total contract
cost indicates a loss on a contract, the projected loss is recognized in full
when determined.
For
contracts as to which we are unable to estimate the final profitability except
to assure that no loss will ultimately be incurred, we recognize equal amounts
of revenue and cost until the final results can be estimated more
precisely. For these deferred profit recognition contracts, we
recognize revenue and cost equally and only recognize gross margin when probable
and reasonably estimable, which we generally determined to be when the contract
is
approximately
70% complete. We treat long-term construction contracts that contain
such a level of risk and uncertainty that estimation of the final outcome is
impractical except to assure that no loss will be incurred, as deferred profit
recognition contracts.
Our
policy is to account for fixed-price contracts under the completed-contract
method if we believe that we are unable to reasonably forecast cost to complete
at start-up. Under the completed-contract method, income is
recognized only when a contract is completed or substantially
complete.
Variations
from estimated contract performance could result in material adjustments to
operating results for any fiscal quarter or year. We include claims
for extra work or changes in scope of work to the extent of costs incurred in
contract revenues when we believe collection is probable.
The
following amounts represent retainages on contracts:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Retainages
expected to be collected in 2008
|
$ | 107,397 | $ | 76,067 | ||||
|
Retainages
expected to be collected after one year
|
68,713 | 67,617 | ||||||
|
Total
Retainages
|
$ | 176,110 | $ | 143,684 | ||||
We have included in accounts receivable
– trade retainages expected to be collected in 2008. Retainages
expected to be collected after one year are included in other
assets. Of the long-term retainages at December 31, 2007, we
anticipate collecting $33.8 million in 2009, $24.8 million in 2010 and $10.1
million in 2011.
Comprehensive
Loss
The
components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Currency
Translation Adjustments
|
$ | 25,328 | $ | 11,404 | ||||
|
Net
Unrealized Gain on Investments
|
984 | 530 | ||||||
|
Net
Unrealized Gain on Derivative Financial Instruments
|
20,876 | 9,444 | ||||||
|
Unrecognized
Losses on Benefit Obligations
|
(329,121 | ) | (386,989 | ) | ||||
|
Accumulated
Other Comprehensive Loss
|
$ | (281,933 | ) | $ | (365,611 | ) | ||
Warranty
Expense
We accrue
estimated expense to satisfy contractual warranty requirements, primarily of our
Government Operations and Power Generation Systems segments, when we recognize
the associated revenue on the related contracts. We include warranty
costs associated with our Offshore Oil and Gas Construction segment as a
component of our total contract cost estimate to satisfy contractual
requirements. In addition, we make specific provisions where we
expect the actual warranty costs to significantly exceed the accrued
estimates. Such provisions could have a material effect on our
consolidated financial position, results of operations and cash
flows.
The
following summarizes the changes in the carrying amount of accrued
warranty:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 79,077 | $ | 8,575 | $ | 9,520 | ||||||
|
Reconsolidation
of B&W PGG
|
- | 48,329 | - | |||||||||
|
Additions
and adjustments
|
34,336 | 32,981 | 4,271 | |||||||||
|
Charges
|
(12,083 | ) | (10,808 | ) | (5,216 | ) | ||||||
|
Balance
at end of period
|
$ | 101,330 | $ | 79,077 | $ | 8,575 | ||||||
Asset
Retirement Obligations and Environmental Clean-up Costs
We accrue
for future decommissioning of our nuclear facilities that will permit the
release of these facilities to unrestricted use at the end of each facility's
life, which is a requirement of our licenses from the Nuclear Regulatory
Commission. In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” we
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When we initially record such a
liability, we capitalize a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of a liability, we will settle
the obligation for its recorded amount or incur a gain or loss. SFAS
No. 143 applies to environmental liabilities associated with assets that we
currently operate and are obligated to remove from service. For
environmental liabilities associated with assets that we no longer operate, we
have accrued amounts based on the estimated costs of clean-up activities,
net of any cost-sharing arrangements. We adjust the estimated costs
as further information develops or circumstances change. An exception
to this accounting treatment relates to the work we perform for one facility,
for which the U.S. Government is obligated to pay all of the decommissioning
costs.
Substantially
all of our asset retirement obligations relate to the remediation of our nuclear
analytical laboratory in our Government Operations segment. The
following table reflects our asset retirement obligations:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 8,395 | $ | 7,556 | $ | 6,800 | ||||||
|
Accretion
|
933 | 839 | 756 | |||||||||
|
Balance
at end of period
|
$ | 9,328 | $ | 8,395 | $ | 7,556 | ||||||
Research
and Development
Research
and development activities are related to development and improvement of new and
existing products and equipment, as well as conceptual and engineering
evaluation for translation into practical applications. We charge to cost of
operations the costs of research and development unrelated to specific contracts
as incurred. Research and development activities totaled $52.0
million, $45.2 million and $34.1 million in the years ended December 31, 2007,
2006 and 2005, respectively, which include $16.5 million, $26.5 million and
$30.8 million, respectively, related to amounts paid for by our
customers. The net expenses recognized in the years ended December
31, 2007, 2006 and 2005 totaled approximately $35.5 million, $18.7 million and
$3.3 million, respectively.
Inventories
We carry
our inventories at the lower of cost or market. We determine cost
principally on the first-in, first-out basis, except for certain materials
inventories of our Power Generation Systems segment, for which we use the
last-in, first-out (“LIFO”) method. We determined the cost of
approximately 20% and 17% of our total inventories using the LIFO method at
December 31, 2007 and 2006, respectively, and the total LIFO reserve at December
31, 2007 and 2006 was approximately $6.0 and $5.6 million,
respectively. Inventories are summarized below:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Raw
Materials and Supplies
|
$ | 65,857 | $ | 56,955 | ||||
|
Work
in Progress
|
10,757 | 7,453 | ||||||
|
Finished
Goods
|
18,594 | 13,361 | ||||||
|
Total
Inventories
|
$ | 95,208 | $ | 77,769 | ||||
Property,
Plant and Equipment
We carry
our property, plant and equipment at depreciated cost, less any impairment
provisions.
Except
for major marine vessels, we depreciate our property, plant and equipment using
the straight-line method over estimated economic useful lives of eight to 40
years for buildings and two to 28 years for machinery and
equipment. We depreciate major marine vessels using the
units-of-production method based on the utilization of each
vessel. Our depreciation expense calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any
period. The annual depreciation based on utilization of each vessel
will not be less than the greater of 25% of annual straight-line depreciation or
50% of cumulative straight-line depreciation. Our depreciation
expense was $91.2 million, $60.5 million and $43.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
We
expense the costs of maintenance, repairs and renewals that do not materially
prolong the useful life of an asset as we incur them, except for drydocking
costs. Through December 31, 2006, we accrued estimated drydocking
costs, including labor, raw materials, equipment costs and regulatory fees, for
our marine fleet over the period of time between drydockings, in accordance with
the method commonly known as the accrue-in-advance method. Effective
January 1, 2007 and pursuant to Financial Accounting Standards Board (“FASB”)
Staff Position (“FSP”) AUG AIR-1, “Accounting for Planned Major Maintenance
Activities,” we changed our accounting policy from the accrue-in-advance method
to the deferral method. Under the deferral method, we recognize
drydocking costs as a prepaid asset when incurred and amortize the costs over
the period of time between drydockings, generally three to five
years. This Staff Position requires that all periods presented in our
consolidated financial statements reflect the period-specific adjustments of
applying the new accounting principle. As a result of applying this
change, we have restated our consolidated balance sheet at January 1, 2006 to
reflect an increase to assets and stockholders’ equity of approximately $41.7
million and $66.5 million, respectively, and a decrease to liabilities of
approximately $24.8 million. Additionally, we have restated our
consolidated statements of income for the years ended December 31, 2006 and 2005
to reflect an increase in our operating income of approximately $4.2 million and
$7.7 million, respectively. Also for the year ended December 31,
2006, we have restated our consolidated statements of income to reflect an
increase in our provision for income taxes of approximately $16.0
million. The impact on basic and diluted earnings per share for the years
ended December 31, 2006 and 2005 was $(0.05) and $0.04 per share,
respectively.
Goodwill
The
following summarizes the changes in the carrying amount of
goodwill:
|
Offshore
Oil and Gas Construction
|
Government
Operations
|
Power
Generation Systems
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance
at December 31, 2005
|
$ | - | $ | 12,926 | $ | - | $ | 12,926 | ||||||||
|
Reconsolidation
of B&W PGG
|
- | - | 75,198 | 75,198 | ||||||||||||
|
Translation
|
- | - | 1,102 | 1,102 | ||||||||||||
|
Balance
at December 31, 2006
|
- | 12,926 | 76,300 | 89,226 | ||||||||||||
|
Acquisition
of Marine Mechanical Corporation (Note 2)
|
- | 39,005 | - | 39,005 | ||||||||||||
|
Acquisition
of Assets from Secunda International Limited (Note 2)
|
29,066 | - | - | 29,066 | ||||||||||||
|
Translation
|
457 | - | 779 | 1,236 | ||||||||||||
|
Balance
at December 31, 2007
|
$ | 29,523 | $ | 51,931 | $ | 77,079 | $ | 158,533 | ||||||||
Other
Intangible Assets
We report
our other intangible assets in other assets. We amortize those
intangible assets which have definite lives to operating expense, using the
straight-line method.
During
the year ended December 31, 2007, we acquired the following intangible assets
subject to amortization (dollars in thousands; periods in years):
|
Intangible
Asset Class
|
Amount
|
Weighted-Average
Amortization Period
|
||||||
|
Customer
Relationship
|
$ | 31,720 | 14 | |||||
|
Backlog
|
9,540 | 5 | ||||||
|
Trade
Name
|
1,770 | 5 | ||||||
| $ | 43,030 | 11 | ||||||
None of
these acquired intangible assets have any residual value. See Note 2
for additional details on these acquired intangible assets.
Other
assets include the following other intangible assets:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Amortized
intangible assets:
|
||||||||||||
|
Gross
cost:
|
||||||||||||
|
Customer
relationships
|
$ | 31,927 | $ | - | $ | - | ||||||
|
Acquired
backlog
|
9,540 | - | - | |||||||||
|
Trade
name
|
1,770 | - | - | |||||||||
|
All
other
|
7,737 | 9,886 | 959 | |||||||||
|
Total
|
$ | 50,974 | $ | 9,886 | $ | 959 | ||||||
|
Accumulated
amortization:
|
||||||||||||
|
Customer
relationships
|
$ | (2,578 | ) | $ | - | $ | - | |||||
|
Acquired
backlog
|
(1,363 | ) | - | - | ||||||||
|
Trade
name
|
(236 | ) | - | - | ||||||||
|
All
other
|
(3,994 | ) | (5,586 | ) | (959 | ) | ||||||
|
Total
|
$ | (8,171 | ) | $ | (5,586 | ) | $ | (959 | ) | |||
|
Net
amortized intangible assets
|
$ | 42,803 | $ | 4,300 | $ | - | ||||||
|
Unamortized
intangible assets:
|
||||||||||||
|
Trademarks
|
$ | 1,305 | $ | 1,305 | $ | - | ||||||
The
following summarizes the changes in the carrying amount of other intangible
assets:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 5,605 | $ | - | $ | 12 | ||||||
|
Reconsolidation
of B&W PGG
|
- | 6,071 | - | |||||||||
|
Acquisition
of Marine Mechanical Corporation
|
31,100 | - | - | |||||||||
|
Acquisition
of Secunda International Limited assets
|
11,930 | - | - | |||||||||
|
Amortization
expense
|
(4,735 | ) | (466 | ) | (12 | ) | ||||||
|
Translation
|
208 | - | - | |||||||||
|
Balance
at end of period
|
$ | 44,108 | $ | 5,605 | $ | - | ||||||
The
estimated amortization expense for the next five fiscal years are as
follows:
|
Year Ended December 31,
|
Amount
|
|||
|
2008
|
$ | 8,054 | ||
|
2009
|
$ | 6,377 | ||
|
2010
|
$ | 5,781 | ||
|
2011
|
$ | 4,828 | ||
|
2012
|
$ | 1,689 | ||
Other
Non-Current Assets
We have
included deferred debt issuance costs in other assets. We amortize
deferred debt issuance cost as interest expense over the life of the related
debt. Following are the changes in the carrying amount of these
assets:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 19,798 | $ | 11,614 | $ | 13,977 | ||||||
|
Additions
(1)
|
3,625 | 10,170 | 949 | |||||||||
|
Reconsolidation
of B&W PGG
|
- | 9,873 | - | |||||||||
|
Terminations
and retirements
|
- | (7,865 | ) | - | ||||||||
|
Interest
expense – debt issuance costs
|
(8,912 | ) | (3,994 | ) | (3,312 | ) | ||||||
|
Balance
at end of period
|
$ | 14,511 | $ | 19,798 | $ | 11,614 | ||||||
|
(1) For the year ended December
31, 2007, additions are deferred debt issuance costs related to amendments
to the credit facilities of our Power Generation Systems segment ($2.1
million) and our Offshore Oil and Gas Construction segment ($1.5
million). For the year ended December 31, 2006, additions are
deferred debt issuance costs related to our Offshore Oil and Gas segment
and performance guarantees.
|
||||||||||||
Capitalization
of Interest Cost
We
capitalize interest in accordance with SFAS No. 34, “Capitalization of Interest
Cost.” We incurred total interest of $28.5 million, $33.4 million and
$33.7 million in the years ended December 31, 2007, 2006 and 2005, respectively,
of which we capitalized $6.0 million, $3.1 million and $1.9 million in the years
ended December 31, 2007, 2006 and 2005, respectively.
Restricted
Cash and Cash Equivalents
We record
current cash and cash equivalents as restricted when we are unable to freely use
such cash and cash equivalents for our general operating purposes.
Our cash
equivalents are highly liquid investments, with maturities of three months or
less when we purchase them, which we do not hold as part of our investment
portfolio.
At
December 31, 2007, we had total restricted cash and cash equivalents of $64.8
million. The restricted cash and cash equivalents include the
following: $0.7 million, which is required to meet reinsurance
reserve requirements of our captive insurance companies, and $64.1 million,
which is held in restricted foreign accounts.
Derivative
Financial Instruments
Our
worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments to
reduce the impact of changes in foreign exchange rates on our operating
results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts that are
denominated in currencies other than our operating entities’ functional
currencies. We record these contracts at fair value on our
consolidated balance sheet. Depending on the hedge designation at the
inception of the contract, the related gains and losses on these contracts are
either deferred in stockholders’ equity (deficit) (as a component of accumulated
other comprehensive loss) until the hedged item is recognized in earnings or
offset against the change in fair value of the hedged firm commitment through
earnings. Any ineffective portion of a derivative’s change in fair
value is immediately recognized in earnings. The gain or loss on a
derivative financial instrument not designated as a hedging instrument is also
immediately recognized in earnings. Gains and losses on derivative
financial instruments that require immediate recognition are included as a
component of other income (expense) – net in our consolidated statements of
income.
Self-Insurance
We have
several wholly owned insurance subsidiaries that provide workers compensation,
employer’s liability, general and automotive liability and workers’ compensation
insurance and, from time to time, builder’s risk insurance (within certain
limits) and marine hull to our companies. We may also, in the future, have these
insurance subsidiaries accept other risks that we cannot or do not wish to
transfer to outside insurance companies. Reserves related to these
insurance programs are based on the facts and circumstances specific to the
insurance claims, our past experience with similar claims, loss factors and the
performance of the outside insurance market for the type of risk at issue. The
actual outcome of insured claims could differ significantly from estimated
amounts. We maintain actuarially determined accruals in our consolidated balance
sheets to cover self-insurance retentions for these coverages. These accruals
are based on assumptions developed utilizing historical data to project future
losses. Loss estimates in the calculation of these accruals are adjusted as
required based upon actual claim settlements and reported claims. These loss
estimates and accruals recorded in our financial statements for claims have
historically been reasonable in light of the actual amount of claims
paid.
Loss
Contingencies
We
estimate liabilities for loss contingencies when it is probable that a liability
has been incurred and the amount of loss is reasonably estimable. We
provide disclosure when there is a reasonable possibility that the ultimate loss
will exceed the recorded provision or if such loss is not reasonably
estimable. We are currently involved in some significant litigation,
as discussed in Note 11. We have accrued our estimates of the
probable losses associated with these matters. However, our losses
are typically resolved over long periods of time and are often difficult to
estimate due to various factors, including the possibility of multiple actions
by third parties. Therefore, it is possible future earnings could be affected by
changes in our estimates related to these matters.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the provisions of the revised SFAS No. 123,
“Share-Based Payment” (“SFAS No. 123(R)”), on a modified prospective application
basis. SFAS No. 123(R) eliminates the alternative permitted under
SFAS No. 123, “Accounting for Stock-Based Compensation,” to use the intrinsic
value method described in Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”), under which issuing
stock options to employees generally did not result in recognition
of
compensation. Under the provisions of SFAS No. 123(R) and using the
modified prospective application method, we recognize stock-based compensation
based on the grant date fair value, net of an estimated forfeiture rate, for all
share-based awards granted after December 31, 2005 and granted prior to, but not
yet vested as of, December 31, 2005 on a straight-line basis over the requisite
service periods of the awards, which is generally equivalent to the vesting
term. Under the modified prospective application, the results of
prior periods are not restated.
Prior to
January 1, 2006, we accounted for our stock-based compensation plans using the
intrinsic value method under APB No. 25 and related
interpretations. Under APB No. 25, if the exercise price of the
employee stock option equaled or exceeded the fair value of the underlying stock
on the measurement date, no compensation expense was recognized. If the
measurement date was later than the date of grant, compensation expense was
recorded to the measurement date based on the quoted market price of the
underlying stock at the end of each reporting period.
Under
SFAS No. 123(R), the fair value of equity-classified awards, such as restricted
stock, performance shares and stock options, is determined on the date of grant
and is not remeasured. Grant date fair values for restricted stock
and performance shares are determined using the closing price of our common
stock on the date of grant. Grant date fair values for stock options
are determined using the Black-Scholes option-pricing model
(“Black-Scholes”). The determination of the fair value of a
share-based payment award on the date of grant using an option-pricing model
requires the input of highly subjective assumptions, such as the expected life
of the award and stock price volatility. For liability-classified
awards, such as cash-settled deferred stock units and performance units, fair
values are determined at grant date using the closing price of our common stock
and are remeasured at the end of each reporting period through the date of
settlement.
SFAS No.
123(R) requires compensation expense to be recognized, net of an estimate for
forfeitures, such that compensation expense is recorded only for those awards
expected to vest. We will review the estimate for forfeitures
periodically and record any adjustments deemed necessary for each reporting
period. If our actual
forfeiture
rate is materially different from our estimate, the stock-based compensation
expense could be significantly different from what we have recorded in the
current period.
Additionally,
SFAS No. 123(R) amends SFAS No. 95, “Statement of Cash Flows,” to require excess
tax benefits to be reported as a financing cash flow, rather than as a reduction
of taxes paid. These excess tax benefits result from tax deductions
in excess of the cumulative compensation expense recognized for options
exercised and other equity-classified awards. Prior to the adoption
of SFAS No. 123(R), we presented all tax benefits resulting from the exercise of
stock options as operating cash flows in our consolidated statement of cash
flows.
On March
29, 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) 107 to address certain issues related to SFAS No. 123(R). SAB
107 provides guidance on transition methods, valuation methods, income tax
effects and other share-based payment topics, and we applied this guidance in
our adoption of SFAS No. 123(R).
On
November 10, 2005, the FASB issued FSP No. FAS No. 123(R)-3, “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards”
(“FSP 123(R)-3”). FSP 123(R)-3 provides for an alternative transition
method for establishing the beginning balance of the additional paid-in capital
pool (“APIC pool”) related to the tax effects of employee share-based
compensation, which is available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS No. 123(R). We have elected to
adopt this alternative transition method, otherwise known as the “simplified
method,” in establishing our beginning APIC pool at January 1,
2006.
See Note
10 for further discussion on stock-based compensation.
Stock
options granted to employees of certain subsidiaries in our Power Generation
Systems segment during the pendency of their Chapter 11 Bankruptcy proceedings
were accounted for using the fair value method of SFAS No. 123, as these
employees were not considered employees of MII for purposes of APB No.
25. In addition, for the year ended December 31, 2005, our
stock-based compensation cost included amounts related to stock options that
required variable accounting.
