See accompanying Notes to these Condensed Consolidated Financial Statements.
See accompanying Notes to these Condensed Consolidated Financial Statements.
See accompanying Notes to these Condensed Consolidated Financial Statements.
See accompanying Notes to these Condensed Consolidated Financial Statements.
See accompanying Notes to these Condensed Consolidated Financial Statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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6
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
—
NATURE OF OPERATIONS AND ORGANIZATION
Nature of Operations
McDermott International, Inc. (“McDermott,” “MDR,” “we,” “our,” “us” or the “Company”), a corporation incorporated under the laws of the Republic of Panama in 1959, is a fully-integrated provider of engineering, procurement, construction and installation (“EPCI”) and technology solutions to the energy industry. On May 10, 2018, we completed our combination with Chicago Bridge & Iron Company N.V. (“CB&I”) through a series of transactions (the “Combination”) (see Note 3,
Business Combination,
for further discussion).
We design and build end-to-end infrastructure and technology solutions, from the wellhead to the storage tank, to transport and transform oil and gas into a variety of products. Our proprietary technologies, integrated expertise and comprehensive solutions are utilized for offshore, subsea, power, liquefied natural gas (“LNG”) and downstream energy projects around the world. Our customers include national, major integrated and other oil and gas companies as well as producers of petrochemicals and electric power, and we operate in most major energy producing regions throughout the world. We execute our contracts through a variety of methods, principally fixed-price, but also including cost reimbursable, cost-plus, day-rate and unit-rate basis or some combination of those methods.
Organization
Our business is organized into five operating groups, which represent our reportable segments consisting of: North, Central and South America (“NCSA”); Europe, Africa, Russia and Caspian (“EARC”); the Middle East and North Africa (“MENA”); Asia Pacific (“APAC”); and Technology. See Note 21,
Segment Reporting,
for further discussion.
NOTE 2
—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Consolidation
The accompanying Condensed Consolidated Financial Statements (the “Financial Statements”) are unaudited and have been prepared from our books and records in accordance with Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements and are not necessarily indicative of results of operations for a full year. Therefore, they should be read in conjunction with the Financial Statements and Notes thereto included in our Current Report on Form 8-K filed with the SEC on July 31, 2018 (the “July 31 Form 8-K”).
These Financial Statements reflect all wholly owned subsidiaries and those entities which we are required to consolidate. See the “Joint Venture and Consortium Arrangements” section of this footnote for further discussion of our consolidation policy for those entities that are not wholly owned. In the opinion of our management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Intercompany balances and transactions are eliminated in consolidation. Values presented within tables (excluding per share data) are in millions and may not sum due to rounding.
Reclassifications
In the second quarter of 2018, we made certain classification changes, as well as reclassifications to our historical financial statements to align with our current presentation as follows:
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Bidding and Proposal Costs—
In conjunction with the Combination, we realigned our commercial personnel within the operating groups for the combined company. As a result of the realignment, beginning in the second quarter of 2018, we included our bid and proposal expenses in Cost of operations in our Condensed Consolidated Statements of Operations (the “Statements of Operations”) to better represent how those costs are managed and controlled. For periods reported prior to the second quarter of 2018, bid and proposal expenses are included in Selling, general and administrative (“SG&A”) expenses. Our Cost of operations for the three months ended June 30, 2018 includes $17 million of bid and proposal expenses. Our SG&A expense for the six months ended June 30, 2018 includes bid and proposal expenses of $10 million incurred in the first quarter of 2018, and the three and six months ended June 30, 2017 includes bid and proposal expenses of $9 million and $16 million, respectively.
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7
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Income
(
L
oss
)
from Investments in Unconsolidated Affiliates
—
Our Statements of Operations for the three and six months ended June 30,
2017 reflect the reclassification of $3 million and $6 million, respectively, of
Loss from investments in unconsolidated
affiliates
associated with our ongoing io
Oil and Gas and Qingdao McDermott Wuchuan Offshore Engineering Company Ltd
.
joint ventures to
O
perating income to conform to our current presentation. Previously, results from these unconsolidated joint ventures we
re presented below
O
perating income
,
as we did not consider the activities of the unconsolidated joint ventures to be integral to our operations.
Based on expected expansion in activity of these unconsolidated joint ventures with
us
in 2018 and in the futu
re, we now believe the activities of these unconsolidated joint ventures are integral to our ongoing operations and are most appropriately
reflected in
O
perating income.
Prior periods have been reclassified to be consistent with our 2018 presentation.
Inco
me (loss) from
investments in
unconsolidated
affiliates
that are
not integral to our
operations
will
continue to be presented below
O
perating income
. See Note
1
0
,
Joint Venture and Consortium
Arrangements
,
for further discussion of our unconsolidated joint
ventures.
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Reverse Common Stock Split
—
We amended our Amended and Restated Articles of Incorporation to effect a three-to-one reverse stock split of McDermott common stock, effective May 9, 2018. Common stock, capital in excess of par, share and per share (except par value per share, which was not affected) information for all periods presented has been recast in the Financial Statements and the accompanying Notes to reflect the reverse stock split.
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Pension and Postretirement Benefit Costs
—
In conjunction with our adoption of Accounting Standards Update (“ASU”) 2017-07, we reclassified non-service costs relating to our pension and postretirement plans from SG&A to Other non-operating income (expense) for all historical periods presented. The reclassification did not result in a material impact.
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Restructuring and Integration/Transaction Costs
—
Approximately $11 million of restructuring and integration costs and $3 million of transaction costs related to the Combination, which were previously recorded within Other operating (income) expenses, net during the three months ended March 31, 2018, were reclassified to (i) Restructuring and integration costs and (ii) Transaction costs, respectively, in our Statements of Operations for the six months ended June 30, 2018.
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Use of Estimates and Judgments
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We believe the most significant estimates and judgments are associated with: (i) revenue recognition for our contracts, including estimating costs to complete each contract and the recognition of incentive fees and unapproved change orders and claims; (ii) determination of fair value with respect to acquired assets and liabilities; (iii) fair value and recoverability assessments that must be periodically performed with respect to long-lived tangible assets, goodwill and other intangible assets; (iv) valuation of deferred tax assets and financial instruments; (v) the determination of liabilities related to self-insurance programs and income taxes; and (vi) consolidation determinations with respect to our joint venture and consortium arrangements. If the underlying estimates and assumptions upon which the Financial Statements are based change in the future, actual amounts may differ from those included in the Financial Statements.
Significant Accounting Policies
Revenue Recognition
—Our revenue is primarily derived from long-term contracts with customers, and we determine the appropriate accounting treatment for each contract at inception in accordance with ASU 2014-09 (Accounting Standards Codification (“ASC”) Topic 606),
Revenue from Contracts with Customers
. Our contracts primarily relate to: EPCI services; engineering services; construction services; pipe and steel fabrication services; engineered and manufactured products; technology licensing; and catalyst supply. An EPCI contract may also include technology licensing, and our services may be provided between or among our reportable segments.
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Contracts
—Our contracts are awarded on a competitively bid and negotiated basis, and the timing of revenue recognition may be impacted by the terms of such contracts. We use a range of contracting options, including cost-reimbursable, fixed-price and hybrid, which has both cost-reimbursable and fixed-price characteristics. Fixed-price contracts, and hybrid contracts with a more significant fixed-price component, tend to provide us with greater control over project schedule and the timing of when work is performed and costs are incurred, and, accordingly, when revenue is recognized. Cost-reimbursable contracts, and hybrid contracts with a more significant cost-reimbursable component, generally provide our customers with greater influence over the timing of when we perform our work, and, accordingly, such contracts often result in less
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8
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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pr
edictability
regarding
the timing of revenue recognition.
A c
ontract may include technology licensing
services, which may be provided between our reportable segments.
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Performance Obligations
—A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in ASC Topic 606. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our contract costs and related revenues are generally recognized over time as work progresses due to continuous transfer to the customer. To the extent a contract is deemed to have multiple performance obligations, we allocate the transaction price of the contract to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. In addition, certain contracts may be combined and deemed to be a single performance obligation. Our EPCI contracts are generally deemed to be single performance obligations and our contracts with multiple performance obligations were not material as of June 30, 2018.
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Performance Obligations Satisfied Over Time
—Revenues for our contracts that satisfy the criteria for over time recognition are recognized as the work progresses. Revenues for contracts recognized over time include revenues for contracts to provide: EPCI services; engineering services; construction services; pipe and steel fabrication services; engineered and manufactured products; technology licensing; and “non-generic” catalyst supply. We measure transfer of control utilizing an input method to measure progress of the performance obligation based upon the cost-to-cost measure of progress, with Cost of operations including direct costs, such as materials and labor, and indirect costs that are attributable to contract activity. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenues and is a significant factor in the accounting for such performance obligations. Significant estimates impacting the cost to complete each performance obligation are: costs of engineering, materials, components, equipment, labor and subcontracts; vessel costs; labor productivity; schedule durations, including subcontractor or supplier progress; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Additionally, external factors such as weather, customer requirements and other factors outside of our control, may affect the progress and estimated cost of a project’s completion and, therefore, the timing and amount of recognition of revenues and income. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates, which could result in material changes to our financial statements and related disclosures. See Note 4,
Revenue Recognition,
for further discussion.
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Performance Obligation Satisfied at a Point-in-Time Method
—Contracts with performance obligations that do not meet the criteria to be recognized over time are required to be recognized at a point-in-time, whereby revenues and gross profit are recognized only when a performance obligation is complete and a customer has obtained control of a promised asset. Revenues for contracts recognized at a point in time include our “generic” catalyst supply and certain manufactured products (which are recognized upon shipment) and certain non-engineering and non-construction oriented services (which are recognized when the services are performed). In determining when a performance obligation is complete for contracts with revenues recognized at a point-in-time, we measure transfer of control considering physical possession of the asset, legal transfer of title, significant risks and awards rewards of ownership, customer acceptance and our rights to payment. See Note 4,
Revenue Recognition,
for further discussion.
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Remaining Performance Obligations (“RPOs”)
―RPOs represent the amount of revenues we expect to recognize in the future from our contract commitments on projects. RPOs include the entire expected revenue values for joint ventures we consolidate and our proportionate value for consortiums we proportionately consolidate. We do not include expected revenues of contracts related to unconsolidated joint ventures in our RPOs, except to the extent of any subcontract awards we receive from those joint ventures. Currency risks associated with RPOs that are not mitigated within the contracts are generally mitigated with the use of foreign currency derivative (hedging) instruments, when deemed significant. However, these actions may not eliminate all currency risk exposure included within our long-term contracts. RPOs may not be indicative of future operating results, and projects included in RPOs may be cancelled, modified or otherwise altered by customers. See Note 4,
Revenue Recognition,
for further discussion.
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Variable Consideration―
Transaction prices for our contracts may include variable consideration, which includes increases to transaction prices for approved and unapproved change orders, claims, incentives and bonuses, and reductions to transaction price for liquidated damages or penalties. Change orders, claims and incentives are generally not distinct from the existing contracts due to the significant integration service provided in the context of the contract and are accounted for as a
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9
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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modification of t
he existing contract and performance obligation. We estimate variable consideration for a performance obligation at the most likely amount to which we expect to be entitled (or the most likely amount we expect to incur in the case of liquidated damages), u
tilizing estimation methods that best predict the amount of consideration to which we will be entitled (or will be incurred in the case of liquidated damages). We include variable consideration in the estimated transaction price to the extent it is probabl
e that a significant reversal of cumulative revenue
s
recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination
s
of whether to include estimated amount
s in transaction price
s
are based largely on
assessment
s
of our anticipated performance and all information (historical,
current and forecasted)
reasonably available to us. The effect of variable consideration on the transaction price of a performance obli
gation is recognized as an adjustment to revenue
s
on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in ou
r favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue. See Note
4
,
Revenue Recognition
,
for further discussion
.
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Loss Recognition
―A risk associated with our contracts is that revenues from customers may not cover increases in our costs. It is possible that current estimates could materially change for various reasons. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full immediately and reflected in Cost of operations in the Statements of Operations. It is possible that these estimates could change due to unforeseen events, which could result in adjustments to overall contract revenues and costs. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. In our Condensed Consolidated Balance Sheets (“Balance Sheets”), the provisions for estimated losses on all active uncompleted projects are included in Advance billings on contracts.
See Note 4,
Revenue Recognition,
for further discussion.
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Accounts Receivable and Contract Balances
―The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of the work, or when the services are provided or products are shipped.
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Accounts Receivable
―Any uncollected billed amounts for our performance obligations recognized over time, including contract retainages to be collected within one year, are recorded within Accounts receivable-trade, net. Any uncollected billed amounts and unbilled receivables for our performance obligations recognized at a point in time are also recorded within Accounts receivable-trade, net. Contract retainages to be collected beyond one year are recorded within Accounts receivable-long-term retainages. We establish allowances for doubtful accounts based on our assessments of collectability. See Note 7,
Accounts Receivable,
for further discussion.
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Contracts in Progress
—Projects with performance obligations recognized over time that have revenues recognized to date in excess of cumulative billings are reported within Contracts in progress on our Balance Sheets. We expect to invoice customers for all unbilled revenues, and our payment terms are generally for less than 12 months upon billing. Our contracts typically do not include a significant financing component. See Note 8,
Contracts in Progress and Advances Billings on Contracts,
for further discussion.
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Advance Billings on Contracts
—Projects with performance obligations recognized over time that have cumulative billings in excess of revenues are reported within Advance billings on contracts on our Balance Sheets. Our Advance billings on contracts balance also includes our provisions for estimated losses on all active projects. See Note 8,
Contracts in Progress and Advances Billings on Contracts
for further discussion.
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Bidding and Proposal Costs
―Bidding and proposal costs are generally charged to Cost of operations as incurred, but in certain cases their recognition may be deferred if specific probability criteria are met. We had no significant deferred bidding and proposal costs at June 30, 2018.
