Washington,
D.C. 20549
|
(Mark
One)
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F O
R M 1 0 – K
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|
X
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2008
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from
_____________ to ________________
Commission
File Number 001-08430
McDERMOTT
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
|
REPUBLIC
OF PANAMA
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72-0593134
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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777
N. ELDRIDGE PKWY.
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|
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HOUSTON,
TEXAS
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77079
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (281)
870-5901
Securities
Registered Pursuant to Section 12(b) of the Act:
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Name
of each Exchange
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|
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Title
of each class
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on
which registered
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Common
Stock, $1.00 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [ü]No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.Yes
[ ]No [ü]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[ü] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ü ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ü] Accelerated
filer [ ] Non-accelerated filer
[ ] Smaller reporting company
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [P]
The aggregate market value of the
registrant’s common stock held by nonaffiliates of the registrant on the last
business day of the registrant’s most recently completed second fiscal quarter
(based on the closing sales price on the New York Stock Exchange on June 30,
2008) was approximately $14.2 billion.
The number of shares of the
registrant’s common stock outstanding at January 30, 2009 was 228,269,696.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with the registrant’s 2009 Annual Meeting of Stockholders are
incorporated by reference into Part III of this report.
INDEX
- FORM 10-K
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Statements
we make in this Annual Report on Form 10-K which express a belief, expectation
or intention, as well as those that are not historical fact, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to various risks,
uncertainties and assumptions, including those to which we refer under the
headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk
Factors” in Items 1 and 1A of Part I of this report.
McDermott International, Inc. (“MII”)
is a leading global engineering and construction company with specialty
manufacturing and service capabilities. We provide a variety of
products and services to customers in the energy and power industries, including
utilities and other power generators, major and national oil companies, and the
United States Government. While we provide a wide range of products
and services, our business segments are heavily focused on major
projects. At any given time, a relatively few number of projects can
represent a significant part of our operations. We have
operations in more than 20 countries and over 20,000 employees
worldwide.
MII was incorporated under the laws of
the Republic of Panama in 1959 and is the parent company of the McDermott group
of companies, including J. Ray McDermott, S.A. (“JRMSA”) and The Babcock &
Wilcox Company (“B&W”). In this Annual Report on Form 10-K,
unless the context otherwise indicates, “we,” “us” and “our” mean MII and its
consolidated subsidiaries. MII’s common stock is listed on the New
York Stock Exchange under the trading symbol MDR.
We
operate in three business segments: Offshore Oil and Gas
Construction, Government Operations and Power Generation Systems. For
financial information about our segments, see Note 18 to our consolidated
financial statements included in this report.
Offshore
Oil and Gas Construction
Our Offshore Oil and Gas Construction
segment includes the business and operations of JRMSA, J. Ray McDermott
Holdings, LLC and their respective subsidiaries. Through this
segment, we supply services primarily to offshore oil and gas field developments
worldwide, including the front-end design and detailed engineering, fabrication
and installation of offshore drilling and production facilities and installation
of marine pipelines and subsea production systems. We also
provide comprehensive project management and procurement services, and we
operate in most major offshore oil and gas producing regions, including the
United States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia
Pacific.
We
operate a fleet of marine vessels used in major offshore construction and
operate several fabrication facilities. Our Offshore Oil and Gas
Construction segment’s principal fabrication facilities are located in Indonesia
on Batam Island, in Dubai, U.A.E., Altamira, Mexico and near Morgan City,
Louisiana. We also operate a portion of the Baku Deepwater Jacket
Factory fabrication facility in Baku, Azerbaijan, which is owned by a subsidiary
of the State Oil Company of the Azerbaijan Republic. These fabrication
facilities are equipped with a wide variety of heavy-duty construction and
fabrication equipment, including cranes, welding equipment, machine tools and
robotic and other automated equipment. We fabricate a full range of offshore
structures, from conventional jacket-type fixed platforms to intermediate water
and deepwater platform configurations employing spar, compliant-tower and
tension leg technologies, as well as floating, production, storage and
off-loading (“FPSO”) technology. For further details regarding our
Offshore Oil and Gas Construction segment’s vessels and facilities, see Item 2,
“Properties.”
Because
of the more conducive weather conditions in certain geographic regions, most
installation operations are conducted in the warmer months of the year in those
areas, and many of our contracts are awarded with only a short period of time
before the desired time of project performance. Major construction
vessels have few alternative uses and, because of their nature and the
environment in which they work, have relatively high fixed
costs.
Our
Offshore Oil and Gas Construction segment’s activity depends mainly on the
capital expenditures for offshore construction services of oil and gas companies
and foreign governments for construction of development projects in the regions
in which we operate. This segment’s operations are generally capital
intensive, and a number of factors influence its activities,
including:
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·
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oil
and gas prices, along with expectations about future
prices;
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·
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the
cost of exploring for, producing and delivering oil and
gas;
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·
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the
terms and conditions of offshore
leases;
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·
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the
discovery rates of new oil and gas reserves in offshore
areas;
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·
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the
ability of businesses in the oil and gas industry to raise capital;
and
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·
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local
and international political and economic
conditions.
|
Government
Operations
Our Government Operations segment
includes the business and operations of BWX Technologies, Inc., Babcock &
Wilcox Nuclear Operations Group, Inc., Babcock & Wilcox Technical Services
Group, Inc. and their respective subsidiaries. Through this segment, we supply
nuclear components, including the manufacture of U.S. Naval nuclear power
systems for submarines and aircraft carriers, and provide various other services
to the U.S. Government, including uranium processing, environmental site
restoration services, and management and operating services for various U.S.
Government-owned facilities, primarily within the nuclear weapons complex of the
U.S. Department of Energy (“DOE”).
We have
over 50 years of experience in the ownership and operation of large nuclear
development, production and reactor facilities. This segment’s
principal operations include:
|
·
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providing
precision manufactured nuclear components for U.S. Government defense
programs;
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·
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managing
and operating nuclear production
facilities;
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·
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managing
and operating environmental management
sites;
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·
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managing
spent nuclear fuel and transuranic waste for the
DOE;
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·
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providing
critical skills and resources for DOE sites;
and
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·
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developing
and deploying next generation technology in support of U.S. Government
programs.
|
With
manufacturing facilities located in Barberton, Ohio, Euclid, Ohio, Mount Vernon,
Indiana, Lynchburg, Virginia and Erwin, Tennessee, our Government Operations
segment specializes in the design and manufacture of close-tolerance and
high-quality equipment for nuclear applications (for further details regarding
our Government Operations segment’s facilities, see Item 2,
“Properties”). In addition, we are a leading manufacturer of critical
nuclear components, fuels and assemblies for government and commercial uses. We
have supplied nuclear components for DOE programs since the 1950s, and we are
the largest domestic supplier of research reactor fuel elements for colleges,
universities and national laboratories. We also provide uranium-based
products used for medical isotopes and convert or downblend high-enriched
uranium into low-enriched fuel for use in commercial reactors to generate
electricity. In addition, we have over 100 years of experience in supplying
heavy fabrications for industrial use, including components for defense
applications.
We work
closely with the DOE supported non-proliferation program. Currently, this
program is assisting in the development of a high-density, low-enriched uranium
fuel required for high-enriched uranium test reactor conversions. We
have also been a leader in the receipt, storage, characterization, dissolution,
recovery and purification of a variety of uranium-bearing materials. All phases
of uranium downblending and uranium recovery are provided at our Lynchburg,
Virginia and Erwin, Tennessee sites.
We manage
and operate complex, high-consequence nuclear and national security operations
for the DOE and the National Nuclear Security Administration (“NNSA”), primarily
through our joint ventures, as further outlined in the “Joint Ventures” section
of Item 1. In addition to these joint ventures, Babcock & Wilcox
Technical Services Clinch River, LLC was awarded a contract from USEC, Inc. in
2007 to manufacture classified metal parts for the American Centrifuge
Program.
We have
an experienced staff of design and manufacturing engineers capable of performing
full scope, prototype design work coupled with manufacturing integration. The
design, engineering and other capabilities of our Government Operations segment
include:
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·
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steam
separation equipment design and
development;
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·
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thermal-hydraulic
design of reactor plant components;
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·
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structural
component design for precision
manufacturing;
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·
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materials
expertise in high-strength, low-alloy steels, nickel-based materials and
others;
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·
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material
procurement of tubing, forgings, weld wire;
and
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·
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metallographic
and chemical analysis.
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Our Government Operations segment’s
operations are generally capital intensive on the manufacturing
side. The demand for nuclear components by the U.S. Government
comprises a substantial portion of this segment’s backlog. We expect
that orders for nuclear components will continue to be a significant part of
backlog for the foreseeable future; however, such orders are subject to defense
department budget constraints.
Power
Generation Systems
Our Power Generation Systems segment
includes the business and operations of Babcock & Wilcox Power Generation
Group, Inc. (“B&W PGG”), Babcock & Wilcox Nuclear Power Generation
Group, Inc. (“B&W NPG”) and their respective
subsidiaries. Through this segment, we supply fossil-fired boilers,
commercial nuclear steam generators and components, environmental equipment and
components, and related services to customers in different regions around the
world. We design, engineer, manufacture, construct and service large
utility and industrial power generation systems, including boilers used to
generate steam in electric power plants, pulp and paper making, chemical and
process applications and other industrial uses.
Through
this segment’s manufacturing facilities, which are located primarily in North
America, we specialize in the fabrication of products used in the power
generation industry and the provision of related services,
including:
|
·
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engineered-to-order
services, products and systems for energy conversion worldwide and related
auxiliary equipment, such as burners, pulverizer mills, soot blowers and
ash handlers;
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·
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heavy-pressure
equipment for energy conversion, such as boilers fueled by coal, oil,
bitumen, natural gas, solid municipal waste, biomass and other
fuels;
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·
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steam
generators and reactor heads for nuclear power
plants;
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·
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environmental
control systems, including both wet and dry scrubbers for flue gas
desulfurization, modules for selective catalytic reduction of the oxides
of nitrogen, equipment to capture particulate matter, such as baghouses
and electrostatic precipitators, and similar devices;
and
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|
·
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power
plant equipment and related heavy mechanical erection
services.
|
For
further details regarding our Power Generation Systems segment’s facilities, see
Item 2, “Properties.”
We
support operating plants with a wide variety of additional services, including
the installation of new systems and replacement parts, engineering services,
construction, maintenance and field technical services, such as condition
assessments and inventory services to help customers respond quickly to plant
interruptions. We also provide power through cogeneration,
refuse-fueled power plants and other independent power-producing facilities and
participate in this market as contractors for engineer-procure-construct
services, as equipment suppliers, as operations and maintenance contractors and
as an owner.
Although
it has been over 30 years since a new nuclear power plant commenced construction
in the United States, we expect to participate in commercial nuclear projects
and related opportunities in the future, through B&W NPG. This
subsidiary was formed during 2007 to bring together our specialized engineering,
services and manufacturing capabilities within a dedicated organization focused
on nuclear utility customers.
Our Power
Generation Systems segment’s overall activity depends mainly on the capital
expenditures of electric power generating companies and other steam-using
industries. Several factors influence these expenditures,
including:
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·
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prices
for electricity, along with the cost of production and
distribution;
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·
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prices
for coal and natural gas and other sources used to produce
electricity;
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·
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demand
for electricity, paper and other end products of steam-generating
facilities;
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·
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availability
of other sources of electricity, paper or other end
products;
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·
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requirements
for environmental improvements;
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·
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impact
of potential regional, state, national and/or global requirements to
significantly limit or reduce greenhouse gas emissions in the
future;
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·
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level
of capacity utilization at operating power plants, paper mills and other
steam-using facilities;
|
|
·
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requirements
for maintenance and upkeep at operating power plants and paper mills to
combat the accumulated effects of wear and
tear;
|
|
·
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ability
of electric generating companies and other steam users to raise capital;
and
|
|
·
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relative
prices of fuels used in boilers, compared to prices for fuels used in gas
turbines and other alternative forms of
generation.
|
Our Power
Generation Systems segment’s products and services are capital intensive. As
such, customer demand is heavily affected by the variations in customer’s
business cycles and by the overall economies of the countries in which they
operate.
On
February 22, 2006, B&W PGG and three of its subsidiaries (collectively the
“Debtors”) exited from their asbestos-related Chapter 11 Bankruptcy proceedings
(the “Chapter 11 Bankruptcy”), which were commenced on February 22,
2000. The Chapter 11 Bankruptcy was initiated as a means to determine
and resolve the asbestos-related liabilities of the Debtors. The
Chapter 11 Bankruptcy was resolved through a settlement, which led to our
contribution of rights under various insurance policies, cash and a promissory
note, with an aggregate value of approximately $2 billion, to a settlement
trust, the channeling of asbestos-related personal injury claims to that trust
and our retention of the equity ownership of the Debtors. Due to the
Chapter 11 Bankruptcy, we did not consolidate the results of operations of the
Debtors and their subsidiaries in our consolidated financial statements from
February 22, 2000 through February 22, 2006.
During
2008 and 2007, we completed acquisitions for total cash costs of approximately
$192 million and $334 million, respectively. The following is a brief
description of some of our key acquisitions:
Nuclear Fuel Services,
Inc. On December 31, 2008, our Government Operations segment
completed its acquisition of Nuclear Fuel Services, Inc., a provider of
specialty nuclear fuels and related services, for approximately $157 million,
net of cash acquired. This business enhances our position as a
leading provider of nuclear manufacturing and services for government and
commercial markets.
Secunda International
Limited. In July 2007, our Offshore Oil and Gas Construction
segment acquired substantially all of the assets of Secunda International
Limited, including 14 harsh-weather, multi-functional vessels and its
shore-based operations. This business adds growth potential to our
Oil and Gas Construction business and was acquired for approximately $263
million, net of cash acquired.
Marine Mechanical
Corporation. In May 2007, our Government Operations segment
completed its acquisition of Marine Mechanical Corporation, which designs,
manufactures and supplies electro-mechanical equipment used by the United States
Navy. This business complements our other government-related nuclear
activities and was acquired for approximately $71 million, net of cash
acquired.
We
continue to evaluate accelerated growth opportunities achievable through
acquisition or consolidation, in addition to pursuing internal growth strategies
to advance our position in the energy arena of engineering and
construction.
We
execute our contracts through a variety of methods, including fixed-price,
cost-plus, cost-reimbursable, day-rate and unit-rate basis or some combination
of those methods. Contracts are usually awarded through a competitive
bid process, primarily based on price. However, other factors that
customers may consider include plant or equipment availability, technical
capabilities of equipment and personnel, efficiency, safety record and
reputation.
Fixed-price
contracts are for a fixed amount to cover all costs and any profit element for a
defined scope of work. Fixed-price contracts entail more risk to us
because they require us to predetermine both the quantities of work to be
performed and the costs associated with executing the work.
We have
contracts that extend beyond one year. Most of our long-term
contracts have provisions for progress payments. We attempt to cover anticipated
increases in labor, material and service costs of our long-term contracts either
through an estimate of such charges, which is reflected in the original price,
or through risk-sharing mechanisms, such as escalation or price adjustments for
items such as labor and commodity prices.
We
generally recognize our contract revenues and related costs on a
percentage-of-completion basis. Accordingly, we review contract price and cost
estimates periodically as the work progresses and reflect adjustments in profit
proportionate to the percentage of completion in the period when we revise those
estimates. To the extent that these adjustments result in a reduction or an
elimination of previously reported profits with respect to a project, we would
recognize a charge against current earnings, which could be
material.
Our
contracts with the U.S. Government are subject to annual funding
determinations. In addition, contracts between the U.S. Government
and its prime contractors usually contain standard provisions for termination at
the convenience of the Government or the prime contractor. The
contracts for the management and operation of U.S. Government facilities are
generally structured as five-year contracts with five-year renewal options,
which are exercisable by the customer. These are cost-reimbursement contracts
with a U.S. Government credit line with little corporate-funded working capital
required. As a U.S. Government contractor, we are subject to federal regulations
under which our right to receive future awards of new federal contracts would be
unilaterally suspended or barred if we were convicted of a crime or indicted
based on allegations of a violation of specific federal statutes.
Our
arrangements with customers frequently require us to provide letters of credit,
bid and performance bonds or guarantees to secure bids or performance under
contracts. While these letters of credit, bonds and guarantees may involve
significant dollar amounts, historically, there have been no material payments
to our customers under these arrangements.
In the
event of a contract deferral or cancellation, we generally would be entitled to
recover costs incurred, settlement expenses and profit on work completed prior
to deferral or termination. Significant or numerous cancellations
could adversely affect our business, financial condition, results of operations
and cash flows.
Backlog
represents the dollar amount of revenue we expect to recognize in the future
from contracts awarded and in progress. Not all of our expected
revenue from a contract award is recorded in backlog for a variety of reasons,
including projects awarded and completed within the same fiscal
quarter.
Backlog
is not a measure defined by generally accepted accounting principles, and our
methodology for determining backlog may not be comparable to the methodology
used by other companies in determining their backlog amounts. Backlog
may not be indicative of future operating results, and projects in our backlog
may be cancelled, modified or otherwise altered by customers.
We
generally include expected revenue of contracts in our backlog when we receive
written confirmation from our customers. We do not include expected
revenue of contracts related to unconsolidated joint ventures in our
backlog.
Our
backlog at December 31, 2008 and 2007 was as follows:
|
December
31,
|
December
31,
|
|||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 4,457 | 46 | % | $ | 4,753 | 49 | % | ||||||||
|
Government
Operations
|
2,883 | 29 | % | 1,791 | 18 | % | ||||||||||
|
Power
Generation Systems
|
2,476 | 25 | % | 3,276 | 33 | % | ||||||||||
|
Total
Backlog
|
$ | 9,816 | 100 | % | $ | 9,820 | 100 | % | ||||||||
Of the
December 31, 2008 backlog, we expect to recognize revenues as
follows:
|
2009
|
2010
|
Thereafter
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
(In
approximate millions)
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 2,670 | $ | 1,240 | $ | 550 | ||||||
|
Government
Operations
|
870 | 720 | 1,290 | |||||||||
|
Power
Generation Systems
|
1,240 | 540 | 700 | |||||||||
|
Total
Backlog
|
$ | 4,780 | $ | 2,500 | $ | 2,540 | ||||||
At
December 31, 2008 the Offshore Oil and Gas Construction backlog included
approximately $1.1 billion related to contracts in or near loss positions, which
are estimated to recognize future revenues with approximately zero percent gross
margins on average. Typical of our business, our estimates of gross
profit may improve based on improved productivity, decreased downtime and the
successful settlement of change orders and claims with our
customers.