New
Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157
became effective for our financial assets and liabilities on January 1,
2008. On February 12, 2008, the FASB issued FSP No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” to provide a partial deferral of
SFAS No. 157. The FSP defers the effective date of SFAS No. 157 for
all nonfinancial assets and liabilities, excluding those recognized or disclosed
at fair value in an entity’s financial statements on a recurring basis (at least
annually), until fiscal years beginning after November 15, 2008. SFAS
No. 157 is not expected to materially affect our determination of fair value but
may result in additional disclosures.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to
measure certain financial assets and certain other items at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS No. 159 became
effective for us on January 1, 2008. We do not plan to elect the fair
value option for any of our existing financial instruments on the effective date
and have not determined whether or not we will elect the option for any eligible
financial instruments we acquire in the future.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51.” SFAS
No. 160 establishes accounting and reporting standards pertaining to ownership
interests in subsidiaries held by parties other than the parent, the amount of
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest and the valuation of any retained
noncontrolling equity investment when a subsidiary is
deconsolidated. It also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 will be
effective for us January 1, 2009. We are currently reviewing this new
guidance to determine the impact on our consolidated financial condition,
results of operations and related disclosures.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”), which amends SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) broadens the guidance of SFAS No. 141,
extending its applicability to all transactions and events in which one entity
obtains control over one or more other businesses. It broadens the
fair value measurements and recognition of assets acquired, liability assumed
and interests transferred as a result of business combinations. It
also provides disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of business
combinations. SFAS No. 141(R) will be effective for us January 1,
2009. We do not expect the adoption of SFAS No. 141(R) to have a
material effect on our consolidated financial statements. However, we
are reviewing the effects SFAS No. 141(R) may have on future business
combinations.
NOTE
2 – BUSINESS ACQUISITIONS
Acquisition
of Marine Mechanical Corporation
On May 1, 2007, our Government
Operations segment completed its stock acquisition of Marine Mechanical
Corporation for approximately $72 million in cash. In addition, we
recognized liabilities in excess of those directly assumed from Marine
Mechanical Corporation of approximately $16 million, primarily related to
deferred income taxes. We recorded goodwill of approximately $39
million in connection with this acquisition, none of which will be deductible
for tax purposes. Headquartered in Euclid, Ohio, Marine Mechanical
Corporation designs, manufactures and supplies electro-mechanical equipment used
by the U.S. Navy. In addition to the goodwill, we recorded
identifiable intangible assets of approximately $31 million, which have a
weighted-average amortization period of 14.4 years. Those intangible
assets consist of the following (amounts in thousands):
|
Amortization
|
|||||
|
Amount
|
Period
|
||||
|
Customer
Relationship
|
$ | 19,790 |
20.0
years
|
||
|
Backlog
|
$ | 9,540 |
4.7
years
|
||
|
Trade
Name
|
$ | 1,770 |
5.0
years
|
||
Acquisition
of Assets from Secunda International Limited
On July
27, 2007, our Offshore Oil and Gas Construction segment completed its
acquisition of substantially all of the assets of Secunda International Limited,
including 14 harsh-weather, multi-functional vessels, with capabilities which
include subsea construction, pipelay, cable lay and dive support, as well as its
shore-based operations, for approximately $263 million in cash and the
assumption of approximately $10 million of liabilities, including approximately
$4 million related to deferred income taxes. We recorded goodwill of
approximately $29 million in connection with this acquisition, none of which
will be deductible for tax purposes. In addition to the goodwill, we
recorded identifiable intangible assets of approximately $12 million related to
contractual customer relationships, which have a weighted-average amortization
period of 3.6 years.
NOTE
3 –DISCONTINUED OPERATIONS
In April
2006, we completed the sale of our Mexican subsidiary, Talleres Navales del
Golfo, S.A. de C.V. (“TNG”), previously a component of our Offshore Oil and Gas
Construction segment. As a result of that sale, we received proceeds
of $19.5 million and recorded a gain of $13.8 million. The gain is
included in discontinued operations in our consolidated statement of income for
the year ended December 31, 2006.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the consolidated statement of income for the year ended
December 31, 2005 has been restated for consistency to reflect TNG as a
discontinued operation. Condensed financial information for our operations
reported in discontinued operations is as follows:
|
Year
Ended December 31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
thousands)
|
||||||||
|
Revenues
|
$ | 4,466 | $ | 16,571 | ||||
|
Income
(Loss) before Provision for (Benefit
from) Income Taxes
|
$ | (802 | ) | $ | 686 | |||
NOTE
4 – EQUITY METHOD INVESTMENTS
We have
investments in entities that we account for using the equity
method. The undistributed earnings of our equity method investees
were $33.5 million and $28.5 million at December 31, 2007 and 2006,
respectively.
Summarized
below is combined balance sheet and income statement information, based on the
most recent financial information, for investments in entities we accounted for
using the equity method:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Current
Assets
|
$ | 228,213 | $ | 196,809 | ||||
|
Noncurrent
assets
|
117,400 | 116,640 | ||||||
|
Total
Assets
|
$ | 345,613 | $ | 313,449 | ||||
|
Current
Liabilities
|
$ | 121,244 | $ | 120,313 | ||||
|
Noncurrent
Liabilities
|
82,418 | 73,065 | ||||||
|
Owners’
Equity
|
141,951 | 120,071 | ||||||
|
Total
Liabilities and Owners’ Equity
|
$ | 345,613 | $ | 313,449 | ||||
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Revenues
|
$ | 1,889,273 | $ | 1,829,688 | $ | 1,831,573 | ||||||
|
Gross
Profit
|
$ | 152,063 | $ | 138,312 | $ | 117,088 | ||||||
|
Income
before Provision for Income Taxes
|
$ | 114,551 | $ | 101,743 | $ | 90,812 | ||||||
|
Provision
for Income Taxes
|
15,916 | 10,732 | 4,642 | |||||||||
|
Net
Income
|
$ | 98,635 | $ | 91,011 | $ | 86,170 | ||||||
Revenues
of equity method investees include $1,392.7 million, $1,403.4 million and
$1,660.5 million of reimbursable costs recorded by limited liability companies
in our Government Operations segment at December 31, 2007, 2006 and 2005,
respectively. Our investment in equity method investees was less than
our underlying equity in net assets of those investees based on stated ownership
percentages by $1.4 million at December 31, 2007. These differences
were primarily related to the timing of distribution of dividends and various
adjustments under U.S. GAAP.
The
provision for income taxes is based on the tax laws and rates in the countries
in which our investees operate. There is no expected relationship
between the provision for income taxes and income before provision for
income
taxes. The
taxation regimes vary not only by their nominal rates, but also by the
allowability of deductions, credits and other benefits. For some of our U.S.
investees, U.S. income taxes are the responsibility of the respective
owners.
Reconciliation
of net income per combined income statement information to equity in income from
investees per our consolidated statements of income is as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Equity
income based on stated ownership percentages
|
$ | 46,966 | $ | 42,366 | $ | 40,722 | ||||||
|
Sale
of shares in foreign entity
|
- | - | 3,073 | |||||||||
|
Impairment
of investment
|
- | (2,609 | ) | - | ||||||||
|
All
other adjustments due to amortization of basis differences, timing of GAAP
adjustments, dividend distributions and other adjustments
|
(5,242 | ) | (2,233 | ) | (3,272 | ) | ||||||
|
Equity
in income from investees
|
$ | 41,724 | $ | 37,524 | $ | 40,523 | ||||||
Our
transactions with unconsolidated affiliates include the following:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Sales
to
|
$ | 9,750 | $ | 48,407 | $ | 81,311 | ||||||
|
Purchases
from
|
$ | 42,686 | $ | 31,602 | $ | - | ||||||
|
Leasing
activities (included in sales to)
|
$ | - | $ | 36,020 | $ | 74,170 | ||||||
|
Dividends
received
|
$ | 41,844 | $ | 39,072 | $ | 35,809 | ||||||
During
the year ended December 31, 2005, we leased certain marine equipment to an
unconsolidated affiliate. During the year ended December 31, 2006, we
disposed of our interest in that unconsolidated affiliate. As
discussed further in Note 13, during the year ended December 31, 2004, we sold
the vessel DB17 to that unconsolidated affiliate. However, we
deferred recognition of the gain on that sale until the receivables were
settled. Such settlement occurred during the year ended December 31,
2007, and we recognized the gain on sale of approximately $5.4
million.
Effective
January 1, 2006, we converted the accounting for our investment in Babcock &
Wilcox Beijing Company, Ltd., a Chinese entity, from the cost method to the
equity method. As a result of this conversion, we recorded
adjustments to retained earnings of $7.0 million and to cumulative translation
adjustment of $0.2 million at January 1, 2006. For the years ended
December 31, 2007 and 2006, we recognized $10.3 million and $8.3 million,
respectively, of equity income related to this entity.
NOTE
5 - INCOME TAXES
We
provide for income taxes based on the tax laws and rates in the countries in
which we conduct our operations. MII is a Panamanian corporation that has earned
all of its income outside of Panama. As a result, we are not subject to income
tax in Panama. We operate in the U.S. taxing jurisdiction and various other
taxing jurisdictions around the world. Each of these jurisdictions has a regime
of taxation that varies from the others. The taxation regimes vary not only with
respect to nominal rates, but also with respect to the basis on which these
rates are applied. These variances, along with variances in our mix of income
from these jurisdictions, contribute to shifts in our effective tax
rate.
On
December 31, 2006, we completed a reorganization of our U.S. tax groups into a
single consolidated U.S. tax group. This reorganization provides us
with administrative efficiencies, the opportunity to increase the flexibility of
our financial structure and returns us to a more tax-efficient legal
structure. Beginning January 1, 2007, the results of the former separate
U.S. tax groups are consolidated.
We
conduct business globally, and as a result, we or one or more of our
subsidiaries file income tax returns in the U.S. federal jurisdiction and in
many state and foreign jurisdictions. In the normal course of
business, we are subject to examination by taxing authorities throughout the
world, including such major jurisdictions as Canada,
Indonesia,
Malaysia, China, Singapore, Saudi Arabia, Kuwait, India, Qatar, Azerbaijan and
the United States. With few exceptions, we are no longer subject to
non-U.S. tax examinations for years prior to 2000.
Both of
our former U.S. tax groups are currently under audit by the Internal Revenue
Service (the “IRS”). The IRS examination of the years 1993 through
2003 for one group has been completed. We are awaiting final
resolution of all disputed adjustments from an appellate conference with the IRS
and a subsequent review by the Joint Committee on
Taxation. Additionally, the IRS has commenced the examination for the
years 2004 through 2006 for this group. The IRS examination of the years 1996
through 2003 for the other group is also complete and is pending review by the
Joint Committee on Taxation. It is anticipated that a settlement with
the IRS for all years under audit may be reached within the next 12
months.
State
income tax returns are generally subject to examination for a period of three to
five years after filing the respective returns. With few exceptions,
we do not have any state returns under examination for years prior to
2000.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). As a result
of this adoption, we recognized a charge of approximately $12.0 million to our
accumulated deficit component of stockholders’ equity. A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (amounts in millions):
|
Balance
at January 1, 2007
|
$ | 70,433 | ||
|
Increases
based on tax positions taken in the current year
|
2,217 | |||
|
Increases
based on tax positions taken in the prior years
|
7,742 | |||
|
Decreases
based on tax positions taken in the prior years
|
(12,759 | ) | ||
|
Decreases
due to settlements with tax authorities
|
(2,313 | ) | ||
|
Decreases
due to lapse of applicable statute of limitations
|
(510 | ) | ||
|
Balance
at December 31, 2007
|
$ | 64,810 |
Approximately
$63.4 million of the balance of unrecognized tax benefits at December 31, 2007
would reduce our effective tax rate if recognized. The
remaining balance relates to positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an earlier
period.
As part
of the adoption of FIN 48, we began to recognize interest and penalties related
to unrecognized tax benefits in income tax expense. As of the date of
implementation, we recorded liabilities of approximately $27.3 million for the
payment of tax-related interest and penalties, including amounts recorded upon
implementation. At December 31, 2007, we have
recorded liabilities of approximately $20.4 million for the payment of
tax-related interest and penalties. The $6.9 million change during
the year is attributable to the reassessment of certain tax positions from the
U.S. federal audits described above, as well as payment of interest to the state
of Virginia from a prior audit settlement.
It is
reasonably possible that within the next 12 months we will see a decrease of
approximately $22.6 million in unrecognized tax benefits and a related $8.7
million of interest and penalties as a result of settling various federal, state
and international audits.
Deferred
income taxes reflect the net tax effects of temporary differences between the
financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of December 31, 2007 and
2006 were as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Pension
liability
|
$ | 93,393 | $ | 151,709 | ||||
|
Minimum
tax credit carryforward
|
26,536 | 5,576 | ||||||
|
Accrued
warranty expense
|
36,318 | 26,690 | ||||||
|
Accrued
vacation pay
|
11,209 | 10,101 | ||||||
|
Accrued
liabilities for self-insurance
(including
postretirement health care benefits)
|
52,057 | 51,710 | ||||||
|
Accrued liabilities for executive and employee incentive
compensation
|
62,733 | 49,155 | ||||||
|
Investments
in joint ventures and affiliated companies
|
1,667 | 2,151 | ||||||
|
Net
operating loss carryforward
|
20,007 | 122,563 | ||||||
|
Environmental
and products liabilities
|
29,068 | 27,982 | ||||||
|
Long-term
contracts
|
16,459 | 30,015 | ||||||
|
Accrued
interest
|
1,602 | 770 | ||||||
|
State
tax net operating loss carryforward
|
67,473 | 109,772 | ||||||
|
Capital
loss carryforward
|
- | 3,419 | ||||||
|
Foreign
tax credit carryforward
|
18,583 | 18,670 | ||||||
|
Other
|
15,290 | 17,556 | ||||||
|
Total
deferred tax assets
|
452,395 | 627,839 | ||||||
|
Valuation
allowance for deferred tax assets
|
(100,617 | ) | (152,950 | ) | ||||
|
Deferred
tax assets
|
351,778 | 474,889 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property,
plant and equipment
|
27,430 | 30,336 | ||||||
|
Prepaid
drydock
|
9,832 | 11,113 | ||||||
|
Investments
in joint ventures and affiliated companies
|
7,883 | 7,896 | ||||||
|
Intangibles
|
15,183 | - | ||||||
|
Other
|
7,146 | 6,527 | ||||||
|
Total
deferred tax liabilities
|
67,474 | 55,872 | ||||||
|
Net
deferred tax assets
|
$ | 284,304 | $ | 419,017 | ||||
Income
from continuing operations before provision for income taxes was as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
U.S.
|
$ | 266,984 | $ | 89,910 | $ | 56,750 | ||||||
|
Other
than U.S.
|
478,481 | 262,906 | 157,660 | |||||||||
|
Income
from continuing operations before provision for income
taxes
|
$ | 745,465 | $ | 352,816 | $ | 214,410 | ||||||
The
provision for income taxes consisted of:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
U.S.
– Federal
|
$ | (16,872 | ) | $ | (207,675 | ) | $ | 28,727 | ||||
|
U.S.
– State and local
|
6,621 | 12,829 | 2,863 | |||||||||
|
Other
than U.S.
|
58,264 | 50,574 | 24,794 | |||||||||
|
Total
current
|
48,013 | (144,272 | ) | 56,384 | ||||||||
|
Deferred:
|
||||||||||||
|
U.S.
- Federal
|
93,815 | 186,721 | (47,685 | ) | ||||||||
|
U.S.
– State and local
|
687 | (321 | ) | 128 | ||||||||
|
Other
than U.S.
|
(4,878 | ) | (6,933 | ) | - | |||||||
|
Total
deferred
|
89,624 | 179,467 | (47,557 | ) | ||||||||
|
Provision
for income taxes
|
$ | 137,637 | $ | 35,195 | $ | 8,827 | ||||||
The
following is a reconciliation of the U.S. statutory federal tax rate (35%) to
the consolidated effective tax rate:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
U.S.
federal statutory (benefit) rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
and local income taxes
|
0.8 | 2.1 | 2.0 | |||||||||
|
Non-U.S.
operations
|
(13.7 | ) | (9.4 | ) | (14.2 | ) | ||||||
|
Non-deductible
Chapter 11 Bankruptcy expense
|
- | - | 1.6 | |||||||||
|
Expiration
of foreign tax credits
|
- | 3.0 | - | |||||||||
|
Valuation
allowance for deferred tax assets
|
(2.0 | ) | (22.8 | ) | (21.3 | ) | ||||||
|
Other
|
(1.6 | ) | 2.1 | 1.0 | ||||||||
|
Effective
tax rate attributable to continuing operations
|
18.5 | % | 10.0 | % | 4.1 | % | ||||||
For the
year ended December 31, 2005, we recorded a tax provision benefit of $50.4
million from the reversal of the valuation allowance related to our minimum
pension liability. For the year ended December 31, 2006, we
reduced the valuation allowance $78.1 million on various deferred assets and
recorded a benefit to the provision as a result of the reorganization of our
U.S. legal entities.
At
December 31, 2007, we had a valuation allowance of $100.6 million for
deferred tax assets, which we expect cannot be realized through carrybacks,
future reversals of existing taxable temporary differences and our estimate of
future taxable income. We believe that our remaining deferred tax assets are
realizable through carrybacks, future reversals of existing taxable temporary
differences and our estimate of future taxable income. Any changes to our
estimated valuation allowance could be material to our consolidated financial
statements.
We have
foreign net operating loss carryforwards of approximately $55.6 million
available to offset future taxable income in foreign jurisdictions.
Approximately $16.4 million of the foreign net operating loss carryforwards
is scheduled to expire in 2008 to 2010. The foreign net operating losses have a
valuation allowance of $11.4 million against them. We have domestic net
operating loss carryforwards of approximately $121.7 million available to
offset future taxable income in domestic jurisdictions, including
$115.4 million of losses related to exercised stock options that will be
reflected as an addition to capital in excess of par when utilized. The domestic
net operating loss carryforwards are scheduled to expire in years 2009 to 2026.
We have state net operating losses of $1,087.3 million available to offset
future taxable income in various states. The state net operating loss
carryforwards begin to expire in the year 2008. The state net operating losses
have a valuation allowance against the entire carryforward.
We would
be subject to withholding taxes if we were to distribute earnings from our U.S.
subsidiaries and certain foreign subsidiaries. For the year ended
December 31, 2007, the undistributed earnings of these subsidiaries were
$589.4 million. Unrecognized deferred income tax liabilities, including
withholding taxes, of approximately
$172.9 million
would be payable upon distribution of these earnings. We have provided $3.1
million of taxes on earnings we intend to remit. All other earnings
are considered permanently reinvested.
NOTE
6 - LONG-TERM DEBT AND NOTES PAYABLE
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Long-term
debt consists of:
|
||||||||
|
Unsecured
Debt:
|
||||||||
|
Other
notes payable through 2009 (interest at various rates up to
6.8%)
|
$ | 14,824 | $ | 19,283 | ||||
|
Secured
Debt:
|
||||||||
|
Power
Generation Systems – various notes payable
|
2,384 | 2,455 | ||||||
|
Power
Generation Systems – term loan due 2012
($250,000
principal amount)
|
- | 250,000 | ||||||
| 17,208 | 271,738 | |||||||
|
Less: Amounts
due within one year
|
6,599 | 256,496 | ||||||
|
Long-term
debt
|
$ | 10,609 | $ | 15,242 | ||||
|
Notes
payable and current maturities of long-term debt consist
of:
|
||||||||
|
Short-term
lines of credit
|
$ | - | $ | 996 | ||||
|
Current
maturities of long-term debt
|
6,599 | 256,496 | ||||||
|
Total
|
$ | 6,599 | $ | 257,492 | ||||
|
Weighted
average interest rate on short-term borrowing
|
- | 6.70 | % | |||||
Maturities
of long-term debt during the five years subsequent to December 31, 2007 are as
follows: 2008 – $6.6 million; 2009 – $4.6 million; 2010 – $0.4 million; 2011 –
$0.4 million; and 2012 – $4.4 million.
Offshore
Oil and Gas Construction
On June
6, 2006, one of our subsidiaries, J. Ray McDermott, S.A. entered into a senior
secured credit facility with a syndicate of lenders (the “JRMSA Credit
Facility”). During July 2007, the JRMSA Credit Facility was amended
to, among other things, (1) increase the revolving credit facility by $100
million to $500 million and eliminate a synthetic letter of credit facility, (2)
reduce the commitment fees and applicable margins for revolving loans and
letters of credit and (3) eliminate the limitation on revolving credit
borrowings. The JRMSA Credit Facility now consists of a five-year,
$500 million revolving credit facility (under which all of the credit capacity
may be used for the issuance of letters of credit and revolver borrowings),
which matures on June 6, 2011. The proceeds of the JRMSA Credit
Facility are available for working capital needs and other general corporate
purposes of our Offshore Oil and Gas Construction segment.
