Table of
Contents
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 March 31, 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 April 30, 2009
was 228,520,662
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
|
March
31, 2009 and December 31, 2008
|
4
|
|
|
|
|
Three
Months Ended March 31, 2009 and 2008
|
6
|
|
|
|
|
Three
Months Ended March 31, 2009 and 2008
|
7
|
|
|
|
|
Three
Months Ended March 31, 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
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
528,624
|
|
|
$
|
586,649
|
|
Restricted
cash and cash equivalents (Note 1)
|
|
|
59,026
|
|
|
|
50,536
|
|
Investments
|
|
|
81,912
|
|
|
|
131,515
|
|
Accounts
receivable – trade, net
|
|
|
613,537
|
|
|
|
712,055
|
|
Accounts
and notes receivable – unconsolidated affiliates
|
|
|
4,569
|
|
|
|
1,504
|
|
Accounts
receivable – other
|
|
|
141,021
|
|
|
|
139,062
|
|
Contracts
in progress
|
|
|
400,305
|
|
|
|
311,713
|
|
Inventories
(Note 1)
|
|
|
113,273
|
|
|
|
128,383
|
|
Deferred
income taxes
|
|
|
100,364
|
|
|
|
97,069
|
|
Other
current assets
|
|
|
63,670
|
|
|
|
58,499
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
2,106,301
|
|
|
|
2,216,985
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
2,276,138
|
|
|
|
2,234,050
|
|
Less
accumulated depreciation
|
|
|
1,172,208
|
|
|
|
1,155,191
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
|
1,103,930
|
|
|
|
1,078,859
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
317,292
|
|
|
|
319,170
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
297,525
|
|
|
|
298,265
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes
|
|
|
288,804
|
|
|
|
335,877
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unconsolidated Affiliates
|
|
|
73,001
|
|
|
|
70,304
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
274,416
|
|
|
|
282,233
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
4,461,269
|
|
|
$
|
4,601,693
|
|
See
accompanying notes to condensed consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Notes
payable and current maturities of long-term debt
|
|
$
|
4,161
|
|
|
$
|
9,021
|
|
Accounts
payable
|
|
|
464,875
|
|
|
|
551,435
|
|
Accrued
employee benefits
|
|
|
181,264
|
|
|
|
205,521
|
|
Accrued
contract cost
|
|
|
92,896
|
|
|
|
97,041
|
|
Advance
billings on contracts
|
|
|
828,610
|
|
|
|
951,895
|
|
Accrued
warranty expense
|
|
|
119,708
|
|
|
|
120,237
|
|
Income
taxes payable
|
|
|
40,603
|
|
|
|
55,709
|
|
Accrued
liabilities – other
|
|
|
249,883
|
|
|
|
217,486
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
1,982,000
|
|
|
|
2,208,345
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
5,915
|
|
|
|
6,109
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit Obligation
|
|
|
106,431
|
|
|
|
107,567
|
|
|
|
|
|
|
|
|
|
|
Self-Insurance
|
|
|
91,637
|
|
|
|
88,312
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
|
|
|
665,518
|
|
|
|
682,624
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
197,028
|
|
|
|
192,564
|
|
|
|
|
|
|
|
|
|
|
Contingencies
and Commitments (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $1.00 per share, authorized 400,000,000 shares; issued
234,544,195 and 234,174,088 shares at March 31, 2009 and
December
31, 2008, respectively
|
|
|
234,544
|
|
|
|
234,174
|
|
Capital
in excess of par value
|
|
|
1,264,556
|
|
|
|
1,252,848
|
|
Retained
earnings
|
|
|
642,283
|
|
|
|
564,591
|
|
Treasury
stock at cost, 5,854,959 and 5,840,314 shares at March 31, 2009 and
December 31, 2008, respectively
|
|
|
(63,166
|
)
|
|
|
(63,026
|
)
|
Accumulated
other comprehensive loss (Note 1)
|
|
|
(665,477
|
)
|
|
|
(672,415
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
1,412,740
|
|
|
|
1,316,172
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
4,461,269
|
|
|
$
|
4,601,693
|
|
See
accompanying notes to condensed consolidated financial
statements.
McDERMOTT INTERNATIONAL,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands, except shares and per share amounts)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,493,263
|
|
|
$
|
1,450,426
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
Cost
of operations
|
|
|
1,228,622
|
|
|
|
1,188,696
|
|
(Gains)
losses on asset disposals and impairments – net
|
|
|
1,241
|
|
|
|
(11,443
|
)
|
Selling,
general and administrative expenses
|
|
|
141,394
|
|
|
|
126,731
|
|
Total
Costs and Expenses
|
|
|
1,371,257
|
|
|
|
1,303,984
|
|
|
|
|
|
|
|
|
|
|
Equity
in Income of Investees
|
|
|
9,200
|
|
|
|
10,670
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
131,206
|
|
|
|
157,112
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,813
|
|
|
|
13,395
|
|
Interest
expense
|
|
|
(956
|
)
|
|
|
(2,940
|
)
|
Other
expense – net
|
|
|
(11,493
|
)
|
|
|
(3,997
|
)
|
Total
Other Income (Expense)
|
|
|
(9,636
|
)
|
|
|
6,458
|
|
|
|
|
|
|
|
|
|
|
Income
before Provision for Income Taxes
|
|
|
121,570
|
|
|
|
163,570
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
43,878
|
|
|
|
40,380
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
77,692
|
|
|
$
|
123,190
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
|
$
|
0.55
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
Shares
used in the computation of earnings per share (Note 8):
|
|
|
|
|
|
|
|
|
Basic
|
|
|
228,314,785
|
|
|
|
225,632,169
|
|
Diluted
|
|
|
232,586,245
|
|
|
|
230,112,858
|
|
See
accompanying notes to condensed consolidated financial statements.
