NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
McDermott International, Inc. (MII), a corporation incorporated under the laws of the Republic of Panama in 1959, is a leading
engineering, procurement, construction and installation (EPCI) company focused on designing and executing complex offshore oil and gas projects worldwide. Providing fully integrated EPCI services, we deliver fixed and floating production
facilities, pipeline installations and subsea systems from concept to commissioning. Operating in approximately 20 countries across the Americas, Middle East and Asia Pacific, our integrated resources include approximately 14,000 employees and a
diversified fleet of marine vessels, fabrication facilities and engineering offices. We support our activities with comprehensive project management and procurement services, while utilizing our fully integrated capabilities in both shallow water
and deepwater construction. Our customers include national, major integrated and other oil and gas companies, and we operate in most major offshore oil and gas producing regions throughout the world. We execute our contracts through a variety of
methods, principally fixed-price, but also including cost reimbursable, cost-plus, day-rate and unit-rate basis or some combination of those methods. In these notes to our unaudited condensed consolidated financial statements, unless the context
otherwise indicates, we, us and our mean MII and its consolidated subsidiaries.
Basis of
Presentation
We have presented our unaudited condensed consolidated financial statements in U.S. Dollars, pursuant to the rules
and regulations of the Securities and Exchange Commission (the SEC) applicable to interim reporting. Financial information and disclosures normally included in our financial statements prepared annually in accordance with accounting
principles generally accepted in the United States (GAAP) have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and the accompanying notes in our annual
report on Form 10-K for the year ended December 31, 2013.
We have included all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation. These condensed consolidated financial statements include the accounts of McDermott International, Inc., its consolidated subsidiaries and controlled entities. 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 unconsolidated affiliates or joint ventures. We have eliminated all intercompany
transactions and accounts.
Certain 2013 amounts in the condensed consolidated balance sheet and statement of cash flows have been
reclassified to conform to the 2014 presentation.
Business Segments
In March 2014, we changed our organizational structure to orient around our offshore and subsea business activities through four primary
geographic regions. The four geographic regions, which we consider to be our operating segments, consist of Asia Pacific, Americas (previously Atlantic), Middle East and North Sea and Africa. The Caspian is no longer considered an operating segment
and will continue to be aggregated in the Middle East reporting segment. The North Sea and Africa operating segment is also aggregated into the Middle East reporting segment due to the proximity of regions and similarities in the nature of services
provided, economic characteristics and oversight responsibilities. Accordingly, we continue to report financial results under reporting segments consisting of Asia Pacific, Americas and the Middle East. We also report certain corporate and other
non-operating activities under the heading Corporate and other. Corporate and other primarily
8
reflects corporate personnel and activities, incentive compensation programs and other costs, which are generally fully allocated to our operating segments. The only corporate costs currently not
being allocated to our operating segments are the restructuring costs associated with our corporate reorganization. See Note 9 for summarized financial information on our segments.
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 based on work performed, man hours, or a cost-to-cost method, as applicable to the activity involved. We include the
amount of accumulated contract costs and estimated earnings that exceed billings to customers in contracts in progress. We include billings to customers that exceed accumulated contract costs and estimated earnings in advance billings on contracts.
Most long-term contracts contain provisions for progress payments. We expect to invoice customers for and collect all unbilled revenues. Certain costs are generally excluded from the cost-to-cost method of measuring progress, such as significant
procurement costs for materials and third-party subcontractors. Total estimated project costs, and resulting income, are affected by changes in the expected cost of materials and labor, productivity, vessel costs, 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 projects completion and, therefore, the timing and amount of revenue and income
recognition.
In addition, change orders, which are a normal and recurring part of our business, can increase (and sometimes
substantially) the future scope and cost of a job. Therefore, change order awards (although frequently beneficial in the long term) can have the short-term effect of reducing the job percentage of completion and thus the revenues and profits
recognized to date. We regularly review contract price and cost estimates as the work progresses and reflect adjustments in profit, proportionate to the job percentage of completion in the period when those estimates are revised. Revenue from
unapproved change orders is generally recognized to the extent of the lesser of amounts management expects to recover or costs incurred. Additionally, to the extent that claims included in backlog, including those that arise from change orders
which are under dispute or which have been previously rejected by the customer, are not resolved in our favor, there could be reductions in or reversals of previously reported, revenues and profits, and charges against current earnings, which could
be material.
Claims Revenue
Claims revenue may relate to various factors, including the procurement of materials, equipment performance failures, change order disputes or
schedule disruptions and other delays, including those associated with weather or sea conditions. Claims revenue, when recorded, is only recorded to the extent of the lesser of the amounts management expects to recover or the associated costs
incurred in our consolidated financial statements. We include certain unapproved claims in the applicable contract values when we have a legal basis to do so, consider collection to be probable and believe we can reliably estimate the ultimate
value. Amounts attributable to unapproved change orders are not included in claims. We continue to actively engage in negotiations with our customers on our outstanding claims. However, these claims may be resolved at amounts that differ from our
current estimates, which could result in increases or decreases in future estimated contract profits or losses. Claims are generally negotiated over the course of the respective projects and many of our projects are long-term in nature. None of the
claims as of March 31, 2014 were involved in litigation.
The amount of revenues and costs included in our estimates at completion
(i.e., contract values) associated with such claims was $6.5 million and $225.8 million as of March 31, 2014 and March 31, 2013, respectively. All of those claim amounts at March 31, 2014 were related to our Middle East segment. For
the three months ended March 31, 2014, no revenues and costs pertaining to claims were included in our condensed consolidated financial statements. For the three months ended March 31, 2013, $29.0 million of revenues and costs
pertaining to claims were included in our condensed consolidated financial statements.
9
Our unconsolidated joint ventures did not include any claims revenue or associated cost in their
financial results for the period ended March 31, 2014. For the period ended March 31, 2013, our unconsolidated joint ventures included $3.7 million of claims revenue and associated costs in their financial results.
Deferred Profit Recognition
For contracts as to which we are unable to estimate the final profitability due to their uncommon nature, including first-of-a-kind projects,
we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these contracts, we only recognize gross margin when reliably estimable and the level of uncertainty has been significantly reduced, which we
generally determine to be when the contract is at least 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 as deferred profit recognition
contracts. If, while being accounted for under our deferred profit recognition policy, a current estimate of total contract costs indicates a loss, the projected loss is recognized in full and the project is accounted for under our normal revenue
recognition guidelines. At March 31, 2014, no projects were accounted for under our deferred profit recognition policy.
Completed
Contract Method
Under the completed contract method, revenue and gross profit is recognized only when a contract is completed or
substantially complete. We generally do not enter into fixed-price contracts without an estimate of cost to complete that we believe to be accurate. However, it is possible that in the time between contract execution and the start of work on a
project, we could lose the 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. We did not enter into any contracts that we accounted for under the completed contract method during the quarters ended March 31, 2014 and March 31, 2013.
Loss Recognition
A risk
associated with fixed-priced contracts is that revenue from customers may not 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 and vessel productivity, vessel repair requirements, weather downtime, subcontractor or supplier performance, pipeline lay rates or steel and other raw material prices. Increases in costs associated with our fixed-price contracts could have a
material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of
operations and cash flows.
As of March 31, 2014, we have provided for our estimated costs to complete on 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. Variations from estimated contract performance could result in material adjustments to
operating results for any fiscal quarter or year. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.
Of the March 31, 2014 backlog amount of $4.4 billion, approximately $550.7 million relates to nine active projects that are in loss
positions, whereby future revenues are expected to equal costs when recognized. Included in this amount is $191.6 million of backlog associated with an EPCI project in Altamira, which is expected to be completed in the third quarter of 2015, $144.6
million pertaining to a five-year charter of the
Agile
in Brazil, which began in early 2012, and $65.9 million relating to a subsea project in the U.S. Gulf of Mexico scheduled for completion during 2014, all of which are being conducted by
our Americas segment. The amount also includes $91.5 million of backlog relating to an EPCI project in Saudi Arabia, in our Middle East segment, which is expected to be completed by the end of 2015. These four projects represent approximately 90% of
the backlog amount in a loss position. It is possible that our estimates of gross profit could increase or decrease based on changes in productivity, actual downtime and the resolution of change orders and claims with the customers.