JRMSA’s
obligations under the JRMSA Credit Facility are unconditionally guaranteed by
substantially all of our wholly owned subsidiaries comprising our Offshore Oil
and Gas Construction segment and secured by liens on substantially all the
assets of those subsidiaries (other than cash, cash equivalents, equipment and
certain foreign assets), including their major marine vessels. JRMSA is
permitted to prepay amounts outstanding under the JRMSA Credit Facility at any
time without penalty. Other than customary mandatory prepayments on
certain contingent events, the JRMSA Credit Facility requires only interest
payments on a quarterly basis until maturity. Loans outstanding under
the JRMSA Credit Facility bear interest at either the Eurodollar rate plus a
margin ranging from 1.00% to 1.75% per year or the base rate plus a margin
ranging from 0.00% to 0.75% per year. If there had been borrowings
under this facility, the applicable interest rate at December 31, 2007 would
have been 6.35% per year. The applicable margin for revolving loans
varies depending on credit ratings of the JRMSA Credit
Facility. JRMSA is charged a commitment fee on the unused portions of
the JRMSA Credit Facility, and that fee varies between 0.25% and 0.375% per year
depending on credit ratings of the JRMSA Credit
Facility. Additionally, JRMSA is charged a letter of credit fee of
between 1.00% and 1.75% per year with respect to the amount of each letter of
credit issued under the JRMSA Credit Facility depending on credit ratings of the
JRMSA Credit Facility. An additional 0.125% annual fee is charged on
the amount of each letter of credit issued under the JRMSA Credit
Facility.
The JRMSA
Credit Facility contains customary financial covenants relating to leverage and
interest coverage and includes covenants that restrict, among other things, debt
incurrence, liens, investments, acquisitions, asset dispositions, dividends,
prepayments of subordinated debt, mergers, transactions with affiliates and
capital expenditures. At December 31, 2007, JRMSA was in compliance
with all of the covenants set forth in the JRMSA Credit Facility.
At
December 31, 2007, there were no borrowings outstanding and letters of credit
issued under the JRMSA Credit Facility totaled $279.2 million. In addition,
JRMSA and its subsidiaries had $172.8 million in outstanding unsecured letters
of credit under separate arrangements with financial institutions at December
31, 2007. At December 31, 2007, there was $220.8 million available
for borrowings or to meet letter of credit requirements under the JRMSA Credit
Facility.
On
December 22, 2005, JRMSA, as guarantor, and its subsidiary, J. Ray McDermott
Middle East, Inc., entered into a $105.2 million unsecured performance guarantee
issuance facility with a syndicate of commercial banking institutions. The
outstanding amount under this facility is included in the $172.8 million
outstanding referenced above. This facility provides credit support
for bank guarantees issued in connection with three major projects. The term of
this facility is for the duration of these projects, and the average commission
rate is less than 4.5% on an annualized basis.
On June
6, 2006, JRMSA completed a cash tender offer for all its outstanding 11% senior
secured notes due 2013 (the “Secured Notes”). The tender offer
consideration was based on a fixed-spread over specified U.S. Treasury
securities, which equated to an offer price of approximately 119% of the
principal amount of the notes. JRMSA used cash on hand to purchase
the entire $200 million in aggregate principal amount of the Secured Notes
outstanding for approximately $249.0 million, including accrued interest of
approximately $10.9 million. As a result of this early retirement of
debt, we recognized $49.0 million of expense during the year ended December 31,
2006.
Government
Operations
On
December 9, 2003, one of our subsidiaries, BWX Technologies, Inc. entered into a
senior unsecured credit facility with a syndicate of lenders (the “BWXT Credit
Facility”), which is currently scheduled to mature March 18, 2010. On
October 29, 2007, the BWXT Credit Facility was amended to reduce the applicable
margins for revolving loans and letters of credit. This facility
provides for borrowings and issuances of letters of credit in an aggregate
amount of up to $135 million. The proceeds of the BWXT Credit Facility are
available for working capital needs and other general corporate purposes of our
Government Operations segment.
The BWXT
Credit Facility requires BWXT to comply with various financial and nonfinancial
covenants and reporting requirements. The financial covenants require
maintenance of a maximum leverage ratio, a minimum fixed charge coverage ratio
and a maximum debt to capitalization ratio within our Government Operations
segment. At December 31, 2007, BWXT was in compliance with all of the
covenants set forth in the BWXT Credit Facility.
Loans
outstanding under the BWXT Credit Facility bear interest at either the
Eurodollar rate plus a margin ranging from 1.25% to 1.75% per year or the base
rate plus a margin ranging from 0.25% and 0.75% per year. The
applicable margin for revolving loans varies depending on the leverage ratio of
our Government Operations segment as of the last day of the preceding fiscal
quarter. If there had been borrowings under this facility, the
applicable interest rate at December 31, 2007 would have been 5.85% per
year. BWXT is charged an annual commitment fee of 0.375%, which is
payable quarterly. Additionally, BWXT is charged a letter of credit
fee of between 1.25% and 1.75% per year with respect to the amount of each
letter of credit issued, depending on the leverage ratio of our Government
Operations segment as of the last day of the preceding fiscal
quarter. An additional 0.125% per year fee is charged on the amount
of each letter of credit issued.
At
December 31, 2007, there were no borrowings outstanding, and letters of credit
issued under the BWXT Credit Facility totaled $48.0 million. At
December 31, 2007, there was $87.0 million available for borrowings or to meet
letter of credit requirements under the BWXT Credit Facility.
Power
Generation Systems
On
February 22, 2006, one of our subsidiaries, Babcock & Wilcox Power
Generation Group, Inc. entered into a senior secured credit facility with a
syndicate of lenders (the “B&W PGG Credit Facility”). During July 2007, the
B&W PGG Credit Facility was amended to, among other things, (1) increase the
revolving credit facility by $200 million to $400 million and eliminate a
synthetic letter of credit facility and (2) reduce the commitment fees and
applicable margins for revolving loans and letters of credit. The
entire credit availability under the B&W PGG Credit Facility may be used for
the issuance of letters of credit or for borrowings to fund working capital
requirements for our Power Generation System segment. The B&W PGG
Credit Facility also originally included a commitment by certain of the lenders
to loan up to $250 million in term debt to refinance the $250 million promissory
note payable to a trust under the Chapter 11 plan of
reorganization. On November 30, 2006, B&W PGG drew down $250
million on this term loan under the B&W PGG Credit Facility. On
April 12, 2007, the $250 million term loan was retired without
penalty. This payment was made using cash on hand, including the $272
million federal tax refund received on April 12, 2007. This federal
tax refund resulted from carrying back to prior tax years the tax loss generated
in 2006, primarily as a result of the $955 million of asbestos-related payments
made during 2006 in connection with the settlement of asbestos-related claims
made in the Chapter 11 Bankruptcy proceedings.
B&W
PGG’s obligations under the B&W PGG Credit Facility are unconditionally
guaranteed by all of our domestic subsidiaries included in our Power Generation
Systems segment and secured by liens on substantially all the assets of those
subsidiaries, excluding cash and cash equivalents.
Loans
outstanding under the revolving credit subfacility bear interest at either the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. If there had
been borrowings under this facility, the applicable interest rate at December
31, 2007 would have been 5.85% per year. The applicable margin for
revolving loans varies depending on credit ratings of the B&W PGG Credit
Facility. B&W PGG is charged a commitment fee on the unused
portion of the B&W PGG Credit Facility, and that fee varies between 0.25%
and 0.375% per year depending on credit ratings of the B&W PGG Credit
Facility. Additionally, B&W PGG is charged a letter of credit fee
of between 1.00% and 1.75% per year with respect to the amount of each letter of
credit issued under the B&W PGG Credit Facility. An additional
0.125% per year fee is charged on the amount of each letter of credit issued
under the B&W PGG Credit Facility.
The
B&W PGG Credit Facility only requires interest payments on a quarterly basis
until maturity. Amounts outstanding under the B&W PGG Credit
Facility may be prepaid at any time without penalty.
The
B&W PGG Credit Facility contains customary financial covenants within our
Power Generation Systems segment, including maintenance of a maximum leverage
ratio and a minimum interest coverage ratio, and covenants that, among other
things, restrict the ability of this segment to incur debt, create liens, make
investments and acquisitions, sell assets, pay dividends, prepay subordinated
debt, merge with other entities, engage in transactions with affiliates and make
capital expenditures. The B&W PGG Credit Facility also contains customary
events of default. At December 31, 2007, B&W PGG was in
compliance with all of the covenants set forth in the B&W PGG Credit
Facility.
As of
December 31, 2007, there were no outstanding borrowings and letters of credit
issued under the B&W PGG Credit Facility totaled $225.2
million. At December 31, 2007, there was $174.8 million available for
borrowings or to meet letter of credit requirements under the B&W PGG Credit
Facility.
Other
Certain
of our subsidiaries are restricted in their ability to transfer funds to
MII. Such restrictions principally arise from debt covenants,
insurance regulations, national currency controls and the existence of minority
shareholders. We refer to the proportionate share of net assets,
after intercompany eliminations, that may not be transferred to MII as a result
of these restrictions, as “restricted net assets.” At December 31,
2007, the restricted net assets of our consolidated subsidiaries were
approximately $596 million.
NOTE
7 - PENSION PLANS AND POSTRETIREMENT BENEFITS
We have
historically provided defined benefit retirement benefits, primarily
through noncontributory pension plans, for most of our regular
employees. Effective March 31, 2003, the retirement plan for
U.S.-based employees of our Offshore Oil and Gas Construction segment was closed
to new entrants and benefit accruals were frozen for existing participants.
Effective March 31, 2006, the retirement plans for corporate employees and for
U.S.-based salaried employees of our Government Operations and Power Generation
Systems segments were closed to new entrants, and benefit accruals were frozen
for existing salaried participants hired on or after April 1, 2001. Effective
December 31, 2007, the salaried retirement plan acquired with Marine Mechanical
Corporation in May, 2007 was closed to new entrants and benefit accruals were
frozen for existing participants who were not vested as of December 31,
2007. In addition, we do not provide retirement benefits to certain
non-resident alien employees of foreign subsidiaries. Retirement benefits for
salaried employees who accrue benefits in a defined benefit plan are based on
final average compensation and years of service, while benefits for hourly paid
employees are based on a flat benefit rate and years of service. Our
funding policy is to fund the plans as recommended by the respective plan
actuaries and in accordance with the Employee Retirement Income Security Act of
1974, as amended, or other applicable law. The Pension Protection Act of 2006
replaces the current funding provisions for single-employer defined benefit
plans. Funding provisions under the Pension Protection Act accelerate funding
requirements to ensure full funding of benefits accrued. The Pension Protection
Act became effective in 2008, and we do not anticipate any material impact on
our consolidated financial condition or cash flows.
Effective
December 31, 2007, we adopted the measurement date provision of SFAS No. 158,
“Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans,” for our plans that were not on a calendar year measurement. In
accordance with this provision, we recorded a reduction in retained earnings of
$1.7 million, net of a related tax benefit of $0.8 million.
Effective
December 31, 2006, we adopted the recognition and disclosure provisions of SFAS
No. 158. In accordance with SFAS No. 158, the funded status of our
defined benefit pension plans and postretirement plans has been recognized on
our consolidated balance sheets. The initial impact of the standard was to
recognize in accumulated other comprehensive loss all unrecognized prior service
costs and net actuarial gains and losses. Furthermore, additional minimum
pension liabilities and associated intangible assets required under previous
accounting rules were reversed.
In
December 2005, we recorded an additional gain totaling $1.4 million related to
the finalization of the 2004 termination of one of our pension plans in the
United Kingdom.
We make
available other benefits which include postretirement health care and life
insurance benefits to certain salaried and union retirees based on their union
contracts. Certain subsidiaries provide these benefits to unionized and salaried
future retirees.
Obligations
and Funded Status
|
Pension
Benefits
Year
Ended
December
31,
|
Other
Benefits
Year
Ended
December
31,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Change
in benefit obligation:
|
||||||||||||||||
|
Benefit
obligation at beginning of period
|
$ | 2,521,895 | $ | 2,313,191 | $ | 108,697 | $ | 38,999 | ||||||||
|
Service
cost
|
37,766 | 37,724 | 331 | 129 | ||||||||||||
|
Interest
cost
|
149,329 | 133,176 | 5,993 | 5,269 | ||||||||||||
|
Measurement
date change
|
4,203 | - | 189 | - | ||||||||||||
|
Acquisition
of Marine Mechanical Corporation
|
24,830 | - | 1,681 | - | ||||||||||||
|
Plan
participants’ contributions
|
319 | 315 | - | - | ||||||||||||
|
Reconsolidation
of B&W PGG
|
- | 197,750 | - | 66,251 | ||||||||||||
|
Amendments
|
(26,381 | ) | (496 | ) | - | - | ||||||||||
|
Medicare
reimbursement
|
- | - | 19 | - | ||||||||||||
|
Actuarial
(gain) loss
|
10,197 | (26,669 | ) | (2,530 | ) | 8,786 | ||||||||||
|
Foreign
currency exchange rate changes
|
28,436 | 4,728 | 1,332 | (60 | ) | |||||||||||
|
Benefits
paid
|
(144,877 | ) | (137,824 | ) | (12,142 | ) | (10,677 | ) | ||||||||
|
Benefit
obligation at end of period
|
2,605,717 | $ | 2,521,895 | $ | 103,570 | $ | 108,697 | |||||||||
|
Change
in plan assets:
|
||||||||||||||||
|
Fair
value of plan assets at beginning of period
|
$ | 2,050,215 | $ | 1,706,343 | $ | - | $ | - | ||||||||
|
Actual
return on plan assets
|
191,203 | 217,798 | - | - | ||||||||||||
|
Measurement
date change
|
3,027 | - | - | - | ||||||||||||
|
Acquisition
of Marine Mechanical Corporation
|
16,466 | - | - | - | ||||||||||||
|
Plan
participants’ contributions
|
319 | 315 | - | - | ||||||||||||
|
Company
contributions
|
138,630 | 104,668 | 12,142 | 10,676 | ||||||||||||
|
Reconsolidation
of B&W PGG
|
- | 155,190 | - | - | ||||||||||||
|
Foreign
currency exchange rate changes
|
25,001 | 3,725 | - | - | ||||||||||||
|
Benefits
paid
|
(144,877 | ) | (137,824 | ) | (12,142 | ) | (10,676 | ) | ||||||||
|
Fair
value of plan assets at the end of period
|
2,279,984 | 2,050,215 | - | - | ||||||||||||
|
Funded
status
|
$ | (325,733 | ) | $ | (471,680 | ) | $ | (103,570 | ) | $ | (108,697 | ) | ||||
|
Amounts
recognized in the balance sheet consist of:
|
||||||||||||||||
|
Prior
to Adoption of SFAS No. 158
|
||||||||||||||||
|
Accrued
employee benefits
|
N/A | $ | (104,073 | ) | N/A | $ | (8,381 | ) | ||||||||
|
Accumulated
postretirement benefit obligation
|
N/A | - | N/A | (79,716 | ) | |||||||||||
|
Pension
liability
|
N/A | (242,734 | ) | N/A | - | |||||||||||
|
Intangible
asset
|
N/A | 24,539 | N/A | - | ||||||||||||
|
Accumulated
other comprehensive loss
|
N/A | 318,213 | N/A | - | ||||||||||||
|
Net
amount recognized
|
N/A | $ | (4,055 | ) | N/A | $ | (88,097 | ) | ||||||||
|
After
Adoption of SFAS No. 158
|
||||||||||||||||
|
Accrued
employee benefits
|
$ | (159,601 | ) | $ | (104,073 | ) | $ | (7,317 | ) | $ | (8,381 | ) | ||||
|
Accumulated
postretirement benefit obligation
|
- | - | (96,253 | ) | (100,316 | ) | ||||||||||
|
Pension
liability
|
(182,739 | ) | (367,607 | ) | - | - | ||||||||||
|
Prepaid
pension
|
16,607 | - | - | - | ||||||||||||
|
Accrued
benefit liability, net
|
$ | (325,733 | ) | $ | (471,680 | ) | $ | (103,570 | ) | $ | (108,697 | ) | ||||
|
Amounts
recognized in accumulated other comprehensive loss:
|
||||||||||||||||
|
Net
actuarial loss
|
$ | 367,057 | $ | 450,352 | $ | 14,413 | $ | 18,494 | ||||||||
|
Prior
service cost
|
17,401 | 17,273 | 473 | 578 | ||||||||||||
|
Unrecognized
transition obligation
|
- | - | 1,156 | 1,528 | ||||||||||||
|
Total
before taxes
|
$ | 384,458 | $ | 467,625 | $ | 16,042 | $ | 20,600 | ||||||||
The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $2,364.4 million, $2,266.2 million and $2,046.1 million,
respectively, at December 31, 2007 for plans with accumulated benefit obligation
in excess of plan assets. The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets were $241.3 million, $218.4 million and
$233.9 million, respectively, at December 31, 2007 for plans with plan assets in
excess of the accumulated benefit obligation. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for all pension
plans were $2,521.9 million, $2,397.0 million and $2,050.2 million,
respectively, at December 31, 2006. The accumulated benefit
obligation was in excess of plan assets for all of our plans at December 31,
2006.
|
Pension Benefits
Year
Ended December 31,
|
Other
Benefits
Year
Ended December 31,
|
|||||||||||||||||||||||
|
2007(1)
|
2006
|
2005(2)
|
2007(1)
|
2006
|
2005
|
|||||||||||||||||||
|
Components
of net periodic benefit cost:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 37,766 | $ | 37,724 | $ | 28,931 | $ | 331 | $ | 129 | $ | - | ||||||||||||
|
Interest cost
|
149,329 | 133,176 | 121,981 | 5,993 | 5,269 | 2,166 | ||||||||||||||||||
|
Expected
return on plan assets
|
(172,087 | ) | (143,674 | ) | (134,400 | ) | - | - | - | |||||||||||||||
|
Amortization
of transition obligation
|
- | - | - | 273 | 222 | - | ||||||||||||||||||
|
Amortization
of prior service cost
|
3,091 | 3,142 | 3,110 | 71 | 58 | - | ||||||||||||||||||
|
Recognized
net actuarial loss
|
45,799 | 63,183 | 43,068 | 1,723 | 1,402 | 1,489 | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 63,898 | $ | 93,551 | $ | 62,690 | $ | 8,391 | $ | 7,080 | $ | 3,655 | ||||||||||||
|
(1) Excludes
approximately $2.2 million and $0.3 million of net benefit cost for
pension benefits and other benefits, respectively, which have been
recorded as adjustments to beginning-of-year retained
earnings.
(2) Includes
approximately $35 million of expense which was recorded in our Power
Generation Systems segment attributable to the spin-off of the B&W PGG
pension plan from MI.
|
||||||||||||||||||||||||
Additional
Information
|
Pension
Benefits
Year
Ended December 31,
|
Other
Benefits
Year
Ended December 31,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Decrease
in accumulated other comprehensive loss due to actuarial gains (before
taxes)
|
$ | 34,625 | N/A | $ | 2,487 | N/A | ||||||||||
|
Increase
in accumulated other comprehensive loss due to adoption of SFAS No. 158
(before taxes)
|
N/A | $ | 124,873 | N/A | $ | 20,600 | ||||||||||
|
Decrease
in minimum liability included in other comprehensive income (before
taxes)
|
N/A | $ | (85,001 | ) | N/A | N/A | ||||||||||
The increase in accumulated other
comprehensive loss of $124.9 million for pension benefits due to the adoption of
SFAS No. 158 includes a reclassification of $24.5 million from intangible
assets. The decrease in the minimum pension liability of $85.0 million is net of
an increase of $39.8 million due to the reconsolidation of B&W
PGG.