As of
December 31, 2008, our backlog with the U.S. Government, primarily attributable
to our Government Operations segment, was $2.9 billion (of which $5.9 million
had not yet been funded), or approximately 29% of our total consolidated
backlog. We do not include the value of our management and operating
contracts in backlog.
During
the year ended December 31, 2008, the U.S. Government awarded new orders of
approximately $1.5 billion to us, primarily in our Government Operations
segment. The amount of new orders awarded during the year ended
December 31, 2008 does not include the acquired U.S. Government backlog of
Nuclear Fuel Services, Inc. of $287.0 million recorded on the date of
acquisition. New awards from the U.S. Government are typically
received by our Government Operations segment during the fourth quarter of each
year.
The
competitive environments in which each segment operates are described
below:
Offshore Oil and Gas
Construction. We believe we are among the few offshore
construction contractors capable of providing a full range of services in major
offshore oil and gas producing regions of the world. We believe that
the substantial capital costs involved in becoming a full-service offshore
construction contractor create a significant barrier to entry into the market as
a global, fully-integrated competitor. We do, however, face
substantial competition from regional competitors and less integrated providers
of offshore construction services, such as engineering firms, fabrication
facilities, pipelaying companies and shipbuilders. A number of
companies compete with us in each of the separate marine pipelay and
construction and fabrication phases in various parts of the world. These
competitors include Allseas Marine Contractors S.A.; Daewoo Engineering &
Construction Co., Ltd.; Global Industries, Ltd.; NPCC (Abu Dhabi); Heerema
Group; Hyundai Heavy Industrial Co., Ltd.; Kiewit Offshore Services, Ltd.;
Nippon Steel Corporation; Saipem S.p.A.; Acergy S.A.; Technip S.A; and Samsung
Heavy Industries Co., Ltd.
Government
Operations. We have unique capabilities that have allowed us
to be a valued supplier of nuclear components for U.S. Naval programs since the
1950s. Also, through this segment, we are engaged in a highly
competitive business through our management and operation of U.S. Government
facilities. Many of our government contracts are bid as a joint
venture, with one or more companies, in which we may have a minority
position. The performance of the prime or lead contractor can impact
our reputation and our future competitive position with respect to that
particular project and customer. Competitors in the delivery of goods
and services to the U.S. Government and the operation of U.S. Government
facilities include Bechtel National, Inc., URS Corporation, CH2M Hill, Inc.,
Fluor Corporation, Lockheed Martin Corporation, Jacobs Engineering Group, Inc.
and EnergySolutions, Inc.
Power Generation
Systems. With more than 140 years of experience, we are
in a strong position to provide some of the most advanced steam generating
equipment, emissions control equipment and services. Having supplied worldwide
capacity of more than 300,000 megawatts and some of the world’s largest and most
efficient steam generating systems, we have the experience and technical
capability to reliably convert the energy in a wide range of fuels to energy in
steam. Our strong, installed based in North America yields competitive
advantages in after-market services, although this share of the market is
pressured by lower level suppliers. Through this segment, we compete
with: a number of domestic and foreign-based companies specializing in
steam-generating systems, equipment and services, including Alstom S.A., Doosan
Babcock, Babcock Power, Inc., Foster Wheeler Ltd., Mitsubishi Heavy Industries
and Hitachi, Ltd.; a number of additional companies in the markets for
environmental control equipment and related specialized industrial equipment and
in the independent power-producing business; and other suppliers of replacement
parts, repair and alteration services and other services required to retrofit
and maintain existing steam systems.
We participate in the ownership of
entities with third parties, primarily through corporations, limited liability
companies and partnerships, which we refer to as “joint
ventures.” Our Government Operations segment manages and operates
complex, high-consequence nuclear and national security operations for the DOE
and the National Nuclear Security Administration (“NNSA”) through its joint
ventures. We generally account for our investments in joint ventures
under the equity method of accounting. Our significant joint ventures
are described below.
Offshore Oil and Gas
Construction
|
·
|
Deepwater Marine Technology
LLC. We co-own this entity with Keppel FELS
Ltd. This joint venture expands our services related to the
solutions involving tension leg platforms (“TLPs”). A TLP is a vertically
moored floating structure normally used for the offshore production of oil
and gas and is particularly suited for water depth greater than 1,000
feet.
|
|
·
|
FloaTEC
LLC. We co-own this entity with Keppel FELS
Ltd. This joint venture designs, markets, procures and
contracts floating production systems to the deepwater oil and gas
industry. The deepwater solutions include TLPs, spars and production
semi-submersibles. A significant part of this entity’s strategy is to
build on the established presence, reputation and resources of its two
owners.
|
Government
Operations
|
·
|
Pantex
Plant. Through Babcock & Wilcox Technical Services
Pantex, L.L.C., which we co-own with Honeywell International Inc. and
Bechtel National, Inc., we manage and operate the Pantex Plant. The Pantex
Plant is located on a 16,000-acre NNSA site located near Amarillo,
Texas. Key operations at this facility include evaluating,
retrofitting and repairing nuclear weapons; dismantling and sanitizing
nuclear weapons components; developing, testing and fabricating
high-explosive components; and handling and storing plutonium
pits.
|
|
·
|
Y-12 National Security Complex
(“Y-12 Complex”). Through Babcock & Wilcox Technical
Services Y-12, L.L.C, an entity we co-own with Bechtel National, Inc., we
manage the Y-12 Complex. The Y-12 Complex is located on an 811-acre NNSA
site located in Oak Ridge, Tennessee. Operations at the site
focus on the production, refurbishment and dismantlement of nuclear
weapons components, storage of nuclear material and the prevention of the
proliferation of weapons of mass
destruction.
|
|
·
|
Idaho National
Laboratory. Through Bechtel BWXT Idaho, L.L.C., a
limited liability corporation formed with Bechtel National, we manage the
nuclear and national security operations of this site as a team member of
the Battelle Energy Alliance, the operator of the site. The
Idaho National Laboratory is an 890-square mile DOE site near Idaho Falls,
Idaho that serves nuclear, national security and scientific research
purposes. Operations at the facility include processing and
managing radioactive and hazardous materials and nuclear reactor design,
demonstration and safety. The site includes 52 facilities, of
which 12 are classified as Hazard Category 2. A Hazard Category
2 designation is based on the quantities of radioactive materials at the
facility and specified levels of radioactive/hazardous material released
without mitigation.
|
|
·
|
Strategic Petroleum
Reserve. Since 1993, this facility has been managed and
operated by DynMcDermott Petroleum Operations Company, an entity we co-own
with DynCorp International, International-Matex Tank and Terminals and
Jacobs Engineering Group, Inc. The Strategic Petroleum Reserve stores an
emergency supply of crude oil stored at four sites in huge underground
salt caverns along the Texas and Louisiana Gulf
Coast.
|
|
·
|
Los Alamos National
Laboratory. Since 2006, as one of the owners of Los
Alamos National Security, LLC, we have been involved in the management and
operations of this facility. Previously, we acted as a
subcontractor to the University of California at this facility, providing
nuclear facility operations assessment, advisory and technical support
services. The Los Alamos National Laboratory is located in New
Mexico and is the DOE weapons laboratory with the largest number of
defense facilities and weapons-related activities. It is the foremost site
for the government’s ongoing research and development on the measures
necessary for certifying the safety and reliability of nuclear weapons
without the use of nuclear testing.
|
|
·
|
Oak Ridge National
Laboratory. This facility is managed and operated by
UT-Battelle, LLC for the DOE. As an integrated subcontractor to
UT-Battelle, LLC, we provide technical support in the areas of nuclear
facility management and operation. The Oak Ridge National Laboratory is a
multi-disciplined science and technology complex located on a 58-square
mile site near Oak Ridge,
Tennessee.
|
|
·
|
Lawrence Livermore National
Laboratory. Lawrence Livermore National Security, LLC is
a consortium, comprised of the University of California, Bechtel National,
URS Corporation and us, which was awarded a contract in late 2007 to
manage the facility in Livermore, California. The laboratory
serves as a national resource in science and engineering, focused on
national security, energy, the environment and bioscience, with special
responsibility for nuclear weapons.
|
|
·
|
Savannah River
Site. As an integrated contractor at this site, we are
responsible for nuclear materials management and the startup and operation
of a facility to extract tritium, a radioactive form of hydrogen used in
the United States’ nuclear weapons program. In January 2008,
the management and operations contract for the site was awarded to a new
team, which does not include Babcock & Wilcox Technical
Services Group, Inc., but does include Nuclear Fuel Services, Inc. as an
integrated subcontractor. In December 2008, our team,
consisting of URS Corporation, Bechtel National, CH2M Hill, AREVA Federal
Services and us, won the liquid waste management and nuclear cleanup
contract for the site. The Savannah River Site is a 310-square
mile DOE industrial complex, located in Aiken, South Carolina, dedicated
to the processing and storing of nuclear materials in support of the
national defense and U.S. nuclear nonproliferation efforts. The
site also develops and deploys technologies to improve the environment and
treat nuclear and hazardous wastes.
|
Power
Generation Systems
|
·
|
Ebensburg Power Company &
Ebensburg Investors Limited Partnership. These entities were formed
by subsidiaries within our Power Generation Systems segment and ESI
Energy, Inc. for the purpose of arranging for engineering, constructing,
owning and operating a combined solid waste and cogeneration facility
located in Cambria County near Ebensburg, Pennsylvania. This facility uses
bituminous waste coal for its primary fuel and sells generated electricity
to a utility and steam to a hospital. Our Power Generation Systems segment
has a long history of selling its goods and services to power producers,
particularly those using fossil fuel-fired steam generating systems. These
entities were formed to hold our interest in a utility, which, at the
time, was part of the strategic plan for our power systems generation
business.
|
|
·
|
Halley & Mellowes Pty.
Ltd. Diamond Power International, Inc. (“DPS”), one of
our wholly owned subsidiaries, owns an interest in this Australian
company. Halley & Mellowes Pty. Ltd. is complementary to DPS and has
helped DPS to become the largest supplier of boiler-cleaning equipment in
the world. Halley & Mellowes Pty. Ltd. sells soot blowers, boiler
cleaning equipment, valves and material handling equipment, all of which
are complementary to DPS’s product lines. In addition, Halley &
Mellowes Pty. Ltd. shares the same customer base as DPS and is basically
an extension of DPS’s operations.
|
|
·
|
Babcock & Wilcox Beijing
Company, Ltd. We own equal interests in this entity with
Beijing Jingcheng Machinery Electric Holding Company, Ltd. Babcock &
Wilcox Beijing Company, Ltd. is located in Beijing, China, and its main
activities are the design, manufacturing, production and sale of various
power plant and industrial boilers. It operates the largest heavy drum
shop in northern China. We formed this entity to expand our
markets internationally and to provide additional capacity to our Power
Generation Systems segment’s existing boiler
business.
|
Our
Government Operations segment generates all of its revenues from customers
within the United States. Our Offshore Oil and Gas Construction
segment and Power Generations Systems segment revenues, net of intersegment
revenues, and income derived from operations located outside of the United
States, as well as the approximate percentages to our total consolidated
revenues and total consolidated segment income, respectively, for each of the
last three years were as follows (dollars in thousands):
|
Revenues
|
Segment
Income
|
|||||||||||||||
|
Amount
|
Percent
of Consolidated
|
Amount
|
Percent
of Consolidated
|
|||||||||||||
|
Offshore
Oil and Gas Construction:
|
||||||||||||||||
|
Year
ended December 31, 2008
|
$ | 2,829,241 | 43 | % | $ | 149,960 | 25 | % | ||||||||
|
Year
ended December 31, 2007
|
$ | 2,170,596 | 39 | % | $ | 413,666 | 55 | % | ||||||||
|
Year
ended December 31, 2006
|
$ | 1,378,339 | 33 | % | $ | 217,181 | 52 | % | ||||||||
|
Power
Generation Systems:
|
||||||||||||||||
|
Year
ended December 31, 2008
|
$ | 526,080 | 8 | % | $ | 72,197 | 12 | % | ||||||||
|
Year
ended December 31, 2007
|
$ | 411,459 | 7 | % | $ | 49,122 | 6 | % | ||||||||
|
Year
ended December 31, 2006
|
$ | 415,995 | 10 | % | $ | 32,050 | 8 | % | ||||||||
For
additional information on the geographic distribution of our revenues, see Note
18 to our consolidated financial statements included in this
report.
We
provide our products and services to a diverse customer base, including
utilities and other power producers, multinational and state-owned oil and gas
companies, businesses in various process industries, such as pulp and paper
mills, petrochemical plants, oil refineries, steel mills and the U.S.
Government. Our five largest customers, as a percentage of our total
consolidated revenues, during the years ended December 31, 2008 and 2007 were as
follows:
|
Year
Ended December 31, 2008:
|
||||
|
U.S.
Government
|
12 | % | ||
|
Ras
Laffan Liquified Natural Gas Company
|
8 | % | ||
|
Cuu
Long Joint Operating Co.
|
5 | % | ||
|
Reliance
Industries Limited
|
5 | % | ||
|
American
Electric Power Company, Inc.
|
4 | % | ||
|
Year
Ended December 31, 2007:
|
||||
|
U.S.
Government
|
12 | % | ||
|
Azerbaijan
International Operating Company
|
6 | % | ||
|
Shell
Oil
|
5 | % | ||
|
American
Electric Power Company, Inc.
|
5 | % | ||
|
TXU
Corp.
|
4 | % | ||
The U.S.
Government is the primary customer of our Government Operations segment,
comprising 89% and 97% of segment revenues for the years ended December 31, 2008
and 2007, respectively.
Customers
that account for a significant portion of revenues in one year may represent an
immaterial portion of revenues in subsequent years.
Our
operations use raw materials, such as carbon and alloy steels in various forms
and components and accessories for assembly, which are available from numerous
sources. We generally purchase these raw materials and components as
needed for individual contracts. Our Offshore Oil and Gas
Construction and Power Generation Systems segments do not depend on a single
source of supply for any significant raw materials. Our Government
Operations segment relies on several single-source suppliers for materials used
in its products. We believe these suppliers are viable, and we and
the U.S. Government expend significant effort to maintain the supplier base for
our Government Operations segment.
Although
shortages of some raw materials have existed from time to time, no serious
shortage exists at the present time.
At
December 31, 2008, we employed approximately 26,400 persons worldwide, compared
with 28,400 at December 31, 2007. Approximately 7,600 of our
employees were members of labor unions at December 31, 2008, compared with
approximately 8,300 at December 31, 2007. Many of our operations are
subject to union contracts, which we customarily renew
periodically. We consider our relationships with our employees to be
satisfactory.
We
currently hold a large number of U.S. and foreign patents and have numerous
patent applications pending. We have acquired patents and licenses
and granted licenses to others when we have considered it advantageous for us to
do so. Although in the aggregate our patents and licenses are
important to us, we do not regard any single patent or license or group of
related patents or licenses as critical or essential to our business as a
whole. In general, we depend on our technological capabilities and
the application of know-how, rather than patents and licenses, in the conduct of
our various businesses.
We
conduct our principal research and development activities through individual
business units at our various manufacturing plants and engineering and design
offices. Our research and development activities cost approximately $57.8
million, $52.0 million and $45.2 million in the years ended December 31, 2008,
2007 and 2006, respectively. Contractual arrangements for
customer-sponsored research and development can vary on a case-by-case basis and
include contracts, cooperative agreements and grants. Of our total research and
development expenses, our customers paid for approximately $17.7 million, $16.5
million and $26.5 million in the years ended December 31, 2008, 2007 and
2006, respectively.
Our
operations present risks of injury to or death of people, loss of or damage to
property, and damage to the environment. We conduct difficult and
frequently precise operations in very challenging and dynamic locations. We have
created loss control systems to assist us in the identification and treatment of
the hazard risks presented by our operations, and we endeavor to make sure these
systems are effective.
As loss
control measures will not always be successful, we seek to establish various
means of funding losses and liability related to incidents or
occurrences. We primarily seek to do this through contractual
protections, including waivers of consequential damages, indemnities, caps on
liability, liquidated damage provisions, and access to the insurance of other
parties. We also procure insurance, operate our own “captive”
insurance companies, and/or establish funded or unfunded
reserves. However, none of these methods will ensure that all risks
have been adequately addressed.
Depending
on competitive conditions, the nature of the work, industry custom and other
factors, we may not be successful in obtaining adequate contractual protection
from our customers and other parties against losses and liabilities arising out
of or related to the performance of our work. The scope of the protection may be
limited, may be subject to conditions and may not be supported by adequate
insurance or other means of financing. In addition, we sometimes have difficulty
enforcing our contractual rights with others following a material
loss.
Similarly,
insurance for certain potential loses or liabilities may not be available or may
only be available at a cost or on terms we consider not to be
economical. Insurers frequently react to market losses by ceasing to
write or severely limiting coverage for certain exposures (for example,
windstorm coverage following the hurricane losses in the Gulf of Mexico in
2005). Risks that we have frequently found difficult to
cost-effectively insure against include, but are not limited to, business
interruption (including from the loss of a vessel), property losses from wind
and flood events, war and confiscation or seizure of property in some areas of
the world, pollution liability, liabilities related to occupational health
exposures (including asbestos), liability related to our executives
participating in the management of certain outside entities, professional
liability/errors and omissions coverage, and liability related to risk of loss
of our work in progress and customer-owned materials in our care, custody and
control. In cases where we place insurance, we are subject to the
credit worthiness of the relevant insurer(s), the available limits of the
coverage, our retention under the relevant policy, exclusions in the policy and
gaps in coverage.