10
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, and variances could materially affect our financial condition and results of operations in future periods. Changes in project
estimates generally exclude change orders and changes in scope, but may include, without limitation, unexpected changes in weather conditions, productivity, unanticipated vessel repair requirements, customer, subcontractor and supplier delays and
other costs. We generally expect to experience a reasonable amount of unanticipated events, and some of these events can result in significant cost increases above cost amounts we previously estimated. As of March 31, 2014, we have provided for
our estimated costs to complete on 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. Variations from estimated contract
performance could result in material adjustments to operating results.
The following is a discussion of our most significant changes in
estimates that impacted operating income for the three months ended March 31, 2014 and 2013.
2014 Period
Operating income for the three months ended March 31, 2014 was impacted by changes in cost estimates relating to projects in each of our
segments.
The Asia Pacific segment experienced an improvement of approximately $20.6 million mostly due to changes in estimates on a
subsea project in Malaysia during the quarter ended March 31, 2014, primarily due to productivity improvements on our marine vessels as well as offshore support activities.
The Middle East segment was negatively impacted by losses of approximately $31.9 million, mostly due to changes in estimates on three projects
in Saudi Arabia during the three months ended March 31, 2014. On two EPCI projects in Saudi Arabia, we increased our estimated cost at completion by approximately $24.3 million, primarily as a result of vessel downtime due to weather and
standby delays (which may be recoverable from the customer, but which were not recognizable at March 31, 2014), and reduced productivity on fabrication and engineering activities. Both projects remain in a profitable position at March 31,
2014. On another EPCI project in Saudi Arabia, we increased our estimated cost to complete by approximately $7.6 million, primarily due to increases in our cost estimates for the completion of onshore activities on the project.
The Americas segment was negatively impacted by changes in estimates of approximately $35.4 million on an EPCI project in Altamira during the
quarter ended March 31, 2014. The estimated cost at completion on this project increased primarily due to expected delays in final project delivery, resulting in a revised execution plan, increased fabrication labor costs and recognition of
liquidated damages.
2013 Period
Operating income for the three months ended March 31, 2013 was impacted by changes in cost estimates relating to projects in each of our
segments.
The Middle East segment was impacted by changes in estimates on five projects. In total, those five projects recognized
approximately $7.7 million in project losses in the three months ended March 31, 2013, as a result of increases to the estimated costs to complete those projects of approximately $38.0 million. On one of those projects, we increased our
estimated cost at completion by $17.5 million, which resulted in the recognition of a $5.4 million loss in the three months ended March 31, 2013, primarily due to changes in the projects execution plan, which resulted in additional
third-party construction vessel usage and marine downtime, cost overruns on offshore hook-up activities, and additional costs for project management-related activities. This project remained in a profitable position at March 31, 2014.
11
On three projects in the Middle East segment, we increased our estimated cost at completion by
$16.7 million, which resulted in the recognition of only $1.8 million of project income in the three months ended March 31, 2013. The changes in estimated cost at completion were principally driven by cost overruns associated with marine
equipment downtime, including productivity, hook-up and project management-related activities. Each of those projects was in a profitable position at March 31, 2013. One of those projects was completed in the third quarter of 2013, and the
remaining two projects are expected to be completed during 2014. On the remaining project in the Middle East segment, we recognized incremental costs of $4.1 million in the three months ended March 31, 2013, primarily due to cost overruns on
marine installation activities. That project was in a loss position at March 31, 2013 and was completed in the second quarter of 2013.
The Americas segment was impacted by changes in estimates on two projects. On one of those projects, we recognized approximately $6.9 million
of incremental project losses in the three months ended March 31, 2013, primarily due to declines in fabrication productivity. That project remained in a loss position through its completion in the fourth quarter of 2013. The other project was
completed in the first quarter of 2013 and recognized $2.4 million of cost savings as a result of efficiencies associated with fabrication activities.
The Asia Pacific segment benefited from certain changes in estimates, which resulted in a reduction of estimated costs at completion in the
three months ended March 31, 2013 of approximately $14.0 million, primarily due to efficiencies associated with the marine campaigns on two of our EPCI projects, both of which were completed in 2013. These benefits were partially offset by
project charges recognized in the three months ended March 31, 2013 of approximately $4.1 million associated with cost overruns on support vessels on one of our subsea projects, which remains in a loss position and is expected to be completed
in the second quarter of 2014.
Loss Contingencies
We record 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 litigation and other proceedings, as
discussed in Note 10. We have accrued our estimates of the probable losses associated with these matters, and associated legal costs are generally recognized in selling, general and administrative expenses as incurred. 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.
Cash and Cash Equivalents
Our cash and cash equivalents are highly liquid investments with maturities of three months or less when we purchase them. We record cash and
cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes. At March 31, 2014, all of our restricted cash was held in restricted foreign-entity accounts.
Investments
We
classify investments available for current operations as current assets in the accompanying balance sheets, and 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)net. The cost of securities sold is based on
the specific identification method. We include interest earned on securities in interest income.
12
Investments in Unconsolidated Affiliates
We generally use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50%, and in which we do
not exercise control over the entity. Currently, most of our investments in affiliates that are not consolidated are recorded using the equity method.
Accounts Receivable
Accounts
ReceivableTrade, Net
A summary of contract receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Contract receivables:
|
|
|
|
|
|
|
|
|
Contracts in progress
|
|
$
|
189,044
|
|
|
$
|
192,745
|
|
Completed contracts
|
|
|
55,880
|
|
|
|
77,248
|
|
Retainages
|
|
|
110,718
|
|
|
|
127,698
|
|
Unbilled
|
|
|
4,325
|
|
|
|
14,571
|
|
Less allowances
|
|
|
(27,905
|
)
|
|
|
(30,404
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivabletrade, net
|
|
$
|
332,062
|
|
|
$
|
381,858
|
|
|
|
|
|
|
|
|
|
|
We expect to invoice our unbilled receivables once certain milestones or other metrics are reached, and we
expect to collect all unbilled amounts. We believe that our provision for losses on uncollectible accounts receivable is adequate for our credit loss exposure.
Contract retainages generally represent amounts withheld by our customers until project completion, in accordance with the terms of the
applicable contracts. The following is a summary of retainages on our contracts:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Retainages expected to be collected within one year
|
|
$
|
110,718
|
|
|
$
|
127,698
|
|
Retainages expected to be collected after one year
|
|
|
107,315
|
|
|
|
65,365
|
|
|
|
|
|
|
|
|
|
|
Total retainages
|
|
$
|
218,033
|
|
|
$
|
193,063
|
|
|
|
|
|
|
|
|
|
|
We have included in accounts receivabletrade, net, retainages expected to be collected within one year.
Retainages expected to be collected after one year are included in other assets.
Accounts ReceivableOther
Accounts receivableother was $109.3 million and $89.3 million at March 31, 2014 and December 31, 2013, respectively. The
balance primarily relates to transactions with unconsolidated affiliates, receivables associated with our hedging activities, value-added tax, other items and employee receivables. Employee receivables were $4.2 million and $4.5 million as of
March 31, 2014 and December 31, 2013, respectively. These amounts are expected to be collected within 12 months, and any allowance for doubtful accounts on our accounts receivableother is based on our estimate of the amount of
probable losses due to the inability to collect these amounts (based on historical collection experience and other available information). As of March 31, 2014 and December 31, 2013, no such allowance for doubtful accounts was recorded.