We have
recognized in the current fiscal year, and expect to recognize in the next
fiscal year, the following amounts in other comprehensive loss as components of
net periodic benefit cost:
|
Recognized
in the
Year
Ended
December
31, 2007
|
To
Be Recognized in the
Year
Ended
December
31, 2008
|
|||||||||||||||
|
Pension
|
Other
|
Pension
|
Other
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Pension
cost in accumulated other comprehensive loss:
|
||||||||||||||||
|
Net
actuarial loss
|
$ | 45,799 | $ | 1,723 | $ | 34,765 | $ | 1,470 | ||||||||
|
Prior
service cost
|
3,091 | 71 | 3,074 | 76 | ||||||||||||
|
Transition
obligation
|
- | 273 | - | 294 | ||||||||||||
| $ | 48,890 | $ | 2,067 | $ | 37,839 | $ | 1,840 | |||||||||
Assumptions
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Weighted
average assumptions used to determine net periodic benefit obligations at
December 31:
|
||||||||||||||||
|
Discount
rate
|
6.14 | % | 5.92 | % | 5.74 | % | 5.75 | % | ||||||||
|
Rate
of compensation increase
|
3.96 | % | 3.96 | % | - | - | ||||||||||
|
Weighted
average assumptions used to determine net periodic benefit cost for the
years ended December 31:
|
||||||||||||||||
|
Discount
rate
|
5.89 | % | 5.67 | % | 5.70 | % | 5.75 | % | ||||||||
|
Expected
return on plan assets
|
8.33 | % | 8.28 | % | - | - | ||||||||||
|
Rate
of compensation increase
|
3.93 | % | 3.96 | % | - | - | ||||||||||
The
expected rate of return on plan assets assumption is based on the long-term
expected returns for the investment mix of assets currently in the
portfolio. In setting this rate, we use a building-block
approach. Historic real return trends for the various asset classes
in the plan’s portfolio are combined with anticipated future market conditions
to estimate the real rate of return for each class. These rates
are then adjusted for anticipated future inflation to determine estimated
nominal rates of return for each class. The expected rate of return on plan
assets is determined to be the weighted average of the nominal returns based on
the weightings of the classes within the total asset portfolio.
We have been using an expected return
on plan assets assumption of 8.5%, which is consistent with the long-term asset
returns of the portfolio.
|
2007(1)
|
2006
|
|||||||
|
Assumed
health-care cost trend rates at December 31
|
||||||||
|
Health-care
cost trend rate assumed for next year
|
8.00% - 9.00 | % | 9.00 | % | ||||
|
Rates
to which the cost trend rate is assumed to decline (ultimate trend
rate)
|
4.50 | % | 4.50 | % | ||||
|
Year
that the rate reaches ultimate trend rate
|
2012 - 2013 |
2012
|
||||||
|
(1) Assumed
health-care cost trend rate for our existing plans is 8.00%, reaching the
ultimate trend rate in 2012. The assumed health-care cost trend rate
for our plans acquired with Marine Mechanical Corporation is 9.00%,
reaching the ultimate trend rate in 2013.
|
||||||||
Assumed
health-care cost trend rates have a significant effect on the amounts we report
for our health-care plan. A one-percentage-point change in our
assumed health-care cost trend rates would have the following
effects:
|
One-Percentage-
Point Increase
|
One-Percentage-
Point Decrease
|
|||||||
|
(In
thousands)
|
||||||||
|
Effect
on total of service and interest cost
|
$ | 335 | $ | (303 | ) | |||
|
Effect
on postretirement benefit obligation
|
$ | 5,076 | $ | (4,619 | ) | |||
Investment
Goals
General
The
overall investment strategy of the pension trusts is to achieve long-term growth
of principal, while avoiding excessive risk and to minimize the probability of
loss of principal over the long term. The specific investment goals
that have been set for the pension trusts in the aggregate are (1) to ensure
that plan liabilities are met when due and (2) to achieve an investment return
on trust assets consistent with a reasonable level of risk.
Allocations
to each asset class for both domestic and foreign plans are reviewed
periodically and rebalanced, if appropriate, to assure the continued relevance
of the goals, objectives and strategies. The pension trusts for both our
domestic and foreign plans employ a professional investment advisor, and a
number of professional investment managers whose individual benchmarks are, in
the aggregate, consistent with the plan’s overall investment
objectives.
The goals
of each investment manager are (1) to meet (in the case of passive accounts) or
exceed (for actively managed accounts) the benchmark selected and agreed upon by
the manager and the Trust and (2) to display an overall level of risk in its
portfolio that is consistent with the risk associated with the agreed upon
benchmark.
The
investment performance of total portfolios, as well as asset class components,
is periodically measured against commonly accepted benchmarks, including the
individual investment manager benchmarks. In evaluating investment
manager performance, consideration is also given to personnel, strategy,
research capabilities, organizational and business matters, adherence to
discipline and other qualitative factors that may impact ability to achieve
desired investment results.
Domestic Plans
We
sponsor the following domestic defined benefit plans:
|
·
|
Retirement
Plan for Employees of McDermott Incorporated and Participating Subsidiary
and Affiliated Companies (covering corporate
employees);
|
|
·
|
Retirement
Plan for Employees of J. Ray McDermott Holdings, LLC and Participating
Subsidiary and Affiliated Companies (the “J. Ray Plan,” covering Offshore
Oil and Gas Construction segment
employees);
|
|
·
|
Retirement
Plan for Employees of The Babcock & Wilcox Company and Participating
Subsidiary and Affiliated Companies (covering Power Generation Systems
segment employees);
|
|
·
|
Retirement
Plan for Employees of BWX Technologies, Inc. (covering Government
Operations segment employees); and
|
|
·
|
Marine
Mechanical Corporation Hourly Pension Plan and Marine Mechanical
Corporation Salaried pension Plan (collectively, the “MMC Plans”) acquired
with Marine Mechanical Corporation.
|
For the
years ended December 31, 2007 and 2006, the investment return on domestic plan
assets (before deductions for management fees) was approximately 10.2% and
12.4%, respectively. The assets of the domestic pension plans are
commingled for investment purposes and held by the Trustee, Mellon Trust of New
England, N.A., in the McDermott Incorporated Master Trust (the “Master Trust”).
Our domestic pension plans’ asset allocations at December 31, 2007 and 2006 by
asset category were as follows:
|
2007
|
2006
|
|||||||
|
Asset
Category:
|
||||||||
|
Equity
Securities
|
34 | % | 42 | % | ||||
|
Debt
Securities
|
33 | % | 28 | % | ||||
|
Partnerships
with Security Holdings
|
12 | % | 10 | % | ||||
|
U.S.
Government Securities
|
10 | % | 8 | % | ||||
|
Real
Estate
|
8 | % | 5 | % | ||||
|
Other
|
3 | % | 7 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
The
target allocation for 2008 for the domestic plans, by asset class, is as
follows:
|
JRAY Plan
|
MMC Plans
|
Other Plans
|
||||||||||
|
Asset
Class:
|
||||||||||||
|
Public
Equity
|
- | % | 70.0 | % | 42.5 | % | ||||||
|
Private
Equity
|
- | % | - | % | 10.0 | % | ||||||
|
Fixed
Income
|
98.0 | % | 29.0 | % | 38.0 | % | ||||||
|
Real
Estate
|
- | % | - | % | 5.0 | % | ||||||
|
Other
|
2.0 | % | 1.0 | % | 4.5 | % | ||||||
Foreign Plans
We
sponsor various plans through certain of our foreign subsidiaries. These plans
are the J. Ray McDermott, S.A. TCN Employees Pension Plan (the “TCN Plan”),
various plans of Babcock & Wilcox Canada, Ltd. (the “Canadian Plans”) and
the Diamond Power Specialty Limited Retirement Benefits Plan (the “Diamond UK
Plan”).
The
weighted average asset allocations of these plans at December 31, 2007 and 2006
by asset category were as follows:
|
2007
|
2006
|
|||||||
|
Asset
Category:
|
||||||||
|
Equity
Securities
|
62 | % | 65 | % | ||||
|
Debt
Securities
|
35 | % | 30 | % | ||||
|
Other
|
3 | % | 5 | % | ||||
|
Total
|
$ | 100 | % | 100 | % | |||
The
target allocation for 2008 for the foreign plans, by asset class, is as
follows:
|
TCN Plan
|
Canadian
Plans
|
Diamond
UK Plan
|
||||||||||
|
Asset
Class:
|
||||||||||||
|
U.
S. Equity
|
40 | % | 20 | % | 10 | % | ||||||
|
Global
Equity
|
30 | % | 40 | % | 50 | % | ||||||
|
Fixed
Income
|
30 | % | 40 | % | 40 | % | ||||||
Cash
Flows
|
Domestic
Plans
|
Foreign
Plans
|
|||||||||||||||
|
Pension Benefits
|
Other Benefits
|
Pension Benefits
|
Other
Benefits
|
|||||||||||||
|
Expected
employer contributions to trusts of defined benefit plans:
|
||||||||||||||||
|
2008
|
$ | 134,503 | N/A | $ | 21,594 | N/A | ||||||||||
|
Expected
benefit payments:
|
||||||||||||||||
|
2008
|
$ | 140,155 | $ | 12,470 | $ | 13,158 | $ | 549 | ||||||||
|
2009
|
$ | 146,988 | $ | 12,226 | $ | 12,909 | $ | 590 | ||||||||
|
2010
|
$ | 153,922 | $ | 11,844 | $ | 13,662 | $ | 640 | ||||||||
|
2011
|
$ | 160,261 | $ | 11,424 | $ | 15,290 | $ | 691 | ||||||||
|
2012
|
$ | 167,584 | $ | 10,698 | $ | 15,553 | $ | 743 | ||||||||
|
2013-2017
|
$ | 918,460 | $ | 42,042 | $ | 97,817 | $ | 4,479 | ||||||||
The
expected employer contributions to trusts for 2008 are included in current
liabilities at December 31, 2007. We are currently reviewing funding
alternatives for certain domestic pension plans. It is possible that amounts
actually contributed to these plans in 2008 will exceed the amounts included in
current liabilities at December 31, 2007.
Defined
Contribution Plans
We
provide benefits under the McDermott International, Inc. Supplemental Executive
Retirement Plan (“SERP Plan”), which is a defined contribution
plan. We recorded expenses related to the SERP Plan of approximately
$1.1 million, $2.9 million and $1.3 million in the years ended December 31,
2007, 2006 and 2005, respectively.
We also
provide benefits under the Thrift Plan for Employees of McDermott Incorporated
and Participating Subsidiary and Affiliated Companies (“Thrift Plan”). The
Thrift Plan generally provides for matching employer contributions of 50% of
participants’ contributions up to 6 percent of compensation. These matching
employer contributions are typically made in shares of MII common stock. The
Thrift Plan also provides for unmatched employer cash contributions to certain
employees of our Offshore Oil and Gas Construction segment as well as
service-based contributions to salaried corporate employees and salaried
employees within our Power Generation Systems and Government Operations
segments. Amounts charged to expense for employer contributions under the Thrift
Plan totaled approximately $18.6 million, $14.6 million and $8.2 million in the
years ended December 31, 2007, 2006 and 2005, respectively.
Multiemployer
Plans
One of
the subsidiaries in our Power Generation Systems segment contributes to various
multiemployer plans. The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $32.6 million in the year ended
December 31, 2007 and $24.4 million in the period ended December 31, 2006, since
the reconsolidation of B&W PGG and its subsidiaries as of February 22,
2006.
NOTE
8 – ASSET SALES AND IMPAIRMENT OF LONG-LIVED ASSETS
We had
losses on the sale of assets totaling approximately $15.0 million in 2006,
primarily in our Offshore Oil and Gas Construction segment, which includes a
loss of approximately $16.4 million associated with an entity operating in
Mexico, offset by gains on sales of various non-strategic assets, primarily in
our Government Operations segment.
During
the years ended December 31, 2007, 2006 and 2005, we did not record any
impairments of property, plant and equipment.
NOTE
9 - CAPITAL STOCK
The
Panamanian regulations that relate to acquisitions of securities of companies
registered with the Panamanian National Securities Commission, such as MII,
require, among other matters, that detailed disclosure concerning an offeror be
finalized before that person acquires beneficial ownership of more than 5% of
the outstanding shares of any class of our stock. The detailed
disclosure is subject to review by either the Panamanian National Securities
Commission or our Board of Directors. Transfers of shares of common
stock in violation of these regulations are invalid and cannot be registered for
transfer.
We issue
shares of our common stock in connection with our 2001 Directors and Officers
Long-Term Incentive Plan, our 1996 Officer Long-Term Incentive Plan (and its
predecessor programs) and contributions to our Thrift Plan. At
December 31, 2007 and 2006, 13,829,901 and 14,999,026 shares of common
stock, respectively, were reserved for issuance in connection with those
plans.
Increase
in Authorized Shares
On May 4,
2007, our shareholders approved an amendment to our articles of
incorporation increasing the number of authorized shares of
common stock from 150 million to 400 million. The amendment became
effective on August 6, 2007 upon filing of a certificate of amendment in
the Public Registry Office of the Republic of Panama.
Stock
Split
On August
7, 2007, our Board of Directors declared a two-for-one stock split effected in
the form of a stock dividend. The dividend was paid on September 10,
2007 to stockholders of record as of the close of business on August 20,
2007. On May 3, 2006, our Board of Directors declared a three-for-two
stock split effected in the form of a stock dividend. The dividend
was paid on May 31, 2006 to stockholders of record as of the close of business
on May 17, 2006. All share and per share information in the
accompanying financial statements and notes has been retroactively adjusted to
reflect these stock splits.
NOTE
10 – STOCK PLANS
At
December 31, 2007, we had a stock-based employee compensation plan, which is
described below. Where required, disclosures have been adjusted for our stock
splits effected in the form of a stock dividend in September 2007 and May 2006.
See Note 9 for further information regarding our stock split.
2001
Directors and Officers Long-Term Incentive Plan
In May 2006, our shareholders approved
the amended and restated 2001 Directors and Officers Long-Term Incentive
Plan. Members of the Board of Directors, executive officers, key
employees and consultants are eligible to participate in the
plan. The Compensation Committee of the Board of Directors selects
the participants for the plan. The plan provides for a number of
forms of stock-based compensation, including nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock, deferred
stock units, performance shares and performance units, subject to satisfaction
of specific performance goals. In addition to shares previously available under
this plan that have not been awarded, or that were subject to awards under this
and other plans that have been canceled, terminated, forfeited, expired, settled
in cash, or exchanged for consideration not involving shares, up to 7,500,000
additional shares of our common stock were authorized for issuance through the
plan in May 2006. Options to purchase shares are granted at not less
than 100% of the fair market value (average of the high and low trading price)
on the date of grant, become exercisable at such time or times as determined
when granted and expire not more than seven years after the date of the
grant. Options granted prior to the amendment of this plan expire not
more than ten years after the date of the grant.
At
December 31, 2007, we had a total of 7,397,650 shares of our common stock
available for award under the 2001 Directors and Officers Long-Term Incentive
Plan.
1997
Director Stock Program
During 2007, we also maintained a 1997
Director Stock Program. Under this program, nonmanagement directors were
entitled to receive a grant of options to purchase 2,700 shares of our common
stock in the first year of a director's term and a grant of options to purchase
900 shares in subsequent years of such term at a purchase price equal to the
fair market value of one share of our common stock on the date of
grant. These options become exercisable, in full, six months after the
date of grant and expire ten years from the date of grant. In addition,
nonmanagement directors are entitled to receive a grant 1,350 shares
of restricted stock in the first year of a director's term and 450 shares
in subsequent years of such term. The shares of restricted stock are
subject to payment by the director of a purchase price at par value ($1.00
per share) and to transfer restrictions that lapse at the end of the director's
term. By the terms of the 1997 Director Stock Program, no award may be
granted under the program beginning June 6, 2007. As a result, we made our
final grants of stock options and restricted stock under the 1997 Directors
Stock Program in connection with our Annual Meeting of Stockholders in May
2007. The shares of common stock available to be awarded under the 1997
Director Stock Program are available under the terms of the 2001
Directors and Officers Long-Term Incentive Plan and have been included in
the amount available for grant discussed above.
In the
event of a change in control of our company, all of these stock-based
compensation programs have provisions that may cause restrictions to lapse and
accelerate the exercisability of outstanding options.
Pursuant
to the adoption of SFAS No. 123(R), we recognized stock-based compensation
expense of $2.7 and $4.4 million related to employee stock options during the
years ended December 31, 2007 and 2006, respectively. During the year
ended December 31, 2005, there was no stock-based compensation expense for
employee stock options, other than for stock options subject to variable
accounting. These stock options subject to variable accounting
resulted from the cancellation and reissuance of stock options during the year
ended December 31, 2000. Under APB No. 25 and its related
interpretations, the cancellation and reissuance of stock options within six
months of each other triggered mark-to-market accounting. For stock
options granted prior to the adoption of SFAS No. 123(R), the effect on net
income and earnings per share, if we had applied the fair value recognition
provisions of SFAS No. 123 to employee stock options, would have been as follows
for the year ended December 31, 2005 (in thousands, except per share
data):
|
Net
income, as reported
|
$ | 205,687 | ||
|
Add
back: stock-based compensation cost included in net income, net
of related tax effects
|
12,763 | |||
|
Deduct: total
stock-based compensation cost determined under fair-value-based method,
net of related tax effects
|
(10,894 | ) | ||
|
Pro
forma net income
|
$ | 207,556 | ||
|
Earnings
per share:
|
||||
|
Basic,
as reported
|
$ | 1.00 | ||
|
Basic,
pro forma
|
$ | 1.01 | ||
|
Diluted,
as reported
|
$ | 0.94 | ||
|
Diluted,
pro forma
|
$ | 0.95 |
For our
other stock-based compensation awards, such as restricted stock and performance
units, the adoption of SFAS No. 123(R) did not significantly change our
accounting policies for the recognition of compensation expense, as we have
recognized expense for those awards in prior periods. Total
compensation expense recognized for the years ended December 31, 2007, 2006 and
2005 was as follows:
|
Compensation
Expense
|
Tax
Benefit
|
Net
Impact
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||
|
Stock
options
|
$ | 2,740 | $ | (747 | ) | $ | 1,993 | |||||
|
Restricted
stock
|
904 | (21 | ) | 883 | ||||||||
|
Performance
shares
|
19,196 | (6,085 | ) | 13,111 | ||||||||
|
Performance
and deferred stock units
|
7,165 | (2,314 | ) | 4,851 | ||||||||
|
TOTAL
|
$ | 30,005 | $ | (9,167 | ) | $ | 20,838 | |||||
|
Year
Ended December 31, 2006
|
||||||||||||
|
Stock
options
|
$ | 4,352 | $ | (971 | ) | $ | 3,381 | |||||
|
Restricted
stock
|
1,199 | (122 | ) | 1,077 | ||||||||
|
Performance
shares
|
4,826 | (1,329 | ) | 3,497 | ||||||||
|
Performance
and deferred stock units
|
8,434 | (2,195 | ) | 6,239 | ||||||||
|
TOTAL
|
$ | 18,811 | $ | (4,617 | ) | $ | 14,194 | |||||
|
Year
Ended December 31, 2005
|
||||||||||||
|
Repriced
stock options
|
$ | 6,116 | $ | (1,128 | ) | $ | 4,988 | |||||
|
Restricted
stock
|
1,106 | (251 | ) | 855 | ||||||||
|
Performance
and deferred stock units
|
11,141 | (2,899 | ) | 8,242 | ||||||||
|
TOTAL
|
$ | 18,363 | $ | (4,278 | ) | $ | 14,085 | |||||
The
impact on basic earnings per share of stock-based compensation expense
recognized for the years ended December 31, 2007, 2006 and 2005 was $0.09, $0.07
and $0.07 per share, respectively, and on diluted earnings per share was $0.09,
$0.06 and $0.06 per share, respectively.
As of
December 31, 2007, total unrecognized estimated compensation expense related to
nonvested awards was $39.3 million, net of estimated tax benefits of $18.3
million. The components of the total gross unrecognized estimated
compensation expense of $57.6 million and their expected weighted-average
periods for expense recognition are as follows (amounts in millions; periods in
years):
|
Amount
|
Weighted-Average
Period
|
|||||||
|
Stock
options
|
$ | 0.9 | 0.4 | |||||
|
Restricted
stock
|
$ | 0.2 | 1.4 | |||||
|
Performance
shares
|
$ | 39.2 | 1.9 | |||||
|
Performance
and deferred stock units
|
$ | 17.3 | 2.4 | |||||
Stock
Options
The fair value of each option grant was
estimated at the date of grant using Black-Scholes, with the following
weighted-average assumptions:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Risk-free
interest rate
|
4.51 | % | 4.99 | % | 3.90 | % | ||||||
|
Expected
volatility
|
0.50 | 0.50 | 0.71 | |||||||||
|
Expected
life of the option in years
|
5.28 | 4.94 | 5.70 | |||||||||
|
Expected
dividend yield
|
0.0 | % | 0.0 | % | 0.0 | % | ||||||
The
risk-free interest rate is based on the implied yield on a U.S. Treasury
zero-coupon issue with a remaining term equal to the expected life of the
option. The expected volatility is based on historical implied
volatility from publicly traded options on our common stock, historical implied
volatility of the price of our common stock and other factors. The
expected life of the option is based on observed historical
patterns. The expected dividend yield is based on the projected
annual dividend payment per share divided by the stock price at the date of
grant. This amount is zero because we have not paid cash dividends
for several years and do not expect to pay cash dividends at this
time.
