NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 1BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
McDermott International, Inc. (MII), a Panamanian corporation, is an engineering, procurement, construction and installation (EPCI) company focused on designing and executing
complex offshore oil and gas projects worldwide. Providing fully integrated EPCI services, we deliver fixed and floating production facilities, pipeline installations and subsea systems from concept to commissioning. Operating in approximately 20
countries across the Atlantic, Middle East and Asia Pacific, our integrated resources include approximately 14,000 employees and a diversified fleet of marine vessels, fabrication facilities and engineering offices. We support our activities with
comprehensive project management and procurement services, while utilizing our fully integrated capabilities in both shallow water and deepwater construction. We execute our contracts through a variety of methods, principally fixed-price, but also
including cost reimbursable, cost-plus, day-rate and unit-rate basis or some combination of those methods. In this annual report on Form 10-K, unless the context otherwise indicates, we, us and our mean MII and
its consolidated subsidiaries.
Basis of Presentation
On March 19, 2012, we completed the sale of our former charter fleet business which operated 10 of the 14 vessels acquired in our
2007 acquisition of substantially all of the assets of Secunda International Limited (the Secunda Acquisition). Additionally, on July 30, 2010, we completed the spin-off of our previously reported Government Operations and Power
Generation Systems segments into an independent, publicly traded company named The Babcock & Wilcox Company (B&W). The consolidated statements of income and the consolidated statements of cash flows for the periods presented
have been retrospectively recasted to reflect the historical operations of the charter fleet business and B&W as discontinued operations. The 2011 consolidated balance sheet reflects the charter fleet business as held for sale. The 2010
consolidated statement of comprehensive income and consolidated statement of equity contain amounts attributable to discontinued operations. Accordingly, we have presented the notes to our consolidated financial statements on the basis of continuing
operations.
We report financial results under reporting segments consisting of Asia Pacific, Atlantic and the Middle East. We
also report certain corporate and other non-operating activities under the heading Corporate and Other. Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other costs, which are
generally fully allocated to our operating segments. For financial information about our segments, see Note 11Segment Reporting.
We have presented our consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States (GAAP). These consolidated financial
statements include the accounts of McDermott International, Inc., its subsidiaries and controlled entities. We use the equity method to account for investments in entities that we do not control, but over which we have significant influence. We
generally refer to these entities as joint ventures or unconsolidated affiliates. We have eliminated all intercompany transactions.
Use of Estimates
We use estimates and assumptions to prepare our
financial statements in conformity with GAAP. These estimates and assumptions affect the amounts we report in our financial statements and accompanying notes. Our actual results could differ from these estimates, and variances could materially
affect our financial condition and results of operations in future periods. Changes in project estimates generally exclude change orders and changes
57
in scope, but may include, without limitation, unexpected changes in weather conditions, productivity, unidentified required vessel repairs, customer and vendor delays and other costs. We
generally expect to experience a reasonable amount of unanticipated events, and some of these events can result in significant cost increases above cost amounts we previously estimated. As of December 31, 2012, we have provided for our
estimated costs to complete on all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract
performance could result in material adjustments to operating results. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.
The following is a discussion of our most significant changes in estimates, which impacted operating income for the years ended
December 31, 2012 and 2011. Operating income for the year ended December 31, 2010 was not significantly impacted by changes in estimates.
2012
Operating income for the year ended December 31, 2012 in our Asia
Pacific segment benefited significantly from certain changes in estimates, which resulted in a reduction of remaining costs as a result of efficiencies associated with our marine campaign on one of our EPCI projects, which is expected to complete in
early 2013. Excluding these cost savings, we believe our costs would have increased by 8% for the year ended December 31, 2012. These benefits were partially offset by certain project charges of approximately $23.0 million associated with
anticipated productivity changes and project delays on one of our subsea projects, which is expected to be completed in late 2013. In addition, our Atlantic segment was impacted by project charges of approximately $16.0 million relating to two
projects, which are expected to be completed during the first half of 2013 primarily due to lower than expected fabrication productivity. In our Middle East segment, we experienced project charges of approximately $13.0 million associated with
increased cost estimates resulting from fabrication productivity and, to a lesser extent, higher than expected marine costs on a project, which is expected to be completed during early 2013.
2011
Operating income for the year ended December 31, 2011 was significantly impacted by changes in cost estimates relating to projects in
our Atlantic segment. The Atlantic segment operating loss for the year ended December 31, 2011 reflected: (1) approximately $74.0 million of incremental costs associated with a five-year marine charter in Brazil, primarily for increases in
estimated vessel operating costs, overruns on certain vessel upgrades and drydock expenses for the
Agile
and estimated liquidated damages based on resulting delays in project commencement; and (2) approximately $65.0 million of costs
incurred on a marine project in Mexico which was completed in the first half of 2012, primarily attributable to unfavorable weather conditions in the Gulf of Mexico and Mexico importation delays, which caused reduced productivity and resulted in
subcontractor standby costs.
Revenue Recognition
We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally
recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours, or a cost-to-cost method, as applicable to the activity involved. We include
the amount of accumulated contract costs and estimated earnings that exceed billings to customers in contracts in progress. We include billings to customers that exceed accumulated contract costs and estimated earnings in advance billings on
contracts. Most long-term contracts contain provisions for progress payments. We expect to invoice customers for all unbilled revenues. Certain costs are generally excluded from the cost-to-cost method of measuring progress, such as significant
costs for materials and third-party subcontractors. Total estimated costs, and resulting contract income, are affected by changes in the expected cost of materials and labor, productivity, scheduling and other factors. Additionally, external factors
such as weather, customer requirements and other factors outside of our control may affect the progress and estimated cost of a projects completion and, therefore, the timing and amount of
58
revenue and income recognition. In addition, change orders, which are a normal and recurring part of our business, can increase (and sometimes substantially) the future scope and cost of a job.
Therefore, change order awards (although frequently beneficial in the long term) can have the short-term effect of reducing the job percentage of completion and thus the revenues and profits recognized to date. We regularly review contract price and
cost estimates as the work progresses and reflect adjustments in profit, proportionate to the job percentage of completion in the period when those estimates are revised.
Deferred Profit Recognition
For contracts as to which we are unable to
estimate the final profitability due to their uncommon nature, including first-of-a-kind projects, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these contracts, we only recognize gross
margin when reliably estimable and the level of uncertainty has been significantly reduced, which we generally determine to be when the contract is at least 70% complete. We treat long-term construction contracts that contain such a level of risk
and uncertainty that estimation of the final outcome is impractical, as deferred profit recognition contracts. If while being accounted for under our deferred profit recognition policy, a current estimate of total contract costs indicates a loss,
the projected loss is recognized in full and the project is accounted for under our normal revenue recognition guidelines.
We
currently account for an Atlantic segment project under our deferred profit recognition policy. This project was awarded to one of our joint ventures, and the Atlantic segments backlog includes a subcontract from that joint venture, of which
$161.5 million relating to this project remains in backlog at December 31, 2012. This project contributed revenues and costs equally, totaling $37.6 million and $45.4 million for the years ended December 31, 2012 and 2011, respectively.
Completed Contract Method
Under the completed contract method, revenue and gross profit is recognized only when a contract is completed or substantially complete. We generally do not enter into fixed-price contracts without an
estimate of cost to complete that we believe to be accurate. However, it is possible that in the time between contract execution and the start of work on a project, we could lose the ability to forecast cost to complete based on intervening events,
including, but not limited to, experience on similar projects, civil unrest, strikes and volatility in our expected costs. In such a situation, we would use the completed contract method of accounting for that project. We did not enter into any
contracts that we accounted for under the completed contract method during 2012, 2011 or 2010.
Claims Revenue
We include certain unapproved claims in the applicable contract value when we have a legal basis to do so, consider
collection to be probable and the value can be reliably estimated. Claim revenue, when recorded, is only recorded to the extent of associated costs in our consolidated financial statements.
The net amount of revenues and costs included in our
estimates at completion (
i.e.
, contract values) associated with such claims was $187.6 million and $55.4 million as of December 31, 2012 and 2011, respectively. These amounts are determined based on various factors, including our analysis of
the underlying contractual language and our experience in making and resolving claims. For the years ended December 31, 2012 and 2011, $78.6 million and $12.0 million of revenues and costs are reflected in our consolidated financial statements
pertaining to claims. Certain of our unconsolidated joint ventures also included $9.2 million and $13.0 million of claim revenue and costs in their financial statements for the years ended December 31, 2012 and 2011, respectively. The amount
recorded for claims in the year ended December 31, 2010 was not material to our consolidated financial statements.
We
continue to actively engage in negotiations with our customers. However, these claims may be resolved at amounts that differ from our current estimates, which could result in increases or decreases in future estimated contract profits or losses.
59
Loss Recognition
A risk associated with fixed-priced contracts is that revenue from customers may not cover increases in our costs. It is possible that
current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, pipeline lay rates or steel and other raw material prices. Increases in costs associated with our
fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated
financial condition, results of operations and cash flows.
As of December 31, 2012, we have provided for our estimated
costs to complete on all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract performance
could result in material adjustments to operating results. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.
We currently have six active projects in our backlog that are in loss positions at December 31, 2012, whereby future revenues are
expected to equal costs when recognized. Included in these projects are a recently commenced marine project in our Asia Pacific segment, which is expected to complete in late 2013, and a five-year charter in Brazil which began in early 2012 being
conducted by our Atlantic segment. These two projects represent the majority of our contract value in a loss position.
Loss Contingencies
We record liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable
possibility that the ultimate loss will exceed the recorded provision or if such loss is not reasonably estimable. We are currently involved in litigation and other proceedings, as discussed in Note 12. We have accrued our estimates of the probable
losses associated with these matters and associated legal costs are generally recognized in selling, general and administrative expenses as incurred. However, our losses are typically resolved over long periods of time and are often difficult to
estimate due to various factors, including the possibility of multiple actions by third parties. Therefore, it is possible future earnings could be affected by changes in our estimates related to these matters.
Cash and Cash Equivalents
Our cash and cash equivalents are highly liquid investments with maturities of three months or less when we purchase them.
We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes. At December 31, 2012, we had restricted cash and
cash equivalents totaling $18.1 million, all of which was held in restricted foreign-entity accounts.
Investments
We classify investments available for current operations in the balance sheet as current assets, and we classify
investments held for long-term purposes as noncurrent assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized
gains and losses on our investments in other income (expense)net. The cost of securities sold is based on the specific identification method. We include interest earned on securities in interest income.
60
Investments in Unconsolidated Affiliates
We generally use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50%. Currently, most
of our significant investments in affiliates that are not consolidated are recorded using the equity method.
Accounts
ReceivableTrade, net
A summary of contract receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Contract receivables:
|
|
|
|
|
|
|
|
|
Contracts in progress
|
|
$
|
273,729
|
|
|
$
|
371,223
|
|
Completed contracts
|
|
|
38,858
|
|
|
|
28,369
|
|
Retainages
|
|
|
133,619
|
|
|
|
65,248
|
|
Unbilled
|
|
|
4,710
|
|
|
|
5,650
|
|
Less allowances
|
|
|
(22,116
|
)
|
|
|
(24,682
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivabletrade, net
|
|
$
|
428,800
|
|
|
$
|
445,808
|
|
|
|
|
|
|
|
|
|
|
We expect to invoice our unbilled receivables once certain milestones or other metrics are reached, and
we expect to collect all unbilled amounts. We believe that our provision for losses on uncollectible accounts receivable is adequate for our credit loss exposure.
The following amounts represent retainages on contracts:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Retainages expected to be collected within one year
|
|
$
|
133,619
|
|
|
$
|
65,248
|
|
Retainages expected to be collected after one year
|
|
|
32,085
|
|
|
|
74,539
|
|
|
|
|
|
|
|
|
|
|
Total retainages
|
|
$
|
165,704
|
|
|
$
|
139,787
|
|
|
|
|
|
|
|
|
|
|
We have included in accounts receivabletrade, net, retainages expected to be collected in 2013.
Retainages expected to be collected after one year are included in other assets. Of the long-term retainages at December 31, 2012, we expect to collect $32.0 million in 2014.
Accounts receivableother was $75.5 million and $53.4 million at December 31, 2012 and December 31, 2011, respectively.