McDERMOTT INTERNATIONAL,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
77,692
|
|
|
$
|
123,190
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Currency
translation adjustments:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(5,363
|
)
|
|
|
3,380
|
|
Unrealized
gains on derivative financial instruments:
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on derivative financial instruments
|
|
|
(1,854
|
)
|
|
|
4,548
|
|
Reclassification
adjustment for losses included in net income
|
|
|
1,922
|
|
|
|
72
|
|
Amortization
of benefit plan costs
|
|
|
14,155
|
|
|
|
6,539
|
|
Unrealized
gains (losses) on investments:
|
|
|
|
|
|
|
|
|
Unrealized
losses arising during the period
|
|
|
(1,872
|
)
|
|
|
(2,910
|
)
|
Reclassification
adjustment for net gains included in net income
|
|
|
(50
|
)
|
|
|
(1,330
|
)
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
6,938
|
|
|
|
10,299
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
84,630
|
|
|
$
|
133,489
|
|
See
accompanying notes to condensed consolidated financial statements.
McDERMOTT INTE
RNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
77,692
|
|
|
$
|
123,190
|
|
Non-cash
items included in net income:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
36,022
|
|
|
|
31,311
|
|
Income
of investees, less dividends
|
|
|
(1,142
|
)
|
|
|
(3,057
|
)
|
(Gains)
losses on asset disposals and impairments – net
|
|
|
1,241
|
|
|
|
(11,443
|
)
|
Provision
for deferred taxes
|
|
|
38,407
|
|
|
|
16,063
|
|
Amortization
of pension and postretirement costs
|
|
|
21,970
|
|
|
|
10,137
|
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
|
|
(134
|
)
|
|
|
(5,346
|
)
|
Other,
net
|
|
|
13,159
|
|
|
|
10,727
|
|
Changes
in assets and liabilities, net of effects of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
90,367
|
|
|
|
(75,109
|
)
|
Net
contracts in progress and advance billings on contracts
|
|
|
(208,063
|
)
|
|
|
(103,241
|
)
|
Accounts
payable
|
|
|
(85,830
|
)
|
|
|
7,754
|
|
Income
taxes
|
|
|
(16,717
|
)
|
|
|
2,150
|
|
Accrued
and other current liabilities
|
|
|
29,767
|
|
|
|
77,316
|
|
Pension
liability, accumulated postretirement benefit obligation and accrued
employee benefits
|
|
|
(43,281
|
)
|
|
|
(107,488
|
)
|
Other,
net
|
|
|
19,629
|
|
|
|
(25,891
|
)
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(26,913
|
)
|
|
|
(52,927
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in restricted cash and cash equivalents
|
|
|
(8,490
|
)
|
|
|
(14,561
|
)
|
Purchases
of property, plant and equipment
|
|
|
(61,388
|
)
|
|
|
(59,286
|
)
|
Net
(increase) decrease in available-for-sale securities
|
|
|
49,007
|
|
|
|
(88,633
|
)
|
Proceeds
from asset disposals
|
|
|
279
|
|
|
|
11,921
|
|
Other,
net
|
|
|
(1,055
|
)
|
|
|
(820
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(21,647
|
)
|
|
|
(151,379
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment
of long-term debt
|
|
|
(4,825
|
)
|
|
|
(4,385
|
)
|
Issuance
of common stock
|
|
|
160
|
|
|
|
2,845
|
|
Payment
of debt issuance costs
|
|
|
(19
|
)
|
|
|
(164
|
)
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
|
|
134
|
|
|
|
5,346
|
|
Other
|
|
|
943
|
|
|
|
-
|
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(3,607
|
)
|
|
|
3,642
|
|
EFFECTS
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(5,858
|
)
|
|
|
(130
|
)
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(58,025
|
)
|
|
|
(200,794
|
)
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
586,649
|
|
|
|
1,001,394
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
528,624
|
|
|
$
|
800,600
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
(net of amount capitalized)
|
|
$
|
1,124
|
|
|
$
|
3,139
|
|
Income
taxes (net of refunds)
|
|
$
|
19,786
|
|
|
$
|
30,058
|
|
See
accompanying notes to condensed consolidated financial
statements.
McDERMOTT
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 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 March 31, 2009 and for the
three months ended March 31, 2009. 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 months ended March 31, 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 footnotes thereto 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:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
Currency
Translation Adjustments
|
|
$
|
(18,405
|
)
|
|
$
|
(13,042
|
)
|
Net
Unrealized Loss on Investments
|
|
|
(10,900
|
)
|
|
|
(8,978
|
)
|
Net
Unrealized Loss on Derivative Financial Instruments
|
|
|
(13,170
|
)
|
|
|
(13,238
|
)
|
Unrecognized
Losses on Benefit Obligations
|
|
|
(623,002
|
)
|
|
|
(637,157
|
)
|
Accumulated
Other Comprehensive Loss
|
|
$
|
(665,477
|
)
|
|
$
|
(672,415
|
)
|
Inventories
The
components of inventories are as follows:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In
thousands)
|
|
Raw
Materials and Supplies
|
|
$
|
80,555
|
|
|
$
|
95,593
|
|
Work
in Progress
|
|
|
10,873
|
|
|
|
12,157
|
|
Finished
Goods
|
|
|
21,845
|
|
|
|
20,633
|
|
Total
Inventories
|
|
$
|
113,273
|
|
|
$
|
128,383
|
|
Restricted
Cash and Cash Equivalents
At March
31, 2009, we had restricted cash and cash equivalents totaling
$59.0
million, $49.0 million of which was held in restricted foreign accounts, $3.0
million was held as cash collateral for letters of credit, $5.0 million was held
for future decommissioning of facilities, and $2.0 million was held to meet
reinsurance reserve requirements of our captive insurance
companies.
