UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D. C. 20549
X
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2009
OR
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________to______________
Commission
File No. 001-08430
McDERMOTT
INTERNATIONAL, INC.
|
(Exact
name of registrant as specified in its
charter)
|
REPUBLIC
OF PANAMA
|
72-0593134
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
Incorporation
or Organization)
|
|
|
|
777
N. ELDRIDGE PKWY.
|
|
HOUSTON,
TEXAS
|
77079
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
Telephone Number, Including Area Code:
(281)
870-5901
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
[ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [
ü
] Accelerated
filer [ ]
Non-accelerated
filer [ ] (Do not check if a smaller reporting
company) 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
number of shares of the registrant's common stock outstanding at July 31, 2009
was 229,905,704
M c D E R M O T T I N T E R N A T I O N A
L , I N C.
I N D E
X - F O R M 1 0 - Q
|
June
30, 2009 and December 31, 2008
|
4
|
|
|
|
|
Three
and Six Months Ended June 30, 2009 and 2008
|
6
|
|
|
|
|
Three
and Six Months Ended June 30, 2009 and 2008
|
7
|
|
|
|
|
Six
Months Ended June 30, 2009 and 2008
|
8
|
|
|
|
|
|
9
|
PART I
McDERMOTT
INTERNATIONAL, INC.
FINANCIAL
INFORMATION
Item
1. Condensed
Consolidated Financial Statements
McDERMOTT INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
671,299
|
|
|
$
|
586,649
|
|
Restricted
cash and cash equivalents (Note 1)
|
|
|
81,229
|
|
|
|
50,536
|
|
Investments
|
|
|
20,187
|
|
|
|
131,515
|
|
Accounts
receivable – trade, net
|
|
|
731,419
|
|
|
|
712,055
|
|
Accounts
and notes receivable – unconsolidated affiliates
|
|
|
1,268
|
|
|
|
1,504
|
|
Accounts
receivable – other
|
|
|
87,929
|
|
|
|
139,062
|
|
Contracts
in progress
|
|
|
381,196
|
|
|
|
311,713
|
|
Inventories
(Note 1)
|
|
|
120,130
|
|
|
|
128,383
|
|
Deferred
income taxes
|
|
|
103,568
|
|
|
|
97,069
|
|
Other
current assets
|
|
|
67,228
|
|
|
|
58,499
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
2,265,453
|
|
|
|
2,216,985
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
2,362,922
|
|
|
|
2,234,050
|
|
Less
accumulated depreciation
|
|
|
1,210,203
|
|
|
|
1,155,191
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
|
1,152,719
|
|
|
|
1,078,859
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
279,948
|
|
|
|
319,170
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
299,168
|
|
|
|
298,265
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes
|
|
|
264,018
|
|
|
|
335,877
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unconsolidated Affiliates
|
|
|
78,082
|
|
|
|
70,304
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
270,806
|
|
|
|
282,233
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
4,610,194
|
|
|
$
|
4,601,693
|
|
See
accompanying notes to condensed consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Notes
payable and current maturities of long-term debt
|
|
$
|
3,780
|
|
|
$
|
9,021
|
|
Accounts
payable
|
|
|
487,396
|
|
|
|
551,435
|
|
Accrued
employee benefits
|
|
|
236,075
|
|
|
|
205,521
|
|
Accrued
liabilities – other
|
|
|
207,630
|
|
|
|
217,486
|
|
Accrued
contract cost
|
|
|
128,807
|
|
|
|
97,041
|
|
Advance
billings on contracts
|
|
|
816,948
|
|
|
|
951,895
|
|
Accrued
warranty expense
|
|
|
128,195
|
|
|
|
120,237
|
|
Income
taxes payable
|
|
|
50,608
|
|
|
|
55,709
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
2,059,439
|
|
|
|
2,208,345
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
5,896
|
|
|
|
6,109
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit Obligation
|
|
|
105,464
|
|
|
|
107,567
|
|
|
|
|
|
|
|
|
|
|
Self-Insurance
|
|
|
93,988
|
|
|
|
88,312
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
|
|
|
644,746
|
|
|
|
682,624
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
141,540
|
|
|
|
192,223
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $1.00 per share, authorized 400,000,000 shares; issued
236,239,688 and 234,174,088 shares
at June 30, 2009 and
December
31, 2008, respectively
|
|
|
236,240
|
|
|
|
234,174
|
|
Capital
in excess of par value
|
|
|
1,274,112
|
|
|
|
1,252,848
|
|
Retained
earnings
|
|
|
734,838
|
|
|
|
564,591
|
|
Treasury
stock at cost, 5,746,871 and 5,840,314 shares at June 30, 2009 and
December 31, 2008, respectively
|
|
|
(67,779
|
)
|
|
|
(63,026
|
)
|
Accumulated
other comprehensive loss
|
|
|
(624,660
|
)
|
|
|
(672,415
|
)
|
Stockholders’
Equity – McDermott International, Inc.
|
|
|
1,552,751
|
|
|
|
1,316,172
|
|
Noncontrolling
interest
|
|
|
6,370
|
|
|
|
341
|
|
Total
Stockholders’ Equity
|
|
|
1,559,121
|
|
|
|
1,316,513
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
4,610,194
|
|
|
$
|
4,601,693
|
|
See
accompanying notes to condensed consolidated financial
statements.
McDERMOTT INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,564,999
|
|
|
$
|
1,792,646
|
|
|
$
|
3,058,262
|
|
|
$
|
3,243,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations
|
|
|
1,275,058
|
|
|
|
1,432,736
|
|
|
|
2,503,680
|
|
|
|
2,621,432
|
|
Gains
on asset disposals – net
|
|
|
(1,897
|
)
|
|
|
(17
|
)
|
|
|
(656
|
)
|
|
|
(11,460
|
)
|
Selling,
general and administrative expenses
|
|
|
153,195
|
|
|
|
138,055
|
|
|
|
294,589
|
|
|
|
264,786
|
|
Total
Costs and Expenses
|
|
|
1,426,356
|
|
|
|
1,570,774
|
|
|
|
2,797,613
|
|
|
|
2,874,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in Income of Investees
|
|
|
9,097
|
|
|
|
9,252
|
|
|
|
18,297
|
|
|
|
19,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
147,740
|
|
|
|
231,124
|
|
|
|
278,946
|
|
|
|
388,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense) - net
|
|
|
4,987
|
|
|
|
8,186
|
|
|
|
6,844
|
|
|
|
18,641
|
|
Other
income (expense) – net
|
|
|
(10,201
|
)
|
|
|
1,843
|
|
|
|
(20,971
|
)
|
|
|
(2,097
|
)
|
Total
Other Income
|
|
|
(5,214
|
)
|
|
|
10,029
|
|
|
|
(14,127
|
)
|
|
|
16,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Provision for Income Taxes
|
|
|
142,526
|
|
|
|
241,153
|
|
|
|
264,819
|
|
|
|
404,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
44,645
|
|
|
|
63,602
|
|
|
|
88,523
|
|
|
|
103,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
97,881
|
|
|
|
177,551
|
|
|
|
176,296
|
|
|
|
300,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net Income Attributable to Noncontrolling Interest
|
|
|
(5,326
|
)
|
|
|
(12
|
)
|
|
|
(6,049
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Attributable to McDermott International, Inc.
|
|
$
|
92,555
|
|
|
$
|
177,539
|
|
|
$
|
170,247
|
|
|
$
|
300,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Attributable to McDermott International, Inc.
|
|
$
|
0.40
|
|
|
$
|
0.78
|
|
|
$
|
0.74
|
|
|
$
|
1.33
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Attributable to McDermott International, Inc.
|
|
$
|
0.40
|
|
|
$
|
0.77
|
|
|
$
|
0.73
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in the computation of earnings per share (Note 8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
229,273,441
|
|
|
|
226,862,500
|
|
|
|
228,794,113
|
|
|
|
226,247,335
|
|
Diluted
|
|
|
233,105,949
|
|
|
|
230,408,760
|
|
|
|
232,846,098
|
|
|
|
230,260,810
|
|
See
accompanying notes to condensed consolidated financial statements.
McDERMOTT INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
97,881
|
|
|
$
|
177,551
|
|
|
$
|
176,296
|
|
|
$
|
300,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
21,323
|
|
|
|
2,843
|
|
|
|
15,951
|
|
|
|
6,204
|
|
Unrealized
gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivative financial instruments
|
|
|
6,619
|
|
|
|
(1,334
|
)
|
|
|
4,765
|
|
|
|
3,214
|
|
Reclassification
adjustment for gains included in net income
|
|
|
(2,546
|
)
|
|
|
(3,822
|
)
|
|
|
(624
|
)
|
|
|
(3,750
|
)
|
Amortization
of benefit plan costs
|
|
|
14,267
|
|
|
|
6,490
|
|
|
|
28,422
|
|
|
|
13,029
|
|
Unrealized
gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) arising during the period
|
|
|
1,234
|
|
|
|
(2,712
|
)
|
|
|
(638
|
)
|
|
|
(5,622
|
)
|
Reclassification
adjustment for net (gains) losses
included
in net income
|
|
|
(36
|
)
|
|
|
228
|
|
|
|
(86
|
)
|
|
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
40,861
|
|
|
|
1,693
|
|
|
|
47,790
|
|
|
|
11,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Income
|
|
|
138,742
|
|
|
|
179,244
|
|
|
|
224,086
|
|
|
|
312,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Attributable to Noncontrolling Interest
|
|
|
(5,370
|
)
|
|
|
(68
|
)
|
|
|
(6,084
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Attributable to
McDermott
International, Inc.
|
|
$
|
133,372
|
|
|
$
|
179,176
|
|
|
$
|
218,002
|
|
|
$
|
312,665
|
|
See
accompanying notes to condensed consolidated financial statements.