The balance primarily relates to transactions with unconsolidated affiliates, receivables associated with our hedging activities, value-added tax, other items and employee receivables. Employee receivables were $6.8 million and $10.8 million as of
December 31, 2012 and 2011, respectively. These amounts are expected to be collected within 12 months, and any allowance for doubtful accounts on our accounts receivableother is based on our estimate of the amount of probable losses due to the
inability to collect these amounts (based on historical collection experience and other available information). As of December 31, 2012 and 2011, respectively, no such allowance for doubtful accounts was recorded.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement
date. An established hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable
61
inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Companys assumptions about the factors that market participants would use in valuing the asset or liability.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest
level of input that is available and significant to the fair value measurement:
|
|
|
Level 1inputs are based upon quoted prices for identical instruments traded in active markets.
|
|
|
|
Level 2inputs are based upon quoted prices for similar instruments in active markets, quoted prices for similar or identical instruments in
inactive markets and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
|
|
|
|
Level 3inputs are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in
pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar valuation techniques.
|
The carrying amounts that we have reported for financial instruments, including cash and cash equivalents, accounts receivables and
accounts payable approximate their fair values. See Note 7Fair Values of Financial Instruments, for additional information regarding fair value measurements.
Derivative Financial Instruments
Our worldwide operations give rise
to exposure to changes in certain market conditions, which may adversely impact our financial performance. When we deem it appropriate, we use derivatives as a risk management tool to mitigate the potential impacts of certain market risks. The
primary market risk we manage through the use of derivative instruments is movement in foreign currency exchange rates. We use foreign currency derivative contracts to reduce the impact of changes in foreign currency exchange rates on our operating
results. We use these instruments to hedge our exposure associated with revenues and/or costs on our long-term contracts and other cash flow exposures that are denominated in currencies other than our operating entities functional currencies.
We do not hold or issue financial instruments for trading or other speculative purposes.
In certain cases, contracts with our
customers contain provisions under which payments from our customers are denominated in U.S. Dollars and in a foreign currency. The payments denominated in a foreign currency are designed to compensate us for costs that we expect to incur in
such foreign currency. In these cases, we may use derivative instruments to reduce the risks associated with foreign currency exchange rate fluctuations arising from differences in timing of our foreign currency cash inflows and outflows.
Concentration of Credit Risk
Our principal customers are businesses in the offshore oil and gas industry. This concentration of customers may impact our overall exposure to credit risk, either positively or negatively, in that our
customers may be similarly affected by changes in economic or other conditions. In addition, we and many of our customers operate worldwide and are therefore exposed to risks associated with the economic and political forces of various countries and
geographic areas. We generally do not obtain any collateral for our receivables. See Note 11 for additional information about our operations in different geographic areas.
Foreign Currency Translation
We translate assets and liabilities of
our foreign operations, other than operations in highly inflationary economies, into U.S. Dollars at year-end exchange rates, and we translate income statement items at average
62
exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of other comprehensive income, net of tax.
Capitalization of Interest Cost
We incurred and capitalized total interest of $8.6 million in the year ended December 31, 2012. We incurred interest of $9.3 million and $14.6 million in the years ended December 31, 2011 and
2010, respectively. Of these amounts, we capitalized $8.8 million and $12.0 million of interest cost in the years ended December 31, 2011 and 2010, respectively.
Earnings per Share
We have computed earnings per common share on
the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. See Note 10Earnings Per Share, for our earnings per share computations.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive income (loss) (AOCI) included in stockholders equity are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Foreign currency translation adjustments
|
|
$
|
(3,366
|
)
|
|
$
|
(12,438
|
)
|
Net loss on investments
|
|
|
(2,316
|
)
|
|
|
(4,403
|
)
|
Net gain on derivative financial instruments
|
|
|
11,735
|
|
|
|
3,089
|
|
Unrecognized losses on benefit obligations
|
|
|
(100,466
|
)
|
|
|
(88,278
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
(1)
|
|
$
|
(94,413
|
)
|
|
$
|
(102,030
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
The tax impact on amounts presented in AOCI are not significant.
|
Stock-Based Compensation
Equity instruments are measured at fair
value on the grant date. Stock-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards. We use a Black-Scholes model to determine the fair value of certain share-based awards, such
as stock options. Additionally, we use a Monte Carlo model to determine the fair value of certain share-based awards that contain market and performance-based conditions. The use of these models requires highly subjective assumptions, such as
assumptions about the expected life of the award, vesting probability, expected dividend yield and the volatility of our stock price.
Property, Plant and Equipment
We carry our property, plant and
equipment at depreciated cost. Except for major marine vessels, we depreciate our property, plant and equipment using the straight-line method, over estimated economic useful lives of eight to 33 years for buildings and three to 28 years for
machinery and equipment. We do not depreciate property, plant and equipment classified as held for sale.
We depreciate major
marine vessels using the units-of-production method based on the utilization of each vessel. Our units-of-production method of depreciation involves the calculation of depreciation expense on each vessel based on the product of actual utilization
for the vessel for the period and the applicable daily depreciation
63
value (which is based on vessel book value, standard utilization and vessel life) for the vessel. Our actual utilization is determined based on the actual days that the vessel was working or
otherwise actively engaged (other than in transit between regions) under a contract, as determined by daily vessel operating reports prepared by the crew of the vessel. Our standard utilization is determined by vessel at least annually based on
recent actual utilization combined with an expectation of future utilization, both of which allow for idle time. We ensure that a minimum amount of accumulated depreciation of at least 50% of equivalent life-to-date straight-line depreciation is
recorded. Additionally, in periods of very low utilization, a minimum amount of depreciation expense of at least 25% of an equivalent straight-line depreciation expense (which is based on an initial 25-year life) is recorded.
Our depreciation expense was $86.4 million, $82.2 million and $75.8 million for the years ended December 31, 2012, 2011 and 2010,
respectively.
A summary of property, plant and equipment by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Marine Vessels
|
|
$
|
882,921
|
|
|
$
|
812,322
|
|
Construction Equipment
|
|
|
546,305
|
|
|
|
545,765
|
|
Construction in Progress
|
|
|
395,949
|
|
|
|
343,555
|
|
Buildings
|
|
|
165,853
|
|
|
|
136,587
|
|
All other
|
|
|
124,148
|
|
|
|
120,648
|
|
|
|
|
|
|
|
|
|
|
Total Cost
|
|
|
2,115,176
|
|
|
|
1,958,877
|
|
Accumulated Depreciation
|
|
|
(833,385
|
)
|
|
|
(857,012
|
)
|
|
|
|
|
|
|
|
|
|
Net Book Value
|
|
$
|
1,281,791
|
|
|
$
|
1,101,865
|
|
|
|
|
|
|
|
|
|
|
We capitalize drydocking costs in other assets when incurred and amortize the costs over the period of
time between drydockings, which is generally three to five years. We expense the costs of other maintenance, repairs and renewals, which do not materially prolong the useful life of an asset, as we incur them.
Impairment Review
We review goodwill for impairment on an annual basis or more frequently if circumstances indicate that impairment may exist. The annual impairment review involves comparing the fair value to the net book
value of each applicable reporting unit and, therefore, is significantly impacted by estimates and judgments.
The following
summarizes the carrying amount of goodwill by segment at December 31, 2012 and 2011:
|
|
|
|
|
Asia Pacific
|
|
Middle East
|
|
Total
|
$ 19,777
|
|
$21,425
|
|
$41,202
|
We completed our annual review of goodwill for the year ended December 31, 2012, which indicated
that the fair value for our Asia Pacific and Middle East reporting units was significantly in excess of the carrying amount, resulting in no goodwill impairment.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation is required, the fair value of each
applicable asset is compared to its carrying value. Factors that impact our determination of potential impairment include forecasted utilization of equipment and estimates of forecasted cash flows from projects expected to be performed in future
periods. Our estimates of cash flow may differ from actual cash flow due to, among other things, economic
64
conditions or changes in operating performance. Any changes in such factors may negatively affect our business segments and result in future asset impairments.
For the year ended December 31, 2012, we did not recognize an impairment charge in our consolidated statements of income. For the
years ended December 31, 2011 and 2010, we recognized impairment charges of $5.5 million and $24.4 million, respectively, in our consolidated statements of income on certain vessels. We used an appraised value to determine the impairment and we
consider that fair value measurement as Level 2.
Other Non-Current Assets
We have included debt issuance costs in other assets. We amortize debt issuance costs as interest expense on a straight-line basis over
the life of the related debt. The following summarizes the changes in the carrying amount of these assets:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
17,125
|
|
|
$
|
16,073
|
|
Debt issuance costs and performance guarantees
|
|
|
|
|
|
|
4,944
|
|
Amortization of interest expense
|
|
|
(3,364
|
)
|
|
|
(3,892
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
13,761
|
|
|
$
|
17,125
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
We provide for income taxes based on the tax laws and rates in the countries in which we conduct our operations. MII is a Panamanian corporation that earns all of its income outside of Panama. As a
result, we are not subject to income tax in Panama. We operate in various taxing jurisdictions around the world. Each of these jurisdictions has a regime of taxation that varies, not only with respect to nominal rates, but also with respect to the
basis on which these rates are applied. These variations, along with changes in our mix of income or loss from these jurisdictions, may contribute to shifts, sometimes significant, in our effective tax rate.
We believe that our deferred tax assets recorded as of December 31, 2012 are realizable through carrybacks, future reversals of
existing taxable temporary differences and future taxable income. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. If we subsequently determine that we will be able to
realize deferred tax assets in the future in excess of our net recorded amount, the resulting adjustment would increase earnings for the period in which such determination was made. We will continue to assess the adequacy of the valuation allowance
on a quarterly basis. Any changes to our estimated valuation allowance could be material to our consolidated financial condition and results of operations.
Insurance and Self-Insurance
Our wholly owned captive
insurance subsidiary provides coverage for our retentions under employers liability, general and products liability, automobile liability and workers compensation insurance and, from time to time, builders risk and marine hull
insurance within certain limits. We may also have business reasons in the future to arrange for our insurance subsidiary to insure other risks which we cannot or do not wish to transfer to outside insurance companies. Premiums charged and reserves
related to these insurance programs are based on the facts and circumstances specific to the insurance claims, our past experience with similar claims, loss factors and the performance of the outside insurance market for the type of risk at issue.
The actual outcome of insured claims could differ significantly from estimated amounts. We maintain actuarially determined accruals in our consolidated balance sheets to cover self-insurance retentions for the coverages discussed above. These
accruals
65
are based on certain assumptions developed utilizing historical data to project future losses. Loss estimates in the calculation of these accruals are adjusted as required based upon reported
claims, actual claim payments and settlements and claim reserves. We reduced our self-insurance accruals in our wholly owned captive insurance subsidiary by $6.8 million, $17.3 million and $2.4 million during the years ended December 31, 2012,
2011 and 2010, respectively, and recognized these reductions in cost of operations in our consolidated statements of income.
Recently Adopted Accounting Standards
In September 2011, the Financial Accounting Standards Board ( FASB) issued an update to the topic
IntangiblesGoodwill and Other.
This update amended guidance on the testing of
goodwill for impairment, by providing an entity with the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, prior to calculating the
fair value of the reporting unit. The update was effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this update did not have a material impact on our consolidated financial statements.
In June 2011, the FASB issued an update to the topic
Comprehensive Income
. This update requires entities to present components of
comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The update was effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this
update did not have a material impact on our consolidated financial statements.
In May 2011, the FASB issued an update to the
topic
Fair Value Measurement
. This update provided guidance about how fair value should be applied where it is already required or permitted under GAAP. The update did not extend the use of fair value or require additional fair value
measurements, but rather explained how to measure fair value and required prospective application. The update was effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this update did not have a
material impact on our consolidated financial statements.
NOTE 2DISPOSITIONS AND OTHER ITEMS
Assets Held for Sale
During the quarter ended September 30, 2012, we committed to a plan to sell three of our multi-function marine vessels, specifically the
Bold Endurance, DB 16
and
DB 26
. At
December 31, 2012, we classified approximately $30.0 million as assets held for sale in our consolidated balance sheet. On December 18, 2012, we entered into an agreement to sell the
Bold Endurance
for cash proceeds of approximately
$2.0 million. The sale was completed in January 2013. We remain in active discussions with several interested parties to sell the remaining two vessels.
On August 26, 2011, we completed the sale of the
DB 23
marine vessel. Cash consideration received from the vessel sale was approximately $8.0 million, resulting in a pre-tax gain of $7.7
million that is included in our consolidated statements of income for the year ended December 31, 2011 for the Atlantic segment.