Goodwill
—Goodwill represents the excess of the purchase price over the fair value of net assets acquired in connection with the Combination. Goodwill is not amortized, but instead is reviewed for impairment at least annually at a reporting unit level, absent any indicators of impairment. We will perform our annual impairment assessment during the fourth quarter of each year based on balances as of October 1. We identify a potential impairment by comparing the fair value of the applicable reporting unit to its net book value, including goodwill. If the net book value exceeds the fair value of the reporting unit, we measure the impairment by comparing the carrying value of the reporting unit to its fair value.
To determine the fair value of our reporting units and test for impairment, we utilize an income approach (discounted cash flow method) as we believe this is the most direct approach to incorporate the specific economic attributes and risk profiles of our reporting units into our valuation model. We generally do not utilize a market approach, given the lack of relevant information generated by market transactions involving comparable businesses. However, to the extent market indicators of fair value become available, we
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10
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
consider such market indicators in our disc
ounted cash flow analysis and determination of fair value. See Note 3,
Business Combination
,
for further discussion.
Intangible and Other Long-Lived Assets
—Our finite-lived intangible assets resulted from the Combination and are amortized over their estimated remaining useful economic lives. Our project-related intangible assets are amortized as the applicable projects progress, customer relationships are amortized utilizing an accelerated method based on the pattern of cash flows expected to be realized, taking into consideration expected revenues and customer attrition, and our other intangibles are amortized utilizing a straight-line method. We review tangible assets and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. If a recoverability assessment is required, the estimated future cash flow associated with the asset or asset group will be compared to their respective carrying amounts to determine if an impairment exists. See Note 3,
Business Combination
,
and Note 9,
Intangible Assets,
for further discussion.
Income Taxes—
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using currently enacted income tax rates for the years in which the differences are expected to reverse. We provide for income taxes based on the tax laws and rates in the countries in which we conduct our operations. McDermott International, Inc. 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 numerous taxing jurisdictions around the world. Each of these jurisdictions has a regime of taxation that varies, not only with respect to statutory 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.
A valuation allowance (“VA”) is provided to offset any net deferred tax assets (“DTAs”) if, based on the available evidence, it is more likely than not that some or all of the DTAs will not be realized. The realization of our net DTAs depends upon our ability to generate sufficient future taxable income of the appropriate character and in the appropriate jurisdictions.
On a periodic and ongoing basis, we evaluate our DTAs (including our net operating loss (“NOL”) DTAs) and assess the appropriateness of our VAs. In assessing the need for a VA, we consider both positive and negative evidence related to the likelihood of realization of the DTAs. If, based on the weight of available evidence, our assessment indicates it is more likely than not a DTA will not be realized, we record a VA. Our assessments include, among other things, the amount of taxable temporary differences which will result in future taxable income, the value and quality of our RPOs, evaluations of existing and anticipated market conditions, analysis of recent and historical operating results (including cumulative losses over multiple periods) and projections of future results, strategic plans and alternatives for associated operations, as well as asset expiration dates, where applicable. At June 30, 2018 and December 31, 2017, we had VAs against certain U.S. and non-U.S. DTAs, as we do not believe it is more likely than not that we will utilize those DTAs. See the July 31 Form 8-K for further discussion of our VA assessments.
If the factors upon which we based our assessment of realizability of our DTAs differ materially from our expectations, including future operating results being lower than our current estimates, our future assessments could be impacted and result in an increase in VAs and increase in tax expense.
Income tax and associated interest and penalty reserves, where applicable, are recorded in those instances where we consider it more likely than not that additional tax will be due in excess of amounts reflected in income tax returns filed worldwide, irrespective of whether we have received tax assessments. We continually review our exposure to additional income tax obligations and, as further information becomes known or events occur, changes in our tax, interest and penalty reserves may be recorded within income tax expense. See Note 17,
Income Taxes,
for further discussion.
Foreign Currency
—The nature of our business activities involves the management of various financial and market risks, including those related to changes in foreign currency exchange rates. The effects of translating financial statements of foreign operations into our reporting currency are recognized as a cumulative translation adjustment in accumulated other comprehensive income (loss) (“AOCI”), which is net of tax, where applicable.
Derivative Financial Instruments
—We utilize derivative financial instruments in certain circumstances to mitigate the effects of changes in foreign currency exchange rates and interest rates, as described below.
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Foreign Currency Rate Derivatives
—We do not engage in currency speculation; however, we utilize foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency related operating exposures. We
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11
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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generally
s
eek hedge accounting treatment for contracts used to hedge operating exposures and designate them as cash flow hedges. Therefore, gains and losse
s, exclusive of credit risk and forward points (which represent the time value component of the fair value of our derivative positions), are included in AOCI until the associated underlying operating exposure impacts our earnings. Changes in the fair value
of (i) credit risk and forward points, (ii) instruments deemed ineffective during the period, and (iii) instruments that we do not designate as cash flo
w hedges are recognized within O
ther non-operating income (expense).
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Interest Rate Derivatives
—Our interest rate derivatives are limited to a swap arrangement entered into on May 8, 2018, to hedge against interest rate variability associated with $1.94 billion of our $2.26 billion “Term Facility” described in Note 12,
Debt
. The swap arrangement has been designated as a cash flow hedge as its critical terms matched those of the Term Facility at inception and through June 30, 2018. Accordingly, changes in the fair value of the swap arrangement are included in AOCI until the associated underlying exposure impacts our interest expense.
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See Note 15,
Fair Value Measurements
, and Note 16,
Derivative Financial Instruments,
for further discussion.
Joint Venture and Consortium Arrangements
—
In the ordinary course of business, we execute specific projects and conduct certain operations through joint venture, consortium and other collaborative arrangements (referred to as “joint ventures” and “consortiums”). We have various ownership interests in these joint ventures and consortiums, with such ownership typically proportionate to our decision making and distribution rights. The joint ventures and consortiums generally contract directly with their third-party customers; however, services may be performed directly by the joint ventures and consortium, us, our co-venturers, or a combination thereof.
Joint ventures and consortium net assets consist primarily of working capital and property and equipment, and assets may be restricted from use for obligations outside of the joint venture or consortiums. These joint ventures and consortiums typically have limited third-party debt or have debt that is non-recourse in nature. They may provide for capital calls to fund operations or require participants in the joint venture or consortiums to provide additional financial support, including advance payment or retention letters of credit.
Each joint venture or consortium is assessed at inception and on an ongoing basis as to whether it qualifies as a Variable Interest Entity (“VIE”) under the consolidations guidance in ASC Topic 810,
Consolidations
. A venture generally qualifies as a VIE when it (i) meets the definition of a legal entity, (ii) absorbs the operational risk of the projects being executed, creating a variable interest, and (iii) lacks sufficient capital investment from the co-venturers, potentially resulting in the joint venture or consortium requiring additional subordinated financial support to finance its future activities.
If at any time a joint venture or consortium qualifies as a VIE, we perform a qualitative assessment to determine whether we are the primary beneficiary of the VIE and therefore need to consolidate the VIE. We are the primary beneficiary if we have (i) the power to direct the economically significant activities of the VIE and (ii) the right to receive benefits from and obligation to absorb losses of the VIE. If the joint venture or consortium is a VIE and we are the primary beneficiary, or we otherwise have the ability to control the joint venture or consortium, it is consolidated. If we determine we are not the primary beneficiary of the VIE or only have the ability to significantly influence, rather than control the joint venture or consortium, it is not consolidated.
We account for unconsolidated joint ventures and consortiums using either (i) proportionate consolidation for both the Balance Sheet and Statement of Operations when we meet the applicable accounting criteria to do so, or (ii) utilize the equity method. For incorporated unconsolidated joint ventures and consortiums under the equity method, we record our share of the profit or loss of the investments, net of income taxes, in the Statements of Operations. We evaluate our equity method investments for impairment when events or changes in circumstances indicate the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, we compare the estimated fair value of our investment to the carrying value of our investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and we consider the decline in value to be other-than-temporary, the excess of the carrying value over the estimated fair value is recognized in the Financial Statements as an impairment. See Note 10,
Joint Venture and Consortium Arrangements,
for further discussion.
Transaction Costs
—Transaction costs primarily related to professional service fees (including audit, legal and advisory services) associated with the Combination. See Note 3,
Business Combination,
for further discussion.
Restructuring and Integration Costs
—Restructuring and integration costs primarily relate to costs to achieve our combination profitability initiative (“CPI”). See Note 11,
Restructuring and Integration Costs,
for further discussion.
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12
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
See Note
2
,
Basis of Presentation and Significant Accounting Policies
,
included in
the July 31 Form 8-K
,
for additional information relating to our accounting policies.
Recently Adopted Accounting Guidance
Revenue from Contracts with Customers (ASC Topic 606)—
In May 2014,
the Financial Accounting Standards Board (the “FASB”)
issued a new standard related to revenue recognition which supersedes most of the existing revenue recognition requirements in U.S. GAAP and requires entities to recognize revenue at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. It also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property, identifying performance obligations, reporting gross versus net revenue and narrow-scope revisions and practical expedients.
We adopted the new standard on January 1, 2018 (the “initial application” date):
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using the modified retrospective application, with no restatement of the comparative periods presented and a cumulative effect adjustment to retained earnings as of the date of adoption;
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•
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applying the new standard only to those contracts that are not substantially complete at the date of initial application; and
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•
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disclosing the impact of the new standard in our 2018 Financial Statements.
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Significant changes to our accounting policies as a result of adopting of the new standard are discussed below:
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We measure transfer of control utilizing an input method to measure progress for individual contracts or combinations of contracts based on the total costs incurred as applicable to each contract. Previously, under ASC Topic 605-35,
Construction-Type and Production-Type Contracts
, we generally excluded certain costs from the cost-to-cost method of measuring progress toward completion, such as significant costs for procured materials and third-party subcontractors.
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•
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Our Balance Sheets no longer reflect assets related to cost incurred in excess of cost recognized due to the inclusion of all costs incurred in our results and associated measurement of progress toward completion under our current policy.
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•
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Variable consideration, including change orders, claims, bonus, incentive fees and liquidated damages or penalties are now included in the estimated contract revenue at the most likely amount to which we expect to be entitled. We include variable consideration in the estimated transaction price to the extent we conclude that it is probable a significant revenue reversal will not occur or when the uncertainty associated with the variable consideration is resolved.
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For accounting policies and disclosures related to our adoption of ASC 606, see our significant accounting policies within this note, Note 4,
Revenue Recognition,
and Note 8,
Contracts in Progress and Advance Billing on Contracts.
Pension and Postretirement Benefits—
In March 2017, the FASB issued ASU 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
. This ASU requires bifurcation of certain components of net pension and postretirement benefit cost in the Statements of Operations.
We adopted this ASU effective as of January 1, 2018.
As a result, benefit costs, excluding any service cost component, previously included in SG&A, are now included in other non-operating income (expense), net in our Statements of Operations. All comparable periods presented have been retrospectively revised to reflect this change.
Income Taxes
—In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740):
Intra-Entity Transfers of Assets Other Than Inventory
. This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective for interim and annual periods beginning after December 15, 2017. The adoption of ASU 2016-16 during the first quarter 2018 did not have a material impact on the Financial Statements. During the three months ended June 30, 2018, we had an income tax benefit of $117 million resulting from an intra-entity transfer of assets. See Note 17,
Income Taxes,
for further discussion.
|
13
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118 to address the application of U.S. GAAP in situations in which a registrant does not have the necessary
information available, prepared
or analyzed (including computations) in reasonabl
e detail to complete the accounting for certain income tax effects of the
U.S.
Tax Cuts and Jobs Act (the “Tax Reform Act”)
,
signed into law on December 22, 2017. In March 2018, the FASB issued ASU 2018-05, which amended ASC 740 to incorporate the requirem
ents of SAB 118. We recognized the provisional tax impacts of the Tax Reform Act in the fourth quarter
of
2017.
During
the
six months ended June 30, 2018, we did not receive any additional information regarding these provisional calculations. As a result,
we continue to anticipate finalizing our analysis in connection with the completion of our tax return for 2017 to be filed in 2018.
Goodwill
—In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
. This ASU eliminates the second step of the goodwill impairment test that required a hypothetical purchase price allocation. The ASU requires that, if a reporting unit’s carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying amount of goodwill. We early adopted this ASU during the second quarter 2018. Our adoption of the standard did not have a material impact on the Financial Statements.
Accounting Guidance Issued But Not Adopted as of June 30, 2018
Financial Instruments
—In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This ASU will require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. A valuation account, allowance for credit losses, will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. This ASU is effective for interim and annual periods beginning after December 15, 2019. We are currently assessing the impact of this guidance on our future consolidated financial statements and related disclosures.
Leases
—In February 2016, the FASB issued ASU 2016-02
,
Leases (Topic 842)
. The ASU will require entities that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this ASU on our future Consolidated Financial Statements and related disclosures.
Income Taxes
—In January 2018, the FASB issued ASU 2018-02,
Reporting Comprehensive Income (Topic 220)
. This ASU gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Reform Act related to items in AOCI that the FASB refers to as having been stranded in AOCI. The standard may be applied retrospectively to each period in the year of adoption. This ASU will also require new disclosures regarding our accounting policy for releasing the tax effects in AOCI. This ASU is effective for us in the first quarter of 2019, although early adoption is permitted. We are assessing the timing of adoption of the new standard and its potential impact on our future Consolidated Financial Statements.
NOTE 3—BUSINESS COMBINATION
General
―On December 18, 2017, we entered into an agreement (as amended, the “Business Combination Agreement”) to combine our business with CB&I, an established downstream provider of industry-leading petrochemical, refining, power, gasification and gas processing technologies and solutions. On May 10, 2018 (the “Combination Date”) we completed the Combination.