McDERMOTT INTERNATIONAL,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
176,296
|
|
|
$
|
300,798
|
|
Non-cash
items included in net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
71,913
|
|
|
|
63,717
|
|
Income
of investees, less dividends
|
|
|
(4,012
|
)
|
|
|
(8,528
|
)
|
Gains
on asset disposals – net
|
|
|
(656
|
)
|
|
|
(11,460
|
)
|
Provision
for deferred taxes
|
|
|
55,221
|
|
|
|
63,547
|
|
Amortization
of pension and postretirement costs
|
|
|
44,094
|
|
|
|
20,266
|
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
|
|
(235
|
)
|
|
|
(3,388
|
)
|
Other,
net
|
|
|
26,725
|
|
|
|
21,193
|
|
Changes
in assets and liabilities, net of effects of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(19,918
|
)
|
|
|
(35,782
|
)
|
Income
tax receivable
|
|
|
56,177
|
|
|
|
(2,661
|
)
|
Net
contracts in progress and advance billings on contracts
|
|
|
(205,376
|
)
|
|
|
(360,000
|
)
|
Accounts
payable
|
|
|
(69,860
|
)
|
|
|
26,321
|
|
Income
taxes
|
|
|
(10,093
|
)
|
|
|
3,002
|
|
Accrued
and other current liabilities
|
|
|
24,466
|
|
|
|
22,743
|
|
Pension
liability, accumulated postretirement benefit obligation and accrued
employee benefits
|
|
|
(12,567
|
)
|
|
|
(129,834
|
)
|
Other,
net
|
|
|
(29,155
|
)
|
|
|
(56,374
|
)
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
103,020
|
|
|
|
(86,440
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in restricted cash and cash equivalents
|
|
|
(30,693
|
)
|
|
|
(5,239
|
)
|
Purchases
of property, plant and equipment
|
|
|
(129,386
|
)
|
|
|
(120,393
|
)
|
Net
(increase) decrease in available-for-sale securities
|
|
|
148,725
|
|
|
|
(124,729
|
)
|
Proceeds
from asset disposals
|
|
|
2,311
|
|
|
|
12,013
|
|
Other,
net
|
|
|
(2,117
|
)
|
|
|
(2,048
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(11,160
|
)
|
|
|
(240,396
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment
of long-term debt
|
|
|
(5,419
|
)
|
|
|
(4,525
|
)
|
Issuance
of common stock
|
|
|
342
|
|
|
|
7,467
|
|
Payment
of debt issuance costs
|
|
|
(45
|
)
|
|
|
(1,564
|
)
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
|
|
235
|
|
|
|
3,388
|
|
Other,
net
|
|
|
(64
|
)
|
|
|
-
|
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(4,951
|
)
|
|
|
4,766
|
|
EFFECTS
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(2,259
|
)
|
|
|
(683
|
)
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
84,650
|
|
|
|
(322,753
|
)
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
586,649
|
|
|
|
1,001,394
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
671,299
|
|
|
$
|
678,641
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid (received) during the period for:
|
|
|
|
|
|
|
|
|
Interest
(net of amount capitalized)
|
|
$
|
2,548
|
|
|
$
|
4,006
|
|
Income
taxes (net of refunds)
|
|
$
|
(16,903
|
)
|
|
$
|
43,981
|
|
See
accompanying notes to condensed consolidated financial
statements.
McDERMOTT INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
We have
presented our condensed consolidated financial statements in U.S. Dollars in
accordance with the interim reporting requirements of Form 10-Q and
Rule 10-01 of Regulation S-X. 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 notes in our
annual report on Form 10-K for the year ended December 31, 2008.
We have
included all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. These condensed 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 have reclassified certain amounts
previously reported to conform to the presentation at June 30, 2009 and for the
three and six months ended June 30, 2009. We have evaluated
subsequent events through August 10, 2009, the date of issuance of this
report. We present the notes to our condensed consolidated financial
statements on the basis of continuing operations, unless otherwise
stated.
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 quarterly report on
Form 10-Q, 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, further described as
follows:
·
|
Our
Offshore Oil and Gas Construction segment 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. It also provides comprehensive
project management and procurement services. 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.
|
·
|
Our
Government Operations segment 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 manufactures 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.
|
·
|
Our
Power Generation Systems segment includes the business and operations of
Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”), Babcock
& Wilcox Nuclear Power Generation Group, Inc. and their respective
subsidiaries. This segment supplies fossil-fired boilers,
commercial nuclear steam generators and components, environmental
equipment and components, and related services to customers in different
regions 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.
|
Operating
results for the three and six months ended June 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009. For further information, refer to the
consolidated
financial
statements and the related footnotes included in our annual report on Form 10-K
for the year ended December 31, 2008.
Comprehensive
Loss
The
components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
Currency
Translation Adjustments
|
|
$
|
2,874
|
|
|
$
|
(13,042
|
)
|
Net
Unrealized Loss on Investments
|
|
|
(9,702
|
)
|
|
|
(8,978
|
)
|
Net
Unrealized Loss on Derivative Financial Instruments
|
|
|
(9,097
|
)
|
|
|
(13,238
|
)
|
Unrecognized
Losses on Benefit Obligations
|
|
|
(608,735
|
)
|
|
|
(637,157
|
)
|
Accumulated
Other Comprehensive Loss
|
|
$
|
(624,660
|
)
|
|
$
|
(672,415
|
)
|
Inventories
The
components of inventories are as follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
Raw
Materials and Supplies
|
|
$
|
87,013
|
|
|
$
|
95,593
|
|
Work
in Progress
|
|
|
7,556
|
|
|
|
12,157
|
|
Finished
Goods
|
|
|
25,561
|
|
|
|
20,633
|
|
Total
Inventories
|
|
$
|
120,130
|
|
|
$
|
128,383
|
|
Restricted
Cash and Cash Equivalents
At June
30, 2009, we had restricted cash and cash equivalents totaling
$
81.2
million, $43.9 million of which was held in restricted foreign accounts,
$28.8 million was held in escrow pending final payment on a legal settlement,
$2.8 million was held as cash collateral for letters of credit, $5.0 million was
held for future decommissioning of facilities, and $0.7 million was held to meet
reinsurance reserve requirements of our captive insurance
companies.
Warranty
Expense
We
generally accrue estimated expense to satisfy contractual warranty
requirements of our Government Operations and Power Generation Systems
segments when we recognize the associated revenue on the related
contracts. We generally 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, and we record the associated
expense under the percent-of-completion method of accounting for long-term
construction contracts. 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 condition, results of operations and cash
flows.
The
following summarizes the changes in our accrued warranty expense:
|
|
Six
Months Ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
Balance
at beginning of period
|
|
$
|
120,237
|
|
|
$
|
101,330
|
|
Additions
and adjustments
|
|
|
16,417
|
|
|
|
9,286
|
|
Charges
|
|
|
(8,459
|
)
|
|
|
(3,982
|
)
|
Balance
at end of period
|
|
$
|
128,195
|
|
|
$
|
106,634
|
|
Research
&
Development Expense
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. For the six months ended June 30, 2009 and 2008 our net
research and development expense included in cost of operations totaled
approximately $21.1 million and $18.8 million, respectively.
Recently
Adopted Accounting Standards
In May
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
165,
Subsequent Events
.
SFAS No. 165 incorporates specific accounting and disclosure requirements for
subsequent events into U.S. generally accepted accounting principles, as part of
the codification effort and in conjunction with SFAS Nos. 162 and 168. The
adoption of these provisions did not have a material impact on our consolidated
financial statements.
In April
2009, the FASB issued FASB Staff Position (“FSP”) 141(R)-1,
Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies
. FSP 141(R)-1 amends and clarifies SFAS No. 141 to address
subsequent measurement and accounting for, and disclosure of, assets and
liabilities arising from contingencies in a business combination. On
January 1, 2009, we adopted the provisions of FSP 141(R)-1. The adoption of
these provisions did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB issued FSP 107-1
, Interim Disclosures about Fair
Value of Financial Instruments.
FSP 107-1 amends SFAS No. 107,
Disclosures about Fair Value of
Financial Instruments
, to require disclosures about fair value of
financial instruments in financial statements. The adoption of these provisions
did not have a material impact on our consolidated financial
statements.
In
April 2008, the FASB issued FSP 142-3,
Determination of the Useful Life of
Intangible Assets
. FSP 142-3 requires companies estimating the useful
life of a recognized intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, to consider assumptions that market participants would use about
renewals or extensions as adjusted for the entity-specific factors in SFAS
No. 142,
Goodwill and
Other Intangible Assets
. On January 1, 2009, we adopted the provisions of
FSP 142-3 for the determination of the useful life of intangible assets. The
adoption of these provisions did not have a material impact on our consolidated
financial statements.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative
Instruments and Hedging Activities
–
an amendment of FASB Statement
No. 133
. SFAS No. 161 requires enhanced disclosures about
derivative and hedging activities and is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. On January 1, 2009, we adopted the provisions of SFAS No. 161
for our disclosures about derivative instruments and hedging activities. The
adoption of these provisions did not have a material impact on our consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements –
a
n 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. On January 1, 2009, we
adopted the provisions of SFAS No. 160. Noncontrolling interest has
been presented as a separate component of stockholders’ equity for the current
reporting period and prior comparative reporting period.
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, liabilities
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. On January 1, 2009, we adopted the
provisions of SFAS 141(R). The adoption of these provisions did not have a
material impact on our consolidated financial statements.
Accounting
Standards Not Yet Adopted
In June
2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles-a
Replacement of FASB Statement No. 162
. SFAS No. 168 identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles in
the United States. This Statement will be effective for interim and annual
reporting ending after September 15, 2009. We do not expect SFAS No.