During the quarter ended September 30, 2010, we incurred approximately $21.0 million of costs to discontinue our development plans for a new fabrication yard in Kazakhstan, including estimated lease
termination costs. After obtaining additional information regarding the discontinuance of our development plans, for the year ended December 31, 2011 we reduced our estimated closure costs by $10.0 million to reflect our revised estimate. The
impact of this revision was reflected in our consolidated statements of income in costs of operations for the year ended December 31, 2011 for the Middle East segment.
66
Discontinued Operations
The following discussion provides information pertaining to our significant discontinued operations.
Charter Fleet Business
On March 19, 2012, we completed the sale of our former charter fleet business, which operated 10 of the 14 vessels acquired in our 2007 Secunda Acquisition. For the year ended December 31, 2011,
we recognized an approximate $22.0 million write-down of our former charter fleet business. The write-down was based on the estimated fair value of consideration expected from the sale, including estimated selling costs, and we considered that fair
value measurement as Level 2. The following table presents selected financial information regarding the results of operations attributable to our former charter fleet business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Revenues
|
|
$
|
8,184
|
|
|
$
|
44,849
|
|
|
$
|
57,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations, before taxes
|
|
|
257
|
|
|
|
(21,934
|
)
|
|
|
(27,690
|
)
|
Income before provision for income taxes
|
|
|
3,240
|
|
|
|
10,030
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,497
|
|
|
|
(11,904
|
)
|
|
|
(19,609
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
(2,908
|
)
|
|
|
(2,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
3,497
|
|
|
$
|
(14,812
|
)
|
|
$
|
(22,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the carrying values of the major classes of assets and liabilities
attributable to our former charter fleet business that are included in our consolidated balance sheet:
|
|
|
|
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
Other current assets
|
|
$
|
3,197
|
|
|
|
|
|
|
Property, plant and equipmentnet
|
|
|
45,892
|
|
Other long-term assets
|
|
|
9,679
|
|
|
|
|
|
|
Total long-term assets held for sale
|
|
$
|
55,571
|
|
|
|
|
|
|
Spin-off of B&W
On July 30, 2010, we completed the spin-off of B&W to our stockholders through a distribution of all of the outstanding common stock of B&W. B&Ws assets and businesses primarily
consisted of those that we previously reported as our Government Operations and Power Generation Systems segments. Prior to the completion of the spin-off, B&W made a cash distribution to us totaling $100 million.
The following table presents selected financial information regarding the results of operations of our former B&W business:
|
|
|
|
|
|
|
Year Ended
December
31, 2010
(1)
|
|
|
|
(In thousands)
|
|
Revenues
|
|
$
|
1,524,424
|
|
|
|
|
|
|
Loss on disposal of discontinued operations, before taxes
|
|
|
(95,621
|
)
|
Income before provision for income taxes
|
|
|
105,796
|
|
|
|
|
|
|
|
|
|
10,175
|
|
Provision for income taxes
|
|
|
(22,755
|
)
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(12,580
|
)
|
|
|
|
|
|
(1)
|
Includes the B&W operations through July 30, 2010.
|
67
NOTE 3LONG-TERM DEBT AND NOTES PAYABLE
Credit Facility
In May 2010, we entered into a credit agreement with a syndicate of lenders and letter of credit issuers (as amended in August 2011, the Credit Agreement). The Credit Agreement provides for
revolving credit borrowings and issuances of letters of credit in an aggregate outstanding amount of up to $950.0 million and is scheduled to mature on August 19, 2016. Proceeds from borrowings under the Credit Agreement are available for
working capital needs and other general corporate purposes. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitment thereunder.
Other than customary mandatory prepayments in connection with casualty events, the Credit Agreement requires only interest payments on a
quarterly basis until maturity. We may prepay all loans under the Credit Agreement at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.
Our overall borrowing capacity is in large part dependent on maintaining compliance with covenants under the Credit Agreement. The Credit
Agreement 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, and capital expenditures. At December 31, 2012, we were in compliance with our covenant requirements. A comparison of the key financial covenants and current compliance is as follows:
|
|
|
|
|
|
|
|
|
|
|
Required
|
|
|
Actual
|
|
Maximum leverage ratio
|
|
|
3.00
|
|
|
|
0.32
|
|
Minimum interest coverage ratio
|
|
|
4.00
|
|
|
|
53.96
|
|
Loans outstanding under the Credit Agreement bear interest at the borrowers option at either the
Eurodollar rate plus a margin ranging from 1.50% to 2.50% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the 30-day Eurodollar rate plus 1.0%, or the administrative agents prime rate) plus a margin ranging
from 0.50% to 1.50% per year. The applicable margin for revolving loans varies depending on the credit ratings of the Credit Agreement. We are charged a commitment fee on the unused portions of the Credit Agreement, and that fee varies between
0.200% and 0.450% per year depending on the credit ratings of the Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.50% and 2.50% per year with respect to the amount of each financial letter of credit
issued under the Credit Agreement and a letter of credit fee of between 0.75% and 1.25% per year with respect to the amount of each performance letter of credit issued under the Credit Agreement, in each case depending on the credit ratings of
the Credit Agreement. Under the Credit Agreement, we also pay customary issuance fees and other fees and expenses in connection with the issuance of letters of credit under the Credit Agreement. In connection with entering into the Credit Agreement,
we paid certain up-front fees to the lenders thereunder, and certain arrangement and other fees to the arrangers and agents for the Credit Agreement, which are being amortized to interest expense over the term of the Credit Agreement.
At December 31, 2012, there were no borrowings outstanding, and letters of credit issued under the Credit Agreement totaled $267.3
million. At December 31, 2012, there was $682.7 million available for borrowings or to meet letter of credit requirements under the Credit Agreement. There were no borrowings under the Credit Agreement during the years ended December 31,
2012 or 2011. Had there been any borrowings at December 31, 2012, the applicable base interest rate would have been approximately 4.00% per annum. At December 31, 2011, there were no borrowings outstanding, and letters of credit
issued under the Credit Agreement totaled $306.1 million. In addition, we had $117.6 million and $219.0 million in outstanding unsecured bilateral letters of credit at December 31, 2012 and 2011, respectively.
68
At December 31, 2012, based on the credit ratings applicable to the Credit Agreement,
the applicable margin for Eurodollar-rate loans was 1.75%, the applicable margin for base-rate loans was 0.75%, the letter of credit fee for financial letters of credit was 1.75%, the letter of credit fee for performance letters of credit was
0.875%, and the commitment fee for unused portions of the Credit Agreement was 0.25%. The Credit Agreement does not have a floor for the base rate or the Eurodollar rate.
North Ocean Financing
North Ocean 102
In December 2009, J. Ray McDermott, S.A. (JRMSA), a wholly owned subsidiary of MII, entered into a vessel-owning joint venture
transaction with Oceanteam ASA. As a result of this transaction, we have consolidated notes payable of approximately $37.3 million and $43.3 million on our consolidated balance sheets at December 31, 2012 and 2011, respectively, of which
approximately $6.0 million is classified as current notes payable at December 31, 2012 and 2011. JRMSA has guaranteed approximately 50% of this debt based on its ownership percentages in the vessel-owning companies. The outstanding debt bears
interest at a rate equal to the three-month LIBOR (which resets every three months) plus a margin of 2.815% and matures in January 2014.
North Ocean 105
On September 30, 2010, MII, as guarantor, and North
Ocean 105 AS, in which we have a 75% ownership interest, as borrower, entered into a financing agreement to finance a portion of the construction costs of the
North Ocean 105
. The agreement provides for borrowings of up to $69.4 million,
bearing interest at 2.76% per year, and requires principal repayment in 17 consecutive semi-annual installments, which commenced on October 1, 2012. Borrowings under the agreement are secured by, among other things, a pledge of all of
the equity of North Ocean 105 AS, a mortgage on the
North Ocean 105
, and a lien on substantially all of the other assets of North Ocean 105 AS. MII unconditionally guaranteed all amounts to be borrowed under the agreement. At
December 31, 2012, there was $65.4 million in borrowings outstanding under this agreement, of which approximately $8.2 million was classified as current notes payable. At December 31, 2011, there were $50.4 million in borrowings
outstanding, of which $2.9 million was classified as current notes payable.
ANZ Reimbursement Agreement
On April 20, 2012, McDermott and one of its wholly owned subsidiaries, McDermott Australia Pty. Ltd. (McDermott
Australia), entered into a secured Letter of Credit Reimbursement Agreement (the Reimbursement Agreement) with Australia and New Zealand Banking Group Limited (ANZ). In accordance with the terms of the Reimbursement
Agreement, ANZ issued letters of credit in the aggregate amount of approximately $109.0 million to support McDermott Australias performance obligations under contractual arrangements relating to a field development project. The obligations of
McDermott and McDermott Australia under the Reimbursement Agreement are secured by McDermott Australias interest in the contractual arrangements and certain related assets.
Surety Bonds
In 2012 and 2007, JRMSA executed general agreements of indemnity in favor of surety underwriters based in Mexico relating to surety bonds issued in support of contracting activities of J. Ray McDermott de
Mèxico, S.A. de C.V., a subsidiary of JRMSA. As of December 31, 2012 and 2011, bonds issued under these arrangements totaled $50.1 million and $19.5 million, respectively.
69
Long-term debt and notes payable obligations
A summary of our long-term debt obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
North Ocean 102
Construction Financing
|
|
$
|
37,349
|
|
|
$
|
43,325
|
|
North Ocean 105
Construction Financing
|
|
|
65,359
|
|
|
|
50,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,708
|
|
|
|
93,735
|
|
Less: Amounts due within one year
|
|
|
14,146
|
|
|
|
8,941
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
88,562
|
|
|
$
|
84,794
|
|
|
|
|
|
|
|
|
|
|
Maturities of long-term debt during the five years subsequent to December 31, 2012 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
2013
|
|
$
|
14,146
|
|
2014
|
|
|
39,543
|
|
2015
|
|
|
8,170
|
|
2016
|
|
|
8,170
|
|
2017
|
|
|
8,170
|
|
Thereafter
|
|
|
24,509
|
|
|
|
|
|
|
Total
|
|
$
|
102,708
|
|
|
|
|
|
|
NOTE 4PENSION PLANS AND POSTRETIREMENT BENEFITS
Although we currently provide retirement benefits for most of our U.S. employees through sponsorship of the McDermott
Thrift Plan (see Defined Contribution Plans below), some of our longer-term U.S. employees and former employees are entitled to retirement benefits under the McDermott (U.S.) Retirement Plan, a non-contributory qualified defined benefit
pension plan (the McDermott Plan), and several non-qualified supplemental defined benefit pension plans. The McDermott Plan and the non-qualified supplemental defined benefit pension plans are collectively referred to herein as the
Domestic Plans. The McDermott Plan has been closed to new participants since 2006, and benefit accruals under the McDermott Plan were frozen completely in 2010.
We also sponsor a defined benefit pension plan established under the laws of the Commonwealth of the Bahamas, the J. Ray McDermott, S.A. Third Country National Employees Pension Plan (the TCN
Plan) which provides retirement benefits for certain of our current and former foreign employees. Effective August 1, 2011, new entry into the TCN Plan was closed, and effective December 31, 2011, benefit accruals under the TCN Plan
were frozen. Effective January 1, 2012, we established a new global defined contribution plan to provide retirement benefits to non-U.S. expatriate employees who may have otherwise obtained benefits under the TCN Plan.
Retirement benefits under the McDermott Plan and the TCN Plan are generally based on final average compensation and years of service,
subject to the applicable freeze in benefit accruals under the plans. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended
(ERISA), or other applicable law. The Pension Protection Act of 2006 (PPA) amended ERISA and modified the funding requirements for certain defined benefit pension plans including the McDermott Plan. Funding provisions under
the PPA accelerated funding requirements are applicable to the McDermott Plan to ensure full funding of benefits accrued.