Coverage
to insure against liability and property damage losses resulting from nuclear
accidents at reactor facilities of our utility customers is not available in the
commercial insurance marketplace, but we do have some protection against claims
based on such losses. To protect against liability for damage to a
customer's property, we endeavor to obtain waivers of subrogation from the
customer and its insurer and are usually named as an additional insured under
the utility customer's nuclear property policy. We also attempt to
cap our overall liability in our contracts. To protect against
liability from claims brought by third parties, we are insured under the utility
customer's nuclear liability policies and have the benefit of the indemnity and
limitation of any applicable liability provision of the Price-Anderson
Act. The Price-Anderson Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of a certain amount. This amount is determined by the sum of
commercially available liability insurance plus certain retrospective premium
assessments payable by operators of commercial nuclear reactors. For
those sites where we provide environmental remediation services, we seek the
same protection from our customers as we do for our other nuclear
activities. The Price-Anderson Act, as amended, includes a sunset
provision and requires renewal each time that it expires. Contracts
that were entered into during a period of time that Price-Anderson was in full
force and effect continue to receive the
benefit
of the Price-Anderson Act’s nuclear indemnity. The Price-Anderson Act
is set to expire on December 31, 2025. Our Government Operations
segment currently has no contracts involving nuclear materials that are not
covered by and subject to the nuclear indemnity provisions of the Price-Anderson
Act.
Although
we do not own or operate any nuclear reactors, we have some coverage under
commercially available nuclear liability and property insurance for three
locations that are currently licensed to possess special nuclear
materials. Two of these locations are at our Lynchburg,
Virginia site, and the other location is at our Erwin, Tennesse
site. The Lynchburg facilities are insured under a nuclear liability
policy that also insures the facility of AREVA Enterprises, Inc. (“AREVA”),
which we sold during the fiscal year ended March 31, 1993. The AREVA
facility and our facility share the same nuclear liability insurance limit, as
the commercial insurer would not allow AREVA to obtain a separate nuclear
liability insurance policy. The Erwin facility is also insured under
a separate nuclear liability policy. Due to the type of contracts
with the U.S. Government, our facilities in Lynchburg and Erwin have statutory
indemnity and limitation of liability under the Price-Anderson Act for public
liability claims related to nuclear incidents. However, we have some
risk of loss for nuclear material and are not able to buy insurance to insure
against this potential liability.
Our
Government Operations segment participates in the management and operation of
various U.S. Government facilities. This participation is customarily
accomplished through the participation in joint ventures with other contractors
for any given facility. Insurable liabilities arising from these
sites are rarely protected by our corporate insurance
program. Instead, we rely on government contractual agreements,
insurance purchased specifically for a site and certain specialized
self-insurance programs funded by the U.S. Government. The U.S.
Government has historically fulfilled its contractual agreement to reimburse its
contractors for covered claims, and we expect it to continue this process during
our participation in the administration of these facilities. However,
in most of these situations in which the U. S. Government is contractually
obligated to pay, the payment obligation is subject to the availability of
authorized government funds. The reimbursement obligation of the U.S.
Government is also conditional, and provisions of the relevant contract or
applicable law may preclude reimbursement.
Our
wholly owned “captive” insurance subsidiaries provide workers compensation,
employer’s liability, commercial general liability, maritime employer’s
liability and automotive liability insurance to support our global
operations. These captives have, from time to time, in the past
provided builder’s risk and marine hull insurance to our
companies. We may also have business reasons in the future to have
these insurance subsidiaries accept other risks which we cannot or do not wish
to transfer to outside insurance companies. These risks may be considerable in
any given year or cumulatively. These insurance subsidiaries have not
provided significant amounts of insurance to unrelated
parties. Claims as a result of our operations could adversely impact
the ability of these captive insurers to respond to all claims
presented.
Additionally,
upon the February 22, 2006 effectiveness of the settlement relating to the
Chapter 11 Bankruptcy, we and most of our subsidiaries contributed substantial
insurance rights to the asbestos personal injury trust, including rights to (1)
certain pre-1979 primary and excess insurance coverages and (2) certain of our
1979-1986 excess insurance coverage, which 1979-1986 excess policies had an
aggregate face value of available limits of coverage of approximately $1.15
billion. These insurance rights provided cover for, among other things, asbestos
and other personal injury claims, subject to the terms and conditions of the
policies. With the contribution of these insurance rights to the asbestos
personal injury trust, we may have underinsured or uninsured exposure for
non-derivative asbestos claims or other personal injury or other claims that
would have been insured under these coverages had the insurance rights not been
contributed to the asbestos personal injury trust.
General
Many
aspects of our operations and properties are affected by political developments
and are subject to both domestic and foreign governmental regulations, including
those relating to:
|
·
|
construction
and equipping of offshore production platforms and other offshore
facilities;
|
|
·
|
construction
and equipping of electric power and other industrial
facilities;
|
|
·
|
possessing
and processing special nuclear
materials;
|
|
·
|
marine
vessel safety;
|
|
·
|
workplace
health and safety;
|
|
·
|
currency
conversions and repatriation;
|
|
·
|
taxation
of foreign earnings and earnings of expatriate personnel;
and
|
|
·
|
protecting
the environment.
|
In
addition, we depend on the demand for our offshore construction services from
the oil and gas industry and, therefore, are affected by changing taxes, price
controls and other laws and regulations relating to the oil and gas industry
generally. The adoption of laws and regulations curtailing offshore exploration
and development drilling for oil and gas for economic and other policy reasons
would adversely affect our operations by limiting demand for our
services.
We are
required by various other governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to our operations. The
kinds of permits, licenses and certificates required in our operations depend
upon a number of factors.
The
exploration and development of oil and gas properties on the continental shelf
of the United States is regulated primarily under the U.S. Outer Continental
Shelf Lands Act and related regulations. These laws require the construction,
operation and removal of offshore production facilities located on the outer
continental shelf of the United States to meet stringent engineering and
construction specifications. Similar regulations govern the plugging and
abandoning of wells located on the outer continental shelf of the United States
and the removal of all production facilities. Violations of regulations issued
pursuant to the U.S. Outer Continental Shelf Lands Act and related laws can
result in substantial civil and criminal penalties, as well as injunctions
curtailing operations.
We cannot
determine the extent to which new legislation, new regulations or changes in
existing laws or regulations may affect our future operations.
Environmental
Our
operations and properties are subject to a wide variety of increasingly complex
and stringent foreign, federal, state and local environmental laws and
regulations, including those governing discharges into the air and water, the
handling and disposal of solid and hazardous wastes, the remediation of soil and
groundwater contaminated by hazardous substances and the health and safety of
employees. Sanctions for noncompliance may include revocation of permits,
corrective action orders, administrative or civil penalties and criminal
prosecution. Some environmental laws provide for strict, joint and several
liability for remediation of spills and other releases of hazardous substances,
as well as damage to natural resources. In addition, companies may be subject to
claims alleging personal injury or property damage as a result of alleged
exposure to hazardous substances. Such laws and regulations may also expose us
to liability for the conduct of or conditions caused by others or for our acts
that were in compliance with all applicable laws at the time such acts were
performed.
These
laws and regulations include the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act and similar
laws that provide for responses to, and liability for, releases of hazardous
substances into the environment. These laws and regulations also
include similar foreign, state or local counterparts to these federal laws,
which regulate air emissions, water discharges, hazardous substances and waste
and require public disclosure related to the use of various hazardous
substances. Our operations are also governed by laws and regulations
relating to workplace safety and worker health, primarily, in the United States,
the Occupational Safety and Health Act and regulations promulgated
thereunder.
We are
currently in the process of investigating and remediating some of our former
operating sites. Although we have recorded reserves in connection with certain
of these matters, due to the uncertainties associated with environmental
remediation, we cannot assure you that the actual costs resulting from these
remediation matters will not exceed the recorded reserves.
Our
compliance with U.S. federal, state and local environmental control and
protection regulations resulted in pretax charges of approximately $11.5 million
in the year ended December 31, 2008. In addition, compliance with existing
environmental regulations necessitated capital expenditures of $2.2 million in
the year ended December 31,
2008. We
expect to spend another $4.9 million on such capital expenditures over the next
five years. We cannot predict all of the environmental requirements or
circumstances that will exist in the future but anticipate that environmental
control and protection standards will become increasingly stringent and costly.
Based on our experience to date, we do not currently anticipate any material
adverse effect on our business or consolidated financial condition as a result
of future compliance with existing environmental laws and regulations. However,
future events, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies or
stricter or different interpretations of existing laws and regulations, may
require additional expenditures by us, which may be material. Accordingly, we
can provide no assurance that we will not incur significant environmental
compliance costs in the future.
In
addition, offshore construction and drilling in some areas have been opposed by
environmental groups and, in some areas, have been restricted. To the extent
laws are enacted or other governmental actions are taken that prohibit or
restrict offshore construction and drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry in
general and the offshore construction industry in particular, our business and
prospects could be adversely affected.
We have
been identified as a potentially responsible party at various cleanup sites
under CERCLA. CERCLA and other environmental laws can impose liability for the
entire cost of cleanup on any of the potentially responsible parties, regardless
of fault or the lawfulness of the original conduct. Generally,
however, where there are multiple responsible parties, a final allocation of
costs is made based on the amount and type of wastes disposed of by each party
and the number of financially viable parties, although this may not be the case
with respect to any particular site. We have not been determined to
be a major contributor of wastes to any of these sites. On the basis
of our relative contribution of waste to each site, we expect our share of the
ultimate liability for the various sites will not have a material adverse effect
on our consolidated financial condition, results of operations or cash flows in
any given year.
Environmental
remediation projects have been and continue to be undertaken at certain of our
current and former plant sites. During the fiscal year ended March
31, 1995, one of our subsidiaries decided to close its nuclear manufacturing
facilities in Parks Township, Armstrong County, Pennsylvania (the "Parks
Facilities") and proceeded to decommission the facilities in accordance with its
then-existing license from the Nuclear Regulatory Commission
(“NRC”). The facilities were subsequently transferred to another
subsidiary of ours in the fiscal year ended March 31, 1998, and, during the
fiscal year ended March 31, 1999, that subsidiary reached an agreement with the
NRC on a plan that provided for the completion of facilities dismantlement and
soil restoration by 2001 and license termination in 2003. An
application to terminate the NRC license for the Parks Township facility was
filed, and the NRC terminated the license in 2004 and released the facility for
unrestricted use. For a discussion of certain civil litigation we are
involved in concerning the Parks Facilities, see Note 11 to our consolidated
financial statements included in this report.
We
perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these
activities, we are subject to continuing reviews by governmental agencies,
including the Environmental Protection Agency and the NRC.
The NRC’s
decommissioning regulations require our Government Operations segment to provide
financial assurance that it will be able to pay the expected cost of
decommissioning each of its facilities at the end of its service
life. We will continue to provide financial assurance aggregating
$28.9 million during the year ending December 31, 2009 with existing letters of
credit for the ultimate decommissioning of all of these licensed facilities,
except two. These two facilities, which represent the largest portion
of our eventual decommissioning costs, have provisions in their government
contracts pursuant to which substantially all of our decommissioning costs and
financial assurance obligations are covered by the DOE, including the costs to
complete the decommissioning projects underway at the Erwin
facility.
The
demand for power generation services and products can be influenced by state and
federal governmental legislation setting requirements for utilities related to
operations, emissions and environmental impacts. The legislative
process is unpredictable and includes a platform that continuously seeks to
increase the restrictions on power producers. Potential legislation
limiting emissions from power plants, including carbon dioxide, could affect our
markets and the demand for our products and services in our Power Generation
Systems segment.
At
December 31, 2008 and 2007, we had total environmental reserves, including
provisions for the facilities discussed above, of $41.9 million and $18.8
million, respectively. Of our total environmental reserves at
December 31, 2008 and 2007, $8.9 million and $7.0 million, respectively, were
included in current liabilities. Inherent in the estimates of those
reserves and recoveries are our expectations regarding the levels of
contamination, decommissioning costs and recoverability from other parties,
which may vary significantly as decommissioning activities
progress. Accordingly, changes in estimates could result in material
adjustments to our operating results, and the ultimate loss may differ
materially from the amounts we have provided for in our consolidated financial
statements.
We are
including the following discussion to inform our existing and potential security
holders generally of some of the risks and uncertainties that can affect our
company and to take advantage of the “safe harbor” protection for
forward-looking statements that applicable federal securities law
affords.
From time
to time, our management or persons acting on our behalf make forward-looking
statements to inform existing and potential security holders about our
company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are
generally accompanied by words such as “estimate,” “project,” “predict,”
“believe,” “expect,” “anticipate,” “plan,” “goal” or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we
will specifically describe a statement as being a forward-looking statement and
refer to this cautionary statement.
In
addition, various statements in this Annual Report on Form 10-K, 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 Item 1 – “Business” and Item 3 – “Legal
Proceedings” in Part I of this report and in Item 7 – “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and in
the notes to our consolidated financial statements in Item 8 of Part II of this
report and elsewhere in this report. 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:
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general
economic and business conditions and industry
trends;
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general
developments in the industries in which we are
involved;
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decisions
about offshore developments to be made by oil and gas
companies;
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decisions
on spending by the U.S. Government and electric power generating
companies;
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the
highly competitive nature of most of our
businesses;
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cancellations
of and adjustments to backlog and the resulting impact from using backlog
as an indicator of future earnings;
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the
ability of our suppliers to deliver raw materials in sufficient quantities
and in a timely manner;
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volatility
and uncertainty of the credit
markets;
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our
ability to comply with covenants in our credit agreements and other debt
instruments and availability, terms and deployment of
capital;
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the
continued availability of qualified
personnel;
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the
operating risks normally incident to our lines of business, including the
potential impact of liquidated
damages;
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changes
in, or our failure or inability to comply with, government
regulations;
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adverse
outcomes from legal and regulatory
proceedings;
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impact
of potential regional, national and/or global requirements to
significantly limit or reduce greenhouse gas emissions in the
future;
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changes
in, and liabilities relating to, existing or future environmental
regulatory matters;
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rapid
technological changes;
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the
realization of deferred tax assets, including through a reorganization we
completed in December 2006;
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the
consequences of significant changes in interest rates and currency
exchange rates;
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difficulties
we may encounter in obtaining regulatory or other necessary approvals of
any strategic transactions;
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the
risks associated with integrating acquired
businesses;
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social,
political and economic situations in foreign countries where we do
business, including countries in the Middle East and Asia Pacific and the
former Soviet Union;
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the
possibilities of war, other armed conflicts or terrorist
attacks;
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the
effects of asserted and unasserted
claims;
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our
ability to obtain surety bonds, letters of credit and
financing;
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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;
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the
aggregated risks retained in our insurance captives;
and
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the
impact of the loss of insurance rights as part of the Chapter 11
Bankruptcy settlement.
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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. These factors are
not necessarily all the factors that could affect us. Unpredictable
or unanticipated factors we have not discussed in this report could also have
material adverse effects on actual results of matters that
are the
subject of our forward-looking statements. We do not intend to update
our description of important factors each time a potential important factor
arises, except as required by applicable securities laws and
regulations. We advise our security holders that they should (1) be
aware that factors not referred to above could affect the accuracy of our
forward-looking statements and (2) use caution and common sense when considering
our forward-looking statements.
Our
website address is www.mcdermott.com. We
make available through the Investor Relations section of this website under “SEC
Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, statements of beneficial ownership of
securities on Forms 3, 4 and 5 and amendments to those reports as soon as
reasonably practicable after we electronically file those materials with, or
furnish those materials to, the Securities and Exchange Commission (the
“SEC”). You may read and copy any materials we file with the SEC at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
You may obtain information regarding the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. We have also posted on
our website our: Corporate Governance Guidelines; Code of Ethics for our Chief
Executive Officer and Senior Financial Officers; Board of Directors Conflicts of
Interest Policies and Procedures; Officers, Board Members and Contact
Information; By-laws; and charters for the Audit, Governance, Compensation and
Finance Committees of our Board.
Our
Offshore Oil and Gas Construction segment derives substantially all its revenues
from companies in the oil and gas exploration and production industry, a
historically cyclical industry with levels of activity that are significantly
affected by the levels and volatility of oil and gas prices.
The
demand for offshore construction services has traditionally been cyclical,
depending primarily on the capital expenditures of oil and gas companies for
construction of development projects. These capital expenditures are
influenced by such factors as:
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prevailing
oil and gas prices;
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expectations
about future prices;
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the
cost of exploring for, producing and delivering oil and
gas;
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the
sale and expiration dates of available offshore
leases;
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the
discovery rate of new oil and gas reserves in offshore
areas;
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domestic
and international political, military, regulatory and economic
conditions;
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technological
advances; and
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the
ability of oil and gas companies to generate funds for capital
expenditures.
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Prices
for oil and gas have historically been extremely volatile and have reacted to
changes in the supply of and demand for oil and natural gas (including changes
resulting from the ability of the Organization of Petroleum Exporting Countries
to establish and maintain production quotas), domestic and worldwide economic
conditions and political instability in oil producing countries. We
anticipate prices for oil and natural gas will continue to be volatile and
affect the demand for and pricing of our offshore construction services. A
material decline in oil or natural gas prices or activities over a sustained
period of time could materially adversely affect the demand for our offshore
construction services and, therefore, our financial condition, results of
operations and cash flows.
Our
Power Generation Systems segment derives substantially all its revenues from
electric power generating companies and other steam-using industries, with
demand for its services and products depending on capital expenditures in these
historically cyclical industries.
The
demand for power generation services and products depends primarily on the
capital expenditures of electric power generating companies, paper companies and
other steam-using industries. These capital expenditures are influenced by such
factors as:
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prices
for electricity, along with the cost of production and
distribution;
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prices
for natural resources such as coal and natural
gas;
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demand
for electricity, paper and other end products of steam-generating
facilities;
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availability
of other sources of electricity, paper or other end
products;
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requirements
for environmental improvements, including potential carbon dioxide
(“CO2”)
legislation;
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level
of capacity utilization at operating power plants, paper mills and other
steam-using facilities;
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requirements
for maintenance and upkeep at operating power plants and paper mills to
combat the accumulated effects of wear and
tear;
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ability
of electric generating companies and other steam users to raise capital;
and
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relative
prices of fuels used in boilers, compared to prices for fuels used in gas
turbines and other alternative forms of
generation.
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A
material decline in capital expenditures by electric power generating companies,
paper companies and other steam-using industries over a sustained period of time
could materially and adversely affect the demand for our power generation
services and products and, therefore, our financial condition, results of
operations and cash flows.