The
following table summarizes activity for our stock options for the year ended
December 31, 2007 (share data in thousands):
|
Number
of
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
(in
millions)
|
||||||||||
|
Outstanding,
beginning of year
|
7,058 | $ | 4.33 | ||||||||||
|
Granted
|
15 | 28.87 | |||||||||||
|
Exercised
|
(3,921 | ) | 3.88 | ||||||||||
|
Cancelled/expired/forfeited
|
(23 | ) | 6.94 | ||||||||||
|
Outstanding,
end of year
|
3,129 | $ | 4.99 |
5.12
Years
|
$ | 170.5 | |||||||
|
Exercisable,
end of year
|
2,636 | $ | 4.65 |
4.69
Years
|
$ | 144.5 | |||||||
The
aggregate intrinsic value included in the table above represents the total
pretax intrinsic value that would have been received by the option holders had
all option holders exercised their options on December 31, 2007. The
intrinsic value is calculated as the total number of option shares multiplied by
the difference between the closing price of our common stock on the last trading
day of each period and the exercise price of the options. This amount
changes based on the fair market value of our common stock.
The
weighted-average fair value of the stock options granted in the years ended
December 31, 2007, 2006 and 2005 was $14.48, $10.32 and $4.37,
respectively. The total fair value of shares vested during the years
ended December 31, 2007, 2006 and 2005 was $4.3 million, $5.0 million and $6.7
million, respectively.
During
the years ended December 31, 2007, 2006 and 2005, the total intrinsic value of
stock options exercised was $134.9 million, $102.4 million and $71.0 million,
respectively. We recorded cash received in the years ended December
31, 2007, 2006 and 2005 from the exercise of these stock options totaling $15.2
million, $21.5 million and $53.0 million, respectively. The actual
tax benefits realized related to the stock options exercised during the years
ended 2006 and 2005 was $17.9 million and $14.2 million,
respectively. Tax benefits related to the year ended December 31,
2007 have been deferred until utilization of the net operating losses causes the
benefits to be realized. Additionally, tax benefits previously
realized in prior years have also been deferred for a total deferral of $115.4
million, as discussed further in Note 5.
Restricted
Stock
Nonvested
restricted stock awards as of December 31, 2007 and changes during the year
ended December 31, 2007 were as follows (share data in thousands):
|
Number
of
Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Nonvested,
beginning of year
|
1,424 | $ | 3.39 | |||||
|
Granted
|
29 | 32.35 | ||||||
|
Vested
|
(1,076 | ) | 4.69 | |||||
|
Cancelled/forfeited
|
- | - | ||||||
|
Nonvested,
end of year
|
377 | $ | 1.87 | |||||
Performance
Shares
Nonvested
performance share awards as of December 31, 2007 and changes during the year
ended December 31, 2007 were as follows (share data in thousands):
|
Number
of
Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Nonvested,
beginning of year
|
960 | $ | 23.38 | |||||
|
Granted
|
891 | 35.04 | ||||||
|
Vested
|
- | - | ||||||
|
Cancelled/forfeited
|
(83 | ) | 24.11 | |||||
|
Nonvested,
end of year
|
1,768 | $ | 29.22 | |||||
The actual number of shares earned by
each participant is dependent upon achievement of certain consolidated operating
income targets over the three-year performance periods. The awards
actually earned will range from zero to 150% of the targeted number of
performance shares, to be determined upon completion of the three-year
performance period.
No performance shares vested during the
years ended December 31, 2007, 2006 and 2005.
Performance
and Deferred Stock Units
Nonvested
performance and deferred stock unit awards as of December 31, 2007 and changes
during the year ended December 31, 2007 were as follows (share data in
thousands):
|
Number
of
Units
|
Aggregate
Intrinsic Value
(in
millions)
|
||||
|
Nonvested,
beginning of year
|
520 | ||||
|
Granted
|
1 | ||||
|
Vested
|
(134 | ) | |||
|
Cancelled/forfeited
|
(13 | ) | |||
|
Nonvested,
end of year
|
374 |
$22.2
|
|||
The aggregate intrinsic value included
in the table above represents the total pretax intrinsic value recorded as a
liability at December 31, 2007 in the consolidated balance
sheets. During the years ended December 31, 2007 and
2006, we
paid $4.7 million and $26.2 million, respectively, for the settlement of vested
performance and deferred stock units. There were no such settlements
during the year ended December 31, 2005.
Thrift
Plan
On
November 12, 1991, 15,000,000 of the authorized and unissued shares of MII
common stock were reserved for issuance for the employer match to the Thrift
Plan for Employees of McDermott Incorporated and Participating Subsidiary and
Affiliated Companies (the "Thrift Plan"). On October 11, 2002, an
additional 15,000,000 of the authorized and unissued shares of MII common stock
were reserved for issuance for the employer match to the Thrift
Plan. Those matching employer contributions equal 50% of the first 6%
of compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are nonforfeitable after three years of service or upon
retirement, death, lay-off or approved disability. The Thrift Plan
allows employees to sell their interest in MII’s common stock fund at any time,
except as limited by applicable securities laws and regulations. During the
years ended December 31, 2007, 2006 and 2005, we issued 333,939, 473,860 and
731,544 shares, respectively, of MII's common stock as employer contributions
pursuant to the Thrift Plan. At December 31, 2007, 6,432,251 shares
of MII's common stock remained available for issuance under the Thrift
Plan.
NOTE
11 - CONTINGENCIES AND COMMITMENTS
Investigations
and Litigation
Apollo/Parks
Township Claims — Hall Litigation
On
June 7, 1994, Donald F. Hall, Mary Ann Hall and others filed suit against
B&W PGG, Babcock & Wilcox Technical Services Group, Inc., formerly known
as B&W Nuclear Environmental Services, Inc., and Atlantic Richfield Company
(“ARCO”) in the United States District Court for the Western District of
Pennsylvania (the “Pennsylvania District Court”). The suit, which has been
amended from time to time, presently involves approximately 500 separate claims
for compensatory and punitive damages relating to the operation of two nuclear
fuel processing facilities located in Apollo and Parks Township, Pennsylvania
(the “Hall Litigation”), previously owned by Nuclear Materials and Equipment
Company (“Numec.”). The plaintiffs in the Hall Litigation allege, among other
things, that they suffered death, personal injury, property damage and other
damages as a result of alleged radioactive and non-radioactive emissions from
these facilities.
At the
time of ARCO’s sale of Numec (a subsidiary of ARCO) to B&W PGG, B&W
PGG received an indemnity and hold harmless from ARCO from claims or liabilities
arising as a result of pre-closing Numec or ARCO actions. We believe
that this indemnity should protect B&W PGG from claims caused by or arising
from the actions of Numec or ARCO prior to B&W PGG’s acquisition of
Numec.
In
September 1998, a jury found B&W PGG and ARCO liable to eight
plaintiffs in the first cases brought to trial, awarding $36.7 million in
compensatory damages. During the trial, B&W PGG settled all pending punitive
damages claims in the Hall Litigation for $8.0 million. In June 1999, the
Pennsylvania District Court set aside the $36.7 million judgment and
ordered a new trial on all issues. In November 1999, the Court allowed an
interlocutory appeal by the plaintiffs of some of the issues, which, following
the commencement of the Chapter 11 Bankruptcy, the Third Circuit Court of
Appeals declined to accept for review.
In July
1999, B&W PGG commenced a declaratory judgment action against its
insurers, American Nuclear Insurers and Mutual Atomic Energy Liability
Underwriters (collectively “ANI”), in Pennsylvania state court seeking, among
other things, a judicial determination as to the amount of coverage available
under four “facility form” nuclear energy liability policies that insure
B&W PGG against, among other things, death, bodily injury and property
damage caused or allegedly caused by the radioactive, toxic, explosive or other
hazardous properties of nuclear material discharged from the nuclear fuel
processing facilities at issue in the Hall Litigation. In April 2001, the
Pennsylvania state court issued a ruling regarding: (1) the applicable
“trigger of coverage” under the insurance policies; and (2) the scope of ANI’s
defense obligations to B&W PGG under the insurance policies. With
respect to the trigger of coverage, the Pennsylvania state court held that
“manifestation” is an applicable trigger with respect to the underlying claims
in the Hall Litigation. Although the Court did not make any specific
determination with respect to any of the underlying claims, the effect of its
ruling is to increase the total amount of coverage potentially available to
B&W PGG for the claims alleged in the Hall Litigation under the insurance
policies to $320 million, subject to decrease for defense costs. The
Pennsylvania state court also held that ANI must pay for separate and
independent counsel to represent B&W PGG
in the
Hall Litigation. ANI appealed and the Pennsylvania Superior Court
affirmed. The Pennsylvania Supreme Court denied further discretionary
review.
The
Chapter 11 plan of reorganization, entered on February 22, 2006, did not
impair the claims asserted in the Hall Litigation, which were permitted to pass
through the Chapter 11 Bankruptcy unaffected by it. Accordingly, the
Hall Litigation is proceeding in the Pennsylvania District Court.
In July
2007, the Pennsylvania District Court ordered separate trials on general
causation for claims based upon uranium and plutonium exposure. A
March 2008 trial on general causation as it relates to uranium has been
postponed to allow the plaintiffs additional limited discovery. The
trial on general causation as it relates to plutonium has not yet been
scheduled. Any plaintiffs who may remain in the case following the
“general causation” trials would be required to show “specific causation” in
additional trial proceedings.
In
December 2007, B&W PGG filed an action for breach of contract against ARCO
in the Court of Common Pleas Allegheny County, Pennsylvania. In addition to its
claim for breach of contract, B&W PGG seeks a declaratory judgment that ARCO
is obligated to indemnify B&W PGG under the indemnity agreement between the
two parties against any losses that B&W PGG may incur arising out of the
nuclear fuel processing facilities at issue in the Hall
Litigation. ARCO removed the declaratory judgment action to federal
court and the case was assigned to the same judge handling the Hall
Litigation. B&W PGG filed a motion to remand to state court,
which has not yet been decided.
In
February 2008, the plaintiffs and ARCO reached an agreement to settle ARCO’s
exposure in the Hall Litigation and have asked the Pennsylvania District Court
to approve the settlement. On February 19, B&W PGG filed
objections to the settlement with the Court. The Court has made no
decision on approval of the settlement.
We
believe these claims will be resolved within the limits of coverage of our
insurance policies and/or the ARCO indemnity. However, should any judgment on
these claims prove excessive, or additional future claims be asserted, there may
be an issue as to whether our insurance coverage is adequate, and we may be
materially and adversely impacted if our liabilities exceed our coverage, the
benefits of the ARCO indemnity and the amount we have reserved for these
claims.
Other
Litigation and Settlements
On or
about August 23, 2004, a declaratory judgment action entitled Certain Underwriters at Lloyd’s
London, et al v. J. Ray McDermott, Inc. et al , was filed by certain
underwriters at Lloyd’s, London and Threadneedle Insurance Company Limited (the
“London Insurers”), in the 23rd Judicial District Court, Assumption Parish,
Louisiana, against MII, JRMI and two insurer defendants, Travelers and INA,
seeking a declaration that the London Insurers have no obligation to indemnify
MII and JRMI for certain bodily injury claims, including claims for asbestos and
welding rod fume personal injury which have been filed by claimants in various
state courts, and an environmental claim involving B&W PGG. Additionally,
Travelers filed a cross-claim requesting a declaration of non-coverage in
approximately 20 underlying matters. This proceeding was stayed by the court on
January 3, 2005.
On
June 1, 2005, a proceeding entitled Iroquois Falls Power Corp. v.
Jacobs Canada Inc., et al., was filed in the Superior Court of Justice,
in Ontario, Canada, alleging damages of approximately $16 million
(Canadian) for remedial work, loss of profits and related engineering/redesign
costs due to the alleged breach by Jacobs Canada Inc. (formerly Delta Hudson
Engineering Limited (“Delta”)), of its engineering design obligations relating
to the supply and installation of heat recovery steam generators. In addition to
Jacobs, the proceeding names as defendants MI, which provided a guarantee to
certain obligations of its then affiliate, Delta, and two bonding companies with
whom MII entered into an indemnity arrangement. Pursuant to a subcontract with
Delta, B&W PGG supplied and installed the generators at issue. On March 20,
2007, the Court granted summary judgment in favor of all defendants and
dismissed all claims of Iroquois Falls Power Corp., which appealed the ruling in
April 2007. The Court of Appeals for Ontario heard arguments on
appeal in November 2007 and has taken the matter under advisement.
In a
proceeding entitled Antoine,
et al. vs. J. Ray McDermott, Inc., et al., filed in the 24th
Judicial District Court, Jefferson Parish, Louisiana, approximately 88
plaintiffs filed suit against approximately 215 defendants, including JRMI and
Delta Hudson Engineering Corporation (“DHEC”), another affiliate of ours,
generally alleging injuries for exposure to asbestos, and unspecified chemicals,
metals and noise while the plaintiffs were allegedly employed as Jones Act
seamen. On January 10, 2007, the District Court dismissed the Plaintiffs’
claims, without prejudice to
their
right to refile their claims. On January 29, 2007, in a matter
entitled Boudreaux, et al v.
McDermott, Inc., et al,. originally filed in the United States District
Court for the Southern District of Texas, 21 plaintiffs originally named in the
Antoine matter filed
suit against JRMI, MI and approximately 30 other employer defendants, alleging
Jones Act seaman status and generally alleging exposure to welding fumes,
solvents, dyes, industrial paints and noise. Boudreaux was transferred to
the United States District Court for the Eastern District of Louisiana on May 2,
2007. The District Court entered an order in September 2007 staying the matter
until further order of the court due to the bankruptcy filing of one of the
co-defendants. Additionally, on January 29, 2007, in a matter
entitled Antoine,
et al. v. McDermott, Inc., et al., filed in the 164
th Judicial District Court for Harris County, Texas, 43
plaintiffs originally named in the Antoine matter filed suit
against JRMI, MI and approximately 65 other employer defendants and 42 maritime
products defendants, alleging Jones Act seaman status and generally alleging
personal injuries for exposure to asbestos and noise. On April 27,
2007, the District Court entered an order staying all activity and deadlines in
this matter other than service of process and answer/appearance dates until
further order of the court. The Plaintiffs seek monetary damages in
an unspecified amount in both cases and attorneys’ fees in the new Antoine case.
In 2003,
we received a favorable arbitration award for one of our claims related to a
project in India completed in the 1980s. The award, which with interest and
costs then had a value of approximately $50 million, was appealed to the Supreme
Court of India. On May 28, 2005, we received a favorable award for the
remainder of our claim in the approximate amount of $48 million, including
interest and costs, which was also appealed. The Supreme Court of India heard
the consolidated appeal in late October 2005 and, in May 2006, issued
a decision reducing the total of the awards to approximately $90 million,
including interest and costs, but otherwise affirming the awards. With interest,
the award value now exceeds $100 million. The Defendants applied for
rehearing of this decision, which was denied in October 2006. We have
aggressively pursued collection of these amounts and will continue to do so;
however, we have not recognized as income any amounts associated with either
award, as collection of these amounts is uncertain.
Additionally,
due to the nature of our business, we are, from time to time, involved in
routine 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, 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 position, results of operations or cash
flows.
Environmental
Matters
We have
been identified as a potentially responsible party at various cleanup sites
under the Comprehensive Environmental Response, Compensation, and Liability Act,
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 wastes
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 position, results of operations or liquidity in any given
year.
The
Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised us in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The
relief sought is related to potential groundwater contamination resulting from
previous operations at the facilities. These facilities are currently
owned by a subsidiary in our Government Operations segment. PADEP has
advised us that it does not intend to assess any monetary sanctions, provided
our Government Operations segment continues its remediation program for the
Parks Facilities. Whether additional nonradiation contamination
remediation will be required at the Parks Facility remains
unclear. Results from sampling completed by our Government Operations
segment have indicated that such remediation may not be
necessary. Our Government Operations segment continues to evaluate
closure of the groundwater issues pursuant to applicable Pennsylvania
law.
We
perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these
activities, we are subject to continuing reviews by governmental agencies,
including the Environmental Protection Agency and the Nuclear Regulatory
Commission (the “NRC”).
The NRC’s
decommissioning regulations require our Government Operations segment to provide
financial assurance that it will be able to pay the expected cost of
decommissioning their facilities at the end of its service lives. We
will continue to provide financial assurance aggregating $24.5 million during
the year ending December 31, 2008 with existing letters of credit for the
ultimate decommissioning of all their licensed facilities, except
one. This facility, which represents the largest portion of our
eventual decommissioning costs, has provisions in its government contracts
pursuant to which all of its decommissioning costs and financial assurance
obligations are covered by the U.S. Department of Energy.
At
December 31, 2007 and 2006, we had total environmental reserves (including
provisions for the facilities discussed above) of $18.8 million and $18.6
million, respectively. Of our total environmental reserves at
December 31, 2007 and 2006, $7.0 million and $9.6 million, respectively, were
included in current liabilities. Inherent in the estimates of those reserves and
recoveries are our expectations regarding the levels of contamination,
decommissioning costs and recoverability from other parties, which may vary
significantly as decommissioning activities progress. Accordingly,
changes in estimates could result in material adjustments to our operating
results, and the ultimate loss may differ materially from the amounts that we
have provided for in our consolidated financial statements.
Operating
Leases
Future
minimum payments required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year at December 31, 2007 are as
follows (in thousands):
|
Fiscal Year Ending December
31,
|
Amount
|
|||
|
2008
|
$ | 17,660 | ||
|
2009
|
$ | 9,402 | ||
|
2010
|
$ | 7,466 | ||
|
2011
|
$ | 4,226 | ||
|
2012
|
$ | 3,862 | ||
|
Thereafter
|
$ | 4,981 | ||
Total
rental expense for the years ended December 31, 2007, 2006 and 2005 was $66.9
million, $52.0 million and $33.1 million, respectively. These expense
amounts include contingent rentals and are net of sublease income, neither of
which is material.
Other
One of
our Canadian subsidiaries has received notice of a possible warranty claim on
one of its projects on a contract executed in 1998. This situation relates to
technical issues concerning components associated with nuclear steam
generators. Data
collection and analysis, which can only be performed at specific time periods
when the power plant is scheduled to be off-line for maintenance, is continuing.
The next outage of this facility is scheduled for the spring of 2008 when
additional testing will be performed. These tests require detailed engineering
study and comprehensive analysis. This project included a
limited-term performance bond totaling approximately $140 million for which we
entered into an
indemnity arrangement with the surety underwriters. At this time, our subsidiary
continues to analyze the facts and circumstances surrounding this issue. It is
possible that our subsidiary may incur warranty costs in excess of amounts
provided for as of December 31, 2007. It is also possible that a claim could be
initiated by our subsidiary’s customer against the surety underwriter should
certain events occur. If such a claim were successful, the surety
could seek to recover from our subsidiary the costs incurred in satisfying the
customer claim. If the surety seeks recovery from our subsidiary, we believe
that our subsidiary would have adequate liquidity to satisfy its obligations.
However, the ultimate resolution of this possible claim is uncertain, and an
adverse outcome could have a material adverse impact on our consolidated
financial position, results of operations and cash flows.
We have
been advised by the IRS of potential proposed unfavorable tax adjustments
related to the 2001 through 2003 tax years. We have reviewed the IRS positions
and disagree with certain proposed
adjustments. Accordingly,
we filed
a protest with the IRS regarding the resolution of these issues and have met
with an appellate conferee in this regard. We have provided for amounts that we
believe will be ultimately payable under the proposed adjustments; however,
these proposed IRS adjustments, should they be sustained, would result in a tax
liability of approximately $15 million in excess of amounts provided for in our
consolidated financial statements. In addition to this IRS matter,
refer to Note 13 for information on the potential uncertainties associated with
our reorganization of our U.S. tax groups.