Transaction Overview
―On the Combination Date, we acquired the equity of certain U.S. and non-U.S. CB&I subsidiaries that owned CB&I’s technology business, as well as certain intellectual property rights, for $2.87 billion in cash consideration that was funded using debt financing, as discussed further in Note 12,
Debt,
and existing cash. Also on the Combination Date, CB&I shareholders received 0.82407 shares of McDermott common stock for each share of CB&I common stock tendered in the exchange offer. Each remaining share of CB&I common stock held by CB&I shareholders not acquired by McDermott in the exchange offer was effectively converted into the right to receive the same 0.82407 shares of McDermott common stock that was paid in the exchange offer, together with cash in lieu of any fractional shares of McDermott common stock, less any applicable withholding taxes. Stock-settled equity based awards relating to shares of CB&I’s common stock were either canceled and converted into the right to receive cash or were converted into comparable McDermott awards on generally the same terms and conditions as prior to the Combination Date. We
|
14
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
issued
84.5
million
shares
of
McDermott
common stock
to the former CB&I shareholders
and converted
CB&I stock-settled equity awards into McDermott stock-settled equity
-based
awards
to be settled in
approximately
2.2 million shares
of
McDermott
common stock
.
Transaction Accounting
―The Combination is accounted for using the acquisition method of accounting in accordance with ASC Topic 805,
Business Combinations
. McDermott is considered the acquirer for accounting purposes based on the following facts at the Combination Date: (i) McDermott’s stockholders owned approximately 53 percent of the combined business on a fully diluted basis; (ii) a group of McDermott’s directors, including the Chairman of the Board, constituted a majority of the Board of Directors; and (iii) McDermott’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer continue in those roles. The series of transactions resulting in McDermott’s acquisition of CB&I’s entire business is being accounted for as a single accounting transaction, as such transactions were entered into at the same time in contemplation of one another and were collectively designed to achieve an overall commercial effect.
Purchase Consideration
―We completed the Combination for a gross purchase price of approximately $4.6 billion ($4.1 billion net of cash acquired), detailed as follows (in millions, except per share amounts):
CB&I shares for Combination consideration
|
|
103
|
Conversion Ratio: 1 CB&I share = 0.82407 McDermott shares
|
|
85
|
McDermott stock price on May 10, 2018
|
|
$19.92
|
Equity Combination consideration transferred
|
|
$1,684
|
Fair value of converted awards earned prior to the Combination
|
|
9
|
Total equity Combination consideration transferred
|
|
1,693
|
Cash consideration transferred
|
|
2,872
|
Total Combination consideration transferred
|
|
4,565
|
Less: Cash acquired
|
|
(498)
|
Total Combination consideration transferred, net of cash acquired
|
|
$4,067
|
Preliminary Purchase Price Allocation
—The aggregate purchase price noted above was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values at the Combination Date, which were based, in part, upon outside preliminary appraisal and valuation of certain assets, including specifically identified intangible assets and property and equipment. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired totaling $3.9 billion, was recorded as goodwill.
|
15
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following sum
marizes
our preliminary purchase price allocation at
the
Combination
Date
(in
millions
):
|
|
May 10, 2018
|
|
Net tangible assets:
|
|
|
|
|
Cash
|
|
$
|
498
|
|
Accounts receivable
|
|
|
905
|
|
Inventory
|
|
|
62
|
|
Contracts in progress
|
|
|
341
|
|
Assets held for sale
(1)
|
|
|
66
|
|
Other current assets
|
|
|
153
|
|
Deferred tax assets
|
|
|
45
|
|
Investments in unconsolidated affiliates
|
|
|
403
|
|
Property, plant and equipment
|
|
|
409
|
|
Deferred tax liabilities
|
|
|
(17
|
)
|
Other non-current assets
|
|
|
145
|
|
Accounts payable
|
|
|
(498
|
)
|
Advance billings on contracts
(2
)
|
|
|
(1,400
|
)
|
Other current liabilities
|
|
|
(1,189
|
)
|
Other non-current liabilities
|
|
|
(445
|
)
|
Total net tangible assets
|
|
|
(522
|
)
|
Project related intangible assets/liabilities, net
(3
)
|
|
|
112
|
|
Other intangible assets
(4
)
|
|
|
1,049
|
|
Net identifiable assets
|
|
|
639
|
|
Goodwill
(5
)
|
|
|
3,926
|
|
Total Combination consideration transferred
|
|
|
4,565
|
|
Less: Cash acquired
|
|
|
(498
|
)
|
Total Combination consideration transferred, net of cash acquired
|
|
$
|
4,067
|
|
(1)
|
Assets held for sale includes CB&I’s former administrative headquarters within Corporate and various fabrication facilities within NCSA.
|
(2)
|
Advance billings on contracts
includes provisions for estimated losses on projects of $112 million.
|
(3)
|
Project related intangible assets/liabilities, net includes intangible asset and liabilities of $145 million and $33 million, respectively. The balances represent the fair value of acquired RPOs and normalized profit margin fair value associated with acquired long-term contracts that were deemed to be lower than fair value (excluding amounts recorded in Advance billings on contracts and Contracts in progress) as of the Combination Date. The project related intangible assets and liabilities will be amortized as the applicable projects progress over a range of 2
to 4 years within Project intangibles amortization in our Statements of Operations.
|
(4)
|
Other
Intangible assets are reflected in the table below and recorded at estimated fair value, as determined by our management, based on available information which includes a preliminary valuation from outside experts. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 10, 2018
Fair value
|
|
|
Useful Life Range
|
|
|
Weighted Average Life
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
Process technologies
|
|
$
|
515
|
|
|
10-30
|
|
|
|
27
|
|
Trade names
|
|
|
420
|
|
|
10-20
|
|
|
|
12
|
|
Customer relationships
|
|
|
87
|
|
|
|
3-10
|
|
|
|
9
|
|
Trademarks
|
|
|
27
|
|
|
|
10
|
|
|
|
10
|
|
Total
|
|
$
|
1,049
|
|
|
|
|
|
|
|
|
|
(5)
|
Goodwill resulted from the acquired established workforce, which does not qualify for separate recognition, as well as expected future cost savings and revenue synergies associated with the combined operations. Of the $3.9 billion of estimated goodwill
|
|
16
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
rec
orded in conjunction with the Combination,
$1.7
billion
is d
eductible for tax purposes.
Given the proximity of the Combination Date to the reporting date of June 30, 2018, the allocation of goodwill for each of our operating groups is in process, and there
fore has not been presented.
We have
not
finalized our
assessment of the fair values of purchased receivables, intangible assets and liabilities,
inventory,
property and equipment,
joint venture and consortium
arrangements,
tax balances, contingent liabili
ties, long-term leases or acquired contracts.
The purchase price allocation is based on preliminary information and is subject to change when additional information is obtained.
The final purchase price allocation will result in adjustments to
various
asse
ts and liabilities, including the residual amount allocated to goodwill
during the measurement
period
.
|
Impact on
RPOs
—CB&I RPOs totaled approximately $7.7 billion at the Combination Date. We reviewed the RPOs acquired through the Combination to ensure consistency in the application of our policies regarding revenues dependent upon one or more future events, and we made adjustments related to our purchase accounting estimates. As a result, the RPO balance on the Combination Date included the net reduction of approximately $860 million for the acquired RPOs. This adjustment to the opening RPOs was not the result of contract cancellations.
Impact of Combination on Statements of Operations
—From the Combination Date through June 30, 2018, revenues and operating income associated with CB&I totaled $1.1 billion and $61 million (excluding $51 million of Restructuring and integration costs), respectively. Additionally, in connection with the Combination, during the three and six months ended June 30, 2018, we incurred transaction costs of $37 million and $40 million, respectively, which primarily related to professional service fees (including audit, legal and advisory services).
Supplemental Pro Forma Information (Unaudited)
—The following unaudited pro forma financial information reflects the Combination and the related events as if they occurred on January 1, 2017, and gives effect to pro forma events that are directly attributable to the Combination, factually supportable, and expected to have a continuing impact on the combined results of the Company, following the Combination. The pro forma financial information includes adjustments to: (i) include additional intangibles amortization and net interest expense associated with the Combination and (ii) exclude restructuring, integration and transaction costs and debt extinguishment costs that were included in McDermott and CB&I’s historical results and are expected to be non-recurring. This pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the future operating results of the combined business operations following the Combination.
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
(1)
|
|
2017
|
|
2018
(1)
|
|
2017
|
|
|
(In millions)
|
Pro forma revenue
|
|
$2,492
|
|
$2,072
|
|
$4,845
|
|
$4,419
|
Pro forma net income (loss) attributable to McDermott
|
|
63
|
|
(315)
|
|
112
|
|
(334)
|
Pro forma net income (loss) per share attributable to McDermott:
|
|
|
|
|
|
|
|
|
Basic
|
|
0.44
|
|
(2.19)
|
|
0.78
|
|
(2.32)
|
Diluted
|
|
0.44
|
|
(2.19)
|
|
0.78
|
|
(2.32)
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
|
144
|
|
144
|
|
144
|
|
144
|
Diluted
|
|
144
|
|
144
|
|
144
|
|
144
|
(1)
|
Adjustments, net of tax, included in the pro forma net income above were of a non-recurring nature and totaled $94 million and $109 million for the three and six months ended June 30, 2018, respectively. The adjustments reflect the elimination of restructuring and integration costs ($54 million and $62 million), transaction costs ($29 million and $36 million) and debt extinguishment costs ($11 million and $11 million) that were included in McDermott and CB&I’s historical results for the three and six months ended June 30, 2018, respectively. These pro forma results exclude the effect of adjustments to the opening balance sheet associated with fair value purchase accounting judgments.
|
(2)
|
Pro forma net income (loss) per share was calculated using basic and diluted shares outstanding as of June 30, 2018.
|
|
17
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
4
—REVENUE RECOGNITION
Effect of ASC Topic 606 Adoption
The cumulative effect of adopting ASC 606 due to our change in method of measuring project progress toward completion, as discussed in Note 2,
Basis of Presentation and Significant Accounting Policies,
is as follows:
|
|
Impact of ASC 606 adoption
|
|
|
|
Recognition under previous guidance
|
|
|
Adjustment
|
|
|
Recognition under ASC 606
|
|
|
|
(In millions)
|
|
Consolidated Statement of Operations for six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,550
|
|
|
$
|
(207
|
)
|
|
$
|
2,343
|
|
Cost of operations
|
|
|
2,141
|
|
|
|
(179
|
)
|
|
|
1,962
|
|
Net income
|
|
|
110
|
|
|
|
(28
|
)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet as of June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts in progress
|
|
|
926
|
|
|
|
(8
|
)
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
62
|
|
|
|
(8
|
)
|
|
|
54
|
|
(1)
|
Includes $20 million of cumulative catch-up adjustment to Retained earnings (Accumulated deficit) on January 1,
2018,
upon adoption of ASC 606.
|
Remaining Performance Obligations (“RPOs”)
Our RPOs by segment were as follows:
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
(In approximate millions)
|
|
NCSA
|
$
|
5,181
|
|
|
|
51
|
%
|
|
$
|
437
|
|
|
|
11
|
%
|
EARC
|
|
1,250
|
|
|
|
12
|
%
|
|
|
732
|
|
|
|
19
|
%
|
MENA
|
|
2,630
|
|
|
|
26
|
%
|
|
|
2,249
|
|
|
|
58
|
%
|
APAC
|
|
638
|
|
|
|
6
|
%
|
|
|
483
|
|
|
|
12
|
%
|
Technology
|
|
487
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
-
|
|
Total
|
$
|
10,186
|
|
|
|
100
|
%
|
|
$
|
3,901
|
|
|
|
100
|
%
|
Of the June 30, 2018 RPOs, we expect to recognize revenues as follows:
|
2018
|
|
|
2019
|
|
|
Thereafter
|
|
|
(In approximate millions)
|
|
Total RPOs
|
$
|
4,480
|
|
|
$
|
4,249
|
|
|
$
|
1,457
|
|
|
18
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Revenue
D
isaggregation
Our revenue by product offering, contract types and revenue recognition methodology was as follows:
|
|
Three months ended June 30,
(2)
|
|
|
Six months ended June 30,
(2)
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In millions)
|
|
Revenue by product offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore and subsea
|
|
$
|
653
|
|
|
$
|
789
|
|
|
$
|
1,261
|
|
|
$
|
1,308
|
|
LNG
|
|
|
382
|
|
|
|
-
|
|
|
|
382
|
|
|
|
-
|
|
Downstream
(1)
|
|
|
496
|
|
|
|
-
|
|
|
|
496
|
|
|
|
-
|
|
Power
|
|
|
204
|
|
|
|
-
|
|
|
|
204
|
|
|
|
-
|
|
|
|
$
|
1,735
|
|
|
$
|
789
|
|
|
$
|
2,343
|
|
|
$
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract types:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed priced
|
|
$
|
1,313
|
|
|
$
|
786
|
|
|
$
|
1,896
|
|
|
|
1,262
|
|
Reimbursable
|
|
|
269
|
|
|
|
-
|
|
|
|
269
|
|
|
|
-
|
|
Hybrid
|
|
|
124
|
|
|
|
-
|
|
|
|
124
|
|
|
|
-
|
|
Unit-basis and other
|
|
|
29
|
|
|
|
3
|
|
|
|
54
|
|
|
|
46
|
|
|
|
$
|
1,735
|
|
|
$
|
789
|
|
|
$
|
2,343
|
|
|
$
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue recognition methodology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time
|
|
$
|
1,707
|
|
|
$
|
789
|
|
|
$
|
2,315
|
|
|
$
|
1,308
|
|
At a point in time
|
|
|
28
|
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
$
|
1,735
|
|
|
$
|
789
|
|
|
$
|
2,343
|
|
|
$
|
1,308
|
|
(1)
|
Includes the results of our Technology operating group.
|
(2)
|
Intercompany amounts have been eliminated in consolidation.
|
Unapproved Change Orders, Claims and Incentives
Unapproved Change Orders, Claims and Incentives
—At June 30, 2018 we had unapproved change orders and claims included in transaction prices aggregating to approximately $472 million, of which approximately $99 million were included in our RPO balance. At December 31, 2017, we had unapproved change orders and claims included in transaction prices aggregating to approximately $117 million, of which approximately $8 million were included in our RPO balance.