168 to have a material impact on our consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R). SFAS No. 167 expands the scope of FASB Interpretation No. 46(R) and
amends guidance for assessing and analyzing variable interest entities as
defined in Interpretation No. 46(R). This Statement will be effective for fiscal
years beginning after November 15, 2009. We do not expect SFAS No. 167 to have a
material impact on our consolidated financial statements.
Other
than as described above, there have been no material changes to the recent
pronouncements discussed in our annual report on Form 10-K for the year ended
December 31, 2008.
NOTE
2 – PENSION PLANS AND POSTRETIREMENT BENEFITS
Components
of net periodic benefit cost included in net income are as follows:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$
|
9,611
|
|
|
$
|
9,757
|
|
|
$
|
19,176
|
|
|
$
|
19,540
|
|
|
$
|
231
|
|
|
$
|
82
|
|
|
$
|
462
|
|
|
$
|
165
|
|
Interest
cost
|
|
|
40,086
|
|
|
|
38,795
|
|
|
|
80,187
|
|
|
|
77,650
|
|
|
|
2,153
|
|
|
|
1,430
|
|
|
|
4,323
|
|
|
|
2,843
|
|
Expected
return on plan assets
|
|
|
(37,016
|
)
|
|
|
(45,787
|
)
|
|
|
(73,925
|
)
|
|
|
(91,620
|
)
|
|
|
(376
|
)
|
|
|
-
|
|
|
|
(753
|
)
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
697
|
|
|
|
768
|
|
|
|
1,387
|
|
|
|
1,537
|
|
|
|
17
|
|
|
|
19
|
|
|
|
32
|
|
|
|
38
|
|
Amortization
of transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
73
|
|
|
|
122
|
|
|
|
147
|
|
Recognized
net actuarial loss
|
|
|
20,948
|
|
|
|
8,904
|
|
|
|
41,749
|
|
|
|
17,815
|
|
|
|
404
|
|
|
|
364
|
|
|
|
809
|
|
|
|
728
|
|
Net
periodic benefit cost
|
|
$
|
34,326
|
|
|
$
|
12,437
|
|
|
$
|
68,574
|
|
|
$
|
24,922
|
|
|
$
|
2,492
|
|
|
$
|
1,968
|
|
|
$
|
4,995
|
|
|
$
|
3,921
|
|
NOTE
3 – COMMITMENTS AND CONTINGENCIES
Other
than as noted below, there have been no material changes during the period
covered by this Form 10-Q in the status of the legal proceedings disclosed in
Note 11 to the consolidated financial statements in Part II of our annual report
on Form 10-K for the year ended December 31, 2008.
Investigations
and Litigation
With
regard to the matter of
Donald
F. Hall and Mary Ann Hall, et al., v. Babcock & Wilcox Company, et
al.
(the “Hall Litigation”), the parties entered into the final
settlement agreement described in our annual report on Form 10-K for the year
ended December 31, 2008 (our “2008 10-K”), and that settlement was approved by
the United States District Court for the Western District of Pennsylvania (the
“District Court”) in April 2009. In May 2009, B&W PGG paid
approximately $52.5 million pursuant to the terms of the final settlement
agreement, which is within the amount we have accrued for these claims.
Additionally, B&W PGG and Atlantic Richfield Company (“ARCO”), a former
defendant in the Hall Litigation, entered into the final settlement agreement
described in our 2008 10-K, relating to B&W PGG’s indemnity action against
ARCO for any liability as a result of the Hall Litigation. The
indemnity settlement was also approved by the District Court in April
2009. B&W PGG and Babcock & Wilcox Technical Services Group,
Inc., formerly known as B&W Nuclear Environmental Services, Inc., have
retained all insurance rights and intend to continue to pursue recovery from
American Nuclear Insurers and mutual Atomic Energy Liability Underwriters
(“ANI”) to recover the amounts paid in settlement of the Hall Litigation in the
matter of
The Babcock &
Wilcox Company et al. v. American Nuclear Insurers et al.
(the
“ANI
Litigation”),
which is pending before the Court of Common Pleas of Allegheny County,
Pennsylvania. A hearing in the ANI Litigation is set for September
14, 2009 to determine the legal standard to be applied in determining ANI’s
insurance coverage obligations with respect to the settlement of the Hall
Litigation.
The three
separate purported class action complaints against MII, Bruce W. Wilkinson
(MII’s former Chief Executive Officer and Chairman of the Board), and Michael S.
Taff (the Chief Financial Officer of MII) described in our 2008 10-K have been
consolidated. In April 2009, our motion to transfer the consolidated cases to
the Southern District of Texas was granted. On May 22, 2009, the plaintiffs
filed an amended consolidated complaint, which, among other things, added Robert
A. Deason (JRMSA’s President and Chief Executive Officer) as a defendant in the
proceedings. On July 1, 2009, MII and the other defendants filed a motion to
dismiss the complaint. The plaintiffs filed two responses to the motion to
dismiss: (1) a motion to convert the motion to dismiss to a motion for summary
judgment and granting the plaintiffs leave to conduct discovery, which was filed
on July 10, 2009; and (2) an opposition to the motion to dismiss, which was
filed on August 3, 2009. MII and the other defendants filed a
response to the plaintiffs’ motion to convert on July 30, 2009 and intend to
file a reply to the plaintiffs’ opposition to the motion to dismiss on or before
August 24, 2009. None of the motions have yet been set for hearing by
the Court.
With
regard to the matter of
Iroquois Falls Power Corp. v. Jacobs
Canada Inc., et al.,
described in our 2008
10-K,
Iroquois Falls Power Corp. (“Iroquois”) filed a notice of appeal of the decision
of the Superior Court of Justice which denied the request of Iroquois to amend
its complaint and assert new claims against the defendants based on a breach of
contractual warranty. A hearing on the appeal was held on June 2,
2009. On June 25, 2009, the Court of Appeals for Ontario reversed the
decision of the Superior Court sending the case back to the Superior Court for
Iroquois to file an amended complaint on those new claims. We have until the end
of September, 2009 to seek leave to appeal the Court of Appeals’
ruling.
For a detailed description of these and other proceedings, please refer to Note
11 to the consolidated financial statements included in Part II of our annual
report on Form 10-K for the year ended December 31, 2008.
Other
Some of
our contracts contain penalty 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
had potential exposure for liquidated damages, such damages ultimately were not
asserted by our customers. As of June 30, 2009, we had not accrued
for approximately $111 million of potential liquidated damages that we could
incur based upon our current expectations of the time to complete certain
projects in our Offshore Oil and Gas Construction segment. We do not
believe any claims for these potential liquidated damages are probable of being
assessed. The trigger dates for the majority of these potential liquidated
damages occurred during the fourth quarter of 2008. We are in active discussions
with our customers on the issues giving rise to delays in these projects, and we
believe we will be successful in obtaining schedule extensions that should
resolve the potential for liquidated damages being assessed. However, we may not
achieve relief on some or all of the issues. For certain projects in our
Offshore Oil and Gas Construction segment, we have currently provided for
approximately $24 million in liquidated damages in our estimates of revenues and
gross profit, of which approximately $22 million has been recognized in our
financial statements to date, as we believe, based on the individual facts and
circumstances, that these liquidated damages are probable.
NOTE
4 – DERIVATIVE FINANCIAL INSTRUMENTS
Our
worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments
(primarily foreign currency forward-exchange contracts) 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.
We have
designated all of our forward contracts as either cash flow or fair value
hedging instruments. 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 and
certain capital expenditures. 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 June 30, 2009, we had deferred approximately $9.1 million
of net losses on these derivative financial instruments in accumulated other
comprehensive loss. Of this amount, we expect to recognize approximately $1.0
million of income in the next 12 months.
At June
30, 2009, all of our derivative financial instruments consisted of foreign
currency forward-exchange contracts. The notional value of our forward contracts
totaled $348.5 million at June 30, 2009, with maturities extending to December
2011. These instruments consist primarily of contracts to purchase or sell Euros
or Canadian Dollars. The fair value of these contracts totaled ($10.4) million.
We are exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. However, when possible, we
enter into International Swaps and Derivative Association, Inc. agreements with
our hedge counterparties to mitigate this risk. We also attempt to
mitigate this risk by using major financial institutions with high credit
ratings and limit our exposure to hedge counterparties based on their credit
ratings. The counterparties to all of our derivative financial
instruments are financial institutions included in our credit facilities
described in Note 6 to the consolidated financial statements included in Part II
of our annual report on Form 10-K for the year ended December 31, 2008. Our
hedge counterparties have the benefit of the same collateral arrangements and
covenants as described under these facilities.
The
following tables summarize our derivative financial instruments at June 30, 2009
(unaudited):
|
|
|
|
|
|
Asset
Derivatives
June
30, 2009
|
|
Liability
Derivatives
June
30, 2009
|
|
|
Balance
Sheet
Account
|
|
Fair
Value
|
|
Balance
Sheet
Account
|
|
Fair
Value
|
|
|
(In
thousands)
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign-exchange
contracts
|
Accounts
receivable-other
|
|
$
|
3,777
|
|
Accounts
payable
|
|
$
|
12,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign-exchange
contracts
|
Accounts
receivable-other
|
|
$
|
1,548
|
|
Accounts
payable
|
|
$
|
3,067
|
|
The
Effect of Derivative Instruments on the Statements of Financial
Performance
June
30, 2009
(in
thousands)
|
|
|
|
Three
Months Ended
June 30, 2009
|
|
|
Six
Months Ended
June 30, 2009
|
|
Derivatives Designated as
Hedges:
|
|
|
|
|
|
|
Cash Flow
Hedges:
|
|
|
|
|
|
|
Foreign Exchange
Contracts:
|
|
|
|
|
|
|
Amount
of gain (loss) recognized in
other
comprehensive income
|
|
$
|
8,479
|
|
|
$
|
5,607
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) reclassified from accumulated other
comprehensive
loss into income: effective portion
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
364
|
|
|
$
|
(214
|
)
|
Cost
of operations
|
|
$
|
2,120
|
|
|
$
|
1,194
|
|
Other-net
|
|
$
|
275
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) recognized in income: portion
excluded
from effectiveness testing
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Other-net
|
|
$
|
(492
|
)
|
|
$
|
(1,592
|
)
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedges:
|
|
|
|
|
|
|
|
|
Foreign
Exchange Contracts
:
|
|
|
|
|
|
|
|
|
Gain
(loss) recognized in income:
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Other-net
|
|
$
|
1,942
|
|
|
$
|
(6,347
|
)
|
NOTE
5 – FAIR VALUE MEASUREMENTS
The
following is a summary of our available-for-sale securities measured at fair
value at June 30, 2009 (in thousands) (unaudited):
|
|
6/30/09
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Mutual
funds
|
|
$
|
4,379
|
|
|
$
|
-
|
|
|
$
|
4,379
|
|
|
$
|
-
|
|
Certificates
of deposit
|
|
|
2,661
|
|
|
|
-
|
|
|
|
2,661
|
|
|
|
-
|
|
U.S.
