|
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 notes thereto 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, 2006.
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;
|
·
|
the
ability of our suppliers to deliver raw materials in sufficient quantities
and in a timely manner;
|
·
|
our
future financial performance, including compliance with covenants
in our
credit agreements and other debt instruments and availability, terms
and
deployment of capital;
|
·
|
the
continued availability of qualified
personnel;
|
·
|
the
operating risks normally incident to offshore construction operations,
power generation operations and nuclear
operations;
|
·
|
changes
in, or our failure or inability to comply with, government regulations
and
adverse outcomes from legal and regulatory
proceedings;
|
·
|
impact
of potential regional, national and/or global requirements to
significantly limit or reduce greenhouse gas emissions in the
future;
|
·
|
changes
in, and liabilities relating to, existing or future environmental
regulatory matters;
|
·
|
rapid
technological changes;
|
·
|
the
realization of deferred tax assets, including through the reorganization
we completed in December 2006;
|
·
|
the
consequences of significant changes in interest rates and currency
exchange rates;
|
·
|
difficulties
we may encounter in obtaining regulatory or other necessary approvals
of
any strategic transactions;
|
·
|
social,
political and economic situations in foreign countries where we do
business, including countries in the Middle East and Asia Pacific
and the
former Soviet Union;
|
·
|
the
possibilities of war, other armed conflicts or terrorist
attacks;
|
·
|
the
effects of asserted and unasserted
claims;
|
·
|
our
ability to obtain surety bonds and letters of
credit;
|
·
|
our
ability to maintain builder’s risk, liability, property and other
insurance in amounts and on terms we consider adequate and at rates
that
we consider economical;
|
·
|
the
aggregated risks retained in our insurance captives;
and
|
·
|
the
impact of the loss of insurance coverage as part of the B&W Chapter 11
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, 2006. These factors are not
necessarily all the important factors that could affect
us. Unpredictable or unknown factors we have not discussed in this
report could also have material adverse effects on actual results of matters
that are the subject of our forward-looking statements. We do not
intend to update our description of important factors each time a potential
important factor arises, except as required by applicable securities laws and
regulations. We advise our security holders that they should (1) be
aware that important factors not referred to above could affect the accuracy
of
our forward-looking statements and (2) use caution and common sense when
considering our forward-looking statements.
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 principal operating subsidiaries is financed on
a stand-alone basis. Our debt covenants generally limit use of the financial
resources of or the movement of excess cash from one principal operating
subsidiary for the benefit of the other. For further discussion, see
“Liquidity and Capital Resources” below.
As
of
September 30, 2007, in accordance with the percentage-of-completion method
of
accounting, we have provided for our estimated costs to complete all 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,
changes in job
conditions,
variations in labor and equipment productivity and increases in the cost of
raw
materials, including various types of steel. Increases in costs on our
fixed-price contracts could have a material adverse impact on our results of
operations, financial condition and cash flow. Alternatively, reductions in
overall contract costs at completion could materially improve our results of
operations, financial condition and cash flow.
Offshore
Oil and Gas Construction Segment
JRM
is a
leading provider of engineering, construction, procurement and installation
services for offshore field developments, primarily for the United States,
Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific regions
of the world. With historically high prices for hydrocarbons, the declining
nature of existing proven
reserves
and forecasted demand for energy, we believe JRM is well-positioned to
participate in future offshore field development in our primary
regions.
Government
Operations Segment
The
revenues of our Government Operations segment are largely a function of capital
spending by the U.S. Government. As a supplier of major nuclear
components for certain U.S. Government programs, BWXT is a significant
participant in the defense industry. Additionally, with BWXT’s unique
capability of full life-cycle management of special nuclear materials,
facilities and technologies, BWXT is poised to continue to participate in the
continuing cleanup and management of the U.S. Department of Energy’s nuclear
sites and weapons complexes.
Power
Generation Systems
The
revenues of our Power Generation Systems segment are largely a function of
capital spending by electric power generating companies and other steam-using
industries. B&W is a leading supplier of fossil fuel-fired steam
generating systems, large replacement commercial nuclear steam generators,
environmental equipment and components and related services to customers around
the world. It designs, engineers, manufactures, constructs and services large
utility and industrial power generation systems, including boilers used to
generate steam in electric power plants, pulp and paper making, chemical and
process applications and other industrial uses.
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,
2006. There have been no material changes to these policies during
the nine months ended September 30, 2007, except as disclosed in the notes
to
condensed consolidated financial statements included in this
report.
RESULTS
OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2007 VS. THREE MONTHS ENDED
SEPTEMBER 30, 2006
McDermott
International, Inc. (Consolidated)
Revenues
increased approximately 18%,
or $205.7 million, to $1,324.0 million for the three months ended September
30,
2007, compared to $1,118.3 million for the three months ended September 30,
2006. Our Offshore Oil and Gas Construction segment generated a 32% increase
in
its revenues in the three months ended September 30, 2007 compared to the three
months ended September 30, 2006, primarily attributable to its Middle East
and
Americas regions. In addition our Government Operations and Power
Generation Systems segment revenues increased approximately 20% and 6%,
respectively, in the three months ended September 30, 2007, as compared to
the
three months ended September 30, 2006.