At June 30, 2018, we also had incentives included in transaction prices of approximately $89 million, of which approximately $13 million were included in our RPO balance. At December 31, 2017, we did not have any material incentives included in transaction prices for our projects.
The aforementioned amounts recorded in contract prices and recognized as revenue reflect our best estimates of recovery; however, the ultimate resolution and amounts received could differ from these estimates and could have a material adverse effect on our results of operations, financial position and cash flow.
Loss Projects
Included in the Combination were three projects in a substantial loss position at the Combination Date.
The loss positions include our changes in cost estimates of $165 million on the Cameron LNG project, $23 million on the Calpine project and $33 million on the now-completed IPL gas power project. These changes in cost estimates did not have a direct impact on our net income for the three months ended June 30, 2018 as the impact of their changes in estimates were included as adjustments to the fair value of the acquired balance sheet.
Summary information for the ongoing projects as of June 30, 2018 is as follows:
|
19
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Cameron LNG
―
At June 30, 2018, our U.S. LNG export facility project in Hackberry, Louisiana
for Cam
eron LNG (
within our NCSA operating group
)
was in a
loss position. The project
was
acquired in the Combination and at June 30, 2018 w
as approximately
23
%
complete on a post-C
ombination basis
(approximately 88% on a pre-Combination basis)
and had
a reserve
for estimated losses of approximately
$32 million
.
A reduction in workforce on the project has subsequently been
implemented to improve productivity and maintain schedule
.
Calpine Power Project
―At June 30, 2018, our U.S. gas turbine power project in the Northeast for Calpine (within our NCSA operating group) was in a loss position. The project was acquired in the Combination and at June 30, 2018 was approximately 28% complete on a post-Combination basis (approximately 89% on a pre-Combination basis) and had a reserve for estimated losses of approximately $42 million.
There were no other material active projects as of June 30, 2018 in a substantial loss position.
NOTE 5—
PROJECT CHANGES IN ESTIMATES
Our RPOs for each of our operating groups generally consist of several hundred contracts and our results may be impacted by changes in estimated margins. The following is a discussion of our most significant changes in cost estimates that impacted segment operating income for the three and six months ended June 30, 2018
and 2017.
Three months ended June 30, 2018
Segment operating income for the three months ended June 30, 2018 was positively impacted by net favorable changes in estimates totaling approximately $84 million, primarily in our MENA and APAC segments.
MENA
—Our segment results were positively impacted by net favorable changes in estimates aggregating approximately $39 million, primarily due to productivity improvements on marine, fabrication and other activities, primarily on two of our projects and savings on several other projects in the Middle East that were not individually significant.
APAC
—
Our segment results were positively impacted by net favorable changes in estimates aggregating approximately $46 million, primarily due to:
|
•
|
costs savings from marine campaigns on a project off the Australian coast; and
|
|
•
|
cost savings upon the substantial completion of pipelay and offshore construction campaign on the Greater Western Flank Phase 2 project in Australia, partly offset by the impact of weather related delays on the project.
|
Six months ended June 30, 2018
Segment operating income for the six months ended June 30, 2018 was positively impacted by net favorable changes in estimates totaling approximately $121 million, primarily in our MENA and APAC segments.
MENA
—
Our segment results were positively impacted by favorable changes in estimates aggregating approximately $69 million, primarily due to:
|
•
|
productivity improvements on marine, fabrication and other activities, primarily on two of our projects and savings on several other projects in the Middle East that were not individually significant;
|
|
•
|
cost savings associated with fabrication, procurement and marine campaigns on two Saudi Aramco lump-sum EPCI projects under the second Saudi Aramco Long Term Agreement (“LTA II”);
|
|
•
|
savings associated with marine campaigns, reimbursement for costs incurred and reduction in estimated costs to complete multiple projects in the Middle East, none of which were individually material;
|
These favorable changes in estimates were partially offset by higher estimated costs associated with;
|
•
|
hook-up and marine campaigns on two Saudi Aramco projects; and
|
|
•
|
standby equipment and mechanical equipment downtime on Middle East projects.
|
|
20
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APAC
—
Our
segment
results were
positively impacted by favorable changes in estimates aggregating approximately $
55 million
. This included
a net reduction in estimates of costs to complete on offshore campaigns and several other active projects, partially offset by additional costs asso
ciated with weather downtime on two active projects.
Three and six months ended June 30, 2017
Segment operating income for the three and six months ended June 30, 2017 was positively impacted by net favorable changes in estimates totaling approximately $32 million and $79 million, respectively, primarily in our MENA (approximately $20 million and $36 million, respectively) and APAC (approximately $16 million and $41 million, respectively) segments.
NOTE 6—CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following is a reconciliation of cash, cash equivalents and restricted cash reported within the Balance Sheets that sum to the totals of such amounts shown in the Statements of Cash Flows at June 30, 2018 and December 31, 2017:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Cash and cash equivalents
|
|
$
|
814
|
|
|
$
|
390
|
|
Restricted cash and cash equivalents
(1)
|
|
|
324
|
|
|
|
18
|
|
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows
|
|
$
|
1,138
|
|
|
$
|
408
|
|
(1)
|
Our restricted cash balances primarily served as cash collateral deposits for our letter of credit facilities. See Note 12,
Debt
for further discussion.
|
NOTE 7—ACCOUNTS RECEIVABLE
Accounts Receivable—Trade, Net
―Our trade accounts receivable balances at June 30, 2018 and December 31, 2017 included the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Contract receivables
(1)
|
|
$
|
857
|
|
|
$
|
225
|
|
Retainages
(2)
|
|
|
128
|
|
|
|
120
|
|
Less allowances
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Accounts receivable
—
trade, net
|
|
$
|
968
|
|
|
$
|
328
|
|
(1)
|
Unbilled receivables for our performance obligations recognized at a point in time are recorded within accounts receivable and were approximately $21 million at June 30, 2018 (all resulted from the acquired CB&I operations).
|
(2)
|
Retainages classified within Accounts receivable-trade, net are anticipated to be collected within one year. Retainages anticipated to be collected beyond one year are classified as Accounts receivable long-term retainages on our Balance Sheet.
|
|
21
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
8
—CONTRACT
S IN PROGRESS AND ADVANCE BILLINGS ON CONTRACTS
Our contract assets and liabilities at June 30, 2018 and December 31, 2017 were as follows:
|
|
June 30, 2018
(1)
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Costs incurred in excess of costs recognized
(1)
|
|
$
|
8
|
|
|
$
|
98
|
|
Revenues recognized less billings to customers
(2)
|
|
|
910
|
|
|
|
523
|
|
Contracts in progress
|
|
$
|
918
|
|
|
$
|
621
|
|
|
|
|
|
|
|
|
|
|
Costs recognized in excess of costs incurred
(1)
|
|
$
|
10
|
|
|
$
|
(14
|
)
|
Billings to customers less revenues recognized
(2)
|
|
|
1,217
|
|
|
|
46
|
|
Advance billings on contracts
|
|
$
|
1,227
|
|
|
$
|
32
|
|
(1)
|
Costs incurred in excess of costs recognized (assets) and costs recognized in excess of costs incurred (liabilities) resulted from the exclusion of certain costs when measuring progress toward completion under the cost-to-cost method, prior to our adoption of ASC Topic 606. These remaining amounts will be recognized in Cost of operations as the underlying projects progress.
|
(2)
|
During the six months ended June 30, 2018, the change in the asset and liability balances includes $411 million and $1.2 billion, respectively, resulting from the Combination. Revenues recognized for the three and six-months periods ended June 30, 2018 with respect to amounts included in our contract liability balance as of December 31, 2017 were $7 million and $45 million, respectively.
|
For the three months ended June 30, 2018, revenues recognized from changes in transaction prices associated with performance obligations satisfied in prior periods were $13 million, primarily in our MENA segment. For the six-months ended June 30, 2018, we recognized $79 million of revenues resulting from the second quarter 2018 impact discussed above and changes in transaction prices during the first quarter 2018 associated with performance obligations satisfied in prior periods, primarily in our APAC segment. The change in transaction prices primarily related to reimbursement of costs incurred in prior periods.
NOTE 9—INTANGIBLE ASSETS
Project Related Intangibles
—
The accumulated amortization and weighted-average useful lives for each major project-related intangible asset class and in total at June 30, 2018 were as follows:
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Weighted Average Life
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
Project-related intangible assets
|
|
$
|
145
|
|
|
$
|
(16
|
)
|
|
|
3
|
|
Project-related intangible liabilities
|
|
|
(33
|
)
|
|
|
4
|
|
|
|
2
|
|
Total
(1)
|
|
$
|
112
|
|
|
$
|
(12
|
)
|
|
|
|
|
(1)
|
All project related intangible assets at June 30, 2018 resulted from the Combination. Amortization expense was $12 million for the three months ended June 30, 2018 and is anticipated to be $42 million, $27 million, $19 million and $12 million for the remainder of 2018, 2019, 2020 and 2021, respectively.
|
|
22
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Intangible Assets
—
The
a
ccumulated amortization and
weighted-average useful lives for each major
other
intangible asset class
and in total at June 30, 2018
were as follows
:
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Weighted Average Life
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
Process technologies
|
|
$
|
515
|
|
|
$
|
(3
|
)
|
|
|
27
|
|
Trade names
|
|
|
420
|
|
|
|
(6
|
)
|
|
|
12
|
|
Customer relationships
|
|
|
87
|
|
|
|
(1
|
)
|
|
|
9
|
|
Trademarks
|
|
|
27
|
|
|
|
-
|
|
|
|
10
|
|
Total
(1)
|
|
$
|
1,049
|
|
|
$
|
(10
|
)
|
|
|
|
|
(1)
|
All other intangible assets at June 30, 2018 resulted from the Combination. Amortization expense was $10 million for the three months ended June 30, 2018 and is anticipated to be $45 million, $81 million, $81 million, $77 million and $73 million for the remainder of 2018, 2019, 2020, 2021 and 2022, respectively.
|
NOTE 10—JOINT VENTURE AND CONSORTIUM ARRANGEMENTS
As discussed in Note 2,
Basis of Presentation and Significant Accounting Policies
we account for our unconsolidated joint ventures or consortiums using either proportionate consolidation, when we meet the applicable accounting criteria to do so, or the equity method. Further, we consolidate any joint venture or consortium that is determined to be a VIE for which we are the primary beneficiary, or which we otherwise effectively control.
Proportionately Consolidated Consortiums
—The following is a summary description of our significant consortiums that have been accounted for using proportionate consolidation:
|
•
|
McDermott/Zachry
—We have a 50%/50% consortium with Zachry to perform engineering, procurement and construction (“EPC”) work for two LNG liquefaction trains in Freeport, Texas. In addition, we have subcontract and risk sharing arrangements with Chiyoda to support our responsibilities to the venture. The costs of these arrangements are recorded in Cost of operations.
|
|
•
|
McDermott/Zachry/Chiyoda
—We have a consortium with Zachry and Chiyoda (MDR—33.3% / Zachry—33.3% / Chiyoda—33.3%) to perform EPC work for an additional LNG liquefaction train at the project site in Freeport, Texas.
|
|
•
|
McDermott/Chiyoda
—We have a 50%/50% consortium with Chiyoda to perform EPC work for three LNG liquefaction trains in Hackberry, Louisiana.
|
|
•
|
McDermott/CTCI
—We have 42.5%/57.5% consortium with CTCI Americas to perform EPC work for a mono-ethylene glycol facility in Gregory, Texas. The results were not material for any of the periods presented in the Financial Statements, but will become more material as project activities progress.
|
The following table presents summarized balance sheet information for our share of our proportionately consolidated consortiums:
|
|
June 30, 2018
(1)
|
|
|
|
(In millions)
|
|
Current assets
(2)
|
|
$
|
382
|
|
Non-current assets
|
|
|
8
|
|
Total assets
|
|
$
|
390
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
433
|
|
(1)
|
All balances at June 30, 2018 resulted from the Combination and are subject to change when additional information is obtained during the measurement period.
|
|
23
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(2)
|
Our
consortium
arrangements allow for excess working capital of the
consortium
to be advanced to the
consortium
participants
. Such advances are returned to the ventures for working capital needs as necessary. Accordingly, at a reporting period end a
consortium
may have a
dvances to its
participants
which are reflected as an advance receivable within current assets of t
he
consortium
. At June 30, 2018, A
ccounts receivable-other included $43 million related to our proportionate share of advances from the
consortiums
to
the
co
nsortium
participants
.
|
At June 30, 2018, Accrued liabilities on the Balance Sheets included $49 million related to advances to McDermott from the consortiums.