Government and agency securities
|
|
|
215,589
|
|
|
|
175,182
|
|
|
|
40,407
|
|
|
|
-
|
|
Asset-backed
securities and collateralized mortgage obligations
|
|
|
9,498
|
|
|
|
-
|
|
|
|
3,053
|
|
|
|
6,445
|
|
Corporate
notes and bonds
|
|
|
68,008
|
|
|
|
-
|
|
|
|
68,008
|
|
|
|
-
|
|
Total
|
|
$
|
300,135
|
|
|
$
|
175,182
|
|
|
$
|
118,508
|
|
|
$
|
6,445
|
|
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 period ended June 30, 2009 (in thousands):
Balance,
beginning of the year
|
$ 7,456
|
Total
realized and unrealized gains (losses):
|
|
Included
in other income (expense)
|
(7)
|
Included
in other comprehensive income
|
86
|
Purchases,
issuances and settlements
|
-
|
Principal
repayments
|
(1,090)
|
Balance,
end of period
|
$ 6,445
|
Other
Financial Instruments
We used
the following methods and assumptions in estimating our fair value disclosures
for our other financial instruments, as follows:
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 and restricted cash and cash equivalents approximate their
fair values.
Long-
term
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.
The
estimated fair values of our financial instruments are as follows:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
671,299
|
|
|
$
|
671,299
|
|
|
$
|
586,649
|
|
|
$
|
586,649
|
|
Restricted
cash and cash equivalents
|
|
$
|
81,229
|
|
|
$
|
81,229
|
|
|
$
|
50,536
|
|
|
$
|
50,536
|
|
Investments
|
|
$
|
300,135
|
|
|
$
|
300,135
|
|
|
$
|
450,685
|
|
|
$
|
450,685
|
|
Debt
|
|
$
|
9,676
|
|
|
$
|
9,757
|
|
|
$
|
15,130
|
|
|
$
|
15,221
|
|
NOTE
6 – STOCK-BASED COMPENSATION
Total
stock-based compensation expense recognized for the three and six months ended
June 30, 2009 and 2008 was as follows:
|
|
Compensation
|
|
|
Tax
|
|
|
Net
|
|
|
|
Expense
|
|
|
Benefit
|
|
|
Impact
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2009
|
|
Stock
Options
|
|
$
|
831
|
|
|
$
|
(279
|
)
|
|
$
|
552
|
|
Restricted
Stock
|
|
|
2,216
|
|
|
|
(366
|
)
|
|
|
1,850
|
|
Performance
Shares
|
|
|
4,871
|
|
|
|
(1,712
|
)
|
|
|
3,159
|
|
Performance
and Deferred Stock Units
|
|
|
2,768
|
|
|
|
(923
|
)
|
|
|
1,845
|
|
Total
|
|
$
|
10,686
|
|
|
$
|
(3,280
|
)
|
|
$
|
7,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2008
|
|
Stock
Options
|
|
$
|
245
|
|
|
$
|
(74
|
)
|
|
$
|
171
|
|
Restricted
Stock
|
|
|
1,876
|
|
|
|
(293
|
)
|
|
|
1,583
|
|
Performance
Shares
|
|
|
8,590
|
|
|
|
(2,767
|
)
|
|
|
5,823
|
|
Performance
and Deferred Stock Units
|
|
|
1,748
|
|
|
|
(576
|
)
|
|
|
1,172
|
|
Total
|
|
$
|
12,459
|
|
|
$
|
(3,710
|
)
|
|
$
|
8,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2009
|
|
Stock
Options
|
|
$
|
1,059
|
|
|
$
|
(355
|
)
|
|
$
|
704
|
|
Restricted
Stock
|
|
|
3,378
|
|
|
|
(728
|
)
|
|
|
2,650
|
|
Performance
Shares
|
|
|
11,396
|
|
|
|
(3,894
|
)
|
|
|
7,502
|
|
Performance
and Deferred Stock Units
|
|
|
3,878
|
|
|
|
(1,289
|
)
|
|
|
2,589
|
|
Total
|
|
$
|
19,711
|
|
|
$
|
(6,266
|
)
|
|
$
|
13,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008
|
|
Stock
Options
|
|
$
|
766
|
|
|
$
|
(234
|
)
|
|
$
|
532
|
|
Restricted
Stock
|
|
|
2,216
|
|
|
|
(386
|
)
|
|
|
1,830
|
|
Performance
Shares
|
|
|
18,345
|
|
|
|
(5,910
|
)
|
|
|
12,435
|
|
Performance
and Deferred Stock Units
|
|
|
3,097
|
|
|
|
(1,020
|
)
|
|
|
2,077
|
|
Total
|
|
$
|
24,424
|
|
|
$
|
(7,550
|
)
|
|
$
|
16,874
|
|
NOTE
7 – SEGMENT REPORTING
An
analysis of our operations by segment is as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
832,700
|
|
|
$
|
872,268
|
|
|
$
|
1,541,224
|
|
|
$
|
1,518,217
|
|
Government
Operations
|
|
|
261,397
|
|
|
|
225,764
|
|
|
|
518,502
|
|
|
|
416,358
|
|
Power
Generation Systems
|
|
|
471,591
|
|
|
|
698,071
|
|
|
|
1,000,164
|
|
|
|
1,314,369
|
|
Adjustments
and Eliminations
(1)
|
|
|
(689
|
)
|
|
|
(3,457
|
)
|
|
|
(1,628
|
)
|
|
|
(5,872
|
)
|
|
|
$
|
1,564,999
|
|
|
$
|
1,792,646
|
|
|
$
|
3,058,262
|
|
|
$
|
3,243,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Segment
revenues are net of the following intersegment transfers and other
adjustments:
|
|
Offshore
Oil and Gas Construction Transfers
|
|
$
|
359
|
|
|
$
|
3,150
|
|
|
$
|
674
|
|
|
$
|
5,393
|
|
Government
Operations Transfers
|
|
|
330
|
|
|
|
254
|
|
|
|
954
|
|
|
|
424
|
|
Power
Generation Systems Transfers
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
55
|
|
|
|
$
|
689
|
|
|
$
|
3,457
|
|
|
$
|
1,628
|
|
|
$
|
5,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
66,991
|
|
|
$
|
98,959
|
|
|
$
|
114,208
|
|
|
$
|
150,842
|
|
Government
Operations
|
|
|
48,821
|
|
|
|
31,705
|
|
|
|
85,871
|
|
|
|
60,906
|
|
Power
Generation Systems
|
|
|
42,334
|
|
|
|
106,564
|
|
|
|
98,838
|
|
|
|
170,500
|
|
|
|
$
|
158,146
|
|
|
$
|
237,228
|
|
|
$
|
298,917
|
|
|
$
|
382,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Asset Disposals –
Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Oil and Gas Construction
|
|
$
|
1,867
|
|
|
$
|
46
|
|
|
$
|
833
|
|
|
$
|
1,842
|
|
Government Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Power Generation Systems
|
|
|
30
|
|
|
|
(29
|
)
|
|
|
42
|
|
|
|
9,618
|
|
|
|
$
|
1,897
|
|
|
$
|
17
|
|
|
$
|
875
|
|
|
$
|
11,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Income (Loss) of
Investees
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
(1,056
|
)
|
|
$
|
(996
|
)
|
|
$
|
(2,201
|
)
|
|
$
|
(1,750
|
)
|
Government
Operations
|
|
|
8,652
|
|
|
|
10,798
|
|
|
|
17,354
|
|
|
|
19,547
|
|
Power
Generation Systems
|
|
|
1,501
|
|
|
|
(550
|
)
|
|
|
3,144
|
|
|
|
2,125
|
|
|
|
$
|
9,097
|
|
|
$
|
9,252
|
|
|
$
|
18,297
|
|
|
$
|
19,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
67,802
|
|
|
$
|
98,009
|
|
|
$
|
112,840
|
|
|
$
|
150,934
|
|
Government
Operations
|
|
|
57,473
|
|
|
|
42,503
|
|
|
|
103,225
|
|
|
|
80,453
|
|
Power
Generation Systems
|
|
|
43,865
|
|
|
|
105,985
|
|
|
|
102,024
|
|
|
|
182,243
|
|
|
|
|
169,140
|
|
|
|
246,497
|
|
|
|
318,089
|
|
|
|
413,630
|
|
Corporate
|
|
|
(21,400
|
)
|
|
|
(15,373
|
)
|
|
|
(39,143
|
)
|
|
|
(25,394
|
)
|
Total
Operating Income
|
|
$
|
147,740
|
|
|
$
|
231,124
|
|
|
$
|
278,946
|
|
|
$
|
388,236
|
|
NOTE
8 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for basic computation
|
|
$
|
92,555
|
|
|
$
|
177,539
|
|
|
$
|
170,247
|
|
|
$
|
300,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
229,273,441
|
|
|
|
226,862,500
|
|
|
|
228,794,113
|
|
|
|
226,247,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.40
|
|
|
$
|
0.78
|
|
|
$
|
0.74
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for diluted computation
|
|
$
|
92,555
|
|
|
$
|
177,539
|
|
|
$
|
170,247
|
|
|
$
|
300,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (basic)
|
|
|
229,273,441
|
|
|
|
226,862,500
|
|
|
|
228,794,113
|
|
|
|
226,247,335
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options, restricted stock and performance shares
|
|
|
3,832,508
|
|
|
|
3,546,260
|
|
|
|
4,051,985
|
|
|
|
4,013,475
|
|
Adjusted
weighted average common shares and assumed exercises of stock options and
vesting of stock awards
|
|
|
233,105,949
|
|
|
|
230,408,760
|
|
|
|
232,846,098
|
|
|
|
230,260,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$
|
0.40
|
|
|
$
|
0.77
|
|
|
$
|
0.73
|
|
|
$
|
1.31
|
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
|
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS
|
The
following information should be read in conjunction with the unaudited condensed
consolidated financial statements and the notes thereto included under Item 1
and the audited consolidated financial statements and the related notes and Item
7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in our annual report on Form 10-K for the year ended
December 31, 2008.