13
Contracts in Progress and Advance Billings on Contracts
Contracts in progress were $431.9 million and $426.0 million at March 31, 2014 and December 31, 2013, respectively. Advance
billings on contracts were $278.9 million at both March 31, 2014 and December 31, 2013. A detail of the components of contracts in progress and advance billings on contracts is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Costs incurred less costs of revenue recognized
|
|
$
|
127,773
|
|
|
$
|
65,113
|
|
Revenues recognized less billings to customers
|
|
|
304,120
|
|
|
|
360,873
|
|
|
|
|
|
|
|
|
|
|
Contracts in Progress
|
|
$
|
431,893
|
|
|
$
|
425,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Billings to customers less revenue recognized
|
|
$
|
496,040
|
|
|
$
|
466,205
|
|
Costs incurred less costs of revenue recognized
|
|
|
(217,159
|
)
|
|
|
(187,276
|
)
|
|
|
|
|
|
|
|
|
|
Advance Billings on Contracts
|
|
$
|
278,881
|
|
|
$
|
278,929
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the measurement date. An established hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Companys assumptions about the factors that market participants would use in valuing the asset or liability.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and
bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
|
Level 1inputs are based upon quoted prices for identical instruments traded in active markets.
|
|
|
|
Level 2inputs are based upon quoted prices for similar instruments in active markets, quoted prices for similar or identical instruments in inactive markets and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
|
|
|
|
Level 3inputs are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore
determined using model-based techniques that include option pricing models, discounted cash flow models and similar valuation techniques.
|
The carrying amounts that we have reported for financial instruments, including cash and cash equivalents, accounts receivables and accounts
payable approximate their fair values. See Note 6 for additional information regarding fair value measurements.
14
Derivative Financial Instruments
Our worldwide operations give rise to exposure to changes in certain market conditions, which may adversely impact our financial performance.
When we deem it appropriate, we use derivatives as a risk management tool to mitigate the potential impacts of certain market risks. The primary market risk we manage through the use of derivative instruments is movement in foreign currency exchange
rates. We use foreign currency derivative contracts to reduce the impact of changes in foreign currency exchange rates on our operating results. We use these instruments to hedge our exposure associated with revenues and/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.
In certain cases, contracts with our customers contain provisions under which some payments from our customers are denominated in U.S. Dollars
and other payments are denominated in a foreign currency. In general, the payments denominated in a foreign currency are designed to compensate us for costs that we expect to incur in such foreign currency. In these cases, we may use derivative
instruments to reduce the risks associated with foreign currency exchange rate fluctuations arising from differences in timing of our foreign currency cash inflows and outflows. See Note 5 for additional information regarding derivative financial
instruments.
Foreign Currency Translation
We translate assets and liabilities of our foreign operations, other than operations in highly inflationary economies, into U.S. Dollars at
period-end 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 income (loss) (AOCI), net of tax.
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. See Note 8 for our earnings per share computations.
Accumulated Other
Comprehensive Loss
The components of AOCI included in stockholders equity are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Foreign currency translation adjustments
|
|
$
|
(2,882
|
)
|
|
$
|
(2,562
|
)
|
Net gain on investments
|
|
|
214
|
|
|
|
238
|
|
Net loss on derivative financial instruments
|
|
|
(30,824
|
)
|
|
|
(45,386
|
)
|
Unrecognized losses on benefit obligations
|
|
|
(89,250
|
)
|
|
|
(92,421
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(122,742
|
)
|
|
$
|
(140,131
|
)
|
|
|
|
|
|
|
|
|
|
15
The following tables present the components of AOCI and the amounts that were reclassified during
the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2014
|
|
Unrealized holding
loss on investment
|
|
|
Deferred gain
(loss) on
derivatives
(1)
|
|
|
Foreign
currency gain
(loss)
|
|
|
Defined benefit
pension plans loss
(2)
|
|
|
TOTAL
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Balance, December 31, 2013
|
|
$
|
238
|
|
|
$
|
(45,386
|
)
|
|
$
|
(2,562
|
)
|
|
$
|
(92,421
|
)
|
|
$
|
(140,131
|
)
|
Other comprehensive income (loss) before reclassification
|
|
|
(24
|
)
|
|
|
12,358
|
|
|
|
(320
|
)
|
|
|
|
|
|
|
12,014
|
|
Amounts reclassified from AOCI
|
|
|
|
|
|
|
2,204
|
(3)
|
|
|
|
|
|
|
3,171
|
(4)
|
|
|
5,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(24
|
)
|
|
|
14,562
|
|
|
|
(320
|
)
|
|
|
3,171
|
|
|
|
17,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2014
|
|
$
|
214
|
|
|
$
|
(30,824
|
)
|
|
$
|
(2,882
|
)
|
|
$
|
(89,250
|
)
|
|
$
|
(122,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2013
|
|
Unrealized holding
loss on investment
|
|
|
Deferred gain
(loss) on
derivatives
(1)
|
|
|
Foreign
currency gain
(loss)
|
|
|
Defined benefit
pension plans loss
(2)
|
|
|
TOTAL
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Balance, December 31, 2012
|
|
$
|
(2,315
|
)
|
|
$
|
11,734
|
|
|
$
|
(3,366
|
)
|
|
$
|
(100,466
|
)
|
|
$
|
(94,413
|
)
|
Other comprehensive income before reclassification
|
|
|
401
|
|
|
|
(15,450
|
)
|
|
|
7,214
|
|
|
|
|
|
|
|
(7,835
|
)
|
Amounts reclassified from AOCI
|
|
|
|
|
|
|
(2,104
|
)
(3)
|
|
|
|
|
|
|
3,655
|
(4)
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
401
|
|
|
|
(17,554
|
)
|
|
|
7,214
|
|
|
|
3,655
|
|
|
|
(6,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
(1,914
|
)
|
|
$
|
(5,820
|
)
|
|
$
|
3,848
|
|
|
$
|
(96,811
|
)
|
|
$
|
(100,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Refer to Note 5 for additional details.
|
(2)
|
Refer to Note 4 for additional details.
|
(3)
|
Reclassified to cost of operations and gain on foreign currency, net.
|
(4)
|
Reclassified to selling, general and administrative expenses.
|
Recently Issued
Accounting Standards
On July 18, 2013, the Financial Accounting Standards Board (FASB) issued an update to the
topic
Income Taxes
. The update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward if settlement is required or expected in the event the uncertain tax position is disallowed. In situations where these items are not available at the reporting date under the tax
law of the applicable jurisdiction or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial
statements as a liability and should not be combined with deferred tax assets. The update is effective for reporting periods beginning after December 15, 2013, and the adoption of this update does not have a material impact on our
condensed consolidated financial statements.
In February 2013, the FASB issued an update to the topic
Comprehensive
Income
. The update requires companies to provide additional information about the nature and amount of certain reclassifications out of AOCI, which impact the income statement. While the amendment does not change current reporting
16
requirements, companies are required to provide information about the amounts reclassified out of AOCI by the respective line item. The update is effective for reporting periods beginning
after December 15, 2012, and the adoption of this update did not have a material impact on our condensed consolidated financial statements.
In January 2013, the FASB issued an update to the topic
Balance Sheet
. This update requires new disclosures presenting detailed
information regarding both the gross and net basis of derivatives and other financial instruments that are eligible for offset in the balance sheet or that are subject to a master netting arrangement. The update is effective for the first quarter of
2013 and is to be applied retrospectively. As this new guidance relates to presentation only, the adoption of this update did not have a material impact on our condensed consolidated financial statements.
NOTE 2ACQUISITION AND DISPOSITIONS
Acquisition
During the quarter ended March 31, 2013, we entered into a share purchase agreement to acquire all of the issued and outstanding shares of
capital stock of Deepsea Group Limited, a United Kingdom-based company that provides subsea and other engineering services to international energy companies, primarily through offices in the United Kingdom and the United States. Total consideration
was approximately $9.0 million, which includes cash ($6.0 million) and the delivery of 313,580 restricted shares of MII common stock (out of treasury). The transaction is being accounted for using the acquisition method and, accordingly, assets
acquired and liabilities assumed are recorded at their respective fair values.
During the quarter ended December 31, 2013, we
entered into two joint ventures with TH Heavy Engineering Berhad (THHE), whereby we acquired a 30% interest in a subsidiary of THHE, THHE Fabricators Sdn. Bhd., and THHE acquired a 30% interest in our Malaysian subsidiary, Berlian
McDermott Sdn. Bhd. Accounting for these transactions is preliminary at March 31, 2014 and is pending finalization of these transactions by mid-2014. As of March 31, 2014, we recorded an equity method investment of approximately $25.5
million, a non-controlling interest of approximately $20.9 million and an increase in capital in excess of par value of approximately $4.6 million arising from these transactions.