70
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
|
TCN Plan
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
568,243
|
|
|
$
|
551,231
|
|
|
$
|
40,147
|
|
|
$
|
47,190
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,740
|
|
Interest cost
|
|
|
26,522
|
|
|
|
28,454
|
|
|
|
1,843
|
|
|
|
2,379
|
|
Actuarial loss
|
|
|
54,885
|
|
|
|
22,154
|
|
|
|
6,441
|
|
|
|
6,652
|
|
Curtailments
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(17,252
|
)
|
Benefits paid
|
|
|
(34,289
|
)
|
|
|
(33,593
|
)
|
|
|
(422
|
)
|
|
|
(1,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
615,361
|
|
|
$
|
568,243
|
|
|
$
|
48,009
|
|
|
$
|
40,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
567,373
|
|
|
$
|
505,853
|
|
|
$
|
34,075
|
|
|
$
|
32,543
|
|
Actual return on plan assets
|
|
|
71,182
|
|
|
|
90,343
|
|
|
|
4,886
|
|
|
|
(906
|
)
|
Company contributions
|
|
|
1,626
|
|
|
|
4,770
|
|
|
|
500
|
|
|
|
4,000
|
|
Benefits paid
|
|
|
(34,289
|
)
|
|
|
(33,593
|
)
|
|
|
(422
|
)
|
|
|
(1,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
605,892
|
|
|
|
567,373
|
|
|
|
39,039
|
|
|
|
34,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(9,469
|
)
|
|
$
|
(870
|
)
|
|
$
|
(8,970
|
)
|
|
$
|
(6,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
$
|
7,981
|
|
|
$
|
16,034
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liabilitycurrent
|
|
|
(1,574
|
)
|
|
|
(1,743
|
)
|
|
|
(500
|
)
|
|
|
(2,300
|
)
|
Pension liability
|
|
|
(15,876
|
)
|
|
|
(15,161
|
)
|
|
|
(8,470
|
)
|
|
|
(3,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
|
(17,450
|
)
|
|
|
(16,904
|
)
|
|
|
(8,970
|
)
|
|
|
(6,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability
|
|
$
|
(9,469
|
)
|
|
$
|
(870
|
)
|
|
$
|
(8,970
|
)
|
|
$
|
(6,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
85,984
|
|
|
$
|
76,038
|
|
|
$
|
6,738
|
|
|
$
|
4,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before taxes
|
|
$
|
85,984
|
|
|
$
|
76,038
|
|
|
$
|
6,738
|
|
|
$
|
4,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
|
TCN Plan
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plans with accumulated benefit obligation in excess of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
615,361
|
|
|
$
|
568,243
|
|
|
$
|
48,009
|
|
|
$
|
40,147
|
|
Accumulated benefit obligation
|
|
$
|
615,361
|
|
|
$
|
568,243
|
|
|
$
|
48,009
|
|
|
$
|
40,147
|
|
Fair value of plan assets
|
|
$
|
605,892
|
|
|
$
|
567,373
|
|
|
$
|
39,039
|
|
|
$
|
34,075
|
|
71
We have recognized in 2012, and expect to recognize in 2013, the
following amounts in other comprehensive loss as a component of net periodic benefit cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in 2012
|
|
|
To Be Recognized
in 2013
|
|
|
|
Domestic
Plans
|
|
|
TCN
Plan
|
|
|
Domestic
Plans
|
|
|
TCN
Plan
|
|
|
|
(In thousands)
|
|
Pension cost in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
9,725
|
|
|
$
|
1,785
|
|
|
$
|
11,820
|
|
|
$
|
2,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
|
TCN Plan
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Weighted average assumptions used to determine net periodic benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.00
|
%
|
|
|
4.80
|
%
|
|
|
4.00
|
%
|
|
|
4.80
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
|
TCN Plan
|
|
|
|
Year Ended
December 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
543
|
|
|
$
|
|
|
|
$
|
2,740
|
|
|
$
|
2,305
|
|
Interest cost
|
|
|
26,522
|
|
|
|
28,454
|
|
|
|
30,639
|
|
|
|
1,843
|
|
|
|
2,379
|
|
|
|
2,185
|
|
Expected return on plan assets
|
|
|
(35,811
|
)
|
|
|
(30,216
|
)
|
|
|
(30,830
|
)
|
|
|
(2,443
|
)
|
|
|
(2,450
|
)
|
|
|
(1,829
|
)
|
Amortization of net loss
|
|
|
9,725
|
|
|
|
15,842
|
|
|
|
18,071
|
|
|
|
1,785
|
|
|
|
2,736
|
|
|
|
2,167
|
|
Amortization of prior service cost (credit)
|
|
|
|
|
|
|
|
|
|
|
(268
|
)
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
Recognized (gain) loss due to curtailments and other adjustments
|
|
|
(91
|
)
|
|
|
(24
|
)
|
|
|
(1,185
|
)
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
345
|
|
|
$
|
14,056
|
|
|
$
|
16,970
|
|
|
$
|
1,185
|
|
|
$
|
5,436
|
|
|
$
|
4,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in accumulated other comprehensive loss due to actuarial lossesbefore taxes
|
|
$
|
19,580
|
|
|
$
|
(37,973
|
)
|
|
$
|
16,492
|
|
|
$
|
3,998
|
|
|
$
|
10,008
|
|
|
$
|
5,120
|
|
Decrease in accumulated other comprehensive loss due to curtailment gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
19,580
|
|
|
$
|
(37,973
|
)
|
|
$
|
16,492
|
|
|
$
|
3,998
|
|
|
$
|
(7,259
|
)
|
|
$
|
5,120
|
|
Weighted average assumptions used to determine net periodic benefit cost for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.80
|
%
|
|
|
5.75
|
%
|
|
|
5.85
|
%
|
|
|
4.80
|
%
|
|
|
5.75
|
%
|
|
|
5.25
|
%
|
Expected return on plan assets
|
|
|
6.50
|
%
|
|
|
5.75
|
%
|
|
|
7.05
|
%
|
|
|
6.90
|
%
|
|
|
5.75
|
%
|
|
|
7.50
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
1.49
|
%
|
|
|
N/A
|
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
During the year ended December 31, 2011, the Investment Committee of the McDermott Plan changed the
investment strategy for the assets in the McDermott Master Trust (McDermott Trust), the funding vehicle underlying the McDermott Plan. The investment strategy change resulted in the portfolio of assets moving from a
72
dollar-duration-matched-fixed-income asset mix to more of a return-seeking asset mix under which assets would be allocated predominantly to dollar-duration-matched-fixed-income investments with a
long credit tilt, but also apportioned to high-yield fixed income and global equity investments. This change in investment strategy caused us to remeasure the McDermott Plans assets and benefit obligations as of April 30, 2011. In
connection with the investment strategy change, we increased the expected rate of return on plan assets assumption for the McDermott Plan to 6.50% from 5.30% as of the remeasurement date. This assumption is consistent with the long-term asset
returns expected from the McDermott Trust after the investment strategy change.
We set the expected rate of return on plan
assets assumption for the Domestic Plans at 6.50% and the TCN Plan at 6.90%. The expected rate of return is determined to be the weighted average of the nominal returns based on the weightings of the asset classes within the McDermott Trust and TCN
Trust investment portfolios. In setting these rates, we used a building-block approach. Historic real return trends for the various asset classes in both investment portfolios were combined with anticipated future market conditions to estimate the
real rate of return for each class. These rates were then adjusted for anticipated future inflation to determine estimated nominal rates of return for each class.
Investment Goals
General
The investment goals of the McDermott Trust and the trust underlying the TCN Plan (TCN Trust) are generally to provide for the
solvency of the respective plans and fulfillment of pension obligations over time, and to maximize long-term investment return consistent with a reasonable level of risk. Asset allocations within the McDermott Trust and TCN Trust are reviewed
periodically and rebalanced, if appropriate, to ensure the continued conformance to the investment goals, objectives and strategies. Both the McDermott Trust and the TCN Trust employ a professional investment advisor and a number of professional
investment managers whose individual benchmarks are, in the aggregate, consistent with the applicable trusts overall investment objectives.
The specific goals of each investment manager are set out in the investment policy adopted by the investment committee for the respective trust, but, in general, the goals are (1) to perform in line
with (in the case of passive accounts) or outperform (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust, and (2) to display an overall level of risk in its portfolio that is consistent with the
risk associated with the agreed upon benchmark. The estimated allocations discussed below are periodically reviewed to assess the appropriateness of the particular funds in which they are invested, and these estimated allocations are subject to
change.
The performance of each investment managers portfolio is periodically measured against commonly accepted
benchmarks, including the individual investment managers benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to
discipline and other qualitative factors that may impact the ability to achieve desired investment results.
The following is
a summary of the asset allocations at December 31, 2012 and 2011 by asset category. The estimated allocation for 2013, by asset class, is expected to remain the same as the year ended December 31, 2012. In connection with our decision to
freeze benefit accruals under the TCN plan, we plan to consider revising the asset allocation for 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plan
|
|
|
TCN Plan
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
|
|
85
|
%
|
|
|
85
|
%
|
|
|
30
|
%
|
|
|
30
|
%
|
Equity Securities
|
|
|
15
|
%
|
|
|
15
|
%
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Fair Value
The following is a summary of total investments for our plans, measured at fair value at December 31, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/12
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Pension Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
|
$
|
516,428
|
|
|
$
|
82,390
|
|
|
$
|
432,462
|
|
|
$
|
1,576
|
|
Equities
|
|
|
116,198
|
|
|
|
27,337
|
|
|
|
88,861
|
|
|
|
|
|
Cash and Accrued Items
|
|
|
12,305
|
|
|
|
12,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
644,931
|
|
|
$
|
122,032
|
|
|
$
|
521,323
|
|
|
$
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/11
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Pension Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
|
$
|
482,767
|
|
|
$
|
482,767
|
|
|
$
|
|
|
|
$
|
|
|
Equities
|
|
|
102,785
|
|
|
|
24,162
|
|
|
|
78,623
|
|
|
|
|
|
Cash and Accrued Items
|
|
|
15,896
|
|
|
|
15,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
601,448
|
|
|
$
|
522,825
|
|
|
$
|
78,623
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Level 3 Instrument
The following is a summary of the changes in our Level 3 fixed income instruments measured on a recurring basis for the years ended
December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
|
|
|
$
|
|
|
Purchases
|
|
|
1,532
|
|
|
|
|
|
Total unrealized gains
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,576
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
|
TCN Plan
|
|
|
|
(In thousands)
|
|
Expected employer contributions to trusts of defined benefit plans:
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
|
|
|
$
|
500
|
|
Expected benefit payments:
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
35,496
|
|
|
$
|
2,650
|
|
2014
|
|
$
|
36,085
|
|
|
$
|
1,629
|
|
2015
|
|
$
|
36,466
|
|
|
$
|
2,207
|
|
2016
|
|
$
|
36,979
|
|
|
$
|
3,790
|
|
2017
|
|
$
|
37,247
|
|
|
$
|
3,959
|
|
2018-2022
|
|
$
|
190,838
|
|
|
$
|
16,057
|
|
The expected employer contributions to trusts for 2013 are included in current liabilities at
December 31, 2012.
Defined Contribution Plans
We provide retirement benefits for most of our U.S. employees through the McDermott Thrift Plan, a qualified defined contribution plan
with a Code section 401(k) feature (the Thrift Plan). The Thrift Plan
74
generally provides for matching employer contributions of 50% of participants contributions up to 6% of compensation and unmatched employer cash contributions equal to 3% of
participants base pay, plus overtime pay, expatriate pay and commissions, which we refer to collectively as thriftable earnings. Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately $6.8
million, $6.6 million and $6.7 million in the years ended December 31, 2012, 2011 and 2010, respectively.
We provide
retirement benefits for some of our international employees through the McDermott Global Defined Contribution Plan (the Global Thrift Plan), a defined contribution plan established on January 1, 2012 and operated under Luxembourg
law. The Global Thrift Plan generally provides for matching employer contributions of 50% of participants contributions up to 6% of base salary and unmatched employer cash contributions equal to 3% of participants base salary. Amounts
charged to expense for employer contributions under the Global Thrift Plan totaled approximately $1.6 million in the year ended December 31, 2012.
We also provide benefits under the McDermott International, Inc. Director and Executive Deferred Compensation Plan (Deferred Compensation Plan), which is a non-qualified defined contribution
plan. Expense associated with the Deferred Compensation Plan was not material to the consolidated financial statements for the years presented.