In this
quarterly report on Form 10-Q, unless the context otherwise indicates, “we,”
“us” and “our” mean MII and its consolidated subsidiaries.
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 quarterly report on Form 10-Q, including
those that express a belief, expectation or intention, as well as those that are
not statements of historical fact, are forward-looking
statements. 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;
|
·
|
cancellations
of and adjustments to backlog and the resulting impact from using backlog
as an indicator of future earnings;
|
·
|
our
ability to obtain schedule extensions in connection with certain projects
in our Offshore Oil and Gas Construction
segment;
|
·
|
the
ability of our suppliers to deliver raw materials in sufficient quantities
and in a timely manner;
|
·
|
volatility
and uncertainty of the credit
markets;
|
·
|
our
ability to comply 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, including the
potential impact of liquidated
damages;
|
·
|
changes
in, or our failure or inability to comply with, government
regulations;
|
·
|
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;
|
·
|
the
risks associated with integrating businesses we
acquire;
|
·
|
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
affects of asserted and unasserted
claims;
|
·
|
our
ability to obtain surety bonds, letters of credit and
financing;
|
·
|
our
ability to maintain builder’s risk, liability, property and other
insurance in amounts and on terms we consider adequate and at rates that
we consider economical;
|
·
|
the
aggregated risks retained in our insurance captives;
and
|
·
|
the
impact of the loss of certain 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 and in our annual report on Form
10-K for the year ended December 31, 2008. These factors are not
necessarily
all the factors that could affect us. Unpredictable or unanticipated
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 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.
GENERAL
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 under a separate
credit facility. 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.
As of
June 30, 2009, 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. In some instances, we guarantee completion dates
related to our projects. 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.
Some of
our contracts contain penalty 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
had potential exposure for liquidated damages, such damages ultimately were not
asserted by our customers. As of June 30, 2009, we had not accrued
for approximately $111 million of potential liquidated damages that we could
incur based upon our current expectations of the time to complete certain
projects in our Offshore Oil and Gas Construction segment. We do not
believe any claims for these potential liquidated damages are probable of being
assessed. The trigger dates for the majority of these potential liquidated
damages occurred during the fourth quarter of 2008. We are in active discussions
with our customers on the issues giving rise to delays in these projects, and we
believe we will be successful in obtaining schedule extensions that should
resolve the potential for liquidated damages being assessed. However, we may not
achieve relief on some or all of the issues. For certain projects in our
Offshore Oil and Gas Construction segment, we have currently provided for
approximately $24 million in liquidated damages in our estimates of revenues and
gross profit, of which approximately $22 million has been recognized in our
financial statements to date, as we believe, based on the individual facts and
circumstances, that these liquidated damages are probable.
Offshore
Oil and Gas Construction Segment
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
in which we operate. This segment’s operations are generally capital
intensive, and a number of factors influence its activities,
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.
|
Government
Operations Segment
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.
Power
Generation Systems Segment
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.
|
For a
summary of the critical accounting policies and estimates that we use in the
preparation of our unaudited condensed consolidated financial statements, see
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our annual report on Form 10-K for the year ended December 31,
2008. There have been no material changes to these policies during
the six months ended June 30, 2009, except as disclosed in Note 1 of the notes
to condensed consolidated financial statements included in this
report.
RESULTS
OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2009 VS. THREE MONTHS ENDED JUNE 30,
2008
McDermott International,
Inc. (Consolidated)
Revenues
decreased approximately 13%, or $227.6 million, to $1,565.0 million in the three
months ended June 30, 2009 compared to $1,792.6 million for the corresponding
period of 2008. In the second quarter of 2009, as compared to the second quarter
of 2008, our Power Generation Systems segment experienced a $226.5 million, or
32%, reduction in its revenues attributable primarily to decreases in its
utility steam and system fabrication business. Additionally, our
Offshore Oil and Gas Construction segment experienced a $39.6 million, or 5%,
decrease in its revenues during the second quarter of 2009 compared to the
second quarter of 2008. Our Government Operations segment generated a
16%, or $35.6 million increase in its revenues during the three months ended
June 30, 2009 compared to the corresponding period of 2008 primarily
attributable to the acquisition of Nuclear Fuel Services, Inc.
Segment
operating income decreased $79.1 million to $158.1 million in the three
months ended June 30, 2009 from $237.2 million for the corresponding period of
2008. The segment operating income of our Power Generation Systems and Offshore
Oil and Gas Construction segments decreased $64.3 million, and $32.0
million, respectively, in the second quarter of 2009, as compared to the second
quarter of 2008. The segment operating income of our Government
Operations Systems segment increased by $17.1 million in the three months ended
June 30, 2009 compared to the comparable period in 2008. We experienced a
significant increase in our pension plan expense in the three months ended June
30, 2009 compared to the corresponding period of 2008 totaling approximately
$21.9 million. This increase is primarily attributable to amortization of losses
on pension plan assets experienced in the year ended 2008.
For
purpose of this discussion and the discussions that follow, segment operating
income is before equity in income (loss) of investees and gains (losses) on
asset disposals – net.
Offshore Oil and Gas
Construction
Revenues
decreased 5% or $39.6 million to $832.7 million in the three months
ended June 30, 2009 compared to $872.3 million in the corresponding period of
2008 primarily attributable to decreases in our Caspian ($96.6 million),
Americas ($50.8 million) and Asia Pacific ($24.4 million) regions partially
offset by increases in our Middle East region ($133.6 million).
Segment
operating income decreased $32.0 million to $67.0 million in the three
months ended June 30, 2009 from $99.0 million in the corresponding period of
2008 attributable primarily to decreases from our Caspian and Americas
regions. In addition, we experienced reduced profits on Qatar
projects in our Middle East region where we recognized approximately $339
million in revenues with $11 million in contract losses in the three months
ended June 30, 2009. These contract losses were mainly a result of cost
increases due to mechanical downtime on marine vessels, primarily on a Middle
East project, and lower productivity, primarily on a project in our Middle East
fabrication yard. These decreases were partially offset by increases
in our Asia Pacific region from project
improvements
and change orders. In addition, we realized total benefits from
project close-outs totaling approximately $5 million in the three months ended
June 30, 2009 compared to approximately $12 million in the corresponding period
of 2008.
Government
Operations
Revenues
increased approximately 16%, or $35.6 million, to $261.4 million in the three
months ended June 30, 2009 compared to $225.8 million for the corresponding
period of 2008, primarily attributable to our acquisition of Nuclear Fuel
Services, Inc. ($47.6 million) and additional volume in the manufacture of
nuclear components of certain U.S. Government programs and recovery work. These
improvements were partially offset by lower volumes in the manufacture of
components for a commercial uranium enrichment project ($2.6 million) and lower
volumes in engineering and laboratory services. Additionally, we experienced
lower revenues from our management and operating contracts at several government
sites.
Segment
operating income increased $17.1 million to $48.8 million in the three months
ended June 30, 2009 compared to $31.7 million for the corresponding period of
2008, attributable to favorable contract cost adjustments related to a
downblending contract, and higher utilization and lower overhead cost in our
nuclear environmental services business. These improvements
were partially offset by increased pension expense attributable to amortization
of losses on pension plan assets experienced in the year ended 2008, and lower
revenues from our management and operating contracts at several government
sites, and lower volumes related to a commercial uranium enrichment project. We
also experienced higher depreciation and amortization expense in the three
months ended June 30, 2009 associated with our acquisition of Nuclear Fuel
Services, Inc.
Equity
income of investees decreased to $2.1 million to $8.7 million in the three
months ended June 30, 2009 compared to the $10.8 million in the corresponding
period of 2008 due to decreases in cost savings incentives earned in the current
year.
Power Generation
Systems
Revenues
decreased approximately 32%, or $226.5 million, to $471.6 million in the three
months ended June 30, 2009, compared to $698.1 million in the corresponding
period of 2008, primarily attributable to decreases in our utility steam and
system fabrication business ($141.3 million), our fabrication, repair and
retrofit of existing facilities ($71.0 million), replacement parts business
($8.3 million), nuclear service business ($6.3 million) and our boiler auxiliary
equipment ($4.7 million). These decreases were partially offset by increased
revenues from our operations and maintenance business ($6.3 million), and our
field service business ($4.1 million).