Our
Government Operations segment is substantially dependent on a single
customer.
Our Government Operations segment
derives substantially all its revenue from the U.S. Government. For
the year ended December 31, 2008, the U.S. Government accounted for
approximately 89% of this segment’s revenue. Government contracts are
subject to various uncertainties, restrictions and regulations, including
oversight audits, which could result in withholding or delaying of payments to
us. In addition, some of our large multi-year contracts with the U.S.
Government are subject to annual funding determinations. As a result,
we are subject to the uncertainties associated with U.S. Government budget
restraints and other factors affecting government funding. The
termination of one or more of our government contracts, our suspension from
government contract work, or the disallowance of a payment of any of our
contract costs may have a material adverse affect on our financial condition,
results of operations and cash flows.
We
are subject to risks associated with contractual pricing in our industries,
including the risk that, if our actual costs exceed the costs we estimate on our
fixed-price contracts, our profitability will decline, and we may suffer
losses.
Our
Offshore Oil and Gas Construction and Power Generation Systems segments are
engaged in highly competitive industries, and they have a substantial number of
their projects on a fixed-price basis. Our actual costs could exceed
our projections. We attempt to cover increased costs of anticipated
changes in labor, material and service costs of long-term contracts, either
through estimates of cost increases, which are reflected in the original
contract price, or through price escalation clauses. Despite these
attempts, however, the cost and gross profit we realize on a fixed-price
contract could vary materially from the estimated amounts because of supplier,
contractor and subcontractor
performance,
changes in job conditions, variations in labor and equipment productivity and
increases in the cost of raw materials, particularly steel, over the term of the
contract. These variations and the risks generally inherent in these
industries may result in actual revenues or costs being different from those we
originally estimated and may result in reduced profitability or losses on
projects. Some of these risks include:
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Our
engineering, procurement and construction projects may encounter
difficulties in the design or engineering phases, related to the
procurement of supplies, and due to schedule changes, equipment
performance failures, and other factors that may result in additional
costs to us, reductions in revenue, claims or
disputes.
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We
may not be able to obtain compensation for additional work we perform or
expenses we incur as a result of customer change orders or our customers
providing deficient design or engineering information or equipment or
materials.
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We
may be required to pay liquidated damages upon our failure to meet
schedule or performance requirements of our
contracts.
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Difficulties
in engaging third-party subcontractors, equipment manufacturers or
materials suppliers or failures by third-party subcontractors, equipment
manufacturers or materials suppliers to perform could result in project
delays and cause us to incur additional
costs.
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Our
use of percentage-of-completion method of accounting could result in volatility
in our results of operations.
We recognize revenues and profits under
our long-term contracts in our segments on a percentage-of-completion
basis. Accordingly, we review contract price and cost estimates
periodically as the work progresses and reflect adjustments proportionate to the
percentage of completion in income in the period when we revise those
estimates. To the extent these adjustments result in a reduction or
an elimination of previously reported profits with respect to a project, we
would recognize a charge against current earnings, which could be
material. Our current estimates of our contract costs and the
profitability of our long-term projects, although reasonably reliable when made,
could change as a result of the uncertainties associated with these types of
contracts, and if adjustments to overall contract costs are significant, the
reductions or reversals of previously recorded revenue and profits could be
material in future periods.
Our
backlog is subject to unexpected adjustments and cancellations.
There can
be no assurance that the revenues projected in our backlog will be realized or,
if realized, will result in profits. Because of project cancellations or changes
in project scope and schedule, we cannot predict with certainty when or if
backlog will be performed. In addition, even where a project proceeds as
scheduled, it is possible that contracted parties may default and fail to pay
amounts owed to us or poor project performance could increase the cost
associated with a project. Delays, suspensions, cancellations, payment defaults,
scope changes and poor project execution could materially reduce the revenues
and profits that we actually realize from projects in backlog.
Reductions
in our backlog due to cancellation or modification by a customer or for other
reasons may adversely affect, potentially to a material extent, the revenues and
earnings we actually receive from contracts included in our backlog. Many of the
contracts in our backlog provide for cancellation fees in the event customers
cancel projects. These cancellation fees usually provide for reimbursement of
our out-of-pocket costs, revenues for work performed prior to cancellation and a
varying percentage of the profits we would have realized had the contract been
completed. However, we typically have no contractual right upon cancellation to
the total revenues reflected in our backlog. Projects may remain in our backlog
for extended periods of time. If we experience significant project terminations,
suspensions or scope adjustments to contracts reflected in our backlog, our
financial condition, results of operations and cash flows may be adversely
impacted.
We
face risks associated with investing in foreign subsidiaries and joint ventures,
including the risk that we may be restricted in our ability to access the cash
flows or assets of these entities.
We
conduct some operations through foreign subsidiaries and joint
ventures. We do not manage all of these entities. Even in
those joint ventures that we manage, we are often required to consider the
interests of our joint venture partners in connection with decisions concerning
the operations of the joint ventures. Arrangements involving these
subsidiaries and joint ventures may restrict us from gaining access to the cash
flows or assets of these entities. In
addition,
these foreign subsidiaries and joint ventures sometimes face governmentally
imposed restrictions on their abilities to transfer funds to us.
Our
international operations are subject to political, economic and other
uncertainties not generally encountered in our domestic operations.
We derive
a significant portion of our revenues from international operations, including
customers in the Middle East. Our international operations are
subject to political, economic and other uncertainties not generally encountered
in our U.S. operations. These include:
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risks
of war, terrorism, piracy and civil
unrest;
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expropriation,
confiscation or nationalization of our
assets;
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renegotiation
or nullification of our existing
contracts;
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changing
political conditions and changing laws and policies affecting trade and
investment;
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overlap
of different tax structures;
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risk
of changes in foreign currency exchange rates;
and
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risks
associated with the assertion of foreign sovereignty over areas in which
our operations are conducted.
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Our
Offshore Oil and Gas Construction segment may be particularly susceptible to
regional conditions that may adversely affect its operations. Its
major marine construction vessels typically require relatively long periods of
time to mobilize over long distances, which could affect our ability to withdraw
them from areas of conflict.
Various
foreign jurisdictions have laws limiting the right and ability of foreign
subsidiaries and joint ventures to pay dividends and remit earnings to
affiliated companies. Our international operations sometimes face the
additional risks of fluctuating currency values, hard currency shortages and
controls of foreign currency exchange.
Our
operations are subject to operating risks and limits on insurance coverage,
which could expose us to potentially significant liability costs.
We are
subject to a number of risks inherent in our operations, including:
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accidents
resulting in injury to or the loss of life or
property;
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environmental
or toxic tort claims, including delayed manifestation claims for personal
injury or loss of life;
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pollution
or other environmental mishaps;
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hurricanes,
tropical storms and other adverse weather
conditions;
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mechanical
failures;
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collisions;
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property
losses;
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business
interruption due to political action in foreign countries or other
reasons; and
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labor
stoppages.
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We have
been, and in the future we may be, named as defendants in lawsuits asserting
large claims as a result of litigation arising from events such as
these. We rely heavily on certain items of equipment,
including vessels and heavy manufacturing equipment and our
fabrication locations, to execute the work we are hired to perform. If these
items became unavailable to us for any reason, including for loss or
damage, political or terrorist event or otherwise, we may not be
able to timely meet the requirements of our customer contracts and may be
in default of our contractual obligations for one or more customers, subjecting
us to delay damage claims, including for loss of profits. Insurance
against some of the risks inherent in our operations is either unavailable or
available only at rates that we consider uneconomical. Also,
catastrophic events, such as the September 11, 2001 terrorist attacks and the
hurricane losses of 2005, customarily result in decreased coverage limits, more
limited coverage, additional exclusions in coverage, increased premium costs and
increased deductibles and self-insured retentions. Risks that are
difficult to insure include, among others, the risk of war and confiscation of
property in some areas of the world, losses or liability resulting from acts of
terrorism, certain risks relating to construction and pollution liability,
property located in certain areas of the world and business
interruption. Depending on competitive conditions and other factors,
we endeavor to obtain contractual protection against certain uninsured risks
from our customers. When obtained, such contractual indemnification
protection may not be as broad as we desire or may not be supported by adequate
insurance maintained by the customer. Such insurance or contractual
indemnity protection may not be sufficient or effective under
all
circumstances
or against all hazards to which we may be subject. A successful claim
for which we are not fully insured could have a material adverse effect on
us.
Additionally,
upon the February 22, 2006 effectiveness of the settlement relating to the
Chapter 11 Bankruptcy, we and most of our subsidiaries contributed substantial
insurance rights to the asbestos personal injury trust, including rights to (1)
certain pre-1979 primary and excess insurance coverages and (2) certain of our
1979-1986 excess insurance coverage, which 1979-1986 excess policies had an
aggregate face value of available limits of coverage of approximately $1.15
billion. These insurance rights provided cover for, among other things,
asbestos and other personal injury claims, subject to the terms and conditions
of such policies. With the contribution of these insurance rights to the
asbestos personal injury trust, we may have underinsured or uninsured exposure
for asbestos claims or other personal injury or other claims against
subsidiaries not debtors in the Chapter 11 Bankruptcy, for which we would have
had insurance rights under these coverages if the insurance rights had not been
contributed to the asbestos personal injury trust.
Through
two of limited liability companies, our Government Operations segment has
management and operating agreements with the U.S. Government for the Y-12 and
Pantex facilities. Most insurable liabilities arising from these
sites are not protected in our corporate insurance program but rely on
government contractual agreements and certain specialized self-insurance
programs funded by the U.S. Government. The U. S. Government has
historically fulfilled its contractual agreement to reimburse for insurable
claims, and we expect it to continue this process during our administration of
these two facilities. However, it should be noted that, in most situations, the
U. S. Government is contractually obligated to pay, subject to the availability
of authorized government funds.
We have
captive insurers which provide certain coverages for our subsidiary entities and
related coverages. Claims as a result of our operations, could
adversely impact the ability of these captive insurers to respond to all claims
presented.
Volatility
and uncertainty of the credit markets may negatively impact us.
We intend
to finance our existing operations and initiatives with cash and cash
equivalents, investments, cash flows from operations, and potential borrowings
under our credit facilities. If adverse national and international economic
conditions continue or deteriorate further, it is possible that we may not be
able to fully draw upon our existing credit facilities and we may not be able to
obtain financing on favorable terms. In addition, while we believe our current
liquidity is adequate for our normal operations and planned capital expenditures
in 2009, continued deterioration in the credit markets could adversely affect
the ability of many of our customers to pay us on time and the ability of many
of our suppliers to meet our needs on a competitive basis.
Our credit
facilities impose restrictions that could limit
our operating
and
investment flexibility
within each
of our segments.
Each of
our three principal operating segments is financed on a stand-alone basis. A
significant subsidiary in each of these segments maintains a separate credit
facility that permits borrowings for working capital and other needs for itself
and other subsidiaries within its segment, as well as letters of credit for
projects conducted by it or other subsidiaries within its segment. Each of those
credit facilities contains financial and non-financial covenants which, among
other things, limit our ability to move capital among our segments. As a result,
we are limited in our ability to fund a segment's operating needs and
investments in capital projects or acquisitions by the capital resources
available within that segment and at our parent company, MII. This limitation
could limit our operating and investment flexibility within each segment in the
event an operational need or capital investment or acquisition opportunity
arises within a segment that requires funding in excess of the amount available
to that segment, even where other funding is available within our consolidated
group of companies.
We
depend on significant customers.
Our three
segments derive a significant amount of their revenues and profits from a
relatively small number of customers in a given year. The inability
of these segments to continue to perform services for a number of their large
existing customers, if not offset by contracts with new or other existing
customers, could have a material adverse effect
on our
business and operations. Our significant customers include federal
government agencies, utilities, and major and national oil and gas
companies.
We
may not be able to compete successfully against current and future
competitors.
Most
industry segments in which we operate are highly competitive. Some of our
competitors or potential competitors have greater financial or other resources
than we have. Our operations may be adversely affected if our current
competitors or new market entrants introduce new products or services with
better features, performance, prices or other characteristics than those of our
products and services. This factor is significant to our segments’
businesses where capital investment is critical to our ability to
compete.
The
loss of the services of one or more of our key personnel, or our failure to
attract, assimilate and retain trained personnel in the future, could disrupt
our operations and result in loss of revenues.
Our
success depends on the continued active participation of our executive officers
and key operating personnel. The unexpected loss of the services of
any one of these persons could adversely affect our operations.
Our
operations require the services of employees having the technical training and
experience necessary to obtain the proper operational results. As a
result, our operations depend, to a considerable extent, on the continuing
availability of such personnel. If we should suffer any material loss
of personnel to competitors or be unable to employ additional or replacement
personnel with the requisite level of training and experience to adequately
operate our equipment, our operations could be adversely
affected. While we believe our wage rates are competitive and our
relationships with our employees are satisfactory, a significant increase in the
wages paid by other employers could result in a reduction in our workforce,
increases in wage rates, or both. If either of these events occurred
for a significant period of time, our financial condition, results of operations
and cash flows could be adversely impacted.
A
substantial number of our employees are members of labor
unions. Although we expect to renew our current union contracts
without incident, if we are unable to negotiate acceptable new contracts with
our unions in the future, we could experience strikes or other work stoppages by
the affected employees, and new contracts could result in increased operating
costs attributable to both union and non-union employees. If any such
strikes or other work stoppages were to occur, or if our other employees were to
become represented by unions, we could experience a significant disruption of
our operations and higher ongoing labor costs.
Our
business strategy includes acquisitions to continue our
growth. Acquisitions of other businesses can create certain risks and
uncertainties.
We may
pursue growth through the acquisition of businesses or assets that we believe
will enable us to strengthen or broaden the types of projects we execute and
also expand into new markets. We may be unable to implement this
growth strategy if we cannot identify suitable businesses or assets, reach
agreement on potential strategic acquisitions on acceptable terms or for other
reasons. Moreover, an acquisition involves certain risks,
including:
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difficulties
relating to the assimilation of personnel, services and systems of an
acquired business and the assimilation of marketing and other operational
capabilities;
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challenges
resulting from unanticipated changes in customer relationships subsequent
to acquisition;
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additional
financial and accounting challenges and complexities in areas such as tax
planning, treasury management, financial reporting and internal
controls;
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assumption
of liabilities of an acquired business, including liabilities that were
unknown at the time the acquisition transaction was
negotiated;
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diversion
of management’s attention from day-to-day
operations;
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failure
to realize anticipated benefits, such as cost savings and revenue
enhancements;
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potentially
substantial transaction costs associated with business combinations;
and
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potential
impairment resulting from the overpayment for an
acquisition.
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Acquisitions
may require us to issue additional equity or obtain debt financing, which may
not be available on attractive terms. Moreover, to the extent an
acquisition transaction financed by non-equity consideration results in
goodwill, it will reduce our tangible net worth, which might have an adverse
effect on potential credit and bonding capacity.
Additionally,
an acquisition may bring us into businesses we have not previously conducted and
expose us to additional business risks that are different than those we have
traditionally experienced.
We
are subject to government regulations that may adversely affect our future
operations.
Many
aspects of our operations and properties are affected by political developments
and are subject to both domestic and foreign governmental regulations, including
those relating to:
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construction
and equipping of production platforms and other offshore
facilities;
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marine
vessel safety;
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currency
conversions and repatriation;
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oil
exploration and development;
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clean
air and other environmental protection
legislation;
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·
|
taxation
of foreign earnings and earnings of expatriate personnel;
and
|
|
·
|
use
of local employees and suppliers by foreign
contractors.
|
In
addition, our Offshore Oil and Gas Construction segment depends on the demand
for its services from the oil and gas industry and, therefore, is affected by
changing taxes, price controls and other laws and regulations relating to the
oil and gas industry generally. The adoption of laws and regulations
curtailing offshore exploration and development drilling for oil and gas for
economic and other policy reasons would adversely affect the operations of our
Offshore Oil and Gas Construction segment by limiting the demand for its
services.
Our Power
Generation Systems segment depends primarily on the demand for its services from
electric power generating companies and other steam-using
customers. The demand for power generation services and products can
be influenced by state and federal governmental legislation setting requirements
for utilities related to operations, emissions and environmental
impacts. The legislative process is unpredictable and includes a
platform that continuously seeks to increase the restrictions on power
producers. Potential legislation limiting emissions from power
plants, including carbon dioxide, could affect our markets and the demand for
our products and services in our Power Generation Systems segment.
We cannot
determine the extent to which our future operations and earnings may be affected
by new legislation, new regulations or changes in existing
regulations.
Environmental
laws and regulations and civil liability for contamination of the environment or
related personal injuries may result in increases in our operating costs and
capital expenditures and decreases in our earnings and cash flow.
Governmental
requirements relating to the protection of the environment, including solid
waste management, air quality, water quality, the decontamination and
decommissioning of former nuclear manufacturing and processing facilities and
cleanup of contaminated sites, have had a substantial impact on our
operations. These requirements are complex and subject to frequent
change. In some cases, they can impose liability for the entire cost
of cleanup on any responsible party without regard to negligence or fault and
impose liability on us for the conduct of others or conditions others have
caused, or for our acts that complied with all applicable requirements when we
performed them. Our compliance with amended, new or more stringent
requirements, stricter interpretations of existing requirements or the future
discovery of contamination may require us to make material expenditures or
subject us to liabilities that we currently do not anticipate. Such
expenditures and liabilities may adversely affect our business, financial
condition, results of operations and cash flows. See Section H in
Item 1 above for further information. In addition, some of our
operations and the operations of predecessor owners of some of our properties
have exposed us to civil claims by third parties for liability resulting from
alleged contamination of the environment or personal injuries caused by releases
of hazardous substances into the environment. For a discussion of
legal proceedings of this nature in which we are currently involved, see Note 11
to our consolidated financial statements included in this report.
U.S.
coal-fired power plants have been scrutinized by environmental groups and
government regulators over the emissions of potentially harmful
pollutants. In addition to recent legislation at the state level, the
U.S. Congress is considering legislation that would limit greenhouse gas
emissions, including CO2. In April
2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency
has some authority to regulate greenhouse gases under
the Clean
Air Act. Some plans for coal-fired power plants have recently been cancelled or
suspended in several states, although more new coal-fired power plants are being
planned to meet the predicted increase in electricity demand. Also, in February
2008, three of the nation’s largest investment banks announced new environmental
standards to ensure lenders evaluate risks associated with investments in
coal-fired power plants. Such standards could make it potentially more difficult
for new U.S. coal-fired power plants to secure financing.