NOTE
12 – RELATED-PARTY TRANSACTIONS
We are a
large business organization with worldwide operations, and we engage in numerous
purchase, sale and other transactions annually. We have various types of
business arrangements with corporations and other organizations in which an
executive officer, director or nominee for director may also be a director,
executive or investor, or have some other direct or indirect relationship. We
enter into these arrangements in the ordinary course of our business,
and
they
typically involve us receiving or providing some good or service on a
nonexclusive basis and at arm’s-length negotiated rates or in accordance with
regulated price schedules.
Each of
the following executive officers of our company has irrevocably elected to
satisfy withholding obligations relating to all or a portion of any applicable
federal, state or other taxes that may be due on the vesting in the year ending
December 31, 2008 of certain shares of restricted stock awarded under various
long-term incentive plans by returning to us the number of such vested shares
having a fair market value equal to the amount of such taxes: Bruce
W. Wilkinson, Robert A. Deason, James Easter, Francis S. Kalman, John T. Nesser
III and Louis J. Sannino. These elections, which apply to an
aggregate of 82,200, 75,000, 11,700, 43,500, 28,200 and 18,300 shares vesting in
the year ending December 31, 2008 and held by Messrs. Wilkinson, Deason, Easter,
Kalman, Nesser and Sannino, respectively, are subject to approval of the
Compensation Committee of our Board of Directors, which approval was
granted. In the year ended December 31, 2007, each of Messrs.
Wilkinson, Easter, Kalman, Nesser and Sannino made a similar election, which
applied to an aggregate of 150,000, 24,000, 120,000, 63,000 and 48,000 shares,
respectively, that vested in the year ended December 31, 2007. Those
elections were also approved by the Compensation Committee. We expect
any transfers reflecting shares of restricted stock returned to us will be
reported in the SEC filings made by those transferring holders who are obligated
to report transactions in our securities under Section 16 of the Securities
Exchange Act of 1934.
See Note
4 for additional transactions with unconsolidated affiliates.
NOTE
13 – RISKS AND UNCERTAINTIES
As of
December 31, 2007, in accordance with the percentage-of-completion method of
accounting, we have provided for our estimated costs to complete all of our
ongoing contracts. However, it is possible that current estimates could change
due to unforeseen events, which could result in adjustments to overall contract
costs. The risk on fixed-priced contracts is that revenue from the customer does
not rise to cover increases in our costs. It is possible that current estimates
could materially change for various reasons, including, but not limited to,
fluctuations in forecasted labor productivity, pipeline lay rates or steel and
other raw material prices. Increases in costs on our fixed-price contracts could
have a material adverse impact on our consolidated results of operations,
financial condition and cash flows. Alternatively, reductions in overall
contract costs at completion could materially improve our consolidated results
of operations, financial condition and cash flows.
At December 31, 2006, we had
approximately $28 million in accounts and notes receivable due from our former
joint venture in Mexico. A note receivable was attributable to the sale of our
DB17 vessel during the quarter ended September 30, 2004. Due to the
joint venture’s liquidity problems, we deferred recognition of a gain of
approximately $5.4 million on the sale of the DB17 pending final settlement of
the accounts and notes receivable. On October 17, 2006, we reached an agreement
with its partner and terminated our interest in this joint
venture. The financial impact of this transaction was included in our
consolidated results of operations for the year ended December 31, 2006,
including an impairment loss totaling approximately $16.4 million attributable
to currency translation losses recorded in accumulated other comprehensive
loss. During the year ended December 31, 2007, we received final
payment from the entity, and the deferred gain of $5.4 million was
recognized.
The
reorganization of our U.S. tax groups, which was completed on December 31, 2006,
resulted in a material, favorable impact on our consolidated financial results
for the year ended December 31, 2006. Although we
believe
that the
tax result of the reorganization as reported in our consolidated financial
statements is accurate, the tax results derived will likely be subject to audit,
or other challenge, by the IRS. Should the IRS’ interpretation of the
tax law in this regard differ from our interpretation and that of our outside
tax advisors, such that adjustments are proposed or sustained by the IRS, there
could be a material adverse effect on our consolidated financial results as
reported and our expected future cash flows.
NOTE
14 – FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
Our
Offshore Oil and Gas Construction segment's principal customers are businesses
in the offshore oil, natural gas and hydrocarbon processing industries and other
offshore construction companies. The primary customer of our
Government Operations segment is the U.S. Government, including its
contractors. Our Power Generation Systems segment’s major customers
are large utilities. These concentrations of customers may impact our
overall exposure to credit risk, either positively or negatively, in that our
customers may be similarly affected by changes in economic or other
conditions. In addition, we and many of our customers operate
worldwide and are therefore exposed to risks associated with the economic and
political forces of various countries and geographic areas. Approximately 37% of
our trade receivables are due from foreign customers. See Note 18 for additional
information about our operations in different geographic areas. We generally do
not obtain any collateral for our receivables.
We
believe that our provision for possible losses on uncollectible accounts
receivable is adequate for our credit loss exposure. At December 31,
2007 and 2006, the allowance for possible losses that we deducted from accounts
receivable – trade on the accompanying balance sheet was $5.2 million and $4.1
million, respectively.
NOTE
15 – INVESTMENTS
The
following is a summary of our available-for-sale securities at December 31,
2007:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
$ | 91,845 | $ | 907 | $ | - | $ | 92,752 | ||||||||
|
Money
market instruments and short term investments
|
341,777 | 1,532 | - | 343,309 | ||||||||||||
|
Asset-Backed
Securities and Collateralized Mortgage Obligations(1)
|
27,555 | - | (1,455 | ) | 26,100 | |||||||||||
|
Total(2)
|
$ | 461,177 | $ | 2,439 | $ | (1,455 | ) | $ | 462,161 | |||||||
|
(1) Included
in our Asset-Backed Securities and Collateralized Mortgage Obligations is
approximately $18 million of commercial paper secured by prime mortgaged
backed securities. These investments originally matured in August of 2007
but were extended.
We
have changed our investment policy effective August of 2007 to no longer
invest in Asset-Backed Securities or Asset-Backed Commercial paper. These
investments represent approximately 1.7% of our total cash and cash
equivalents and investments at December 31, 2007.
|
||||||||||||||||
|
(2) Fair
value of $30.7 million pledged to secure payments under certain
reinsurance agreements
|
||||||||||||||||
The
following is a summary of our available-for-sale securities at December 31,
2006:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
$ | 89,557 | $ | - | $ | (179 | ) | $ | 89,378 | |||||||
|
Money
market instruments and short term investments
|
202,909 | 712 | (1 | ) | 203,620 | |||||||||||
|
Asset-Backed
Securities and Collateralized Mortgage Obligations
|
1,087 | - | - | 1,087 | ||||||||||||
|
Total(1)
|
$ | 293,553 | $ | 712 | (180 | ) | $ | 294,085 | ||||||||
|
(1) Fair
value of $36.0 million pledged to secure payments under certain
reinsurance agreements
|
||||||||||||||||
At
December 31, 2007, all our available-for-sale debt securities have contractual
maturities primarily between 2008 and 2010.
Proceeds,
gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows:
|
Proceeds
|
Gross
Realized Gains
|
Gross
Realized Losses
|
||||||||||
|
Year
Ended December 31, 2007
|
$ | 2,311,730 | $ | 177 | $ | - | ||||||
|
Year
Ended December 31, 2006
|
$ | 1,730,838 | $ | 7 | $ | - | ||||||
|
Year
Ended December 31, 2005
|
$ | 11,030,512 | $ | - | $ | 5 | ||||||
NOTE
16 – DERIVATIVE FINANCIAL INSTRUMENTS
Our
worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments to
reduce the impact of changes in foreign exchange rates on our operating
results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts and other cash flow
exposures that are denominated in currencies other than our operating entities’
functional currencies. We do not hold or issue financial instruments
for trading or other speculative purposes.
We enter
into derivative financial instruments primarily as hedges of certain firm
purchase and sale commitments 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 deferred in
stockholders’ equity (deficit), as a component of accumulated other
comprehensive loss, until the hedged item is recognized in earnings or offset
against the change in fair value of the hedged firm commitment through
earnings. 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. The gain or loss on a derivative
instrument not designated as a hedging instrument is also immediately recognized
in earnings. Gains and losses on derivative financial instruments
that require immediate recognition are included as a component of other income
(expense) – net in our consolidated statements of income.
At
December 31, 2007, we had forward contracts to purchase or sell a net total
notional value of $368.7 million in foreign currencies, primarily Euros and
Canadian Dollars, at varying maturities through December 2011. At
December 31, 2006, we had forward contracts to purchase or sell a net total of
$211.1 million in foreign currencies, primarily Euros and Canadian Dollars, at
varying maturities through September 2009.
At
December 31, 2007, we had a foreign currency option contract outstanding to
purchase 0.9 million Euros at a strike price of 1.34 with varying expiration
dates extending to October 2008. Also at December 31, 2007, we had a
foreign currency option contract to purchase 427.1 million Japanese Yen at a
strike price of 110.0 with an expiration date of February 29,
2008. At December 31, 2006, we had a foreign currency option contract
outstanding to purchase 1.3 million Euros at a strike price of 1.30 with varying
expiration dates extending to October 31, 2007. Also at December 31, 2006, we
had a foreign currency option contract to purchase 1.5 million Chinese Renminbi
at a strike price of 8.0316 with an expiration date of August 30,
2007.
We have
designated substantially all of our forward and option contracts as cash flow
hedging instruments. For the option contracts, the hedged risk is the
risk of changes in forecasted U.S. dollar equivalent cash flows related to
long-term contracts attributable to movements in the exchange rate above the
strike prices. We assess effectiveness based upon total changes in
cash flows of the option contracts. For forward contracts, the
hedged risk is the risk of changes in functional-currency-equivalent cash flows
attributable to changes in spot exchange rates of forecasted transactions
related to long-term contracts. 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. At December 31, 2007 and 2006, we have deferred
approximately $20.9 million and $9.4 million, respectively, of net gains on
these derivative financial instruments. Of the deferred amount at December 31,
2007, we expect to recognize substantially all of it in income over the next 12
months, primarily in accordance with the percentage-of-completion method of
accounting. For the years ended December 31, 2007, 2006 and 2005, we
immediately recognized net losses of approximately $2.1 million, $4.1 million
and $0.2 million, respectively, which primarily represent changes in the fair
value of forward contracts excluded from hedge effectiveness.
We are
exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. We mitigate this
risk by using major financial institutions with high credit
ratings.
NOTE
17 – FAIR VALUES OF FINANCIAL INSTRUMENTS
We used
the following methods and assumptions in estimating our fair value disclosures
for financial instruments:
Cash and
cash equivalents and restricted cash and cash equivalents: The
carrying amounts that we have reported in the accompanying consolidated balance
sheets for cash and cash equivalents approximate their fair values.
Investments: We
estimate the fair values of investments based on quoted market
prices. For investments for which there are no quoted market prices,
we derive fair values from available yield curves for investments of similar
quality and terms.
Long- and
short-term debt: We base the fair values of debt instruments on
quoted market prices. Where quoted prices are not available, we base
the fair values 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.
Foreign
currency derivative instruments: We estimate the fair values of
foreign currency option contracts and forward contracts by obtaining quoted
market rates. At December 31, 2007, we had net forward contracts
outstanding to purchase or sell foreign currencies, primarily Euros and Canadian
Dollars, with a total notional value of $368.7 million and a total fair value of
$5.5 million.
The
estimated fair values of our financial instruments are as follows:
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
Carrying
Amount
|
Fair Value
|
Carrying
Amount
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance
Sheet Instruments
|
||||||||||||||||
|
Cash
and Cash equivalents
|
$ | 1,001,394 | $ | 1,001,394 | $ | 600,843 | $ | 600,843 | ||||||||
|
Restricted
cash and cash equivalents
|
$ | 64,786 | $ | 64,786 | $ | 106,674 | $ | 106,674 | ||||||||
|
Investments
|
$ | 462,161 | $ | 462,161 | $ | 294,085 | $ | 294,085 | ||||||||
|
Debt
|
$ | 17,208 | $ | 17,421 | $ | 272,734 | $ | 275,648 | ||||||||
NOTE
18 – SEGMENT REPORTING
Our
reportable segments are Offshore Oil and Gas Construction, Government Operations
and Power Generation Systems, as described in Note 1. The operations
of our segments are managed separately and each has unique technology, services
and customer class.
We
account for intersegment sales at prices that we generally establish by
reference to similar transactions with unaffiliated
customers. Reportable segments are measured based on operating income
exclusive of general corporate
expenses,
contract and insurance claims provisions, legal expenses and gains (losses) on
sales of corporate assets. Other reconciling items to income from
continuing operations before provision for income taxes are interest income,
interest expense, minority interest and other income (expense) –
net. We exclude prepaid pension costs from segment
assets.
Due to
the Chapter 11 Bankruptcy, we did not consolidate the results of operations for
the primary operating subsidiaries in our Power Generation Systems segment from
February 22, 2000 through February 22, 2006.
SEGMENT
INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005.
1. Information
about Operations in our Different Industry Segments:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006(2)
|
2005(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
REVENUES
(1):
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 2,445,675 | $ | 1,610,307 | $ | 1,238,870 | ||||||
|
Government
Operations
|
694,024 | 630,067 | 601,042 | |||||||||
|
Power
Generation Systems
|
2,504,225 | 1,888,636 | - | |||||||||
|
Adjustments
and Eliminations
|
(12,314 | ) | (8,869 | ) | (172 | ) | ||||||
| $ | 5,631,610 | $ | 4,120,141 | $ | 1,839,740 | |||||||
|
(1)
Segment revenues are net of the following intersegment transfers and other
adjustments:
|
||||||||||||
|
Offshore
Oil and Gas Construction Transfers
|
$ | 11,415 | $ | 7,770 | $ | 51 | ||||||
|
Government
Operations Transfers
|
776 | 784 | 121 | |||||||||
|
Power
Generation Systems Transfers
|
123 | 315 | - | |||||||||
| $ | 12,314 | $ | 8,869 | $ | 172 | |||||||
|
(2) Due to the Chapter 11
Bankruptcy, we did not consolidate the results of operations for the
primary operating subsidiaries in our Power Generation Systems segment
from February 22, 2000 through February 22,
2006.
|
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006(2)
|
2005(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
OPERATING
INCOME:
|
||||||||||||
|
Segment
Operating Income (Loss):
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 397,560 | $ | 214,105 | $ | 157,470 | ||||||
|
Government
Operations
|
90,022 | 82,744 | 67,983 | |||||||||
|
Power
Generation Systems
|
219,734 | 101,904 | (891 | ) | ||||||||
| $ | 707,316 | $ | 398,753 | $ | 224,562 | |||||||
|
Gains
(Losses) on Asset Disposal and Impairments – Net:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 6,765 | $ | (16,175 | ) | $ | 6,445 | |||||
|
Government
Operations
|
1,631 | 1,123 | 130 | |||||||||
|
Power
Generation Systems
|
(25 | ) | 65 | - | ||||||||
| $ | 8,371 | $ | (14,987 | ) | $ | 6,575 | ||||||
|
Equity
in Income (Loss) of Investees:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | (3,923 | ) | $ | (2,882 | ) | $ | 2,818 | ||||
|
Government
Operations
|
31,288 | 27,768 | 31,258 | |||||||||
|
Power
Generation Systems
|
14,359 | 12,638 | 6,447 | |||||||||
| $ | 41,724 | $ | 37,524 | $ | 40,523 | |||||||
|
SEGMENT
INCOME:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 400,402 | $ | 195,048 | $ | 166,733 | ||||||
|
Government
Operations
|
122,941 | 111,635 | 99,371 | |||||||||
|
Power
Generation Systems
|
234,068 | 114,607 | 5,556 | |||||||||
| $ | 757,411 | $ | 421,290 | $ | 271,660 | |||||||
|
Unallocated
Corporate
|
(41,214 | ) | (29,949 | ) | (39,940 | ) | ||||||
| $ | 716,197 | $ | 391,341 | $ | 231,720 | |||||||
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006(2)
|
2005(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
SEGMENT
ASSETS:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 2,044,740 | $ | 1,299,883 | $ | 1,008,906 | ||||||
|
Government
Operations
|
494,707 | 336,750 | 300,223 | |||||||||
|
Power
Generation Systems
|
1,420,162 | 1,433,551 | 16,101 | |||||||||
|
Total
Segment Assets
|
3,959,609 | 3,070,184 | 1,325,230 | |||||||||
|
Corporate
Assets
|
451,877 | 563,578 | 384,732 | |||||||||
|
Total
Assets
|
$ | 4,411,486 | $ | 3,633,762 | $ | 1,709,962 | ||||||
|
CAPITAL
EXPENDITURES:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 172,580 | $ | 89,501 | $ | 37,411 | ||||||
|
Government
Operations
|
14,117 | 16,608 | 26,892 | |||||||||
|
Power
Generation Systems
|
40,218 | 23,718 | - | |||||||||
|
Segment
Capital Expenditures
|
226,915 | 129,827 | 64,303 | |||||||||
|
Corporate
Capital Expenditures
|
6,374 | 2,877 | 217 | |||||||||
|
Total
Capital Expenditures
|
$ | 233,289 | $ | 132,704 | $ | 64,520 | ||||||
|
DEPRECIATION
AND AMORTIZATION:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 54,318 | $ | 28,515 | $ | 28,727 | ||||||
|
Government
Operations
|
19,269 | 14,833 | 13,696 | |||||||||
|
Power
Generation Systems
|
21,266 | 16,342 | - | |||||||||
|
Segment
Depreciation and Amortization
|
94,853 | 59,690 | 42,423 | |||||||||
|
Corporate
Depreciation and Amortization
|
1,136 | 1,310 | 1,843 | |||||||||
|
Total
Depreciation and Amortization
|
$ | 95,989 | $ | 61,000 | $ | 44,266 | ||||||
|
INVESTMENT
IN UNCONSOLIDATED AFFILIATES:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 7,339 | $ | 6,662 | $ | 5,812 | ||||||
|
Government
Operations
|
3,983 | 4,404 | 7,303 | |||||||||
|
Power
Generation Systems
|
50,919 | 41,735 | 9,754 | |||||||||
|
Total Investment
in Unconsolidated Affiliates
|
$ | 62,241 | $ | 52,801 | $ | 22,869 | ||||||
2. Information
about our Product and Service Lines:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006(2)
|
2005(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
REVENUES:
|
||||||||||||
|
Offshore
Oil and Gas Construction:
|
||||||||||||
|
Offshore
Operations
|
$ | 1,126,609 | $ | 661,231 | $ | 596,729 | ||||||
|
Fabrication
Operations
|
413,940 | 307,759 | 126,807 | |||||||||
|
Project
Services and Engineering Operations
|
303,671 | 241,102 | 201,268 | |||||||||
|
Procurement
Activities
|
618,795 | 417,905 | 324,993 | |||||||||
|
Eliminations
|
(17,340 | ) | (17,690 | ) | (10,927 | ) | ||||||
| 2,445,675 | 1,610,307 | 1,238,870 | ||||||||||
|
Government
Operations:
|
||||||||||||
|
Nuclear
Component Program
|
619,154 | 533,468 | 509,560 | |||||||||
|
Management
& Operation Contracts of U.S. Government Facilities
|
18,776 | 10,628 | 5,594 | |||||||||
|
Other
Commercial Operations
|
3,853 | 11,879 | 24,637 | |||||||||
|
Nuclear
Environmental Services
|
51,703 | 44,833 | 42,174 | |||||||||
|
Contract
Research
|
1,877 | 5,426 | 9,886 | |||||||||
|
Other
Government Operations
|
708 | 25,830 | 14,082 | |||||||||
|
Other
Industrial Operations
|
- | 913 | 160 | |||||||||
|
Eliminations
|
(2,047 | ) | (2,910 | ) | (5,051 | ) | ||||||
| 694,024 | 630,067 | 601,042 | ||||||||||
|
Power
Generation Systems:
|
||||||||||||
|
Original
Equipment Manufacturers’ Operations
|
1,371,427 | 916,889 | - | |||||||||
|
Nuclear
Equipment Operations
|
137,864 | 135,403 | - | |||||||||
|
Aftermarket
Goods and Services
|
829,185 | 693,578 | - | |||||||||
|
Operations
and Maintenance
|
54,854 | 47,057 | - | |||||||||
|
Boiler
Auxiliary Equipment
|
115,855 | 106,121 | - | |||||||||
|
Eliminations
|
(4,960 | ) | (10,412 | ) | - | |||||||
| 2,504,225 | 1,888,636 | - | ||||||||||
|
Eliminations
|
(12,314 | ) | (8,869 | ) | (172 | ) | ||||||
| $ | 5,631,610 | $ | 4,120,141 | $ | 1,839,740 | |||||||
3.