Segment
operating income decreased $64.3 million to $42.3 million in the three months
ended June 30, 2009, compared to $106.6 million in the corresponding period of
2008, primarily attributable to lower volumes in our utility steam and system
fabrication business, our fabrication, repair and retrofit of existing
facilities, and nuclear service businesses. We also experienced lower volume and
margins in our replacement parts, and nuclear steam generator businesses. In
addition we experienced higher qualified pension plan expense in the three
months ended June 30, 2009 compared to the corresponding period in 2008
attributable to amortization of losses on pension plan assets experienced in the
year ended 2008. These decreases were partially offset by improved margins in
our operations and maintenance business.
Equity in
income of investees increased $2.1 million from a $0.6 million loss in the three
months ended June 30, 2008 compared to income of $1.5 million in the
corresponding period of 2009, primarily attributable to operating improvements
at our joint venture in China.
Corporate
Unallocated
Corporate expenses increased $6.0 million to $21.4 million in the three months
ended June 30, 2009, as compared to $15.4 million for the corresponding period
of 2008, primarily attributable to increased qualified pension plan expense
attributable to amortization of losses on pension plan assets experienced in the
year ended 2008, higher salary expenses resulting primarily from an increased
number of employees, and increased expenses associated with development of a
global human resources management system and an enterprise financial reporting
system.
Other Income Statement
Items
Interest
income (expense) - net decreased $3.2 million to $5.0 million in the three
months ended June 30, 2009, primarily due to lower average interest rates on our
investments, and an increase in interest expense attributable to borrowings and
amortization of fees on our credit facilities. These decreases were partially
offset by an increase in capitalized interest.
Other
income (expense) – net decreased by $12.0 million to expense of $10.2
million in the three months ended June 30, 2009 from income of $1.8 million for
the corresponding period of 2008, primarily due to higher currency translation
exchange losses incurred in the second quarter of 2009.
Provision for Income
Taxes
For the
three months ended June 30, 2009, the provision for income taxes decreased $19.0
million to $44.6 million, while income before provision for income taxes
decreased $98.6 million to $142.5 million. Our effective tax rate for
the three months ended June 30, 2009 was approximately 31.3%, as compared to
26.4% for the three months ended June 30, 2008. The prior year
included a benefit associated with our evaluation of amounts ultimately payable
for certain proposed audit adjustments.
Income
before provision for income taxes, provision for income taxes and effective tax
rates for our U.S. and non-U.S. jurisdictions are as shown below:
|
|
Income
before
Provision for
Income
Taxes
|
|
|
Provision
for
Income
Taxes
|
|
|
Effective
Tax Rate
|
|
|
|
For
the three months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
52,630
|
|
|
$
|
119,821
|
|
|
$
|
21,532
|
|
|
$
|
38,395
|
|
|
|
40.91
|
%
|
|
|
32.04
|
%
|
Non-United
States
|
|
|
89,896
|
|
|
|
121,332
|
|
|
|
23,113
|
|
|
|
25,207
|
|
|
|
25.71
|
%
|
|
|
20.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,526
|
|
|
$
|
241,153
|
|
|
$
|
44,645
|
|
|
$
|
63,602
|
|
|
|
31.32
|
%
|
|
|
26.38
|
%
|
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. These variances, along with variances in our mix of income
from these jurisdictions, contribute to shifts in our effective tax
rate.
RESULTS
OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2009 vs. SIX MONTHS ENDED JUNE 30,
2008
McDermott International,
Inc. (Consolidated)
Revenues
decreased approximately 5%, or $184.8 million, to $3,058.3 million in the six
months ended June 30, 2009 compared to $3,243.1 million for the corresponding
period of 2008. Our Power Generation Systems segment experienced a 24% or $314.2
million reduction in its revenues for the six months ended June 30, 2009
compared to 2008 attributable primarily to decreases in its utility steam and
system fabrication business. Our Offshore Oil and Gas Construction
and Government Operations segments generated increases in revenues totaling
$23.0 million and $102.1 million, respectively, in the six months ended June 30,
2009 compared to the corresponding period of 2008. Our Government Operations
segment revenue increase was primarily attributable to the acquisition of
Nuclear Fuel Services, Inc.
Segment
operating income decreased $83.3 million to $298.9 million in the six
months ended June 30, 2009 from $382.2 million for the corresponding period of
2008. The segment operating income of our Power Generation Systems and Offshore
Oil and Gas Construction segments decreased $71.7 million and $36.6 million,
respectively, in the six months ended June 30, 2009, as compared to the same
period in 2008. These decreases were partially offset by a $25.0
million increase in the segment operating income of our Government Operations
segment in the six months ended June 30, 2009, as compared to the same period in
2008. We experienced a significant increase in our pension plan expense in the
six months ended June 30, 2009 compared to the corresponding period of 2008
totaling
approximately
$43.7 million. This increase is primarily attributable to amortization of losses
on pension plan assets experienced in the year ended 2008.
Offshore Oil and Gas
Construction
Revenues
increased 2% or $23.0 million to $1,541.2 million in the six months
ended June 30, 2009 compared to $1,518.2 million in the corresponding period of
2008 primarily attributable to increases from our Middle East region ($220.0
million). These increases are partially offset by decreases from our
Caspian ($127.4 million), Americas ($27.9 million) and Asia Pacific ($23.3
million) regions.
Segment
operating income decreased $36.6 million to $114.2 million in the six
months ended June 30, 2009 from $150.8 million in the corresponding period of
2008 primarily attributable to reduced profits on Qatar projects in our Middle
East region. For the six months ended June 30, 2009 we recognized
approximately $553 million in revenues with $16 million in contract losses on
these projects. These contract losses were mainly a result of cost increases due
to mechanical downtime on marine vessels, primarily on a Middle East project,
and lower productivity, primarily on a project in our Middle East fabrication
yard. In addition, we experienced a decrease in segment operating
income as a result of decreases in our Caspian
region. These decreases were partially offset by an increase in our
Asia Pacific region as a result of project improvements, and increases in our
Americas region from project close-outs and change orders. We
realized total benefits from project close-outs totaling approximately $37
million in the six months ended June 30, 2009 compared to approximately $22
million in the corresponding period of 2008. General and administrative expenses
decreased $4.6 million for the six months ended June 30, 2009 compared to the
six months ended June 30, 2008.
Government
Operations
Revenues
increased approximately 25%, or $102.1 million, to $518.5 million in the six
months ended June 30, 2009 compared to $416.4 million for the corresponding
period of 2008, primarily attributable our acquisition of Nuclear Fuel Services,
Inc. in Erwin, Tennessee ($87.5 million) and additional volume in the
manufacture of nuclear components of certain U.S. Government programs and
recovery work. In addition, we experienced higher volumes in the manufacture of
components for a commercial uranium enrichment project ($6.2
million). These improvements were partially offset by lower volumes
in engineering and laboratory services and lower revenues from our management
and operating contracts at several government sites.
Segment
operating income increased $25.0 million to $85.9 million in the six months
ended June 30, 2009 compared to $60.9 million for the corresponding period of
2008, attributable to a favorable contract cost adjustment related to a
downblending contract, and additional volume in the manufacture of nuclear
components of certain U.S. Government programs and recovery work. In
addition, we experienced higher volumes related to a commercial uranium
enrichment project and higher utilization and lower overhead cost in nuclear
environmental services. These improvements were partially offset by
increased pension expense and lower revenues from our management and operating
contracts at several government sites. We also experienced higher depreciation
and amortization expense in the six months ended June 30, 2009 associated with
our acquisition of Nuclear Fuel Services, Inc.
Equity
income of investees decreased to $2.1 million to $17.4 million in the six months
ended June 30, 2009 compared to $19.5 million in the corresponding period of
2008 due to decreases in cost savings incentives in the current
year.
Power Generation
Systems
Revenues decreased approximately 24%,
or $314.2 million, to $1,000.2 million for the six months ended June 30, 2009,
compared to $1,314.4 million for the corresponding period of 2008 primarily
attributable to decreases in our utility steam and system fabrication business
($241.8 million), our fabrication, repair and retrofit of existing facilities
($52.3million), our replacement parts business ($11.4 million), nuclear service
business ($9.6 million) and our OEM industrial boilers ($2.9 million). These
decreases were partially offset by increased revenues from our operations and
maintenance business ($9.5 million), and our field service business ($4.3
million).
Segment operating income decreased
$71.7 million to $98.8 million for the six months ended June 30, 2009, compared
to $170.5 million for the corresponding period of 2008 primarily attributable to
lower volumes in our utility steam and system fabrication business, nuclear
steam generator and nuclear service businesses, combined
with
lower margins in our OEM industrial boiler businesses. In addition we
experienced higher qualified pension plan expense in the three months ended June
30, 2009 compared to the corresponding period of 2008 attributable to
amortization of losses on pension plan assets experienced in the year ended
2008. Partially offsetting these decreases were increases attributable to
improved margins in our fabrication, repair and retrofit of existing facilities
and higher volume and margins in our operations and maintenance and boiler
auxiliary equipment businesses.
Corporate
Unallocated
corporate expenses increased $13.7 million to $39.1 million in the six months
ended June 30, 2009, as compared to $25.4 million for the corresponding period
of 2008, primarily attributable to increased qualified pension plan expense
attributable to amortization of losses on pension plan assets experienced in the
year ended 2008, higher salary expenses resulting primarily from an increased
number of employees, and increased expenses associated with development of a
global human resources management system and an enterprise financial reporting
system.
Other Income Statement
Items
Interest
income (expense) - net decreased $11.8 million to $6.8 million in the six months
ended June 30, 2009, primarily due to reduced cash and investment balances and
lower average interest rates on our investments, and an increase in interest
expense attributable to borrowings and amortization of fees on our credit
facilities. These decreases were partially offset by an increase in capitalized
interest.
Other
income (expense) – net decreased by $18.9 million to expense of $21.0
million in the six months ended June 30, 2009 from expense of $2.1 million for
the corresponding period of 2008, primarily due to higher currency exchange
losses incurred in 2009.