Segment
operating income, which, for purposes of this discussion and the segment
discussions that follow, is before equity in income of investees and gains
(losses) on asset disposals and impairments – net, increased $30.0 million from
$119.6 million in the three months ended September 30, 2006 to $149.6 million
in
the three months ended September 30, 2007. Our Offshore Oil and Gas Construction
segment operating income increased $29.6 million in the three months ended
September 30, 2007, as compared to the three months ended September 30,
2006. In addition, in the three months ended September 30, 2007
compared to the three months ended September 30, 2006, our Power Generation
Systems’ segment operating income increased by approximately $9.9 million, while
our Government Operations’ segment operating income decreased by approximately
$9.5 million.
Offshore
Oil and Gas Construction
Revenues
increased approximately 32%, or $142.0 million, to $582.2 million for
the three months ended September 30, 2007, compared to $440.2 million for the
three months ended September 30, 2006, primarily due to an increase in
fabrication activities in our Middle East and Americas regions and an increase
in marine activities worldwide.
Segment
operating income increased $29.6 million from $59.1 million in the
three months ended September 30, 2006 to $88.7 million in the three months
ended
September 30, 2007. This increase is primarily attributable
to increased fabrication activities and cost savings in our Middle East
regions and increased activities in our Americas region. In addition,
we experienced increased marine activities worldwide and cost savings in
projects in our Asia Pacific region. These increases were partially offset
by
higher general and administrative expenses in the three months ended September
30, 2007 compared to the three months ended September 30, 2006.
Government
Operations
Revenues
increased approximately 20%,
or $29.9 million, to $177.2 million in the three months ended September 30,
2007, compared to $147.3 million in the three months ended September 30, 2006,
primarily attributable to higher volumes in the manufacture of nuclear
components for certain U.S. Government programs, including additional volume
from our acquisition of Marine Mechanical Corporation. We also
experienced higher volumes from our management and operating contract in South
Carolina and higher volumes in our commercial nuclear environmental services
activities, including additional environmental engineering work at our
Pennsylvania location and new transition contracts in Tennessee and
California.
Segment
operating income decreased $9.5 million from $28.1 million in the three months
ended September 30, 2006 to $18.6 million in the three months ended September
30, 2007, primarily due to benefits recognized in the three months ended
September 30, 2006 attributable to project cost and efficiency improvements
resulting from our consolidation of two operating divisions into our Nuclear
Operations Division. This decrease was partially offset by higher
volumes and margins from our management and operating contract in South
Carolina, increased segment operating income from our acquisition of Marine
Mechanical Corporation and a decrease in our pension plan
expense.
Power
Generation Systems
Revenues
increased approximately 6%, or
$33.1 million, to $567.2 million in the three months ended September 30, 2007,
compared to $534.1 million in the three months ended September 30, 2006,
primarily due to increased activities from utility steam system fabrication,
replacement parts and industrial boilers. These increases were partially offset
by lower activities from replacement nuclear steam generators, boiler auxiliary
equipment and field service work.
Segment
operating income had a net
increase of approximately $9.9 million from $32.4 million in the three months
ended September 30, 2006 to $42.3 million in the three months ended September
30, 2007, primarily due to our utility steam system fabrication and industrial
boiler projects, particularly a high level of related settlements, change orders
and contract close-outs. In addition, we experienced a higher volume
of replacement parts and improved margins on the fabrication, repair and
retrofit of existing facilities. These increases were partially
offset by lower activities and margins on boiler auxiliary equipment, nuclear
service work and on certain construction projects. We also
experienced lower pension plan and legal expenses in the three months ended
September 30, 2007 compared to the three months ended September 30,
2006.
Equity
in
income of investees increased from $4.5 million in the three months ended
September 30, 2006 to $6.9 million in the three months ended September 30,
2007,
primarily attributable to our joint venture in China.
Corporate
Unallocated
Corporate expenses increased $1.8 million from $5.8 million in the three months
ended September 30, 2006 to $7.6 million in the three months ended September
30,
2007, primarily due to increased general and administrative expenses and higher
stock-based compensation expense attributable to the increase in our stock
price. These increases were partially offset by lower pension plan expense
in
the three months ended September 30, 2007 compared to the three months ended
September 30, 2006.
Other
Income Statement Items
Interest
expense decreased $1.5 million from $5.0 million in the three months ended
September 30, 2006 to $3.5 million in the three months ended September 30,
2007,
primarily due to higher capitalized interest in the three months ended September
30, 2007.
Other
–
net expense decreased $4.4 million from $4.6 million in the three months ended
September 30, 2006 to $0.2 million in the three months ended September 30,
2007,
primarily due to higher currency exchange losses incurred in the three months
ended September 30, 2006.
Provision
for Income Taxes
In
the three months ended September 30,
2007, our provision for income taxes decreased $0.6 million to $28.3 million,
while income before provision for income taxes increased $37.2 million to $168.7
million. Our effective tax rate for the three months ended September
30, 2007 was approximately 16.8%.
We
provide for income taxes based on the tax laws and rates in the countries in
which we conduct our operations. MII is a Panamanian corporation that
has earned all of its income outside of Panama. As a result, we are
not subject to income tax in Panama. We operate in the U.S. taxing
jurisdiction and various other taxing jurisdictions around the
world. Each of these jurisdictions has a regime of taxation that
varies from the others. The taxation regimes vary not only with
respect to nominal tax rates, but also with respect to the allowability of
deductions, credits and other benefits and tax bases (for example, revenue
versus income). These variances, along with variances in our mix of
income from these jurisdictions, contribute to shifts in our effective tax
rate.