NOTE 5INVESTMENTS
At December 31, 2012, we had investments with a fair value of $46.0 million. Our investment portfolio consists
primarily of investments in commercial paper. 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 income. Our net unrealized
loss on investments was $2.4 million and $4.4 million as of December 31, 2012 and 2011, respectively. The major components of our investments in an unrealized loss position are asset-backed and mortgage-backed obligations. These investments
have generally shown a positive trend and continue to perform positively, and we currently do not have the intent to sell these securities before their anticipated recovery. Based on our analysis, we believe that none of our available-for-sale
securities were other than temporarily impaired at December 31, 2012.
The following is a summary of our
available-for-sale securities at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
(In thousands)
|
|
Mutual funds
(1)
|
|
$
|
1,975
|
|
|
$
|
48
|
|
|
$
|
|
|
|
$
|
2,023
|
|
Commercial paper
(5)
|
|
|
29,728
|
|
|
|
9
|
|
|
|
|
|
|
|
29,737
|
|
Asset-backed securities and collateralized mortgage obligations
(2)
(3)
|
|
|
10,853
|
|
|
|
|
|
|
|
(2,376
|
)
|
|
|
8,477
|
|
Corporate notes and bonds
(4)
|
|
|
5,750
|
|
|
|
5
|
|
|
|
|
|
|
|
5,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,306
|
|
|
$
|
62
|
|
|
$
|
(2,376
|
)
|
|
$
|
45,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Various U.S. equities and other investments managed under mutual funds.
|
(2)
|
Included in our asset-backed securities and collateralized mortgage obligations is approximately $6.3 million of commercial paper secured by mortgaged-backed
securities.
|
(3)
|
Asset-backed and mortgage-backed securities with maturities of up to 26 years.
|
(4)
|
Corporate notes and bonds with maturities of three years or less.
|
(5)
|
Commercial paper with maturities less than one year.
|
75
The following is a summary of our available-for-sale securities at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
(In thousands)
|
|
Mutual funds
(1)
|
|
$
|
1,975
|
|
|
$
|
|
|
|
$
|
(52
|
)
|
|
$
|
1,923
|
|
Commercial paper
(5)
|
|
|
123,195
|
|
|
|
22
|
|
|
|
(7
|
)
|
|
|
123,210
|
|
Asset-backed securities and collateralized mortgage obligations
(2)(3)
|
|
|
12,489
|
|
|
|
|
|
|
|
(4,358
|
)
|
|
|
8,131
|
|
Corporate notes and bonds
(4)
|
|
|
5,750
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
5,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,409
|
|
|
$
|
22
|
|
|
$
|
(4,425
|
)
|
|
$
|
139,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Various U.S. equities and other investments managed under mutual funds.
|
(2)
|
Included in our asset-backed securities and collateralized mortgage obligations is approximately $7.4 million of commercial paper secured by mortgaged-backed
securities.
|
(3)
|
Asset-backed and mortgage-backed securities with maturities of up to 26 years.
|
(4)
|
Corporate notes and bonds with maturities of three years or less.
|
(5)
|
Commercial paper with maturities less than one year.
|
Proceeds, gross realized gains and gross realized losses on sales of available-for-sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
Gross
Realized
Gains
|
|
|
Gross
Realized
Losses
|
|
|
|
(In thousands)
|
|
Year Ended December 31, 2012
|
|
$
|
191,298
|
|
|
$
|
|
|
|
$
|
|
|
Year Ended December 31, 2011
|
|
$
|
693,424
|
|
|
$
|
|
|
|
$
|
20
|
|
Year Ended December 31, 2010
|
|
$
|
1,363,803
|
|
|
$
|
|
|
|
$
|
91
|
|
NOTE 6DERIVATIVE FINANCIAL INSTRUMENTS
We enter into derivative financial instruments primarily to hedge certain firm purchase, sale commitments and
forecasted transactions 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: (1) deferred as a component of AOCI until the hedged item is recognized in earnings; (2) offset against the change in fair value of the hedged firm commitment through earnings; or (3) recognized immediately in
earnings. At inception and on an ongoing basis, we assess the hedging relationship to determine its effectiveness in offsetting changes in cash flows or fair value attributable to the hedged risk. We exclude from our assessment of effectiveness the
portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. The ineffective portion of a derivatives change in fair value and any portion excluded from the
assessment of effectiveness are immediately recognized in earnings. Gains and losses on derivative financial instruments that are immediately recognized in earnings are included as a component of gain (loss) on foreign currency-net in our
consolidated statements of income. At December 31, 2012, we had designated the majority of our foreign currency forward contracts as cash flow hedging instruments.
At December 31, 2012, we had deferred approximately $11.7 million of net gains on these derivative financial instruments in AOCI, and we expect to reclassify approximately $0.2 million of the net
deferred gains out of AOCI by December 31, 2013.
76
At December 31, 2012, the majority of our derivative financial instruments consisted of
foreign currency forward contracts. The notional value of our outstanding derivative contracts totaled $1.6 billion at December 31, 2012, with maturities extending to December 2017. Of this amount, approximately $896.4 million is associated
with various foreign currency expenditures we expect to incur on one of our EPCI projects. These instruments consist of contracts to purchase or sell foreign-denominated currencies. At December 31, 2012, the fair value of these contracts was in
a net asset position totaling $21.4 million. The fair value of outstanding derivative instruments is determined using observable financial market inputs, such as quoted market prices, and is classified as Level 2 in nature.
The following tables summarize our derivative financial instruments:
Asset and Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Accounts receivableother
|
|
$
|
12,311
|
|
|
$
|
2,765
|
|
Other assets
|
|
|
13,770
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Total asset derivatives
|
|
$
|
26,081
|
|
|
$
|
2,831
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,604
|
|
|
$
|
6,891
|
|
Other liabilities
|
|
|
1,043
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
Total liability derivatives
|
|
$
|
4,647
|
|
|
$
|
7,860
|
|
|
|
|
|
|
|
|
|
|
The Effects of Derivative Instruments on our Financial Statements
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
|
Amount of gain recognized in other comprehensive income attributable to MII
|
|
$
|
1,576
|
|
|
$
|
4,505
|
|
Income reclassified from AOCI into income: effective portion attributable to MII
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
6,213
|
|
|
$
|
430
|
|
Gain recognized in income: ineffective portion and amount excluded from effectiveness testing attributable to MII
|
|
|
|
|
|
|
|
|
Location
|
|
|
|
|
|
|
|
|
Gain on foreign currencynet
|
|
$
|
23,116
|
|
|
$
|
2,516
|
|
Credit Risk
In the event of nonperformance by counterparties to our derivative financial instruments, we may be exposed to credit-related losses. However, when possible, we enter into International Swaps and
Derivative Association agreements with our derivative counterparties to mitigate this risk. We also attempt to mitigate this risk by using highly-rated major financial institutions as counterparties. Our derivative counterparties have the benefit of
the same collateral arrangements and covenants as described under our Credit Agreement.
77
NOTE 7FAIR VALUES OF FINANCIAL INSTRUMENTS
The valuation methodologies we use to measure the fair values of our derivatives and available-for-sale securities are
as follows:
Derivatives
Level 2 derivative assets and liabilities primarily include over-the-counter forward contracts, largely consisting of foreign currency derivative instruments. Where applicable, the value of these
derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including foreign exchange forward and spot rates, interest rates and counterparty performance
risk adjustments.
At December 31, 2012, we had forward contracts outstanding to purchase or sell foreign currencies with
a total notional value of $1.6 billion and a total asset position fair value of $21.4 million.
Available-for-Sale
Securities
The following is a summary of our
available-for-sale securities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/12
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Mutual funds
|
|
$
|
2,023
|
|
|
$
|
|
|
|
$
|
2,023
|
|
|
$
|
|
|
Commercial paper
|
|
|
29,737
|
|
|
|
|
|
|
|
29,737
|
|
|
|
|
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
8,477
|
|
|
|
|
|
|
|
2,134
|
|
|
|
6,343
|
|
Corporate notes and bonds
|
|
|
5,755
|
|
|
|
|
|
|
|
5,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,992
|
|
|
$
|
|
|
|
$
|
39,649
|
|
|
$
|
6,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/11
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Mutual funds
|
|
$
|
1,923
|
|
|
$
|
|
|
|
$
|
1,923
|
|
|
$
|
|
|
U.S. Government and agency securities
|
|
|
123,210
|
|
|
|
|
|
|
|
123,210
|
|
|
|
|
|
Asset-backed securities and collateralized mortgage obligations
|
|
|
8,131
|
|
|
|
|
|
|
|
2,101
|
|
|
|
6,030
|
|
Corporate notes and bonds
|
|
|
5,742
|
|
|
|
|
|
|
|
5,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139,006
|
|
|
$
|
|
|
|
$
|
132,976
|
|
|
$
|
6,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Level 2 investments consist primarily of commercial paper, asset-backed commercial paper notes backed
by a pool of mortgage-backed securities and mutual funds. The fair value of our Level 2 investments was determined using a market approach which is based on quoted prices and other information for similar or identical instruments.
Our Level 3 investment consists of asset-backed commercial paper notes backed by a pool of mortgage-backed securities. The fair value of
this Level 3 investment was based on the calculation of an overall weighted-average valuation, using the prices of the underlying individual securities. Individual securities in the pool were valued based on market observed prices, where available.
If market prices were not available, prices of similar securities backed by similar assets were used.
78
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 years ended December 31,
2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
6,030
|
|
|
$
|
7,372
|
|
Total realized and unrealized gains
|
|
|
1,674
|
|
|
|
75
|
|
Principal repayments
|
|
|
(1,361
|
)
|
|
|
(1,417
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
6,343
|
|
|
$
|
6,030
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for other financial instruments:
Cash and cash equivalents and restricted cash and cash equivalents
. The carrying amounts that we have reported in the accompanying
consolidated balance sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values.
Longand short-term debt
. The fair value of debt instruments is classified as Level 2 within the fair value hierarchy. We base the fair values of these 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
certain of our financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Balance Sheet Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
640,147
|
|
|
$
|
640,147
|
|
|
$
|
570,854
|
|
|
$
|
570,854
|
|
Restricted cash and cash equivalents
|
|
$
|
18,116
|
|
|
$
|
18,116
|
|
|
$
|
21,962
|
|
|
$
|
21,962
|
|
Investments
|
|
$
|
45,992
|
|
|
$
|
45,992
|
|
|
$
|
139,006
|
|
|
$
|
139,006
|
|
Debt
|
|
$
|
(102,708
|
)
|
|
$
|
(106,324
|
)
|
|
$
|
(93,735
|
)
|
|
$
|
(96,187
|
)
|
Derivative contracts
|
|
$
|
21,434
|
|
|
$
|
21,434
|
|
|
$
|
(5,029
|
)
|
|
$
|
(5,029
|
)
|
NOTE 8STOCK-BASED COMPENSATION
Equity instruments are measured at fair value on the grant date. Stock-based compensation expense is generally
recognized on a straight-line basis over the requisite service periods of the awards. Compensation expense is based on awards we expect to ultimately vest. Therefore, we have reduced compensation expense for estimated forfeitures based on our
historical forfeiture rates. Our estimate of forfeitures is determined at the grant date and is revised if our actual forfeiture rate is materially different from our estimate.
79
Total compensation expense recognized for the years ended December 31, 2012, 2011 and
2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Stock options
|
|
$
|
3,984
|
|
|
$
|
3,845
|
|
|
$
|
1,724
|
|
Restricted stock awards and units
|
|
|
6,880
|
|
|
|
11,939
|
|
|
|
11,920
|
|
Performance and deferred stock units
|
|
|
4,505
|
|
|
|
2,041
|
|
|
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,369
|
|
|
$
|
17,825
|
|
|
$
|
16,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, total unrecognized estimated compensation expense related to nonvested
awards was $24.5 million. The components of the total gross unrecognized estimated compensation expense and their expected remaining weighted-average periods for expense recognition are as follows (amounts in millions; periods in years):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Weighted-
Average
Period
|
|
Stock options
|
|
$
|
5.5
|
|
|
|
1.8
|
|
Restricted stock awards
|
|
$
|
9.4
|
|
|
|
2.1
|
|
Performance shares
|
|
$
|
9.6
|
|
|
|
1.8
|
|
Stock Plans
2009 McDermott International, Inc. Long-Term Incentive Plan
In May 2009,
our shareholders approved the 2009 LTIP. Members of the Board of Directors, executive officers and key employees are eligible to participate in the plan. The Compensation Committee of the Board of Directors selects the participants for the plan. The
plan provides for a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units and performance shares and performance units, subject to satisfaction of specific
performance goals. Shares approved under the 2001 Directors and Officers Long-Term Incentive Plan (the 2001 LTIP) that were not awarded as of the date of approval of the 2009 LTIP, or shares that are subject to awards that are cancelled,
terminated, forfeited, expired or settled in cash in lieu of shares, are available for issuance under the 2009 LTIP. As part of the approval of the 2009 LTIP, 9,000,000 shares were authorized for issuance. Options to purchase shares are granted at
the fair market value (closing trading price) on the date of grant, become exercisable at such time or times as determined when granted and expire not more than seven years after the date of grant.