Non-Core Asset Sales
We previously committed to a plan to sell four of our multi-function marine vessels, specifically the
Bold Endurance
,
DB 16
,
DB 26
and the
DLB KP1
. Assets classified as held for sale are no longer depreciated. During the quarter ended March 31, 2014, we completed the sale of the
DLB KP1
for aggregate cash proceeds of approximately $8.4 million,
resulting in a gain of approximately $6.4 million recognized in our Middle East segment. During the quarter ended March 31, 2013, we completed the sale of the
Bold Endurance
and the
DB 26
for aggregate cash proceeds of
approximately $32.0 million, resulting in an aggregate gain of approximately $12.5 million. We remain in active discussions with interested parties to sell the
DB 16
.
Americas and Corporate Restructuring
We commenced a restructuring of our Americas operations during the quarter ended June 30, 2013, which involves our Morgan City, Louisiana,
Houston, Texas, New Orleans, Louisiana and Brazil locations. The restructuring involves, among other things, reductions of management, administrative, fabrication and engineering personnel, and a plan to discontinue utilization of the Morgan City
facility (after the completion of existing backlog projects, which are currently forecasted to be completed in the third quarter of 2014). Future fabrication operations in the Americas segment are expected to be executed using the Altamira, Mexico
facility. In addition, we have reached an agreement to exit our joint venture operation in Brazil. Costs associated with our Americas restructuring activities primarily include severance and other personnel-related costs, costs associated
17
with exiting the joint venture in Brazil, asset impairment and relocation costs, environmental reserves and future unutilized lease costs. The total costs are expected to range between $55.0 and
$60.0 million in the aggregate. Of the total anticipated costs, we incurred approximately $3.6 million during the quarter ended March 31, 2014 and had incurred an aggregate of $37.7 million through March 31, 2014.
In October 2013, we announced certain executive management changes that became effective during the fourth quarter of 2013. In March 2014, we
changed our organizational structure to orient around offshore and subsea business activities through four primary geographic regions. Costs associated with our corporate reorganization activities will primarily include severance, relocation and
other personnel-related costs and costs for advisors. The total of these costs is expected to range between $20.0 million and $25.0 million and to be incurred by the end of 2014. Of the total anticipated costs, we incurred approximately $2.5
million during the quarter ended March 31, 2014 and had incurred an aggregate of $4.2 million as of March 31, 2014.
The
following table presents total amounts incurred during the quarter ended March 31, 2014, as well as amounts incurred from inception of restructuring efforts up to March 31, 2014 and amounts expected to be incurred in the future by major
type of cost and by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred for three
months ended
March 31, 2014
|
|
|
Incurred from
restructuring
inception to
March 31, 2014
|
|
|
Remaining
to be
incurred
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments and write offs
|
|
$
|
|
|
|
$
|
14,138
|
|
|
$
|
112
|
|
|
$
|
14,250
|
|
Severance and other personnel-related costs
|
|
|
2,029
|
|
|
|
11,676
|
|
|
|
1,324
|
|
|
|
13,000
|
|
Morgan City environmental reserve (accrued)
|
|
|
|
|
|
|
5,925
|
|
|
|
|
|
|
|
5,925
|
|
Morgan City yard-related expenses
|
|
|
1,602
|
|
|
|
5,800
|
|
|
|
9,450
|
|
|
|
15,250
|
|
Other
|
|
|
|
|
|
|
158
|
|
|
|
6,417
|
|
|
|
6,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,631
|
|
|
$
|
37,697
|
|
|
$
|
17,303
|
|
|
$
|
55,000
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other personnel-related costs
|
|
$
|
908
|
|
|
$
|
2,569
|
|
|
$
|
6,931
|
|
|
$
|
9,500
|
|
Legal and other advisor fees
|
|
|
1,586
|
|
|
|
1,586
|
|
|
|
8,914
|
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,494
|
|
|
$
|
4,155
|
|
|
$
|
15,845
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,125
|
|
|
$
|
41,852
|
|
|
$
|
33,148
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities associated with restructuring activities were approximately $7.9 million and $8.0 million
as of March 31, 2014 and December 31, 2013, respectively.
NOTE 3LONG-TERM DEBT AND NOTES PAYABLE
During April 2014, we refinanced our existing obligations, and replaced in its entirety, our then existing $950.0 million
credit agreement (the Former Credit Agreement) with a new credit agreement (the New Credit Agreement), which provides for:
|
|
|
a $400.0 million first-lien, first-out three-year letter of credit facility (the LC Facility); and
|
|
|
|
a $300.0 million first-lien, second-out five-year term loan (the Term Loan).
|
As
of March 31, 2014 we had $250.0 million of revolving credit borrowings outstanding and approximately $376.0 million of letters of credit outstanding under the Former Credit Agreement.
18
Additionally, during April 2014, we completed the following new financing transactions:
|
|
|
the issuance of $500.0 million of second-lien seven-year senior secured notes (the Notes).
|
|
|
|
the issuance of $287.5 million of tangible equity units (Units) composed of (1) three-year amortizing, senior unsecured notes, in an aggregate principal amount of $47.5 million, and (2) prepaid
common stock purchase contracts.
|
With the completion of these financing transactions in April 2014, we terminated the
bridge loan commitment we had obtained from an affiliate of Goldman, Sachs, & Co. (Goldman Sachs). As a result of the termination of the bridge loan commitment, the fee we previously paid to Goldman Sachs to obtain the bridge
loan commitment will be recognized as interest expense in the second quarter of 2014. Due to the replacement of the Former Credit Agreement, the unamortized issuance fees related to the Former Credit Agreement will also be recognized as interest
expense in the second quarter of 2014. The total additional interest expense related to these items is expected to be approximately $28.0 million in the quarter ending June 30, 2014.
The Former Credit Agreement provided for revolving credit borrowings and issuances of letters of credit in an aggregate outstanding amount of
up to $950.0 million.
At March 31, 2014, there was $250.0 million of revolving credit borrowings outstanding, and letters of credit
issued under the Former Credit Agreement totaled approximately $376.0 million, including letters of credit in the aggregate amount of $109.0 million issued in February 2014 to replace the letters of credit issued by Australia and New Zealand Banking
Group Limited discussed below. During the quarter ended March 31, 2014, our outstanding borrowings under the Former Credit Agreement did not exceed $250.0 million, and we had average outstanding borrowings under the Former Credit Agreement of
approximately $165.0 million, with an average interest rate of 3.45%. At December 31, 2013, there were no borrowings outstanding, and letters of credit issued under the Former Credit Agreement totaled approximately $214.3 million.
At March 31, 2014, the applicable margin for Eurodollar-rate loans was 2.00%, the applicable margin for base-rate loans was 1.00%, the
letter of credit fee for financial letters of credit was 2.00%, the letter of credit fee for performance letters of credit was 1.00%, and the commitment fee for unused portions of the Former Credit Agreement was 0.3%. The Former Credit Agreement did
not have a floor for the base rate or the Eurodollar rate.
Obligations under the Former Credit Agreement were secured on a first-lien
basis by pledges of capital stock of certain of our subsidiaries and mortgages and other security interests covering (1) all of our personal property and substantially all of the personal property of our wholly owned subsidiaries, subject to
exceptions for bank accounts, equipment and certain other assets, and (2) certain of our marine vessels.
New Credit Facilities
During April 2014 we entered into the New Credit Agreement, which provides for the LC Facility and the Term Loan.
The New Credit Agreement includes the $400.0 million first-lien, first-out LC Facility, which is scheduled to mature on April 16, 2017,
and the $300.0 million first-lien, second-out Term Loan, which is scheduled to mature April 16, 2019. The indebtedness and other obligations under the New Credit Agreement are guaranteed by substantially all of our material, wholly owned
subsidiaries, other than our captive insurance subsidiary (collectively, the Guarantors).
In connection with the New Credit
Agreement, we paid certain fees to the lenders thereunder, as well as certain arrangement fees to the arrangers and agents for the New Credit Facilities, which we intend to amortize to interest expense over the respective terms of the LC Facility
and the Term Loan.