Employee,
agent or partner misconduct or our overall failure to comply with laws or
regulations could weaken our ability to win contracts, which could result in
reduced revenues and profits.
Misconduct,
fraud, non-compliance with applicable laws and regulations, or other improper
activities by one or more of our employees, agents or partners could have a
significant negative impact on our business and reputation. Such misconduct
could include the failure to comply with government procurement regulations,
regulations regarding the protection of classified information, regulations
regarding the pricing of labor and other costs in government contracts,
regulations on lobbying or similar activities, regulations pertaining to the
internal controls over financial reporting and various other applicable laws or
regulations. For example, we regularly provide services that may be highly
sensitive or that are related to critical national security matters; if a
security breach were to occur, our ability to procure future government
contracts could be severely limited. The precautions we take to prevent and
detect these activities may not be effective, and we could face unknown risks or
losses. Our failure to comply with applicable laws or regulations or acts of
misconduct could subject us to fines and penalties, loss of security clearance
and suspension or debarment from contracting, which could weaken our ability to
win contracts and result in reduced revenues and profits.
We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices
Act or our 1976 Consent Decree.
The U.S. Foreign Corrupt Practices Act
(“FCPA”) generally prohibits companies and their intermediaries from making
improper payments to non-U.S. officials. We are also subject to a Consent Decree
entered into in 1976 with the U.S. Securities and Exchange Commission. The 1976
Consent Decree forbids us, among other things, from making payments in the
nature of a commercial bribe to any customer or supplier to induce the purchase
or sale of goods, services or supplies. Our training program and
policies mandate compliance with the FCPA and the 1976 Consent
Decree. We operate in many parts of the world that have experienced
governmental corruption to some degree, and, in certain circumstances, strict
compliance with anti-bribery laws may conflict with local customs and
practices. Although we have procedures and controls in place to
monitor internal and external compliance, if we are found to be liable for FCPA
or 1976 Consent Decree violations (either due to our own acts or our
inadvertence, or due to the acts or inadvertence of others), we could suffer
from civil and criminal penalties or other sanctions, which could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
Our internal controls may not be
sufficient to achieve all stated goals and objectives.
Our
internal 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 internal 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.
Systems
and information technology interruption could adversely impact our ability to
operate.
We depend
on our information technology systems for many aspects of our business. Our
business may be adversely affected if our systems are disrupted or if we are
unable to improve, upgrade, integrate or expand our systems to meet our changing
needs. Any damage, delay or loss of critical data associated with our
systems may delay or prevent certain operations and may materially adversely
affect our financial condition, results of operations and cash
flows.
We
are subject to other risks, including legal proceedings that we discuss in other
sections of this annual report.
For
discussions of various factors that affect the demand for our products and
services in our segments, see the discussions under the heading “Business
Segments” in Item 1 above. For a discussion of our insurance
coverages and uninsured exposures, see the discussions under the heading
“Insurance” in Item 1 above. For discussions of various legal
proceedings in which we are involved, in addition to those we refer to above,
see Note 11 to our consolidated financial statements included in this
report.
War,
other armed conflicts or terrorist attacks could have a material adverse effect
on our business.
The war
in Iraq and subsequent terrorist attacks and unrest have caused instability in
the world’s financial and commercial markets, have significantly increased
political and economic instability in some of the geographic areas in which we
operate and have contributed to high levels of volatility in prices for oil and
gas. The continuing instability and unrest in Iraq, as well as
threats of war or other armed conflict elsewhere, may cause further disruption
to financial and commercial markets and contribute to even higher levels of
volatility in prices for oil and gas. In addition, the continued
unrest in Iraq could lead to acts of terrorism in the United States or
elsewhere, and acts of terrorism could be directed against companies such as
ours. Also, acts of terrorism and threats of armed conflicts in or
around various areas in which we operate, such as the Middle East and Indonesia,
could limit or disrupt our markets and operations, including disruptions from
evacuation of personnel, cancellation of contracts or the loss of personnel or
assets. Armed conflicts, terrorism and their effects on us or our
markets may significantly affect our business and results of operations in the
future.
None
The
following table provides the segment name, location, and general use of each of
our principal properties at December 31, 2008 that we own or lease.
|
Business
Segment and Location
|
Principal
Use
|
Owned/Leased
(Lease
Expiration)
|
||
|
Offshore
Oil & Gas Construction
|
||||
|
Dubai
(Jebel Ali), U.A.E.
|
Engineering
office / fabrication facility
|
Leased
(2015)(2)
|
||
|
Chennai,
India
|
Engineering
office
|
Leased
(2009-2011)
|
||
|
Batam
Island, Indonesia
|
Fabrication
facility
|
Owned
/ Leased(3)
|
||
|
Singapore,
Singapore
|
Engineering
/ administrative office
|
Leased
(2011)
|
||
|
Jakarta,
Indonesia
|
Engineering
/ administrative office
|
Leased
(2009-2010)
|
||
|
Baku,
Azerbaijan
|
Operations
/ administrative office
|
Leased(4)
|
||
|
Altamira,
Mexico
|
Fabrication
facility
|
Owned
/ Leased(3)
|
||
|
Houston,
Texas
|
Engineering
/ operations / administrative office
|
Leased
(2011)
|
||
|
Morgan
City, Louisiana
|
Fabrication
facility
|
Leased
(2009-2048)(1)
|
||
|
New
Orleans, Louisiana
|
Engineering
office
|
Leased
(2011)
|
||
|
Halifax,
Nova Scotia, Canada
|
Administrative
office
|
Leased
(2010)
|
||
|
Government
Operations
|
||||
|
Lynchburg,
Virginia
|
Administrative
office
|
Leased
(2011)
|
||
|
Lynchburg,
Virginia
|
Manufacturing
facility(6)
|
Owned
|
||
|
Barberton,
Ohio
|
Manufacturing
facility
|
Owned
|
||
|
Euclid,
Ohio
|
Manufacturing
facility
|
Owned
/ Leased(5)
|
||
|
Mount
Vernon, Indiana
|
Manufacturing
facility
|
Owned
|
||
|
Erwin,
Tennessee
|
Manufacturing
facility
|
Owned
|
||
|
Power
Generation Systems
|
||||
|
Barberton,
Ohio
|
Manufacturing
facility / administrative office
|
Owned(7)
|
||
|
Lynchburg,
Virginia
|
Administrative
office
|
Leased
(2015)
|
||
|
West
Point, Mississippi
|
Manufacturing
facility
|
Owned(7)
|
||
|
Lancaster,
Ohio
|
Manufacturing
facility
|
Owned(7)
|
||
|
Copley,
Ohio
|
Warehouse
/ service center
|
Owned(7)
|
||
|
Cambridge,
Ontario, Canada
|
Manufacturing
facility
|
Owned
|
||
|
Esbjerg,
Denmark
|
Manufacturing
facility
|
Owned(7)
|
||
|
Melville,
Saskatchewan, Canada
|
Manufacturing
facility
|
Owned
|
||
|
Jingshan,
Hubei, China
|
Manufacturing
facility
|
Owned(7)
|
|
(1)
|
As
a result of renewal options on the various tracts comprising the Morgan
City fabrication facility, we have the ability, within our sole
discretion, to continue leasing almost all the land we are currently using
for that facility until 2048.
|
|
(2)
|
Approximately
33,000 square feet of the Dubai facility is leased with a lease expiration
date of 2010.
|
|
(3)
|
The
Batam Island and Altamira facilities are owned by us; however, the
facilities are located on leased land with expiration dates of 2038 and
2036, respectively.
|
|
(4)
|
The
Baku facility is not under a formal lease agreement, and payments are made
to the facility owner on a monthly basis, without a governing contract in
place.
|
|
(5)
|
We
acquired the Euclid facilities through a bond/lease transaction
facilitated by the Cleveland Cuyahoga County Port Authority (the “Port”),
whereby we acquired a ground parcel and the Port issued bonds, the
proceeds of which were used to acquire, improve and equip the facilities,
including the acquisition of the larger facility and a 40-year prepaid
ground lease for the smaller facility. We are leasing the
facilities from the Port with an expiration date of 2014 but subject to
certain extension options.
|
|
(6)
|
The
Lynchburg, Virginia facility is our Government Operations segment’s
primary manufacturing plant and is the nation’s largest commercial
high-enriched uranium processing facility. The site is the recipient of
the highest rating given by the Nuclear Regulatory Commission for license
performance. The performance review determines the safe and secure conduct
of operations of the facility. The site is also the largest commercial
International Atomic Energy Agency-certified facility in the
U.S.
|
|
(7)
|
These
properties are encumbered by liens under existing credit
facilities.
|
We also
own or lease a number of sales, administrative and field construction offices,
warehouses and equipment maintenance centers strategically located throughout
the world. We consider each of our significant properties to be suitable and
adequate for its intended use.
Through our Offshore Oil and Gas
Construction segment, we operate a fleet of construction and multi-service
vessels. Our construction vessels range in length from 350 to
497 feet and are fully equipped with revolving cranes, auxiliary cranes, welding
equipment, pile-driving hammers, anchor winches and a variety of additional
equipment. Our multi-service vessels have capabilities which
include subsea construction, pipelay, cable lay and dive
support. Seven of our owned and/or operated major construction
vessels are self-propelled. Nine of our other self-propelled vessels
are active in the offshore supply and service sector. We also have a
substantial inventory of specialized support equipment for intermediate water
and deepwater construction and pipelay. In addition, we own or lease a
substantial number of other vessels, such as tugboats, utility boats, launch
barges and cargo barges, to support the operations of our major marine
construction vessels. Most of our marine vessels are encumbered by
liens under existing credit facilities.
The
following table sets forth certain information with respect to the major
construction and multi-service vessels utilized to conduct our Offshore Oil and
Gas Construction business, including their location at December 31, 2008 (except
where otherwise noted, each of the vessels is owned and operated by
us):
|
Location and Vessel Name
|
Vessel Type
|
Year
Entered Service/ Upgraded
|
Maximum Derrick
Lift (tons)
|
Maximum
Pipe Diameter (inches)
|
|
UNITED
STATES
|
||||
|
DB
50 (1)
|
Pipelay/Derrick
|
1988
|
4,400
|
20
|
|
Intermac
600 (2)
|
Launch/Cargo
Barge
|
1973
|
—
|
—
|
|
MEXICO
|
||||
|
Bold
Endurance (1)
|
Multi-Service
Vessel
|
1979
|
—
|
—
|
|
MIDDLE
EAST
|
||||
|
DB
101
|
Semi-Submersible
Derrick
|
1978/1984
|
3,500
|
—
|
|
DB
27
|
Pipelay/Derrick
|
1974/1984
|
2,400
|
60
|
|
DB
16 (1)
|
Pipelay/Derrick
|
1967/2000
|
860
|
30
|
|
DLB
KP1
|
Pipelay/Derrick
|
1974
|
660
|
60
|
|
Agile
(1)
|
Multi-Service
Vessel
|
1978
|
—
|
—
|
|
Thebaud
Sea (1)
|
Multi-Service
Vessel
|
1999
|
—
|
—
|
|
ASIA
PACIFIC
|
||||
|
DB
30
|
Pipelay/Derrick
|
1975/1999
|
3,080
|
60
|
|
DB
26
|
Pipelay/Derrick
|
1975
|
900
|
60
|
|
Emerald
Sea (1)
|
Multi-Service
Vessel
|
1996/2007
|
—
|
—
|
|
Intermac
650 (3)
|
Launch/Cargo
Barge
|
1980/2006
|
—
|
—
|
|
(1)
|
Vessel
with dynamic positioning capability
|
|
(2)
|
The
dimensions of this vessel are 500’ x 120’ x 33’
|
|
(3)
|
The
overall dimensions of this vessel are 650’ x 170’ x
40’
|
Governmental
regulations, our insurance policies and some of our financing arrangements
require us to maintain our vessels in accordance with standards of seaworthiness
and safety set by governmental authorities or classification societies. We
maintain our fleet to the standards for seaworthiness, safety and health set by
the American Bureau of Shipping, Den Norske Veritas, Lloyd’s Register of
Shipping and other world-recognized classification societies.
The
information set forth under the heading “Investigations and Litigation” in Note
11, “Contingencies and Commitments,” to our consolidated financial statements
included in this report is incorporated by reference into this
Item 3.
We did
not submit any matter to a vote of security holders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 2008.
Our
common stock is traded on the New York Stock Exchange under the symbol
MDR. In accordance with Section 303A.12(a) of the New York Stock
Exchange Listed Company’s Manual, we submitted the Annual CEO Certification to
the New York Stock Exchange in 2008. Additionally, we filed
certifications of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 32.1 and
32.2, respectively, included as exhibits to this report.
High and
low stock prices by quarter in the years ended December 31, 2008 and 2007, as
adjusted for the two-for-one stock split effected in September 2007, were as
follows:
|
YEAR
ENDED DECEMBER 31, 2008
|
||||||||
|
SALES PRICE
|
||||||||
|
QUARTER ENDED
|
HIGH
|
LOW
|
||||||
|
March
31, 2008
|
$ | 63.01 | $ | 37.17 | ||||
|
June
30, 2008
|
$ | 67.14 | $ | 51.22 | ||||
|
September
30, 2008
|
$ | 63.48 | $ | 23.68 | ||||
|
December
31, 2008
|
$ | 25.50 | $ | 5.98 | ||||
|
YEAR
ENDED DECEMBER 31, 2007
|
||||||||
|
SALES PRICE
|
||||||||
|
QUARTER ENDED
|
HIGH
|
LOW
|
||||||
|
March
31, 2007
|
$ | 27.99 | $ | 22.16 | ||||
|
June
30, 2007
|
$ | 42.41 | $ | 23.96 | ||||
|
September
30, 2007
|
$ | 55.30 | $ | 34.32 | ||||
|
December
31, 2007
|
$ | 62.78 | $ | 45.69 | ||||
We have
not paid cash dividends on MII’s common stock since the second quarter of 2000
and do not currently have plans to reinstate a cash dividend at this
time. Our Board of Directors will evaluate our cash dividend policy
from time to time.
As of
January 30, 2009, there were approximately 3,120 record holders of our common
stock.
The
following table provides information on our equity compensation plans as of
December 31, 2008:
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options and
rights
|
Weighted-average
exercise price
of outstanding
options and rights
|
Number
of securities remaining available for future issuance
|
|||||||||
|
Equity
compensation plans
approved by security
holders
|
756,164 | $ | 5.37 | 6,465,314 | ||||||||
|
Equity
compensation plans not
approved by security
holders
(1)
|
563,870 | $ | 3.38 | - | ||||||||
|
Total
|
1,320,034 | $ | 4.52 | 6,465,314 | ||||||||
|
(1) Reflects
information on our 1992 Senior Management Stock Plan, which is our only
equity compensation plan that has not been approved by our stockholders
and that has any outstanding awards that have not been exercised. We
are no longer authorized to grant new awards under our 1992 Senior
Management Stock Plan.
|
||||||||||||
The
following graph provides a comparison of our five-year, cumulative total
shareholder return from December 2003 through December 2008 to the return of
S&P 500 and our custom peer group.
The peer
group used for the five-year comparison was comprised of the following
companies:
|
·
|
Cal
Dive International, Inc.
|
|
·
|
Chicago
Bridge & Iron Company N.V.
|
|
·
|
Fluor
Corporation
|
|
·
|
Foster
Wheeler, Ltd.
|
|
·
|
Jacobs
Engineering Group, Inc.
|
|
·
|
KBR,
Inc.
|
|
·
|
Oceaneering
International, Inc.
|
|
·
|
The
Shaw Group, Inc.
|
|
·
|
URS
Corporation
|
|
For
the Years Ended
|
||||||||||||||||||||
|
2008
|
2007
|
2006(1)(4)
|
2005(2)(5)
|
2004(2)(6)
|
||||||||||||||||
|
(In
thousands, except for per share amounts)
|
||||||||||||||||||||
|
Revenues
|
$ | 6,572,423 | $ | 5,631,610 | $ | 4,120,141 | $ | 1,839,740 | $ | 1,912,910 | ||||||||||
|
Income
from Continuing Operations
|
$ | 429,302 | $ | 607,828 | $ | 317,621 | $ | 205,583 | $ | 63,123 | ||||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | $ | 205,687 | $ | 59,919 | ||||||||||
|
Basic
Earnings per Common Share(3):
|
||||||||||||||||||||
|
Income
from Continuing Operations
|
$ | 1.89 | $ | 2.72 | $ | 1.46 | $ | 1.00 | $ | 0.32 | ||||||||||
|
Net
Income
|
$ | 1.89 | $ | 2.72 | $ | 1.52 | $ | 1.00 | $ | 0.30 | ||||||||||
|
Diluted
Earnings per Common Share(3):
|
||||||||||||||||||||
|
Income
from Continuing Operations
|
$ | 1.86 | $ | 2.66 | $ | 1.39 | $ | 0.94 | $ | 0.31 | ||||||||||
|
Net
Income
|
$ | 1.86 | $ | 2.66 | $ | 1.45 | $ | 0.94 | $ | 0.29 | ||||||||||
|
Total
Assets
|
$ | 4,601,693 | $ | 4,411,486 | $ | 3,633,762 | $ | 1,709,962 | $ | 1,419,788 | ||||||||||
|
Current
Maturities of Long-Term Debt
|
$ | 9,021 | $ | 6,599 | $ | 257,492 | $ | 4,250 | $ | 12,009 | ||||||||||
|
Long-Term
Debt
|
$ | 6,109 | $ | 10,609 | $ | 15,242 | $ | 207,861 | $ | 268,011 | ||||||||||
|
(1) Results
for the year ended December 31, 2006 include approximately ten months for
the principal operating subsidiaries of our Power Generation Systems
segment, which were reconsolidated into our results effective February 22,
2006. We did not consolidate the results of operations of these
entities in our consolidated financial statements from February 22, 2000
through February 22, 2006 due to the Chapter 11 Bankruptcy. See Note
21 to our consolidated financial statements included in this report for
information on the Chapter 11 Bankruptcy. Additionally, the results for
the year ended December 31, 2006 have been restated to reflect the impact
of the change in accounting for drydocking costs, as discussed in Note 1
to our consolidated financial statements included in this
report.
|
||||||||||||||||||||
|
(2) Financial
data for the years ended December 31, 2005 and 2004 have been
restated to reflect the impact of discontinued operations, as discussed in
Note 3 to our consolidated financial statements included in this report,
and to reflect the impact of the change in accounting for drydocking
costs, as discussed in Note 1 to our consolidated financial statements
included in this report. Also, we did not consolidate the results of
operations of the principal operating subsidiaries of our Power Generation
Systems segment in our consolidated financial statements from February 22,
2000 through February 22, 2006 due to the Chapter 11 Bankruptcy. See
Note 21 to our consolidated financial statements included in this report
for information on the Chapter 11 Bankruptcy.
|
||||||||||||||||||||
|
(3) Per
share amounts for the years ended December 31, 2006, 2005 and 2004 have
been restated to reflect the stock splits effected during the years ended
December 31, 2007 and 2006, as discussed in Note 9 to our consolidated
financial statements included in this report.
|
||||||||||||||||||||
|
(4) Results
for the year ended December 31, 2006 include $15 million attributable to
profit deferred since the inception of a project with Dolphin Energy Ltd.,
a $16 million non-cash impairment associated with our former joint venture
in Mexico, a $27 million provision for warranty, insurance and the
settlement of litigation, $54 million of expense associated with the
retirement of debt and a $78 million tax benefit resulting from the
reversal of the deferred tax asset valuation allowance.
|
||||||||||||||||||||
|
(5) Results
for the year ended December 31, 2005 include the reversal of a federal
deferred tax valuation allowance adjustment totaling $50
million.
|
||||||||||||||||||||
|
(6) Results
for the year ended December 31, 2004 include a before- and after-tax gain
on the settlement of our U.K. pension plan of $28 million.
|
||||||||||||||||||||
Statements
we make in the following discussion which express a belief, expectation or
intention, as well as those that are not historical fact, are forward-looking
statements that are subject to risks, uncertainties and
assumptions. Our actual results, performance or achievements, or
industry results, could differ materially from those we express in the following
discussion as a result of a variety of factors, including the risks and
uncertainties we have referred to under the headings “Cautionary Statement
Concerning Forward-Looking Statements” and “Risk Factors” in Items 1
and 1A of Part I of this report.