Equity Method Joint Ventures
—The following is a summary description of our significant joint ventures accounted for using the equity method:
|
•
|
Chevron-Lummus Global (“CLG”)
—We have a 50%/50% joint venture with Chevron which provides proprietary process technology licenses and associated engineering services and catalyst, primarily for the refining industry. As sufficient capital investments in CLG have been made by the joint venture participants, it does not qualify as a VIE.
|
|
•
|
NET Power
—We have a joint venture with Exelon and 8 Rivers Capital (McDermott—33.3% / Exelon—33.3% / 8 Rivers Capital—33.3%) to commercialize a new natural gas power generation system that recovers the carbon dioxide produced during combustion. NET Power is building a first-of-its-kind demonstration plant which is being funded by contributions and services from the joint venture participants and other parties. We have determined the joint venture to be a VIE; however, we are not the primary beneficiary, and therefore do not consolidate it. Our cash commitment for NET Power totals $57 million, and at June 30, 2018, we had made cumulative investments totaling $47 million (all prior to the Combination).
|
|
•
|
McDermott/CTCI
—We have a 50%/50% joint venture with CTCI to perform EPC work for a liquids ethylene cracker and associated units at Sohar, Oman. We have determined the joint venture to be a VIE; however, we are not the primary beneficiary, and therefore do not consolidate it. Our joint venture arrangement allows for excess working capital of the joint venture to be advanced to the joint venture participants. Such advances are returned to the joint venture for working capital needs as necessary. At June 30, 2018, Accrued liabilities on the Balance Sheets included $95 million related to advances to McDermott from the joint venture.
|
|
•
|
io Oil and Gas
—We co-own several 50%/50% joint venture entities with Baker Hughes, a GE company. These joint venture entities focus on the pre-FEED phases of projects in offshore markets. They bring comprehensive field development expertise and provide technically advanced solutions in new full field development concept selection and evaluation.
|
|
•
|
Qingdao McDermott Wuchuan Offshore Engineering Company Ltd.
—We
have a 50%/50% joint venture with
Wuhan Wuchuan Investment Holding Co., Ltd., a leading shipbuilder in China. This joint venture provides project management, procurement, engineering, fabrication, construction and pre-commissioning of onshore and offshore oil and gas structures, including onshore modules, topsides, floating production storage, off-loading modules, subsea structures, and manifolds.
|
As discussed in Note 2,
Basis of Presentation and Significant Accounting Policies
in the second quarter of 2018 we
implemented certain changes to our financial reporting structure
, including presentation of income and losses from investments (listed above) in unconsolidated affiliates, as a component of operating income in the Statements of Operations. Income and loss from investments in unconsolidated affiliates were previously presented below provision for income taxes. We believe this presentation better represents the integrated operating nature of these joint ventures which are considered essential to our core operations.
Our income and losses from investments in unconsolidated affiliates that were dissolved or not considered integral to our core operations as of December 31, 2017 are presented below provision for income taxes in the consolidated statements of operations for the comparative three and six-month periods ended June 30, 2017.
|
24
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Aggregate
summarized
financial
information
for
CLG and Qingdao McDermott Wuchuan Offshore Engineering Company Ltd.
is as follows:
|
|
Three months ended June 30,
|
|
|
Six months ended
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In millions)
|
|
Revenues
|
|
$
|
56
|
|
|
$
|
2
|
|
|
$
|
56
|
|
|
$
|
2
|
|
Cost of operations
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
-
|
|
Gross profit
|
|
|
11
|
|
|
|
2
|
|
|
|
11
|
|
|
|
2
|
|
Income (loss) from operations
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(4
|
)
|
Net income (loss)
(1)
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
(8
|
)
|
(1)
|
Includes results for CLG from the Combination Date.
|
Consolidated Joint Ventures—
The following is a summary description of our significant joint venture we consolidate due to its designation as a VIE for which we are the primary beneficiary:
|
•
|
McDermott/Orano
—We have a joint venture with Orano (McDermott—52% / Orano—48%) relating to a mixed oxide fuel fabrication facility in Aiken, South Carolina.
|
The following table presents summarized balance sheet information for our consolidated joint ventures:
|
|
June 30, 2018
(1)
|
|
|
|
(In millions)
|
|
Current assets
|
|
$
|
74
|
|
Non-current assets
|
|
|
15
|
|
Total assets
|
|
$
|
89
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
81
|
|
(1)
|
All balances at June 30, 2018 resulted from the Combination and are subject to change when additional information is obtained during the measurement period.
|
Other
—The use of these joint ventures and consortiums exposes us to a number of risks, including the risk that the third party joint venture or consortium participants may be unable or unwilling to provide their share of capital investment to fund the operations of the joint venture or consortium or complete their obligations to us, the joint venture or consortium, or ultimately, our customer. Differences in opinions or views among joint venture or consortium participants could also result in delayed decision-making or failure to agree on material issues, which could adversely affect the business and operations of a joint venture or consortium
. In addition, agreement terms may subject us to joint and several liability for the third-party participants in our joint ventures or consortiums, and the failure of any of those third parties to perform their obligations could impose additional performance and financial obligations on us. These factors could result in unanticipated costs to complete the projects, liquidated damages or contract disputes.
NOTE 11—RESTRUCTURING AND INTEGRATION COSTS
Restructuring and integration costs primarily relate to costs to achieve our CPI program. We launched the CPI program in the second quarter of 2018, with the goal of realizing transformative cost savings across our business. The program incorporates the activities of our Fit 2 Grow program previously announced in the fourth quarter of 2017 and targets a significant improvement in cost controls across five main opportunity areas: (i) procurement and supply chain; (ii) systems, applications and support; (iii) assets and facilities; (iv) perquisites, travel and other; and (v) workforce efficiency. The program also includes other costs associated with the Combination, including change-in-control, severance, incremental incentive plan costs and professional fees. These costs are recorded within our Corporate operating results and were $63 million and $75 million for the three and six months ended June 30, 2018, respectively. Our accrued liability for this program was $27 million at June 30, 2018, and we anticipate incurring an additional $135 million prior to its completion date, which is anticipated in the fourth quarter of 2019.
|
25
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
2
—DEBT
The carrying values of our long-term debt obligations as of June 30, 2018 and December 31, 2017 are as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Current
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
43
|
|
|
|
24
|
|
Less: unamortized debt issuance costs
|
|
|
(1
|
)
|
|
|
-
|
|
Current maturities of long-term debt, net of unamortized debt issuance costs
|
|
|
42
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
Term Facility
|
|
$
|
2,254
|
|
|
$
|
-
|
|
10.625% senior notes
|
|
|
1,300
|
|
|
|
-
|
|
8.000% second-lien notes
|
|
|
-
|
|
|
|
500
|
|
North Ocean 105 construction financing
|
|
|
21
|
|
|
|
25
|
|
Vendor equipment financing
|
|
|
10
|
|
|
|
16
|
|
Capital lease
|
|
|
22
|
|
|
|
1
|
|
Less: current maturities of long-term debt
|
|
|
(43
|
)
|
|
|
(24
|
)
|
Less: unamortized debt issuance costs
|
|
|
(146
|
)
|
|
|
(5
|
)
|
Long-term debt, net of unamortized debt issuance costs
|
|
$
|
3,418
|
|
|
$
|
513
|
|
Credit Agreement
On May 10, 2018, we entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and letter of credit issuers, Barclays Bank PLC, as administrative agent for a term facility under the Credit Agreement, and Crédit Agricole Corporate and Investment Bank, as administrative agent for the other facilities under the Credit Agreement. The Credit Agreement provides for borrowings and letters of credit in the aggregate principal amount of $4.65 billion, consisting of the following:
|
•
|
a $2.26 billion senior secured term loan facility (the “Term Facility”), the full amount of which was borrowed, and $319.3 million of which has been deposited into a restricted cash collateral account (the “LC Account”) to secure reimbursement obligations in respect of up to $310.0 million of letters of credit (the “Term Facility Letters of Credit”);
|
|
•
|
a $1.0 billion senior secured revolving credit facility (the “Revolving Credit Facility”); and
|
|
•
|
a $1.39 billion senior secured letter of credit facility (the “LC Facility”).
|
The Credit Agreement provides that:
|
•
|
Term Facility Letters of Credit can be issued in an amount up to the amount on deposit in the LC Account ($319.6 million at June 30, 2018), less an amount equal to approximately 3% of such amount on deposit (to be held as a reserve for related letter of credit fees), not to exceed $310.0 million;
|
|
•
|
subject to compliance with the financial covenants in the Credit Agreement, the full amount of the Revolving Credit Facility is available for revolving loans;
|
|
•
|
subject to our utilization in full of our capacity to issue Term Facility Letters of Credit, the full amount of the Revolving Credit Facility is available for the issuance of performance letters of credit and up to $200 million of the Revolving Credit Facility is available for the issuance of financial letters of credit; and
|
|
•
|
the full amount of the LC Facility is available for the issuance of performance letters of credit.
|
Borrowings are available under the Revolving Credit Facility for working capital and other general corporate purposes. Certain existing letters of credit outstanding under our previously existing Amended and Restated Credit Agreement, dated as of June 30, 2017 (the “Prior Credit Agreement”) and certain existing letters of credit outstanding under CB&I’s previously existing credit facilities have been deemed issued under the Credit Agreement, and letters of credit were issued under the Credit Agreement to backstop certain other existing letters of credit issued for the account of McDermott, CB&I and their respective subsidiaries and affiliates.
|
26
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Credit Agreement includes mandatory commitment reductions and prepayments in connection with, among other things, certain asset sales and casualty events (subject to reinvestment rights
with respect to asset sales of less than $500 million). In addition, we are required to make annual prepayments of term loans under the Term Facility and cash collateralize letters of credit issued under the Revolving Credit Facility and the LC Facility
with 75% of excess cash flow (as defined in the Credit Agreement), reducing to 50% of excess cash flow and 25% of excess cash flow depending on our secured leverage ratio.
Term Facility
—At June 30, 2018, we had $2.25 billion of borrowings outstanding under our seven-year Term Facility. Proceeds of our borrowing under the Term Facility were used, together with proceeds from the senior notes described below and cash on hand, (i) to consummate the Business Combination Agreement, including the repayment of certain existing indebtedness of CB&I and its subsidiaries, (ii) to redeem our $500 million aggregate principal amount of the 8.000% second-lien notes, (iii) to prepay existing indebtedness under, and to terminate in full, our Prior Credit Agreement, and (iv) to pay fees and expenses in connection with the Combination, the Credit Agreement and the issuance of the Senior Notes.
Principal under the Term Facility is payable quarterly and interest is assessed at either (i) the Eurodollar rate plus a margin of 5.00% per year or (ii) the base rate (the highest of the Federal Funds rate plus 0.50%, the Eurodollar rate plus 1.0%, or the administrative agent’s prime rate) plus a margin of 4.00%, subject to a 1.0% floor with respect to the Eurodollar rate and is payable periodically dependent upon the interest rate in effect during the period. However, on May 8, 2018, we entered into a U.S. dollar interest rate swap arrangement to mitigate exposure associated with cash flow variability on $1.94 billion of the $2.26 billion Term Facility. This resulted in a weighted average interest rate of 7.09%, inclusive of the applicable margin during the period ending June 30, 2018. The Credit Agreement requires us to prepay a portion of the term loans made under the Term Facility on the last day of each fiscal quarter in an amount equal to $5.65 million.
The future scheduled maturities of the Term Facility are:
|
|
(In millions)
|
|
2018
|
|
$
|
11
|
|
2019
|
|
|
23
|
|
2020
|
|
|
23
|
|
2021
|
|
|
23
|
|
2022
|
|
|
23
|
|
Thereafter
|
|
|
2,151
|
|
|
|
$
|
2,254
|
|
Additionally, at June 30, 2018, there were approximately $308 million of Term Facility Letters of Credit issued (or deemed issued) under the Credit Agreement.
Revolving Credit Facility and LC Facility
—We have a $1.0 billion Revolving Credit Facility which is scheduled to expire in May 2023. Through June 30, 2018, we had not made any borrowings under the Revolving Credit Facility. As of June 30, 2018, we had approximately $121 million of letters of credit outstanding (including $60 million of financial letters of credit), leaving $879 million of available capacity under the Revolving Credit Facility. We also have a $1.39 billion LC Facility that is scheduled to expire in May 2023. As of June 30, 2018, we had approximately $1.377 billion of letters of credit outstanding, leaving $13 million of available capacity under the LC Facility. If we borrow funds under the Revolving Credit Facility, interest will be assessed at either the base rate plus a floating margin ranging from 2.75% to 3.25% (3.25% at June 30, 2018) or the Eurodollar rate plus a floating margin ranging from 3.75% to 4.25% (4.25% at June 30, 2018), in each case depending on our leverage ratio (calculated quarterly). We are charged a commitment fee of 0.50% per year on the daily amount of the unused portions of the commitments under the Revolving Credit Facility and the LC Facility. Additionally, with respect to all letters of credit outstanding under the Credit Agreement, we are charged a fronting fee of 0.25% per year and, with respect to all letters of credit outstanding under the Revolving Credit Facility and the LC Facility, we are charged a participation fee of (i) between 3.75% to 4.25% (4.25% at June 30, 2018) per year in respect of financial letters of credit and (ii) between 1.875% to 2.125% (2.125% at June 30, 2018) per year in respect of performance letters of credit, in each case depending on our leverage ratio (calculated quarterly). We are also required to pay customary issuance fees and other fees and expenses in connection with the issuance of letters of credit under the Credit Agreement.
|
27
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Credit Agreement Covenants
—The Credit Agreement includes the following financial covenants that will be tested on a quarterly basis commencing September 30, 201
8:
|
•
|
the minimum permitted fixed charge coverage ratio (as defined in the Credit Agreement) is 1.50 to 1.00;
|
|
•
|
the maximum permitted leverage ratio is (i) 4.25 to 1.00 for each fiscal quarter ending on or before September 30, 2019, (ii) 4.00 to 1.00 for the fiscal quarter ending December 31, 2019, (iii) 3.75 to 1.00 for each fiscal quarter ending after December 31, 2019 and on or before December 31, 2020, (iv) 3.50 to 1.00 for each fiscal quarter ending after December 31, 2020 and on or before December 31, 2021 and (v) 3.25 to 1.00 for each fiscal quarter ending after December 31, 2021; and
|
|
•
|
the minimum liquidity (as defined in the Credit Agreement, but generally meaning the sum of McDermott’s unrestricted cash and cash equivalents plus unused commitments under the Credit Agreement available for revolving borrowings) is $200 million.
|
In addition, the Credit Agreement contains various covenants that, among other restrictions, limit our ability to:
|
•
|
incur or assume indebtedness;
|
|
•
|
make acquisitions or engage in mergers;
|
|
•
|
sell, transfer, assign or convey assets;
|
|
•
|
repurchase equity and make dividends and certain other restricted payments;
|
|
•
|
change the nature of its business;
|
|
•
|
engage in transactions with affiliates;
|
|
•
|
enter into burdensome agreements;
|
|
•
|
modify its organizational documents;
|
|
•
|
enter into sale and leaseback transactions;
|
|
•
|
make capital expenditures;
|
|
•
|
enter into speculative hedging contracts; and
|
|
•
|
make prepayments on certain junior debt.
|
As of June 30, 2018, we were in compliance with all our restrictive covenants under the Credit Agreement. Our financial covenant requirements under the Credit Agreement will be subject to testing beginning in the third quarter of 2018.