As
more
fully described in Parts I and II of our annual report on Form 10-K for the
year
ended December 31, 2006, the reorganization of the MI and JRMH U.S. tax groups
into a single consolidated U.S. tax group was completed on December 31,
2006. Beginning January 1, 2007, the results of the former separate
U.S. tax groups are consolidated through MHI, and a single U.S. tax return
will
be filed.
Income
(loss) before provision for income taxes, provision for income taxes and
effective tax rates for MII’s U.S. and non-U.S. operations are as shown
below. To provide for a better comparison with the results for the
three-month period ended September 30, 2006, we continue to disclose the
separate company results of MI and JRMH, which, as indicated above,
will be consolidated for tax purposes effective January 1, 2007.
|
|
Income
(loss)
before
Provision for
Income
Taxes
|
|
|
Provision
for
Income
Taxes
|
|
|
Effective
Tax Rate
|
|
|
|
For
the three months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primarily
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MI
|
|
$
|
53,733
|
|
|
$
|
63,724
|
|
|
$
|
14,104
|
|
|
$
|
19,465
|
|
|
|
26.25
|
%
|
|
|
30.55
|
%
|
JRMH
|
|
|
12,600
|
|
|
|
(15,669
|
)
|
|
|
5,184
|
|
|
|
3
|
|
|
|
41.14
|
%
|
|
|
(0.02
|
)%
|
Subtotal
(MHI for 2007)
|
|
|
66,333
|
|
|
|
48,055
|
|
|
|
19,288
|
|
|
|
19,468
|
|
|
|
29.08
|
%
|
|
|
40.51
|
%
|
Non-United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Subsidiaries
|
|
|
102,408
|
|
|
|
83,509
|
|
|
|
9,045
|
|
|
|
9,429
|
|
|
|
8.83
|
%
|
|
|
11.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
MII
|
|
$
|
168,741
|
|
|
$
|
131,564
|
|
|
$
|
28,333
|
|
|
$
|
28,897
|
|
|
|
16.79
|
%
|
|
|
21.96
|
%
|
We
are
subject to U.S. federal income tax at the rate of 35% on our U.S.
operations. The effective tax rate of our U.S. operations is
primarily affected by applicable state income taxes on our profitable U.S.
subsidiaries.
Effective
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). As a result of this adoption, we recognized a
charge of approximately $12 million to stockholders’
equity. Additionally, as of the adoption date, our gross tax-effected
unrecognized tax benefits were approximately $70 million, of which approximately
$68 million would impact our effective tax rate if recognized.
As
part of the adoption of FIN 48, we
began to recognize interest, net of tax, and penalties related to unrecognized
tax benefits in income tax expense. As of January 1, 2007, we
recorded a liability of approximately $27 million for the payment of tax-related
interest and penalties.
During
the three months ended September
30, 2007, we recorded a reduction in FIN 48 liabilities of approximately $3.8
million, including estimated tax-related interest and penalties.
RESULTS
OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2007 vs. NINE MONTHS ENDED
SEPTEMBER 30, 2006
McDermott
International, Inc. (Consolidated)
Revenues
increased approximately 46%, or $1,293.5 million, to $4,105.6 million for the
nine months ended September 30, 2007, compared to $2,812.1 million for the
nine
months ended September 30, 2006. Our Offshore Oil and Gas Construction segment
generated a 51% increase in its revenues in the nine months ended September
30,
2007 compared to the nine months ended September 30, 2006, primarily
attributable to its Middle East and Asia Pacific regions. In addition, our
Power
Generation Systems segment revenues increased approximately 56% in the nine
months ended September 30, 2007, as compared to the nine months ended September
30, 2006, primarily attributable to B&W being consolidated in our results of
operations for approximately seven months in the nine-month period ended
September 30, 2006, as compared to the full period in the nine months ended
September 30, 2007. Our Government Operations segment revenues increased
approximately 7% in the nine months ended September 30, 2007, as compared to
the
nine months ended September 30, 2006.
Segment
operating income increased
$211.6 million from $317.2 million in the nine months ended September 30, 2006
to $528.8 million in the nine months ended September 30, 2007. The segment
operating income of each of our Offshore Oil and Gas Construction and Power
Generation Systems segments improved substantially in the nine months ended
September 30, 2007, as compared to the nine months ended September 30,
2006. Our Government Operations segment operating income decreased in
the nine months ended September 30, 2007, as compared to the nine months ended
September 30, 2006.
Offshore
Oil and Gas Construction
Revenues
increased approximately 51%, or $577.9 million, to $1,712.4 million in
the nine months ended September 30, 2007, compared to $1,134.5 million in the
nine months ended September 30, 2006, primarily due to increased activities
in
our Middle East and Asia Pacific regions.
Segment
operating income increased $138.6 million from $164.1 million in the
nine months ended September 30, 2006 to $302.7 million in the nine months ended
September 30, 2007. This increase was primarily attributable to higher
fabrication activities, productivity improvements and cost savings in projects
in our Middle East and Asia Pacific regions. In addition, our Caspian
region improved due to contract change orders and agreements, which were
finalized as part of our contract close-out process on projects, and our
Americas region improved due to increased fabrication activities. These
increases were partially offset by higher general and administrative expenses
in
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006.