In
general, our business segments are composed of capital-intensive businesses that
rely on large contracts for a substantial amount of their
revenues. Each of our business segments is financed on a stand-alone
basis. Our debt covenants limit using the financial resources of or the movement
of excess cash from one segment for the benefit of the other. For
further discussion, see “Liquidity and Capital Resources” below.
We are
currently exploring growth strategies across our segments through acquisitions
to expand and complement our existing businesses. As we pursue these
opportunities, we expect they would be funded by cash on hand, external
financing, equity or some combination thereof. It is our policy to
not comment on any potential acquisition/transaction until a definitive
agreement has been reached.
Outlook
Offshore
Oil and Gas Construction
We expect
the backlog of our Offshore Oil and Gas Construction segment of approximately
$4.5 billion at December 31, 2008 to produce revenues for 2009 of approximately
$2.7 billion, not including any change orders or new contracts that may be
awarded during the year. The total backlog at December 31, 2008 includes
approximately $1.1 billion related to contracts in or near loss positions, which
are estimated to recognize future revenues with approximately zero percent gross
margins on average. Typical of our business, our estimates of gross
profit may improve based on improved productivity, decreased downtime and the
successful settlement of change orders and claims with our
customers.
Through
this segment, we are actively bidding on and, in some cases, beginning
preliminary work on projects that we expect will be awarded to it in 2009,
subject to successful contract negotiations, which are not currently in
backlog. Our liquidity position for this segment remains strong, and
we expect it to remain so throughout 2009.
The
demand for our Offshore Oil and Gas Construction segment’s products and services
is dependent primarily on the capital expenditures of the world’s major oil and
gas producing companies and foreign governments for construction of development
projects in the regions in which we operate. In recent years, the
worldwide demand for energy, along with high prices for oil and gas, has led to
strong levels of capital expenditures by the major oil and gas companies and
foreign governments. However, a slowdown in economic activity caused
by the recent economic downturn could reduce worldwide demand for energy and
result in an extended period of lower oil and natural gas
prices. Perceptions of longer-term lower oil and natural gas prices
by the major oil and gas companies and foreign governments could lead these
companies and governments to reduce or defer major capital expenditures, which
would reduce the level of offshore construction activity. Although we
have experienced few delays to date, lower levels of activity would result in a
decline in the demand for our Offshore Oil and Gas Construction segment’s
services.
The
decision-making process for oil and gas companies in making capital expenditures
on offshore construction services for a development project differs depending on
whether the project involves new or existing development. In the case of new
development projects, the demand for offshore construction services generally
follows the exploratory drilling and, in some cases, initial development
drilling activities. Based on the results of these activities and evaluations of
field economics, customers determine whether to install new platforms and new
infrastructure, such as subsea gathering lines and pipelines. For existing
development projects, demand for offshore construction services is generated by
decisions to, among other things, expand development in existing fields and
expand existing infrastructure.
Government
Operations
We expect
the backlog of our Government Operations segment of approximately $2.9 billion
at December 31, 2008 to produce revenues for 2009 of approximately $870 million,
not including any change orders or new contracts that may be awarded during the
year. Our liquidity position for this segment remains strong, and we
expect it to remain so throughout 2009.
The
revenues of our Government Operations segment are largely a function of defense
spending by the U.S. Government. As a supplier of major nuclear
components for certain U.S. Government programs, we are a significant
participant in the defense industry. With our unique capabilities of
full life-cycle management of special nuclear materials, facilities and
technologies, our Government Operations segment is well-positioned to continue
to participate in the continuing cleanup, operation and management of the
nuclear sites and weapons complexes maintained by the U.S. Department of Energy
(the “DOE”).
Power
Generation Systems
We expect
the backlog of our Power Generation Systems segment of approximately $2.5
billion at December 31, 2008 to produce revenues for 2009 of approximately $1.2
billion, not including any change orders or new contracts that may be awarded
during the year. Through this segment, we are actively bidding on
and, in some cases, beginning preliminary work on projects that we expect will
be awarded to it in 2009, subject to successful contract negotiations, which are
not currently in backlog. Our liquidity position for this segment
remains strong, and we expect it to remain so throughout 2009.
Our Power
Generation Systems segment’s overall activity depends mainly on the capital
expenditures of electric power generating companies and other steam-using
industries. This segment’s products and services are capital
intensive. As such, customer demand is heavily affected by the variations in
customers’ business cycles and by the overall economies of the countries in
which they operate.
The
current worldwide credit and economic environment, as well as short-term
uncertainty regarding environmental regulations, has affected the utility
industry more than other industries. As a result of this, bookings
during the fourth quarter of 2008 were below recent quarters. While
we have experienced few delays to date for existing projects, lower levels of
activity would result in a decline in the demand for our Power Generation
Systems segment’s services.
According
to the International Energy Agency, consumption of electricity worldwide is
expected nearly to double in the next quarter century. While we cannot predict
what impact potential future legislation and regulations concerning CO2 and other
emissions will have on our results of operations, it is possible such
legislation could favorably impact the environmental retrofit and service
businesses of our Power Generation Systems segment.
Other
At
December 31, 2008, the underfunded status of our defined benefit plans,
determined in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
and SFAS No. 87, Employers’
Accounting for Pensions, increased by approximately $396 million from
2007. This deterioration was primarily due to the losses on our plan assets in
2008. Because of this deterioration, we expect to incur an increase in pension
expense totaling approximately $90 million in 2009 compared to
2008.
Some of
our contracts contain penalty provisions that require us to pay liquidated
damages if we are responsible for the failure to meet specified contractual
milestone dates and the applicable customer asserts a claim under these
provisions. These contracts define the conditions under which our customers may
make claims against us for liquidated damages. In many cases in which we have
had potential exposure for liquidated damages, such damages ultimately were not
asserted by our customers. As of December 31, 2008, we had not
accrued for approximately $108 million of potential liquidated damages that we
believe we could incur based upon our current expectations of the time to
complete certain projects in our Offshore Oil and Gas Construction
segment. We do not believe any claims for these potential liquidated
damages are probable of being assessed. The trigger dates for the majority of
these potential liquidated damages occurred during the fourth quarter of 2008.
We are in active discussions with our customers on the issues giving rise to
delays in these projects, and we believe we will be successful in obtaining
schedule extensions that should resolve the potential for liquidated damages
being assessed. However, we may not achieve relief on some or all of the issues.
For certain other projects in our Offshore Oil and Gas Construction segment, we
have currently provided for approximately $23 million in liquidated damages in
our estimates of revenues and gross profit, of which approximately $17 million
has been recognized in our financial statements to date, as we believe, based on
the individual facts and circumstances, that these liquidated damages are
probable.
During
the year ended December 31, 2008, we recorded contract losses of approximately
$146 million attributable to changes in our estimates on the expected costs to
complete various projects, primarily in the Middle East operations of our
Offshore Oil and Gas Construction segment. These contract losses
largely resulted from revised cost estimates due to (1) lower actual and
forecasted productivity, (2) an increase in downtime on our marine vessels and
(3) increased third-party costs, primarily on three Middle East pipeline
installation projects.
A
significant component of our net cash provided by operating activities resulted
from the change in our net contracts in progress and advance billings components
of working capital. In some years, significant liquidity has been provided by
our advance billings on contracts in progress based on payments received from
our customers. In the years ended December 31, 2007 and 2006, we generated cash
flows from such activities on a net basis totaling $382.2 million and $331.0
million, respectively. As our customer cash advances are used in project
execution and not replaced by advances on new projects, our liquidity position
is reduced. We experienced this condition in the year ended December 31, 2008
when we realized a use of cash from net contracts in progress and advance
billings totaling $630.5 million.
Our
financial statements and accompanying notes are prepared in accordance with U.S.
GAAP. Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. These estimates and assumptions are affected by management’s
application of accounting policies. We believe the following are our
most critical accounting policies that we apply in the preparation of our
financial statements. These policies require our most difficult,
subjective and complex judgments, often as a result of the need to make
estimates of matters that are inherently uncertain.
Contracts and Revenue
Recognition. We determine the appropriate accounting method for each
of our long-term contracts before work on the project begins. We generally
recognize contract revenues and related costs on a percentage-of-completion
method for individual contracts or combinations of contracts under the
guidelines of the Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), issued by
the American Institute of Certified Public Accountants. The use of
this method is based on our experience and history of being able to prepare
reasonably dependable estimates of the cost to complete our
projects. Under this method, we recognize estimated contract revenue
and resulting income based on costs incurred to date as a percentage of total
estimated costs. Certain costs may be excluded from the cost-to-cost method of
measuring progress, such as significant costs for materials and major
third-party subcontractors, if it appears that such exclusion would result in a
more meaningful measurement of actual contract progress and resulting periodic
allocation of income. Total estimated costs, and resulting contract
income, are affected by changes in the expected cost of materials and labor,
productivity, scheduling and other factors. Additionally, external
factors such as weather, customer requirements and other factors outside of our
control may affect the progress and estimated cost of a project’s completion
and, therefore, the timing of revenue and income
recognition. We routinely review estimates related to our
contracts, and revisions to profitability are reflected in the quarterly and
annual earnings we report.
For
contracts as to which we are unable to estimate the final profitability except
to assure that no loss will ultimately be incurred, we recognize equal amounts
of revenue and cost until the final results can be estimated more
precisely. For these deferred profit recognition contracts, we
recognize revenue and cost equally and only recognize gross margin when probable
and reasonably estimable, which we generally determine to be when the contract
is approximately 70% complete. We treat long-term construction
contracts that contain such a level of risk and uncertainty that estimation of
the final outcome is impractical except to assure that no loss will be incurred
as deferred profit recognition contracts.
Fixed-price
contracts are required to be accounted for under the completed-contract method
if we are unable to reasonably forecast cost to complete at start-up. For
example, if we have no experience in performing the type of work on a particular
project and were unable to develop reasonably dependable estimates of total
costs to complete, we would follow the completed-contract method of accounting
for such projects. Our management’s policy is not to enter into fixed-price
contracts without an accurate estimate of cost to complete. However,
it is possible that in the time between contract execution and the start of work
on a project, we could lose confidence in our ability to forecast cost to
complete based on intervening events, including, but not limited to, experience
on similar projects, civil unrest, strikes
and
volatility in our expected costs. In such a situation, we would use
the completed-contract method of accounting for that project. We did
not enter into any such contracts during 2008 or 2007.
For all
contracts, if a current estimate of total contract cost indicates a loss on a
contract, the projected loss is recognized in full when determined.
Although
we continually strive to improve our ability to estimate our contract costs and
profitability, adjustments to overall contract costs due to unforeseen events
could be significant in future periods. We recognize claims for extra
work or for changes in scope of work in contract revenues, to the extent of
costs incurred, when we believe collection is probable and can be reasonably
estimated. We recognize income from contract change orders or claims
when formally agreed with the customer. We reflect any amounts not
collected as an adjustment to earnings. We regularly assess the
collectibility of contract revenues and receivables from customers.
Property, Plant and
Equipment. We carry our property, plant and equipment at
depreciated cost, reduced by provisions to recognize economic impairment when we
determine impairment has occurred. Factors that impact our
determination of impairment include forecasted utilization of equipment and
estimates of cash flow from projects to be performed in future
periods. Our estimates of cash flow may differ from actual cash flow
due to, among other things, technological changes, economic conditions or
changes in operating performance. Any changes in such factors may
negatively affect our business segments and result in future asset
impairments.
Except
for major marine vessels, we depreciate our property, plant and equipment using
the straight-line method, over estimated economic useful lives of eight to 40
years for buildings and two to 28 years for machinery and
equipment. We depreciate major marine vessels using the
units-of-production method based on the utilization of each vessel. Our
depreciation expense calculated under the units-of-production method may be less
than, equal to or greater than depreciation expense calculated under the
straight-line method in any period. The annual depreciation based on
utilization of each vessel will not be less than the greater of 25% of annual
straight-line depreciation and 50% of cumulative straight-line
depreciation.
We
expense the costs of maintenance, repairs and renewals, which do not materially
prolong the useful life of an asset, as we incur them, except for drydocking
costs. We recognize drydocking costs for our marine fleet as a
prepaid asset when incurred and amortize the expense over the period of time
between drydockings, generally three to five years. We adopted this
accounting policy for our drydocking costs, commonly referred to as the deferral
method, effective January 1, 2007, as more fully discussed in Note 1 to our
consolidated financial statements included in this report.
Self-Insurance. We have
several wholly owned insurance subsidiaries that provide workers’ compensation,
employer’s liability, general and automotive liability and workers’ compensation
insurance and, from time to time, builder’s risk insurance within certain limits
and marine hull insurance to our companies. We may also have business reasons in
the future to have these insurance subsidiaries accept other risks which we
cannot or do not wish to transfer to outside insurance
companies. Reserves related to these insurance programs are based on
the facts and circumstances specific to the insurance claims, our past
experience with similar claims, loss factors and the performance of the outside
insurance market for the type of risk at issue. The actual outcome of insured
claims could differ significantly from estimated amounts. We maintain
actuarially determined accruals in our consolidated balance sheets to cover
self-insurance retentions for the coverage discussed above. These accruals are
based on certain assumptions developed utilizing historical data to project
future losses. Loss estimates in the calculation of these accruals are adjusted
as required based upon actual claim settlements and reported claims. These loss
estimates and accruals recorded in our financial statements for claims have
historically been reasonable in light of the actual amount of claims
paid.
Pension Plans and Postretirement
Benefits. We estimate income or expense related to our pension
and postretirement benefit plans based on actuarial assumptions, including
assumptions regarding discount rates and expected returns on plan
assets. We determine our discount rate based on a review of published
financial data and discussions with our actuary regarding rates of return on
high-quality, fixed-income investments currently available and expected to be
available during the period to maturity of our pension
obligations. Based on historical data and discussions with our
actuary, we determine our expected return on plan assets based on the expected
long-term rate of return on our plan assets and the market-related value of our
plan assets. Changes in these assumptions can result
in
significant
changes in our estimated pension income or expense and our consolidated
financial condition. We revise our assumptions on an annual basis
based upon changes in current interest rates, return on plan assets and the
underlying demographics of our workforce. These assumptions are
reasonably likely to change in future periods and may have a material impact on
future earnings. Effective December 31, 2006, we adopted SFAS No.
158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, which resulted in
the recognition of the funded status of our defined benefit pension plans and
postretirement plans in our consolidated balance sheets included in this
report. See Note 7 to our consolidated financial statements included
in this report for additional information related to SFAS No. 158.
Loss
Contingencies. We estimate liabilities for loss contingencies
when it is probable that a liability has been incurred and the amount of loss is
reasonably estimable. We provide disclosure when there is a
reasonable possibility that the ultimate loss will exceed the recorded provision
or if such loss is not reasonably estimable. We are currently
involved in some significant litigation, as discussed in Note 11 to our
consolidated financial statements included in this report. We have
accrued our estimates of the probable losses associated with these
matters. However, our losses are typically resolved over long periods
of time and are often difficult to estimate due to the possibility of multiple
actions by third parties. Therefore, it is possible future earnings could be
affected by changes in our estimates related to these matters.
Goodwill. SFAS No.
142, Goodwill and Other
Intangible Assets, requires us to perform periodic testing for
impairment. It requires a two-step impairment test to identify
potential goodwill impairment and measure the amount of a goodwill impairment
loss. The first step of the test compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of the
impairment loss, if any. Both steps of goodwill impairment testing
involve significant estimates. We have completed our annual review of
goodwill for each of our segments as of December 31, 2008, which indicated that
we had no impairment of goodwill.