Provision for Income
Taxes
For the
six months ended June 30, 2009, the provision for income taxes decreased $15.5
million to $88.5 million, while income before provision for income taxes
decreased $140.0 million to $264.8 million. Our effective tax rate
for the six months ended June 30, 2009 was approximately 33.4%, as compared to
25.7% for the six months ended June 30, 2008. The rate increase is
attributable to a higher mix of US versus non-US income for the quarter and an
unfavorable mix within our non-US operations resulting in a larger proportion of
the total book income being taxed at higher rates.
Income
before provision for income taxes, provision for income taxes and effective tax
rates for our U.S. and non-U.S. jurisdictions are as shown below:
|
|
Income
before
Provision for
Income
Taxes
|
|
|
Provision
for
Income
Taxes
|
|
|
Effective
Tax Rate
|
|
|
|
For
the six months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
129,554
|
|
|
$
|
181,966
|
|
|
$
|
54,841
|
|
|
$
|
62,349
|
|
|
|
42.33
|
%
|
|
|
34.26
|
%
|
Non-United
States
|
|
|
135,265
|
|
|
|
222,814
|
|
|
|
33,682
|
|
|
|
41,633
|
|
|
|
24.90
|
%
|
|
|
18.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
264,819
|
|
|
$
|
404,780
|
|
|
$
|
88,523
|
|
|
$
|
103,982
|
|
|
|
33.43
|
%
|
|
|
25.69
|
%
|
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. These variances, along with variances in our mix of income
from these jurisdictions, contribute to shifts in our effective tax
rate.
Backlog
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. Backlog may not
be indicative of future operating results, and projects in our backlog may be
cancelled, modified or otherwise altered by customers.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
millions)
|
|
Offshore
Oil and Gas Construction
|
|
$
|
4,689
|
|
|
$
|
4,457
|
|
Government
Operations
|
|
|
2,613
|
|
|
|
2,883
|
|
Power
Generation Systems
|
|
|
2,222
|
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
|
Total
Backlog
|
|
$
|
9,524
|
|
|
$
|
9,816
|
|
Of the
June 30, 2009 backlog, we expect to recognize revenues as follows:
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
|
(Unaudited)
|
|
|
|
(In
approximate millions)
|
|
Offshore
Oil and Gas Construction
|
|
$
|
1,600
|
|
|
$
|
2,400
|
|
|
$
|
689
|
|
Government
Operations
|
|
|
450
|
|
|
|
760
|
|
|
|
1,403
|
|
Power
Generation Systems
|
|
|
700
|
|
|
|
780
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Backlog
|
|
$
|
2,750
|
|
|
$
|
3,940
|
|
|
$
|
2,834
|
|
At June
30, 2009, the Offshore Oil and Gas Construction backlog included approximately
$624 million related to contracts in or near loss positions, which are estimated
to recognize future revenues with approximately zero percent gross
margins. It is possible that our estimates of gross profit could
increase or decrease based on improved productivity, actual downtime and the
resolution of change orders and claims with our customers.
At June
30, 2009, Government Operations' backlog with the U. S. Government was $2.6
billion, which was substantially fully funded. Approximately $166.2 million had
not been funded as of June 30, 2009.
We
believe the current worldwide credit and economic environment and short-term
uncertainty regarding environmental regulations have affected customers in the
electric utility industry more than our other customers. While we have not
experienced significant delays on existing projects in our Power Generation
Systems’ backlog, we have experienced some delays in expected bookings on new
planned projects.
At June
30, 2009, Power Generation Systems’ backlog with the U. S. Government was $2.4
million, all of which was fully funded.
Liquidity and Capital
Resources
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”). As amended to date, the JRMSA Credit Facility provides
for borrowings and issuances of letters of credit in an aggregate amount of up
to $800 million and is scheduled to mature 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.
Other
than customary mandatory prepayments on certain contingent events, the JRMSA
Credit Facility requires only interest payments on a quarterly basis until
maturity. JRMSA is permitted to prepay amounts outstanding under the
JRMSA Credit Facility at any time without penalty.
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 June 30, 2009, JRMSA was in compliance with
all of the covenants set forth in the JRMSA Credit Facility.
While
there were no borrowings outstanding as of June 30, 2009, we borrowed under
the JRMSA Credit Facility for working capital purposes during the
quarter ended June 30, 2009. We expect to access the JRMSA Credit Facility
for similar borrowings, as needed, in the future. As of June 30, 2009, letters
of credit issued under the JRMSA Credit Facility totaled $203.0 million, and
there was a total of $597.0 million available under this facility, $345.6
million of which could be used for cash borrowings. Borrowings under
this facility during the June 30, 2009 quarter had an applicable interest rate
of approximately 3.75% per year. In addition, JRMSA and its
subsidiaries had $279.5 million in outstanding unsecured letters of credit under
separate arrangements with financial institutions at June 30, 2009.
In 2007,
JRMSA executed a general agreement of indemnity in favor of a surety underwriter
based in Mexico relating to surety bonds that underwriter issued in support of
contracting activities of J. Ray McDermott de Mèxico, S.A. de C.V., a subsidiary
of JRMSA. As of June 30, 2009, bonds issued under this arrangement
totaled $7.7 million.
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. (“BWXT”),
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. 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 contains customary 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 June 30, 2009, BWXT was in compliance with all of the
covenants set forth in the BWXT Credit Facility.
The BWXT
Credit Facility only requires interest payments on a quarterly basis until
maturity. Amounts outstanding under the BWXT Credit Facility may be
prepaid at any time without penalty.
At June
30, 2009, there were no borrowings outstanding, but letters of credit issued
under the BWXT Credit Facility totaled $54.3 million. At June 30,
2009, there was $80.7 million available for borrowings or to meet letter of
credit requirements under the BWXT Credit Facility. If there had been
borrowings under this facility, the applicable interest rate at June 30, 2009
would have been 3.50% per year.
At June
30, 2009, Nuclear Fuel Services, Inc., a subsidiary of BWXT, had $3.7 million in
letters of credit issued by various commercial banks on its
behalf. The obligations to the commercial banks issuing such letters
of credit are secured by cash, short-term certificates of deposit and certain
real and intangible assets.
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”). As amended to date,
this facility provides for borrowings and issuances of letters of credit in an
aggregate amount of up to $400 million and is scheduled to mature on February
22, 2011. The proceeds of the B&W PGG Credit Facility are
available for working capital needs and other similar corporate purposes of our
Power Generation Systems segment.
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.
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, including
maintenance of a maximum leverage ratio and a minimum interest coverage ratio
within our Power Generation Systems segment 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. At June 30, 2009, B&W PGG was in compliance with all
of the covenants set forth in the B&W PGG Credit Facility.
As of
June 30, 2009, there were no outstanding borrowings but letters of credit issued
under the B&W PGG Credit Facility totaled $205.4 million. At June
30, 2009, there was $194.6 million available for borrowings or to meet letter of
credit requirements under the B&W PGG Credit Facility. If there
had been borrowings under this facility, the applicable interest rate at June
30, 2009 would have been 3.25% per year.
Certain
foreign subsidiaries of B&W PGG have credit arrangements with various
commercial banks for the issuance of bank guarantees. The aggregate
value of all such bank guarantees as of June 30, 2009 was $18.5
million.
In June
2008, MII, B&W PGG and McDermott Holdings, Inc. jointly executed a general
agreement of indemnity in favor of a surety underwriter relating to surety bonds
that underwriter issued in support of B&W PGG’s contracting
activity. As of June 30, 2009, bonds issued under this arrangement in
support of contracts totaled approximately $68 million. Any claim
successfully asserted against the surety by one or more of the bond obligees
would likely be recoverable from MII, B&W PGG and McDermott Holdings, Inc.
under the indemnity agreement.
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
In
aggregate, our cash and cash equivalents, restricted cash and cash equivalents
and investments decreased by
$
35.2
million
to
$
1,052.7
million at June 30, 2009 from $1,087.9 million at December 31, 2008, primarily
due to cash used in operating activities and purchases of property, plant and
equipment.
Our
working capital, excluding cash and cash equivalents and restricted cash and
cash equivalents, changed by $82.0 million to a negative $546.5 million at June
30, 2009 from a negative $628.5 million at December 31, 2008, primarily due
to the increase in the net amount of contracts in progress and advance billings
on contracts, and a decrease in accounts payable.
Our net
cash provided by (used in) operations changed by $189.4 million to net cash
provided by operations of $103.0 million in the six months ended June 30, 2009
from net cash used in operations of $86.4 million for the six months ended June
30, 2008. This change was primarily attributable to net improvements in our
contracts in progress and advance billings on contracts, and a decrease in cash
used in our pension, postretirement and employee benefit
obligations.
Our net
cash used in investing activities decreased by $229.2 million to $11.2
million in the six months ended June 30, 2009 from $240.4 million in the six
months ended June 30, 2008. This change was primarily attributable to a net
increase in available-for-sale securities during the six months ended June 30,
2009.
Our net
cash provided by (used in) financing activities changed by $9.7 million to net
cash used in financing activities of $4.9 million in the six months ended June
30, 2009 from net cash provided by financing activities of $4.8 million in the
six months ended June 30, 2008, primarily due to lower excess tax benefits
related to stock-based compensation, and issuance of common stock.
At June
30, 2009, we had restricted cash and cash equivalents totaling $81.2 million,
$43.9 million of which was held in restricted foreign accounts, $28.8
million was held in escrow pending final payment on a legal settlement, $2.8
million was held as cash collateral for letters of credit, $5.0 million was held
for future decommissioning of facilities, and $0.7 million was held to meet
reinsurance reserve requirements of our captive insurance
companies.