2001 Directors and Officers Long-Term Incentive Plan
We no longer issue awards under the 2001 LTIP. Members of the Board of Directors, executive officers, key employees and consultants were eligible to participate in the 2001 LTIP. The Compensation
Committee of the Board of Directors selected the participants for the plan. The plan provided for a number of forms of stock-based compensation, including incentive and nonqualified stock options, stock appreciation rights, restricted stock,
deferred stock units, performance shares and performance units, subject to satisfaction of specific performance goals. Options to purchase shares were granted at not less than 100% of the fair market value (average of the high and low trading price)
on the date of grant, became exercisable at such time or times as determined when granted and expire not more than seven years after the date of the grant. Options granted prior to May 2009 expire not more than ten years after the date of the grant.
Shares of common stock available to be awarded under the 2001 LTIP are available under the terms of the 2009 LTIP and have been included in the amount available for grant discussed above.
80
Thrift Plan
On November 12, 1991, 15,000,000 of the authorized and unissued shares of common stock were reserved for issuance for the employer match to the Thrift Plan. On October 11, 2002, an additional
15,000,000 of the authorized and unissued shares of common stock were reserved for issuance for the employer match to the Thrift Plan. Those employer matching contributions equal 50% of the first 6% of compensation, as defined in the Thrift Plan,
contributed by participants, and fully vest and are nonforfeitable after three years of service or upon retirement, death, involuntary termination of employment due to reduction in force or approved disability. During the year ended
December 31, 2010, we issued 282,022 shares of common stock as employer matching contributions pursuant to the Thrift Plan. Effective June 2010, we began making employer matching contributions in cash, in lieu of shares of common stock.
Accordingly, there were no shares issued under the Thrift Plan during the years ended December 31, 2012 and 2011.
B&W Spin-off Changes
In connection with the spin-off of B&W, we made certain adjustments to our stock-based compensation awards. For our employees who held performance shares issued in or prior to May 2009, we cancelled
the performance shares and issued restricted stock units in an amount equal to the fair value of the shares held immediately prior to the spin-off. For holders of restricted stock units granted in or prior to May 2010, the holder received additional
units of restricted stock to maintain the total fair value of restricted stock held immediately prior to the spin-off. For stock options granted in or prior to May 2010, we adjusted the number of options held by each holder so that the intrinsic
value of the stock options held immediately following the spin-off equaled the intrinsic value of the stock options held immediately prior to the spin-off. The adjustments to stock-based compensation awards were treated as a modification and
resulted in total incremental compensation cost of $14.5 million, of which approximately $5.2 million and $9.3 million was recognized in the years ended December 31, 2011 and 2010, respectively.
In the event of a change in control of our company, all of these stock-based compensation programs have provisions that may cause
restrictions to lapse with respect to restricted stock units and accelerate the exercisability of outstanding options.
Stock Options
The fair value of each option grant was estimated with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Risk-free interest rate
|
|
|
0.77
|
%
|
|
|
2.26
|
%
|
|
|
2.12
|
%
|
Expected volatility
|
|
|
59
|
%
|
|
|
41
|
%
|
|
|
54
|
%
|
Expected life of the option in years
|
|
|
4.60
|
|
|
|
4.60
|
|
|
|
4.64
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a
remaining term equal to the expected life of the option. The expected volatility is based on implied volatility from publicly traded options on our common stock, historical volatility of the price of our common stock and other factors. The expected
life of the option is based on observed historical patterns. The expected dividend yield is zero based on the projected annual dividend payment. This amount is zero because we have not paid cash dividends historically and do not expect to pay cash
dividends for the foreseeable future, although management continues to review and may elect to change this practice.
81
The following table summarizes activity for our stock options for the year ended
December 31, 2012 (share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Option
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding at beginning of period
|
|
|
2,263
|
|
|
$
|
10.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
760
|
|
|
|
14.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(215
|
)
|
|
|
4.42
|
|
|
|
|
|
|
|
|
|
Cancelled/expired/forfeited
|
|
|
(80
|
)
|
|
|
16.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
(1)
|
|
|
2,728
|
|
|
$
|
12.24
|
|
|
|
4.2 Years
|
|
|
$
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,581
|
|
|
$
|
9.19
|
|
|
|
1.9 Years
|
|
|
$
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Of the remaining shares subject to outstanding options, we expect approximately 1.1 million shares to vest at a weighted-average exercise price of $16.45.
|
The aggregate intrinsic value included in the table above represents the total intrinsic value that would
have been received by the option holders had all option holders exercised their options on December 31, 2012. The intrinsic value is calculated as the total number of option shares multiplied by the excess of the closing price of our common
stock on the last trading day over the exercise price of the options. This amount changes based on the fair market value of our common stock.
During the years ended December 31, 2012, 2011 and 2010, the total intrinsic value of stock options exercised was $1.9 million, $8.4 million, and $4.0 million, respectively. We recorded cash received
in the years ended December 31, 2012, 2011 and 2010 from the exercise of these stock options totaling $1.4 million, $4.8 million and $5.4 million, respectively. The weighted-average fair value of the stock options granted in the years ended
December 31, 2012, 2011 and 2010 was $6.93, $9.53 and $25.39, respectively. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was $3.6 million, $3.2 million and $1.6 million, respectively.
There were no tax benefits realized related to stock options exercised during the years ended December 31, 2012 and
2011. There were $0.8 million of actual tax benefits realized related to the stock options exercised during the year ended December 31, 2010.
Restricted Stock Awards and Units
Nonvested restricted stock awards
and changes during the year ended December 31, 2012 were as follows (share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Nonvested at beginning of period
|
|
|
1,038
|
|
|
$
|
13.02
|
|
Granted
|
|
|
764
|
|
|
|
13.16
|
|
Vested
|
|
|
(811
|
)
|
|
|
11.00
|
|
Cancelled/forfeited
|
|
|
(73
|
)
|
|
|
14.99
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period
|
|
|
918
|
|
|
$
|
14.80
|
|
|
|
|
|
|
|
|
|
|
There were no tax benefits realized related to restricted stock and restricted stock units lapsed during
the years ended December 31, 2012 and 2011. The actual tax benefit realized related to the restricted stock and restricted stock units lapsed during the year ended December 31, 2010 was $1.6 million.
82
Performance Shares
Nonvested performance share awards and changes during the year ended December 31, 2012 were as follows (share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Nonvested at beginning of period
|
|
|
188
|
|
|
$
|
41.96
|
|
Granted
|
|
|
371
|
|
|
|
22.92
|
|
Vested
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
(31
|
)
|
|
|
32.58
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period
|
|
|
528
|
|
|
$
|
29.19
|
|
|
|
|
|
|
|
|
|
|
NOTE 9INCOME TAXES
The provision for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Other than U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
125,402
|
|
|
$
|
85,474
|
|
|
$
|
39,352
|
|
Deferred
|
|
|
3,802
|
|
|
|
1,650
|
|
|
|
1,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
129,204
|
|
|
$
|
87,124
|
|
|
$
|
41,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic sources of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
U.S.
|
|
$
|
(82,035
|
)
|
|
$
|
(187,426
|
)
|
|
$
|
(132,673
|
)
|
Other than U.S.
|
|
|
425,165
|
|
|
|
438,717
|
|
|
|
436,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
343,130
|
|
|
$
|
251,291
|
|
|
$
|
303,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the Panama statutory federal tax rate to the consolidated effective
tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Panama federal statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
27.5
|
%
|
Non-Panama operations
|
|
|
(5.2
|
)
|
|
|
(24.7
|
)
|
|
|
(32.8
|
)
|
Effect of change in tax rates
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
12.0
|
|
Valuation allowance for deferred tax assets
|
|
|
14.2
|
|
|
|
30.7
|
|
|
|
2.9
|
|
Audit settlements and reserves
|
|
|
2.9
|
|
|
|
0.7
|
|
|
|
2.8
|
|
Other
|
|
|
0.8
|
|
|
|
2.7
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate attributable to continuing operations
|
|
|
37.7
|
%
|
|
|
34.7
|
%
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2011 the Panama tax rate was reduced to 25%.
83
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, as well as operating loss and tax credit carryforwards.
Significant components of deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension liability
|
|
$
|
5,779
|
|
|
$
|
4,030
|
|
Accrued liabilities for incentive compensation
|
|
|
13,630
|
|
|
|
8,762
|
|
Net operating loss carryforward
|
|
|
172,073
|
|
|
|
128,654
|
|
State tax credits and net operating loss carryforward
|
|
|
23,231
|
|
|
|
18,888
|
|
Long-term contracts
|
|
|
10,791
|
|
|
|
31,857
|
|
Other
|
|
|
8,606
|
|
|
|
5,316
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
234,110
|
|
|
|
197,507
|
|
Valuation allowance for deferred tax assets
|
|
|
(208,061
|
)
|
|
|
(160,266
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
26,049
|
|
|
$
|
37,241
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
14,072
|
|
|
$
|
14,223
|
|
Prepaid drydock
|
|
|
6,633
|
|
|
|
8,018
|
|
Investments in joint ventures and affiliated companies
|
|
|
8,988
|
|
|
|
14,810
|
|
Unrealized exchange gains and other
|
|
|
3,424
|
|
|
|
3,410
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
33,117
|
|
|
$
|
40,461
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(7,068
|
)
|
|
$
|
(3,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Deferred tax assets and liabilities in the accompanying consolidated balance sheets include:
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
9,765
|
|
|
$
|
11,931
|
|
Noncurrent deferred tax assets
|
|
$
|
4,180
|
|
|
$
|
6,227
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,945
|
|
|
$
|
18,158
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities
|
|
$
|
10,758
|
|
|
$
|
13,187
|
|
Noncurrent deferred tax liabilities
|
|
|
10,255
|
|
|
|
8,191
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,013
|
|
|
$
|
21,378
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(7,068
|
)
|
|
$
|
(3,220
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, we had a valuation allowance of $208.1 million for deferred tax assets
that we expect cannot be realized through carrybacks, future reversals of existing taxable temporary differences or based on our estimate of future taxable income. We believe that our remaining deferred tax assets will more likely than not be
realized through carrybacks, future reversals of existing taxable temporary differences and future taxable income. Any changes to our estimated valuation allowance could be material to our consolidated financial statements.
84
We have foreign net operating loss carryforwards of $277.8 million available to offset
future taxable income in foreign jurisdictions. Of the foreign net operating loss carryforwards, $12.4 million is scheduled to expire in years 2013 to 2015. The foreign net operating losses have a valuation allowance of $67.1 million against
the related deferred taxes. We have U.S. federal net operating loss carryforwards of approximately $316.0 million, which includes $16.2 million for which the benefit will be recorded in APIC when realized, and carry an $104.9 million valuation
allowance against the related deferred taxes. The U.S. federal net operating loss carryforwards are scheduled to expire in years 2023 to 2032. We have state net operating losses of $446.8 million available to offset future taxable income in
states where we operate. The state net operating loss carryforwards begin to expire in 2013. We are carrying a valuation allowance of $23.2 million against the deferred tax asset related to the state loss carryforwards. We also have an approximate
$12.9 million valuation allowance against other deferred tax assets.
We have provided $10.7 million of taxes on earnings we
intend to remit. All other earnings are considered permanently reinvested. We would be subject to withholding taxes if we were to distribute these permanently reinvested earnings from our U.S. subsidiaries and certain foreign subsidiaries. At
December 31, 2012, the undistributed earnings of these subsidiaries were $213.7 million. Unrecognized deferred income tax liabilities, including withholding taxes, of approximately $3.9 million would be payable upon distribution of
these earnings.
We conduct business globally and, as a result, we or one or more of our subsidiaries file income tax returns
in a number of jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Indonesia, Singapore, Saudi Arabia, Kuwait, India, Qatar,
Azerbaijan and the United States. With few exceptions, we are no longer subject to tax examinations for years prior to 2008. U.S. state income tax returns are generally subject to examination for a period of three to five years after filing the
respective returns. We do not have any U.S. state returns under examination for years prior to 2008.