Asset Retirement Obligations and
Environmental Clean-up Costs. We accrue for future
decommissioning of our nuclear facilities that will permit the release of these
facilities to unrestricted use at the end of each facility's life, which is a
requirement of our licenses from the Nuclear Regulatory
Commission. In accordance with SFAS No. 143, Accounting for Asset Retirement
Obligations, we record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When we
initially record such a liability, we capitalize a cost by increasing the
carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon
settlement of a liability, we will settle the obligation for its recorded amount
or incur a gain or loss. SFAS No. 143 applies to environmental
liabilities associated with assets that we currently operate and are obligated
to remove from service. For environmental liabilities associated with
assets that we no longer operate, we have accrued amounts based on the estimated
costs of clean-up activities, net of the anticipated effect of any applicable
cost-sharing arrangements. We adjust the estimated costs as further
information develops or circumstances change. An exception to this
accounting treatment relates to the work we perform for one facility for which
the U.S. Government is obligated to pay all the decommissioning
costs.
Deferred Taxes. We
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We believe that the
deferred tax asset recorded as of December 31, 2008 is realizable through
carrybacks, future reversals of existing taxable temporary differences and
future taxable income. If we were to subsequently determine that we
would be able to realize deferred tax assets in the future in excess of our net
recorded amount, an adjustment to deferred tax assets would increase earnings
for the period in which such determination was made. We will continue
to assess the adequacy of the valuation allowance on a quarterly
basis. Any changes to our estimated valuation allowance could be
material to our consolidated financial condition and results of
operations. Effective January 1, 2007, we adopted the provision of
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” (“FIN 48”), as more fully discussed in Notes 1
and 5 to our consolidated financial statements included in this
report.
Warranty. We
account for warranty costs to satisfy contractual warranty requirements as a
component of our total contract cost estimate on the related contracts for our
Offshore Oil and Gas Construction segment or as an accrued estimated expense
recognized in conjunction with the associated revenue on the related contracts
for our Government Operations and Power Generation Systems
segments. In addition, we make specific provisions where we expect
the actual warranty costs to significantly exceed the accrued
estimates. In our Offshore Oil and Gas Construction
segment,
warranty
periods are generally limited, and we have had minimal warranty cost in prior
years. Factors that impact our estimate of warranty costs include
prior history of warranty claims and our estimates of future costs of materials
and labor. Our future warranty provisions may vary from what we
have experienced in the past.
Stock-Based
Compensation. We account for stock-based compensation in accordance
with SFAS No. 123, Share-Based
Payment (“SFAS No. 123(R)”). Under the fair value recognition
provisions of this statement, the cost of employee services received in exchange
for an award of equity instruments is measured at the grant date based on the
fair value of the award. Stock-based compensation expense is
recognized on a straight-line basis over the requisite service periods of the
awards, which is generally equivalent to the vesting term. We use the
Black-Scholes model to determine the fair value of certain share-based awards,
such as stock options. The use of the Black Scholes model requires
the use of highly subjective assumptions, such as the volatility of our stock
price and our expected dividend yield.
Business
Combinations. Through December 31, 2008, we accounted for
business combinations under the purchase accounting method pursuant to SFAS No.
141, Business
Combinations. The cost of an acquired company is assigned to
the tangible and intangible assets purchased and the liabilities assumed on the
basis of their fair values at the date of acquisition. The determination of fair
values of assets and liabilities acquired requires us to make estimates and use
valuation techniques when market value is not readily available. Any excess of
purchase price over the fair value of the tangible and intangible assets
acquired is allocated to goodwill. Effective January 1, 2009, we
became subject to the provisions of the revised SFAS No. 141 (“SFAS
141(R)”). SFAS No. 141(R) broadens the guidance of SFAS No. 141,
extending its applicability to all transactions and events in which one entity
obtains control over one or more other businesses. It broadens the
fair value measurements and recognition of assets acquired, liability assumed
and interests transferred as a result of business combinations. It
also provides disclosure requirements to assist users of the financial
statements in evaluating the nature and financial effects of business
combinations.
For
further discussion of recently adopted accounting standards, see Note 1 to our
consolidated financial statements included in this report.
McDermott
International, Inc. (Consolidated)
Consolidated
revenues increased approximately 17%, or $1.0 billion, to $6.6 billion for year
ended December 31, 2008, compared to $5.6 billion for the year ended December
31, 2007. Our Offshore Oil and Gas Construction segment generated a 30% increase
in its revenues in the year ended December 31, 2008 compared to the year ended
December 31, 2007, primarily attributable to its Middle East and Asia Pacific
regions. Our Power Generation Systems segment revenues increased approximately
2% in the year ended December 31, 2008, as compared to 2007. Our Government
Operations segment revenues increased approximately 23% in the year ended
December 31, 2008, compared to 2007, primarily attributable to higher
volumes in the
manufacture of nuclear components for certain U.S. Government programs and for a
commercial uranium enrichment project.
Consolidated
segment operating income, which, for purposes of this discussion and the segment
discussions that follow, is before equity in income (losses) of investees and
gains (losses) on asset disposals and impairments – net, decreased $155.9
million from $707.3 million in the year ended December 31, 2007 to $551.4
million in 2008. The segment operating income of our Offshore Oil and Gas
Construction segment decreased by $250.4 million, primarily attributable to
contract losses recognized principally in our Middle East region and decreased
activities in our Caspian and Asia Pacific regions. Our Power Generation Systems
segment operating income increased by $75.6 million in the year ended December
31, 2008, as compared to the year ended December 31, 2007, primarily
attributable to favorable cost improvements on a significant number of its
projects. Our Government Operations segment operating income
increased by $18.8 million in the year ended December 31, 2008, as compared to
the year ended December 31, 2007, primarily attributable to the higher volumes
of manufacturing activity described above.
Offshore
Oil and Gas Construction
Revenues
increased approximately 30%, or $735.5 million, to $3,181.2 million in
the year ended December 31, 2008 compared to $2,445.7 million in the year ended
December 31, 2007, primarily due to increased revenues from our Asia Pacific
($420.5 million), Middle East ($403.5 million) and Americas ($105.3 million)
regions. In addition, we experienced increased revenues related to
the additional vessels we acquired from Secunda International Limited in July
2007 ($41.0 million) and increased revenues resulting from a settlement of
claims related to contracts previously completed in India ($44.9 million). These
increases were partially offset by decreased revenues from our Caspian region
($279.0 million).
Segment
operating income decreased $250.4 million from $397.6 million in the
year ended December 31, 2007 to $147.2 million in 2008, primarily attributable
to the recognition of approximately $146 million of contract losses in 2008 from
increases in expected costs to complete various projects, principally in our
Middle East region. These contract losses largely resulted from
revised cost estimates due to (1) lower actual and forecasted productivity, (2)
an increase in downtime on our marine vessels and (3) increased third-party
costs, primarily on three Middle East pipeline installation
projects. We also experienced a decrease in activities in our Caspian
region and a decrease in change orders and cost savings in our Asia Pacific
region in 2008 compared to 2007. We realized total benefits from
project close-outs, change orders and settlements totaling approximately $68
million for 2008 compared to approximately $138 million for
2007. General and administrative expenses increased by $31.0 million
in 2008 compared to 2007, primarily attributable to the increased employee
headcount necessary to support our operations and higher stock-based
compensation expense in 2008 totaling $2.0 million. Our 2008 operating income
also reflects a gain on the settlement of the India contract claims referenced
above totaling approximately $36 million.
Gains on
asset disposals and impairments – net decreased $4.2 million from $6.8 million
in the year ended December 31, 2007 to $2.6 million in 2008 attributable
primarily to a gain on the sale of one of our vessels in 2007.
Equity in
losses of investees decreased from $3.9 million in the year ended December 31,
2007 to $3.7 million for 2008. These losses were primarily
attributable to our share of expenses in our deepwater solutions joint
venture.
Government
Operations
Revenues
increased approximately 23%, or $157.0 million, to $851.0 million in the year
ended December 31, 2008 compared to $694.0 million for the year ended December
31, 2007, primarily attributable to higher volumes in the manufacture of nuclear
components for certain U.S. Government programs ($61.0 million), including
increased contract procurement activities and additional volumes from Marine
Mechanical Corporation, which we acquired in May 2007. In addition,
we experienced higher volumes in the manufacture of nuclear components for a
commercial uranium enrichment project ($79.5 million) and higher revenues in our
management and operating (“M&O”) contracts.
Segment
operating income increased $18.9 million to $108.9 million in the year ended
December 31, 2008 compared to $90.0 million in 2007, primarily attributable to
the higher volumes in the manufacture of nuclear components for certain U.S.
Government programs discussed above. In addition, we experienced higher volumes
related to the commercial uranium enrichment project referenced above and a
decrease in our pension expense. These improvements were partially
offset by the completion of a subcontract at a DOE clean-up site in Ohio during
2007 and the completion of M&O contracts at certain government
sites. We also experienced higher selling, general and administrative
expenses, primarily due to increased bid and proposal costs.
Gains on
asset disposals and impairments – net decreased by $1.6 million in the year
ended December 31, 2008, attributable to the gain we recorded on the sale of our
investment in a research and development venture during the year ended December
31, 2007.
Equity in
income from investees increased $10.1 million to $41.4 million in the year ended
December 31, 2008 compared to $31.3 million in 2007, primarily attributable to
increased profitability from our joint ventures in Idaho, Tennessee and
Louisiana.
Power
Generation Systems
Revenues
increased approximately 2%, or $46.7 million, to $2,550.9 million in the year
ended December 31, 2008, compared to $2,504.2 million for the year ended
December 31, 2007. In 2008, we experienced increased revenues from our
fabrication, repair and retrofit of existing facilities ($127.2 million),
nuclear service business ($58.3 million), boiler auxiliary equipment business
($22.3 million), industrial boilers business ($17.2 million) and replacement
parts business ($12.9 million). These increases were partially offset by
decreased revenues from our utility steam and system fabrication business
($206.5 million), due primarily to the absence in 2008 of approximately $178
million in revenues recognized from our termination and settlement agreement
executed with TXU Corp. (“TXU”) on the cancellation of five contracts to supply
TXU supercritical, coal-fired boilers and selective catalytic reduction systems
(“SCRs”).
Segment
operating income increased $75.6 million to $295.3 million in the year ended
December 31, 2008, compared to $219.7 million in 2007, primarily attributable to
improved margins in our utility steam and system fabrication business and
increased volume and margins in our fabrication, repair and retrofit of existing
facilities and replacement parts businesses. These increased margins were
largely the result of favorable cost improvements on a significant number of our
projects. In addition, we experienced increased volumes in our nuclear service
business and lower pension plan expense in the year ended December 31,
2008. Partially offsetting these increases were lower volumes and
margins in our replacement nuclear steam generator business and lower margins in
our nuclear service business. We also experienced $27.4 million in
higher selling, general and administrative expenses, including higher
stock-based compensation expense totaling $2.9 million, in the year ended
December 31, 2008. In addition, in the year ended December 31, 2007,
we recognized significant benefits resulting from contract terminations and a
variety of settlements.
Gains
(losses) on asset disposals and impairments – net increased $9.6 million for the
year ended December 31, 2008, primarily attributable to the gain we recognized
on the sale of the former location for our Dumbarton, Scotland facility, as the
facility was moved to a new location in Dumbarton.
Equity in
income from investees decreased $3.9 million to $10.4 million for the year ended
December 31, 2008, primarily attributable to cost increases for materials at our
joint venture in China.
Corporate
Unallocated
Corporate expenses increased $0.7 million in the year ended December 31, 2008 to
$41.9 million from $41.2 million in the year ended December 31, 2007, primarily
attributable to increased departmental expenses and higher expenses associated
with our development of a global human resources management system. These
increases were partially offset by favorable results attributable to claim
experience in our captive insurers and lower pension plan expense in the year
ended December 31, 2008.
Other
Income Statement Items
Interest
income decreased $27.6 million to $34.4 million in the year ended December 31,
2008, primarily due to a decrease in average cash equivalents and investments
and prevailing interest rates.
Interest
expense decreased $15.1 million to $7.4 million in the year ended December 31,
2008, primarily due to interest during the year ended December 31, 2007 on the
B&W PGG term loan that was retired in April 2007 and lower amortization and
costs on our credit facilities.
Other
expense – net decreased $0.4 million to $9.7 million in the year ended December
31, 2008, primarily due to higher currency exchange losses in 2008, offset by
gains on sales of securities in 2008 and higher bad debt expense during
2007.
Provision
for Income Taxes
For the
year ended December 31, 2008, our provision for income taxes increased $20.2
million to $157.8 million, while income before provision for income taxes
decreased $158.4 million to $587.1 million. Our effective tax rate
was approximately 27% for the year ended December 31, 2008, as compared to 18%
for the year ended December 31, 2007. The increase in the effective
tax rate was primarily attributable to a higher mix of U.S. versus non-U.S.
income and an unfavorable mix within our non-U.S. operations, including losses
in jurisdictions where no tax benefit was available. This increase
was partially offset by certain tax assets and benefits totaling approximately
$61.8 million, which we recognized from the release of state valuation
allowances and as a result of audit activity.
Income
before provision for income taxes, provision for income taxes and effective tax
rates for our U.S. and non-U.S. jurisdictions were as shown below:
|
Income
from
Continuing
Operations
before
Provision for
Income
Taxes
|
Provision
for
Income
Taxes
|
Effective
Tax Rate
|
||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||
|
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||
|
United
States
|
$ | 346,447 | $ | 266,984 | $ | 76,910 | $ | 84,251 | 22.20 | % | 31.56 | % | ||||||||||||
|
Non-United
States
|
240,667 | 478,481 | 80,902 | 53,386 | 33.62 | % | 11.16 | % | ||||||||||||||||
|
Total
|
$ | 587,114 | $ | 745,465 | $ | 157,812 | $ | 137,637 | 26.88 | % | 18.46 | % | ||||||||||||
We are
subject to U.S. federal income tax at a rate of 35% on our U.S. operations plus
the applicable state income taxes on our profitable U.S.
subsidiaries. Our non-U.S. earnings are subject to tax at various tax
rates and under various tax regimes, including deemed profits tax
regimes.
During
the year ended December 31, 2008, we recorded a reduction in FIN 48 liabilities
of approximately $9.5 million, including estimated tax-related interest and
penalties.
See Note
5 to our consolidated financial statements included in this report for further
information on income taxes.
McDermott
International, Inc. (Consolidated)
Consolidated
revenues increased approximately 37%, or $1.5 billion, to $5.6 billion for year
ended December 31, 2007, compared to $4.1 billion for the year ended December
31, 2006. Our Offshore Oil and Gas Construction segment generated a 52% increase
in its revenues in the year ended December 31, 2007 compared to the year ended
December 31, 2006, primarily attributable to its Middle East and Asia Pacific
regions. In addition, our Power Generation Systems segment revenues increased
approximately 33% in the year ended December 31, 2007, as compared to the year
ended December 31, 2006, primarily attributable to 2006 including approximately
ten months of revenues from B&W PGG and its subsidiaries, compared to 12
months for 2007, and the recognition of revenues of approximately $178 million
during 2007 from our termination and settlement agreement executed with TXU on
the cancellation of five contracts to supply TXU supercritical, coal-fired
boilers and SCRs, as described above. Our Government Operations segment revenues
increased approximately 10% in the year ended December 31, 2007, as compared to
the year ended December 31, 2006.
Consolidated
segment operating income, which, for purposes of this discussion and the segment
discussions that follow, is before equity in income (losses) of investees and
gains (losses) on asset disposals and impairments – net, increased $308.5
million from $398.8 million in the year ended December 31, 2006 to $707.3
million in the year ended December 31, 2007. The segment operating income of
each of our Offshore Oil and Gas Construction and
Power
Generation Systems segments improved substantially in the year ended December
31, 2007, as compared to the year ended December 31, 2006. Our
Government Operations segment operating income increased slightly in the year
ended December 31, 2007, as compared to the year ended December 31,
2006.
Offshore
Oil and Gas Construction
Revenues
increased approximately 52%, or $835.4 million, to $2.4 billion for
the year ended December 31, 2007, compared to $1.6 billion for the year ended
December 31, 2006, primarily due to increased activities in our Middle East
($393.6 million) and Asia Pacific ($226.0 million) regions. Our revenues are
principally derived from capital expenditures of major offshore oil and gas
construction projects for oil and gas companies and foreign governments in the
regions in which we operate and the successful execution of engineering,
construction and installation projects. We experienced increases in
our fabrication man-hours and our major marine barge days of 37% and 50%,
respectively, in the year ended December 31, 2007, as compared to 2006. In
addition, we experienced an increase in revenues totaling approximately $34.7
million attributable to the assets we acquired from Secunda International
Limited in July 2007.
Segment
operating income increased $183.5 million from $214.1 million in the
year ended December 31, 2006 to $397.6 million in the year ended December 31,
2007. This increase is primarily attributable to higher fabrication activities,
productivity improvements and cost savings in projects in our Middle East and
Asia Pacific regions. In addition, our Caspian region improved due to
contract change orders and agreements, which were finalized as part of our
contract close-out process on projects, and our Americas region improved due to
increased fabrication activities. These increases were partially
offset by higher general and administrative expenses, including an increase in
our stock-based compensation expense attributable to the increase in our stock
price, in the year ended December 31, 2007, as compared to the year ended
December 31, 2006.
Gain
(loss) on asset disposals and impairments – net increased $23.0 million from a
loss of $16.2 million in the year ended December 31, 2006 to a gain of $6.8
million in the year ended December 31, 2007. This change was
primarily attributable to a non-cash impairment of $16.4 million in the year
ended December 31, 2006 associated with our former joint venture in
Mexico. Also contributing to the increase was the recognition during
the year ended December 31, 2007 of a deferred gain of approximately $5.4
million related to the sale of our DB17 vessel to this same joint venture in
Mexico. We sold the DB17 in September 2004; however, due to this
joint venture’s liquidity problems, we deferred recognition of the gain until
payment was received on our accounts and notes receivable. Final
settlement of the receivables occurred during the year ended December 31,
2007.
Equity in
losses of investees increased $1.0 million to $3.9 million in the year
ended December 31, 2007, primarily attributable to our share of expenses in a
deepwater solutions joint venture.
Government
Operations
Revenues
increased approximately 10%, or $63.9 million, to $694.0 million in the year
ended December 31, 2007, compared to $630.1 million in the year ended December
31, 2006, primarily attributable to higher volumes in the manufacture of nuclear
components for certain U.S. Government programs totaling $85.7 million,
including additional volume from our acquisition of Marine Mechanical
Corporation in Euclid, Ohio.