The Credit Agreement contains events of default that we believe are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events occurs, all obligations under the Credit Agreement will immediately become due and payable. If any other event of default exists under the Credit Agreement, the lenders may accelerate the maturity of the obligations outstanding under the Credit Agreement and exercise other rights and remedies. In addition, if any event of default exists under the Credit Agreement, the lenders may commence foreclosure or other actions against the collateral.
If any default exists under the Credit Agreement, or if the Borrowers are unable to make any of the representations and warranties in the Credit Agreement at the applicable time, the Borrowers will be unable to borrow funds or have letters of credit issued under the Credit Agreement.
|
28
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Senior Notes
On April 18, 2018, we issued $1.3 billion in aggregate principal of 10.625% senior notes due 2024 (the “Senior Notes”), pursuant to an indenture we entered into with Wells Fargo Bank, National Association, as trustee (the “Senior Notes Indenture”). Interest on the Senior Notes is payable semi-annually in arrears, and the Senior Notes are scheduled to mature in May 2024. However, at any time or from time to time on or after May 1, 2021, we may redeem the Senior Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount of the Senior Notes to be redeemed) set forth below, together with accrued and unpaid interest to (but excluding) the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period beginning on May 1 of the years indicated:
Year
|
|
Optional redemption price
|
|
2021
|
|
|
105.313
|
%
|
2022
|
|
|
102.656
|
%
|
2023 and thereafter
|
|
|
100.000
|
%
|
In addition, prior to May 1, 2021, we may redeem up to 35.0% of the aggregate principal amount of the outstanding Senior Notes, in an amount not greater than the net cash proceeds of one or more qualified equity offerings (as defined in the Senior Notes Indenture) at a redemption price equal to 110.625% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to (but excluding) the date of redemption (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), subject to certain limitations and other requirements. The Senior Notes may also be redeemed, in whole or in part, at any time prior to May 1, 2021 at our option, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus the applicable premium (as defined in the Senior Notes Indenture) as of, and accrued and unpaid interest to (but excluding) the applicable redemption date (subject to the right of the holders of record on the relevant record date to receive interest due on the relevant interest payment date).
The Senior Notes Indenture contains covenants that, among other things, limit our ability to: (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) make investments or certain other restricted payments; (iii) pay dividends or distributions on its capital stock or purchase or redeem its subordinated indebtedness; (iv) sell assets; (v) create restrictions on the ability of its restricted subsidiaries to pay dividends or make other payments to McDermott; (vi) create certain liens; (vii) sell all or substantially all of its assets or merge or consolidate with or into other companies; (viii) enter into transactions with affiliates; and (ix) create unrestricted subsidiaries. Those covenants are subject to various exceptions and limitations.
As of June 30, 2018, we were in compliance with all our restrictive covenants under the Senior Notes Indenture.
Other Financing Arrangements
North Ocean Financing
―On September 30, 2010, McDermott International Inc., as guarantor, and North Ocean 105 AS, in which we then had a 75% ownership interest, as borrower, entered into a financing agreement to pay a portion of the construction costs of the
NO 105.
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
NO 105
, and a lien on substantially all of the other assets of North Ocean 105 AS. The financing agreement requires principal repayment in 17 consecutive semiannual installments of $4.1 million, which commenced on October 1, 2012.
In the second quarter of 2017 we exercised our option under the North Ocean 105 AS joint venture agreement and purchased the 25% ownership interest of Oceanteam ASA (“Oceanteam”) in the vessel-owning company for approximately $11 million in cash. As part of that transaction, we also assumed the right to a $5 million note payable from North Ocean 105 AS to Oceanteam (which had been issued in connection with a dividend declared by North Ocean 105 AS in 2016). As of June 30, 2018, the outstanding borrowing under this facility was approximately $21 million.
Future maturities are approximately $4 million, $8 million and $8 million for the remainder of 2018 and the years 2019 and 2020, respectively.
Receivable Factoring Facility
―During the three months ended June 30, 2018, we sold, without recourse, approximately $138.7 million of receivables under an uncommitted receivables purchase agreement in Mexico at a discount rate of applicable LIBOR plus a margin of 2.00%. We recorded approximately $1.9 million of factoring costs in Other operating income (expense) during the three months ended June 30, 2018.
|
29
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Vendor Equipment Financing
―In February 2017, JRM Mexico entered into a 21-month loan agreement for equipment financing in the amount of $47 million. Borrowings under the loan agreement bear interest at a fixed rate of 5.75%. JRM Mexico’s obligations in connection with this equipmen
t financing are guaranteed by McDermott Internati
onal Management, S. de RL.,
one of our indirect, wholly owned subsidiaries. The equipment financing agreement contains various customary affirmative covenants, as well as specific affirmative covenants, incl
uding the pledge of specified equipment. The equipment financing agreement also requires compliance with various negative covenants, including restricted use of the proceeds. As of June 30, 2018, the outstanding borrowings under this facility were approxim
ately $10 million and will mature during the remainder of 2018.
Capital Lease Obligations
―In May 2018, we entered into a vessel related capital lease arrangement and recorded a $21 million asset for the present value of the future minimum lease payments, along with a corresponding liability. The future annual maturities of the obligation are $
0.6
million, $1.3 million, $1.4 million, $1.5 million, $1.6 million and $14.0 million for the remainder of 2018, 2019, 2020, 2021, 2022 and thereafter.
Uncommitted Bilateral Credit Facilities
—We are party to a number of short-term uncommitted bilateral credit facilities and surety bond arrangements (the “Uncommitted Facilities”) across several geographic regions, as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Uncommitted Line Capacity
|
|
|
Utilized
|
|
|
Uncommitted Line Capacity
|
|
|
Utilized
|
|
|
|
(In millions)
|
|
Bank Guarantee and Bilateral Letter of Credit
(1)
|
|
$
|
1,608
|
|
|
$
|
945
|
|
|
$
|
725
|
|
|
$
|
572
|
|
Surety Bonds
(2)
|
|
825
|
|
|
400
|
|
|
|
300
|
|
|
|
49
|
|
Bilateral arrangements to issue cash collateralized letters of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
175
|
|
|
|
18
|
|
(1)
|
Approximately $175 million of this capacity is available only upon provision of an equivalent amount of cash collateral.
|
(2)
|
Excludes approximately $395 million of surety bonds maintained on behalf of CB&I’s former Capital Services Operations, which were sold to CSVC Acquisition Corp (“CSVC”) in June 2017. We also continue to maintain guarantees on behalf of CB&I’s former Capital Services Operations business in support of approximately $44 million of RPOs. We have received indemnity from CSVC for both the surety bonds and guarantees.
|
Debt Issuance Costs
—We incurred approximately $150 million of fees relating to the establishment of our Credit Agreement (including $93 million associated with the Term Facility and $57 million associated with the Revolving Credit Facility and LC Facility) and approximately $58 million relating to the issuance of our Senior Notes. On the Balance Sheets, the costs associated with the Term Facility and Senior Notes are reflected as a direct reduction from the related debt liability and amortized over the terms of the respective facilities. The costs associated with the Revolving Credit Facility and LC Facility are reflected within Other current and noncurrent assets and amortized within Interest expense, net, over the terms of the respective facilities.
Debt Extinguishment Costs
—We incurred approximately $10 million of make-whole fees in connection with the redemption of our $500 million 8.000% second-lien notes, as well as charges of approximately $4 million relating to the write-off of deferred debt issuance costs resulting from the extinguishment of our previous debt arrangements. These costs were recorded within Other non-operating expense, net, in our Statement of Operations.
|
30
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1
3
—PENSION AND POSTRETIREMENT BENEFITS
We sponsor various defined benefit pension plans covering eligible employees and provide specific post-retirement benefits for eligible retired U.S. employees and their dependents through health care and life insurance benefit programs. These plans may be changed or terminated by us at any time. Our post-retirement benefit plans are not material.
The following table provides contribution information for our plans at June 30, 2018:
|
|
Non-U.S. Pension Plans
|
|
|
|
(In millions)
|
|
Contributions made through June 30, 2018
|
|
$
|
1
|
|
Contributions expected for the remainder of 2018
|
|
|
9
|
|
Total contributions expected for 2018
(1)
|
|
$
|
10
|
|
(1)
|
All contributions expected for 2018 are associated with pension plans acquired in the Combination. Total contributions for our U.S. pension plans are not anticipated to be material.
|
The following table provides a breakout of the components of the net periodic benefit cost (income) associated with our defined benefit pension and other postretirement plans for the three and six months ended June 30, 2018 and 2017:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In millions)
|
|
U.S. pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest cost
|
|
|
5
|
|
|
|
5
|
|
|
|
9
|
|
|
|
10
|
|
Expected return on plan assets
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
(10
|
)
|
Net periodic benefit cost (income)
(1) (2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
Interest cost
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1
|
|
Expected return on plan assets
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(1
|
)
|
Net periodic benefit cost (income)
(1) (2)
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
(1)
|
Includes approximately $.04 million and $0.6 million of pension cost associated with our U.S. and non-U.S. plans, respectively, for both the three and six months ended June 30, 2018, which resulted from the Combination.
|
(2)
|
The components of net periodic benefit cost (income) other than the service cost component are included in Other non-operating (income) expense, net in our Statements of Operations. The service cost component is included in Cost of operations and SG&A, in our Statements of Operations, along with other compensation costs rendered by the participating employees.
|
In August 2017, one of our non-U.S. plans was amended to issue lump-sum distributions of certain accrued benefits or allow transfer of such benefits into the defined contribution plan. As of December 31, 2017, all investments in the trust for that plan were converted to cash and cash equivalents to facilitate settlements. Settlements are expected to be completed by the end of 2018.
As of June 30, 2018, total benefits remaining under the plan were approximately $13 million.
We recognize mark-to-market fair value adjustments on defined benefit pension and other postretirement plans in Other non-operating (income) expense, net in our Statements of Operations in the fourth quarter of each year.
|
31
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14—ACCRUE
D LIABILITIES
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Accrued contract costs
|
|
$
|
711
|
|
|
$
|
141
|
|
Advances from equity method and proportionally consolidated joint ventures and consortiums
(1)
|
|
|
144
|
|
|
|
-
|
|
Other accrued liabilities
(2)
|
|
|
587
|
|
|
|
196
|
|
Accrued liabilities
|
|
$
|
1,442
|
|
|
$
|
337
|
|
(1)
|
Represents advances to us from the joint ventures and consortiums in which we participate. See Note 10,
Joint Venture and Consortium Arrangements
for further discussion.
|
(2)
|
Represents various accruals that are each individually less than 5% of total current liabilities.
|
NOTE 15
—FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
—Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is available and significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:
|
•
|
Level 1—inputs are based on quoted prices for identical instruments traded in active markets.
|
|
•
|
Level 2—inputs are based on 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 3—inputs are generally unobservable and typically reflect management’s 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 following table presents the fair value of our financial instruments at June 30, 2018 and December 31, 2017 that are (i) measured and reported at fair value in the Financial Statements on a recurring basis and (ii) not measured at fair value on a recurring basis in the Financial Statements:
|
|
June 30, 2018
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In millions)
|
|
Measured at fair value on recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
(1)
|
|
$
|
(14
|
)
|
|
$
|
(14
|
)
|
|
$
|
-
|
|
|
$
|
(14
|
)
|
|
$
|
-
|
|
Not measured at fair value on recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
(2)
|
|
|
(3,460
|
)
|
|
|
(3,676
|
)
|
|
|
-
|
|
|
|
(3,623
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In millions)
|
|
Measured at fair value on recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
(1)
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
Not measured at fair value on recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
(2)
|
|
|
(537
|
)
|
|
|
(558
|
)
|
|
|
-
|
|
|
|
(516
|
)
|
|
|
(42
|
)
|
(1)
|
The fair value of forward contracts is classified as Level 2 within the fair value hierarchy and is valued using observable market parameters for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value forward contracts. This approach discounts future cash flows based on current market expectations and credit risk.
|
|
32
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(2)
|
Our debt instruments are generally valued
using a market approach based on quoted prices for similar instruments traded in active markets
and are
classified as Level 2 within the fair value hierarchy. Quoted prices were not available for the
NO 105
construction financing
,
vendor equipment financi
ng or capital leases. Therefore, these instruments were valued based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar qu
ality and terms and are classified as Level 3 within the fair value hierarchy.
|
The carrying amounts that we have reported for our other financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivables and accounts payable approximate their fair values due to the short maturity of those instruments. The fair value of financial instruments included in purchase accounting estimates as a result of the Combination are subject to change when additional information is obtained.