A reconciliation of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of period
|
|
$
|
31,664
|
|
|
$
|
26,412
|
|
|
$
|
59,113
|
|
Increases based on tax positions taken in the current year
|
|
|
10,830
|
|
|
|
8,197
|
|
|
|
3,511
|
|
Increases based on tax positions taken in prior years
|
|
|
158
|
|
|
|
2,590
|
|
|
|
920
|
|
Decreases based on tax positions taken in prior years
|
|
|
(1,465
|
)
|
|
|
(473
|
)
|
|
|
(875
|
)
|
Unrecognized tax benefits transferred to discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(35,920
|
)
|
Decreases due to settlements with tax authorities
|
|
|
|
|
|
|
(2,697
|
)
|
|
|
(95
|
)
|
Decreases due to lapse of applicable statute of limitation
|
|
|
(671
|
)
|
|
|
(2,365
|
)
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
40,516
|
|
|
$
|
31,664
|
|
|
$
|
26,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The entire balance of unrecognized tax benefits at December 31, 2012 would reduce our effective tax
rate if recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.
During the year ended December 31, 2012, we recorded liabilities of approximately $15.3 million for the payment of tax-related interest and penalties. At December 31, 2011 and 2010, we had recorded liabilities of approximately $15.3
million and $16.4 million, respectively, for the payment of tax-related interest and penalties.
NOTE 10EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to McDermott International, Inc. by the
weighted average number of common shares outstanding during the period. Diluted earnings per share
85
equals net income attributable to McDermott International, Inc. divided by the weighted average common shares outstanding adjusted for the dilutive effect of our stockbased awards.
The diluted earnings per share calculation excludes 1.8 million, 0.5 million and 0.2 million shares underlying
outstanding stock-based awards for the years ended December 31, 2012, 2011 and 2010, respectively, as they were antidilutive.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except shares and per share amounts)
|
|
Income from continuing operations less noncontrolling interest
|
|
$
|
203,156
|
|
|
$
|
151,542
|
|
|
$
|
236,566
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
3,497
|
|
|
|
(12,812
|
)
|
|
|
(34,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to McDermott International, Inc.
|
|
$
|
206,653
|
|
|
$
|
138,730
|
|
|
$
|
201,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (basic)
|
|
|
235,638,422
|
|
|
|
234,598,901
|
|
|
|
232,173,362
|
|
Effect of dilutive securities: Stock options, restricted stock and performance shares
|
|
|
1,981,266
|
|
|
|
2,441,606
|
|
|
|
3,448,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares (diluted)
|
|
|
237,619,688
|
|
|
|
237,040,507
|
|
|
|
235,622,029
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations less noncontrolling interest
|
|
|
0.86
|
|
|
|
0.65
|
|
|
|
1.02
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
(0.05
|
)
|
|
|
(0.15
|
)
|
Net income attributable to McDermott International, Inc.
|
|
|
0.88
|
|
|
|
0.59
|
|
|
|
0.87
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations less noncontrolling interest
|
|
|
0.86
|
|
|
|
0.64
|
|
|
|
1.00
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
(0.05
|
)
|
|
|
(0.15
|
)
|
Net income attributable to McDermott International, Inc.
|
|
|
0.87
|
|
|
|
0.59
|
|
|
|
0.85
|
|
NOTE 11SEGMENT REPORTING
We report our financial results under a geographic-based reporting structure, which coincides with how our financial
information is reviewed and evaluated on a regular basis by our chief operating decision maker. We operate in four primary operating segments, which consist of Asia Pacific, Atlantic, Caspian and the Middle East. The Caspian and Middle East
operating segments are aggregated into the Middle East reporting segment due to the proximity of regions and similarities in the nature of services provided, economic characteristics and oversight responsibilities. Accordingly, we have three
reporting segments consisting of Asia Pacific, Atlantic and the Middle East. We also report certain corporate and other non-operating activities under the heading Corporate and Other. Corporate and Other primarily reflects corporate
personnel and activities, incentive compensation programs and other costs, which are generally fully allocated to our operating segments.
86
We account for intersegment sales at prices that we generally establish by reference to
similar transactions with unaffiliated customers. Reporting segments are measured based on operating income, which is defined as revenues reduced by total costs and expenses and equity in loss of unconsolidated affiliates.
1. Information about Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
1,575,682
|
|
|
$
|
1,898,033
|
|
|
$
|
870,410
|
|
Atlantic
|
|
|
474,061
|
|
|
|
267,019
|
|
|
|
183,001
|
|
Middle East
|
|
|
1,591,881
|
|
|
|
1,280,058
|
|
|
|
1,350,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
(1)
|
|
$
|
3,641,624
|
|
|
$
|
3,445,110
|
|
|
$
|
2,403,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
242,148
|
|
|
$
|
202,969
|
|
|
$
|
88,012
|
|
Atlantic
|
|
|
(66,883
|
)
|
|
|
(174,152
|
)
|
|
|
(89,692
|
)
|
Middle East
|
|
|
144,062
|
|
|
|
221,906
|
|
|
|
316,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
319,327
|
|
|
$
|
250,723
|
|
|
$
|
314,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
219,920
|
|
|
$
|
86,081
|
|
|
$
|
25,345
|
|
Atlantic
|
|
|
32,699
|
|
|
|
147,062
|
|
|
|
100,673
|
|
Middle East
|
|
|
29,736
|
|
|
|
35,762
|
|
|
|
47,851
|
|
Corporate and Other
|
|
|
3,955
|
|
|
|
13,716
|
|
|
|
12,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
286,310
|
|
|
$
|
282,621
|
|
|
$
|
186,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
23,797
|
|
|
$
|
25,698
|
|
|
$
|
19,002
|
|
Atlantic
|
|
|
24,589
|
|
|
|
15,348
|
|
|
|
17,681
|
|
Middle East
|
|
|
31,119
|
|
|
|
28,740
|
|
|
|
24,357
|
|
Corporate and Other
|
|
|
6,935
|
|
|
|
12,605
|
|
|
|
15,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
86,440
|
|
|
$
|
82,391
|
|
|
$
|
76,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drydock amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
9,487
|
|
|
$
|
10,831
|
|
|
$
|
10,728
|
|
Atlantic
|
|
|
13,569
|
|
|
|
11,165
|
|
|
|
12,968
|
|
Middle East
|
|
|
2,489
|
|
|
|
2,571
|
|
|
|
2,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total drydock amortization
|
|
$
|
25,545
|
|
|
$
|
24,567
|
|
|
$
|
26,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Intercompany transactions were not significant for the years ended December 31, 2012 and 2011. For the year ended December 31, 2010, intercompany
transactions of $20,129 in our Atlantic segment were eliminated at the consolidated level.
|
87
2. Information about our most significant Customers
Our customers, which significantly impacted our segments during the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
% of
Consolidated
Revenues
|
|
|
Reportable
Segment
|
|
Year Ended December 31, 2012:
|
|
|
|
|
|
|
|
|
Exxon Mobil Corporation
|
|
|
24
|
%
|
|
|
Asia Pacific
|
|
Saudi Aramco
|
|
|
22
|
%
|
|
|
Middle East
|
|
BHP Billiton Petroleum Pty Ltd.
|
|
|
10
|
%
|
|
|
Asia Pacific
|
|
|
|
|
Year Ended December 31, 2011:
|
|
|
|
|
|
|
|
|
Exxon Mobil Corporation
|
|
|
36
|
%
|
|
|
Asia Pacific
|
|
Saudi Aramco
|
|
|
24
|
%
|
|
|
Middle East
|
|
Chevron Corporation
|
|
|
10
|
%
|
|
|
Asia Pacific
|
|
|
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
|
|
Saudi Aramco
|
|
|
40
|
%
|
|
|
Middle East
|
|
Chevron Corporation
|
|
|
15
|
%
|
|
|
Asia Pacific
|
|
Exxon Mobil Corporation
|
|
|
10
|
%
|
|
|
Asia Pacific
|
|
3. Information about our Service Lines and Operations in Different Geographic Areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Service line revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Operations
|
|
$
|
1,885,143
|
|
|
$
|
1,907,512
|
|
|
$
|
883,559
|
|
Fabrication Operations
|
|
|
487,215
|
|
|
|
446,426
|
|
|
|
412,048
|
|
Project Services and Engineering Operations
|
|
|
337,774
|
|
|
|
343,357
|
|
|
|
255,298
|
|
Procurement Activities
|
|
|
931,492
|
|
|
|
747,815
|
|
|
|
852,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,641,624
|
|
|
$
|
3,445,110
|
|
|
$
|
2,403,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia
|
|
$
|
1,485,503
|
|
|
$
|
1,398,868
|
|
|
$
|
373,864
|
|
Saudi Arabia
|
|
|
1,057,930
|
|
|
|
955,929
|
|
|
|
966,504
|
|
Azerbaijan
|
|
|
268,419
|
|
|
|
5,022
|
|
|
|
4,899
|
|
United Arab Emirates
|
|
|
156,395
|
|
|
|
139,400
|
|
|
|
13,613
|
|
Equatorial Guinea
|
|
|
146,912
|
|
|
|
80,196
|
|
|
|
|
|
United States
|
|
|
119,785
|
|
|
|
57,472
|
|
|
|
108,377
|
|
India
|
|
|
98,305
|
|
|
|
94,503
|
|
|
|
3,868
|
|
Brazil
|
|
|
87,597
|
|
|
|
53,263
|
|
|
|
57,128
|
|
Malaysia
|
|
|
67,553
|
|
|
|
2,876
|
|
|
|
52,705
|
|
Trinidad
|
|
|
63,367
|
|
|
|
24,863
|
|
|
|
18,382
|
|
Vietnam
|
|
|
11,771
|
|
|
|
127,954
|
|
|
|
43,528
|
|
Qatar
|
|
|
9,910
|
|
|
|
83,028
|
|
|
|
352,508
|
|
Thailand
|
|
|
7,580
|
|
|
|
261,040
|
|
|
|
351,275
|
|
Other Countries
|
|
|
60,597
|
|
|
|
160,696
|
|
|
|
57,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,641,624
|
|
|
$
|
3,445,110
|
|
|
$
|
2,403,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
4. Information about our Segment Assets and Property, Plant and Equipment by Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
1,402,923
|
|
|
$
|
934,134
|
|
|
$
|
564,403
|
|
Atlantic
|
|
|
536,734
|
|
|
|
419,258
|
|
|
|
265,607
|
|
Middle East
|
|
|
1,006,284
|
|
|
|
1,065,478
|
|
|
|
1,302,398
|
|
Corporate and Other
|
|
|
387,686
|
|
|
|
515,176
|
|
|
|
378,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
3,333,627
|
|
|
|
2,934,046
|
|
|
|
2,511,377
|
|
Total assets attributable to discontinued operations
|
|
|
|
|
|
|
58,768
|
|
|
|
87,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,333,627
|
|
|
$
|
2,992,814
|
|
|
$
|
2,598,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
(
2
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Singapore
|
|
$
|
324,106
|
|
|
$
|
139,258
|
|
|
|
|
|
Australia
|
|
|
212,955
|
|
|
|
63,065
|
|
|
|
|
|
United States
|
|
|
201,815
|
|
|
|
69,552
|
|
|
|
|
|
Indonesia
|
|
|
144,322
|
|
|
|
144,274
|
|
|
|
|
|
United Arab Emirates
|
|
|
110,292
|
|
|
|
322,233
|
|
|
|
|
|
Saudi Arabia
|
|
|
102,334
|
|
|
|
131,637
|
|
|
|
|
|
Mexico
|
|
|
61,390
|
|
|
|
65,039
|
|
|
|
|
|
Brazil
|
|
|
52,955
|
|
|
|
58,780
|
|
|
|
|
|
Spain
|
|
|
15,159
|
|
|
|
89,539
|
|
|
|
|
|
Other Countries
|
|
|
56,463
|
|
|
|
18,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
1,281,791
|
|
|
$
|
1,101,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Our marine vessels are included in the country in which they were located as of year-end.
|
5. Information about our Unconsolidated Affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Equity in loss of unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
(10,123
|
)
|
|
$
|
(4,432
|
)
|
|
$
|
(1,663
|
)
|
Atlantic
|
|
|
(6,016
|
)
|
|
|
(23
|
)
|
|
|
(5,408
|
)
|
Corporate and Other
|
|
|
(580
|
)
|
|
|
(530
|
)
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity in loss of unconsolidated affiliates
|
|
$
|
(16,719
|
)
|
|
$
|
(4,985
|
)
|
|
$
|
(7,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
31,377
|
|
|
$
|
37,855
|
|
|
|
|
|
Atlantic
|
|
|
3,909
|
|
|
|
1,804
|
|
|
|
|
|
Corporate and Other
|
|
|
2,149
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments in unconsolidated affiliates
|
|
$
|
37,435
|
|
|
$
|
42,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our consolidated balance sheets include accounts receivables attributable to our unconsolidated
affiliates of approximately $15.2 million and $6.1 million as of December 31, 2012 and 2011, respectively.