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 three months ended March 31, 2009 and 2008 our
net research and development expense included in cost of operations totaled
approximately $10.2 million and $9.0 million respectively.
Recently
Adopted Accounting Standards
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 Statement of Financial
Accounting Standards (“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
January 2009, the FASB issued FSP 107-b
, Interim Disclosures about Fair
Value of Financial Instruments.
FSP 107-b amends SFAS No. 107,
Disclosures about Fair Value of
Financial Instruments
, to require disclosures about fair value of
financial instruments in financial statements. On January 1, 2009, we
adopted the provisions of FSP 107-b. 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 the
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
adoptions 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 – An Amendment of ARB No.
51
. SFAS No. 160 establishes accounting and reporting
standards pertaining to ownership interests in subsidiaries held by parties
other than the parent, the amount of net income attributable to the parent and
to the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of any retained noncontrolling equity investment when a subsidiary is
deconsolidated. It also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. On January 1, 2009, we
adopted the provisions of SFAS No. 160. The adoption of these provisions did not
have a material impact on our consolidated financial
statements. Income attributable to noncontrolling interests and the
related liability are not material to us. Therefore, we have not presented these
items separately in our financial statements. Income attributable to
noncontrolling interests is included in other expense-net in our condensed
consolidated statements of income, and the related liability is included in
other liabilities in our condensed consolidated balance sheets. The following is
a summary of noncontrolling interests:
|
|
Three
Months Ended
March
31,
|
|
|
Twelve
Months Ended
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Income Statement
Item
:
Minority
Interest Expense
included
in Other-net
|
|
$
|
723
|
|
|
$
|
57
|
|
|
$
|
287
|
|
|
$
|
93
|
|
|
$
|
1,023
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Balance
Sheet Item:
Minority
Interest Liability
included
in Other liabilities
|
|
$
|
1,055
|
|
|
$
|
341
|
|
|
$
|
373
|
|
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.
New
Accounting Standards
In May
2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
. SFAS No. 162 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 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
. We
do not expect SFAS No. 162 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
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$
|
9,565
|
|
|
$
|
9,783
|
|
|
$
|
231
|
|
|
$
|
83
|
|
Interest
cost
|
|
|
40,101
|
|
|
|
38,855
|
|
|
|
2,170
|
|
|
|
1,413
|
|
Expected
return on plan assets
|
|
|
(36,909
|
)
|
|
|
(45,833
|
)
|
|
|
(377
|
)
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
690
|
|
|
|
769
|
|
|
|
15
|
|
|
|
19
|
|
Amortization
of transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
59
|
|
|
|
74
|
|
Recognized
net actuarial loss
|
|
|
20,801
|
|
|
|
8,911
|
|
|
|
405
|
|
|
|
364
|
|
Net
periodic benefit cost
|
|
$
|
34,248
|
|
|
$
|
12,485
|
|
|
$
|
2,503
|
|
|
$
|
1,953
|
|
NOTE
3 – CONTINGENCIES AND COMMITMENTS
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. 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 may pursue its insurers to collect any of the settlement amount paid.
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.
The three
separate purported class action complaints against MII, Bruce 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 Form 10-K have been
consolidated. In April 2009, our motion to transfer the consolidated cases to
the Southern District of Texas was granted.
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 has been scheduled for June 2,
2009.
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 March 31, 2009, we had not accrued for approximately
$110 million of potential liquidated damages that we believe 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 other projects in our
Offshore Oil and Gas Construction segment, we have currently provided for
approximately $23 million in liquidated damages in our estimates of revenues and
gross profit, of which approximately $19 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 March 31, 2009, we had deferred approximately $13.2 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 twelve months.