NOTE 16
—DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Derivatives
—The notional value of our outstanding foreign exchange rate derivative contracts totaled $898 million at June 30, 2018, with maturities extending through August 2022. These instruments consist of contracts to purchase or sell foreign-denominated currencies. As of June 30, 2018, the fair value of these contracts was in a net liability position totaling approximately $5 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.
As of June 30, 2018, for, we deferred approximately $5 million of net losses in AOCI in connection with foreign exchange rate derivatives designated as cash flow hedges, and we expect to reclassify approximately $3 million of deferred losses out of AOCI by June 30, 2019, as hedged items are recognized in earnings.
Interest Rate Derivatives—
On May 8, 2018, we entered into a U.S. dollar interest rate swap arrangement to mitigate exposure associated with cash flow variability on the Term Facility in an aggregate notional value of $1.94 billion. The swap arrangement has been designated as a cash flow hedge as its critical terms matched those of the Term Facility at inception and through June 30, 2018. Accordingly, changes in the fair value of the swap arrangement are included in AOCI until the associated underlying exposure impacts our interest expense. As of June 30, 2018, the fair value of the swap arrangement was in a net liability position totaling approximately $10 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.
As of June 30, 2018, in connection with the interest rate swap arrangement, we deferred approximately $10 million of net losses in AOCI, and we expect to reclassify approximately $2 million of deferred losses out of AOCI by June 30, 2019, as the hedged items are recognized in earnings.
The following table presents the total fair value of the derivatives by underlying risk and balance sheet classification:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Derivatives designated as cash flow hedges
|
|
|
Derivatives not designated as cash flow hedges
|
|
|
Derivatives designated as cash flow hedges
|
|
|
Derivatives not designated as cash flow hedges
|
|
|
|
(In millions)
|
|
Other current assets
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
-
|
|
Other non-current assets
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total derivatives asset
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
-
|
|
Other non-current liabilities
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total derivatives liability
|
|
$
|
22
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
33
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents
the total value, by underlying risk, recognized in other comprehensive i
ncome and
reclassified from AOCI to Cost of operations (foreign currency derivatives) and Interest expense,
net (interest rate derivatives
)
in the Statements of Operations for the three and six months ended June 30, 20
18 and 2017, in connection with
derivatives designated as cash flow hedges:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In millions)
|
|
Foreign currency hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income (loss)
|
|
$
|
(5
|
)
|
|
$
|
5
|
|
|
$
|
(5
|
)
|
|
$
|
10
|
|
Loss (gain) reclassified from AOCI to Cost of operations
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
(3
|
)
|
Ineffective portion and amount excluded from effectiveness testing: gain (loss) recognized in Other non-operating income (expense)
|
|
|
(3)
|
|
|
|
(1
|
)
|
|
|
(2)
|
|
|
|
(1
|
)
|
Interest rate hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income (loss)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the total value of gain (loss) recognized in Other non-operating income (expense), net, in our Statements of Operations for the three and six months ended June 30, 2018 and 2017, in connection with derivatives not designated as cash flow hedges:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In millions)
|
|
Foreign currency hedges
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
NOTE 17—INCOME TAXES
During the three months ended June 30, 2018, we recognized an income tax benefit of $84 million (effective tax rate of 215.4%), compared to tax expense of $23 million (effective tax rate of 38.3%) for the second quarter of 2017. Our provision for the second quarter of 2018 benefited from the release of a valuation allowance ($117 million) as a result of the taxable sale of low tax basis, pre-Combination McDermott assets to our new Technology entity that files its U.S. income taxes separately from pre-Combination McDermott. The pre-Combination McDermott U.S. net operating loss carryforwards utilized by this transaction previously had been offset by a valuation allowance. This benefit was partially offset by non-deductible transaction costs ($16 million), changes in other valuation allowances ($12 million) and state tax and other items ($15 million combined).
During the six months ended June 30, 2018, we recognized an income tax benefit of $63 million (effective tax rate of 393.8%), compared to tax expense of $34 million (effective tax rate of 35.4%) for the six months ended June 30, 2017. Our provision for the six months ended June 30, 2018 benefited from the tax effect ($117 million) of the sale described above, partially offset by non-deductible transaction costs ($16 million), changes in valuation allowances ($19 million) and state tax and other items ($15 million combined).
For the three-months ended June 30, 2018, the pre-Combination McDermott operations continued to utilize the discrete-period method to compute its interim tax provision, due to significant variations in the relationship between income tax expense and pre-tax accounting income or loss; consequently, the actual effective rate for the interim period is reported. The discrete-period method is applied when the application of the estimated annual effective tax rate is impractical, because it is not possible to reliably estimate the annual effective tax rate. The pre-Combination CB&I operations used the estimated annual effective tax rate approach to calculate its interim tax provision related to ordinary income and continued to use this method for the three months ended June 30, 2018. We are currently assessing the timeframe and process to implement an estimated annual effective tax rate approach on a combined company basis.
|
34
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Due to the impact of ongoing tax losses in the U.S. and the corresponding valuation allowance on our U.S. net deferred tax asset position, the new provisi
ons from
the Tax Reform Act
taking effect in 2018 are not expected to have a material impact on our 2018 tax position.
See Note 2,
Basis of Presentation and Significant Accounting Policies
,
for further discussion.
As a result of the Combination, our unrecognized tax benefits increased $17 million during the second quarter of 2018. We do not anticipate significant changes to this balance in the next twelve months.
NOTE 18—STOCKHOLDERS’ EQUITY AND EQUITY-BASED INCENTIVE PLANS
Stockholders’ Equity
On May 2, 2018, stockholders of McDermott approved an amendment to McDermott’s Amended and Restated Articles of Incorporation to effect a three-to-one reverse stock split of McDermott shares of common stock with par value of $1.00 per share, which became effective May 9, 2018. All comparable periods presented have been retrospectively revised to reflect this change.
Shares Outstanding and Treasury Shares
―
The changes in the number of shares outstanding and treasury shares held by the Company for the six months ended June 30, 2018 and 2017 are as follows (in millions):
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Shares outstanding
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
95
|
|
|
|
80
|
|
Common stock issued
|
|
|
2
|
|
|
|
15
|
|
Shares issued in the Combination (Note 3,
Business Combination
)
|
|
|
85
|
|
|
|
-
|
|
Purchase of common stock
|
|
|
(1
|
)
|
|
|
-
|
|
Ending balance
|
|
|
181
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
Shares held as treasury shares
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
3
|
|
|
|
3
|
|
Purchase of common stock
|
|
|
1
|
|
|
|
-
|
|
Retirement of common stock
|
|
|
(1
|
)
|
|
|
-
|
|
Ending balance
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued at the end of the period
|
|
|
183
|
|
|
|
98
|
|
Combination
—As discussed in Note 3,
Business Combination,
we issued 84.5 million shares of McDermott common stock to the former CB&I shareholders. Additionally, effective as of the Combination Date, unvested and unexercised stock-settled equity-based awards (which included 2.1 million restricted stock units and 0.1 million stock options) relating to shares of CB&I’s common stock were canceled and converted into comparable McDermott stock-settled awards with generally the same terms and conditions as those prior to the Combination Date. The restricted stock units generally vest over a period ranging from three to four years from the original grant date.
Stock-Based Compensation Expense―
During the three months ended June 30, 2018 and 2017, we recognized $9 million and $7 million, respectively, of stock-based compensation expense, and during the six months ended June 30, 2018 and 2017, we recognized $15 million and $12 million, respectively, primarily within SG&A in our Statements of Operations. In addition, we recognized $26 million of expense in the second quarter of 2018 as a result of accelerated vesting for employees terminated in connection with the Combination, which was recorded within Restructuring and integration costs in our Statements of Operations.
|
35
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AOCI
The components of AOCI included in stockholders’ equity are as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Foreign currency translation adjustments ("CTA")
|
|
$
|
(61
|
)
|
|
$
|
(49
|
)
|
Net unrealized loss on derivative financial instruments
|
|
|
(14
|
)
|
|
|
(2
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(75
|
)
|
|
$
|
(51
|
)
|
The following table presents the components of AOCI and the amounts that were reclassified during the periods indicated:
|
|
Foreign currency translation adjustments
|
|
|
Gain (loss) on derivative (1)
|
|
|
TOTAL
|
|
|
|
(In millions)
|
|
For the Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
$
|
(49
|
)
|
|
$
|
(2
|
)
|
|
|
(51
|
)
|
Other comprehensive income before reclassification
|
|
|
(12
|
)
|
|
|
(15
|
)
|
|
|
(27
|
)
|
Amounts reclassified from AOCI
(2)
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
Net current period other comprehensive income
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
(24
|
)
|
Balance at June 30, 2018
|
|
$
|
(61
|
)
|
|
$
|
(14
|
)
|
|
$
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
$
|
(42
|
)
|
|
$
|
(25
|
)
|
|
$
|
(67
|
)
|
Other comprehensive income before reclassification
|
|
|
-
|
|
|
|
10
|
|
|
|
10
|
|
Acquisition of NCI
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Amounts reclassified from AOCI
(2)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Net current period other comprehensive income
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
Balance at June 30, 2017
|
|
$
|
(42
|
)
|
|
$
|
(14
|
)
|
|
$
|
(56
|
)
|
(1)
|
Refer to Note 16,
Derivative Financial Instruments
for additional details.
|
(2)
|
Amounts are net of tax, which was not material for the three- and six-month periods ended June 30, 2018 and 2017.
|
NOTE 19
—EARNINGS PER SHARE
On May 2, 2018, stockholders of McDermott approved an amendment to McDermott’s Amended and Restated Articles of Incorporation to effect a three-to-one reverse stock split of McDermott shares of common stock (par value of $1.00 per share), which became effective May 9, 2018. All comparable periods presented have been retrospectively revised to reflect this change.
|
36
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table sets forth the computation of basic and diluted earnings per common share.
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
(In millions, except per share amounts)
|
|
Net income attributable to McDermott
|
$
|
47
|
|
|
$
|
36
|
|
|
$
|
82
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock (basic)
|
|
144
|
|
|
|
94
|
|
|
|
120
|
|
|
|
87
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity units
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Stock options, restricted stock and restricted stock units
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Potential dilutive common stock
|
|
144
|
|
|
|
94
|
|
|
|
120
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to McDermott
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
$
|
0.33
|
|
|
$
|
0.38
|
|
|
$
|
0.68
|
|
|
$
|
0.67
|
|
Diluted:
|
$
|
0.33
|
|
|
$
|
0.38
|
|
|
$
|
0.68
|
|
|
$
|
0.62
|
|
Approximately 0.5 million shares underlying outstanding stock-based awards for the three and six months ended June 30, 2018, and approximately 0.6 million shares underlying outstanding stock-based awards for the three and six months ended June 30, 2017, were excluded from the computation of diluted earnings per share during those periods because the exercise price of those awards was greater than the average market price of our common stock, and the inclusion of such shares would have been antidilutive.
NOTE 20—COMMITMENTS AND CONTINGENCIES
Investigations and Litigation
General
—Due to the nature of our business, we and our affiliates are, from time to time, involved in litigation or subject to disputes, governmental investigations or claims related to our business activities, including, among other things:
|
•
|
performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and
|
|
•
|
workers’ compensation claims, Jones Act claims, occupational hazard claims, premises liability claims and other claims.
|
Based upon our prior experience, we do not expect that any of these other litigation proceedings, disputes, investigations 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 other dispute resolution proceedings and, in some cases, the availability and amount of potentially applicable insurance, we can provide no assurance 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.
Combination Related Lawsuits
—In January, February and March 2018, five shareholders of CB&I filed separate lawsuits under the federal securities laws in the United States District Court for the Southern District of Texas challenging the accuracy of the disclosures made in the registration statement
we and a subsidiary of CB&I filed
in connection with the Combination
(the “Registration Statement”)
. The cases are captioned (
1
) McIntyre v. Chicago Bridge & Iron Company N.V., et al., Case No. 4:18-cv-00273 (S.D. Tex.) (the “McIntyre Action”); (
2
) The George Leon Family Trust v. Chicago Bridge & Iron Company N.V., et al., Case No. 4:18-cv-00314 (S.D. Tex.) (the “Leon Action”); (
3
) Maresh v. Chicago Bridge & Iron Company N.V., et al., Case No. 4:18-cv-00498 (S.D. Tex.) (the “Maresh Action”); (
4
) Patel v. Chicago Bridge & Iron Co. N.V., et al., Case No. 4:18-cv-00550 (S.D. Tex.) (the “Patel Action”); and (
5
) Judd v. Chicago Bridge& Iron Co. N.V., et. al., Case No. 4:18-cv-00799 (S.D. Tex.) (the “Judd Action”).
The McIntyre Action, Leon Action, Maresh Action and Judd Action are asserted on behalf of putative classes of CB&I’s public shareholders, while the Patel Action is brought only on behalf of the named plaintiff.
|
37
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All five actions allege violations o
f Section 14(a) and 20(a) of the
Securities
Exchange Act
of 1934, as amended (the “Exchange Act”),
and Rule 14a-9 promulgated thereunder based on various alleged omissions of material information from the
R
egistration
S
tatement.
|
•
|
The McIntyre Action names as defendants CB&I, each of CB&I’s directors individually, and certain current and former CB&I officers and employees individually. It seeks to enjoin the Combination, an award of costs and attorneys’ and expert fees, and damages.
|
|
•
|
The Leon Action names as defendants CB&I, certain subsidiaries of CB&I and McDermott that are parties to the Combination Agreement, each of CB&I’s directors, individually, and McDermott as an alleged control person of CB&I. The Leon Action seeks to enjoin the Combination (or, in the alternative, rescission or an award for rescissory damages in the event the Combination is completed), to compel CB&I to issue revised disclosures, and an award of costs and attorneys’ and expert fees.
|
|
•
|
The Maresh Action, which was originally filed in Delaware and voluntarily dismissed without prejudice on February 13, 2018, was re-filed in Texas and names as defendants CB&I, each of CB&I’s directors, individually, and certain current and former CB&I officers and employees, individually.