19
LC Facility
The LC Facility provides for an initial letter of credit capacity of $400.0 million and allows for uncommitted increases in capacity of $100.0
million through December 31, 2014 and an additional $100.0 million thereafter, potentially increasing the total capacity to $600.0 million through the term of the LC Facility. Letters of credit issuable under the LC Facility support the
obligations of McDermott and its affiliates and joint ventures. The aggregate amount of the LC Facility available for financial letters of credit is capped at 25% of the total LC Facility.
The LC Facility is secured on a first-lien, first-out basis (with relative priority over the Term Loan) by pledges of the capital stock of all
the Guarantors and mortgages on, or other security interests in, substantially all the tangible and intangible assets of our company and the Guarantors, subject to specific exceptions.
The LC Facility contains various customary affirmative covenants, as well as specific affirmative covenants, including specific reporting
requirements and a requirement for ongoing periodic financial reviews by a financial advisor. The LC Facility also requires compliance with various negative covenants, including limitations with respect to the incurrence of other indebtedness and
liens, restrictions on acquisitions, capital expenditures and other investments, restrictions on sale/leaseback transactions and restrictions on prepayments of other indebtedness.
The LC Facility requires us to meet a minimum EBITDA (as defined) covenant, which requires that we generate consolidated EBITDA of at least
certain specified amounts for different periods over the term of the facility. The LC Facility also requires us to maintain a ratio of fair market value of vessel collateral to the sum of (1) the outstanding principal amount of the Term Loan,
(2) the aggregate amount of undrawn financial letters of credit outstanding under the LC Facility, (3) all drawn but unreimbursed letters of credit under the LC Facility, and (4) mark-to-market foreign exchange exposure that is not
cash secured of at least 1.20:1.00. The LC Facility also requires us to maintain at least $200.0 million of minimum available cash, excluding restricted cash, at the end of each quarter.
The LC Facility provides for a commitment fee of 0.50% per year on the unused portion of the LC Facility and letter of credit fees at an
annual rate of 2.25% for performance letters of credit and 4.50% for financial letters of credit, as well as customary issuance fees and other fees and expenses.
Term Loan
The Term Loan
is secured on a first-lien, second-out basis (with the LC Facility having relative priority over the Term Loan) by pledges of the capital stock of all the Guarantors and mortgages on, or other security interests in, substantially all tangible and
intangible assets of our company and the Guarantors, subject to specific exceptions.
The Term Loan requires mandatory prepayments from:
(1) the proceeds from the sale of assets, as well as insurance proceeds, in each case subject to certain exceptions, to the extent such proceeds are not reinvested in our business within 365 days of receipt; (2) net cash proceeds from the
incurrence of indebtedness not otherwise permitted by the New Credit Facilities; and (3) 50% of amounts deemed to be excess cash flow, subject to specified adjustments. The Term Loan also requires quarterly amortization payments
equal to $750,000. The Term Loan also provides for a prepayment premium if we prepay or re-price the Term Loan prior to April 16, 2016.
The Term Loan requires compliance with various customary affirmative and negative covenants. We must also maintain a ratio of ownership
adjusted fair market value of marine vessels to the sum of (1) the outstanding principal amount of the Term Loan and (2) the aggregate principal amount of unreimbursed drawings and advances under the LC Facility of at least
1.75:1.00.
20
The Term Loan was incurred with 25 basis points of original issue discount and bears interest at
a floating rate, which can be, at our option, either: (1) a LIBOR rate for a specified interest period (subject to a LIBOR floor of 1.00%) plus an applicable margin of 4.25%; or (2) an alternate base rate (subject to a base
rate floor of 2.00%) plus an applicable margin of 3.25%.
Senior Notes
During April 2014 we issued $500.0 million in aggregate principal amount of 8.000% senior secured notes due 2021 (the Notes) in a
private placement in accordance with Rule 144A and Regulation S under the Securities Act of 1933, as amended. Interest on the Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1,
2014, at an annual rate of 8%. The Notes are scheduled to mature on May 1, 2021.
The Notes are unconditionally guaranteed on a
senior secured basis by the Guarantors, and the Notes are secured on a secondlien basis by pledges of capital stock of certain of our subsidiaries and mortgages and other security interests covering (1) specified marine vessels owned by
certain of the Guarantors and (2) substantially all the other tangible and intangible assets of our company and the Guarantors, subject to exceptions for certain assets.
At any time or from time to time on or after May 1, 2017, at our option, we may redeem the Notes, in whole or in part, at the redemption
prices (expressed as percentages of principal amount of the Notes to be redeemed) set forth below, together with accrued and unpaid interest to the redemption date, if redeemed during the 12-month period beginning May 1 of the years indicated:
|
|
|
|
|
Year
|
|
Percentage
|
|
2017
|
|
|
104
|
%
|
2018
|
|
|
102
|
%
|
2019 and thereafter
|
|
|
100
|
%
|
The Indenture governing the Notes contains covenants that, among other things, limit our ability and the
ability of our restricted subsidiaries to: (1) incur or guarantee additional indebtedness or issue preferred stock; (2) make investments or certain other restricted payments; (3) pay dividends or distributions on capital stock or
purchase or redeem subordinated indebtedness; (4) sell assets; (5) create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (6) create certain liens; (7) sell all or
substantially all of our assets or merge or consolidate with or into other companies; (8) enter into transactions with affiliates; and (9) create unrestricted subsidiaries. Many of those covenants would become suspended if the Notes were
to attain an investment grade rating from both Moodys Investors Service, Inc. and Standard and Poors Ratings Services and no default has occurred. The covenants mentioned above are subject to a number of important exceptions and
limitations.
Units
During April 2014, we issued 11,500,000 6.25% tangible equity units, each with a stated amount of $25.00. Each Unit consists of (1) a
prepaid common stock purchase contract and (2) a senior amortizing note due April 1, 2017 (each an Amortizing Note) that has an initial principal amount of $4.1266 per Amortizing Note, bears interest at a rate of 7.75% per
annum and has a final scheduled installment payment date of April 1, 2017. Each prepaid common stock purchase contract will automatically settle on April 1, 2017, unless settled earlier: (1) at the holders option, upon which we
will deliver shares of our common stock, based on the applicable settlement rate and applicable market value of our stock as determined under the purchase contract; or (2) at our option, upon which we will deliver shares of our common stock,
based upon the stated maximum settlement rate of 3.5562 shares per unit, subject to adjustment.
21
North Ocean Financing
North Ocean 102
In
December 2009, J. Ray McDermott, S.A. (JRMSA), a wholly owned subsidiary of MII, entered into a vessel-owning joint venture transaction with Oceanteam ASA. JRMSA has guaranteed approximately 50% of this debt based on its ownership
percentages in the vessel-owning companies. The outstanding debt bore interest at a rate equal to the three-month LIBOR (which was subject to reset every three months) plus a margin of 3.315%. JRMSA paid in full the approximately $31.4 million notes
payable balance upon maturity during January 2014. JRMSA expects to exercise its option to purchase Oceanteam ASAs 50% ownership interest in the vessel-owing companies in December 2014. As of December 31, 2013 we reported a consolidated
notes payable of $31.4 million on our consolidated balance sheet, all of which was classified as current notes payable.
North Ocean
105
On September 30, 2010, MII, as guarantor, and North Ocean 105 AS, in which we have a 75% ownership interest, as borrower,
entered into a financing agreement to finance a portion of the construction costs of the
North Ocean 105
. The agreement provides for borrowings of up to $69.4 million, bearing interest at 2.76% per year, and requires principal
repayment in 17 consecutive semi-annual installments, which commenced on October 1, 2012. Borrowings under the agreement are secured by, among other things, a pledge of all of the equity of North Ocean 105 AS, a mortgage on the
North
Ocean 105
, and a lien on substantially all of the other assets of North Ocean 105 AS. MII unconditionally guaranteed all amounts to be borrowed under the agreement. At March 31, 2014 and December 31, 2013, there was $57.2 million
in borrowings outstanding under this agreement, of which approximately $8.2 million was classified as current notes payable.