Gains
(losses) on asset disposals and impairments – net increased $16.8 million from a
loss of $16.1 million in the nine months ended September 30, 2006 to a gain
of
$0.7 million in the nine months ended September 30, 2007, primarily attributable
to a non-cash impairment of $16.4 million in the nine months ended September
30,
2006 associated with our former joint venture in Mexico.
Government
Operations
Revenues
increased approximately 7%, or
$34.5 million, to $506.3 million in the nine months ended September 30, 2007,
compared to $471.8 million in the nine months ended September 30, 2006,
primarily due to higher volumes in the manufacture of nuclear components for
certain U.S. Government programs, including additional volume from our
acquisition of Marine Mechanical Corporation, and higher volumes from our
management and operating contracts in New Mexico and South
Carolina. These increases were partially offset by lower revenues
from the completion of our contract for the recovery of uranium and reduced
activity for foreign research test reactors. In addition, we
experienced lower volume from environmental engineering work, including the
end
of a transition contract for our management and operating activities in New
Mexico, partially offset by new transition contracts in Tennessee and California
during the nine months ended September 30, 2007.
Segment
operating income decreased $3.3 million from $71.7 million in the nine months
ended September 30, 2006 to $68.4 million in the nine months ended September
30,
2007, primarily attributable to benefits recognized in the nine months ended
September 30, 2006 due to project cost and efficiency improvements resulting
from our consolidation of two operating divisions into our Nuclear Operations
Division. In the nine months ended September 30, 2007, we also experienced
an
increase in segment operating income attributable to our acquisition of Marine
Mechanical Corporation. In addition, we
experienced
decreases in volumes and margins from our other government operations producing
fuel for research test reactors, DOE fuel development for commercial reactors
and commercial downblending. We also experienced a decrease in our commercial
nuclear environmental services activity due to the completion of a contract
in
Ohio and lower environmental engineering work in Idaho and New Mexico. These
costs were partially offset by lower selling and marketing expenses, decreased
pension plan expense and increased fees for a management and operating contract
in South Carolina.
Power
Generation Systems
Revenues
increased approximately 56%,
or $684.4 million, to $1,896.2 million in the nine months ended September 30,
2007, compared to $1,211.8 million in the nine months ended September 30, 2006,
primarily due to increased activities from utility steam system fabrication,
the
fabrication, repair and retrofit of existing facilities, replacement parts
and
industrial boilers. These increases were partially offset by lower
activities on replacement nuclear steam generators, field service and boiler
auxiliary equipment.
Segment
operating income had a net
increase of approximately $76.4 million from $81.4 million in the nine months
ended September 30, 2006 to $157.8 million in the nine months ended September
30, 2007, primarily attributable to our utility steam system fabrication and
industrial boiler projects, particularly a higher level of related settlements,
change orders and contract close-outs. In addition, we experienced higher
margins on the fabrication, repair and retrofit of existing facilities and
higher margins in operations and maintenance contracts. These increases were
partially offset by lower volume and margins in nuclear service work and on
certain construction projects. We also experienced lower pension plan expense
in
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006.
Equity
in income of investees increased
from $8.3 million in the nine months ended September 30, 2006 to $10.4 million
in the nine months ended September 30, 2007, primarily attributable to our
joint
venture in China.
Corporate
Unallocated
corporate expenses increased $5.9 million from $22.9 million in the nine months
ended September 30, 2006 to $28.8 million in the nine months ended September
30,
2007. This increase was primarily due to increased general and administrative
expenses, higher stock-based compensation expense attributable to the increase
in our stock price and higher accounting fees. These increases were partially
offset by lower pension plan expense in the nine months ended September 30,
2007
compared to the nine months ended September 30, 2006.
Other
Income Statement Items
Interest
income increased $8.8 million from $36.6 million in the nine months ended
September 30, 2006 to $45.4 million in the nine months ended September 30,
2007,
primarily due to an increase in average cash equivalents and investments and
prevailing interest rates.
Interest
expense decreased $4.0 million from $22.4 million in the nine months ended
September 30, 2006 to $18.4 million in the nine months ended September 30,
2007,
primarily due to higher levels of debt outstanding in the nine months ended
September 30, 2006.
We
recorded a reduction in interest expense for the nine months ended September
30,
2006 totaling approximately $13.2 million attributable to a settlement MI
reached with the U.S. and Canadian tax authorities related to transfer pricing
issues. In addition, in the nine months ended September 30, 2006, we recorded
an
increase in interest expense totaling approximately $2.2 million for potential
U.S. tax deficiencies.
On
June
6, 2006, JRM completed a tender offer and used cash on hand to purchase $200
million in aggregate principal amount of the JRM 11% senior secured notes due
2013 (the “JRM Secured Notes”) for approximately $249.0 million, including
accrued interest of approximately $10.9 million. As a result of this
early retirement of debt, JRM recognized $49.0 million of expense during the
nine months ended September 30, 2006.
Other
–
net expense decreased $5.5 million from $10.6 million in the nine months ended
September 30, 2006 to $5.1 million in the nine months ended September 30, 2007,
primarily due to higher currency exchange losses incurred in the nine months
ended September 30, 2006.