The Maresh Action seeks to enjoin the Combination (or, in the alternative, an award for rescissory damages in the event the Combination is completed) and an award of costs and attorneys’ and expert fees.
|
|
•
|
The Patel Action names as defendants CB&I and each of CB&I’s directors individually and seeks to enjoin the Combination, an award of costs and attorneys’ and expert fees.
|
|
•
|
The Judd Action names as defendants CB&I and each of CB&I’s directors individually and seeks to enjoin the Combination or, in the alternative, in the event the Combination is consummated, to recover rescissory damages from the directors individually, together with an award of costs and attorneys’ and expert fees.
|
The Court consolidated all of the actions. The consolidation order appointed the plaintiff in the Leon Action and the plaintiff’s counsel in the Leon Action as the interim lead plaintiff and the interim lead plaintiff’s counsel, respectively. On March 9, 2018, the interim lead plaintiff filed a consolidated amended complaint. On March 16, 2018, defendants moved to dismiss the consolidated amended complaint and interim lead plaintiff filed a motion for preliminary injunction. On March 29, 2018, interim lead plaintiff withdrew its motion for a preliminary injunction. Motions for permanent lead plaintiff status were due on April 2, 2018, and only interim lead plaintiff filed such a motion. On April 5, 2018, interim lead plaintiff sought an extension of time to respond to defendants’ motion to dismiss until after such time as a permanent lead plaintiff is appointed. That motion was granted.
We believe the substantive allegations contained in the complaints are without merit, and we intend to defend against the claims made against us vigorously.
Project Arbitration Matters
—We are in arbitration (governed by the arbitration rules of the International Chamber of Commerce) with the customer for one of our previously completed large cost-reimbursable projects, in which the customer is alleging cost overruns and consequential damages on the project. We have a counterclaim against the customer for unpaid receivables. We do not believe a risk of material loss is probable related to this matter, and accordingly, our reserves were not significant at June 30, 2018. While it is possible that a loss may be incurred, we are unable to estimate the range of potential loss, if any.
In addition, we are in arbitration (governed by the arbitration rules of the United Nations Commission on International Trade Law) with the customer for one of our previously completed consolidated joint venture projects, regarding differing interpretations of the contract related to reimbursable billings. We do not believe a risk of material loss is probable related to this matter, and accordingly, no amounts have been accrued. While it is possible that a loss may be incurred, we are unable to estimate the range of potential loss, if any.
Dispute Related to Sale of Nuclear Operations
—On December 31, 2015, we sold our Nuclear Operations to Westinghouse Electric Company LLC (“WEC”). In connection with the transaction, a post-closing purchase price adjustment mechanism was negotiated between CB&I and WEC to account for any difference between target working capital and actual working capital as finally determined pursuant to the terms of the purchase agreement. On April 28, 2016, WEC delivered to us a purported closing statement that estimated closing working capital was negative $976.5 million, which was $2.1 billion less than the target working capital amount. In contrast, we calculated closing working capital to be $1.6 billion, which was $427.8 million greater than the target working capital amount. On July 21, 2016, we filed a complaint against WEC in the Court of Chancery in the State of Delaware seeking a declaration
|
38
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
that WEC has no remedy for the vast majority of its claims, and
we
requested an injunction barring WEC from bringing such claims. On December 2, 2016, th
e Court of Chancery granted WEC’s motion for judgment on the pleadings and dismissed our complaint, stating that the dispute should follow the dispute resolution process set forth in the purchase agreement, which includes the use of an independent auditor
to resolve the working capital dispute.
We
appealed that ruling to the Delaware Supreme Court. Due to WEC’s bankruptcy filing on March 29, 2017, all claim resolution proceedings were automatically stayed pursuant to the Bankruptcy Code. At the parties’ req
uest, the Bankruptcy Court lifted the automatic stay to permit the appeal and dispute resolution process to continue. Oral argument before the Delaware Supreme Court was held on May 3, 2017, and on June 27, 2017, the Delaware Supreme Court overturned the d
ecision of the Court of Chancery and instructed the Court of Chancery to issue an order enjoining WEC from submitting certain claims to the independent auditor. The parties
have discussed
those matters still subject to the disp
ute resolution process and
th
e selection of a new independent auditor to replace the previous auditor, who had resigned. We do not believe a risk of material loss is probable related to this matter, and, accordingly, no amounts have been accrued. While it is possible that a loss may b
e incurred, we are unable to estimate the range of potential loss, if any. We believe the Delaware Supreme Court ruling significantly improved our position on this matter and intend to continue pursuing our rights under the purchase agreement.
Asbestos Litigation
—We
are a defendant in numerous lawsuits wherein plaintiffs allege exposure to asbestos at various locations. We have never been a manufacturer, distributor or supplier of asbestos products. We review and defend each case on its own merits and make accruals based on the probability of loss and best estimates of potential loss. We do not believe any unresolved asserted claim will have a material adverse effect on our future results of operations, financial position or cash flow. With respect to unasserted asbestos claims, we cannot identify a population of potential claimants with sufficient certainty to determine the probability of loss or estimate of future loss. While we continue to pursue recovery for recognized and unrecognized contingent losses through insurance, indemnification arrangements and other sources, we are unable to quantify the amount that we may recover because of the variability in coverage amounts, limitations and deductibles or the viability of carriers, with respect to our insurance policies for the years in question.
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.
In connection with the historical operation of our facilities, including those associated with acquired operations, substances which currently are or might be considered hazardous were used or disposed of at some sites that will or may require us to make expenditures for remediation. In addition, we have agreed to indemnify parties from whom we have purchased or to whom we have sold facilities for certain environmental liabilities arising from acts occurring before the dates those facilities were transferred. 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 waste 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.
We believe we are in compliance, in all material respects, with applicable environmental laws and regulations and maintain insurance coverage to mitigate our exposure to environmental liabilities. We do not anticipate we will incur material capital expenditures for environmental controls or for the investigation or remediation of environmental conditions during the remainder of 2018 or 2019. As of June 30, 2018, we had no environmental reserve recorded.
Asset Retirement Obligations
At some sites, we are contractually obligated to decommission our fabrication facilities upon site exit. Currently, we are unable to estimate any asset retirement obligations (“AROs”) due to the indeterminate life of our fabrication facilities. We regularly review the optimal future alternatives for our facilities. Any decision to retire one or more facilities will result in recording the present value of such obligations.
AROs would be recorded at the present value of the estimated costs to retire the asset at the time the obligation is incurred. As of June 30, 2018, we had no AROs recorded.
|
39
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 those provisions. Those 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 June 30, 2018, we determined that we had approximately $320 million of potential liquidated damages exposure, based on performance under contracts to date, and included $66 million as a reduction in transaction prices related to such exposure. We believe we will be successful in obtaining schedule extensions or other customer-agreed changes that should resolve the potential for the liquidated damages where we have not made a reduction in transaction prices. However, we may not achieve relief on some or all of the issues involved and, as a result, could be subject to liquidated damages being imposed on us in the future.
NOTE 21—SEGMENT REPORTING
We disclose the results of each of our reportable segments in accordance with ASC 280,
Segment Reporting
. Each of the reportable segments is separately managed by a senior executive who is a member of our Executive Committee (“EXCOM”). Our EXCOM is led by our Chief Executive Officer, who is the chief operating decision maker (“CODM”). Discrete financial information is available for each of the segments, and the EXCOM uses the operating results of each of the reportable segments for performance evaluation and resource allocation.
Upon completion of the Combination, during the second quarter of 2018, we reorganized our operations around five operating segments. This reorganization is intended to better serve our global clients, leverage our workforce, help streamline operations, and provide enhanced growth opportunities. Our five operating groups are: NCSA; EARC; MENA; APAC; and Technology. The segment information for the prior periods presented has been recast to conform to the current presentation. We also report certain corporate and other non-operating activities under the heading “Corporate and Other.”
Corporate and Other primarily reflects c
orporate expenses, certain centrally managed initiatives (such as restructuring charges), impairments, year-end mark-to-market pension actuarial gains and losses, costs not attributable to a particular
reportable
segment and unallocated direct operating expenses associated with the underutilization
of vessels,
f
abrication facilities and engineering resources
.
|
40
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Summarized financial information
for the three and six months ended June 30, 2018 and 2017 is as follows
:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In millions)
|
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA
|
|
$
|
995
|
|
|
$
|
42
|
|
|
$
|
1,093
|
|
|
$
|
70
|
|
EARC
|
|
|
58
|
|
|
|
2
|
|
|
|
74
|
|
|
|
18
|
|
MENA
|
|
|
469
|
|
|
|
557
|
|
|
|
814
|
|
|
|
867
|
|
APAC
|
|
|
108
|
|
|
|
188
|
|
|
|
257
|
|
|
|
353
|
|
Technology
|
|
|
105
|
|
|
|
-
|
|
|
|
105
|
|
|
|
-
|
|
Total revenues
|
|
$
|
1,735
|
|
|
$
|
789
|
|
|
$
|
2,343
|
|
|
$
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA
|
|
$
|
49
|
|
|
$
|
(7
|
)
|
|
$
|
51
|
|
|
$
|
(5
|
)
|
EARC
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
(3
|
)
|
MENA
|
|
|
97
|
|
|
|
118
|
|
|
|
167
|
|
|
|
182
|
|
APAC
|
|
|
43
|
|
|
|
31
|
|
|
|
116
|
|
|
|
53
|
|
Technology
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
Total segment operating income
|
|
|
206
|
|
|
|
137
|
|
|
|
348
|
|
|
|
227
|
|
Corporate
(2
)
|
|
|
(157
|
)
|
|
|
(52
|
)
|
|
|
(235
|
)
|
|
|
(90
|
)
|
Total operating income
|
|
|
49
|
|
|
|
85
|
|
|
|
113
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA
|
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
16
|
|
|
$
|
11
|
|
EARC
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
MENA
|
|
|
10
|
|
|
|
14
|
|
|
|
16
|
|
|
|
22
|
|
APAC
|
|
|
2
|
|
|
|
5
|
|
|
|
9
|
|
|
|
13
|
|
Technology
|
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
Corporate
|
|
|
20
|
|
|
|
2
|
|
|
|
22
|
|
|
|
4
|
|
Depreciation and amortization
|
|
$
|
58
|
|
|
$
|
28
|
|
|
$
|
80
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
(
3
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
15
|
|
EARC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
MENA
|
|
|
4
|
|
|
|
5
|
|
|
|
7
|
|
|
|
11
|
|
APAC
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
6
|
|
Technology
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Corporate
(
4
)
|
|
|
18
|
|
|
|
1
|
|
|
|
29
|
|
|
|
49
|
|
Total Capital expenditures
|
|
$
|
24
|
|
|
$
|
18
|
|
|
$
|
43
|
|
|
$
|
81
|
|
(1)
|
Intercompany transactions were not significant for the three and six months ended June 30, 2018 and 2017, respectively.
|
(2)
|
Corporate operating results for the three and six months ended June 30, 2018 include $63 million and $75 million of restructuring and integration costs, respectively. See Note 11,
Restructuring and Integration Costs,
for further discussion. Corporate operating results for the three and six months ended June 30, 2018 also include $37 million and $40 million of transaction costs, respectively. See Note 3,
Business Combination,
for further discussion. Corporate operating results for the three and six months ended June 30, 2017 includes approximately $3 million of gain on sale of assets.
|
(3)
|
Liabilities associated with assets acquired during the first six months of 2018 and 2017 were $14 million and $3 million, respectively.
|
(4)
|
Corporate and other capital expenditures in the first half of 2017 include the purchase of the
Amazon
, a pipelay and construction vessel. Following the purchase, we sold this vessel to an unrelated party and simultaneously entered into an 11-year bareboat charter agreement.
|
|
41
|
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Our assets by segment at June 30, 2018 and December 31, 2017 were as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(In millions)
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
NCSA
|
|
$
|
2,080
|
|
|
$
|
917
|
|
EARC
|
|
|
641
|
|
|
|
3
|
|
MENA
|
|
|
1,494
|
|
|
|
1,022
|
|
APAC
|
|
|
1,158
|
|
|
|
887
|
|
Technology
|
|
|
944
|
|
|
|
-
|
|
Corporate
|
|
|
146
|
|
|
|
394
|
|
Total tangible assets
|
|
|
6,463
|
|
|
|
3,223
|
|
Goodwill
|
|
|
3,926
|
|
|
|
-
|
|
Other intangibles, net
|
|
|
1,039
|
|
|
|
-
|
|
Total assets
(1)
|
|
$
|
11,428
|
|
|
$
|
3,223
|
|
(1)
|
Our marine vessels are included in the area in which they were located as of the reporting date.
|
NOTE 22—
SUBSEQUENT EVENTS
On July 27, 2018, we entered into agreements (the “Amazon Modification Agreements”) providing for certain modifications to the Amazon vessel and related financing and amended bareboat charter arrangements. The
Amazon
, a pipelay and construction vessel, was purchased by McDermott in February 2017, sold to an unrelated third party (the “Amazon Owner”) and leased back under a long-term bareboat charter that gives us the right to use the vessel. The total cost of the modifications, including project management and other fees and expenses, is expected to be in the range of approximately $260 million to $290 million. The Amazon Owner is expected to fund the cost of the modifications primarily through an export credit-backed senior loan provided by a group of lenders, supplemented by expected direct capital expenditure by McDermott of approximately $57.5 million over the course of the modifications, of which approximately $18.8 million had been incurred as at June 30, 2018. We will pay for the modification project through an increased bareboat charter rate over an extended 12-year term once the modifications are complete. For additional information about the modifications and the amended bareboat charter terms, see Part II – Other Information – Item 5.
|
42
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS