UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.
McDERMOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA |
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72-0593134 |
(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s Telephone Number, Including Area Code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of exchange on which registered |
Common stock, par value $1.00 per share |
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New York Stock Exchange (NYSE) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares of the registrant’s common stock outstanding at July 25, 2019 was
TABLE OF CONTENTS
McDERMOTT INTERNATIONAL, INC.
INDEX—FORM 10-Q
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1 |
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1 |
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1 |
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2 |
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3 |
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4 |
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5 |
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7 |
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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations |
44 |
Item 3—Quantitative and Qualitative Disclosures about Market Risk |
73 |
74 |
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75 |
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75 |
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75 |
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76 |
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77 |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
McDERMOTT INTERNATIONAL, INC. |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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(Unaudited) |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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(In millions, except per share amounts) |
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Revenues |
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$ |
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$ |
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$ |
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$ |
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Costs and Expenses: |
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Cost of operations |
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Project intangibles and inventory-related amortization |
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Total cost of operations |
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Research and development expenses |
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Selling, general and administrative expenses |
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Other intangibles amortization |
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Transaction costs |
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Restructuring and integration costs |
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Loss on asset disposals |
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Total expenses |
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Income (loss) from investments in unconsolidated affiliates |
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( |
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Investment in unconsolidated affiliates-related amortization |
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( |
) |
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- |
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( |
) |
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- |
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Operating (loss) income |
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( |
) |
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( |
) |
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Other expense: |
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Interest expense, net |
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( |
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( |
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( |
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( |
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Other non-operating expense, net |
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( |
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( |
) |
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( |
) |
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( |
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Total other expense, net |
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( |
) |
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( |
) |
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( |
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( |
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(Loss) income before provision for income taxes |
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( |
) |
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( |
) |
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( |
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Income tax benefit |
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( |
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( |
) |
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( |
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( |
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Net (loss) income |
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( |
) |
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( |
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Less: Net income (loss) attributable to noncontrolling interests |
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( |
) |
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( |
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Net (loss) income attributable to McDermott |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Dividends on redeemable preferred stock |
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( |
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- |
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( |
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- |
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Accretion of redeemable preferred stock |
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( |
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- |
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( |
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- |
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Net (loss) income attributable to common stockholders |
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( |
) |
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( |
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Net (loss) income per share attributable to common stockholders |
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Basic |
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$ |
( |
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$ |
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$ |
( |
) |
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$ |
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Diluted |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Shares used in the computation of net (loss) income per share |
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Basic |
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Diluted |
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See accompanying Notes to these Condensed Consolidated Financial Statements.
1 |
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
McDERMOTT INTERNATIONAL, INC. |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
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(Unaudited) |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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(In millions) |
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Net (loss) income |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Loss on derivatives |
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( |
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( |
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( |
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( |
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Foreign currency translation |
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( |
) |
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( |
) |
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( |
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Total comprehensive (loss) income |
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( |
) |
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( |
) |
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Less: Comprehensive income (loss) attributable to noncontrolling interests |
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( |
) |
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( |
) |
Comprehensive (loss) income attributable to McDermott |
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$ |
( |
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$ |
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$ |
( |
) |
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$ |
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See accompanying Notes to these Condensed Consolidated Financial Statements.
2 |
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
McDERMOTT INTERNATIONAL, INC. |
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CONSOLIDATED BALANCE SHEETS |
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June 30, 2019 |
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December 31, 2018 |
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(In millions, except per share amounts) |
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Assets |
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(Unaudited) |
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Current assets: |
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Cash and cash equivalents ($ |
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$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts receivable—trade, net ($ |
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Accounts receivable—other ($ |
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Contracts in progress ($ |
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Project-related intangible assets, net |
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Inventory |
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Other current assets ($ |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets |
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- |
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Accounts receivable—long-term retainages |
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Investments in unconsolidated affiliates |
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Goodwill |
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Other intangibles, net |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities, Mezzanine Equity and Stockholders' Equity |
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Current liabilities: |
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Revolving credit facility |
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$ |
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$ |
- |
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Short-term borrowing and current maturities of long-term debt |
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Current portion of long-term lease obligations |
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Accounts payable ($ |
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Advance billings on contracts ($ |
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Project-related intangible liabilities, net |
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Accrued liabilities ($ |
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Total current liabilities |
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Long-term debt |
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Long-term lease obligations |
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Deferred income taxes |
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Other non-current liabilities |
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Total liabilities |
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Commitments and contingencies |
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Mezzanine equity: |
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Redeemable preferred stock |
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Stockholders' equity: |
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Common stock, par value $ |
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issued |
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Capital in excess of par value |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Treasury stock, at cost: |
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( |
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( |
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Total McDermott Stockholders' Equity |
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Noncontrolling interest |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying Notes to these Condensed Consolidated Financial Statements.
3 |
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
McDERMOTT INTERNATIONAL, INC. |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(Unaudited) |
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Six Months Ended June 30, |
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2019 |
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2018 |
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(In millions) |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
) |
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$ |
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Non-cash items included in net (loss) income: |
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Loss on disposal of APP |
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- |
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Depreciation and amortization |
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Debt issuance cost amortization |
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Stock-based compensation charges |
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Deferred taxes |
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( |
) |
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( |
) |
Changes in operating assets and liabilities, net of effects of businesses acquired: |
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Accounts receivable |
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( |
) |
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Contracts in progress, net of advance billings on contracts |
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( |
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( |
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Accounts payable |
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Other current and non-current assets |
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( |
) |
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Investments in unconsolidated affiliates |
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- |
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Other current and non-current liabilities |
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( |
) |
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Total cash (used in) provided by operating activities |
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( |
) |
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Cash flows from investing activities: |
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CB&I consideration, net of cash of $ |
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- |
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( |
) |
Proceeds from asset disposals, net |
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Purchases of property, plant and equipment |
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( |
) |
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( |
) |
Advances related to proportionately consolidated consortiums |
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( |
) |
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( |
) |
Investments in unconsolidated affiliates |
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( |
) |
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( |
) |
Other |
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- |
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Total cash used in investing activities |
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( |
) |
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( |
) |
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Cash flows from financing activities: |
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Revolving credit facility borrowings |
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- |
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Revolving credit facility repayments |
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( |
) |
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- |
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Structured equipment financing |
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- |
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Proceeds from issuance of long-term debt |
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- |
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Repayment of debt and finance lease obligations |
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( |
) |
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( |
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Advances related to equity method joint ventures and proportionately consolidated consortiums |
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( |
) |
Debt and letter of credit issuance costs |
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- |
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( |
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Debt extinguishment costs |
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- |
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( |
) |
Repurchase of common stock |
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( |
) |
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( |
) |
Distribution to joint venture member |
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( |
) |
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- |
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Total cash provided by financing activities |
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Effects of exchange rate changes on cash, cash equivalents and restricted cash |
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|
( |
) |
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|
( |
) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
( |
) |
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Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
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Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to these Condensed Consolidated Financial Statements.
4 |
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
McDERMOTT INTERNATIONAL, INC. |
|
|||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
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(Unaudited) |
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Common Stock Par Value |
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Capital in Excess of Par Value |
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Retained Earnings/ (Accumulated Deficit) |
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Accumulated Other Comprehensive Loss ("AOCI") |
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Treasury Stock |
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Stockholders' Equity |
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Noncontrolling Interest ("NCI") |
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Total Equity |
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(In millions) |
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Balance at December 31, 2017 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Adoption of ASC 606 |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Balance at January 1, 2018 |
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|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other comprehensive loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Common stock issued |
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based compensation charges |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Purchase of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Retirement of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance at March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other comprehensive loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
CB&I combination |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Stock-based compensation charges |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Purchase of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Retirement of common stock |
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance at June 30, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other comprehensive loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Common stock issued |
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based compensation charges |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Accretion and dividends on redeemable preferred stock |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Conversion of noncontrolling interest |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Purchase of treasury shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Retirement of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Balance at March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
Net loss (income) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
$ |
|
|
|
|
( |
) |
Other comprehensive loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Common stock issued |
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock-based compensation charges |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Accretion and dividends on redeemable preferred stock |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See accompanying Notes to these Condensed Consolidated Financial Statements.
5 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TABLE OF CONTENTS
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|
PAGE |
|
7 |
|
Note 2—Basis of Presentation and Significant Accounting Policies |
|
7 |
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10 |
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13 |
|
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14 |
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16 |
|
|
17 |
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|
17 |
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|
18 |
|
|
19 |
|
Note 11—Restructuring and Integration Costs and Transaction Costs |
|
22 |
|
23 |
|
|
28 |
|
|
29 |
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|
30 |
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|
31 |
|
|
32 |
|
|
33 |
|
Note 19—Stockholders’ Equity and Equity-Based Incentive Plans |
|
33 |
|
35 |
|
|
37 |
|
|
37 |
|
|
41 |
6 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1—NATURE OF OPERATIONS AND ORGANIZATION
Nature of Operations
McDermott International, Inc. (“McDermott,” “we” or “us”), 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. We design and build end-to-end infrastructure and technology solutions 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
NOTE 2—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).
The Financial Statements reflect all wholly owned subsidiaries and those entities we are required to consolidate. See the “Joint Venture and Consortium Arrangements” section of “Note 2—Basis of Presentation and Significant Accounting Policies” in the 2018 Form 10-K 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.
On May 10, 2018, we completed our combination with Chicago Bridge & Iron Co. N.V. (“CB&I”) through a series of transactions (the “Combination”). See Note 3, Business Combination, for further discussion.
Reclassifications
Loss on asset disposals—In the second quarter of 2019, we sold APP, as discussed in Note 4, Disposition of Alloy Piping Products, LLC. Loss from the disposition of APP is included in Loss on asset disposals in our Condensed Consolidated Statements of Operations (our “Statement of Operations”). To conform to current period presentation, $
Bidding and Proposal Costs—We began classifying bid and proposal costs in Cost of operations in our Statement of Operations in the second quarter of 2018, as a result of our realignment of commercial personnel within our operating groups in conjunction with the Combination. For periods reported prior to the second quarter of 2018, bid and proposal costs were included in Selling, general and administrative expenses (“SG&A”). For the six months ended June 30, 2019 and 2018, our Cost of operations included $
7 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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:
|
• |
revenue recognition for our contracts, including estimating costs to complete each contract and the recognition of incentive fees and unapproved change orders and claims; |
|
• |
determination of fair value with respect to acquired assets and liabilities; |
|
• |
fair value and recoverability assessments that must be periodically performed with respect to long-lived tangible assets, goodwill and other intangible assets; |
|
• |
valuation of deferred tax assets and financial instruments; |
|
• |
the determination of liabilities related to loss contingencies, self-insurance programs and income taxes; |
|
• |
the determination of pension-related obligations; and |
|
• |
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.
Recently Adopted Accounting Guidance
Leases—In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This ASU requires 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. We adopted this ASU effective January 1, 2019 using the modified retrospective application, applying the new standard to leases in place as of the adoption date. Prior periods have not been adjusted.
We elected to apply certain practical expedients allowed upon the adoption of this ASU, which, among other things, allowed us to: not reassess whether any expired or existing contracts contain leases; carry forward the historical lease classification; and not have to reassess any initial direct cost of any expired or existing leases. Adoption of the new standard resulted in the recording of Operating lease right-of-use assets, Current portion of long-term lease obligations and Long-term lease obligations of approximately $
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 U.S. Tax Cuts and Jobs Act related to items in accumulated other comprehensive income (loss) (“AOCI”) that the FASB refers to as having been stranded in AOCI. We adopted this ASU effective January 1, 2019. The adoption of this ASU did not have a material impact on the Financial Statements and related disclosures.
Derivatives—In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815). This ASU includes financial reporting improvements related to hedging relationships to better report the economic results of an entity’s risk management activities in its financial statements. Additionally, this ASU makes certain improvements to simplify the application of the hedge accounting guidance. We adopted this ASU effective January 1, 2019. The adoption of this ASU did not have a material impact on the Financial Statements. See Note 17, Derivative Financial Instruments, for related disclosures.
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging: Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of benchmark interest rates permitted in the application of hedge accounting. This ASU permits the use of an OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. We adopted this ASU effective January 1, 2019. The adoption of this ASU did not have a material impact on the Financial Statements and related disclosures. See Note 17, Derivative Financial Instruments.
8 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Significant Accounting Policies
Our significant accounting policies are detailed in “Note 2—Basis of Presentation and Significant Accounting Policies” in the 2018 Form 10-K. The following is an update to those significant accounting policies due to recently adopted accounting guidance.
Leases—We classify an arrangement as a lease at inception if we have the right to control the use of an identified asset we do not legally own for a period of time in exchange for consideration. In general, leases with an initial term of 12 months or less are not recorded on our Balance Sheet unless it is reasonably certain we will renew the lease. All leases with an initial term of more than 12 months, whether classified as operating or finance, are recorded to our Balance Sheet based on the present value of lease payments over the lease term, determined at lease commencement. Determination of the present value of lease payments requires a discount rate. We use the implicit rate in the lease agreement when available. Most of our leases do not provide an implicit interest rate; therefore, we use an incremental borrowing rate based on information available at the commencement date.
Our lease terms may include options to extend or terminate the lease. Lease expense for operating leases and the amortization of the right-of-use asset for finance leases are recognized on a straight-line basis over the lease terms, in each case taking into account such option when it is reasonably certain we will exercise that option.
We have lease agreements with lease and non-lease components, which are generally accounted for separately for all leases other than leases at our construction project sites. Non-lease components included in assets and obligations under operating leases are not material to our financial statements.
For our joint ventures, consortiums and other collaborative arrangements (referred to as “joint ventures” and “consortiums”), the right-of-use asset and lease obligations are generally recognized by the party that enters into the lease agreement, which could be the joint venture directly, one of our joint venture members or us. We have recognized our proportionate share of leases entered into by our joint ventures, where the joint venture has the right to control the use of an identified asset.
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.
|
• |
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 generally apply hedge accounting treatment for contracts used to hedge operating exposures and designate them as cash flow hedges. Therefore, gains and losses are included in AOCI until the associated underlying operating exposure impacts our earnings, at which time the impact of the hedge is recorded within the income statement line item associated with the underlying exposure. Changes in the fair value of instruments that we do not designate as cash flow hedges are recognized in the income statement line item associated with the underlying exposure. |
|
• |
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 $ |
See Note 16, Fair Value Measurements, and Note 17, Derivative Financial Instruments, for further discussion.
Accounting Guidance Issued but Not Adopted as of June 30, 2019
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 ASU on our future consolidated financial statements and related disclosures.
Defined Benefit Pension Plans—In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20). This ASU eliminates, modifies and adds disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. We are evaluating the impact of the new guidance on our future disclosures.
9 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidation—In October 2018, the FASB issued ASU No. 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities (“VIE”). This ASU amends the guidance for determining whether a decision-making fee is a variable interest, which requires companies to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The ASU is effective for annual and interim periods beginning after December 15, 2019. We are currently assessing the impact of this ASU on our future consolidated financial statements and related disclosures.
Collaborative Arrangements—In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606. This ASU clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In addition, unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that is, a distinct good or service) when assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. This ASU is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of this ASU on our future consolidated financial statements and related disclosures.
NOTE 3—BUSINESS COMBINATION
General―On
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 $
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: (1) McDermott’s stockholders owned approximately
Purchase Consideration―We completed the Combination for a gross purchase price of approximately $
|
|
|
(In millions, except per share amounts) |
CB&I shares for Combination consideration |
|
|
|
Conversion Ratio: 1 CB&I share = 0.82407 McDermott shares |
|
|
|
McDermott stock price on May 10, 2018 |
|
|
|
Equity Combination consideration transferred |
|
$ |
|
Fair value of converted awards earned prior to the Combination |
|
|
|
Total equity Combination consideration transferred |
|
|
|
Cash consideration transferred |
|
|
|
Total Combination consideration transferred |
|
|
|
Less: Cash acquired |
|
|
( |
Total Combination consideration transferred, net of cash acquired |
|
$ |
|
10 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 external appraisal and valuation of certain assets, including specifically identified intangible assets and property and equipment. The excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired, totaling approximately $
Our final purchase price allocation, completed in the second quarter of 2019, resulted in adjustments to certain assets and liabilities of approximately $
The following summarizes our final purchase price allocation of the fair values of the assets acquired and liabilities assumed at the Combination Date (in millions):
|
|
May 10, 2018 |
|
|
Net tangible assets: |
|
|
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventory |
|
|
|
|
Contracts in progress |
|
|
|
|
Assets held for sale (1) |
|
|
|
|
Other current assets |
|
|
|
|
Investments in unconsolidated affiliates (2) |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Other non-current assets |
|
|
|
|
Accounts payable |
|
|
( |
) |
Advance billings on contracts (3) |
|
|
( |
) |
Deferred tax liabilities |
|
|
( |
) |
Other current liabilities |
|
|
( |
) |
Other non-current liabilities |
|
|
( |
) |
Noncontrolling interest |
|
|
|
|
Total net tangible liabilities |
|
|
( |
) |
Project-related intangible assets/liabilities, net (4) |
|
|
|
|
Other intangible assets (5) |
|
|
|
|
Net identifiable liabilities |
|
|
( |
) |
Goodwill (6) |
|
|
|
|
Total Combination consideration transferred |
|
|
|
|
Less: Cash acquired |
|
|
( |
) |
Total Combination consideration transferred, net of cash acquired |
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
11 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) |
|
|
|
|
|
May 10, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
Useful Life Range |
|
Weighted Average Useful Life |
|
|
||
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Process technologies |
|
|
|
$ |
|
|
|
10-30 |
|
|
27 |
|
|
Trade names |
|
|
|
|
|
|
|
10-20 |
|
|
12 |
|
|
Customer relationships |
|
|
|
|
|
|
|
4-11 |
|
|
10 |
|
|
Trademarks |
|
|
|
|
|
|
|
10 |
|
|
10 |
|
|
Total |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
(6) |
|
Impact on RPOs—CB&I RPOs totaled approximately $
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, 2018 and gives effect to pro forma events that are directly attributable to the Combination, factually supportable, and expected to have a continuing impact on our combined results, following the Combination. The pro forma financial information includes adjustments to: (1) include additional intangibles amortization, investment in unconsolidated affiliates-related amortization, depreciation of property, plant and equipment and net interest expense associated with the Combination and (2) exclude restructuring, integration and transaction 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 date indicated.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
June 30, 2018 (1) |
|
|||||
|
|
(In millions, except per share amounts) |
|
|||||
Pro forma revenue |
|
$ |
|
|
|
$ |
|
|
Pro forma net income attributable to common stockholders |
|
|
|
|
|
|
|
|
Pro forma net income per share attributable to common stockholders |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
Shares used in the computation of net income per share (2) |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
|
(1) |
|
12 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(2) |
|
NOTE 4—DISPOSITION OF ALLOY PIPING PRODUCTS, LLC
We performed a review of our business portfolio, which included businesses acquired in the Combination. Our review sought to determine if any portions of our business are non-core for purposes of our vertically integrated offering model. As a result of our review, we identified our industrial storage tank and pipe fabrication businesses as non-core for purposes of our vertically integrated offering model. On June 24, 2019, we entered into an agreement to sell APP, the distribution and manufacturing arm of our pipe fabrication business, previously included in our NCSA segment. We completed the sale of APP on June 27, 2019.
Loss on the APP sale is included in Loss on asset disposals in our Statement of Operations and is summarized as follows:
|
|
(In millions) |
|
|
Assets |
|
|
|
|
Inventory |
|
$ |
|
|
Property and equipment |
|
|
|
|
Goodwill |
|
|
|
|
Other assets |
|
|
|
|
Assets sold |
|
$ |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Account payable |
|
$ |
|
|
Other liabilities |
|
|
|
|
Liabilities sold |
|
$ |
|
|
|
|
|
|
|
Net assets sold |
|
$ |
|
|
|
|
|
|
|
Sale proceeds (net of transaction costs of $ |
|
|
|
|
|
|
|
|
|
Loss on net assets sold |
|
$ |
|
|
Results of APP’s operations during the three and six-month periods ended June 30, 2019 and 2018 were not material to McDermott, as a whole.
We are continuing to pursue the sale of the remaining portion of the pipe fabrication business, subject to approval by our Board of Directors.
13 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5—REVENUE RECOGNITION
RPOs
Our RPOs by segment were as follows:
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
(Dollars in millions) |
|
|||||||||||||
NCSA |
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
EARC |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
MENA |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
APAC |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
Technology |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
% |
Total |
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
Of the June 30, 2019 RPOs, we expect to recognize revenues as follows:
|
2019 |
|
|
2020 |
|
|
Thereafter |
|
|||
|
(In millions) |
|
|||||||||
Total RPOs |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Revenue Disaggregation
Our revenue by product offering, contract types and revenue recognition methodology was as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2019 (2) |
|
|
2018 (2) |
|
|
2019 (2) |
|
|
2018 (2) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by product offering: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore and subsea |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
LNG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Downstream (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by contract type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed price |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Reimbursable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hybrid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit-basis and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by recognition methodology: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
At a point in time |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
14 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other
For the three and six months ended June 30, 2019, we recognized approximately $
For the three and six months ended June 30, 2018, we recognized approximately $
Revenues recognized during the three and six months ended June 30, 2019, with respect to amounts included in our Advance billings on contracts balance as of December 31, 2018, were approximately $
Unapproved Change Orders, Claims and Incentives
Unapproved Change Orders and Claims—As of June 30, 2019, we had unapproved change orders and claims included in transaction prices for our projects aggregating to approximately $
Incentives—As of June 30, 2019, we had incentives included in transaction prices for our projects aggregating to approximately $
The amounts recorded in contract prices and recognized as revenues 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
Our accrual of provisions for estimated losses on active uncompleted contracts as of June 30, 2019 was $
Our subsea pipeline flowline installation project in support of the Ayatsil field offshore Mexico for Pemex (“Line 1 and Line 10”) was also determined to be in substantial loss position as of June 30, 2019, as discussed further below.
For purposes of the discussion below, when we refer to a percentage of completion on a cumulative basis, we are referring to the cumulative percentage of completion, which includes progress made prior to the Combination Date. In accordance with U.S. GAAP, as of the Combination Date, we reset the progress to completion for all of CB&I’s projects then in progress to
Summary information for our significant ongoing loss projects as of June 30, 2019 is as follows:
Cameron LNG―At June 30, 2019, our U.S. LNG export facility project in Hackberry, Louisiana for Cameron LNG (being performed by our NCSA operating group) was approximately
15 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Freeport LNG―At June 30, 2019, Trains 1 & 2 of our U.S. LNG export facility project in Freeport, Texas for Freeport LNG (being performed by our NCSA operating group) were approximately
During the three months ended June 30, 2019, Freeport LNG Train 3 was negatively impacted by $
Line 1 and Line 10― As of June 30, 2019, our subsea pipeline flowline installation project in support of the Ayatsil field offshore Mexico (being performed by our NCSA operating group) was approximately
Summary information for our significant loss projects previously reported in the 2018 Form 10-K that are substantially complete as of June 30, 2019 is as follows:
Calpine Power Project―At June 30, 2019, our U.S. gas turbine power project for Calpine (being performed by our NCSA operating group) was approximately
Abkatun-A2 Project―At June 30, 2019, our Abkatun-A2 platform project in Mexico for Pemex (being performed by our NCSA operating group) was approximately
NOTE 6—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, 2019 and 2018. For discussion of significant changes in estimates resulting from changes in transaction prices, see Note 5, Revenue Recognition.
Three and six months ended June 30, 2019
Segment operating income for the three and six months ended June 30, 2019 was impacted by net unfavorable changes in estimates totaling approximately $
NCSA—Our segment results for the three and six months ended June 30, 2019 were negatively impacted by net unfavorable changes in cost estimates, recognized during the period, aggregating approximately $
|
• |
the Freeport LNG project taken as a whole - $ |
|
• |
Calpine - $ |
|
• |
Abkatun-A2, Line 1 and Line 10 and Xanab projects for Pemex - $ |
|
• |
Downstream petrochemical projects - $ |
|
• |
Power projects - $ |
16 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
• |
various other projects. |
See Note 5, Revenue Recognition, for further discussion of our Freeport LNG Trains 1 & 2 and Train 3 and Pemex Line 1 and Line 10 projects.
MENA—Our segment results for the three and six months ended June 30, 2019 were positively impacted by net favorable changes in estimates aggregating approximately $
Three and six months ended June 30, 2018
Segment operating income for the three and six months ended June 30, 2018 was positively impacted by net favorable changes in estimates totaling approximately $
NOTE 7—CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Balance Sheets that sum to the totals of such amounts shown in our Statements of Cash Flows as of June 30, 2019 and December 31, 2018:
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
Restricted cash and cash equivalents (1) |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash shown in the Statements of Cash Flows |
|
$ |
|
|
|
$ |
|
|
(1) |
|
NOTE 8—ACCOUNTS RECEIVABLE
Accounts Receivable—Trade, Net―
|
|
|
|
|||||
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Contract receivables (1) |
|
$ |
|
|
|
$ |
|
|
Retainages (2) |
|
|
|
|
|
|
|
|
Less allowances |
|
|
( |
) |
|
|
( |
) |
Accounts receivable—trade, net |
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
17 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Our goodwill balance is attributable to the excess of the purchase price over the fair value of net assets acquired in connection with the Combination.
|
|
|
|
|
|
|
(In millions) |
|
|
Balance as of December 31, 2018 |
|
$ |
|
|
Adjustments to finalize purchase accounting estimates (1) |
|
|
|
|
Allocated to APP for disposal |
|
|
( |
) |
Currency translation adjustments |
|
|
( |
) |
Balance as of June 30, 2019 (2) |
|
$ |
|
|
(1) |
|
(2) |
|
During the first quarter of 2019
In the second quarter of 2019, goodwill was allocated to the APP business. Following its disposal, a goodwill impairment test was performed on the retained portion of goodwill within the NCSA reporting unit. We utilized 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 consider such market indicators as well as market participant assumptions in our discounted cash flow analysis and determination of fair value. The discounted cash flow methodology is based, to a large extent, on assumptions about future events, which may or may not occur as anticipated, and such deviations could have a significant impact on the calculated estimated fair values of our reporting units. These assumptions included the use of significant unobservable inputs, representative of a Level 3 fair value measurement, and included, but were not limited to, estimates of discount rates, future growth rates and terminal values for each reporting unit.
The discounted cash flow analysis for the NCSA reporting unit included forecasted cash flows over a five-year forecast period (2019 through 2023), with our 2019 management budget used as the basis for our projections. These forecasted cash flows took into consideration historical and recent results, the reporting unit’s backlog and near-term prospects and management’s outlook for the future. A terminal value was also calculated using a terminal value growth assumption to derive the annual cash flows after the discrete forecast period. A reporting unit specific discount rate was applied to the forecasted cash flows and terminal cash flows to determine the discounted future cash flows, or fair value, of each reporting unit. Our assessment took into consideration the incremental changes in project estimates discussed above and reflected the increased market risk surrounding the award and execution of future projects and adjusted our cost of capital assumptions to be in-line with recent market indicators for our company and industry. These increases in cost of capital and risk premium assumptions resulted in a significant increase in our discount rates utilized for purposes of determining our discounted cash flows and reduced the estimated fair values of our reporting units.
18 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Project-Related Intangibles
Our project-related intangibles at June 30, 2019 and December 31, 2018, including the June 30, 2019 weighted-average useful lives, were as follows:
|
|
|
|
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||
|
|
Weighted Average Useful Life |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|||||||
|
|
(In years) |
|
|
(In millions) |
|
||||||||||||||||||||||
Project-related intangible assets |
|
|
4 |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Project-related intangible liabilities |
|
|
2 |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Total (1) |
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
(1) |
|
Other Intangible Assets
Our other intangible assets at June 30, 2019 and December 31, 2018, including the June 30, 2019 weighted-average useful lives, were as follows:
|
|
|
|
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||
|
|
Weighted Average Useful Life |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|||||||
|
|
(In years) |
|
|
(In millions) |
|
||||||||||||||||||||||
Process technologies |
|
|
27 |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Trade names |
|
|
12 |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Customer relationships |
|
|
10 |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Trademarks |
|
|
10 |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total (1) |
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
(1) |
|
NOTE 10—JOINT VENTURE AND CONSORTIUM ARRANGEMENTS
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 deemed to be VIEs where we are not the primary beneficiary and are accounted for using proportionate consolidation:
|
• |
McDermott/Zachry Industrial Inc. (“Zachry”)—We have a |
|
• |
McDermott/Zachry/Chiyoda—We have a consortium with Zachry and Chiyoda (MDR— |
19 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
• |
McDermott/Chiyoda—We have a |
|
• |
McDermott/CTCI—We have a |
|
• |
CCS JV s.c.a.r.l.—We have a joint venture with Saipem and Chiyoda (MDR— |
The following table presents summarized balance sheet information for our share of our proportionately consolidated consortiums:
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Current assets (1) |
|
$ |
|
|
|
$ |
|
|
Non-current assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
|
|
|
$ |
|
|
(1) |
|
As of June 30, 2019 and December 31, 2018, Accrued liabilities reflected on the McDermott International, Inc. Consolidated Balance Sheet included $
The following is a summary description of our significant consortium that has been deemed a collaborative arrangement, in which we are not the primary beneficiary and we record our share of the consortium’s revenues, costs and profits:
|
• |
McDermott/Zachry/Chiyoda—We have a consortium with Zachry and Chiyoda to perform EPC work for a natural gas liquefaction facility in Sabine Pass, Texas. The collaborative arrangement includes an underlying primary consortium with all three parties sharing equal voting interests. This primary consortium has subcontract relationships with a separate consortium between Zachry and McDermott, with equal voting interests and separate scopes of work to be executed by each consortium party. |
The following table presents summarized balance sheet information for our share of that proportionately consolidated collaborative arrangement:
|
|
June 30, 2019 |
|
|
|
|
(In millions) |
|
|
Current assets |
|
$ |
|
|
Non-current assets |
|
|
- |
|
Total assets |
|
$ |
|
|
|
|
|
|
|
Current liabilities |
|
$ |
|
|
Equity Method Joint Ventures—The following is a summary description of our significant joint ventures accounted for using the equity method:
20 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
• |
Chevron Lummus Global, L.L.C. (“CLG”)—We have a |
|
• |
NET Power, LLC (“NET Power”)—We have a joint venture with a unit of Exelon Corporation (“Exelon”), 8 Rivers Capital and Oxy Low Carbon Ventures LLC, a subsidiary of Occidental Petroleum Corporation (“Oxy”), (MDR— |
|
• |
McDermott/CTCI—We have a |
|
• |
io Oil and Gas—We co-own several |
|
• |
Qingdao McDermott Wuchuan Offshore Engineering Company Ltd.—We have a |
Amortization expense associated with fair value adjustments recorded to Investments in unconsolidated affiliates in conjunction with the Combination was $
Consolidated Joint Ventures—The following is a summary description of our significant joint ventures we consolidate due to their designation as VIEs for which we are the primary beneficiary:
|
• |
McDermott/Orano— We have a joint venture with Orano, of which we own |
|
• |
McDermott/Kentz—We have a venture with Kentz Engineers & Constructors, a unit of SNC-Lavalin Group “Kentz” (McDermott— |
|
• |
CB&I Nass Pipe Fabrication W.L.L.—We have a joint venture created in 1993 to support the fabrication and distribution of pipe in the Middle East. |
|
• |
CB&I SKE&C Middle East Ltd.—We have a joint venture created in 2010 to own and support a pipe fabrication facility in the United Arab Emirates. Through its wholly owned subsidiary, Shaw Emirates Pipes Manufacturing LLC, it supports the fabrication and distribution of pipe in the Middle East. |
21 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents summarized balance sheet information for our consolidated joint ventures, including other consolidated joint ventures that are not individually material to our financial results:
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Current assets |
|
$ |
|
|
|
$ |
|
|
Non-current assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
|
|
|
$ |
|
|
Other—The use of 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 AND TRANSACTION COSTS
Restructuring and Integration Costs
Restructuring and integration costs for the three and six months ended June 30, 2019 were $
Transaction Costs
Transaction costs were $
22 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12—DEBT
The carrying values of our debt obligations are as follows:
|
|
|
|
|||||
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Current |
|
|
|
|
|
|
|
|
Revolving credit facility |
|
$ |
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Structured equipment financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
|
|
|
|
|
|
|
Less: unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Current maturities of long-term debt, net of unamortized debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowing and current maturities of long-term debt |
|
$ |
|
|
|
$ |
|
|
Long-term |
|
|
|
|
|
|
|
|
Term Facility |
|
$ |
|
|
|
$ |
|
|
10.625% senior notes |
|
|
|
|
|
|
|
|
North Ocean 105 construction financing |
|
|
|
|
|
|
|
|
Less: current maturities of long-term debt |
|
|
( |
) |
|
|
( |
) |
Less: unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net of unamortized debt issuance costs |
|
$ |
|
|
|
$ |
|
|
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 $
|
• |
a $ |
|
• |
a $ |
|
• |
a $ |
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 ($ |
|
• |
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 $ |
|
• |
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.
23 |
|
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 $
Term Facility—As of June 30, 2019, we had $
Principal under the Term Facility is payable quarterly and interest is assessed at either (1) the Eurodollar rate plus a margin of
The future scheduled maturities of the Term Facility are:
|
|
(In millions) |
|
|
2019 |
|
$ |
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
|
Additionally, as of June 30, 2019, there were approximately $
Revolving Credit Facility and LC Facility—We have a $
24 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Credit Agreement Covenants—The Credit Agreement includes the following financial covenants that are tested on a quarterly basis:
|
• |
the minimum permitted fixed charge coverage ratio (as defined in the Credit Agreement) is |
|
• |
the maximum permitted leverage ratio is (i) |
|
• |
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 $ |
In addition, the Credit Agreement contains various covenants that, among other restrictions, limit our ability to:
|
• |
incur or assume indebtedness; |
|
• |
grant or assume liens; |
|
• |
make acquisitions or engage in mergers; |
|
• |
sell, transfer, assign or convey assets; |
|
• |
make investments; |
|
• |
repurchase equity and make dividends and certain other restricted payments; |
|
• |
change the nature of our business; |
|
• |
engage in transactions with affiliates; |
|
• |
enter into burdensome agreements; |
|
• |
modify our organizational documents; |
|
• |
enter into sale and leaseback transactions; |
|
• |
make capital expenditures; |
|
• |
enter into speculative hedging contracts; and |
|
• |
make prepayments on certain junior debt. |
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 event 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 we are unable to make any of the representations and warranties in the Credit Agreement at the applicable time, we will be unable to borrow funds or have letters of credit issued under the Credit Agreement.
Credit Agreement Covenants Compliance—As of June 30, 2019, we were in compliance with all our restrictive and financial covenants under the Credit Agreement.
Ratios |
|
Requirement |
|
Actual |
Minimum fixed charge coverage ratio |
|
|
|
|
Maximum total leverage ratio |
|
|
|
|
Minimum liquidity |
$ |
|
$ |
1,023 million |
25 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Future compliance with our financial and restrictive covenants under the Credit Agreement could be impacted by circumstances or conditions beyond our control, including, but not limited to, the delay or cancellation of projects, decreased letter of credit capacity, decreased profitability on our projects, changes in currency exchange or interest rates, performance of pension plan assets or changes in actuarial assumptions. Further, we could be impacted if our customers experience a material change in their ability to pay us or if the banks associated with the Credit Agreement were to cease operations, or if there is a full or partial break-up of the European Union (“EU”) or its currency, the Euro.
Letter of Credit Agreement
On October 30, 2018, we, as a guarantor, entered into a Letter of Credit Agreement (the “Letter of Credit Agreement”) with McDermott Technology (Americas), Inc., McDermott Technology (US), Inc. and McDermott Technology, B.V., each a wholly owned subsidiary of ours, as co-applicants, and Barclays Bank PLC, as administrative agent. The Letter of Credit Agreement provides for a facility for extensions of credit in the form of performance letters of credit in the aggregate face amount of up to $
Letter of Credit Agreement Covenants Compliance—As of June 30, 2019, we were in compliance with all our restrictive and financial covenants under the Letter of Credit Agreement.
Senior Notes
On April 18, 2018, we issued $
Year |
|
Optional redemption price |
|
|
2021 |
|
|
|
% |
2022 |
|
|
|
% |
2023 and thereafter |
|
|
|
% |
In addition, prior to May 1, 2021, we may redeem up to
26 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Senior Notes Covenants—The Senior Notes Indenture contains covenants that, among other things, provide limits around our ability to: (1) incur or guarantee additional indebtedness or issue preferred stock; (2) make investments or certain other restricted payments; (3) pay dividends or distributions on our capital stock or purchase or redeem our subordinated indebtedness; (4) sell assets; (5) create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (6) create certain liens; (7) sell all or substantially all of our assets or merge or consolidate with or into other companies; (8) enter into transactions with affiliates; and (9) create unrestricted subsidiaries. Those covenants are subject to various exceptions and limitations.
Senior Notes Covenants Compliance—As of June 30, 2019, we were in compliance with all our restrictive covenants under the Senior Notes Indenture. Future compliance with our restrictive covenants under the Senior Notes Indenture could be impacted by circumstances or conditions beyond our control, including, but not limited to, those discussed above with respect to the Credit Agreement.
Other Financing Arrangements
North Ocean (“NO”) Financing―On September 30, 2010, McDermott International, Inc., as guarantor, and NO 105 AS, one of our subsidiaries, 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 NO 105 AS, a mortgage on the NO 105, and a lien on substantially all of the other assets of NO 105 AS. As of June 30, 2019, the outstanding borrowing under this facility was approximately $
Receivables Factoring―During the six months ended June 30, 2019, we sold, without recourse, approximately $
Structured Equipment Financing―In the second quarter of 2019, we entered into a $
Uncommitted 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, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
Uncommitted Line Capacity |
|
|
Utilized |
|
|
Uncommitted Line Capacity |
|
|
Utilized |
|
||||
|
|
(In millions) |
|
|||||||||||||
Bank Guarantee and Bilateral Letter of Credit (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Surety Bonds (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
(2) |
|
27 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13—LEASE OBLIGATIONS
The following tables summarize our leased assets and lease liability obligations:
|
|
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
|
|
(In millions) |
|
|||||
Leases |
|
Classification |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
Operating lease assets |
|
Operating lease right-of-use assets |
|
$ |
|
|
|
$ |
- |
|
Finance lease assets (1) |
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|
|
Total leased assets |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Operating |
|
Current portion of long-term lease obligations |
|
|
|
|
|
|
- |
|
Finance |
|
Current portion of long-term lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
Operating |
|
Long-term lease obligations |
|
|
|
|
|
|
- |
|
Finance |
|
Long-term lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
(1) |
Our finance leases are represented by: |
|
(a) |
A jack-up barge utilized in our MENA region; and |
|
(b) |
The Amazon, a pipelay and construction vessel, was purchased by us in February 2017, sold to an unrelated third party (the “Amazon Owner”) and leased back under a long-term bareboat charter that gave us the right to use the vessel and was recorded as an operating lease. 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 total cost of the modifications, including project management and other fees and expenses, is expected to be in the range of approximately $ |
28 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Our lease cost was as follows:
|
|
|
|
Three months ended |
|
|
Six months ended |
|
||
|
|
|
|
June 30, 2019 |
|
|||||
|
|
Classification |
|
(In millions) |
|
|||||
Operating lease cost (1) |
|
SG&A Expenses |
|
$ |
|
|
|
$ |
|
|
Operating lease cost (1) |
|
Cost of operations |
|
|
|
|
|
|
|
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
Cost of operations |
|
|
|
|
|
|
|
|
Interest on lease liabilities |
|
Net Interest Expense |
|
|
|
|
|
|
|
|
Net lease cost |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
Future minimum lease payments for our operating and finance lease obligations as of June 30, 2019 are as follows:
|
|
Operating leases |
|
|
Finance leases |
|
|
Total |
|
|||
|
|
(In millions) |
|
|||||||||
2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
After 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Interest |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Lease term and discount rates for our operating and finance lease obligations are as follows:
Lease Term and Discount Rate |
|
June 30, 2019 |
|
|
Weighted-average remaining lease term (years) |
|
|
|
|
Operating leases |
|
7.2 |
|
|
Finance leases |
|
8.6 |
|
|
Weighted-average discount rate |
|
|
|
|
Operating leases |
|
|
|
% |
Finance leases |
|
|
|
% |
Supplemental information for our operating and finance lease obligations are as follows:
Other information |
|
June 30, 2019 |
|
|
|
|
(In millions) |
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
Operating cash flows from operating leases |
|
$ |
( |
) |
Financing cash flows from finance leases |
|
|
( |
) |
Leased assets obtained in exchange for new operating lease liabilities |
|
|
|
|
Leased assets obtained in exchange for new finance lease liabilities |
|
|
- |
|
NOTE 14—PENSION AND POSTRETIREMENT BENEFITS
We sponsor various defined benefit pension plans covering eligible employees and provide specific postretirement benefits for eligible retired U.S. employees and their dependents through health care and life insurance benefit programs.
29 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides contribution information for our Non-U.S. defined benefit pension plans and other postretirement plans at June 30, 2019:
|
|
Non-U.S. Pension Plans |
|
|
|
|
(In millions) |
|
|
Contributions made through June 30, 2019 |
|
$ |
|
|
Contributions expected for the remainder of 2019 |
|
|
|
|
Total contributions expected for 2019 |
|
$ |
|
|
The following table provides a breakdown of the components of the net periodic benefit cost (income) associated with our defined benefit pension plans for the periods indicated:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30 |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
|
(In millions) |
|
|
(In millions) |
|
||||||||||
U.S. pension plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amortization of prior service (credits) costs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net periodic benefit cost (1) |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. pension plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amortization of prior service (credits) costs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net periodic benefit cost (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
Net periodic benefit cost for our other postretirement plans is not material. |
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.
NOTE 15—ACCRUED LIABILITIES
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Accrued contract costs |
|
$ |
|
|
|
$ |
|
|
Advances from equity method and proportionally consolidated joint ventures and consortiums (1) |
|
|
|
|
|
|
|
|
Income taxes payable |
|
|
- |
|
|
|
|
|
Other accrued liabilities (2) |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
30 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16—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 as of June 30, 2019 and December 31, 2018 that are (1) measured and reported at fair value in the Financial Statements on a recurring basis and (2) not measured at fair value on a recurring basis in the Financial Statements:
|
|
June 30, 2019 |
|
|||||||||||||||||
|
|
Carrying Amount |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
|
|
(In millions) |
|
|||||||||||||||||
Measured at fair value on recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts (1) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
- |
|
Not measured at fair value on recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and capital lease obligations (2) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|||||||||||||||||
|
|
Carrying Amount |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
|
|
(In millions) |
|
|||||||||||||||||
Measured at fair value on recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts (1) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
- |
|
Not measured at fair value on recurring basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and capital lease obligations (2) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
(1) |
|
(2) |
|
The carrying amounts that we have reported for our other financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and revolving credit facility debt approximate their fair values due to the short maturity of those instruments.
31 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17—DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Derivatives—The notional value of our outstanding foreign exchange rate derivative contracts totaled $
As of June 30, 2019, we have approximately $
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 $
As of June 30, 2019, in connection with the interest rate swap arrangement, we have approximately $
The following table presents the total fair value of the derivatives by underlying risk and balance sheet classification:
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other non-current assets |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total derivatives asset |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
Other non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Total derivatives liability |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
32 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the total value, by underlying risk, recognized in other comprehensive income and reclassified from AOCI to our Statements of Operations, in connection with derivatives:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
|
(In millions) |
|
|
(In millions) |
|
||||||||||
Amount of gain (loss) recognized in other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Interest rate hedges |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gain (loss) recognized on derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Cost of operations |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Interest rate hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Gain (loss) recognized on derivatives not designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Cost of operations |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
NOTE 18—INCOME TAXES
During the three months ended June 30, 2019, we recognized an income tax benefit of $
During the six months ended June 30, 2019, we recognized an income tax benefit of $
During the six months ended June 30, 2019, our unrecognized tax benefits decreased $
33 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 19—STOCKHOLDERS’ EQUITY AND EQUITY-BASED INCENTIVE PLANS
Shares Outstanding and Treasury Shares―The changes in the number of shares outstanding and treasury shares held by us are as follows (in millions):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Shares outstanding |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
|
|
|
|
|
|
Common stock issued |
|
|
|
|
|
|
|
|
Shares issued in the Combination (Note 3, Business Combination) |
|
|
- |
|
|
|
|
|
Purchase of common stock |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares held as Treasury shares |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
|
|
|
|
|
|
Purchase of common stock |
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued at the end of the period |
|
|
|
|
|
|
|
|
(1) |
Amounts in this table may not sum due to rounding. |
Combination—As discussed in Note 3, Business Combination, we issued
Stock-Based Compensation Expense―During the three months ended June 30, 2019 and 2018, we recognized $
In addition, during the three months ended June 30, 2019 and 2018, we recognized $
Accumulated Other Comprehensive (Loss) Income―
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In millions) |
|
|||||
Foreign currency translation adjustments ("CTA") |
|
$ |
( |
) |
|
$ |
( |
) |
Net unrealized loss on derivative financial instruments |
|
|
( |
) |
|
|
( |
) |
Defined benefit pension and other postretirement plans |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
34 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the components of AOCI and the amounts that were reclassified during the periods indicated:
|
|
Foreign currency translation adjustments |
|
|
Net unrealized loss on derivative financial instruments (1) |
|
|
Defined benefit pension and other postretirement plans |
|
|
TOTAL |
|
||||
|
|
(In millions) |
|
|||||||||||||
December 31, 2017 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
Other comprehensive income before reclassification |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Amounts reclassified from AOCI (2) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Net current period other comprehensive income |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
June 30, 2018 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Other comprehensive income before reclassification |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Amounts reclassified from AOCI (2) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Net current period other comprehensive income |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
June 30, 2019 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
(1) |
|
(2) |
|
Noncontrolling Interest―In 2002, P.T. Sarana Interfab Mandiri (“PTSIM”) acquired a
NOTE 20—REDEEMABLE PREFERRED STOCK
On November 29, 2018 (the “Closing Date”), we completed a private placement of (1)
Redeemable Preferred Stock—The Redeemable Preferred Stock will initially have an Accreted Value (as defined in the Certificate of Designation with respect to the Redeemable Preferred Stock (the “Certificate of Designation”)) of $
35 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Redeemable Preferred Stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by us.
The Redeemable Preferred Stock will have a liquidation preference equal to the then applicable Minimum Return (the “Liquidation Preference”) plus accrued and unpaid dividends. The Liquidation Preference will initially be equal to $
|
• |
|
prior to January 1, 2020, a MOIC multiple of |
|
• |
|
on or after January 1, 2020 but prior to January 1, 2022, a MOIC multiple of |
|
• |
|
on or after January 1, 2022 but prior to January 1, 2023, a MOIC multiple of |
|
• |
|
on or after January 1, 2023 but prior to January 1, 2025, a MOIC multiple of |
|
• |
|
on or after January 1, 2025, a MOIC multiple of |
We may redeem the Redeemable Preferred Stock at any time for an amount per share of Redeemable Preferred Stock equal to the Liquidation Preference of each such share plus all accrued dividends on such share (such amount per share, the “Redemption Consideration”).
At any time after the seventh anniversary of the Closing Date, each holder may elect to have us fully redeem such holder’s then outstanding Redeemable Preferred Stock in cash, to the extent we have funds legally available for payment of dividends, at a redemption price per share equal to the Redemption Consideration for each share.
Upon a change of control (as defined in the Certificate of Designation), if we have not previously redeemed the Redeemable Preferred Stock and the holders of a majority of the then-outstanding Redeemable Preferred Stock do not agree with us to an alternative treatment, then in connection with such change of control, each holder may elect either: (1) to cause us to redeem all, but not less than all, of its outstanding Redeemable Preferred Stock at a redemption price per share equal to the Redemption Consideration, which would be payable in full in cash or, if any of the Senior Notes are then outstanding, payable partially in cash in an amount equal to
The fair value upon issuance represented the net impact of $
Warrants—The Warrants are exercisable at any time after the earlier of (1) any change of control or the commencement of proceedings for the voluntary or involuntary dissolution, liquidation or winding up of us and (2) the first anniversary of the Closing Date, and from time to time, in whole or in part, until the tenth anniversary of the Closing Date. The fair value measurement of the Warrants was based on the market-observable fair value of our common stock upon issuance and thus represented a level 1 input.
36 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The exercise price and the number of shares of common stock for which a Warrant is exercisable are subject to adjustment from time to time upon the occurrence of certain events including: (1) payment of a dividend or distribution to holders of shares of our common stock payable in common stock, (2) the distribution of any rights, options or warrants to all holders of our common stock entitling them for a period of not more than
NOTE 21—EARNINGS PER SHARE
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, |
|
||||||||||
|
|
2019 (1) |
|
|
2018 (2) |
|
|
2019 (1) |
|
|
2018 (2) |
|
||||
|
|
(In millions, except per share amounts) |
|
|||||||||||||
Net (loss) income attributable to McDermott |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Dividends on redeemable preferred stock |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Accretion of redeemable preferred stock |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Net (loss) income attributable to common stockholders |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock (basic) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based awards |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Warrants and preferred stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Weighted average common stock (diluted) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Diluted: |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
(1) |
|
(2) |
|
NOTE 22—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.
37 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Project Arbitration Matters—We are in arbitration (governed by the arbitration rules of the International Chamber of Commerce) entitled Refineria de Cartagena S.A. v. Chicago Bridge & Iron Company N.V., et al., which was commenced on March 8, 2016 in connection with a large, cost reimbursable refinery construction project in Colombia completed by CB&I in 2015. Refineria de Cartagena, the customer on the project, is alleging that we are responsible for certain cost overruns, delays and consequential damages on the project. The customer is claiming total damages in excess of $
In addition, we are in arbitration (governed by the arbitration rules of the United Nations Commission on International Trade Law) entitled CBI Constructors Pty & Kentz Pty Ltd and Chevron Australia Pty Ltd., which was commenced on or about May 17, 2017, with the customer for one of CB&I’s previously completed consolidated joint venture projects, regarding differing interpretations of the contract related to reimbursable billings. The matter has been bifurcated, with hearings on entitlement held in November 2018 and hearings on the amount of damages scheduled for September 2019. In December 2018, the tribunal issued an interim award on entitlement, finding that the joint venture was not overpaid for its craft labor but that certain overpayments were made to the joint venture for its staff. As a result, we and our joint venture counterparty are asserting claims against the customer of approximately $
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 $
Asbestos Litigation—We are a defendant in numerous lawsuits wherein plaintiffs allege exposure to asbestos at various locations. 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 future losses. We do not believe a risk of material loss is probable related to these matters, and, accordingly, our reserves were not significant as of June 30, 2019. 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.
38 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Mercury Litigation—Certain of our subsidiaries are co-defendants in a group of consolidated “toxic exposure” claims, involving
In addition, under the terms of certain insurance policies, additional deductible amounts may be due upon a resolution of these matters, either by settlement or judgment. We do not believe a risk of material loss is probable for additional deductible amounts due upon resolution of these matters, and accordingly, our reserves for this matter were not significant as of June 30, 2019.
Labor Litigation—A former employee of one of our subsidiaries commenced a class action lawsuit under the Fair Labor Standards ACT (“FLSA”) entitled Cantrell v. Lutech Resources, Inc., (S.D. Texas 2017) Case No. 4:17-CV-2679 on or about September 5, 2017, alleging that he and his fellow class members were not paid one and one half times their normal hourly wage rates for hours worked that exceeded 40 hours in a work week. Our subsidiary has yet to answer the allegations in the complaint, as agreed by the parties, in order to allow mediation to take place. The first mediation session commenced in October 2018 and is ongoing, and a tentative settlement has been reached between the parties. We do not believe a risk of material loss is probable related to this matter, and, accordingly, our reserves for this matter were not significant as of June 30, 2019.
Pre-Combination CB&I Securities Litigations—On March 2, 2017, a complaint was filed in the United States District Court for the Southern District of New York seeking class action status on behalf of purchasers of CB&I common stock and alleging damages on their behalf arising from alleged false and misleading statements made during the class period from October 30, 2013 to June 23, 2015. The case is captioned: In re Chicago Bridge & Iron Company N.V. Securities Litigation, No. 1:17-cv-01580-LGS (the “Securities Litigation”). The defendants in the case are: CB&I; a former chief executive officer of CB&I; a former chief financial officer of CB&I; and a former controller and chief accounting officer of CB&I. On June 14, 2017, the court named ALSAR Partnership Ltd. as lead plaintiff. On August 14, 2017, a consolidated amended complaint was filed alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, arising out of alleged misrepresentations about CB&I’s accounting for the acquisition of The Shaw Group, CB&I’s accounting with respect to the two nuclear projects being constructed by The Shaw Group, and CB&I’s financial reporting and public statements with respect to those two projects. On May 24, 2018, the court denied defendants’ motion to dismiss and the parties are currently engaged in the discovery process. On February 4, 2019, lead plaintiff ALSAR Partnership Ltd. and additional plaintiffs Iron Workers Local 40, 361, & 417 – Union Security Funds and Iron Workers Local 580 – Joint Funds moved for class certification and appointment as class representatives. That motion remains pending before the magistrate-judge. We are not able at this time to determine the likelihood of loss, if any, arising from this matter and, accordingly,
On October 26, 2018, two actions were filed by individual plaintiffs based on allegations similar to those alleged in the Securities Litigation. On February 25, 2019, a third action was filed by an individual plaintiff based on similar allegations. All three actions were filed in the United States District Court for the Southern District of New York and are captioned Gotham Diversified Neutral Master Fund, LP, et al. v. Chicago Bridge & Iron Company N.V. et al., Case No. 1:18-cv-09927 (the “Gotham Action”); Appaloosa Investment L.P., et al., v. Chicago Bridge & Iron Company N.V., et al., Case No. 1:18-cv-09928 (the “Appaloosa Action”) and CB Litigation Recovery I, LLC v. Chicago Bridge & Iron Company N.V., et al., Case No. 1:19-cv-01750 (the “CB Litigation Recovery Action”). Besides CB&I, the other defendants in all three cases are the same individual defendants as in the Securities Litigation described above. Plaintiffs assert causes of action based on alleged violations of Sections 10(b), 18 and 20(a) of the Exchange Act and Rule 10b-5 thereunder, along with common law causes of action. On January 25, 2019, the defendants filed in the Gotham and Appaloosa Actions partial motions to dismiss the causes of actions asserted under Section 18 of the Exchange Act and the common law causes of action, which are currently pending. On March 25, 2019, the court entered a stipulation and order staying the CB Recovery Action pending a ruling on the partial motions to dismiss in the Gotham and Appaloosa Actions and making the decision on the partial motions to dismiss the Gotham and Appaloosa Actions applicable to the CB Recovery Action. We are not able at this time to determine the likelihood of loss, if any, arising from these matters and, accordingly,
39 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On or about November 2, 2017, a complaint was filed in the District Court of Montgomery County, Texas by Daniel Cohen and associated individuals and corporations, alleging causes of action under both common and state law for alleged false and misleading statements related to CB&I’s acquisition of The Shaw Group in 2013, particularly with regard to two nuclear projects being constructed by Shaw in South Carolina and Georgia. The case is captioned Daniel Cohen, et al. v. Chicago Bridge & Iron Company, N.V., et al., No. 17-10-12820. The other defendants are the same individual defendants as in the Securities Litigation described above. The plaintiffs alleged that the individual defendants made, or had authority over the content and method of communicating information to the public, including the alleged misstatements and omissions detailed in the complaint, resulting in a financial loss on shares of stock purchased by the plaintiffs. Discovery in this matter is proceeding. We are not able at this time to determine the likelihood of loss, if any, arising from this matter and, accordingly,
Post-Combination McDermott Securities Litigation—On November 15, 2018, a complaint was filed in the United States District Court for the Southern District of Texas seeking class action status on behalf of purchasers of McDermott common stock and alleging damages on their behalf arising from allegedly false and misleading statements made during the class period from January 24, 2018 to October 30, 2018. The case is captioned: Edwards v. McDermott International, Inc., et al., No. 4:18-cv-04330. The defendants in the case are: McDermott; David Dickson, our president and chief executive officer; and Stuart Spence, our chief financial officer. The plaintiff has alleged that the defendants made material misrepresentations and omissions about the integration of the CB&I business, certain CB&I projects and their fair values, and our business, prospects and operations. The plaintiff asserts claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. On January 14, 2019, a related action was filed in the United States District Court for the Southern District of Texas seeking class action status on behalf of all shareholders of McDermott common stock as of April 4, 2018 who had the right to vote on the Combination, captioned: The Public Employees Retirement System of Mississippi v. McDermott International, Inc., et al., No. 4:19-cv-00135. The plaintiff has alleged the defendants (which include our chief executive officer and chief financial officer) made material misrepresentations and omissions in the proxy statement we used in connection with the Combination. The plaintiff asserted claims under Section 14(a) and 20(a) of the Exchange Act. We filed a motion to consolidate the two actions, and the court granted that motion on February 22, 2019. The court appointed lead plaintiffs in both actions on June 5, 2019. We plan to file motions to dismiss all of the claims once amended pleadings are filed. We are not able at this time to determine the likelihood of loss, if any, arising from these matters and, accordingly,
On March 1, 2019 and March 4, 2019, two essentially identical class action lawsuits were filed in the Harris County (Texas) District Court alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933 on behalf of CB&I shareholders who acquired McDermott common stock pursuant or traceable to the Registration Statement on Form S-4 and the related Prospectus we issued in connection with the Combination. These actions were captioned Curti v. McDermott International, Inc., et al., Case No. 2019-15780 and Stremcha v. McDermott International, Inc., et al., Case No. 2019-15473. The defendants, besides McDermott International, Inc., included present officers of McDermott and current and past members of McDermott’s board of directors. On or about July 9, 2019, the plaintiffs in these actions voluntarily filed a notice of nonsuit and the actions have been dismissed without any payment by us.
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.
40 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 matters or for the investigation or remediation of environmental conditions during the remainder of 2019 and 2020. As of June 30, 2019, we had
Asset Retirement Obligations (“ARO”)
On March 26, 2019, we signed an agreement to enter into a long-term land lease agreement with Saudi Aramco to establish a fabrication and maritime facility located in Ras Al-Khair, Saudi Arabia. In connection with the contemplated lease, the closure of our current fabrication facility in Dubai, United Arab Emirates, is expected to occur in 2030. ARO recorded as of June 30, 2019 was equal to the present value of the estimated costs to decommission the current fabrication facility and was not material.
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, 2019, we determined that we had approximately $
NOTE 23—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
41 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intersegment sales are recorded at prices we generally establish by reference to similar transactions with unaffiliated customers and were not material during the three and six months ended June 30, 2019 or 2018 and are eliminated upon consolidation.
Operating Information by Segment
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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(In millions) |
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(In millions) |
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Revenues: |
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NCSA |
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$ |
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$ |
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$ |
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|
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$ |
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EARC |
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MENA |
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APAC |
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Technology |
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Total revenues |
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$ |
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$ |
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$ |
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$ |
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Operating (loss) income: (1) |
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Segment operating income (loss): |
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|
|
|
|
|
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|
|
|
|
|
|
|
NCSA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
EARC |
|
|
|
|
|
|
( |
) |
|
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|
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|
|
( |
) |
MENA |
|
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APAC |
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Technology |
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Total segment operating income |
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Corporate |
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( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total operating (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Depreciation and amortization: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
EARC |
|
|
|
|
|
|
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|
|
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|
|
|
|
|
MENA |
|
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|
|
|
|
|
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|
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|
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|
|
|
|
APAC |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
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|
|
|
|
|
|
|
|
|
|
|
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Corporate |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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$ |
|
|
|
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|
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Capital expenditures (2): |
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|
|
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NCSA |
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$ |
|
|
|
$ |
- |
|
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$ |
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|
|
$ |
|
|
EARC |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
MENA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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APAC |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
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- |
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Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Capital expenditures |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
42 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Assets by Segment
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|||||
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June 30, 2019 |
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December 31, 2018 |
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(In millions) |
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Segment assets: |
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NCSA |
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$ |
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$ |
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EARC |
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MENA |
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APAC |
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Technology |
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|
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Corporate (3) |
|
|
( |
) |
|
|
( |
) |
Total assets |
|
$ |
|
|
|
$ |
|
|
(1) NCSA operating results for the three and six months ended June 30, 2019 included $
Corporate operating results for the three and six months ended June 30, 2019 included:
|
• |
$ |
|
• |
$ |
Corporate operating results for the six months ended June 30, 2018 included:
|
• |
$ |
|
• |
$ |
See Note 11, Restructuring and Integration Costs and Transaction Costs, for further discussion.
(2)
(3)
NOTE 24—SUBSEQUENT EVENT
On July 15, 2019, we entered into an asset purchase agreement to acquire assets of Siluria Technologies, including various intellectual property and research and development assets. The purchase price was not material to McDermott.
The purchase adds complementary process and catalyst technologies to our Technology business, expands our licensing portfolio further into the gas monetization market and expands our research and development capabilities for process development, high-throughput catalyst developments and catalyst scale-up.
43 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this quarterly report on Form 10-Q, unless the context otherwise indicates, “McDermott,” “MDR,” “we,” “our,” “us” or the “Company” mean McDermott International, Inc. and its consolidated subsidiaries.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords. This information should be read in conjunction with the unaudited Financial Statements and the Notes thereto included in Item 1 of this report and the audited Consolidated Financial Statements and the related Notes and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 25, 2019 (the “2018 Form 10-K”).
From time to time, our management or persons acting on our behalf make “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the scope, execution, timing and success of specific projects and our future remaining performance obligations (“RPOs”), revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as “achieve,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy” or other words that convey the uncertainty of future events or outcomes. Sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.
In addition, various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. Those forward-looking statements appear in the Notes to our Condensed Consolidated Financial Statements (the “Financial Statements”) in Item 1 of this report, in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, Legal Proceedings in Item 1 of Part II of this report and elsewhere in this report.
These forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:
|
• |
expectations regarding our business combination with CB&I described in Note 3, Business Combination, to the accompanying Financial Statements, and the anticipated benefits of combining CB&I’s business with McDermott’s business; |
|
• |
future levels of revenues, operating margins, operating income, cash flows, net income or earnings per share; |
|
• |
the outcome of project awards and scope, execution and timing of specific projects, including timing to complete and cost to complete these projects; |
|
• |
future project activities, including the commencement and subsequent timing of, and the success of, operational activities on specific projects, and the ability of projects to generate sufficient revenues to cover our fixed costs; |
|
• |
estimates of revenue over time and contract profits or losses; |
|
• |
expectations regarding the acquisition or divestiture of assets, including expectations regarding the sales of our industrial storage tanks and the remaining portion of our pipe fabrication businesses and the timing of, and use of proceeds from, those transactions; |
|
• |
anticipated levels of demand for our products and services; |
|
• |
global demand for oil and gas and fundamentals of the oil and gas industry; |
|
• |
expectations regarding offshore development of oil and gas; |
|
• |
market outlook for the EPCI market; |
|
• |
expectations regarding cash flows from operating activities; |
44 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
expectations regarding RPOs; |
|
• |
future levels of capital, environmental or maintenance expenditures; |
|
• |
the success or timing of completion of ongoing or anticipated capital or maintenance projects; |
|
• |
the adequacy of our sources of liquidity and capital resources; |
|
• |
interest expense; |
|
• |
the effectiveness of our derivative contracts in mitigating foreign currency and interest rate risks; |
|
• |
results of our capital investment program; |
|
• |
the impact of U.S. and non-U.S. tax law changes; |
|
• |
the potential effects of judicial or other proceedings on our business, financial condition, results of operations and cash flows; and |
|
• |
the anticipated effects of actions of third parties such as competitors, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation. |
These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
|
• |
general economic and business conditions and industry trends; |
|
• |
general developments in the industries in which we are involved; |
|
• |
the volatility of oil and gas prices; |
|
• |
decisions about capital investment to be made by oil and gas companies and other participants in the energy and natural resource industries, demand from which is the largest component of our revenues; |
|
• |
other factors affecting future levels of demand, including investments across the natural gas value chain, including LNG and petrochemicals, investments in power and petrochemical facilities and investments in various types of facilities that require storage structures and pre-fabricated pipe; |
|
• |
the highly competitive nature of the businesses in which we are engaged; |
|
• |
uncertainties as to timing and funding of new contract awards; |
|
• |
our ability to appropriately bid, estimate and effectively perform projects on time, in accordance with the schedules established by the applicable contracts with customers; |
|
• |
changes in project design or schedule; |
|
• |
changes in scope or timing of work to be completed under contracts; |
|
• |
cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates, performance, disputes or otherwise; |
|
• |
changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors; |
|
• |
risks associated with labor productivity; |
|
• |
cancellations of contracts, change orders and other modifications and related adjustments to RPOs and the resulting impact from using RPOs as an indicator of future revenues or earnings; |
|
• |
the collectability of amounts reflected in change orders and claims relating to work previously performed on contracts; |
45 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
our ability to settle or negotiate unapproved change orders and claims and estimates regarding liquidated damages; |
|
• |
the capital investment required to construct new-build vessels and maintain and/or upgrade our existing fleet of vessels; |
|
• |
the ability of our suppliers and subcontractors to deliver raw materials in sufficient quantities and/or perform in a timely manner; |
|
• |
volatility and uncertainty of the credit markets; |
|
• |
our ability to comply with covenants in our credit agreements and other debt instruments and the availability, terms and deployment of capital; |
|
• |
the unfunded liabilities of our pension and other post-retirement plans, which may negatively impact our liquidity and, depending upon future operations, may impact our ability to fund our pension obligations; |
|
• |
the continued availability of qualified personnel; |
|
• |
the operating risks normally incident to our lines of business, which could lead to increased costs and affect the quality, costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors and give rise to contractually imposed liquidated damages; |
|
• |
natural or man-caused disruptive events that could damage our facilities, equipment or our work-in-progress and cause us to incur losses and/or liabilities; |
|
• |
equipment failure; |
|
• |
changes in, or our failure or inability to comply with, government regulations; |
|
• |
adverse outcomes from legal and regulatory proceedings; |
|
• |
impact of potential regional, national and/or global requirements to significantly limit or reduce greenhouse gas and other emissions in the future; |
|
• |
changes in, and liabilities relating to, existing or future environmental regulatory matters; |
|
• |
changes in U.S. and non-U.S. tax laws or regulations; |
|
• |
the continued competitiveness and availability of, and continued demand and legal protection for, our intellectual property assets or rights, including the ability of our patents or licensed technologies to perform as expected and to remain competitive, current, in demand, profitable and enforceable; |
|
• |
our ability to keep pace with rapid technological changes or innovations; |
|
• |
the risk that we may not be successful in updating and replacing current information technology and the risks associated with information technology systems interruptions and cybersecurity threats; |
|
• |
the risks associated with failures to protect data privacy in accordance with applicable legal requirements and contractual provisions binding upon us; |
|
• |
the consequences of significant changes in interest rates and currency exchange rates; |
|
• |
difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions; |
|
• |
the risks associated with integrating acquired businesses; |
|
• |
the risks associated with forming and operating joint ventures, including exposure to joint and several liability for failures in performance by our co-venturers; |
|
• |
social, political and economic situations in countries where we do business; |
|
• |
the risks associated with our international operations, including risks relating to local content or similar requirements; |
46 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
foreign currency and interest rate risks and our ability to properly manage or hedge those or similar risks; |
|
• |
interference from adverse weather or sea conditions; |
|
• |
the possibilities of war, other armed conflicts or terrorist attacks; |
|
• |
the effects of asserted and unasserted claims and the extent of available insurance coverages; |
|
• |
our ability to obtain surety bonds, letters of credit and new financing arrangements; |
|
• |
our ability to maintain builder’s risk, liability, property and other insurance in amounts and on terms we consider adequate and at rates that we consider economical; |
|
• |
the aggregated risks retained in our captive insurance subsidiaries; and |
|
• |
the impact of the loss of insurance rights as part of the Chapter 11 Bankruptcy settlement concluded in 2006 involving several of our former subsidiaries. |
We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in the 2018 Form 10-K. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report and in the 2018 Form 10-K could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.
Overview
We are a fully integrated provider of engineering, procurement, construction and installation (“EPCI”) and technology solutions to the energy industry and design and build end-to-end infrastructure and technology solutions to transport and transform oil and gas into a variety of products. Our customers include national, major integrated and other oil and gas companies as well as producers of petrochemicals and electric power. Our proprietary technologies, integrated expertise and comprehensive solutions are utilized for liquefied natural gas (“LNG”), power, offshore and subsea, and downstream (includes downstream oil and gas processing facilities and licensed technologies and catalysts) energy projects around 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. Contracts are usually awarded through a competitive bid process.
Business Combination in 2018
On May 10, 2018 (the “Combination Date”), we completed our combination with Chicago Bridge & Iron Company N.V. (“CB&I”) (the “Combination”) (see Note 3, Business Combination, to the accompanying Financial Statements for further discussion). Following completion of the Combination, during the second quarter of 2018, we reorganized our operations into five business segments to better serve our global clients, leverage our workforce, help streamline operations and provide enhanced growth opportunities.
Business Segments
Our five business segments, which represent our reportable segments, are: North, Central & South America (“NCSA”); Europe, Africa, Russia & the Caspian (“EARC”); Middle East & North Africa (“MENA”); Asia Pacific (“APAC”); and Technology. We also report certain corporate and other non-operating activities under the heading “Corporate and Other.” Corporate and Other primarily reflects costs that are not allocated to our segments. For financial information about our segments, see Note 23, Segment Reporting, to the accompanying Financial Statements.
|
• |
NCSA—Our NCSA segment designs, engineers and constructs upstream offshore oil & gas facilities, downstream oil & gas facilities, gas-fired power plants, LNG import and export terminals, atmospheric and refrigerated storage vessels and terminals and water storage and treatment facilities and performs pipe and module fabrication. Our June 30, 2019 RPOs composition by product offering was 53% LNG, 33% Downstream, 8% Offshore & Subsea and 6% Power. We anticipate the majority of future opportunities over the intermediate term are likely to be in the U.S. LNG and petrochemical markets. Our June 30, 2019 RPOs distribution for this segment by contracting type was approximately 92% fixed-price and hybrid and 8% cost-reimbursable and other. |
47 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
EARC―Our EARC segment designs, engineers and constructs upstream offshore oil & gas facilities, downstream oil & gas facilities, LNG import and export terminals and atmospheric and refrigerated storage vessels and terminals. Our June 30, 2019 RPOs composition by product offering was 50% LNG, 26% Offshore & Subsea and 24% Downstream and was primarily comprised of fixed-price contracts. We anticipate the majority of future opportunities over the intermediate term are likely to be in the downstream oil & gas markets in Russia and upstream and LNG projects in Africa. |
|
• |
MENA―Our MENA segment designs, engineers and constructs upstream offshore oil & gas facilities and pipelines, downstream oil & gas facilities, hydrocarbon processing facilities, atmospheric and refrigerated storage vessels and terminals, and performs pipe fabrication and manufacturing. Our June 30, 2019 RPOs composition by product offering was 91% Offshore & Subsea and 9% Downstream and was primarily comprised of fixed-price contracts. We anticipate the majority of future opportunities over the intermediate term are likely to be in the Middle East offshore market. |
|
• |
APAC—Our APAC segment designs, engineers and constructs upstream offshore oil & gas facilities and pipelines, refining and petrochemical facilities, hydrocarbon processing facilities, LNG import and export terminals and atmospheric and refrigerated storage vessels and terminals. Our June 30, 2019 RPOs composition by product offering was 93% Offshore & Subsea and 7% Downstream, which was primarily comprised of fixed-price contracts. We anticipate the majority of future opportunities over the intermediate term are likely to be in India and Australia. |
|
• |
Technology―Our Technology segment is a leading technology licensor of proprietary gas processing, refining, petrochemical and coal gasification technologies as well as a supplier of proprietary catalysts, equipment and related engineering services. These technologies are critical in the refining of crude oil into gasoline, diesel, jet fuel and lubes, the manufacturing of petrochemicals and polymers, as well as the gasification of coal into syngas. The Technology segment also has a 50% owned unconsolidated joint venture that provides proprietary process technology licenses and associated engineering services and catalysts, primarily for the refining industry. Our June 30, 2019 RPOs composition for this segment was 100% Downstream and primarily comprised of fixed-price contracts. |
Loss Projects
Our accrual of provisions for estimated losses on active uncompleted contracts as of June 30, 2019 was $132 million and primarily related to the Cameron LNG project and the Freeport LNG Trains 1 & 2 projects. Our accrual of provisions for estimated losses on active uncompleted contracts as of December 31, 2018 was $266 million and primarily related to the Cameron LNG, Freeport LNG Trains 1 & 2, Calpine and Abkatun-A2 projects. Our Freeport LNG Train 3 project is not anticipated to be in a loss position.
Our subsea pipeline flowline installation project in support of the Ayatsil field offshore Mexico for Pemex (“Line 1 and Line 10”) was also determined to be in substantial loss position as of June 30, 2019, as discussed further below.
For purposes of the discussion below, when we refer to a percentage of completion on a cumulative basis, we are referring to the cumulative percentage of completion, which includes progress made prior to the Combination Date. In accordance with U.S. GAAP, as of the Combination Date, we reset the progress to completion for all of CB&I’s projects then in progress to 0% for accounting purposes based on the remaining costs to be incurred as of that date.
Summary information for our significant ongoing loss projects as of June 30, 2019 is as follows:
Cameron LNG―At June 30, 2019, our U.S. LNG export facility project in Hackberry, Louisiana for Cameron LNG (being performed by our NCSA operating group) was approximately 78% complete on a post-Combination basis (approximately 93% on a cumulative basis) and had an accrued provision for estimated losses of approximately $58 million. In the second quarter of 2019, NCSA project operating margin was positively impacted by recognition of approximately $110 million of incentives related to the projected achievement of progress milestones.
48 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Freeport LNG―At June 30, 2019, Trains 1 & 2 of our U.S. LNG export facility project in Freeport, Texas for Freeport LNG (being performed by our NCSA operating group) were approximately 87% complete on a post-Combination basis (approximately 96% on a cumulative basis) and had an accrued provision for estimated losses of approximately $19 million. During the three and six months ended June 30, 2019, the project was negatively impacted by $27 million and $54 million, respectively, due to changes in cost estimates resulting from increases in construction and subcontractor costs. These cost estimate increases were partially offset by the recording of approximately $11 million of incentive revenues in the first quarter of 2019.
During the three months ended June 30, 2019, Freeport LNG Train 3 was negatively impacted by $11 million of changes in cost estimates at completion. During the six months ended June 30, 2019, Freeport LNG Train 3 was positively impacted by $5 million of changes in estimates, primarily due to increased productivity and savings in indirect costs in the first quarter. During the six months ended June 30, 2019, the Freeport LNG project taken as a whole had an overall negative $38 million impact on operating margin at completion.
Line 1 and Line 10― As of June 30, 2019, our subsea pipeline flowline installation project in support of the Ayatsil field offshore Mexico (being performed by our NCSA operating group) was approximately 85% complete and had an accrued provision for estimated losses of approximately $6 million. During the three and six months ended June 30, 2019, the project was negatively impacted by $10 million and $28 million, respectively, of changes in cost estimates associated with unexpected schedule extensions, resulting in additional vessel and labor costs. The project is expected to be completed in the third quarter of 2019.
Summary information for our significant loss projects previously reported in the 2018 Form 10-K that are substantially complete as of June 30, 2019 is as follows:
Calpine Power Project―At June 30, 2019, our U.S. gas turbine power project for Calpine (being performed by our NCSA operating group) was approximately 99% complete on a post-Combination basis (approximately 99.7% on a pre-Combination basis), and the remaining accrued provision for estimated losses was not significant.
Abkatun-A2 Project―At June 30, 2019, our Abkatun-A2 platform project in Mexico for Pemex (being performed by our NCSA operating group) was approximately 99% complete, and the remaining accrued provision for estimated losses was not significant.
Review of Business Portfolio
We have performed a review of our business portfolio, which included businesses acquired in the Combination. Our review sought to determine if any portions of our business are non-core for purposes of our vertically integrated offering model. As a result of our review, we identified our industrial storage tank and pipe fabrication businesses as non-core for purposes of our vertically integrated offering model. We completed the sale of Alloy Piping Products, the distribution and manufacturing arm of our pipe fabrication business (“APP”), during the second quarter of 2019. We are continuing to pursue the sale of the remaining portion of our pipe fabrication business.
We have identified potential buyers for our industrial storage tank business, and sales efforts with respect to that business remain ongoing. In connection with that contemplated sale, we may retain a continuing minority ownership or other economic interest in the business. Our anticipated aggregate net cash proceeds from the pipe fabrication and storage tank transactions are now expected to be lower than the approximately $1 billion we previously estimated. Our ongoing competitive sale processes are now expected to result in closings of the sales in the fourth quarter of 2019; however, we can provide no assurance that either sale process will be completed on the anticipated timeline or at all. Any potential sale would be subject to approval by our Board of Directors. Our Credit Agreement and the Indenture relating to our Senior Notes (each as defined and described in “—Liquidity and Capital Resources” below) require us to use the net cash proceeds from any sale of a business generating in excess of $500 million in sales proceeds to reduce our outstanding debt. If the net cash proceeds received are less than $500 million, our Credit Agreement and such Indenture permit us to reinvest those proceeds in long-term assets within 365 days after the receipt of the net proceeds (or enter into binding commitments to do so within such period, and thereafter reinvest such proceeds within 180 days). Any proceeds not reinvested at the end of such period would be required to be used to reduce our outstanding debt.
The financial results of our industrial storage tank and pipe fabrication businesses are primarily included within our NCSA, MENA and APAC operating groups.
49 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for our industrial storage tank business as a percentage of our consolidated Revenues were approximately 11% and 8% for the six months ended June 30, 2019 and year ended December 31, 2018, respectively. Property, plant and equipment, net for our industrial storage tank business as a percentage of our consolidated Property, plant and equipment, net was approximately 6% and 3% as of June 30, 2019 and December 31, 2018, respectively. Operating income, including the allocation of the corresponding intangible amortization, for our industrial storage tank business was $26 million and $69 million for the six months ended June 30, 2019 and year ended December 31, 2018, respectively.
Revenues for our pipe fabrication business as a percentage of our consolidated Revenues were less than 1% for the six months ended June 30, 2019 and 1% for the year ended December 31, 2018. Property, plant and equipment, net for our pipe fabrication business as a percentage of our consolidated Property, plant and equipment, net was approximately 5% and 6% as of June 30, 2019 and December 31, 2018, respectively. Operating results for our pipe fabrication business were not material for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively.
We have not included total assets of the two businesses in the above discussion, as the allocation of goodwill resulting from the Combination to these businesses has not been completed. As of June 30, 2019, we have allocated our goodwill at the reporting unit level. Similar to our disposal of APP, if we complete the planned dispositions of the remaining pipe fabrication business and storage tanks business, we will be required to allocate goodwill for purposes of determining and recording any gain or loss on sale. We expect a significant portion of the remaining goodwill of our NCSA segment will be allocated to the storage tanks business for purposes of determining its carrying value.
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 values 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.
RPOs for each of our segments can consist of up to several hundred contracts. These contracts vary in size from less than one hundred thousand dollars in contract value to several billion dollars, with varying durations that can exceed five years. The timing of awards and differing types, sizes and durations of our contracts, combined with the geographic diversity and stages of completion of the associated projects, often results in fluctuations in our quarterly segment results as a percentage of total revenue. RPOs may not be indicative of future operating results, and projects in our RPOs may be cancelled, modified or otherwise altered by customers. We can provide no assurance as to the profitability of our contracts reflected in RPOs. It is possible that our estimates of profit could increase or decrease based on, among other things, changes in productivity, actual downtime and the resolution of change orders and claims with the customers, and therefore our future profitability is difficult to predict.
The timing of our revenue recognition may be impacted by the contracting structure of our contracts. Under fixed-price contracts, we perform our services and execute our projects at an established price. 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. Under cost-reimbursable contracts, we generally perform our services in exchange for a price that consists of reimbursement of all customer-approved costs and a profit component, which is typically a fixed rate per hour, an overall fixed fee or a percentage of total reimbursable costs. 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 predictability with respect to the timing of revenue recognition. Our shorter-term contracts and services are generally provided on a cost-reimbursable, fixed-price or unit price basis.
Our RPOs by business segment as of June 30, 2019 and December 31, 2018 were as follows:
50 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
June 30, 2019 |
|
|
December 31, 2018 |
|
|
|
|
Change (1) |
|
|||||||||||||||
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
NCSA |
$ |
8,123 |
|
|
|
39 |
% |
|
$ |
5,649 |
|
|
|
52 |
% |
|
|
|
$ |
2,474 |
|
|
|
44 |
% |
EARC |
|
4,032 |
|
|
|
20 |
% |
|
|
1,378 |
|
|
|
12 |
% |
|
|
|
|
2,654 |
|
|
|
193 |
% |
MENA |
|
6,538 |
|
|
|
32 |
% |
|
|
1,834 |
|
|
|
17 |
% |
|
|
|
|
4,704 |
|
|
|
256 |
% |
APAC |
|
1,289 |
|
|
|
6 |
% |
|
|
1,420 |
|
|
|
13 |
% |
|
|
|
|
(131 |
) |
|
|
-9 |
% |
Technology |
|
565 |
|
|
|
3 |
% |
|
|
632 |
|
|
|
6 |
% |
|
|
|
|
(67 |
) |
|
|
-11 |
% |
Total |
$ |
20,547 |
|
|
|
100 |
% |
|
$ |
10,913 |
|
|
|
100 |
% |
|
|
|
$ |
9,634 |
|
|
|
88 |
% |
(1) |
Our RPOs increased by $9.6 billion from December 31, 2018, due to new awards of $13.9 billion exceeding the recognition of revenues of $4.3 billion. |
Of the RPOs as of June 30, 2019, we expect to recognize revenues as follows:
|
2019 |
|
|
2020 |
|
|
Thereafter |
|
|||
|
(In millions) |
|
|||||||||
Total RPOs |
$ |
4,768 |
|
|
$ |
7,372 |
|
|
$ |
8,407 |
|
Three months ended June 30, 2019 vs three months ended June 30, 2018
Revenue
Revenues increased by 23%, or $402 million, in the second quarter of 2019 compared to the second quarter of 2018, primarily due to our NCSA and EARC segments. Revenues for the second quarter of 2018 included impact of the CB&I activity from the Combination Date.
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|||||
|
2019 |
|
|
2018 |
|
|
Change |
|||||||||
|
(In millions) |
|
|
Percentage |
||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA |
$ |
1,259 |
|
|
$ |
995 |
|
|
$ |
264 |
|
|
|
27 |
|
% |
EARC |
|
192 |
|
|
|
58 |
|
|
|
134 |
|
|
|
231 |
|
|
MENA |
|
399 |
|
|
|
469 |
|
|
|
(70 |
) |
|
|
(15 |
) |
|
APAC |
|
133 |
|
|
|
108 |
|
|
|
25 |
|
|
|
23 |
|
|
Technology |
|
154 |
|
|
|
105 |
|
|
|
49 |
|
|
|
47 |
|
|
Total |
$ |
2,137 |
|
|
$ |
1,735 |
|
|
$ |
402 |
|
|
|
23 |
|
% |
NCSA—Revenues increased by 27%, or $264 million, compared to the second quarter of 2018.
In the second quarter of 2019, a variety of projects and activities contributed to revenues, including:
51 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
construction progress on our two U.S. LNG export facility projects (approximately $362 million combined), including incentive revenue recognized on our Cameron, Louisiana LNG export facility project; |
|
• |
construction progress on our ethane projects in Texas and Louisiana (approximately $174 million combined); and |
|
• |
various power projects in the United States. |
In the second quarter of 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
construction progress on our two U.S. LNG export facility projects (approximately $370 million combined); |
|
• |
construction progress on our ethane cracker projects in Texas and Louisiana (approximately $260 million combined); |
|
• |
fabrication and marine activity progress on the Abkatun-A2 platform, a turnkey EPCI project in the Gulf of Mexico; |
|
• |
power projects in the U.S.; and |
|
• |
various other projects in the U.S. |
EARC—Revenues increased by 231%, or $134 million, compared to the second quarter of 2018.
In the second quarter of 2019, a variety of projects and activities contributed to revenues, including:
|
• |
progress on engineering and procurement activities on the Tyra Redevelopment EPCI project, awarded in the fourth quarter of 2017; |
|
• |
engineering, procurement and supply of process equipment for a deep conversion complex built at a refinery in central Russia; and |
|
• |
progress on engineering and procurement activities on the BP Tortue EPCI project. |
In the second quarter of 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
commencement in 2018 of the Tyra Redevelopment EPCI project; |
|
• |
mobilization activities for an oil refinery expansion project in Russia; |
|
• |
commencement and completion of the diving scope project for a refinery off the coast of Durban, South Africa; |
|
• |
engineering, procurement and supply of process equipment for the deep conversion complex built at a refinery in central Russia; and |
|
• |
various other projects. |
MENA—Revenues decreased by 15%, or $70 million, compared to the second quarter of 2018.
In the second quarter of 2019, a variety of projects and activities contributed to revenues, including:
|
• |
procurement, fabrication and marine and hookup activities on the Saudi Aramco Safaniya Phase 6 project, awarded in the fourth quarter of 2017; |
|
• |
fabrication, marine and procurement activities on the Bul Hanine EPCI project for Qatar Petroleum, awarded in the fourth quarter of 2017; |
|
• |
engineering and procurement progress on the Abu Dhabi National Oil Company (“ADNOC”) crude flexibility project in Ruwais, UAE, awarded in the first quarter of 2018; and |
|
• |
various other projects. |
In the second quarter of 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
engineering and fabrication progress and pipelay and spool installation activity by our DB 32 and DB 30 vessels on the Saudi Aramco Safaniya Phase 5 project; |
|
• |
engineering, fabrication and procurement progress on our Saudi Aramco 13 Jackets project, awarded in the first quarter of 2018; |
52 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
deck installations, tie-ins and hook-up activities by our DB 30 vessel on the Saudi Aramco Header 9 Facilities project; |
|
• |
engineering, fabrication and procurement progress on the Saudi Aramco Safaniya Phase 6 project; |
|
• |
marine hook-up activities utilizing a jack-up barge on the lump-sum EPCI project under the Saudi Aramco Long-Term Agreement (the “LTA II”); |
|
• |
marine installation activities by our Emerald Sea and DB 27 vessels on a pipeline replacement project offshore Qatar; and |
|
• |
various other projects. |
APAC—Revenues increased by 23%, or $25 million, compared to the second quarter of 2018.
In the second quarter of 2019, a variety of projects and activities contributed to revenues, including:
|
• |
substantial completion of initial offshore campaign by our DLV 2000 vessel on a subsea installation project in India; |
|
• |
the offshore installation campaign by our DB30 vessel for the transportation and installation of offshore structures, pipelines and pre-commissioning project for the Pan Malaysia field development; and |
|
• |
various other projects. |
In the second quarter of 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
substantial completion of the pipelay campaign and offshore construction on the Greater Western Flank Phase 2 project offshore Australia; and |
|
• |
commencement of activities on a subsea installation project offshore India, awarded in the fourth quarter of 2017. |
Technology—Revenues increased by 47%, or $49 million, compared to the second quarter of 2018. Revenues during both the second quarter of 2019 and 2018 were primarily associated with licensing and proprietary equipment activities in the petrochemical and refining market and the sale of catalyst.
Segment Operating Income
53 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment operating income in the second quarter of 2019 was $85 million compared to segment operating income of $206 million in the second quarter of 2018. Our second quarter 2019 operating results included a $101 million loss associated with the sale of APP in our NCSA segment. Our second quarter 2018 operating results included impact of the CB&I activity from the Combination Date.
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|||||
|
2019 |
|
|
2018 |
|
|
Change |
|||||||||
|
(In millions) |
|
|
Percentage |
||||||||||||
Segment operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA |
$ |
15 |
|
|
$ |
49 |
|
|
$ |
(34 |
) |
|
|
(69 |
) |
% |
EARC |
|
4 |
|
|
|
(8 |
) |
|
|
12 |
|
|
|
150 |
|
|
MENA |
|
29 |
|
|
|
97 |
|
|
|
(68 |
) |
|
|
(70 |
) |
|
APAC |
|
2 |
|
|
|
43 |
|
|
|
(41 |
) |
|
|
(95 |
) |
|
Technology |
|
35 |
|
|
|
25 |
|
|
|
10 |
|
|
|
40 |
|
|
Total |
$ |
85 |
|
|
$ |
206 |
|
|
$ |
(121 |
) |
|
|
(59 |
) |
% |
NCSA—Segment operating income was $15 million and $49 million during the second quarters of 2019 and 2018, respectively. Our second quarter of 2019 operating results included a $101 million loss on the sale of APP, discussed in Note 4, Disposition of Alloy Piping Products, LLC, to the accompanying Financial Statements.
In the second quarter of 2019, a variety of projects and activities contributed to operating income, including:
|
• |
$110 million of incentives recognized on our Cameron, Louisiana LNG export facility project, related to the projected achievement of progress milestones; |
|
• |
close-out improvements and settlements of claims on our substantially complete projects; and |
|
• |
construction progress and cost savings on our ethane projects in Texas and Louisiana and various power projects. |
These benefits were partially offset by:
|
• |
charges resulting from changes in cost estimates on several projects, as discussed in Note 6, Project Changes in Estimates, to the accompanying Financial Statements; and |
|
• |
the $101 million loss on the sale of APP. |
In the second quarter of 2018, a variety of projects and activities contributed to operating income, including:
|
• |
construction progress on our ethane cracker projects in Texas and Louisiana; and |
|
• |
various other projects in the U.S. |
During the second quarter of 2018, our two U.S. LNG export facility projects and our gas turbine power projects in the Midwest and Northeast did not materially contribute to our operating margin.
EARC—Segment operating income was $4 million in the second quarter of 2019 compared to a segment operating loss of $8 million in the second quarter of 2018.
In the second quarter of 2019, a variety of projects and activities contributed to operating income, including:
|
• |
progress on engineering and procurement activities on the Tyra Redevelopment project; and |
|
• |
ongoing procurement activities for the oil refinery expansion project in Russia. |
In the second quarter of 2018, our project operating results were adversely affected by selling, general and administrative expenses and losses from our investment in the io Oil and Gas unconsolidated joint venture.
54 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MENA—Segment operating income in the second quarters of 2019 and 2018 was $29 million and $97 million, respectively.
In the second quarter of 2019, a variety of projects and activities contributed to operating income, including:
|
• |
procurement, fabrication and marine and hookup activities on the Saudi Aramco Safaniya Phase 6 project; |
|
• |
engineering and procurement progress on the ADNOC crude flexibility project in Ruwais, UAE; |
|
• |
income from our unconsolidated joint venture with CTCI Corporation (“CTCI”); and |
|
• |
various other projects. |
In the second quarter of 2018, a variety of projects and activities contributed to operating income, including:
|
• |
engineering and fabrication progress and pipelay and spool installation activity by our DB 32 and DB 30 vessels on the Saudi Aramco Safaniya Phase 5 project, as well as productivity improvements and cost savings on the project; |
|
• |
deck installations, tie-ins and hook up activities by our DB 30 vessel on the Saudi Aramco Header 9 Facilities project, as well as productivity improvements and cost savings on the project; |
|
• |
a favorable settlement on the Saudi Aramco Safaniya Phase 1 project, completed in 2016; |
|
• |
marine hook-up activities utilizing a jack-up barge on the lump-sum EPCI project under the LTA II; |
|
• |
a demolition campaign on the Saudi Aramco Marjan power systems replacement project; and |
|
• |
income from the investment in our unconsolidated joint venture with CTCI. |
APAC—Segment operating income in the second quarters of 2019 and 2018 was $2 million and $43 million, respectively. Operating income in the second quarters of 2019 and 2018 was primarily associated with cost savings and close-out activities on completed projects, partially offset by cost increases and weather downtime on various projects.
Technology—Segment operating income during the second quarters of 2019 and 2018 was $35 million and $25 million, respectively. These results were primarily associated with licensing and proprietary equipment activity, as well as the supply of catalyst materials, and included equity income from our unconsolidated joint venture, Chevron Lummus Global, L.L.C. Operating results for the second quarters of 2019 and 2018, also included $17 million and $13 million, respectively, of amortization expense associated with project-related and other intangible assets and investment in unconsolidated affiliates.
Other Items in Operating Income
Corporate and Other
|
Three months ended June 30, |
|
|
|
|
|
|
|
|
|
|
|||||
|
2019 |
|
|
2018 |
|
|
Change |
|||||||||
|
(In thousands) |
|
|
Percentage |
||||||||||||
Corporate and Other |
$ |
(146 |
) |
|
$ |
(157 |
) |
|
$ |
11 |
|
|
|
7 |
|
% |
The decrease in Corporate and Other expenses was primarily due to a decrease of $43 million in restructuring and integration costs, and $26 million in transaction costs (see Note 11, Restructuring and Integration Costs and Transaction Costs, to the accompanying Financial Statements), partially offset by increased selling, general and administrative expenses for the combined organization.
Other Non-operating Items
Interest expense, net—Interest expense, net, was $100 million and $72 million in the second quarter of 2019 and 2018, respectively.
Interest expense in the second quarter of 2019 primarily consisted of:
|
• |
$34 million of interest expense and $3 million of deferred debt issuance costs (“DIC”) amortization associated with the issuance of $1.3 billion principal amount of our 10.625% senior notes due 2024 (the “Senior Notes”); |
55 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
$43 million of interest expense and $3 million of DIC amortization associated with our $2.26 billion senior secured term loan facility (the “Term Facility”); and |
|
• |
$10 million of interest expense and $3 million of DIC amortization associated with the revolving credit facility under the Credit Agreement. |
See Note 12, Debt, to the accompanying Financial Statements for further discussion.
Interest expense, net in the second quarter of 2018 primarily consisted of:
|
• |
$28 million of interest expense and $1 million of amortization associated with the issuance of the Senior Notes; |
|
• |
$29 million of interest expense and $2 million of deferred DIC amortization associated with the Term Facility; |
|
• |
$8 million of amortization of deferred DIC associated with the revolving credit facility and letter of credit facility under the Credit Agreement; and |
|
• |
$4 million of interest expense associated with our $500 million principal amount of 8.000% second-lien notes, which were redeemed in May 2018. |
Income tax benefit—During the three months ended June 30, 2019, we recognized an income tax benefit of $49 million (effective tax rate of 30%), compared to an income tax benefit of $84 million (effective tax rate of 215%) for the three months ended June 30, 2018. Our income tax provision for the second quarter of 2019 benefited from nondeductible expenses ($19 million).
Six months ended June 30, 2019 vs six months ended June 30, 2018
Revenue
Revenues increased by 86%, or $2 billion, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an increase in our NCSA segment. Revenues for the six months of 2018 included impact of the CB&I activity from the Combination Date.
56 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|||||
|
2019 |
|
|
2018 |
|
|
Change |
|||||||||
|
(In millions) |
|
|
Percentage |
||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA |
$ |
2,639 |
|
|
$ |
1,093 |
|
|
$ |
1,546 |
|
|
|
141 |
|
% |
EARC |
|
340 |
|
|
|
74 |
|
|
|
266 |
|
|
|
359 |
|
|
MENA |
|
779 |
|
|
|
814 |
|
|
|
(35 |
) |
|
|
(4 |
) |
|
APAC |
|
288 |
|
|
|
257 |
|
|
|
31 |
|
|
|
12 |
|
|
Technology |
|
302 |
|
|
|
105 |
|
|
|
197 |
|
|
|
188 |
|
|
Total |
$ |
4,348 |
|
|
$ |
2,343 |
|
|
$ |
2,005 |
|
|
|
86 |
|
% |
NCSA—Revenues increased by 141%, or $2 billion, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
In the six months ended June 30, 2019, a variety of projects and activities contributed to revenues, including:
|
• |
construction progress on our two U.S. LNG export facility projects (approximately $771 million combined), including incentive revenue recognized on our Cameron, Louisiana LNG export facility project; |
|
• |
construction progress on our ethane projects in Texas and Louisiana (approximately $509 million combined); and |
|
• |
various power projects in the United States. |
In the six months ended June 30, 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
construction progress on our two U.S. LNG export facility projects (approximately $370 million combined); |
|
• |
construction progress on our ethane cracker projects in Texas and Louisiana (approximately $260 million combined); |
|
• |
fabrication and marine activity progress on the Abkatun-A2 platform; |
|
• |
various power projects in the United States; and |
|
• |
various other projects in the United States. |
EARC—Revenues increased by 359%, or $266 million, in the six months ended June 30, 2019, compared to the six months ended June 30, 2018.
In the six months ended June 30, 2019, a variety of projects and activities contributed to revenues, including:
|
• |
progress on engineering and procurement activities on the Tyra Redevelopment EPCI project; |
|
• |
ongoing procurement activities for the oil refinery expansion project in Russia; |
|
• |
progress on engineering and procurement activities on the BP Tortue EPCI project; and |
|
• |
the engineering, procurement and supply of process equipment for a deep conversion complex built at a refinery in central Russia. |
In the second quarter of 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
commencement in 2018 of the Tyra Redevelopment EPCI project; |
|
• |
mobilization activities for the oil refinery expansion project in Russia; |
|
• |
commencement and completion of the diving scope project for the refinery off the coast of Durban, South Africa; |
|
• |
engineering, procurement and supply of process equipment for the deep conversion complex built at a refinery in central Russia; and |
|
• |
various other projects. |
57 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MENA—Revenues decreased by 4%, or $35 million, in the six months ended June 30, 2019, compared to the six months ended June 30, 2018.
In the six months ended June 30, 2019, a variety of projects and activities contributed to revenues, including:
|
• |
procurement, fabrication, marine and hookup activities on the Saudi Aramco Safaniya Phase 6 project, awarded in the fourth quarter of 2017; |
|
• |
engineering, fabrication, marine and procurement activities on the Bul Hanine EPCI project for Qatar Petroleum, awarded in the fourth quarter of 2017; |
|
• |
engineering and procurement progress on the ADNOC crude flexibility project in Ruwais, UAE, awarded in the first quarter of 2018; and |
|
• |
various other projects. |
In the six months ended June 30, 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
engineering and fabrication progress and pipelay and spool installation activity by our DB 32 and DB 30 vessels on the Saudi Aramco Safaniya Phase 5 project; |
|
• |
engineering, fabrication and procurement progress on our Saudi Aramco 13 Jackets project, awarded in the first quarter of 2018; |
|
• |
deck installations, tie-ins and hook-up activities by our DB 30 vessel on the Saudi Aramco Header 9 Facilities project; |
|
• |
engineering, fabrication and procurement progress on the Saudi Aramco Safaniya Phase 6 project; |
|
• |
marine hook-up activities utilizing a jack-up barge on the lump-sum EPCI project for Saudi Aramco under the LTA II; |
|
• |
marine installation activities by our Emerald Sea and DB 27 vessels on a pipeline replacement project offshore Qatar; and |
|
• |
various other projects. |
APAC—Revenues increased by 12%, or $31 million, in the six months ended June 30, 2019, compared to the six months ended June 30, 2018.
In the six months ended June 30, 2019, a variety of projects and activities contributed to revenues, including:
|
• |
substantial completion of the initial offshore campaign by our DLV 2000 vessel on a subsea installation project offshore India; |
|
• |
the offshore installation campaign by our DB30 vessel for the transportation and installation of offshore structures, pipelines and pre-commissioning project for the Pan Malaysia field development; and |
|
• |
close-out activities on a completed project and progress on various other projects. |
In the six months ended June 30, 2018, a variety of projects and activities contributed to revenues, as follows:
|
• |
commencement and substantial completion of the pipelay campaign and offshore construction on the Greater Western Flank Phase 2 project offshore Australia; |
|
• |
the Inpex Ichthys project offshore Australia and Vashishta subsea field infrastructure development project offshore India, both of which are substantially complete; and |
|
• |
commencement of activities on a subsea installation project offshore India, awarded in the fourth quarter of 2017. |
Technology—Revenues increased by 188%, or $197 million, in the six months ended June 30, 2019, compared to the six months ended June 30, 2018. Revenues during both the six months ended June 30, 2019 and 2018 were primarily associated with licensing and proprietary equipment activities in the petrochemical and refining market and the sale of catalyst.
58 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment Operating Income
Segment operating income decreased by 20%, or $69 million, in the first half of 2019 compared to the first half of 2018. Our first half 2019 operating results included a $101 million loss associated with the sale of APP in our NCSA segment. Our first half of 2018 operating results included impact of the CB&I activity from the Combination Date.
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|||||
|
2019 |
|
|
2018 |
|
|
Change |
|||||||||
|
(In millions) |
|
|
Percentage |
||||||||||||
Segment operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSA |
$ |
88 |
|
|
$ |
51 |
|
|
$ |
37 |
|
|
|
73 |
|
% |
EARC |
|
11 |
|
|
|
(11 |
) |
|
|
22 |
|
|
|
200 |
|
|
MENA |
|
95 |
|
|
|
167 |
|
|
|
(72 |
) |
|
|
(43 |
) |
|
APAC |
|
15 |
|
|
|
116 |
|
|
|
(101 |
) |
|
|
(87 |
) |
|
Technology |
|
70 |
|
|
|
25 |
|
|
|
45 |
|
|
|
180 |
|
|
Total |
$ |
279 |
|
|
$ |
348 |
|
|
$ |
(69 |
) |
|
|
(20 |
) |
% |
NCSA—Segment operating income was $88 million and $51 million during the six months ended June 30, 2019 and 2018, respectively. Our second quarter of 2019 operating results included a $101 million loss on the sale of APP, discussed in Note 4, Disposition of Alloy Piping Products, LLC, to the accompanying Financial Statements.
In the first half of 2019, a variety of projects and activities contributed to operating income, including:
|
• |
incentive revenues recognized on our U.S. LNG export facility projects, including $110 million recognized on Cameron in the second quarter of 2019, related to the projected achievement of progress milestones; |
|
• |
close-out improvements and settlements of claims on our substantially complete projects; and |
|
• |
construction progress and cost savings on our ethane projects in Texas and Louisiana and various power projects. |
These benefits were partially offset by:
|
• |
charges resulting from changes in cost estimates on several projects, as discussed in Note 6, Project Changes in Estimates, to the accompanying Financial Statements; and |
|
• |
the $101 million loss on the sale of APP. |
In the first half of 2018, a variety of projects and activities contributed to operating income, as follows:
|
• |
construction progress on our ethane cracker projects in Texas and Louisiana; and |
|
• |
various other projects in the United States. |
During the first of half of 2018, our two U.S. LNG export facility projects and our gas turbine power projects in the Midwest and Northeast did not materially contribute to our operating margin.
59 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARC—Segment operating income was $11 million in the six months ended June 30, 2019 compared to a segment operating loss of $11 million in the six months ended June 30, 2018.
In the first half of 2019, a variety of projects and activities contributed to operating income, including:
|
• |
progress on engineering and procurement activities on the Tyra Redevelopment project; |
|
• |
ongoing procurement activities for the oil refinery expansion project in Russia; and |
|
• |
progress on engineering and procurement activities on the BP Tortue EPCI project. |
In the first half of 2018, our project operating results were adversely affected by selling, general and administrative expenses and losses from our investment in the io Oil and Gas unconsolidated joint venture.
MENA—Segment operating income in the six months ended June 30, 2019 and 2018 was $95 million and $167 million, respectively.
In the first half of 2019, a variety of projects and activities contributed to operating income, including:
|
• |
procurement, fabrication and marine and hookup activities on the Saudi Aramco Safaniya Phase 6 project; |
|
• |
close-out activities and cost savings on the substantially completed Saudi Aramco Safaniya Phase 5 project; |
|
• |
engineering and procurement progress on the ADNOC crude flexibility projects in Ruwais, UAE, awarded in the first quarter of 2018; |
|
• |
income from the investment in our unconsolidated joint venture with CTCI; and |
|
• |
various other projects. |
In the first half of 2018, a variety of projects and activities contributed to operating income, including:
|
• |
engineering and fabrication progress and pipelay and spool installation activity by our DB 32 and DB 30 vessels on the Saudi Aramco Safaniya phase 5 project, as well as productivity improvements and cost savings on the project; |
|
• |
deck installations, tie-ins and hook up activities by our DB 30 vessel on the Saudi Aramco Header 9 Facilities project, as well as productivity improvements and cost savings on the project; |
|
• |
favorable settlement on the Saudi Aramco Safaniya Phase 1 project, completed in 2016; |
|
• |
marine hook-up activities utilizing a jack-up barge on the lump-sum EPCI project for Saudi Aramco under the LTA II; |
|
• |
demolition campaign on the Saudi Aramco Marjan power systems replacement project; and |
|
• |
income from the investment in our unconsolidated joint venture with CTCI. |
APAC—Segment operating income in the six months ended June 30, 2019 and 2018 was $15 million and $116 million, respectively.
In the first half of 2019, cost savings and close-out activities on completed projects contributed to operating income, partially offset by cost increases and weather downtime on various projects.
In the six months ended June 30, 2018, a variety of projects and activities contributed to operating income, as follows:
|
• |
cost savings and the close-out of outstanding change orders on active and completed projects; and |
|
• |
cost savings upon the commencement and substantial completion of pipelay campaign and offshore construction on the Greater Western Flank Phase 2 project offshore Australia, partially offset by the impact of weather-related delays on the project. |
60 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Technology—Segment operating income during the six months ended June 30, 2019 and 2018, was $70 million and $25 million, respectively. The results were primarily associated with licensing and proprietary equipment activity, as well as the supply of catalyst materials, and included equity income from our unconsolidated joint venture, Chevron Lummus Global, L.L.C. Operating results for the six months ended June 30, 2019 and 2018, also included $35 million and $13 million, respectively, of amortization expense associated with project-related and other intangible assets and investment in unconsolidated affiliates.
Other Items in Operating Income
Corporate and Other
|
Six months ended June 30, |
|
|
|
|
|
|
|
|
|
|
|||||
|
2019 |
|
|
2018 |
|
|
Change |
|||||||||
|
(In millions) |
|
|
Percentage |
||||||||||||
Corporate and Other |
$ |
(327 |
) |
|
$ |
(235 |
) |
|
$ |
(92 |
) |
|
|
(39 |
) |
% |
For the six months ended June 30, 2019 and 2018, Corporate and Other expenses were $327 million and $235 million, respectively. The increase in Corporate and Other expenses was primarily due to the following:
|
• |
an increase of $14 million in restructuring and integration costs, primarily related to change-in-control, severance, professional fees and costs of settlement of litigation (see Note 11, Restructuring and Integration Costs and Transaction Costs, to the accompanying Financial Statements); and |
|
• |
increased selling, general and administrative expenses for the combined organization. |
Other Non-operating Items
Interest expense, net—Interest expense, net, was $192 million and $83 million during the six months ended June 30, 2019 and 2018, respectively.
Interest expense in the six months ended June 30, 2019 primarily consisted of:
|
• |
$69 million of interest expense and $5 million of DIC amortization associated with the issuance of the Senior Notes; |
|
• |
$85 million of interest expense and $6 million of DIC amortization associated with the Term Facility; and |
|
• |
$13 million of interest expense and $6 million of DIC amortization associated with the revolving credit facility under the Credit Agreement. |
See Note 12, Debt, to the accompanying Financial Statements for further discussion.
Interest expense in the six months ended June 30, 2018 primarily consisted of:
|
• |
$28 million of interest expense and $1 million of deferred DIC amortization associated with the Senior Notes; |
|
• |
$29 million of interest expense and $2 million of deferred DIC amortization, associated with the Term Facility; |
|
• |
$9 million of amortization of deferred DIC associated with our revolving credit facility and letter of credit facility under the Credit Agreement; and |
|
• |
$14 million of interest expense associated with our 8.000% second-lien notes, which were redeemed in May 2018. |
61 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income tax benefit— During the six months ended June 30, 2019, we recognized an income tax benefit of $70 million (effective tax rate of 29%), compared to an income tax benefit of $63 million (effective tax rate of 394%) for the six months ended June 30, 2018. Our income tax provision for the six months ended June 30, 2019 benefited from the settlement of a customer claim ($18 million) and a favorable court ruling on tax matters ($19 million), partially offset by nondeductible, state tax and other expenses ($12 million).
During the six months ended June 30, 2019, our unrecognized tax benefits decreased $19 million, primarily due to the favorable court ruling referenced above. We do not anticipate significant changes to this balance in the next 12 months.
Inflation and Changing Prices
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), generally using historical U.S. dollar accounting (“historical cost”). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation.
In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts.
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents on hand, cash flows generated from operations and capacity under our revolving credit and other facilities. Our revolving credit and other facilities are also available to provide letters of credit, which are generally issued to customers in the ordinary course of business to support advance payments and performance guarantees in lieu of retention on our contracts, or in certain cases, are issued in support of our insurance programs. We regularly review our sources and uses of funds and may seek to access capital markets or increase our revolving credit and letter of credit capacity to increase our liquidity position and support our ability to take on larger project awards. We also perform periodic reviews of our business portfolio and may adjust our portfolio to dispose of those portions of our business deemed to be non-core to our vertically integrated offering model.
We believe our cash and cash equivalents on hand, cash flows generated from operations, amounts available under our credit facilities and uncommitted bilateral lines of credit and proceeds from previously announced non-core asset sales will be sufficient to finance our capital expenditures, settle our commitments and contingencies (as more fully described in Note 22, Commitments and Contingencies to the Financial Statements) and address our normal, anticipated working capital needs for the foreseeable future.
As discussed above under “Company Overview – Review of Business Portfolio,” we completed the sale of APP during the second quarter of 2019. We are continuing to pursue the sale of the remaining portion of the pipe fabrication business. We have identified potential buyers for our industrial storage tank business, and sales efforts with respect to that business remain ongoing. In connection with that contemplated sale, we may retain a continuing minority ownership or other economic interest in the business. Our anticipated aggregate net cash proceeds from the pipe fabrication and storage tank transactions are now expected to be lower than the approximately $1 billion we previously estimated. Our ongoing competitive sale processes are now expected to result in closings of the sales in the fourth quarter of 2019; however, we can provide no assurance that either sale process will be completed on the anticipated timeline or at all. Any potential sale would be subject to approval by our Board of Directors. Our Credit Agreement and the Indenture relating to our Senior Notes (each as defined and described in “—Liquidity and Capital Resources” below) require us to use the net cash proceeds from any sale of a business generating in excess of $500 million in sales proceeds to reduce our outstanding debt. If the net cash proceeds received are less than $500 million, our Credit Agreement and such Indenture permit us to reinvest those proceeds in long-term assets within 365 days after the receipt of the net proceeds (or enter into binding commitments to do so within such period, and thereafter reinvest such proceeds within 180 days). Any proceeds not reinvested at the end of such period would be required to be used to reduce our outstanding debt.
There can be no assurance that funding sources will continue to be available, as our ability to generate cash flows from operations, our ability to access our credit facilities and uncommitted bilateral lines of credit, our ability to access capital markets and our ability to sell non-core assets, at reasonable terms or at all, may be impacted by a variety of business, economic, legislative, financial and other factors, which may be outside of our control. Additionally, while we currently have significant uncommitted bonding facilities, primarily to support various commercial provisions in our contracts, a termination or reduction of these bonding facilities could result
62 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in the utilization of letters of credit in lieu of performance bonds, thereby reducing the available capacity under our credit facilities and uncommitted bilateral lines of credit. Although we do not anticipate a reduction or termination of the bonding facilities, there can be no assurance that such facilities will continue to be available at reasonable terms to service our ordinary course obligations.
Cash, Cash Equivalents and Restricted Cash
As of June 30, 2019, we had $782 million of cash, cash equivalents and restricted cash, as compared to $845 million as of December 31, 2018. Approximately $252 million of our cash and cash equivalents as of June 30, 2019 was within our variable interest entities (“VIEs”) associated with our joint venture and consortium arrangements, which is generally only available for use in our operating activities when distributed to the joint venture and consortium participants. As of June 30, 2019, we had approximately $158 million of cash in jurisdictions outside the U.S., principally in Ireland, Brazil, the United Kingdom, the United Arab Emirates and Saudi Arabia. As of June 30, 2019, approximately 4.5% of our outstanding cash balance is held in countries that have established government-imposed currency restrictions that could impede the ability of our subsidiaries to transfer funds to us.
Cash Flow Activities
Operating activities―Net cash (used in) provided by operating activities in the six months ended June 30, 2019 and 2018 was ($449) million and $435 million, respectively.
The cash (used in) provided by operating activities primarily reflected our net (loss) income, adjusted for non-cash items and changes in components of our working capital and changes in our current and non-current liabilities. The changes in our working capital during the six months ended June 30, 2019 were primarily driven by accounts receivable, contracts in progress, net of advance billings on contracts, and accounts payable. Fluctuations in working capital are normal in our business. Working capital is impacted by the size of our projects and the achievement of billing milestones on RPOs as we complete different phases of our projects.
As of June 30, 2019 and December 31, 2018, negative working capital associated with the Calpine power project and our aggregate proportionate shares of the Cameron LNG and Freeport LNG consortium projects (collectively, the “Focus Projects”) was approximately $412 million and $815 million, respectively.
In the second quarter of 2019, Cameron LNG projects operating margin was positively impacted by recognition of approximately $110 million of incentives related to the projected achievement of progress milestones. That incentive has two cash components:
|
• |
$75 million expected to be received in the second half of 2019, including $38 million received in July 2019; and |
|
• |
$35 million expected to be received in 2020. |
In the six months ended June 30, 2019, net cash used by working capital was approximately $364 million.
The components of working capital that used cash were:
|
• |
Contracts in progress/Advance billings on contracts—a net increase of $745 million, primarily due to the impact of progress on projects within our NCSA segment (including approximately $282 million used for the Focus Projects) and projects within our EARC and MENA segments; and |
|
• |
Accounts receivable—a net increase of $164 million, primarily due to billings in our NCSA and APAC segments, partially offset by collections within our EARC, MENA and Technology segments. |
This increase was partially offset by:
|
• |
Accounts payable—an increase of $545 million, primarily driven by project progress across all segments and Corporate. |
The net decrease in current and non-current liabilities of $112 million was primarily driven by our NCSA and MENA segments and Corporate, partially offset by our EARC and APAC segments. The net decrease was primarily associated with a decrease in accrued contract costs and tax payments.
63 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the six months ended June 30, 2018, net cash provided by working capital was approximately $266 million.
The components of working capital that provided cash were:
|
• |
Accounts receivable—decrease of $278 million driven by collections primarily within our NCSA segment; and |
|
• |
Accounts payable—increase of $129 million driven by project progress primarily within our MENA segment. |
The increase was partially offset by a $141 million increase in Contracts in progress, net of Advance billings on contracts, primarily due to the impact of progress on projects within our NCSA segment, partially offset by projects within our APAC segment.
Investing activities― Net cash used in investing activities in the six months ended June 30, 2019 was $185 million and was primarily associated with:
|
• |
outflows from advances of $234 million with our third-party consortium participants of proportionately consolidated consortiums (see Note 10, Joint Venture and Consortium Arrangements, to the accompanying Financial Statements); and |
|
• |
capital expenditures of $33 million. |
Cash outflows in the six months ended June 30, 2019 were partially offset by $83 million in net proceeds from the sale of APP (see Note 4, Disposition of Alloy Piping Products, LLC).
Net cash used in investing activities in the six months ended June 30, 2018 was $2.5 billion and was primarily associated with:
|
• |
the cash portion of the Combination consideration ($2.4 billion, net of cash acquired of $498 million – see Note 3, Business Combination, to the Financial Statements for further discussion); |
|
• |
net outflows from advances of $45 million with our third-party consortium participants of proportionately consolidated consortiums; and |
|
• |
capital expenditures of $43 million. |
Financing activities―Net cash provided by financing activities in the six months ended June 30, 2019 and 2018 was $573 million and $2.8 billion, respectively.
Net cash provided in the six months ended June 30, 2019 was primarily attributable to:
|
• |
$379 million of net borrowings under the revolving credit facility under the Credit Agreement discussed below; |
|
• |
$190 million of net inflows attributable to advances from our equity method joint ventures and proportionately consolidated consortiums; and |
|
• |
$32 million provided under structured equipment financing discussed below. |
The inflows were partially offset by:
|
• |
$11 million of Term Facility, $4 million of North Ocean financing and $4 million of capital lease payments; |
|
• |
$5 million of distributions to a former joint venture member (see Note 19, Stockholders’ Equity and Equity-Based Incentive Plans, to the accompanying Financial Statements); and |
|
• |
$4 million of repurchases of common stock tendered by participants in our long-term incentive plans for payment of applicable withholding taxes upon vesting of awards under those plans. |
Net cash provided for the six months ended June 30, 2018 was primarily attributable to:
|
• |
borrowings of $2.26 billion from our Term Facility; and |
|
• |
the issuance of $1.3 billion in aggregate principal amount of Senior Notes. |
The inflows were partly offset by:
64 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
• |
redemption of the entire $500 million aggregated principal amount of our 8.000% second-lien notes and a $10 million make-whole associated with the early repayment; |
|
• |
$208 million of DIC associated with our Credit Agreement and Senior Notes; |
|
• |
net outflows from advances of $42 million with our equity method and proportionately consolidated joint ventures and consortiums; |
|
• |
$15 million of other debt repayments; and |
|
• |
repurchases of common stock of $14 million tendered by participants in our long-term incentive plans for payment of applicable withholding taxes upon vesting of awards under those plans. |
Effects of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash—During the first six months of 2019, our cash, cash equivalents and restricted cash balance decreased by $2 million, due to the impact of changes in functional currency exchange rates against the U.S. Dollar for non-U.S. Dollar cash balances, primarily for net changes in the Canadian Dollar, Australian Dollar, British Pound and Euro exchange rates. The net unrealized loss on our cash, cash equivalents and restricted cash resulting from these exchange rate movements is reflected in the cumulative translation adjustment component of Other comprehensive income (loss). Our cash, cash equivalents and restricted cash held in non-U.S. Dollar currencies are used primarily for project-related and other operating expenditures in those currencies, and, therefore, our exposure to realized exchange gains and losses is not anticipated to be material.
During the first six months of 2018, our cash and cash equivalents balance decreased by $15 million due to the impact of changes in functional currency exchange rates against the U.S. Dollar for non-U.S. Dollar cash balances, primarily for net changes in the Australian Dollar, British Pound and Euro exchange rates.
Credit and Other Financing Arrangements
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 $4.7 billion, consisting of the following:
|
• |
a $2.26 billion senior secured, seven-year 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 $1.44 billion senior secured letter of credit facility (the “LC Facility”), which includes a $50 million increase pursuant to an Increase and Joinder Agreement we entered into with Morgan Stanley Senior Funding, Inc. as of May 24, 2019. |
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 ($320 million at June 30, 2019), 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
65 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
backstop certain other existing letters of credit issued for the account of McDermott, CB&I and their respective subsidiaries and affiliates.
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—As of June 30, 2019, we had $2.2 billion of borrowings outstanding under the Term Facility. Proceeds from our borrowing under the Term Facility were used, together with proceeds from the issuance of the Senior Notes and cash on hand, (1) to consummate the Combination in 2018, including the repayment of certain existing indebtedness of CB&I and its subsidiaries, (2) to redeem $500 million aggregate principal amount of our 8.000% second-lien notes, (3) to prepay existing indebtedness under, and to terminate in full, the Prior Credit Agreement, and (4) 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 (1) the Eurodollar rate plus a margin of 5.00% per year or (2) 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. 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 7.70%, inclusive of the applicable margin during the three months ended June 30, 2019. 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) |
|
|
2019 |
|
$ |
11 |
|
2020 |
|
|
23 |
|
2021 |
|
|
23 |
|
2022 |
|
|
23 |
|
2023 |
|
|
23 |
|
Thereafter |
|
|
2,129 |
|
|
|
$ |
2,232 |
|
Additionally, as of June 30, 2019, there were approximately $309 million of Term Facility letters of credit issued (including $48 million of financial letters of credit) under the Credit Agreement, leaving approximately $1 million of available capacity under the Term Facility.
Revolving Credit Facility and LC Facility—We have a $1.0 billion Revolving Credit Facility which is scheduled to expire in May 2023. As of June 30, 2019, we had approximately $379 million in borrowings and $53 million of letters of credit outstanding (including $49 million of financial letters of credit) under the Revolving Credit Facility, leaving $568 million of available capacity under this facility. During the six months ended June 30, 2019, the maximum borrowing under the Revolving Credit Facility was $639 million. We also have a $1.440 billion LC Facility that is scheduled to expire in May 2023. As of June 30, 2019, we had approximately $1.439 billion of letters of credit outstanding, leaving $1 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, 2019) or the Eurodollar rate plus a floating margin ranging from 3.75% to 4.25% (4.25% at June 30, 2019), 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, 2019) per year in respect of financial letters of credit and (ii) between 1.875% to 2.125% (2.125% at June 30, 2019) 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.
66 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Agreement Covenants—The Credit Agreement includes the following financial covenants that are tested on a quarterly basis:
|
• |
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; |
|
• |
grant or assume liens; |
|
• |
make acquisitions or engage in mergers; |
|
• |
sell, transfer, assign or convey assets; |
|
• |
make investments; |
|
• |
repurchase equity and make dividends and certain other restricted payments; |
|
• |
change the nature of our business; |
|
• |
engage in transactions with affiliates; |
|
• |
enter into burdensome agreements; |
|
• |
modify our organizational documents; |
|
• |
enter into sale and leaseback transactions; |
|
• |
make capital expenditures; |
|
• |
enter into speculative hedging contracts; and |
|
• |
make prepayments on certain junior debt. |
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 event 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 we are unable to make any of the representations and warranties in the Credit Agreement at the applicable time, we will be unable to borrow funds or have letters of credit issued under the Credit Agreement.
Credit Agreement Covenants Compliance—As of June 30, 2019, we were in compliance with all our restrictive and financial covenants under the Credit Agreement. The financial covenants as of June 30, 2019 are summarized below:
Ratios |
|
Requirement |
|
Actual |
Minimum fixed charge coverage ratio |
|
1.50x |
|
2.46x |
Maximum total leverage ratio |
|
4.25x |
|
2.61x |
Minimum liquidity |
$ |
200 million |
$ |
1,023 million |
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|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future compliance with our financial and restrictive covenants under the Credit Agreement could be impacted by circumstances or conditions beyond our control, including, but not limited to, the delay or cancellation of projects, decreased letter of credit capacity, decreased profitability on our projects, changes in currency exchange or interest rates, performance of pension plan assets or changes in actuarial assumptions. Further, we could be impacted if our customers experience a material change in their ability to pay us or if the banks associated with the Credit Agreement were to cease operations, or if there is a full or partial break-up of the European Union (“EU”) or its currency, the Euro.
Letter of Credit Agreement
On October 30, 2018, we, as a guarantor, entered into a Letter of Credit Agreement (the “Letter of Credit Agreement”) with McDermott Technology (Americas), Inc., McDermott Technology (US), Inc. and McDermott Technology, B.V., each a wholly owned subsidiary of ours, as co-applicants, and Barclays Bank PLC, as administrative agent. The Letter of Credit Agreement provides for a facility for extensions of credit in the form of performance letters of credit in the aggregate face amount of up to $230 million (the “$230 Million LC Facility”). The $230 Million LC Facility is scheduled to expire in December 2021. The obligations under the Letter of Credit Agreement are unconditionally guaranteed on a senior secured basis by us and substantially all of our wholly owned subsidiaries, other than the co-applicants (which are directly obligated thereunder) and several captive insurance subsidiaries and certain other designated or immaterial subsidiaries. The liens securing the $230 Million LC Facility will rank equal in priority with the liens securing obligations under the Credit Agreement. The Letter of Credit Agreement includes financial and other covenants and provisions relating to events of default that are substantially the same as those in the Credit Agreement. As of June 30, 2019, there were approximately $216 million of letters of credit issued (or deemed issued) under the $230 million LC Facility, leaving approximately $14 million of available capacity.
Letter of Credit Agreement Covenants Compliance—As of June 30, 2019, we were in compliance with all our restrictive and financial covenants under the Letter of Credit Agreement.
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).
68 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Senior Notes Covenants—The Senior Notes Indenture contains covenants that, among other things, provide limits around our ability to: (1) incur or guarantee additional indebtedness or issue preferred stock; (2) make investments or certain other restricted payments; (3) pay dividends or distributions on our capital stock or purchase or redeem our subordinated indebtedness; (4) sell assets; (5) create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (6) create certain liens; (7) sell all or substantially all of our assets or merge or consolidate with or into other companies; (8) enter into transactions with affiliates; and (9) create unrestricted subsidiaries. Those covenants are subject to various exceptions and limitations.
Senior Notes Covenants Compliance—As of June 30, 2019, we were in compliance with all our restrictive covenants under the Senior Notes Indenture. Future compliance with our restrictive covenants under the Senior Notes Indenture could be impacted by circumstances or conditions beyond our control, including, but not limited to, those discussed above with respect to the Credit Agreement.
Other Financing Arrangements
North Ocean (“NO”) Financing―On September 30, 2010, McDermott International, Inc., as guarantor, and NO 105 AS, one of our subsidiaries, 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 NO 105 AS, a mortgage on the NO 105, and a lien on substantially all of the other assets of NO 105 AS. As of June 30, 2019, the outstanding borrowing under this facility was approximately $12 million. Future maturities are approximately $4 million for the remainder of 2019 and $8 million in 2020.