At March
31, 2009 all of our derivative financial instruments consisted of foreign
currency forward-exchange contracts. The notional value of our forward contracts
totaled $317.0 million at March 31, 2009 with maturities extending to December
2011 and consists primarily of contracts to purchase or sell Euros or Canadian
Dollars. The fair value of these contracts totaled ($23.9) 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
ending 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 March 31,
2009:
|
|
|
|
|
|
Asset
Derivatives
March
31, 2009
|
|
Liability
Derivatives
March
31, 2009
|
|
|
Balance
Sheet
Account
|
|
Fair
Value
|
|
Balance
Sheet Account
|
|
Fair
Value
|
|
|
(In
thousands)
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign-exchange
contracts
|
Accounts
receivable-other
|
|
$
|
2,487
|
|
Accounts
payable
|
|
$
|
21,350
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign-exchange
contracts
|
Accounts
receivable-other
|
|
$
|
2,445
|
|
Accounts
payable
|
|
$
|
7,512
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Effect of Derivative Instruments on the Statement of Financial
Performance
For
the Three Months Ended March 31, 2009
(in
thousands)
|
|
Derivatives Designated
as Hedges:
|
|
|
|
Cash
Flow Hedges:
|
|
|
|
Foreign
Exchange Contracts:
|
|
|
|
Amount
of gain (loss) recognized in other
comprehensive
income
|
|
$
|
(2,872
|
)
|
|
|
|
|
|
Loss
reclassified from accumulated other
comprehensive
loss into income: effective
portion
|
|
|
|
|
Location
|
|
Amount
|
|
Revenues
|
|
$
|
578
|
|
Cost
of operations
|
|
$
|
926
|
|
Other-net
|
|
$
|
37
|
|
|
|
|
|
|
Gain
(loss) recognized in income: portion
excluded
from effectiveness testing
|
|
|
|
|
Location
|
|
Amount
|
|
Other-net
|
|
$
|
(1,100
|
)
|
|
|
|
|
|
Derivatives Not
Designated as Hedges:
|
|
|
|
|
Foreign
Exchange Contracts:
|
|
|
|
|
Gain
(loss) recognized in income:
|
|
|
|
|
Location
|
|
Amount
|
|
Other-net
|
|
$
|
(8,289
|
)
|
NOTE
5 – FAIR VALUE MEASUREMENTS
The
following is a summary of our available-for-sale securities measured at fair
value at March 31, 2009 (in thousands):
|
|
3/31/09
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Mutual
funds
|
|
$
|
4,024
|
|
|
$
|
-
|
|
|
$
|
4,024
|
|
|
$
|
-
|
|
Commercial
paper
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Certificates
of deposit
|
|
|
7,671
|
|
|
|
-
|
|
|
|
7,671
|
|
|
|
-
|
|
U.S.
Government and agency securities
|
|
|
287,777
|
|
|
|
245,627
|
|
|
|
42,150
|
|
|
|
-
|
|
Foreign
government bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed
securities and collateralized mortgage obligations
|
|
|
10,150
|
|
|
|
-
|
|
|
|
3,452
|
|
|
|
6,698
|
|
Corporate
notes and bonds
|
|
|
89,582
|
|
|
|
-
|
|
|
|
89,582
|
|
|
|
-
|
|
Total
|
|
$
|
399,204
|
|
|
$
|
245,627
|
|
|
$
|
146,879
|
|
|
$
|
6,698
|
|
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 March 31, 2009 (in thousands):
Balance,
beginning of the year
|
|
$
|
7,456
|
|
Total
realized and unrealized gains (losses):
|
|
|
-
|
|
Included
in other income (expense)
|
|
|
-
|
|
Included
in other comprehensive income
|
|
|
(288
|
)
|
Purchases,
issuances and settlements
|
|
|
-
|
|
Principal
repayments
|
|
|
(470
|
)
|
Balance,
end of period
|
|
$
|
6,698
|
|
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 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:
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
528,624
|
|
|
$
|
528,624
|
|
|
$
|
586,649
|
|
|
$
|
586,649
|
|
Restricted
cash and cash equivalents
|
|
$
|
59,026
|
|
|
$
|
59,026
|
|
|
$
|
50,536
|
|
|
$
|
50,536
|
|
Investments
|
|
$
|
399,204
|
|
|
$
|
399,204
|
|
|
$
|
450,685
|
|
|
$
|
450,685
|
|
Debt
|
|
$
|
10,076
|
|
|
$
|
10,401
|
|
|
$
|
15,130
|
|
|
$
|
15,221
|
|
NOTE 6 –
STOCK-BASED COMPENSATION
Total
stock-based compensation expense recognized for the three months ended March 31,
2009 and 2008 was as follows:
|
|
Compensation
|
|
|
Tax
|
|
|
Net
|
|
|
|
Expense
|
|
|
Benefit
|
|
|
Impact
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2009
|
|
Stock
Options
|
|
$
|
228
|
|
|
$
|
(76
|
)
|
|
$
|
152
|
|
Restricted
Stock
|
|
|
1,162
|
|
|
|
(362
|
)
|
|
|
800
|
|
Performance
Shares
|
|
|
6,525
|
|
|
|
(2,182
|
)
|
|
|
4,343
|
|
Performance
and Deferred Stock Units
|
|
|
1,109
|
|
|
|
(365
|
)
|
|
|
744
|
|
Total
|
|
$
|
9,024
|
|
|
$
|
(2,985
|
)
|
|
$
|
6,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2008
|
|
Stock
Options
|
|
$
|
521
|
|
|
$
|
(160
|
)
|
|
$
|
361
|
|
Restricted
Stock
|
|
|
340
|
|
|
|
(93
|
)
|
|
|
247
|
|
Performance
Shares
|
|
|
9,755
|
|
|
|
(3,143
|
)
|
|
|
6,612
|
|
Performance
and Deferred Stock Units
|
|
|
1,349
|
|
|
|
(444
|
)
|
|
|
905
|
|
Total
|
|
$
|
11,965
|
|
|
$
|
(3,840
|
)
|
|
$
|
8,125
|
|
NOTE
7 – SEGMENT REPORTING
An
analysis of our operations by segment is as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
708,524
|
|
|
$
|
645,949
|
|
Government
Operations
|
|
|
257,105
|
|
|
|
190,594
|
|
Power
Generation Systems
|
|
|
528,573
|
|
|
|
616,298
|
|
Adjustments
and Eliminations
(1)
|
|
|
(939
|
)
|
|
|
(2,415
|
)
|
|
|
$
|
1,493,263
|
|
|
$
|
1,450,426
|
|
|
|
|
|
|
|
|
|
|
(1)
Segment revenues are net of the following intersegment transfers
and other adjustments:
|
|
Offshore Oil and Gas Construction Transfers
|
|
$
|
315
|
|
|
$
|
2,243
|
|
Government Operations Transfers
|
|
|
624
|
|
|
|
170
|
|
Power Generation Systems Transfers
|
|
|
-
|
|
|
|
2
|
|
|
|
$
|
939
|
|
|
$
|
2,415
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME:
|
|
|
|
|
|
|
|
|
Segment Operating
Income
:
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
47,217
|
|
|
$
|
51,883
|
|
Government
Operations
|
|
|
37,050
|
|
|
|
29,201
|
|
Power
Generation Systems
|
|
|
56,504
|
|
|
|
63,936
|
|
|
|
$
|
140,771
|
|
|
$
|
145,020
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Asset Disposals and
Impairments – Net:
|
|
|
|
|
|
|
|
|
Offshore Oil and Gas Construction
|
|
$
|
(1,034
|
)
|
|
$
|
1,796
|
|
Government Operations
|
|
|
-
|
|
|
|
-
|
|
Power Generation Systems
|
|
|
12
|
|
|
|
9,647
|
|
|
|
$
|
(1,022
|
)
|
|
$
|
11,443
|
|
|
|
|
|
|
|
|
|
|
Equity in Income
(Loss) of Investees
:
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
(1,145
|
)
|
|
$
|
(754
|
)
|
Government
Operations
|
|
|
8,702
|
|
|
|
8,749
|
|
Power
Generation Systems
|
|
|
1,643
|
|
|
|
2,675
|
|
|
|
$
|
9,200
|
|
|
$
|
10,670
|
|
|
|
|
|
|
|
|
|
|
Segment
Income
:
|
|
|
|
|
|
|
|
|
Offshore
Oil and Gas Construction
|
|
$
|
45,038
|
|
|
$
|
52,925
|
|
Government
Operations
|
|
|
45,752
|
|
|
|
37,950
|
|
Power
Generation Systems
|
|
|
58,159
|
|
|
|
76,258
|
|
|
|
|
148,949
|
|
|
|
167,133
|
|
Corporate
|
|
|
(17,743
|
)
|
|
|
(10,021
|
)
|
Total
Operating Income
|
|
$
|
131,206
|
|
|
$
|
157,112
|
|
NOTE
8 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for basic computation
|
|
$
|
77,692
|
|
|
$
|
123,190
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
228,315
|
|
|
|
225,632
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.34
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted computation
|
|
$
|
77,692
|
|
|
$
|
123,190
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (basic)
|
|
|
228,315
|
|
|
|
225,632
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, restricted stock and performance shares
|
|
|
4,271
|
|
|
|
4,481
|
|
Adjusted
weighted average common shares and assumed exercises of stock options
and vesting of stock awards
|
|
|
232,586
|
|
|
|
230,113
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.33
|
|
|
$
|
0.54
|
|
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;
|
·
|
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 of successfully integrating our
acquisitions;
|
·
|
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 currently financed on a
stand-alone basis. Our debt covenants limit using the financial resources of or
the movement of excess cash from one segment for the benefit of the
other. For further discussion, see “Liquidity and Capital Resources”
below.
As of
March 31, 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 March 31, 2009, we had not accrued
for approximately $110 million of potential liquidated damages that we believe
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 other projects in our
Offshore Oil and Gas Construction segment, we have currently provided for
approximately $23 million in liquidated damages in our estimates of revenues and
gross profit, of which approximately $19 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. With its unique capability of
full life-cycle management of special nuclear materials, facilities and
technologies, our Government Operations segment is well positioned to continue
to participate in the continuing cleanup, operation and management of the
nuclear sites and weapons complexes maintained by the U.S. Department of
Energy.
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 three months ended March 31, 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 MARCH 31, 2009 VS. THREE MONTHS ENDED MARCH
31, 2008
McDermott International,
Inc. (Consolidated)
Revenues
increased approximately 3%, or $42.9 million, to $1,493.3 million in the three
months ended March 31, 2009 compared to $1,450.4 million for the corresponding
period in 2008 due to increases from our Offshore Oil and Gas Construction and
Government Operations segments, partially offset by declines in our Power
Generation Systems segment. Our Offshore Oil and Gas Construction segment
generated a $62.6 million, or 10%, increase in its revenues during the first
quarter of 2009 compared to the first quarter of 2008. This increase was
primarily attributable to increased activities in our Middle East region.
Additionally, in the first quarter of 2009, as compared to the corresponding
period in 2008, our Government Operations segment generated a $66.5 million, or
35%, increase in its revenues primarily attributable to our acquisition of
Nuclear Fuel Services Inc. while our Power Generation Systems segment generated
an $87.7 million, or 14%, decrease in its revenues primarily attributable to
lower revenues from our utility steam and system fabrication
business.
Segment
operating income decreased $4.3 million to $140.7 million in the three
months ended March 31, 2009 from $145.0 million for the corresponding period in
2008 due to our Offshore Oil and Gas Construction and Power Generation Systems
segments, partially offset by our Government Operations segment. The segment
operating income of our Offshore Oil and Gas Construction and Power Generation
Systems segments decreased $4.7 million and $7.4 million, respectively, in 2009,
while our Government Operations segment experienced an increase totaling $7.8
million in the first quarter of 2009, as compared to the corresponding period in
2008. We experienced a significant increase in our pension plan expense in the
three months ended March 31, 2009 compared to the corresponding period of 2008
totaling approximately $21.8 million. This increase is primarily attributable to
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
increased approximately 10% or $62.6 million to $708.5 million in the
three months ended March 31, 2009 compared to $645.9 million in the
corresponding period of 2008 primarily attributable to increased activities from
our Middle East ($86.4 million) and Americas ($23.3 million) regions partially
offset by decreased activities from our Caspian region ($30.8
million). Revenues from all other activities decreased by
approximately $16.3 million in the three months ended March 31, 2009 compared to
the corresponding period of 2008.
Segment
operating income decreased $4.7 million from $51.9 million in the
three months ended March 31, 2008 to $47.2 million for the corresponding period
of 2009 primarily attributable to reduced profits on projects in our Middle East
region, where we recognized approximately $214 million in revenues with little
or no gross profit. In the three months ended March 31, 2009, we
recognized approximately $5 million in net contract losses on these projects,
which were largely a result of costs incurred in preparation for our offshore
pipeline operations and increases in forecasted third party costs. We also
experienced increases in the Americas, Asia Pacific and Caspian regions,
primarily attributable to project close-outs and change orders. We realized
total benefits from project close-outs and change orders totaling approximately
$25 million in the three months ended March 31, 2009 compared to approximately
$11 million in the corresponding period of 2008. We also experienced
a decrease in general and
administrative
expenses totaling $4.3 million for the three months ended March 31, 2009
compared to the corresponding period of 2008.
Gain
(loss) on asset disposals and impairments – net decreased $2.8 million in the
three months ended March 31, 2009. We recognized a loss totaling approximately
$1.0 million in the three months ended March 31, 2009 attributable to the
impairment of obsolete assets in our Asia Pacific region, and the sale of a
vessel we acquired in our acquisition of Secunda International, Limited. We
recognized a gain totaling approximately $1.8 million in the three months ended
March 31, 2008 on the sale of cranes at our fabrication facility in Batam,
Indonesia.
Equity in
loss of investees increased $0.4 million to a loss totaling $1.1 million in the
three months ended March 31, 2009, primarily attributable to our share of
expenses in our FloaTEC LLC joint venture formed in late 2005.
Government
Operations
Revenues
increased approximately 35%, or $66.5 million, to $257.1 million in the three
months ended March 31, 2009 compared to $190.6 million for the corresponding
period of 2008, primarily attributable our acquisition of Nuclear Fuel Services,
Inc. in Erwin, Tennessee ($42.1 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 ($8.8
million). These improvements were partially offset by lower revenues
from our management and operating contracts at several government
sites.
Segment
operating income increased $7.8 million to $37.0 million in the three months
ended March 31, 2009 compared to $29.2 million for the corresponding period of
2008, primarily attributable to 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 . 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 three months ended March 31, 2009 associated with
our acquisition of Nuclear Fuel Services, Inc.
Power Generation
Systems
Revenues decreased approximately 14%,
or $87.7 million, to $528.6 million in the three months ended March 31, 2009,
compared to $616.3 million for the corresponding period of 2008, primarily
attributable to decreases in our utility steam and system fabrication business
($100.6 million), our replacement nuclear steam generator business ($10.6
million), our nuclear service business ($3.3 million), and our replacement parts
business ($3.0 million). These decreases were partially offset by
increased revenues from our fabrication, repair and retrofit of existing
facilities business ($18.2 million), boiler auxiliary equipment business ($7.7
million), and our operations and maintenance business ($3.3
million).
Segment operating income decreased $7.4
million to $56.5 million in the three months ended March 31, 2009, compared to
$63.9 million for the corresponding period of 2008, primarily attributable to
lower volumes in our utility steam and system fabrication business, combined
with lower volume and margins in our replacement nuclear steam generator and
nuclear service businesses, and lower margins in our industrial boiler business.
We also experienced higher qualified pension plan expense in the three months
ended March 31, 2009 compared to the corresponding period in 2008. These items
were partially offset by improved margins in our utility steam and system
fabrication and operations and maintenance businesses. These
increased margins resulted from favorable cost improvements on a preponderance
of our contracts in the three months ended March 31, 2009. Other improvements
included increased volume and margins in our fabrication, repair and retrofit of
existing facilities, and boiler auxiliary equipment businesses.
Gains
(losses) on asset disposals and impairments – net decreased by $9.6 million in
the three months ended March 31, 2009 compared to the corresponding period of
2008 due to a 9.6 million gain on the sale of our Dumbarton facilities in
2008.
Equity in
income of investees decreased $1.0 million in the three months ended March 31,
2009 compared to the corresponding period of 2008 primarily attributable to
material cost increases at our joint venture in China.
Corporate
Unallocated
corporate expenses increased $7.7 million to $17.7 million for the
three months ended March 31, 2009, as compared to $10.0 million for the
corresponding period in 2008, primarily attributable to increased qualified
pension plan expense due to the negative returns realized by our pension plan
assets in 2008 and higher salary expenses resulting primarily from an increased
number of employees.
Other Income Statement
Items
Interest
income decreased $10.6 million to $2.8 million in the three months ended March
31, 2009, primarily due to decreases in average cash equivalents and investments
and prevailing interest rates.
Interest
expense decreased $1.9 million to $1.0 million in the three months ended March
31, 2009, primarily due to lower amortization of debt issuance costs on our
credit facilities.
Other
expense – net increased by $7.5 million to $11.5 million in the three months
ended March 31, 2009 primarily due to losses incurred in the change in fair
value of our foreign currency forward-exchange contracts attributable to
mark-to-market adjustments and ineffectiveness totaling approximately $7.0
million in the three months ended March 31, 2009.
Provision for Income
Taxes
For the
three months ended March 31, 2009, the provision for income taxes increased $3.5
million to $43.9 million, while income before provision for income taxes
decreased $42.0 million to $121.6 million. Our effective tax rate for
the three months ended March 31, 2009 was approximately 36.1%, as compared to
24.7% for the three months ended March 31, 2008. The rate increase
was attributable to a higher mix of U.S. versus non-U.S. income for the quarter
and an unfavorable mix within our non-U.S. 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
(Benefit
from)
Income
Taxes
|
|
|
Effective
Tax Rate
|
|
|
|
For
the three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
76,925
|
|
|
$
|
62,145
|
|
|
$
|
33,309
|
|
|
$
|
23,961
|
|
|
|
43.30
|
%
|
|
|
38.56
|
%
|
Non-United
States
|
|
|
44,645
|
|
|
|
101,425
|
|
|
|
10,569
|
|
|
|
16,419
|
|
|
|
23.67
|
%
|
|
|
16.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,570
|
|
|
$
|
163,570
|
|
|
$
|
43,878
|
|
|
$
|
40,380
|
|
|
|
36.09
|
%
|
|
|
24.69
|
%
|
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.
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
(In
millions)
|
|
Offshore
Oil and Gas Construction
|
|
$
|
5,044
|
|
|
$
|
4,457
|
|
Government
Operations
|
|
|
2,699
|
|
|
|
2,883
|
|
Power
Generation Systems
|
|
|
2,220
|
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
|
Total
Backlog
|
|
$
|
9,963
|
|
|
$
|
9,816
|
|
Of the
March 31, 2009 backlog, we expect to recognize revenues as
follows:
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
|
(Unaudited)
|
|
|
|
(In
approximate millions)
|
|
Offshore
Oil and Gas Construction
|
|
$
|
2,300
|
|
|
$
|
1,925
|
|
|
$
|
819
|
|
Government
Operations
|
|
|
700
|
|
|
|
750
|
|
|
|
1,249
|
|
Power
Generation Systems
|
|
|
940
|
|
|
|
580
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Backlog
|
|
$
|
3,940
|
|
|
$
|
3,255
|
|
|
$
|
2,768
|
|
At March
31, 2009, the Offshore Oil and Gas Construction backlog included approximately
$865 million related to contracts in or near loss positions, which are estimated
to recognize future revenues with approximately zero percent gross margins on
average. 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 March
31, 2009, Government Operations' backlog with the U. S. Government was $2.6
billion, which was substantially fully funded. Only $5.9 million had not been
funded as of March 31, 2009.
We
believe the current worldwide credit and economic environment and short-term
uncertainty regarding environmental regulations, has affected the electric
utility industry more than our other customers. As these factors affect
electrical consumption and customer demand, our bookings during the two most
recent quarters have been lower than recent periods. While we have not
experienced significant delays on existing projects in our Power Generation
Systems’ backlog, we have experienced increasing delays in expected bookings on
new planned projects.
At March
31, 2009, Power Generation Systems’ backlog with the U. S. Government was $5.9
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 March 31, 2009, JRMSA was in compliance with
all of the covenants set forth in the JRMSA Credit Facility.
At March
31, 2009, there were no borrowings outstanding but letters of credit issued
under the JRMSA Credit Facility totaled $219.7 million. At March 31, 2009, there
was a total of $580.3 million available under this facility, $398.0 million of
which could be used for cash borrowings. If there had been borrowings
under this facility, the applicable interest rate at March 31, 2009 would have
been 3.75% per year. In addition, JRMSA and its subsidiaries had
$274.6 million in outstanding unsecured letters of credit under separate
arrangements with financial institutions at March 31, 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 March 31, 2009, bonds issued under this arrangement
totaled $7.6 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 March
31, 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 March
31, 2009, there were no borrowings outstanding but letters of credit issued
under the BWXT Credit Facility totaled $54.3 million. At March 31,
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 March 31, 2009
would have been 3.50 % per year.
At March
31, 2009, Nuclear Fuel Services, Inc., a subsidiary of BWXT, had $3.6 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 March 31, 2009, B&W PGG was in compliance with all
of the covenants set forth in the B&W PGG Credit Facility.
As of
March 31, 2009, there were no outstanding borrowings but letters of credit
issued under the B&W PGG Credit Facility totaled $203.7
million. At March 31, 2009, there was $196.3 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 March 31, 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 March 31, 2009 was $16.4
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 March 31, 2009, bonds issued under this arrangement
in support of contracts totaled approximately $59 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
$
101.0
million
to
$
986.9
million at March 31, 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, increased by $165.2 million to a negative $463.3 million at
March 31, 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.
Our net
cash used in operations was $26.9 million in the three months ended March 31,
2009, compared to $52.9 million for the three months ended March 31,
2008. This decrease in cash used was primarily attributable to improvements in
our accounts receivable position, partially offset by our accounts payable and
net contracts in progress and advance billings on contracts.
Our net
cash used in investing activities decreased by $129.8 million to $21.6 million
in the three months ended March 31, 2009 from $151.4 million in the three months
ended March 31, 2008. This decrease in net cash used in
investing
activities was primarily attributable to a net increase in available-for-sale
securities during the three months ended March 31, 2009.
Our net
cash provided by (used in) financing activities changed by $7.2 million to net
cash used in financing activities of $3.6 million in the three months ended
March 31, 2009 from net cash provided by financing activities of $3.6 million in
the three months ended March 31, 2008, primarily due to lower excess tax
benefits related to stock-based compensation.
At March
31, 2009, we had restricted cash and cash equivalents totaling
$59.0
million, $49.0 of which was held in restricted foreign accounts, $3.0 million
was held as cash collateral for letters of credit, $5.0 million was held for
future decommissioning of facilities, and $2.0 million was held to meet
reinsurance reserve requirements of our captive insurance
companies.
At March
31, 2009, we had investments with a fair value of $399.2 million. Our
investment portfolio consists primarily of investments in government obligations
and other highly liquid money market instruments. As of March 31,
2009, we had pledged approximately $31.0 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 gain (loss) on investments is currently
in an unrealized loss position totaling $10.9 million at March 31, 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 March 31, 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 the Chief Financial Officer
concluded that the design and operation of our disclosure controls and
procedures are effective as of March 31, 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 March 31, 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 2. Unregistered Sales of
Equity Securities and Use of Proceed
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
|
|
|
|
|
|
|
|
|
|
March
3, 2009
|
|
|
19,045
|
|
|
$
|
9.8450
|
|
not
applicable
|
not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,045
|
|
|
$
|
9.8450
|
|
not
applicable
|
not
applicable
|
Item
5. Other Information
On May 7,
2009, the Compensation Committee of our Board of Directors (the “Committee”)
approved an amendment to the McDermott International Inc. New Supplemental
Executive Retirement Plan to vest all amounts allocated to each participant’s
account as of December 31, 2008.
Robert L.
Howard retired from our Board of Directors after 12 years of service effective
as of the end of the Annual Meeting of Stockholders on May 8, 2009.
On May 8,
2009, Stephen G. Hanks and David A. Trice were appointed to the Board of
Directors effective May 12, 2009. Mr. Hanks will serve as a member of
the Audit and Finance Committees of the Board and Mr. Trice will serve as a
member of the Audit and Compensation Committees of the Board.
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 3.1 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
-
Form of Change-In-Control Agreement entered into between McDermott
International, Inc. and Stephen M. Johnson.
Exhibit
10.2
-
Form 0f 2009 LTIP Restricted Stock Unit Grant Agreement.
Exhibit
10.3
-
Form of 2009 LTIP Performance Shares Grant Agreement.
Exhibit
10.4
-
Form of 2009 LTIP Stock Options Grant Agreement.
Exhibit
10.5 - The McDermott International, Inc. Supplemental Executive Retirement Plan,
amended effective December 31, 2008.
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)
|
|
|
|
May
11, 2009
|
|
|
EXHIBIT
INDEX
Exhibit
Number
|
Description
|
|
|
|
3.1*
|
McDermott
International, Inc.'s Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2008 (File No. 1-08430)).
|
|
|
3.2*
|
McDermott
International, Inc.’s Amended and Restated By-Laws (incorporated by
reference to Exhibit 3.1 to McDermott International, Inc.'s Current Report
on Form 8-K dated May 3, 2006 (File No. 1-08430)).
|
|
|
3.3*
|
Amended
and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.1 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-08430)).
|
|
|
10.1
|
Form
of Change-In-Control Agreement entered into between McDermott
International, Inc. and Stephen M. Johnson.
|
|
|
10.2
|
Form
of 2009 LTIP Restricted Stock Unit Grant Agreement.
|
|
|
10.3
|
Form
of 2009 LTIP Performance Shares Grant Agreement.
|
|
|
10.4
|
Form
of 2009 LTIP Stock Options Grant Agreement.
|
|
|
10.5
|
The
McDermott International, Inc. Supplemental Executive Retirement Plan,
amended effective December 31, 2008.
|
|
|
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.
EXHIBIT
31.1
CERTIFICATION
S
I, John
A. Fees, certify that:
1.
I have
reviewed this quarterly report on Form 10-Q of McDermott International, Inc. for
the quarterly period ended March 31, 2009;
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a.
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
b.
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
c.
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
d.
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
a.
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b.
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
May 11,
2009
/s/ John A.
Fees
John A. Fees
Chief Executive
Officer
EXHIBIT
31.2
I
, Michael S. Taff, certify
that:
1.
I have
reviewed this quarterly report on Form 10-Q of McDermott International, Inc. for
the quarterly period ended March 31, 2009;
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
a.
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
b.
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
c.
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
d.
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
a.
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
b.
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
May 11,
2009
/s/ Michael S.
Taff
Michael S. Taff
Chief Financial Officer
EXHIBIT
32.1
MCDERMOTT INTERNATIONAL
, INC.
Certification
Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
(Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code), I, John A. Fees,
Chief Executive Officer of McDermott International, Inc., a Panamanian
corporation (the “Company”), hereby certify, to my knowledge, that:
|
(1)
|
the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2009 (the “Report”) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934;
and
|
|
(2)
|
information
contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the
Company.
|
Dated: May
11, 2009
|
/s/
John A. Fees
|
|
John
A. Fees
|
|
Chief
Executive Officer
|
EXHIBIT
32.2
MCDERMOTT INTERNATIONAL, INC
.
Certification
Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
(Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States
Code), I,
Michael S. Taff, Senior Vice President and Chief Financial Officer of McDermott
International, Inc., a Panamanian corporation (the “Company”), hereby certify,
to my knowledge, that:
|
(1)
|
the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2009 (the “Report”) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934;
and
|
|
(2)
|
information
contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the
Company.
|
Dated: May
11, 2009
|
/s/
Michael S. Taff
|
|
Michael
S. Taff
|
|
Senior
Vice President and Chief Financial
Officer
|
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