At June
30, 2009, we had investments with a fair value of $300.1 million. Our
investment portfolio consists primarily of investments in government obligations
and other highly liquid money market instruments. As of June 30,
2009, we had pledged approximately $33.2 million fair value of these investments
in connection with certain reinsurance agreements.
Our
investments are classified as available for sale and are carried at fair value
with unrealized gains and losses, net of tax, reported as a component of other
comprehensive loss. Our net unrealized loss on investments was in an unrealized
loss position totaling $9.7 million at June 30, 2009. At December 31, 2008, we
had unrealized losses on our investments totaling $9.0 million. The major
components of our investments in an unrealized loss position are corporate
bonds, asset-backed obligations and commercial paper. Based on our analysis of
these investments, we believe that none of our available-for-sale securities
were permanently impaired at June 30, 2009.
See Note
1 to our unaudited condensed consolidated financial statements included in this
report for information on new and recently adopted accounting
standards.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Our
exposures to market risks have not changed materially from those disclosed in
Item 7A included in Part II of our annual report on Form 10-K for the year ended
December 31, 2008.
Item 4. Controls and
Procedures
As of the end of the period covered by this quarterly report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by
the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)). Our disclosure controls and procedures were developed through a process
in which our management applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding the control objectives. You should note that the
design of any system of disclosure controls and procedures is based in part upon
various assumptions about the likelihood of future events, and we cannot assure
you that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. Based on the evaluation
referred to above, our Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of our disclosure controls and
procedures are effective as of June 30, 2009 to provide reasonable assurance
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission, and such information is accumulated and
communicated to management as appropriate to allow timely decisions regarding
disclosure. There has been no change in our internal control over
financial reporting during the quarter ended June 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II
OTHER
INFORMATION
Item 1. Legal Proceedings
For
information regarding ongoing investigations and litigation, see Note 3 to our
unaudited condensed consolidated financial statements in Part I of this report,
which we incorporate by reference into this Item.
Item 1A. Risk Factors
Systems
and information technology interruption could adversely impact our ability to
operate.
In 2009,
and 2010, we expect to replace current key financial and human resources legacy
systems with enterprise systems. This implementation subjects us to
inherent costs and risks associated with replacing and changing these systems,
including potential disruption of our internal control structure, substantial
capital expenditures, demands on management time and other risks of delays or
difficulties in transitioning to new systems or of integrating new systems into
our current systems. Our systems implementations may not result in
productivity improvements at the levels anticipated, or at all. In
addition, the implementation of new technology systems may cause disruptions in
our business operations. This and any other information technology system
disruptions and our ability to mitigate those disruptions, if not anticipated
and appropriately mitigated, could have a material adverse effect on
us.
Recent
U.S. regulation may adversely affect our ability to contract with the U.S.
government.
As a
result of our reorganization in 1982, which we completed through a transaction
commonly referred to as an “inversion,” MII is a corporation organized under the
laws of the Republic of Panama. Prior legislative proposals and
enactments have sought to prohibit the U.S. government from contracting with
“inverted” companies such as MII. Although such prior legislation has
not adversely affected our U.S. government contract work, we cannot provide any
assurance that further actions taken by the U.S. government with regard to
“inverted” companies will not adversely impact us. We derive a
substantial amount of our revenues and profits from services provided to the US.
government, mainly through our Government Operations segment, and any exclusion
from pursuing future U.S. government contract work could have a material
adverse affect on our financial condition, results of operations and cash
flows.
The
U.S. government recently adopted interim rules prohibiting federal agencies
from awarding new contracts to “inverted” companies and their subsidiaries with
U.S. federal appropriated funds for fiscal year 2009 and certain prior fiscal
years. We are unable, at this time, to predict with certainty the
impact that the interim rules will have on our ultimate ability to pursue new
contract awards, directly or indirectly with the U.S. government and its
agencies. We are also unable to predict the form in which, or the
scope of, any final rules or regulations governing U.S. federal contracts using
appropriated funds that may be adopted, or any potential future legislation
impacting such rules and regulations. We are continuing to analyze the
interim rules described above and will follow the development of any final rules
or regulations and legislative actions that may limit our ability to pursue
future contracts with the U.S. government and its agencies, with a view to
determining what steps, if any, may be appropriate to mitigate any adverse
impact. These steps could include one or more transactions that may
result in significant changes to our corporate organization and structure.
Depending on the application of the interim rules and the actual provisions of
the anticipated final rules and regulations, we may not be able to mitigate,
fully or partially, any material adverse impact from the adoption of such rules
or regulations.
A
change in tax laws could have a material adverse effect on us by substantially
increasing our corporate income taxes and, consequently, decreasing our future
net income and increasing our future cash outlays for taxes.
As a
result of our reorganization in 1982 discussed above, MII is a corporation
organized under the laws of the Republic of Panama. Tax legislative
proposals intending to eliminate some perceived tax advantages of companies that
have legal domiciles outside the U.S. but operate in the U.S. through one or
more subsidiaries have repeatedly been introduced in the U.S.
Congress. Recent examples include, but are not limited to,
legislative proposals that would broaden the circumstances in which a non-U.S.
company would be considered a U.S. resident for U.S. tax purposes.
It is possible that, if
legislation is enacted in this area, we could be subject to a substantial
increase in our corporate income taxes and, consequently, decrease our future
net income and increase our future cash outlays for taxes. Although
we are unable to predict the form in which any proposed legislation might become
law or the nature of regulations that may be promulgated under any such future
legislative enactments, such laws or regulations could have a material adverse
effect on us.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
The
following table provides information on our purchases of equity securities
during the quarter ended June 30, 2009, all of which involved repurchases of
restricted shares of MII common stock pursuant to the provisions of employee
benefit plans that permit the repurchase of restricted shares to satisfy
statutory tax withholding obligations associated with the lapse of restrictions
applicable to those shares:
Period
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
Maximum
number of shares that may yet be purchased under the plans or
programs
|
|
|
|
|
|
May
8, 2009
|
260,710
|
$18.09
|
not
applicable
|
not
applicable
|
|
|
|
|
|
Total
|
260,710
|
$18.09
|
not
applicable
|
not
applicable
|
Item 4. Submission of Matters to a
Vote of Securities Holders
At
our annual meeting of stockholders held on M ay 8, 2009, we submitted the
following matters to our stockholders, with voting as follows:
|
(a)
|
|
The
election of six directors:
|
|
|
|
|
|
Class I
— For a one-year term
|
Nominee
|
|
Votes
For
|
|
|
Votes
Withheld
|
|
Roger
A. Brown
|
|
|
190,615,067
|
|
|
|
18,716,247
|
|
John
A. Fees
|
|
|
191,290,551
|
|
|
|
18,040,763
|
|
Oliver
D. Kingsley, Jr.
|
|
|
190,817,722
|
|
|
|
18,513,593
|
|
|
|
|
Class II
— For a one-year term
|
Nominee
|
|
Votes
For
|
|
|
Votes
Withheld
|
|
D.
Bradley McWilliams
|
|
|
191,690,900
|
|
|
|
17,640,414
|
|
Richard
W. Mies
|
|
|
191,569,739
|
|
|
|
17,761,575
|
|
Thomas
C. Schievelbein
|
|
|
190,881,266
|
|
|
|
18,450,049
|
|
|
|
|
|
|
John
F. Bookout III, Ronald C. Cambre and Robert W. Goldman continued as
directors pursuant to their prior election.
|
|
|
|
(b)
|
|
A
proposal to approve the 2009 McDermott International, Inc. Long-Term
Incentive Plan
(1)
:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
124,304,299
|
|
|
44,854,662
|
|
|
|
3,491,793
|
|
(1)
Broker
non-votes totaled 36,680,559
|
(c)
|
|
A
proposal to ratify the appointment of Deloitte & Touche LLP as our
independent registered public accounting firm for the year ending
December 31, 2009:
|
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
208,206,972
|
|
|
905,451
|
|
|
|
218,590
|
|
Item 6. Exhibits
Exhibit
3.1*
-
McDermott International, Inc.'s Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No.
1-08430)).
Exhibit
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)).
Exhibit
3.3*
-
Amended and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.3 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-08430)).
Exhibit
10.1* - 2009 McDermott International, Inc. Long-Term Incentive Plan (Effective
May 8, 2009) (incorporated by reference to Appendix A to McDermott
International, Inc.’s Proxy Statement dated March 27, 2009 (File No.
1-08430)).
Exhibit
31.1 - Rule 13a-14(a)/15d-14(a) certification of Chief Executive
Officer.
Exhibit
31.2 - Rule 13a-14(a)/15d-14(a) certification of Chief Financial
Officer.
Exhibit
32.1 - Section 1350 certification of Chief Executive Officer.
Exhibit
32.2 - Section 1350 certification of Chief Financial Officer.
|
*
Incorporated
by reference to the filing
indicated.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
McDERMOTT
INTERNATIONAL, INC.
|
|
|
|
|
|
|
|
|
/s/
Michael S. Taff
|
|
|
|
|
By:
|
Michael
S. Taff
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial Officer and Duly Authorized
|
|
|
Representative)
|
|
|
|
|
|
|
|
|
/s/
Dennis S. Baldwin
|
|
|
|
|
By:
|
Dennis
S. Baldwin
|
|
|
Vice
President and Chief Accounting Officer
|
|
|
(Principal
Accounting Officer and Duly Authorized
|
|
|
Representative)
|
|
|
|
August
10, 2009
|
|
|
EXHIBIT
INDEX
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 September 30, 2008 (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*
10.1*
|
Amended
and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.3 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-08430)).
2009
McDermott International, Inc. Long-Term Incentive Plan (Effective May 8,
2009) (incorporated by reference to Appendix A to McDermott International,
Inc.’s Proxy Statement dated March 27, 2009 (File No.
1-08430)).
|
|
|
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.
|
|
|
*
Incorporated
by reference to the filing indicated.