Receivables Factoring―During the six months ended June 30, 2019, we sold, without recourse, approximately $62 million of receivables under an uncommitted receivables purchase agreement in Mexico at a discount rate of applicable LIBOR plus a margin of 1.40% - 2.00% and Interbank Equilibrium Interest Rate in Mexico plus a margin of 1.40% - 1.70%. We recorded approximately $2 million of factoring costs in Other operating income (expense) during the six months ended June 30, 2019. Ten percent of the receivables sold are withheld and received on the due date of the original invoice. We have received cash, net of fees and amounts withheld, of approximately $54 million under these arrangements during the six months ended June 30, 2019.
Structured Equipment Financing―In the second quarter of 2019, we entered into a $37 million uncommitted revolving re-invoicing facility for settlement of certain equipment supplier invoices. During the second quarter of 2019, we received approximately $32 million under this arrangement, with repayment obligations maturing in January 2020. Interest expense and origination fees associated with this facility were not material.
Uncommitted 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, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
Uncommitted Line Capacity |
|
|
Utilized |
|
|
Uncommitted Line Capacity |
|
|
Utilized |
|
||||
|
|
(In millions) |
|
|||||||||||||
Bank Guarantee and Bilateral Letter of Credit (1) |
|
$ |
1,627 |
|
|
$ |
1,062 |
|
|
$ |
1,669 |
|
|
$ |
1,060 |
|
Surety Bonds (2) |
|
829 |
|
|
567 |
|
|
|
842 |
|
|
|
475 |
|
(1) Approximately $175 million of this capacity is available only upon provision of an equivalent amount of cash collateral.
(2) Excludes approximately $346 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 $29 million of RPOs. We are entitled to an indemnity from CSVC for both the surety bonds and guarantees.
Finance Lease Obligation
Our significant finance lease obligation is as follows:
The Amazon, a pipelay and construction vessel, was purchased by us in February 2017, sold to an unrelated third party (the “Amazon Owner”) and leased back under a long-term bareboat charter that gave us the right to use the vessel and was recorded as an operating
69 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
lease. 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 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 expenditures by us of approximately $58 million over the course of the modifications. The amended bareboat charter arrangement is accounted for as a finance lease, recognizing Property, plant and equipment and Lease obligation for the present value of future minimum lease payments. The cost of modifications will be recorded in Property, plant and equipment with a corresponding liability for direct capital expenditures not incurred by us. The finance lease obligation will increase upon completion of the modifications and funding by the Amazon Owner. As of June 30, 2019, Property, plant and equipment, net included a $50 million asset (net of accumulated amortization of $6 million) and a finance lease liability of approximately $50 million. As of December 31, 2018, Property, plant and equipment, net included a $52 million asset (net of accumulated amortization of $3 million) and a finance lease liability of approximately $53 million.
Redeemable Preferred Stock
On November 29, 2018 (the “Closing Date”), we completed a private placement of (1) 300,000 shares of 12% Redeemable Preferred Stock, par value $1.00 per share (the “Redeemable Preferred Stock”), and (2) Series A warrants (the “Warrants”) to purchase approximately 6.8 million shares of our common stock, with an initial exercise price per share of $0.01, for aggregate proceeds of $289.5 million, before payment of approximately $18 million of directly related issuance costs.
Redeemable Preferred Stock—The Redeemable Preferred Stock will initially have an Accreted Value (as defined in the Certificate of Designation with respect to the Redeemable Preferred Stock (the “Certificate of Designation”)) of $1,000.00 per share. The holders of the Redeemable Preferred Stock will be entitled to receive cumulative compounding preferred cash dividends quarterly in arrears at a fixed rate of 12.0% per annum compounded quarterly (of which 3.0% accrues each quarter) on the Accreted Value per share (the “Dividend Rate”). The cash dividends are payable only when, as and if declared by our Board of Directors out of funds legally available for payment of dividends. If a cash dividend is not declared and paid in respect of any dividend payment period ending on or prior to December 31, 2021, then the Accreted Value of each outstanding share of Redeemable Preferred Stock will automatically be increased by the amount of the dividend otherwise payable for such dividend payment period, except the applicable dividend rate for this purpose is 13.0% per annum. Such automatic increase in the Accreted Value of each outstanding share of Redeemable Preferred Stock would be in full satisfaction of the preferred dividend that would have otherwise accrued for such dividend payment period. Our Board of Directors declared, and we paid cash dividends on the Redeemable Preferred Stock on the first dividend payment date (December 31, 2018), but our Board of Directors did not declare cash dividends on the Redeemable Preferred Stock on the March 31, 2019 and June 30, 2019 dividend payment dates and, as a result, the Accreted Value of the Redeemable Preferred Stock was increased by the amount of the accrued but unpaid dividend (i.e., a paid-in-kind (“PIK”) dividend).
The Redeemable Preferred Stock has no stated maturity and will remain outstanding indefinitely unless repurchased or redeemed by us.
The Redeemable Preferred Stock will have a liquidation preference equal to the then applicable Minimum Return (the “Liquidation Preference”) plus accrued and unpaid dividends. The Liquidation Preference will initially be equal to $1,200.00 per share. The “Minimum Return” is equal to a multiple of invested capital (“MOIC”) (as defined in the Certificate of Designation) as follows, exclusive of cash dividends previously paid:
|
• |
|
prior to January 1, 2020, a MOIC multiple of 1.2; |
|
• |
|
on or after January 1, 2020 but prior to January 1, 2022, a MOIC multiple of 1.25; |
|
• |
|
on or after January 1, 2022 but prior to January 1, 2023, a MOIC multiple of 1.20; |
|
• |
|
on or after January 1, 2023 but prior to January 1, 2025, a MOIC multiple of 1.15; and |
|
• |
|
on or after January 1, 2025, a MOIC multiple of 1.20. |
We may redeem the Redeemable Preferred Stock at any time for an amount per share of Redeemable Preferred Stock equal to the Liquidation Preference of each such share plus all accrued dividends on such share (such amount per share, the “Redemption Consideration”).
At any time after the seventh anniversary of the Closing Date, each holder may elect to have us fully redeem such holder’s then outstanding Redeemable Preferred Stock in cash, to the extent we have funds legally available for payment of dividends, at a redemption price per share equal to the Redemption Consideration for each share.
70 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon a change of control (as defined in the Certificate of Designation), if we have not previously redeemed the Redeemable Preferred Stock and the holders of a majority of the then-outstanding Redeemable Preferred Stock do not agree with us to an alternative treatment, then in connection with such change of control, each holder may elect either: (1) to cause us to redeem all, but not less than all, of its outstanding Redeemable Preferred Stock at a redemption price per share equal to the Redemption Consideration, which would be payable in full in cash or, if any of the Senior Notes are then outstanding, payable partially in cash in an amount equal to 101% of the Share Purchase Price (as defined in the Certificate of Designation) (or such lower amount as may be required under the Senior Notes Indenture) and the remainder in shares of our common stock based on a per share price equal to 96% of the volume-weighted average price of our common stock on the New York Stock Exchange during the 10 trading days prior to the announcement of such change of control; (2) to receive a substantially equivalent security to the Redeemable Preferred Stock in the surviving entity of the change of control; or (3) to continue to hold the Redeemable Preferred Stock if we are the surviving entity in the change of control. However, any such redemption in cash will be tolled until a date that will not result in the Redeemable Preferred Stock being characterized as “disqualified stock,” “disqualified equity interest” or a similar concept under our debt instruments.
The fair value upon issuance represented the net impact of $289.5 million of aggregate proceeds, less $18 million of fees and $43 million of fair value assigned to the warrants described below (separately included within Capital in excess of par value in our Balance Sheet). The fair value measurement upon issuance was based on inputs that were not observable in the market and thus represented level 3 inputs. We will record accretion as an adjustment to Retained earnings (deficit) over the seven years from the Closing Date through the expected redemption date of November 29, 2025 using the effective interest method. From the Closing Date through June 30, 2019, we recorded cumulative accretion of approximately $9 million with respect to the Redeemable Preferred Stock, including approximately $4 million and $8 million during the three and six months ended June 30, 2019, respectively. As of June 30, 2019, the Redeemable Preferred Stock balance was $257 million, adjusted for accretion and PIK dividends of approximately $20 million. During 2018, approximately $3 million of cash dividends were paid to the holders of the Redeemable Preferred Stock.
Warrants—The Warrants are exercisable at any time after the earlier of (1) any change of control or the commencement of proceedings for the voluntary or involuntary dissolution, liquidation or winding up of us and (2) the first anniversary of the Closing Date, and from time to time, in whole or in part, until the tenth anniversary of the Closing Date. The fair value measurement of the Warrants was based on the market-observable fair value of our common stock upon issuance and thus represented a level 1 input.
The exercise price and the number of shares of common stock for which a Warrant is exercisable are subject to adjustment from time to time upon the occurrence of certain events including: (1) payment of a dividend or distribution to holders of shares of our common stock payable in common stock, (2) the distribution of any rights, options or warrants to all holders of our common stock entitling them for a period of not more than 60 days to purchase shares of common stock at a price per share less than the fair market value per share, (3) a subdivision, combination, or reclassification of our common stock, (4) a distribution to all holders of our common stock of cash, any shares of our capital stock (other than our common stock), evidences of indebtedness or other assets of ours, and (5) any dividend of shares of a subsidiary of ours in a spin-off transaction.
Capital Expenditures
As part of our strategic growth program, our management regularly evaluates our marine vessel fleet and our fabrication yard construction capacity to ensure our fleet and construction capabilities are adequately aligned with our overall growth strategy. These assessments may result in capital expenditures to construct, upgrade, acquire or operate vessels or acquire or upgrade fabrication yards that would enhance or grow our technical capabilities, or may involve engaging in discussions to dispose of certain marine vessels or fabrication yards.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital expenditures for the six months ended June 30, 2019 and 2018 were $33 million and $43 million, respectively, and were primarily attributable to our vessel upgrades (including upgrades to the Amazon) and information technology upgrades. Our capital expenditures in the second quarter included expenditures associated with our new administrative headquarters in Houston, Texas.
During the remainder of 2019, we expect to spend approximately $112 million for capital projects, such as our new administrative headquarters and various vessel upgrades and capital maintenance projects.
Other
Shelf Registration Statement―We filed a shelf registration statement with the SEC in September 2018. The registration statement became effective automatically and is scheduled to expire in September 2021. The shelf registration statement enables us to offer and sell shares of our common or preferred stock and issue debt or other securities from time to time.
Other―A portion of our pension plans’ assets are invested in EU government securities, which could be impacted by economic turmoil in Europe or a full or partial break-up of the EU or its currency, the Euro. However, given the long-term nature of pension funding requirements, in the event any of our pension plans (including those with investments in EU government securities) become materially underfunded from a decline in value of our plan assets, we believe our cash on hand and amounts available under the Revolving Credit Facility would be sufficient to fund any increases in future contribution requirements.
We are a defendant in a number of lawsuits arising in the normal course of business, and we have in place appropriate insurance coverage for the type of work that we perform. As a matter of standard policy, we review our litigation accrual quarterly and, as further information becomes known on pending cases, we may record increases or decreases, as appropriate, for these reserves. See Note 22, Commitments and Contingencies, to the accompanying Financial Statements for a discussion of pending litigation.
Critical Accounting Policies and Estimates
For a discussion of the impact of critical accounting policies and estimates on our Consolidated Financial Statements, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2018 Form 10-K. For a discussion of the impact of the new accounting standards adopted in 2019 on our significant accounting policies, see Note 2, Basis of Presentation and Significant Accounting Policies, to the accompanying Financial Statements.
New Accounting Standards
See Note 2, Basis of Presentation and Significant Accounting Policies, to the accompanying Financial Statements for a discussion of the potential impact of new accounting standards issued but not adopted as of June 30, 2019 on our Financial Statements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
In the normal course of business, our results of operations are exposed to certain market risks, primarily associated with fluctuations in currency exchange rates.
We have operations in many locations around the world and are involved in transactions in currencies other than those of our entity’s functional currencies, which could adversely affect our results of operations due to changes in currency exchange rates or weak economic conditions in foreign markets. We manage these risks associated with currency exchange rate fluctuations by hedging those risks with foreign currency derivative instruments. Historically, we have hedged those risks with foreign currency forward contracts. In certain cases, contracts with our customers may contain provisions under which payments from our customers are denominated in U.S. dollars and in a foreign currency. The payments denominated in a foreign currency are designed to compensate us for costs that we expect to incur in such foreign currency. In these cases, we may use derivative instruments to reduce the risks associated with currency exchange rate fluctuations arising from differences in timing of our foreign currency cash inflows and outflows. The related gains and losses on these contracts are either: (1) deferred as a component of Accumulated Other Comprehensive Income (“AOCI”) until the hedged item is recognized in earnings; (2) offset against the change in fair value of the hedged firm commitment through earnings; or (3) recognized immediately in earnings.
At June 30, 2019, the notional value of our outstanding forward contracts to hedge certain foreign currency exchange-related operating exposures was $700 million. The total fair value of these contracts was a net liability of approximately $6 million at June 30, 2019. The potential change in fair value for our outstanding contracts resulting from a hypothetical ten percent change in quoted foreign currency exchange rates would have been approximately $14 million at June 30, 2019. This potential change in fair value of our outstanding contracts would be offset by the change in fair value of the associated underlying operating exposures.
We are exposed to fluctuating exchange rates related to the effects of translating financial statements of entities with functional currencies other than the U.S. Dollar into our reporting currency. Net movements in the Canadian Dollar, Australian Dollar, British Pound, and Euro exchange rates against the U.S. Dollar unfavorably impacted the cumulative translation adjustment component of AOCI by approximately $42 million, net of tax, and our cash balance by approximately $2 million as of June 30, 2019. We generally do not hedge our exposure to potential foreign currency translation adjustments.
Interest Rate Risk
As of June 30, 2019, we continued to utilize a U.S. dollar floating-to-fixed 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, 2019. Accordingly, changes in the fair value of the swap arrangement are initially recorded in AOCI and then reclassified into earnings in the period in which corresponding interest payments are made. As of June 30, 2019, the fair value of the swap arrangement was in a net liability position totaling approximately $71 million. The potential change in fair value for our interest rate swap resulting from a hypothetical one percent change in the Eurodollar rate would have been approximately $55 million at June 30, 2019.
Other
As of June 30, 2019, the fair values of the Term Facility and Senior Notes, based on current market rates for debt with similar credit risk and maturities, were approximately $2.2 billion and $1.2 billion, respectively, and were categorized within level 2 on the valuation hierarchy. As of December 31, 2018, the fair values of the Term Facility and Senior Notes, based on current market rates for debt with similar credit risk and maturities, were approximately $2.1 billion and $1.1 billion, respectively, and were categorized within level 2 on the valuation hierarchy. See Note 16, Fair Value Measurements, to the accompanying Financial Statements for further discussion of our financial instruments.
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CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
Disclosure Controls and Procedures—As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2019 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management, including our principal executive and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting—There has been no change in our internal control over financial reporting during the period ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding ongoing investigations and litigation, see Note 22, Commitments and Contingencies, to our unaudited Financial Statements in Part I of this report, which we incorporate by reference into this Item.
Item 1A. Risk Factors
We are updating the risk factor disclosure in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 by adding the discussion below.
The United Kingdom’s proposed withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
We are a Panamanian corporation with a tax residency in the United Kingdom (“U.K.”) and with worldwide operations, including material business operations in Europe. In June 2016, a majority of voters in the U.K. voted in favor of the U.K.’s withdrawal from the European Union in a national referendum (“Brexit”). The referendum was advisory, and the U.K. government served notice under Article 50 of the Treaty of the European Union in March 2017 to formally initiate the withdrawal process. The U.K. and the European Union have had a two-year period under Article 50 to negotiate the terms for the U.K.’s withdrawal from the European Union, which has been extended until October 31, 2019. The withdrawal agreement and political declaration that were endorsed at a special meeting of the European Council on November 25, 2018 did not receive the approval of the U.K. Parliament in January 2019. Further discussions are ongoing, although the European Commission has stated that the European Union will not reopen the withdrawal agreement. Any further extension of the negotiation period for withdrawal will require the consent of the remaining 27 member states of the European Union. Brexit has created significant uncertainty about the future relationship between the U.K. and the European Union and has given rise to calls for certain regions within the U.K. to preserve their place in the European Union by separating from the U.K.
These developments, or the perception that any of them could occur, could have a material adverse effect on global economic conditions and the stability of the global financial markets and could also significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility. Lack of clarity about applicable future laws, regulations or treaties as the U.K. negotiates the terms of a withdrawal, as well as the operation of any such rules pursuant to any withdrawal terms, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws, employment laws, and other rules that could apply to us and our subsidiaries, could increase our costs, restrict our access to capital within the U.K. and the European Union, depress economic activity and further decrease foreign direct investment in the U.K. For example, withdrawal from the European Union could, depending on the negotiated terms of such withdrawal, eliminate the benefit of certain tax-related European Union directives currently applicable to U.K.-tax-resident companies such as us, including the Parent-Subsidiary Directive and the Interest and Royalties Directive, which could, subject to any relief under an available tax treaty, raise our tax costs.
If the U.K. and the European Union are unable to negotiate mutually acceptable withdrawal terms or if other European Union member states pursue withdrawal, barrier-free access between the U.K. and other European Union member states or within the European Economic Area overall could be diminished or eliminated. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
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EXHIBITS
Item 6. Exhibits
EXHIBIT INDEX
Exhibit Number |
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Description |
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3.1* |
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3.2* |
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3.3* |
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4.1 |
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10.1 |
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Form of 2019 Non-Employee Director Restricted Stock Unit Grant Agreement. |
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31.1 |
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Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer. |
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31.2 |
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Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer. |
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32.1 |
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32.2 |
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101.INS XBRL |
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Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH XBRL |
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Taxonomy Extension Schema Document |
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101.CAL XBRL |
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Taxonomy Extension Calculation Linkbase Document |
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101.LAB XBRL |
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Taxonomy Extension Label Linkbase Document |
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101.PRE XBRL |
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Taxonomy Extension Presentation Linkbase Document |
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101.DEF XBRL |
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Taxonomy Extension Definition Linkbase Document |
* |
Incorporated by reference to the filing indicated. |
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SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
July 29, 2019 |
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McDERMOTT INTERNATIONAL, INC. |
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By: |
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/s/ CHRISTOPHER A. KRUMMEL |
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Christopher A. Krummel Global Vice President, Finance and Chief Accounting Officer |
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