NOTE 12COMMITMENTS AND CONTINGENCIES
Investigations and Litigation
On or about August 23, 2004, a declaratory judgment action entitled
Certain Underwriters at Lloyds London, et al. v. J. Ray McDermott, Inc. et al.
, was filed by certain underwriters at
Lloyds, London and
89
Threadneedle Insurance Company Limited (the London Insurers), in the 23rd Judicial District Court, Assumption Parish, Louisiana, against MII, J. Ray McDermott, Inc. (JRMI)
and two insurer defendants, Travelers and INA, seeking a declaration that the London Insurers have no obligation to indemnify MII and JRMI for certain bodily injury claims, including claims for asbestos and welding rod fume personal injury which
have been filed by claimants in various state courts. Additionally, Travelers filed a cross-claim requesting a declaration of non-coverage in approximately 20 underlying matters. This proceeding was stayed by the Court on January 3, 2005. We do
not believe an adverse judgment or material losses in this matter are probable, and, accordingly, we have not accrued any amounts relating to this contingency. Although there is a possibility of an adverse judgment, the amount or potential range of
loss is not estimable at this time. The insurer-plaintiffs in this matter commenced this proceeding in a purported attempt to obtain a determination of insurance coverage obligations for occupational exposure and/or environmental matters for which
we have given notice that we could potentially seek coverage. Because estimating losses would require, for every matter, known and unknown, on a case by case basis, anticipating what impact on coverage a judgment would have and a determination of an
otherwise expected insured value, damages cannot be reasonably estimated.
On December 16, 2005, a proceeding entitled
Antoine, et al. vs. J. Ray McDermott, Inc., et al.(Antoine Suit),
was filed in the 24th Judicial District Court, Jefferson Parish, Louisiana, by approximately 88 plaintiffs against approximately 215 defendants, including our
subsidiaries formerly known as JRMI and Delta Hudson Engineering Corporation (DHEC), generally alleging injuries for exposure to asbestos, and unspecified chemicals, metals and noise while the plaintiffs were allegedly employed as Jones
Act seamen. This case was dismissed by the Court on January 10, 2007, without prejudice to plaintiffs rights to refile their claims. On January 29, 2007, 21 plaintiffs from the dismissed
Antoine Suit
filed a matter entitled
Boudreaux, et al. v. McDermott, Inc., et al.
(the Boudreaux Suit), in the United States District Court for the Southern District of Texas, against JRMI and our subsidiary formerly known as McDermott Incorporated, and approximately
30 other employer defendants, alleging Jones Act seaman status and generally alleging exposure to welding fumes, solvents, dyes, industrial paints and noise. The Boudreaux Suit was transferred to the United States District Court for the Eastern
District of Louisiana on May 2, 2007, which entered an order in September 2007 staying the matter until further order of the Court due to the bankruptcy filing of one of the co-defendants. Additionally, on January 29, 2007, another 43
plaintiffs from the dismissed
Antoine Suit
filed a matter entitled
Antoine, et al. v. McDermott, Inc., et al. (
the New Antoine Suit
),
in the 164th Judicial District Court for Harris County, Texas, against JRMI, our
subsidiary formerly known as McDermott Incorporated and approximately 65 other employer defendants and 42 maritime products defendants, alleging Jones Act seaman status and generally alleging personal injuries for exposure to asbestos and noise. On
April 27, 2007, the District Court entered an order staying all activity and deadlines in the New Antoine Suit, other than service of process and answer/appearance dates, until further order of the Court. The New Antoine Suit plaintiffs filed a
motion to lift the stay on February 20, 2009, which is pending before the Texas District Court. The plaintiffs seek monetary damages in an unspecified amount in both the Boudreaux Suit and New Antoine Suit cases and attorneys fees in the
New Antoine Suit. We cannot reasonably estimate the extent of a potential judgment against us, if any, and we intend to vigorously defend these suits.
Additionally, due to the nature of our business, we and our affiliates are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including, among
other things:
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performanceor warranty-related matters under our customer and supplier contracts and other business arrangements; and
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workers compensation claims, Jones Act claims, occupational hazard claims, including asbestos-exposure claims, premises liability claims and
other claims.
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Based upon our prior experience, we do not expect that any of these other litigation
proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows; however, because of the inherent uncertainty of litigation and, in some cases, the availability and
amount of potentially applicable insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations
or cash flows for the fiscal period in which that resolution occurs.
90
Environmental Matters
We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (CERCLA). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of
the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this
may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate
liability for the various sites will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows in any given year.
At December 31, 2012 and 2011, we had total environmental reserves of $0.6 million and $1.3 million, respectively, which were included in current liabilities. Inherent in the estimates of those
reserves and recoveries are our expectations regarding the levels of contamination, remediation costs and recoverability from other parties, which may vary significantly as remediation activities progress. Accordingly, changes in estimates could
result in material adjustments to our operating results, and the ultimate loss may differ materially from the amounts we have provided for in our consolidated financial statements.
During the year ended December 31, 2011, we recovered $2.0 million of environmental reserves associated with the April 2006 sale of
our former Mexican subsidiary, Talleres Navales del Golfo, S.A. de C.V. (TNG). TNG was reported as a discontinued operation in our consolidated financial statements for the year ended December 31, 2006 and, accordingly, the recovery
of this reserve is included in income from discontinued operations, net of tax, for the year ended December 31, 2011.
Contracts Containing Liquidated Damages Provisions
Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a
claim under these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. In many cases in which we have historically had potential exposure for liquidated damages, such damages
ultimately were not asserted by our customers. As of December 31, 2012, it is possible that we may incur liabilities for liquidated damages aggregating approximately $100.7 million, of which approximately $11.0 million has been recorded in our
financial statements, based on our actual or projected failure to meet certain specified contractual milestone dates. The dates for which these potential liquidated damages could arise extend to July 2013. We believe we will be successful in
obtaining schedule extensions or other customer-agreed changes that should resolve the potential for additional liquidated damages. Accordingly, we believe that no amounts for these potential liquidated damages in excess of the amounts currently
reflected in our financial statements are probable of being paid by us. However, we may not achieve relief on some or all of the issues.
Contractual Obligations
At December 31, 2012, we had outstanding
obligations, related to our new vessel construction contracts on the
LV 108
and
DLV 2000
of approximately $413.0 million, with approximately $146.0 million, $206.0, and $61.0 million due in the years 2013, 2014, and 2015, respectively.
91
Operating Leases
Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at
December 31, 2012 are as follows (in thousands):
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Fiscal Year Ending December 31,
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Amount
|
|
2013
|
|
$
|
16,988
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|
2014
|
|
$
|
15,573
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|
2015
|
|
$
|
14,674
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|
2016
|
|
$
|
12,103
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|
2017
|
|
$
|
9,103
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Thereafter
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$
|
150,148
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Total rental expense for the years ended December 31, 2012, 2011 and 2010 was $60.7 million, $53.9
million and $47.9 million, respectively. These expense amounts include contingent rentals and are net of sublease income, neither of which is material.
NOTE 13QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the years ended December 31,
2012 and 2011:
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Quarter Ended
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March 31,
2012
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June 30,
2012
(1)
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September 30,
2012
(2
)
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December 31,
2012
(3
)
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(In thousands, except per share amounts)
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Revenues
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|
$
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727,678
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$
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889,248
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|
$
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1,028,745
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|
|
$
|
995,953
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|
Operating income
|
|
$
|
80,176
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|
|
$
|
79,382
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|
|
$
|
82,481
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|
|
$
|
77,288
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|
Income from continuing operations, less noncontrolling interest
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|
$
|
59,261
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|
|
$
|
52,739
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|
|
$
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50,612
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|
|
$
|
40,544
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Income (loss) from discontinued operations, net of tax
|
|
|
3,497
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
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|
$
|
62,758
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|
|
$
|
52,739
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|
|
$
|
50,612
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|
$
|
40,544
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
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Per Share Data
Quarter
Ended
|
|
|
|
March 31,
2012
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|
|
June 30,
2012
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|
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September 30,
2012
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|
|
December 31,
2012
|
|
Basic earnings per common share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from continuing operations, less noncontrolling interest
|
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|
0.25
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|
|
|
0.22
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|
|
|
0.21
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|
|
|
0.17
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|
Income (loss) from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.27
|
|
|
|
0.22
|
|
|
|
0.21
|
|
|
|
0.17
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|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from continuing operations, less noncontrolling interest
|
|
|
0.25
|
|
|
|
0.22
|
|
|
|
0.21
|
|
|
|
0.17
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.26
|
|
|
|
0.22
|
|
|
|
0.21
|
|
|
|
0.17
|
|
(1)
|
Operating income for the quarter ended June 30 2012 was influenced by increased fabrication activities partially offset by lower project close-outs and
settlements.
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(2)
|
Revenues for the quarter ended September 30, 2012 were influenced by increased marine activity on certain of our Asia Pacific projects.
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(3)
|
Operating income for the quarter ended December 31, 2012 was influenced by significant cost savings on marine installation activities on an EPCI
project, partially offset by project losses of approximately $52.0 million
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92
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recognized across each segment. Income from continuing operations, less non-controlling interests was impacted by an increase in our provision for income taxes and sales, general &
administrative expenses, partially offset by an increase in gain (loss) on foreign currency - net.
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|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
2011
|
|
|
June 30,
2011
(2)
|
|
|
September 30,
2011
(3)
|
|
|
December 31,
2011
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenues
|
|
$
|
899,240
|
|
|
$
|
849,801
|
|
|
$
|
879,894
|
|
|
$
|
816,175
|
|
Operating income
|
|
$
|
100,298
|
|
|
$
|
83,779
|
|
|
$
|
35,216
|
|
|
$
|
31,430
|
|
Income from continuing operations, less noncontrolling interest
|
|
$
|
68,758
|
|
|
$
|
63,718
|
|
|
$
|
9,764
|
|
|
$
|
9,302
|
|
Income (loss) from discontinued operations, net of tax
(1)
|
|
|
1,662
|
|
|
|
3,610
|
|
|
|
1,187
|
|
|
|
(19,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
70,420
|
|
|
$
|
67,328
|
|
|
$
|
10,951
|
|
|
$
|
(9,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
Quarter
Ended
|
|
|
|
March 31,
2011
|
|
|
June 30,
2011
|
|
|
September 30,
2011
|
|
|
December 31,
2011
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less noncontrolling interest
|
|
|
0.29
|
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
(0.08
|
)
|
Net income
|
|
|
0.30
|
|
|
|
0.29
|
|
|
|
0.05
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less noncontrolling interest
|
|
|
0.29
|
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
0.04
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
(0.08
|
)
|
Net income
|
|
|
0.30
|
|
|
|
0.28
|
|
|
|
0.05
|
|
|
|
(0.04
|
)
|
(1)
|
See Note 2 in the notes to the consolidated financial statements for a discussion of discontinued operations and other items.
|
(2)
|
Operating income for the June 30, 2011 quarter was influenced by a $49.1 million decline in our Middle East segment as a result of reduced marine activity and the
substantial completion of several higher margin projects in Saudi Arabia for which the marine activities were ongoing during the 2010 quarter but were complete prior to the 2011 quarter.
|
(3)
|
Operating income for the September 30, 2011 quarter was influenced by the $75.4 million decline in the Middle East segment. The Middle East decline was primarily
driven by reduced fabrication and marine activity levels, lower change orders, project close-outs and settlements on completed contracts. In addition, the September quarter was impacted by approximately $50.0 million of project charges recognized
across segments.
|