Unsecured Bilateral Letters of Credit and Bank Guarantees
In 2012, McDermott Middle East, Inc, and MII executed a general reimbursement agreement in favor of a bank located in the UAE relating to
issuances of bank guarantees in support of contracting activities in the Middle East and India. As of March 31, 2014 and December 31, 2013, bank guarantees issued under these arrangements totaled $56.2 million and $55.8 million,
respectively. In 2007 and in 2012, JRMSA and MII executed general unsecured reimbursement agreements in favor of two institutions that were lenders under the Former Credit Agreement relating to issuances of letters of credit in support of
contracting activities primarily in Asia and the Middle East. The letters of credit issued under these arrangements totaled $23.3 million and $26.0 million as of March 31, 2014 and December 31, 2013, respectively.
On April 20, 2012, McDermott and one of its wholly owned subsidiaries, McDermott Australia Pty. Ltd. (McDermott Australia),
entered into a secured Letter of Credit Reimbursement Agreement (the Reimbursement Agreement) with Australia and New Zealand Banking Group Limited (ANZ). In accordance with the terms of the Reimbursement Agreement, ANZ issued
letters of credit in the aggregate amount of approximately $109.0 million to support McDermott Australias performance obligations under contractual arrangements relating to a field development project. The obligations of McDermott and
McDermott Australia under the Reimbursement Agreement are secured by McDermott Australias interest in the contractual arrangements and certain related assets. During February 2014, we replaced these letters of credit with letters of credit
issued under the Former Credit Agreement and subsequently replaced those letters of credit with letters of credit under the LC Facility.
Surety Bonds
In
2012 and 2011, MII executed general agreements of indemnity in favor of surety underwriters based in Mexico relating to surety bonds issued in support of contracting activities of J. Ray McDermott de Mèxico, S.A. de C.V. and McDermott, Inc,
both subsidiaries of MII. As of March 31, 2014 and December 31, 2013, bonds issued under these arrangements totaled $42.1 million and $43.5 million, respectively. In October 2013, MII
22
executed general agreements of indemnity in favor of surety underwriters relating to surety bonds in support of vessels operating in Brazil. The bonds issued under these arrangements totaled
$111.2 million and $106.3 million as of March 31, 2014 and December 31, 2013, respectively.
Long-term debt and notes
payable obligations
A summary of our long-term debt obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
Former Credit Agreement
|
|
$
|
250,000
|
|
|
$
|
|
|
North Ocean 102
Construction Financing
|
|
|
|
|
|
|
31,373
|
|
North Ocean 105
Construction Financing
|
|
|
57,189
|
|
|
|
57,189
|
|
Other financing
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308,178
|
|
|
|
88,562
|
|
Less: Amounts due within one year
|
|
|
258,417
|
|
|
|
39,543
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
49,761
|
|
|
$
|
49,019
|
|
|
|
|
|
|
|
|
|
|
NOTE 4PENSION PLANS
Although we currently provide retirement benefits for most of our U.S. employees through sponsorship of the McDermott Thrift
Plan, some of our longer-term U.S. employees and former employees are entitled to retirement benefits under the McDermott (U.S.) Retirement Plan, a non-contributory qualified defined benefit pension plan (the McDermott Plan), and several
non-qualified supplemental defined benefit pension plans. The McDermott Plan and the non-qualified supplemental defined benefit pension plans are collectively referred to herein as the Domestic Plans. The McDermott Plan has been closed
to new participants since 2006, and benefit accruals under the McDermott Plan were frozen completely in 2010.
We also sponsor a defined
benefit pension plan established under the laws of the Commonwealth of the Bahamas, the J. Ray McDermott, S.A. Third Country National Employees Pension Plan (the TCN Plan), which provides retirement benefits for certain of our current
and former foreign employees. Effective August 1, 2011, new entry into the TCN Plan was closed, and effective December 31, 2011, benefit accruals under the TCN Plan were frozen. Effective January 1, 2012, we established a new global
defined contribution plan to provide retirement benefits to non-U.S. expatriate employees who may have otherwise obtained benefits under the TCN Plan.
Retirement benefits under the McDermott Plan and the TCN Plan are generally based on final average compensation and years of service, subject
to the applicable freeze in benefit accruals under the plans. 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
(ERISA), or other applicable law. The Pension Protection Act of 2006 (PPA) amended ERISA and modified the funding requirements for certain defined benefit pension plans including the McDermott Plan. Funding provisions under
the PPA accelerated funding requirements are applicable to the McDermott Plan to ensure full funding of benefits accrued.
23
Net periodic benefit cost for the Domestic Plans and the TCN Plan includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
|
TCN Plan
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Interest cost
|
|
$
|
6,778
|
|
|
$
|
167
|
|
|
$
|
475
|
|
|
$
|
467
|
|
Expected return on plan assets
|
|
|
(6,875
|
)
|
|
|
(3,000
|
)
|
|
|
(740
|
)
|
|
|
(651
|
)
|
Recognized net actuarial loss and other
|
|
|
3,290
|
|
|
|
3,152
|
|
|
|
(74
|
)
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (gain)
|
|
$
|
3,193
|
|
|
$
|
319
|
|
|
$
|
(339
|
)
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5DERIVATIVE FINANCIAL INSTRUMENTS
We enter into derivative financial instruments primarily to hedge certain firm purchase commitments and forecasted
transactions denominated in foreign currencies. We record these contracts at fair value on our condensed consolidated balance sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these
contracts are either: (1) deferred as a component of AOCI until the hedged item is recognized in earnings; (2) offset against the change in fair value of the hedged firm commitment through earnings; or (3) recognized immediately in
earnings. At inception and on an ongoing basis, we assess the hedging relationship to determine its effectiveness in offsetting changes in cash flows or fair value attributable to the hedged risk. We exclude from our assessment of effectiveness the
portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. The ineffective portion of a derivatives change in fair value and any portion excluded from the
assessment of effectiveness are immediately recognized in earnings. Gains and losses on derivative financial instruments that are immediately recognized in earnings are included as a component of gain (loss) on foreign currency-net in our condensed
consolidated statements of operations.
At March 31, 2014, the majority of our foreign currency forward contracts were designated as
cash flow hedging instruments. In addition, we deferred approximately $30.8 million of net losses on these derivative financial instruments in AOCI, and we expect to reclassify approximately $22.0 million of deferred losses out of AOCI by
March 31, 2015, as hedged items are recognized in earnings. The notional value of our outstanding derivative contracts totaled $1.0 billion at March 31, 2014, with maturities extending through 2017. Of this amount, approximately $635.3
million is associated with various foreign currency expenditures we expect to incur on one of our Asia Pacific segment EPCI projects. These instruments consist of contracts to purchase or sell foreign-denominated currencies. At March 31, 2014,
the fair value of these contracts was in a net liability position totaling $15.0 million. The fair value of outstanding derivative instruments is determined using observable financial market inputs, such as quoted market prices, and is classified as
Level 2 in nature.
24
The following tables summarize our derivative financial instruments:
Asset and Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Accounts receivableother
|
|
$
|
8,258
|
|
|
$
|
11,641
|
|
Other assets
|
|
|
964
|
|
|
|
1,647
|
|
|
|
|
|
|
|
|
|
|
Total asset derivatives
|
|
$
|
9,222
|
|
|
$
|
13,288
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,781
|
|
|
$
|
20,209
|
|
Other liabilities
|
|
|
12,436
|
|
|
|
21,846
|
|
|
|
|
|
|
|
|
|
|
Total liability derivatives
|
|
$
|
24,217
|
|
|
$
|
42,055
|
|
|
|
|
|
|
|
|
|
|
The Effects of Derivative Instruments on our Financial Statements
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
|
Amount of gain/ (loss) recognized in other comprehensive income
|
|
$
|
12,358
|
|
|
$
|
(15,450
|
)
|
Income reclassified from AOCI into income: effective portion
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
202
|
|
|
$
|
2,014
|
|
Gain (loss) recognized in income: ineffective portion and amount excluded from effectiveness testing
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Gain (loss) on foreign currencynet
|
|
$
|
(847
|
)
|
|
$
|
(2,849
|
)
|
NOTE 6FAIR VALUE MEASUREMENTS
The following is a summary of our available-for-sale securities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
March 31, 2014
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Mutual funds
(1)
|
|
$
|
2,189
|
|
|
$
|
|
|
|
$
|
2,189
|
|
|
$
|
|
|
Commercial paper
|
|
|
3,248
|
|
|
|
|
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,437
|
|
|
$
|
|
|
|
$
|
5,437
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
December 31, 2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Mutual funds
(1)
|
|
$
|
2,173
|
|
|
$
|
|
|
|
$
|
2,173
|
|
|
$
|
|
|
Commercial paper
|
|
|
3,699
|
|
|
|
|
|
|
|
3,699
|
|
|
|
|
|
Asset-backed securities and collateralized mortgage obligations
(2)
|
|
|
7,639
|
|
|
|
|
|
|
|
2,082
|
|
|
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,511
|
|
|
$
|
|
|
|
$
|
7,954
|
|
|
$
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
(1)
|
Various U.S. equities and other investments managed under mutual funds
|
(2)
|
Asset-backed and mortgage-backed securities with maturities of up to 26 years
|
Our Level 2
investments consist primarily of commercial paper, asset-backed commercial paper notes backed by a pool of mortgage-backed securities and mutual funds. The fair value of our Level 2 investments was determined using a market approach which is based
on quoted prices and other information for similar or identical instruments.