Information about our Operations in Different Geographic Areas:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006(2)
|
2005(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
REVENUES(3):
|
||||||||||||
|
United
States
|
$ | 2,986,442 | $ | 2,197,368 | $ | 688,748 | ||||||
|
Azerbaijan
|
469,984 | 406,510 | 424,061 | |||||||||
|
Saudi
Arabia
|
367,651 | 256,484 | 89,145 | |||||||||
|
Qatar
|
365,410 | 262,681 | 174,609 | |||||||||
|
India
|
246,881 | 25,752 | 36,993 | |||||||||
|
Canada
|
239,181 | 228,246 | 768 | |||||||||
|
Australia
|
172,838 | 7,201 | 84,511 | |||||||||
|
Malaysia
|
167,125 | 75,513 | 42,769 | |||||||||
|
Vietnam
|
131,438 | 102,680 | 16,945 | |||||||||
|
Thailand
|
130,419 | 129,753 | 52,209 | |||||||||
|
Indonesia
|
102,560 | 161,023 | 42,743 | |||||||||
|
Sweden
|
41,754 | 49,286 | - | |||||||||
|
Denmark
|
36,382 | 45,438 | - | |||||||||
|
Trinidad
|
36,220 | 27,213 | 11,310 | |||||||||
|
China
|
32,903 | 42,199 | - | |||||||||
|
Belgium
|
17,416 | 424 | - | |||||||||
|
United
Arab Emirates
|
10,598 | - | 776 | |||||||||
|
United
Kingdom
|
10,142 | 8,040 | 585 | |||||||||
|
France
|
9,934 | 10,207 | - | |||||||||
|
Germany
|
8,815 | 4,627 | - | |||||||||
|
Mexico
|
3,657 | 39,204 | 82,697 | |||||||||
|
Russia
|
1,165 | 4,477 | 89,928 | |||||||||
|
Other
Countries
|
42,695 | 35,815 | 943 | |||||||||
| $ | 5,631,610 | $ | 4,120,141 | $ | 1,839,740 | |||||||
|
(3) We
allocate geographic revenues based on the location of the customer’s
operations.
|
||||||||||||
|
PROPERTY,
PLANT AND EQUIPMENT, NET(4):
|
||||||||||||
|
United
States
|
$ | 333,815 | $ | 279,095 | $ | 193,512 | ||||||
|
United
Arab Emirates
|
154,113 | 60,707 | 36,932 | |||||||||
|
Indonesia
|
145,549 | 74,259 | 34,366 | |||||||||
|
Canada
|
114,472 | 34,529 | - | |||||||||
|
Mexico
|
42,607 | 3,523 | 12,693 | |||||||||
|
Australia
|
25,458 | 72 | - | |||||||||
|
India
|
18,912 | 21,183 | 6,808 | |||||||||
|
United
Kingdom
|
14,587 | 5,340 | - | |||||||||
|
Trinidad
|
12,763 | - | - | |||||||||
|
Singapore
|
9,315 | 1,203 | - | |||||||||
|
Denmark
|
8,943 | 8,403 | - | |||||||||
|
Malaysia
|
186 | 16 | 31,558 | |||||||||
|
Saudi
Arabia
|
- | 19,667 | - | |||||||||
|
Other
Countries
|
33,018 | 5,497 | 1,864 | |||||||||
| $ | 913,738 | $ | 513,494 | $ | 317,733 | |||||||
|
(4)
Our marine vessels are included in the country in which they are operating
as of December 31, 2007.
|
||||||||||||
4. Information
about our Major Customers:
In the
years ended December 31, 2007, 2006 and 2005, the U.S. Government accounted for
approximately 12%, 15% and 31%, respectively, of our total
revenues. We have included these revenues in our Government
Operations segment. In the year ended December 31, 2005, revenue from
a distinct customer of our Offshore Oil and Gas Construction segment was $369.6
million and represented 20% of our total revenues.
NOTE
19 – QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following tables set forth selected unaudited quarterly financial information
for the years ended December 31, 2007 and 2006:
|
Year
Ended December 31, 2007
Quarter
Ended
|
||||||||||||||||
|
March
31,
2007
|
June
30,
2007
|
Sept.
30,
2007
|
Dec.
31,
2007
|
|||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Revenues
|
$ | 1,363,430 | $ | 1,418,146 | $ | 1,324,018 | $ | 1,526,016 | ||||||||
|
Operating
income
(1)
|
$ | 192,478 | $ | 181,792 | $ | 155,150 | $ | 186,777 | ||||||||
|
Equity
in income from investees
|
$ | 7,241 | $ | 7,308 | $ | 12,477 | $ | 14,698 | ||||||||
|
Net
income
|
$ | 158,061 | $ | 149,374 | $ | 140,408 | $ | 159,985 | ||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net
income
|
$ | 0.72 | $ | 0.67 | $ | 0.63 | $ | 0.71 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Net
income
|
$ | 0.69 | $ | 0.66 | $ | 0.61 | $ | 0.70 | ||||||||
|
(1) Includes
equity in income from investees.
|
||||||||||||||||
|
Year
Ended December 31, 2006
Quarter
Ended
|
||||||||||||||||
|
March
31,
2006
|
June
30,
2006
|
Sept.
30,
2006
|
Dec.
31,
2006
|
|||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Revenues
|
$ | 644,907 | $ | 1,048,930 | $ | 1,118,260 | $ | 1,308,044 | ||||||||
|
Operating
income
(1)
|
$ | 67,728 | $ | 112,711 | $ | 124,100 | $ | 86,802 | ||||||||
|
Equity
in income from investees
|
$ | 7,547 | $ | 7,340 | $ | 10,310 | $ | 12,327 | ||||||||
|
Net
income
|
$ | 55,323 | $ | 47,014 | $ | 102,667 | $ | 125,511 | ||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net
income
|
$ | 0.26 | $ | 0.22 | $ | 0.47 | $ | 0.57 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Net
income
|
$ | 0.25 | $ | 0.21 | $ | 0.45 | $ | 0.55 | ||||||||
|
(1) Includes
equity in income from investees.
|
||||||||||||||||
Results
for each quarter in the year ended December 31, 2006 have been adjusted for the
change in accounting policy for drydocking costs, as discussed further in Note
1, and the stock splits effected in September 2007 and May 2006, as discussed
further in Note 9.
NOTE
20 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands, except shares and per share amounts)
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
from continuing operations
|
$ | 607,828 | $ | 317,621 | $ | 205,583 | ||||||
|
Income
from discontinued operations
|
- | 12,894 | 104 | |||||||||
|
Net
income for basic computation
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | ||||||
|
Weighted
average common shares
|
223,511,880 | 217,752,454 | 205,137,664 | |||||||||
|
Basic
earnings per common share:
|
||||||||||||
|
Income
from continuing operations
|
$ | 2.72 | $ | 1.46 | $ | 1.00 | ||||||
|
Income
from discontinued operations
|
0.00 | 0.06 | 0.00 | |||||||||
|
Net
income
|
$ | 2.72 | $ | 1.52 | $ | 1.00 | ||||||
|
Diluted:
|
||||||||||||
|
Income
from continuing operations
|
$ | 607,828 | $ | 317,621 | $ | 205,583 | ||||||
|
Income
from discontinued operations
|
- | 12,894 | 104 | |||||||||
|
Net
income for diluted computation
|
$ | 607,828 | $ | 330,515 | $ | 205,687 | ||||||
|
Weighted
average common shares (basic)
|
223,511,880 | 217,752,454 | 205,137,664 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options, restricted stock and performance shares
|
5,230,642 | 9,966,330 | 13,199,866 | |||||||||
|
Adjusted
weighted average common shares
|
228,742,522 | 227,718,784 | 218,337,530 | |||||||||
|
Diluted
earnings per common share:
|
||||||||||||
|
Income
from continuing operations
|
$ | 2.66 | $ | 1.39 | $ | 0.94 | ||||||
|
Income
from discontinued operations
|
0.00 | 0.06 | 0.00 | |||||||||
|
Net
income
|
$ | 2.66 | $ | 1.45 | $ | 0.94 | ||||||
NOTE
21 – PRO FORMA CONSOLIDATION (UNAUDITED)
On
February 22, 2006, several subsidiaries included in our Power Generation Systems
segment exited from the Chapter 11 Bankruptcy, which commenced on February 22,
2000. Due to the Chapter 11 Bankruptcy, we did not consolidate the
results of operations for these subsidiaries in our consolidated financial
statements from February 22, 2000 through February 22, 2006. The pro
forma information below presents combined results of operations as if these
subsidiaries had been reconsolidated at the beginning of the respective periods
presented. This pro forma information is not necessarily indicative of the
results of operations of the combined entities had the combination occurred at
the beginning of the periods presented, nor is it indicative of future
results.
|
Year
Ended December 31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
thousands)
|
||||||||
|
Revenues
|
$ | 4,378,408 | $ | 3,347,820 | ||||
|
Operating
Income (Loss)
(1)
|
$ | 393,019 | $ | (183,752 | ) | |||
|
Net
Income (Loss) (2)
|
$ | 332,307 | $ | (57,084 | ) | |||
|
Diluted
Earnings (Loss) Per Share
|
$ | 1.46 | $ | (0.26 | ) | |||
|
(1) Included
in Operating Income (Loss) for the year ended December 31, 2005 is
approximately $491 million of expenses related to asbestos and
certain other liability claims and various expenses associated with the
Chapter 11 Bankruptcy.
|
||||||||
|
(2)
Included in Net Income (Loss) for the year ended December 31, 2005 is
approximately $314 million, net of tax, of expenses related to asbestos
and certain other liability claims and various expenses associated with
the Chapter 11 Bankruptcy.
|
||||||||
For the
years ended December 31, 2007 and 2006, we had no disagreements with Deloitte
& Touche LLP on any accounting or financial disclosure
issues. For the year ended December 31, 2005, we had no disagreements
with PricewaterhouseCoopers LLP on any accounting or financial disclosure
issues. The information required by this item is incorporated by
reference to McDermott International, Inc.’s Current Report on Form 8-K filed
March 31, 2006.
|
Item
9A.
|
As of the
end of the period covered by this annual 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 the Chief Financial Officer concluded that the
design and operation of our disclosure controls and procedures are effective as
of December 31, 2007 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
forms and such information is accumulated and communicated to management as
appropriate to allow timely decisions regarding disclosure.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as that term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)
and for our assessment of the effectiveness of internal control over financial
reporting.
Our
internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of our consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of our
management and Board of Directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the consolidated
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
has conducted an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2007, based on the framework
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
This assessment included an evaluation of the design of our internal control
over financial reporting and testing of the operational effectiveness of those
controls. Based on our assessment under the criteria described above,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2007.
We
completed the purchase of all of the capital stock of Marine Mechanical
Corporation on May 1, 2007 and of substantially all the assets of Secunda
International Limited on July 27, 2007. In conducting the Company’s
evaluation of the effectiveness of its internal control over financial
reporting, management excluded these acquired businesses from
its 2007 internal control assessment, as permitted by the Securities and
Exchange Commission. As of December 31, 2007, these acquired
businesses represented approximately 8% of our
consolidated revenues and approximately 9% of our
consolidated total assets.
There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
To the
Board of Directors and Stockholders of McDermott International,
Inc.:
We have
audited the internal control over financial reporting of McDermott
International, Inc. and subsidiaries (the "Company") as of December 31, 2007,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. As described in Management’s Report on Internal
Control Over Financial Reporting, management excluded from its assessment the
internal control over financial reporting at Marine Mechanical Corporation and
Secunda International Limited, acquired on May 1, 2007 and July 27, 2007,
respectively, and whose financial statements constitute 9% of consolidated total
assets, respectively, and a combined 8% of consolidated revenues of the
consolidated financial statement amounts as of and for the year ended December
31, 2007. Accordingly, our audit did not include the internal control over
financial reporting at Marine Mechanical Corporation and Secunda International
Limited. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules as of and for the year ended December 31,
2007 of the Company and our report dated February 27, 2008 expressed an
unqualified opinion on those financial statements and financial statement
schedules and included an explanatory paragraph regarding the adoption of
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” as of January 1, 2007.
/s/
DELOITTE & TOUCHE LLP
Houston,
Texas
February
27, 2008
|
Item
9B.
|
On
February 26, 2008, Bruce W. Wilkinson, Chairman and Chief Executive Officer,
notified McDermott of his intention to retire as Chairman of our Board of
Directors and Chief Executive Officer by December 31, 2008.
The
Compensation Committee of our Board of Directors (the “Compensation Committee”)
administers the Executive Incentive Compensation Plan (“EICP”), a cash bonus
plan under which our executive officers participate. The payment
amount, if any, of an EICP award is determined based on: (1) the attainment of
financial performance measures, (2) the attainment of individual performance
measures, and (3) the exercise of the Compensation Committee’s discretionary
authority.
On
February 26, 2008, our Compensation Committee established 2008 target award
opportunities and confidential financial performance measures relative to those
opportunities for our named executive officers, Messrs. Bruce W. Wilkinson,
Robert A. Deason, John A. Fees, Francis S. Kalman, John T. Nesser III and
Michael S. Taff. For the year ending December 31, 2008, the target
award opportunities for these named executive officers are as
follows:
|
Named Executive Officer
|
Target
Award Opportunity
(as a percentage of 2008 base
salary)
|
|
Bruce
W. Wilkinson
|
100%
|
|
Robert
A. Deason
|
70%
|
|
John
A. Fees
|
70%
|
|
Francis
S. Kalman
|
65%
|
|
John
T. Nesser III
|
65%
|
|
Michael
S. Taff
|
55%
|
For 2008,
85% of the target award opportunity is attributable to financial performance
measures established by the Compensation Committee and 15% of the target award
opportunity is attributable to individual performance measures determined by our
Chief Executive Officer. The Compensation Committee retained its
discretion to increase or decrease an award in its discretion.
The
Compensation Committee established three levels of financial performance for
determining the minimum, target and maximum payment under the financial
performance component of the 2008 EICP award for these named executive
officers. For our 2008 EICP awards, our Compensation Committee set
the levels of financial performance based upon year-over-year increases in our
consolidated operating income. For Messrs. Deason and Fees, the
Compensation Committee divided the financial performance measure, with 60%
attributable to the operating income of their respective business unit, J. Ray
McDermott, S.A. or The Babcock & Wilcox Company, respectively, and 25%
attributable to McDermott’s consolidated operating income.
Additionally,
on February 25, 2008, our Compensation Committee approved the form of grant
agreement to be used in connection with grants of performance shares and
restricted stock to our officers and key employees pursuant to our 2001
Directors and Officers Long-Term Incentive Plan, as amended to date (“2001
LTIP”). A copy of the general form of agreement for grants of
performance shares under the 2001 LTIP are included as exhibits to this annual
report.
P
A R T I I I
The
information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers," respectively, in the
Proxy Statement for our 2008 Annual Meeting of Stockholders. The
information required by this item with respect to compliance with section 16(a)
of the Securities and Exchange Act of 1934, as amended, is incorporated by
reference to the material appearing under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement for our 2008 Annual
Meeting of Stockholders. The information required by this item with
respect to the Audit Committee and Audit Committee financial experts is
incorporated by reference to the material appearing in the “Committee” and
“Audit Committee” sections under the heading “Corporate Governance – Board of
Directors and Its Committees” in the Proxy Statement for our 2008 Annual Meeting
of Stockholders.
We have
adopted a Code of Business Conduct for our employees and directors, including,
specifically, our chief executive officer, our chief financial officer, our
chief accounting officer, and our other executive officers. Our code satisfies
the requirements for a “code of ethics” within the meaning of SEC rules. A copy
of the code is posted on our website, www.mcdermott.com/
under "Corporate Governance - Governance Policies - Code of Ethics for Chief
Executive Officer and Senior Financial Officers."
The
information required by this item is incorporated by reference to the material
appearing under the headings “Compensation Discussion and Analysis,”
“Compensation of Directors,” "Compensation of Executive Officers," “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee
Report” in the Proxy Statement for our 2008 Annual Meeting of
Stockholders.
The
information required by this item is incorporated by reference to (1) the Equity
Compensation Plan Information table appearing in Item 5 – “Market for the
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities” in Part II of this report and (2) the material appearing
under the headings "Security Ownership of Directors and Executive Officers" and
"Security Ownership of Certain Beneficial Owners" in the Proxy Statement for our
2008 Annual Meeting of Stockholders.
The
information in Note 12 to our consolidated financial statements included in this
report is incorporated by reference. Additional information required
by this item is incorporated by reference to the material appearing under the
heading “Corporate Governance – Director Independence” in the Proxy Statement
for our 2008 Annual Meeting of Stockholders.
The
information required by this item is incorporated by reference to the material
appearing under the heading “Ratification of Appointment of Independent
Registered Public Accounting Firm for Year Ending December 31, 2008” in the
Proxy Statement for our 2008 Annual Meeting of Stockholders.
P
A R T I V
The
following documents are filed as part of this Annual Report or incorporated by
reference:
|
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
||||||
|
Report
of Independent Registered Public Accounting Firm
|
|||||||
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|||||||
|
Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006 and
2005
|
|||||||
|
Consolidated
Statements of Comprehensive Income for the Years Ended December 31, 2007,
2006 and 2005
|
|||||||
|
Consolidated
Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 20007, 2006 and 2005
|
|||||||
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
|||||||
|
Notes
to Consolidated Financial Statements for the Years Ended December 31,
2007, 2006 and 2005
|
|||||||
|
2.
|
CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES
|
||||||
|
Schedule
II is filed with this report. All other schedules, except for Schedule I,
which will be filed on Form 10-K/A, for which provision is made of the
applicable regulations of the SEC have been omitted because they are not
required under the relevant instructions or because the required
information is included in the financial statements or the related
footnotes contained in this report.
|
|||||||
|
3.
|
EXHIBITS
|
||||||
|
Exhibit
Number
|
Description
|
||||||
|
3.1
|
McDermott
International, Inc.'s Articles of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to McDermott International, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007 (File No.
1-08430)).
|
||||||
|
3.2
|
McDermott
International, Inc.'s Amended and Restated By-laws (incorporated by
reference to Exhibit 3.1 to McDermott International, Inc.’s Current Report
on Form 8-K dated May 3, 2006 (File No. 1-08430)).
|
||||||
|
3.3
|
Amended
and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.1
to McDermott International, Inc.’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 (File No.
1-08430)).
|
||||||
|
4.1
|
Revolving
Credit Agreement dated as of December 9, 2003 among BWX Technologies,
Inc., as borrower, certain subsidiaries of BWX Technologies, Inc. as
guarantors, the initial lenders named therein, Credit Lyonnais New York
Branch, as administrative agent, and Credit Lyonnais Securities, as lead
arranger and sole bookrunner (incorporated by reference to Exhibit 4.8 of
McDermott International, Inc.’s Annual Report on Form 10-K, as amended,
for the year ended December 31, 2003 (File No.
1-08430)).
|
||||||
|
4.2
|
First
Amendment, dated as of March 18, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated March 18, 2005 (File No.
1-08430)).
|
||||||
|
4.3
|
Second
Amendment, dated as of November 7, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2005 (File No. 1-08430)).
|
||||||
|
4.4
|
Third
Amendment, dated as of December 22, 2006, to the Revolving Credit
Agreement dated as of December 9, 2003 among BWX Technologies, Inc., as
borrower, certain subsidiaries of BWX Technologies, Inc. as guarantors,
the initial lenders named therein, Calyon, New York Branch (formerly known
as Credit Lyonnais New York Branch), as administrative agent and lender,
as amended.
|
||||||
|
4.5
|
Fourth
Amendment, dated as of March 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007
(File No. 1-08430)).
|
||||||
|
4.6
|
Fifth
Amendment, dated as of October 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated October 29, 2007 (File No.
1-08430)).
|
||||||
|
4.7
|
Credit
Agreement dated as of June 6, 2006, by and among J. Ray McDermott, S.A.,
credit lenders, synthetic investors and issuers party thereto, Credit
Suisse, Cayman Islands Branch, Bank of America, N.A., Calyon New York
Branch, Fortis Capital Corp. and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
|
4.8
|
First
Amendment to Credit Agreement, dated as of August 4, 2006, by and among,
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party
thereto.
|
|
|
4.9
|
Second
Amendment to Credit Agreement, dated as of December 1, 2006, by and among,
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party
thereto.
|
|
|
4.10
|
Third
Amendment to Credit Agreement, dated as of July 9, 2007, by and among, J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
|
4.11
|
Fourth
Amendment to Credit Agreement, dated as of July 20, 2007, by and among, J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated July 20, 2007 (File No.