Provision
for Income Taxes
In
the nine months ended September 30,
2007, our provision for income taxes increased $25.4 million to $103.5 million,
while income before provision for income taxes increased $281.2 million to
$551.4 million. Our effective tax rate for the nine months ended
September 30, 2007 was approximately 18.8%.
We
provide for income taxes based on the tax laws and rates in the countries in
which we conduct our operations. MII is a Panamanian corporation that
has earned all of its income outside of Panama. As a result, we are
not subject to income tax in Panama. We operate in the U.S. taxing
jurisdiction and various other taxing jurisdictions around the
world. Each of these jurisdictions has a regime of taxation that
varies from the others. The taxation regimes vary not only with
respect to nominal tax rates, but also with respect to the allowability of
deductions, credits and other benefits and tax bases (for example, revenue
versus income). These variances, along with variances in our mix of
income from these jurisdictions, contribute to shifts in our effective tax
rate.
As
more
fully described in Parts I and II of our annual report on Form 10-K for the
year
ended December 31, 2006, the reorganization of the MI and JRMH U.S. tax groups
into a single consolidated U.S. tax group was completed on December 31,
2006. Beginning January 1, 2007, the results of the former separate
U.S. tax groups are consolidated through MHI, and a single U.S. tax return
will
be filed.
Income
(loss) before provision for income taxes, provision for income taxes and
effective tax rates for MII’s U.S. and non-U.S. operations are as shown
below. To provide for a better comparison with the results for the
nine-month period ended September 30, 2006, we continue to disclose the separate
company results of MI and JRMH, which, as indicated above, will be
consolidated for tax purposes effective January 1, 2007.
|
|
Income
(loss)
before
Provision for
Income
Taxes
|
|
|
Provision
for
Income
Taxes
|
|
|
Effective
Tax Rate
|
|
|
|
For
the nine months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primarily
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MI
|
|
$
|
181,879
|
|
|
$
|
168,321
|
|
|
$
|
66,632
|
|
|
$
|
48,483
|
|
|
|
36.64
|
%
|
|
|
28.80
|
%
|
JRMH
|
|
|
1,624
|
|
|
|
(103,581
|
)
|
|
|
872
|
|
|
|
15
|
|
|
|
53.69
|
%
|
|
|
(0.01
|
)%
|
Subtotal
(MHI for 2007)
|
|
|
183,503
|
|
|
|
64,740
|
|
|
|
67,504
|
|
|
|
48,498
|
|
|
|
36.79
|
%
|
|
|
74.91
|
%
|
Non-United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Subsidiaries
|
|
|
367,847
|
|
|
|
205,429
|
|
|
|
36,003
|
|
|
|
29,561
|
|
|
|
9.79
|
%
|
|
|
14.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
MII
|
|
$
|
551,350
|
|
|
$
|
270,169
|
|
|
$
|
103,507
|
|
|
$
|
78,059
|
|
|
|
18.77
|
%
|
|
|
28.89
|
%
|
We
are
subject to U.S. federal income tax at the rate of 35% on our U.S.
operations. The effective tax rate of our U.S. operations is
primarily affected by applicable state income taxes on our profitable U.S.
subsidiaries.
In
the
nine months ended September 30, 2006, MI reached a settlement in a tax dispute
with U.S. and Canadian tax authorities, primarily related to transfer pricing
matters, resulting in an adjustment to the tax liability and associated accrued
interest established for the disputed items. This favorably impacted
MI’s income before provision for income taxes and provision for income taxes by
$13.2 million and $4.7 million, respectively. As reported in our
quarterly report on Form 10-Q for the quarter ended September 30, 2006, no
tax
benefit was recognized on the $49 million expense recorded by JRMH associated
with the retirement of the JRM Secured Notes in the nine months ended September
30, 2006. In addition, in the nine months ended September 30, 2006, a
valuation allowance for the realization of deferred tax assets was provided
against JRMH’s current losses in accordance with SFAS No. 109.
On
April
12, 2007, MI received a $272 million federal income tax refund from the U.S.
Internal Revenue Service. This federal tax refund resulted from
carrying back to prior tax years the tax loss generated in 2006, primarily
as a
result of the $955 million of asbestos-related payments made during 2006 in
connection with the settlement of asbestos-related claims made in B&W’s
Chapter 11 bankruptcy proceedings. A number of these prior tax years
are currently open and, therefore, certain adjustments may still occur before
final settlement of these tax years.
As
discussed above, effective January 1, 2007, we adopted the provisions of FIN
48. As a result of this adoption, we recognized a charge of
approximately $12 million to stockholders’ equity. Additionally, as
of the adoption date, our gross tax-effected unrecognized tax benefits were
approximately $70 million, of which approximately $68 million would impact
our
effective tax rate if recognized.
As
part
of the adoption of FIN 48, we began to recognize interest, net of tax, and
penalties related to unrecognized tax benefits in income tax
expense. As of January 1, 2007, we recorded a liability of
approximately $27 million for the payment of tax-related interest and
penalties.
During
the nine months ended September 30, 2007, we recorded a reduction in FIN 48
liabilities of approximately $4.1 million, including estimated tax-related
interest and penalties.
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. It is possible
that backlog may not be indicative of future results.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
Offshore
Oil and Gas Construction
|
|
$
|
4,905,011
|
|
|
$
|
4,138,545
|
|
Government
Operations
|
|
|
1,366,905
|
|
|
|
1,269,328
|
|
Power
Generation Systems
|
|
|
3,048,323
|
|
|
|
2,225,149
|
|
|
|
|
|
|
|
|
|
|
TOTAL
BACKLOG
|
|
$
|
9,320,239
|
|
|
$
|
7,633,022
|
|
Of
the
September 30, 2007 backlog, we expect to recognize revenues as
follows:
|
|
Q4
2007
|
|
|
2008
|
|
|
Thereafter
|
|
|
|
(Unaudited)
|
|
|
|
(in
approximate millions)
|
|
Offshore
Oil and Gas Construction
|
|
$
|
700
|
|
|
$
|
2,870
|
|
|
$
|
1,330
|
|
Government
Operations
|
|
|
170
|
|
|
|
520
|
|
|
|
680
|
|
Power
Generation Systems
|
|
|
480
|
|
|
|
1,250
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Backlog
|
|
$
|
1,350
|
|
|
$
|
4,640
|
|
|
$
|
3,330
|
|
At
September 30, 2007, Government Operations' backlog with the U. S. Government
was
$1.4 billion, which was substantially fully funded. Only $20.4 million had
not
been funded as of September 30, 2007.
At
September 30, 2007, Power Generation Systems’ backlog with the U. S. Government
was $41.7 million, which was fully funded.
As
disclosed in Parts I and II of our annual report on Form 10-K for the year
ended
December 31, 2006, B&W received notice from TXU to suspend activity on five
of the eight supercritical coal-fired boilers and selective catalytic reduction
systems that were originally planned for TXU’s solid-fuel power generation
program in Texas. At December 31, 2006, the value of all eight units
was excluded from our consolidated backlog, as TXU announced it did not intend
to pursue any of these projects.
B&W
is continuing to fulfill its contracts to supply the three units not covered
by
the termination and settlement agreement. As a result of agreements
reached with customers, the value of these three units are now included in
our
backlog at September 30, 2007. Two of these units were acquired by a
customer other than TXU.
Liquidity
and Capital Resources
JRM
On
June
6, 2006, JRM entered into a senior secured credit facility with a syndicate
of
lenders (the “JRM Credit
Facility”). During
July 2007, the JRM Credit Facility was amended to, among other things, (1)
increase the revolving credit facility by $100 million to $500 million and
eliminate a synthetic letter of credit facility, (2) reduce the commitment
fees
and applicable margins for revolving loans and letters of credit and (3)
eliminate the limitation on revolving credit borrowings. The JRM
Credit Facility now consists of a five-year, $500 million revolving credit
facility (under which all of the credit capacity may be used for the issuance
of
letters of credit and revolver borrowings), which matures on June 6,
2011. The proceeds of the JRM Credit Facility are available for
working capital needs and other general corporate purposes of JRM and its
subsidiaries.
JRM’s
obligations under the JRM Credit Facility are unconditionally guaranteed by
substantially all of JRM’s wholly owned subsidiaries and secured by liens on
substantially all the assets of JRM and these subsidiaries (other than cash,
cash equivalents, equipment and certain foreign assets), including their major
marine vessels. JRM is permitted to prepay amounts outstanding under the JRM
Credit Facility at any time without penalty. Other than customary
mandatory prepayments on certain contingent events, the JRM Credit Facility
requires only interest payments on a quarterly basis until
maturity. Loans outstanding under the JRM Credit Facility bear
interest at either the Eurodollar rate plus a margin ranging from 1.00% to
1.75%
per year or the base rate plus a margin ranging from 0.00% to 0.75% per
year. If JRM had borrowed under this facility, the applicable
interest rate at September 30, 2007 would have been 6.62% per
year. The applicable margin for revolving loans varies depending on
credit ratings of the JRM Credit Facility. JRM is charged a
commitment fee on the unused portions of the JRM Credit Facility, and that
fee
varies between 0.25% and 0.375% per year depending on credit ratings of the
JRM
Credit Facility. Additionally, JRM is charged a letter of credit fee
of between 1.00% and 1.75% per year with respect to the amount of each letter
of
credit issued under the JRM Credit Facility depending on credit ratings of
the
JRM Credit Facility. An additional 0.125% annual fee is charged on
the amount of each letter of credit issued under the JRM Credit
Facility.
The
JRM
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. JRM was in compliance with these covenants at
September 30, 2007.
At
September 30, 2007, JRM had no borrowings outstanding, and letters of credit
issued on the JRM Credit Facility totaled $300.1 million. In addition, JRM
had
$150.8 million in outstanding unsecured letters of credit under separate
arrangements with financial institutions at September 30, 2007.
On
December 22, 2005, JRM, as guarantor, and its subsidiary, J. Ray McDermott
Middle East, Inc., entered into a $105.2 million unsecured performance guarantee
issuance facility with a syndicate of commercial banking institutions. The
outstanding amount under this facility is included in the $150.8 million
outstanding referenced above. This facility provides credit support
for bank guarantees issued in favor of three projects awarded to JRM. The term
of this facility is for the duration of these projects, and the average
commission rate is less than 4.5% on an annualized basis.
At
September 30, 2007, JRM had approximately $28 million in accounts and notes
receivable due from its former joint venture in Mexico. This joint venture
has
experienced liquidity problems. Recognition of a gain of
approximately
$5.4 million on the sale of the
DB17
in September 2004 is currently
being deferred. JRM expects to collect all net accounts and notes receivable
currently owed from this joint venture.
On
July
27, 2007, JRM completed its acquisition of substantially all of the assets
of
Secunda International Limited, including 14 harsh-weather, multi-functional
vessels, with capabilities which include subsea construction, pipelay, cable
lay
and dive support, as well as its shore-based-operations, for approximately
$263
million in cash and recognition of approximately $6 million of
liabilities. We recorded goodwill of approximately $20 million in
connection with this acquisition, of which approximately $4 million will be
deductible for tax purposes. In addition to the goodwill, we recorded
identifiable intangible assets of approximately $12 million related to
contractual customer relationships, which have a weighted-average amortization
period of 3.6 years.
Based
on
JRM’s liquidity position, we believe JRM has sufficient cash and letter of
credit and borrowing capacity to fund its operating requirements for at least
the next 12 months.
BWXT
On
December 9, 2003, 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. On October 29, 2007, the
BWXT
Credit Facility was amended to reduce the applicable margins for revolving
loans
and letters of credit. This facility provides for borrowings and
issuances of letters of credit in an aggregate amount of up to $135
million.
The
BWXT
Credit Facility requires BWXT to comply with various financial and nonfinancial
covenants and reporting requirements. The financial covenants require
BWXT to maintain a maximum leverage ratio, a minimum fixed charge coverage
ratio
and a maximum debt to capitalization ratio. BWXT was in compliance
with these covenants at September 30, 2007. Loans outstanding under
the BWXT Credit Facility bear interest at either the Eurodollar rate plus a
margin ranging from 1.25% to 1.75% per year or the base rate plus a margin
ranging from 0.25% and 0.75% per year. The applicable margin for
revolving loans varies depending on BWXT’s leverage ratio as of the last day of
the preceding fiscal quarter. If BWXT had borrowed under this
facility, the applicable interest rate at September 30, 2007 would have been
8.25% per year. BWXT is charged an annual commitment fee of 0.375%,
which is payable quarterly. Additionally, BWXT is charged a letter of
credit fee of between 1.25% and 1.75% per year with respect to the amount of
each letter of credit issued, depending on BWXT’s leverage ratio as of the last
day of the preceding fiscal quarter. An additional 0.125% per year
fee is charged on the amount of each letter of credit issued.
At
September 30, 2007, BWXT had no borrowings outstanding, and letters of credit
outstanding under the facility totaled $48.0 million.
On
May 1,
2007, BWXT completed its stock acquisition of Marine Mechanical Corporation
for
approximately $72 million in cash and recognition of liabilities in excess
of
the liabilities directly assumed from Marine Mechanical Corporation of
approximately $16 million, primarily related to deferred income
taxes. We recorded goodwill of approximately $39 million in
connection with this acquisition, none of which will be deductible for tax
purposes.
Based
on
BWXT’s liquidity position, we believe BWXT has sufficient cash and letter of
credit and borrowing capacity to fund its operating requirements for at least
the next 12 months.
B&W
On
February 22, 2006, B&W entered into a senior secured credit facility with a
syndicate of lenders (the “B&W Credit Facility”). During July 2007, the
B&W Credit Facility was amended to, among other things, (1) increase the
revolving credit facility by $200 million to $400 million and eliminate a
synthetic letter of credit facility and (2) reduce the commitment fees and
applicable margins for revolving loans and letters of credit. The
entire credit availability under the B&W Credit Facility may be used for the
issuance of letters of credit or for borrowings to fund working capital
requirements. The B&W Credit Facility also originally included a
commitment by certain of the lenders to loan B&W up to $250 million in term
debt to refinance the $250 million promissory note payable to a trust under
the
B&W Chapter 11 plan of reorganization. On November 30, 2006,
B&W drew down $250 million on this term loan under the B&W Credit
Facility. On April 12, 2007, B&W retired the $250 million term
loan without penalty. This payment was made using cash on hand,
including B&W’s portion of the $272 million federal tax refund received by
MI on April 12, 2007.
B&W’s
obligations under the B&W Credit Facility are unconditionally guaranteed by
all of B&W’s domestic subsidiaries and secured by liens on substantially all
of B&W’s and these subsidiaries’ assets, excluding cash and cash
equivalents.
Loans
outstanding under the revolving credit subfacility bear interest at either
the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. If B&W
had borrowed under this facility, the applicable interest rate at September
30,
2007 would have been 6.37% per year. The applicable margin for
revolving loans varies depending on credit ratings of the B&W Credit
Facility. B&W is charged a commitment fee on the unused portion
of the B&W Credit Facility, and that fee varies between 0.25% and 0.375% per
year depending on credit ratings of the B&W Credit
Facility. Additionally, B&W is charged a letter of credit fee of
between 1.00% and 1.75% per year with respect to the amount of each letter
of
credit issued under the B&W Credit Facility. An additional 0.125%
per year fee is charged on the amount of each letter of credit issued under
the
B&W Credit Facility.
The
B&W Credit Facility only requires interest payments on a quarterly basis
until maturity. B&W may prepay amounts outstanding under the
B&W Credit Facility at any time without penalty.
The
B&W Credit Facility contains customary financial covenants, including
maintenance of a maximum leverage ratio and a minimum interest coverage ratio,
and covenants that, among other things, restrict B&W’s ability to incur
debt, create liens, make investments and acquisitions, sell assets, pay
dividends, prepay subordinated debt, merge with other entities, engage in
transactions with affiliates and make capital expenditures. The B&W Credit
Facility also contains customary events of default. B&W was in
compliance with these covenants at September 30, 2007.
As
of
September 30, 2007, B&W had no outstanding borrowings, and letters of credit
issued on the B&W Credit Facility totaled $214.5 million.
Based
on
B&W’s liquidity position, we believe B&W has sufficient cash and letter
of credit and borrowing capacity to fund its operating requirements for at
least
the next 12 months.
OTHER
One
of
B&W's Canadian subsidiaries has received notice of a possible warranty claim
on one of its projects on a contract executed in 1998. This project included
a
limited-term performance bond totaling approximately $140 million, for which
MII
entered into
an indemnity arrangement with the surety
underwriters. At this time, we are continuing to analyze the facts and
circumstances surrounding this issue. It is possible that B&W's subsidiary
may incur warranty costs in excess of amounts provided for as of September
30,
2007. It is also possible that a claim could be initiated by the B&W
subsidiary’s customer against the surety underwriter should certain events
occur. If such a claim were successful, the surety could seek to
recover from B&W’s subsidiary the costs incurred in satisfying the customer
claim. If the surety should seek recovery from B&W’s subsidiary, we believe
that B&W’s subsidiary would have adequate liquidity to satisfy its
obligations. However, the ultimate resolution of this possible claim is
uncertain, and an adverse outcome could have a material adverse impact on our
consolidated financial position, results of operations and cash
flows.
In
July
2007, we and our rated subsidiaries received upgraded ratings from both major
corporate credit rating services, Standard & Poor’s Rating Services
(“S&P”) and Moody’s Investors Service (“Moody’s”). Included among
these ratings actions, our corporate credit rating at S&P was raised to BB
from B+, with a stable outlook, and our corporate family rating at Moody’s was
raised to Ba3 from B1, also with a stable outlook. As a result of
recent improved operating performance, stronger liquidity and now higher credit
ratings, we were able to amend the JRM Credit Facility and the B&W Credit
Facility, as mentioned above, to reduce fees and expenses, in addition to other
modifications.
We
are
currently exploring growth strategies across our segments through acquisitions
to expand and complement our existing businesses. As we pursue these
opportunities, we expect they would be funded by cash on hand, external
financing or both.
At
September 30, 2007, we had restricted cash and cash equivalents totaling $98.3
million, of which $0.8 million is required to meet reinsurance reserve
requirements of our captive insurance companies and $97.5 million is held in
restricted foreign accounts.
At
September 30, 2007 and December 31, 2006, our balance in cash and cash
equivalents on our consolidated balance sheets included approximately $29.7
million and $18.0 million, respectively, in adjustments for bank overdrafts,
with a corresponding increase in accounts payable for these
overdrafts.
Our
working capital, excluding restricted cash and cash equivalents, increased
approximately $196.5 million from a negative $414.5 million at December 31,
2006 to a negative $218.0 million at September 30, 2007, primarily attributable
to the collection of approximately $274 million of income taxes receivable,
which was classified as long-term at December 31, 2006, and an overall increase
in net operating activities in the nine months ended September 30, 2007, as
discussed below. These increases were partially offset by the cash we
used to fund the acquisition of substantially all the assets of Secunda
International Limited and our acquisition of Marine Mechanical
Corporation.
Our
net
cash provided by operations was approximately $959.3 million for the nine months
ended September 30, 2007, compared to approximately $559.7 million for the
nine
months ended September 30, 2006. This increase was primarily attributable to
higher net income, receipt of the TXU settlement during the nine months ended
September 30, 2007 and receipt of $274 million of income tax
refunds.
Our
net
cash provided by (used in) investing activities changed by approximately $808.5
million to net cash used in investing activities of $611.5 million for the
nine
months ended September 30, 2007, compared to net cash provided by investing
activities of $197.0 million for the nine months ended September 30, 2006.
This
change was primarily attributable to the Marine Mechanical Corporation and
Secunda International Limited acquisitions, increased capital expenditures
and
an increase in our net activity for available-for-sale securities for the nine
months ended September 30, 2007. Also contributing to the change was
the cash acquired from our reconsolidation of B&W and its subsidiaries
during the nine months ended September 30, 2006.
Our
net
cash used in financing activities increased by approximately $11.6 million
to
$219.2 million in the nine months ended September 30, 2007 from $207.6 million
in the nine months ended September 30, 2006, primarily attributable to B&W’s
retirement of its $250 million term loan in April 2007.
At
September 30, 2007, we had investments with a fair value of $407.7
million. Our investment portfolio consists primarily of investments
in government obligations and other highly liquid money market
instruments. As of September 30, 2007, we had pledged approximately
$30.7 million fair value of these investments to secure a letter of credit
in
connection with certain reinsurance agreements.
See
Note
1 to our unaudited condensed consolidated financial statements included in
this
report for information on new accounting standards.