Our Level 3 investment consists of asset-backed commercial
paper notes backed by a pool of mortgage-backed securities. The fair value of this Level 3 investment was based on the calculation of an overall weighted-average valuation, using the prices of the underlying individual securities. Individual
securities in the pool were valued based on market observed prices, where available. If market prices were not available, prices of similar securities backed by similar assets were used.
Changes in Level 3 Instrument
The
following is a summary of the changes in our Level 3 instrument measured on a recurring basis for the three months ended March 31, 2014 and March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
5,557
|
|
|
$
|
6,343
|
|
Total realized and unrealized gains
|
|
|
1,248
|
|
|
|
210
|
|
Sales/ principal repayments
|
|
|
(6,805
|
)
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
|
|
|
$
|
6,157
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses on Investments
Our net unrealized gain on investments was $0.2 million at March 31, 2014. During the year ended December 31, 2013, we recognized
other than temporary impairment of $1.6 million on the asset-backed securities and collateralized mortgage obligations. Our net unrealized gain on investments was $0.2 million as of December 31, 2013. The amount of investments in an unrealized
loss position for less than twelve months was not significant for either of the periods presented.
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
Cash and cash equivalents and restricted cash and cash equivalents
. The carrying amounts that we have reported in the accompanying
condensed consolidated balance sheets for cash, cash equivalents and restricted cash and cash equivalents approximate their fair values and are classified as Level 1 within the fair value hierarchy.
Short-term and long-term debt.
The fair value of debt instruments is classified as Level 2 within the fair value hierarchy and is
valued using a market approach based on quoted prices for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value these instruments based on the present value of future cash flows
discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms.
26
Forward contracts
. The fair value of forward contracts is classified as Level 2 within the
fair value hierarchy and is valued using observable market parameters for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value forward contracts, which discounts future cash flows
based on current market expectations and credit risk.
The estimated fair values of certain of our financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Balance Sheet Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
268,130
|
|
|
$
|
268,130
|
|
|
$
|
118,702
|
|
|
$
|
118,702
|
|
Restricted cash and cash equivalents
|
|
$
|
43,286
|
|
|
$
|
43,286
|
|
|
$
|
23,652
|
|
|
$
|
23,652
|
|
Investments
|
|
$
|
5,437
|
|
|
$
|
5,437
|
|
|
$
|
13,511
|
|
|
$
|
13,511
|
|
Debt
|
|
$
|
(308,178
|
)
|
|
$
|
(309,430
|
)
|
|
$
|
(88,562
|
)
|
|
$
|
(90,005
|
)
|
Forward contracts
|
|
$
|
(14,995
|
)
|
|
$
|
(14,995
|
)
|
|
$
|
(28,767
|
)
|
|
$
|
(28,767
|
)
|
NOTE 7STOCK-BASED COMPENSATION
Equity instruments are measured at fair value on the grant date. Stock-based compensation expense is generally recognized on
a straight-line basis over the requisite service periods of the awards. Compensation expense is based on awards we expect to ultimately vest. Therefore, we have reduced compensation expense for estimated forfeitures based on our historical
forfeiture rates. Our estimate of forfeitures is determined at the grant date and is revised if our actual forfeiture rate is materially different from our estimate.
We use a Black-Scholes model to determine the fair value of certain share-based awards, such as stock options. Additionally, we use a Monte
Carlo model to determine the fair value of certain share-based awards that contain market and performance-based conditions. The use of these models requires highly subjective assumptions, such as assumptions about the expected life of the award,
vesting probability, expected dividend yield and the volatility of our stock price.
Total stock-based compensation expense, net
recognized for the three months ended March 31, 2014 and March 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Stock Options
|
|
$
|
680
|
|
|
$
|
1,030
|
|
Restricted Stock Units
|
|
|
3,379
|
|
|
|
1,737
|
|
Performance Shares
|
|
|
328
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,387
|
|
|
$
|
3,923
|
|
|
|
|
|
|
|
|
|
|
27
NOTE 8EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share and
per share amounts)
|
|
Income from operations less noncontrolling interests
|
|
$
|
(49,953
|
)
|
|
$
|
20,553
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to McDermott International, Inc.
|
|
$
|
(49,953
|
)
|
|
$
|
20,553
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (basic)
|
|
|
236,961,158
|
|
|
|
235,941,185
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, restricted stock and restricted stock units
(1)
|
|
|
|
|
|
|
3,258,696
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares and assumed exercises of stock options and vesting of stock awards (diluted)
|
|
|
236,961,158
|
|
|
|
239,199,881
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Income (loss) from operations less noncontrolling interests
|
|
|
(0.21
|
)
|
|
|
0.09
|
|
Net income (loss) attributable to McDermott International, Inc.
|
|
|
(0.21
|
)
|
|
|
0.09
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Income (loss) from operations less noncontrolling interests
|
|
|
(0.21
|
)
|
|
|
0.09
|
|
Net income (loss) attributable to McDermott International, Inc
|
|
|
(021
|
)
|
|
|
0.09
|
|
(1)
|
Approximately 3.0 million and 2.9 million shares underlying outstanding stock-based awards were excluded from the computation of diluted earnings per share because they were antidilutive for the three months
ended March 31, 2014 and 2013, respectively.
|
NOTE 9SEGMENT REPORTING
In March 2014, we changed our organizational structure to orient around our offshore and subsea business activities through
four primary geographic regions. The four geographic regions, which we consider to be our operating segments, consist of Asia Pacific, Americas, Middle East, and North Sea and Africa. The Caspian is no longer considered an operating segment and will
continue to be aggregated in the Middle East reporting segment. The North Sea and Africa operating segment is also aggregated into the Middle East reporting segment due to the proximity of regions and similarities in the nature of services provided,
economic characteristics and oversight responsibilities. Accordingly, we continue to report financial results under reporting segments consisting of Asia Pacific, Americas and the Middle East. We also report certain corporate and other non-operating
activities under the heading Corporate and other. Corporate and other primarily reflects corporate personnel and activities, incentive compensation programs and other costs, which are generally fully allocated to our
operating segments. The only corporate costs currently not being allocated to our operating segments are the restructuring costs associated with our corporate reorganization.