1-08430)).
|
|
|
4.12
|
Pledge
and Security Agreement by J. Ray McDermott, S.A. and certain of its
subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of June 6, 2006
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
|
4.13
|
Credit
Agreement dated as of February 22, 2006, by and among The Babcock
& Wilcox Company, certain lenders, synthetic investors and issuers
party thereto, Credit Suisse, Cayman Islands Branch, Credit Suisse
Securities (USA) LLC, JPMorgan Chase Bank, National Association, Wachovia
Bank, National Association and The Bank of Nova Scotia (incorporated by
reference to Exhibit 10.4 to McDermott International, Inc.’s Current
Report on Form 8-K dated February 21, 2006 (File
No. 1-08430)).
|
|
|
4.14
|
First
Amendment to Credit Agreement, dated as of July 9, 2007, by and among, The
Babcock & Wilcox Company, certain guarantors thereto, certain lenders
and issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.3 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
|
4.15
|
Second
Amendment to Credit Agreement, dated as of July 20, 2007, by and among,
The Babcock & Wilcox Company, certain guarantors thereto, certain
lenders and issuers party thereto, Credit Suisse, Cayman Islands Branch,
as administrative agent and collateral agent, and other agents party
thereto (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated July 20, 2007 (File
No. 1-08430)).
|
|
|
4.16
|
Pledge
and Security Agreement by The Babcock & Wilcox Company and certain of
its subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of February 22,
2006 (incorporated by reference to Exhibit 10.5 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 21,
2006 (File No. 1-08430)).
|
||
|
We
and certain of our consolidated subsidiaries are parties to other debt
instruments under which the total amount of securities authorized does not
exceed 10% of our total consolidated assets. Pursuant to
paragraph 4(iii)(A) of Item 601 (b) of Regulation S-K, we agree to furnish
a copy of those instruments to the Commission on
request.
|
|||
|
10.1*
|
McDermott
International, Inc.'s Executive Incentive Compensation Plan (incorporated
by reference to Appendix C to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on May 3, 2006, as
filed with the Commission under a Schedule 14A (File No.
1-08430)).
|
||
|
10.2*
|
McDermott
International, Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s Annual Report on Form10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994 (File No.
1-08430)).
|
||
|
10.3*
|
McDermott
International, Inc.'s Restated 1996 Officer Long-Term Incentive Plan, as
amended (incorporated by reference to Appendix B to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997, as filed with the Commission under
a Schedule 14A (File No. 1-08430)).
|
||
|
10.4*
|
McDermott
International, Inc.'s 1997 Director Stock Program (incorporated by
reference to Appendix A to McDermott International, Inc.'s Proxy Statement
for its Annual Meeting of Stockholders held on September 2, 1997, as filed
with the Commission under a Schedule 14A (File No.
1-08430)).
|
||
|
10.5*
|
McDermott
International, Inc.’s Amended and Restated 2001 Directors & Officers
Long-Term Incentive Plan (incorporated by reference to Appendix B to
McDermott International, Inc.’s Proxy Statement for its Annual Meeting of
Stockholders held on May 3, 2006, as filed with the Commission under a
Schedule 14A (File No. 1-08430)).
|
||
|
10.6*
|
McDermott
International, Inc. Supplemental Executive Retirement Plan, Effective
January 1, 2005 (incorporated by reference to Exhibit 10.2 to McDermott
International, Inc.’s Current Report on Form 8-K dated December 31, 2004
(File No. 1-08430)).
|
||
|
10.7*
|
Change
in Control Agreement dated June 30, 2004 between McDermott International,
Inc. and John A. Fees (incorporated by reference to Exhibit
10.5 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004 (File No. 1-08430)).
|
||
|
10.8*
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.20 to
McDermott International, Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2004 (File No. 1-08430)).
|
||
|
10.9*
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Robert A. Deason (incorporated by reference to Exhibit
10.21 to McDermott International, Inc.’s Annual Report on Form
10-K for the year ended December 31, 2004 (File No.
1-08430)).
|
||
|
10.10*
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Francis S. Kalman (incorporated by reference to Exhibit 10.22 to
McDermott International, Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2004 (File No. 1-08430)).
|
||||||
|
10.11*
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and John T. Nesser, III (incorporated by reference to Exhibit 10.23
to McDermott International, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 2004 (File No.
1-08430)).
|
||||||
|
10.12*
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Louis J. Sannino (incorporated by reference to Exhibit 10.24 to
McDermott International, Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2004) (File No. 1-08430)).
|
||||||
|
10.13*
|
Change in Control
Agreement, dated as of March 29, 2007, between McDermott International,
Inc. and Michael S. Taff (incorporated by reference to Exhibit 10.1 to
McDermott International, Inc.’s Current Report on Form 8-K dated March 26,
2007 (File No. 1-08430)).
|
||||||
|
10.14*
|
Arrangement
with Chief Financial Officer (incorporated by reference to Exhibit 10.1 to
McDermott International, Inc.’s Current Report on Form 8-K dated March 26,
2007 (File No. 1-08430)).
|
||||||
|
10.15*
|
McDermott
International Inc. Executive Compensation Incentive Plan
2007 performance goals (incorporated by reference to McDermott
International, Inc.’s Current Report on Form 8-K dated February 26, 2007
(File No. 1-08430)).
|
||||||
|
10.16*
|
McDermott
International, Inc. Executive Compensation Incentive Plan 2007 individual
goals (incorporated by reference to Part II, Item 5 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007 (File No. 1-08430)).
|
||||||
|
10.17*
|
Notice
of Grant (Stock Options and Deferred Stock Units) (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K filed May 18, 2005 (File No.
1-08430)).
|
||||||
|
10.18*
|
Form
of 2001 LTIP Stock Option Grant Agreement (incorporated by reference to
Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K
filed May 18, 2005 (File No. 1-08430)).
|
||||||
|
10.19*
|
Form
of 2001 LTIP Deferred Stock Unit Grant Agreement (incorporated by
reference to Exhibit 10.3 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
||||||
|
10.20*
|
Form
of 2001 LTIP Stock Option Grant Agreement to Nonemployee Directors
(incorporated by reference to Exhibit 10.5 to McDermott International,
Inc.’s Current Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
||||||
|
10.21*
|
Form
of 2001 LTIP Restricted Stock Grant Agreement to Nonemployee Directors
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated May 3, 2006 (File No.
1-08430)).
|
||||||
|
10.22*
|
Form
of 2001 LTIP 2006 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.2 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 3, 2006 (File No.
1-08430)).
|
||||||
|
10.23*
|
Form
of 2001 LTIP 2007 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K dated April 30, 2007 (File No. 1-08430)).
|
||||||
|
10.24*
|
Summary
of Arrangement with Named Executive Officer (incorporated by reference to
Exhibit 10.1 to McDermott International, Inc.’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2007 (File No.
1-08430)).
|
||||||
|
10.25*
|
Separation
Agreement between McDermott Incorporated and Francis S. Kalman dated
February 8, 2008 (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 14, 2008
(File No. 1-08430)).
|
||||||
|
10.26*
|
Form
of 2001 LTIP 2008 Performance Shares Grant Agreement.
|
||||||
|
10.27*
|
Form
of 2001 LTIP 2008 Restricted Stock Grant Agreement.
|
||||||
|
12.1
|
Ratio
of Earnings to Fixed Charges.
|
||||||
|
16.1
|
Letter
from PricewaterhouseCoopers (incorporated by reference to Exhibit 16.1 to
McDermott International, Inc.’s Current Report on Form 8-K dated March 27,
2006 (File No. 1-08430)).
|
||||||
|
21.1
|
Significant
Subsidiaries of the Registrant.
|
||||||
|
23.1
|
Consent
of PricewaterhouseCoopers LLP.
|
||||||
|
23.2
|
Consent
of Deloitte & Touche LLP.
|
||||||
|
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.
|
||||||
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
McDERMOTT
INTERNATIONAL, INC.
|
||
|
/s/
Bruce W. Wilkinson
|
||
|
February
27, 2008
|
By:
|
Bruce
W. Wilkinson
|
|
Chairman
of the Board and
|
||
|
Chief
Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.
|
Signature
|
Title
|
|
|
/s/
Bruce W. Wilkinson
|
Chairman
of the Board, Chief Executive Officer
and
Director (Principal Executive Officer)
|
|
|
Bruce
W. Wilkinson
|
||
|
/s/
Michael S. Taff
|
Senior
Vice President and Chief Financial Officer
(Principal
Financial Officer and Duly Authorized Representative)
|
|
|
Michael
S. Taff
|
||
|
/s/
Dennis S. Baldwin
|
Vice
President and Chief Accounting Officer
(Principal
Accounting Officer and Duly Authorized Representative)
|
|
|
Dennis
S. Baldwin
|
||
|
/s/
John F. Bookout, III
|
Director
|
|
|
John
F. Bookout, III
|
||
|
/s/
Roger A. Brown
|
Director
|
|
|
Roger
A. Brown
|
||
|
/s/
Ronald C. Cambre
|
Director
|
|
|
Ronald
C. Cambre
|
||
|
/s/
Bruce DeMars
|
Director
|
|
|
Bruce
DeMars
|
||
|
/s/
Robert W. Goldman
|
Director
|
|
|
Robert
W. Goldman
|
||
|
/s/
Robert L. Howard
|
Director
|
|
|
Robert
L. Howard
|
||
|
/s/
Oliver D. Kingsley, Jr.
|
Director
|
|
|
Oliver
D. Kingsley, Jr.
|
||
|
/s/
D. Bradley McWilliams
|
Director
|
|
|
D.
Bradley McWilliams
|
||
|
/s/
Thomas C. Schievelbein
|
Director
|
|
|
Thomas
C. Schievelbein
|
||
February
27, 2008
Schedule
II
McDERMOTT
INTERNATIONAL, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
Additions
|
||||||||||||||||
|
Description
|
Balance
at
Beginning
of Period
|
Charged
to
Costs
and Expenses
(1)
|
Charged
to Other
Accounts
|
Balance
at
End
of Period
|
||||||||||||
|
Valuation
Allowance for Deferred Tax Assets (2)
|
||||||||||||||||
|
Year
Ended December 31, 2007
|
$ | (152,950 | ) | $ | 52,333 | $ | - | $ | (100,617 | ) | ||||||
|
Year
Ended December 31, 2006
|
$ | (126,613 | ) | $ | (226,337 | ) | - | $ | (152,950 | ) | ||||||
|
Year
Ended December 31, 2005
|
$ | (188,271 | ) | $ | 67,249 | $ | (5,591 | ) | $ | (126,613 | ) | |||||
|
(1) Net
of reductions and other adjustments, all of which are charged to costs and
expenses
|
||||||||||||||||
|
(2) Amounts
charged to other accounts included in other comprehensive income (minimum
pension liability)
|
||||||||||||||||
INDEX
TO EXHIBITS
|
Exhibit
Number
|
Description
|
Sequentially
Numbered
Pages
|
|
3.1
|
McDermott
International, Inc.'s Articles of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to McDermott International, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007 (File No.
1-08430)).
|
|
3.2
|
McDermott
International, Inc.'s Amended and Restated By-laws (incorporated by
reference to Exhibit 3.1 to McDermott International, Inc.’s Current Report
on Form 8-K dated May 3, 2006 (File No. 1-08430)).
|
|
3.3
|
Amended
and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.1 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-08430)).
|
|
4.1
|
Revolving
Credit Agreement dated as of December 9, 2003 among BWX Technologies,
Inc., as borrower, certain subsidiaries of BWX Technologies, Inc. as
guarantors, the initial lenders named therein, Credit Lyonnais New York
Branch, as administrative agent, and Credit Lyonnais Securities, as lead
arranger and sole bookrunner) (incorporated by reference to Exhibit 4.8 of
McDermott International, Inc.’s Annual Report on Form 10-K, as amended,
for the year ended December 31, 2003 (File No.
1-08430)).
|
|
4.2
|
First
Amendment, dated as of March 18, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8- K dated March 18, 2005 (File No.
1-08430)).
|
|
4.3
|
Second
Amendment, dated as of November 7, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2005 (File No. 1-08430)).
|
|
4.4
|
Third
Amendment, dated as of December 22, 2006, to the Revolving Credit
Agreement dated as of December 9, 2003 among BWX Technologies, Inc., as
borrower, certain subsidiaries of BWX Technologies, Inc. as guarantors,
the initial lenders named therein, Calyon, New York Branch (formerly known
as Credit Lyonnais New York Branch), as administrative agent and lender,
as amended.
|
|
4.5
|
Fourth
Amendment, dated as of March 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007
(File No. 1-08430)).
|
|
4.6
|
Fifth
Amendment, dated as of October 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated October 29, 2007 (File No.
1-08430)).
|
|
4.7
|
Credit
Agreement dated as of June 6, 2006, by and among J. Ray McDermott, S.A.,
credit lenders, synthetic investors and issuers party thereto, Credit
Suisse, Cayman Islands Branch, Bank of America, N.A., Calyon New York
Branch, Fortis Capital Corp. and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
4.8
|
First
Amendment to Credit Agreement, dated as of August 4, 2006, by and among,
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party
thereto.
|
|
4.9
|
Second
Amendment to Credit Agreement, dated as of December 1, 2006, by and among,
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party
thereto.
|
|
4.10
|
Third
Amendment to Credit Agreement, dated as of July 9, 2007, by and among, J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
4.11
|
Fourth
Amendment to Credit Agreement, dated as of July 20, 2007, by and among, J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated July 20, 2007 (File No.
1-08430)).
|
|
4.12
|
Pledge
and Security Agreement by J. Ray McDermott, S.A. and certain of its
subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of June 6, 2006
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
4.13
|
Credit
Agreement dated as of February 22, 2006, by and among The Babcock
& Wilcox Company, certain lenders, synthetic investors and issuers
party thereto, Credit Suisse, Cayman Islands Branch, Credit Suisse
Securities (USA) LLC, JPMorgan Chase Bank, National Association, Wachovia
Bank, National Association and The Bank of Nova Scotia (incorporated by
reference to Exhibit 10.4 to McDermott International, Inc.’s Current
Report on Form 8-K dated February 21, 2006 (File
No. 1-08430)).
|
|
4.14
|
First
Amendment to Credit Agreement, dated as of July 9, 2007, by and among, The
Babcock & Wilcox Company, certain guarantors thereto, certain lenders
and issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.3 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
4.15
|
Second
Amendment to Credit Agreement, dated as of July 20, 2007, by and among,
The Babcock & Wilcox Company, certain guarantors thereto, certain
lenders and issuers party thereto, Credit Suisse, Cayman Islands Branch,
as administrative agent and collateral agent, and other agents party
thereto (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated July 20, 2007 (File
No. 1-08430)).
|
|
4.16
|
Pledge
and Security Agreement by The Babcock & Wilcox Company and certain of
its subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of February 22,
2006 (incorporated by reference to Exhibit 10.5 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 21,
2006 (File No. 1-08430)).
|
|
10.1
|
McDermott
International, Inc.'s Executive Incentive Compensation Plan (incorporated
by reference to Appendix C to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on May 3, 2006, as
filed with the Commission under a Schedule 14A (File No.
1-08430)).
|
|
10.2
|
McDermott
International, Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s Annual Report on Form10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994 (File No.
1-08430)).
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10.3
|
McDermott
International, Inc.'s Restated 1996 Officer Long-Term Incentive Plan, as
amended (incorporated by reference to Appendix B to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997, as filed with the Commission under
a Schedule 14A (File No. 1-08430)).
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|
10.4
|
McDermott
International, Inc.'s 1997 Director Stock Program (incorporated by
reference to Appendix A to McDermott International, Inc.'s Proxy Statement
for its Annual Meeting of Stockholders held on September 2, 1997, as filed
with the Commission under a Schedule 14A (File No.
1-08430)).
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|
10.5
|
McDermott
International, Inc.’s Amended and Restated 2001 Directors & Officers
Long-Term Incentive Plan (incorporated by reference to Appendix B to
McDermott International, Inc.’s Proxy Statement for its Annual Meeting of
Stockholders held on May 3, 2006, as filed with the Commission under a
Schedule 14A (File No. 1-08430)).
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|
10.6
|
McDermott
International, Inc. Supplemental Executive Retirement Plan, Effective
January 1, 2005 (incorporated by reference to Exhibit 10.2 to McDermott
International, Inc.’s Current Report on Form 8-K dated December 31, 2004
(File No. 1-08430)).
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|
10.7
|
Change
in Control Agreement dated June 30, 2004 between McDermott International,
Inc. and John A. Fees (incorporated by reference to Exhibit 10.5 to
McDermott International, Inc.’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File No. 1-08430)).
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|
10.8
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.20 to
McDermott International, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 1-08430)).
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|
10.9
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Robert A. Deason (incorporated by reference to Exhibit 10.21 to
McDermott International, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 1-08430)).
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|
10.10
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Francis S. Kalman (incorporated by reference to Exhibit 10.22 to
McDermott International, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 1-08430)).
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|
10.11
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and John T. Nesser, III (incorporated by reference to Exhibit 10.23
to McDermott International, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 1-08430)).
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|
10.12
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Louis J. Sannino (incorporated by reference to Exhibit 10.24 to
McDermott International, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 1-08430)).
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|
10.13
|
Change in Control
Agreement, dated as of March 29, 2007, between McDermott International,
Inc. and Michael S. Taff (incorporated by reference to Exhibit 10.1 to
McDermott International, Inc.’s Current Report on Form 8-K dated March 26,
2007 (File No. 1-08430)).
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|
10.14
|
Arrangement
with Chief Financial Officer (incorporated by reference to Exhibit 10.1 to
McDermott International, Inc.’s Current Report on Form 8-K dated March 26,
2007 (File No. 1-08430)).
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|
10.15
|
McDermott
International Inc. Executive Compensation Incentive Plan 2006 Performance
Goals (incorporated by reference to McDermott International, Inc.’s
Current Report on Form 8-K dated February 27, 2006 (File No.
1-08430)).
|
|
10.16
|
McDermott
International, Inc. Executive Compensation Incentive Plan 2007 individual
goals (incorporated by reference to Part II, Item 5 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007 (File No. 1-08430)).
|
|
10.17
|
Notice
of Grant (Stock Options and Deferred Stock Units) (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K filed May 18, 2005 (File No.
1-08430)).
|
|
10.18
|
Form
of 2001 LTIP Stock Option Grant Agreement (incorporated by reference to
Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K
filed May 18, 2005 (File No. 1-08430)).
|
|
10.19
|
Form
of 2001 LTIP Deferred Stock Unit Grant Agreement (incorporated by
reference to Exhibit 10.3 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
|
10.20
|
Form
of 2001 LTIP Stock Option Grant Agreement to Nonemployee Directors
(incorporated by reference to Exhibit 10.5 to McDermott International,
Inc.’s Current Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
|
10.21
|
Form
of 2001 LTIP Restricted Stock Grant Agreement to Nonemployee Directors
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated May 3, 2006 (File No.
1-08430)).
|
|
10.22
|
Form
of 2001 LTIP 2006 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.2 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 3, 2006 (File No.
1-08430)).
|
|
10.23
|
Form
of 2001 LTIP 2007 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K dated April 30, 2007 (File No.
1-08430)).
|
|
10.24
|
Summary
of Arrangement with Named Executive Officer (incorporated by reference to
Exhibit 10.1 to McDermott International, Inc.’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2007 (File No.
1-08430)).
|
|
10.25
|
Separation
Agreement between McDermott Incorporated and Francis S. Kalman dated
February 8, 2008 (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 14, 2008
(File No. 1-08430)).
|
|
10.26
|
Form
of 2001 LTIP 2008 Performance Shares Grant Agreement.
|
|
10.27
|
Form
of 2001 LTIP 2008 Restricted Stock Grant Agreement.
|
|
12.1
|
Ratio
of Earnings to Fixed Charges.
|
|
16.1
|
Letter
from PricewaterhouseCoopers (incorporated by reference to Exhibit 16.1 to
McDermott International, Inc.’s Current Report on Form 8-K dated March 27,
2006 (File No. 1-08430)).
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|
21.1
|
Significant
Subsidiaries of the Registrant.
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP.
|
|
23.2
|
Consent
of Deloitte & Touche LLP.
|
|
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.
|