28
Reporting segments are measured based on operating income, which is defined as revenues reduced
by total costs and expenses and equity in income (loss) of unconsolidated affiliates. Summarized financial information is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
161,825
|
|
|
$
|
326,062
|
|
Americas
|
|
|
181,625
|
|
|
|
148,184
|
|
Middle East
|
|
|
260,361
|
|
|
|
333,242
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
603,811
|
|
|
$
|
807,488
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
2,091
|
|
|
$
|
87,952
|
|
Americas
|
|
|
(31,811
|
)
|
|
|
(16,410
|
)
|
Middle East
|
|
|
(9,428
|
)
|
|
|
(18,509
|
)
|
Corporate
|
|
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
(41,642
|
)
|
|
$
|
53,033
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(2)
:
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
4,068
|
|
|
$
|
3,755
|
|
Americas
|
|
|
7,405
|
|
|
|
22,010
|
|
Middle East
|
|
|
22,579
|
|
|
|
10,552
|
|
Corporate and other
|
|
|
3,841
|
|
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
37,893
|
|
|
$
|
37,649
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
5,032
|
|
|
$
|
5,030
|
|
Americas
|
|
|
8,297
|
|
|
|
6,805
|
|
Middle East
|
|
|
9,575
|
|
|
|
6,510
|
|
Corporate and Other
|
|
|
1,698
|
|
|
|
1,877
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
24,602
|
|
|
$
|
20,222
|
|
|
|
|
|
|
|
|
|
|
Drydock amortization:
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
1,955
|
|
|
$
|
2,961
|
|
Americas
|
|
|
4,562
|
|
|
|
1,908
|
|
Middle East
|
|
|
429
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
Total drydock amortization
|
|
$
|
6,946
|
|
|
$
|
5,550
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Intersegment transactions included in revenues were not significant for either of the periods presented.
|
(2)
|
Total capital expenditures presents expenditures for which cash payments were made during the period. Capital expenditures for the three months ended March 31, 2014 include $8.3 million of cash payments for accrued
capital expenditures outstanding as of December 31, 2013. Capital expenditures for the three months ended March 31, 2013 exclude approximately $34.0 million in accrued liabilities related to capital expenditures.
|
29
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
740,507
|
|
|
$
|
1,030,823
|
|
Americas
|
|
|
795,598
|
|
|
|
522,713
|
|
Middle East
|
|
|
1,148,041
|
|
|
|
1,129,529
|
|
Corporate and other
|
|
|
339,783
|
|
|
|
124,306
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,023,929
|
|
|
$
|
2,807,371
|
|
|
|
|
|
|
|
|
|
|
NOTE 10COMMITMENTS AND CONTINGENCIES
Investigations and Litigation
On or about August 23, 2004, a declaratory judgment action entitled
Certain Underwriters at Lloyds London, et al. v. J. Ray
McDermott, Inc. et al.
, was filed by certain underwriters at Lloyds, London and Threadneedle Insurance Company Limited (the London Insurers), in the 23rd Judicial District Court, Assumption Parish, Louisiana, against MII, J.
Ray McDermott, Inc. (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. 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. We do not believe an adverse judgment or material losses in this matter are probable, and, accordingly, we have not accrued any amounts relating to this contingency. Although there is a possibility of an adverse
judgment, the amount or potential range of loss is not estimable at this time. The insurer-plaintiffs in this matter commenced this proceeding in a purported attempt to obtain a determination of insurance coverage obligations for occupational
exposure and/or environmental matters for which we have given notice that we could potentially seek coverage. Because estimating losses would require, for every matter, known and unknown, on a case by case basis, anticipating what impact on coverage
a judgment would have and a determination of an otherwise expected insured value, damages cannot be reasonably estimated.
On
December 16, 2005, a proceeding entitled
Antoine, et al. vs. J. Ray McDermott, Inc., et al. (Antoine Suit),
was filed in the 24th Judicial District Court, Jefferson Parish, Louisiana, by approximately 88 plaintiffs against
approximately 215 defendants, including our subsidiaries formerly known as JRMI and Delta Hudson Engineering Corporation (DHEC), generally alleging injuries for exposure to asbestos, and unspecified chemicals, metals and noise while the
plaintiffs were allegedly employed as Jones Act seamen. This case was dismissed by the Court on January 10, 2007, without prejudice to plaintiffs rights to refile their claims. On January 29, 2007, 21 plaintiffs from the dismissed
Antoine Suit
filed a matter entitled
Boudreaux, et al. v. McDermott, Inc., et al.
(the Boudreaux Suit), in the United States District Court for the Southern District of Texas, against JRMI and our subsidiary formerly known
as McDermott Incorporated, and approximately 30 other employer defendants, alleging Jones Act seaman status and generally alleging exposure to welding fumes, solvents, dyes, industrial paints and noise. The Boudreaux Suit was transferred to the
United States District Court for the Eastern District of Louisiana on May 2, 2007, which 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, another 43 plaintiffs from the dismissed
Antoine Suit
filed a matter entitled
Antoine, et al. v. McDermott, Inc., et al.
(the New Antoine Suit
),
in the 164th Judicial District
Court for Harris County, Texas, against JRMI, our subsidiary formerly known as McDermott Incorporated 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 the New Antoine Suit, other than service of process and answer/appearance dates, until further
order of the Court. The New Antoine Suit plaintiffs filed a motion to lift the stay on February 20, 2009, which is pending before the Texas District Court. On April 4, 2014, 20 of the plaintiffs in the
30
New Antoine Suit voluntarily dismissed their claims against McDermott without prejudice to re-filing. The remaining plaintiffs seek monetary damages in an unspecified amount in both the Boudreaux
Suit and New Antoine Suit cases and attorneys fees in the New Antoine Suit. We cannot reasonably estimate the extent of a potential judgment against us, if any, and we intend to vigorously defend these suits.
On August 15, 2013 and August 20, 2013, two separate alleged purchasers of our common stock filed purported class action complaints
against us, Stephen M. Johnson and Perry L. Elders in the United States District Court for the Southern District of Texas. Both of the complaints sought to represent a class of purchasers of our stock between November 6, 2012 and August 5,
2013, and alleged, among other things, that the defendants violated federal securities laws by disseminating materially false and misleading information and failing to disclose material information relating to weaknesses in project bidding and
execution, poor risk evaluation, poor project management and losses in each of our reporting segments. Each complaint sought relief, including unspecified compensatory damages and an award for attorneys fees and other costs. By order dated
December 5, 2013, the District Court consolidated the two cases and appointed a lead plaintiff and lead plaintiffs counsel. The lead plaintiff filed a consolidated amended complaint on February 6, 2014. The consolidated amended
complaint asserts substantially the same claims as were made in the two original complaints, with some additional factual allegations, and purports to extend the class period to August 6, 2013. It also seeks relief, including unspecified
compensatory damages and an award for attorneys fees and other costs. On April 7, 2014, MII and the other defendants filed a motion to dismiss the case, which motion is still pending before the court. We believe the substantive
allegations contained in the complaints on file are without merit, and we intend to defend against these claims vigorously.
Additionally,
due to the nature of our business, we and our affiliates are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including, among other things:
|
|
|
performanceor warranty-related matters under our customer and supplier contracts and other business arrangements; and
|
|
|
|
workers compensation claims, Jones Act claims, occupational hazard claims, including asbestos-exposure claims, premises liability claims and other claims.
|
Based upon our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material
adverse effect on our consolidated financial condition, results of operations or cash flows; however, because of the inherent uncertainty of litigation and, in some cases, the availability and amount of potentially applicable insurance, we can
provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that
resolution occurs.
Environmental Matters
We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (CERCLA). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of
the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this
may not be the case with respect to any particular site. We have not been determined to be a major contributor of 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 condition, results of operations or cash flows in any given year.
At March 31, 2014, we had total environmental reserves of $6.3 million, all of which was included in noncurrent liabilities. We
established an environmental reserve of $5.9 million in connection with our plan to
31
discontinue the utilization of our Morgan City fabrication facility. Inherent in the estimates of those reserves and recoveries are our expectations regarding the levels of contamination,
remediation costs and recoverability from other parties, which may vary significantly as remediation 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.
Contracts Containing Liquidated
Damages Provisions
Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for
the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. In many
cases in which we have historically had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. As of March 31, 2014, it is possible that we may incur liabilities for liquidated damages aggregating
approximately $56.9 million, of which approximately $37.9 million has been recorded in our financial statements, based on our actual or projected failure to meet certain specified contractual milestone dates. The dates for which these potential
liquidated damages could arise extend to June 2015. We believe we will be successful in obtaining schedule extensions or other customer-agreed changes that should resolve the potential for additional liquidated damages. Accordingly, we believe that
no amounts for these potential liquidated damages in excess of the amounts currently reflected in our financial statements are probable of being paid by us. However, we may not achieve relief on some or all of the issues involved and, as a result,
could be subject to higher damage amounts.
Contractual Obligations
At March 31, 2014, we had outstanding obligations related to our new vessel construction contracts on the
LV 108
and
DLV
2000
of $325.6 million in the aggregate, with $132.4 million and $193.2 million due in the years ending December 31, 2014 and 2015, respectively.
32