Segment
operating income increased $7.3 million to $90.0 million in the year ended
December 31, 2007, compared to $82.7 million in the year ended December 31,
2006, primarily attributable to additional volume from the manufacturing of
nuclear components due to contract productivity improvements, along with
additional volume from the acquisition of Marine Mechanical
Corporation.
Equity in
income of investees increased $3.5 million to $31.3 million in the year ended
December 31, 2007, primarily due to the termination of our joint venture
research and development program and increases in fees at joint ventures in
Texas and Tennessee. These increases were partially offset by
decreased scope at our joint venture in Idaho.
Power
Generation Systems
Revenues
increased approximately 33%, or $615.6 million, to $2.5 billion in the year
ended December 31, 2007, compared to $1.9 billion in the year ended December 31,
2006. Due to the Chapter 11 Bankruptcy, our results for the year
ended December 31, 2006 included approximately ten months of revenues from
B&W PGG and its subsidiaries, compared to 12 months for the year ended
December 31, 2007. In addition, we recognized revenue totaling $178
million during the year ended December 31, 2007 from our termination and
settlement agreement executed with TXU on the cancellation of five contracts to
supply TXU supercritical, coal-fired boilers and SCRs, as described
above. Also, in the year ended December 31, 2007, we experienced
increases in revenues from our replacement parts business ($36.3 million), our
industrial boiler activity ($14.7 million) and our utility steam and system
fabrication business ($222.0 million). These increases were partially offset by
lower revenues from our replacement nuclear steam generator business ($10.8
million), a reduction in our field service revenues ($4.5 million) and a
decrease in revenues from our fabrication, repair and retrofit of existing
facilities ($8.8 million).
Segment
operating income increased $117.8 million to $219.7 in the year ended December
31, 2007, compared to $101.9 million in the year ended December 31, 2006,
primarily attributable to significant benefits recognized in the second and
third quarter of 2007 resulting from contract terminations and a variety of
settlements. In addition, we experienced increases in segment operating income
attributable to higher volumes from our replacement parts business, an increase
in margins from our fabrication, repair and retrofit of existing facilities and
higher margins on our replacement nuclear steam generator business. We also
experienced lower pension plan expense in the year ended December 31, 2007
compared to the year ended December 31, 2006, primarily attributable to the
performance of our pension plan assets and a change in our discount rate during
the year ended December 31, 2007. These factors were partially offset by higher
selling, general and administrative expenses and higher stock-based compensation
expense attributable to the increase in our stock price during the year ended
December 31, 2007. Also, segment operating income from our construction business
decreased during the year ended December 31, 2007 as compared to the year ended
December 31, 2006, primarily attributable to losses incurred on several
contracts during 2007.
The year
ended December 31, 2006 also included a $27 million provision for warranty,
insurance and the settlement of litigation we concluded in early
2007.
Equity in
income of investees increased $1.7 million to $14.4 million in the year ended
December 31, 2007, primarily attributable to our joint venture in
China.
Corporate
Unallocated
Corporate expenses increased $11.3 million in the year ended December 31, 2007
from $29.9 million to $41.2 million, primarily attributable to higher
departmental expenses and an increase in our stock-based compensation expense
due to the improvement in our stock price. These increases were partially offset
by lower pension plan expense in the year ended December 31, 2007 compared to
the year ended December 31, 2006, primarily attributable to the performance of
our pension plan assets and a change in our discount rate during the year ended
December 31, 2007.
Other
Income Statement Items
Interest
income increased by $8.4 million to $62.0 million in the year ended December 31,
2007, primarily due to an increase in average cash equivalents and investments
and prevailing interest rates.
Interest
expense decreased by $7.8 million to $22.5 million in the year ended December
31, 2007, primarily due to lower average levels of debt outstanding during the
year ended December 31, 2007 as compared to the year ended December 31, 2006,
partially offset by higher interest and associated amortization and costs on our
credit facilities.
We
recorded a reduction in interest expense during the year ended December 31, 2006
totaling approximately $13.2 million, attributable to a settlement we reached
with U.S. and Canadian tax authorities related to transfer pricing
issues. Additionally, during the year ended December 31, 2006, we
recorded an increase in interest expense totaling approximately $7.5 million for
potential U.S. tax deficiencies. These activities resulted in a net
U.S. tax-related interest expense adjustment of approximately $5.7 million for
the year ended December 31, 2006.
On June
6, 2006, we completed a tender offer and used cash on hand to purchase $200
million in aggregate principal amount of the 11% senior secured notes due 2013
issued by JRMSA (the “Secured Notes”) for approximately $249.0 million,
including accrued interest of approximately $10.9 million. As a
result of this early retirement of debt, we recognized $49.0 million of expense
during the year ended December 31, 2006. In addition, in December
2006, B&W PGG retired its $250 million promissory note issued in 2005, as
part of the Chapter 11 Bankruptcy. As a result of this retirement, we recognized
approximately $4.7 million of expense.
Other-net
expense decreased by $3.6 million to $10.2 million in the year ended December
31, 2007, primarily due to higher currency exchange losses incurred during the
year ended December 31, 2006 and higher bad debt expense during the year ended
December 31, 2007.
|
Provision
for Income Taxes
|
For the
year ended December 31, 2007, our provision for income taxes increased $102.4
million to $137.6 million, while income before provision for income taxes
increased $392.6 million to $745.5 million. Our effective tax rate
was approximately 18% for the year ended December 31, 2007, as compared to 10%
for the year ended December 31, 2006. The increase in the effective
tax rate was primarily attributable to a tax benefit of $78.1 million recorded
during the year ended December 31, 2006, which resulted from the U.S. legal
entity reorganization completed on December 31, 2006, as more fully described in
the comparative analysis of results for the year ended December 31, 2006 to
results for the year ended December 31, 2005.
Income
before provision for income taxes, provision for (benefit from) income taxes and
effective tax rates for our U.S. and non-U.S. jurisdictions were as shown
below:
|
Income
from
Continuing
Operations
before
Provision for
Income
Taxes
|
Provision
for
(Benefit
from)
Income
Taxes
|
Effective
Tax Rate
|
||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||
|
(In
thousands)
|
(In
thousands)
|
|||||||||||||||||||||||
|
United
States
|
$ | 266,984 | $ | 89,910 | $ | 84,251 | $ | (8,446 | ) | 31.56 | % | (9.39 | )% | |||||||||||
|
Non-United
States
|
478,481 | 262,906 | 53,386 | 43,641 | 11.16 | % | 16.60 | % | ||||||||||||||||
|
Total
|
$ | 745,465 | $ | 352,816 | $ | 137,637 | $ | 35,195 | 18.46 | % | 9.98 | % | ||||||||||||
We are
subject to U.S. federal income tax at a rate of 35% on our U.S. operations plus
the applicable state income taxes on our profitable U.S.
subsidiaries. Our non-U.S. earnings are subject to tax at various tax
rates and under various tax regimes, including deemed profits tax
regimes.
Effective
January 1, 2007, we adopted the provisions of FIN 48. As a result of
this adoption, we recognized a charge of approximately $12.0 million to our
accumulated earnings component of stockholders’ equity. As of the
adoption date, our unrecognized tax benefits, excluding tax-related interest and
penalties, were approximately $70.4 million. As part of the adoption
of FIN 48, we began to recognize interest, net of tax, and penalties related to
unrecognized tax benefits in income tax expense. As of the adoption
date, we recorded a liability of approximately $27.3 million for the payment of
tax-related interest and penalties.
During
the year ended December 31, 2007, we recorded a reduction in FIN 48 liabilities
of approximately $10.4 million, including estimated tax-related interest and
penalties.
See Note
5 to our consolidated financial statements included in this report for further
information on income taxes.
Our
financial statements are prepared in accordance with generally accepted
accounting principles in the United States, 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.
Our
overall liquidity position, which we generally define as our unrestricted cash
and investments plus amounts available for borrowings under our credit
facilities, continued to remain strong in 2008. Our liquidity position at
December 31, 2008 decreased by approximately $100 million from December 31,
2007, mainly due to factors discussed below in connection with the changes in
our cash flows from operating, investing and financing activities. We
experienced a net use of cash in our operating activities in 2008 compared to
net cash generated from operations in 2007. The major components of our net cash
used in operating activities were the changes in our net contracts in progress
and advance billings components of working capital. In some years, significant
liquidity has been provided by our advance billings on contracts in progress, as
a result of payments received from customers. In the years ended December 31,
2007 and 2006, we generated cash flows from such activities on a net basis
totaling approximately $382 million and $331 million, respectively. As our
customer cash advances are used in project execution and are not replaced by
advances on new projects, our liquidity position is reduced. We experienced this
condition in the year ended December 31, 2008, when we realized a use of cash
from net contracts in progress and advance billings totaling approximately $630
million. We expect this trend to continue for the first three quarters of 2009.
However, we do expect to generate cash flows from our operating activities in
the year ending December 31, 2009.
Offshore
Oil and Gas Construction
Credit
Facility
On June
6, 2006, our subsidiary, J. Ray McDermott, S.A., entered into a senior secured
credit facility with a syndicate of lenders (the “JRMSA Credit
Facility”). As amended to date, the JRMSA Credit Facility provides
for borrowings and issuances of letters of credit in an aggregate amount of up
to $800 million and matures on June 6, 2011. The proceeds of the
JRMSA Credit Facility are available for working capital needs and other general
corporate purposes of our Offshore Oil and Gas Construction
segment.
JRMSA’s
obligations under the JRMSA Credit Facility are unconditionally guaranteed by
substantially all of our wholly owned subsidiaries comprising our Offshore Oil
and Gas Construction segment and secured by liens on substantially all the
assets of those subsidiaries (other than cash, cash equivalents, equipment and
certain foreign assets), including their major marine vessels.
Other
than customary mandatory prepayments on certain contingent events, the JRMSA
Credit Facility requires only interest payments on a quarterly basis until
maturity. JRMSA is permitted to prepay amounts outstanding under the
JRMSA Credit Facility at any time without penalty.
Loans
outstanding under the JRMSA Credit Facility bear interest at either the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. The
applicable margin for revolving loans varies depending on credit ratings of the
JRMSA Credit Facility. JRMSA is charged a commitment fee on the
unused portions of the JRMSA Credit Facility, and that fee varies between 0.25%
and 0.375% per year depending on credit ratings of the JRMSA Credit
Facility. Additionally, JRMSA is charged a letter of credit fee of
between 1.00% and 1.75% per year with respect to the amount of each letter of
credit issued under the JRMSA Credit Facility depending on credit ratings of the
JRMSA Credit Facility. An additional 0.125% annual fee is charged on
the amount of each letter of credit issued under the JRMSA Credit
Facility.
The JRMSA
Credit Facility contains customary financial covenants relating to leverage and
interest coverage and includes covenants that restrict, among other things, debt
incurrence, liens, investments, acquisitions, asset dispositions, dividends,
prepayments of subordinated debt, mergers, transactions with affiliates and
capital expenditures. The capital expenditure annual limits allow us
to roll forward unspent limit amounts from one year to the
next. However, the amount rolled forward must be spent entirely in
the subsequent year and may not be rolled forward again to future years. A
comparison of the key financial covenants and current compliance at December 31,
2008 is as follows:
|
Required
|
Actual
|
||
|
(In
millions, except ratios)
|
|||
|
Maximum
leverage ratio
|
2.50
|
0.21
|
|
|
Minimum
interest coverage ratio
|
3.75
|
57.81
|
|
|
Limitation
on capital expenditures: general
|
$90
|
$14
|
|
|
Limitation
on capital expenditures: fabrication yards
|
$45
|
$45
|
|
|
Capital
expenditure carry forward from 2007
|
$125
|
$125
|
|
At
December 31, 2008, JRMSA was in compliance with all of the covenants set forth
in the JRMSA Credit Facility.
At
December 31, 2008, there were no borrowings outstanding and letters of credit
issued under the JRMSA Credit Facility totaled $282.9 million. At December 31,
2008, there was $517.1 million available for borrowings or to meet letter of
credit requirements under the JRMSA Credit Facility. If there had
been borrowings under this facility, the applicable interest rate at December
31, 2008 would have been 3.75% per year. In addition, JRMSA and its
subsidiaries had $288.3 million in outstanding unsecured letters of credit and
bank guarantees under separate arrangements with financial institutions at
December 31, 2008.
Unsecured
Performance Guarantee (Middle East Operations)
In
December 2005, JRMSA, as guarantor, and its subsidiary, J. Ray McDermott Middle
East, Inc. (“JRM Middle East”), entered into a $105.2 million unsecured
performance guarantee issuance facility with a syndicate of commercial banking
institutions to provide credit support for bank guarantees issued in connection
with three major projects. On February 3, 2008, JRM Middle East entered into a
new $88.8 million unsecured performance guarantee issuance facility to replace
the $105.2 million facility, which it terminated on February 14,
2008. The outstanding amount under the new facility is included in
the $288.3 million of outstanding letters of credit referenced
above. This new facility continues to provide credit support for bank
guarantees for the duration of the three projects. On an annualized basis, the
average commission rate of the new facility is less than 1.5%, compared to less
than 4.5% for the former facility. JRMSA is also a guarantor of the
new facility.
Surety
Bonds (Mexico Operations)
In 2007,
JRMSA executed a general agreement of indemnity in favor of a surety underwriter
based in Mexico relating to surety bonds that underwriter issued in support of
contracting activities of J. Ray McDermott de Mèxico, S.A. de C.V., a subsidiary
of JRMSA. As of December 31, 2008, bonds issued under this
arrangement totaled $3.3 million.
Based on
the liquidity position of our Offshore Oil and Gas Construction segment, we
believe this segment has sufficient cash and letter of credit and borrowing
capacity to fund its operating requirements for at least the next 12
months.
Government
Operations
Credit
Facility
On
December 9, 2003, our subsidiary, BWX Technologies, Inc. (“BWXT”), entered into
a senior unsecured credit facility with a syndicate of lenders (the “BWXT Credit
Facility”), which is currently scheduled to mature March 18,
2010. This facility provides for borrowings and issuances of letters
of credit in an aggregate amount of up to $135 million. The proceeds of the BWXT
Credit Facility are available for working capital needs and other general
corporate purposes of our Government Operations segment.
The BWXT
Credit Facility only requires interest payments on a quarterly basis until
maturity. Amounts outstanding under the BWXT Credit Facility may be
prepaid at any time without penalty.
Loans
outstanding under the BWXT Credit Facility bear interest at either the
Eurodollar rate plus a margin ranging from 1.25% to 1.75% per year or the base
rate plus a margin ranging from 0.25% and 0.75% per year. The
applicable margin for revolving loans varies depending on the leverage ratio of
our Government Operations segment as of the last day of the preceding fiscal
quarter. BWXT is charged an annual commitment fee of 0.375%, which is
payable quarterly. Additionally, BWXT is charged a letter of credit
fee of between 1.25% and 1.75% per year with respect to the amount of each
letter of credit issued, depending on the leverage ratio of our Government
Operations segment as of the last day of the preceding fiscal
quarter. An additional 0.125% per year fee is charged on the amount
of each letter of credit issued.
The BWXT
Credit Facility contains customary financial and nonfinancial covenants and
reporting requirements. The financial covenants require maintenance
of a maximum leverage ratio, a minimum fixed charge coverage ratio and a maximum
debt to capitalization ratio within our Government Operations
segment. A comparison of the key financial covenants and current
compliance at December 31, 2008 is as follows:
|
Required
|
Actual
|
||
|
(In
millions, except ratios)
|
|||
|
Maximum
leverage ratio
|
2.0
|
0.39
|
|
|
Minimum
fixed charge coverage ratio
|
1.1
|
9.13
|
|
|
Maximum
debt to capitalization ratio
|
0.4
|
0.00
|
|
At
December 31, 2008, BWXT was in compliance with all of the covenants set forth in
the BWXT Credit Facility.
At
December 31, 2008, there were no borrowings outstanding, and letters of credit
issued under the BWXT Credit Facility totaled $71.6 million. At
December 31, 2008, there was $63.4 million available for borrowings or to meet
letter of credit requirements under the BWXT Credit Facility. If
there had been borrowings under this facility, the applicable interest rate at
December 31, 2008 would have been 3.50% per year.
Letters
of Credit (Nuclear Fuel Services, Inc.)
At
December 31, 2008, Nuclear Fuel Services, Inc., a subsidiary of BWXT, had $3.7
million in letters of credit issued by various commercial banks on its
behalf. The obligations to the commercial banks issuing such letters
of credit are secured by cash, short-term certificates of deposit and certain
real and intangible assets.
Based on
the liquidity position of our Government Operations segment, we believe this
segment has sufficient cash and letter of credit and borrowing capacity to fund
its operating requirements for at least the next 12 months.
Power
Generation Systems
Credit
Facility
On
February 22, 2006, our subsidiary, Babcock & Wilcox Power Generation Group,
Inc., entered into a senior secured credit facility with a syndicate of lenders
(the “B&W PGG Credit Facility”). As amended to date, this facility provides
for borrowings and issuances of letters of credit in an aggregate amount of up
to $400 million and matures on February 22, 2011. The proceeds of the
B&W PGG Credit Facility are available for working capital needs and other
similar corporate purposes of our Power Generation Systems segment.
B&W
PGG’s obligations under the B&W PGG Credit Facility are unconditionally
guaranteed by all of our domestic subsidiaries included in our Power Generation
Systems segment and secured by liens on substantially all the assets of those
subsidiaries, excluding cash and cash equivalents.
The
B&W PGG Credit Facility only requires interest payments on a quarterly basis
until maturity. Amounts outstanding under the B&W PGG Credit
Facility may be prepaid at any time without penalty.
Loans
outstanding under the revolving credit subfacility bear interest at either the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. The
applicable margin for revolving loans varies depending on credit ratings of the
B&W PGG Credit Facility. B&W PGG is charged a commitment fee
on the unused portion of the B&W PGG Credit Facility, and that fee varies
between 0.25% and 0.375% per year depending on credit ratings of the B&W PGG
Credit Facility. Additionally, B&W PGG is charged a letter of
credit fee of between 1.00% and 1.75% per year with respect to the amount of
each letter of credit issued under the B&W PGG Credit
Facility. An additional 0.125% per year fee is charged on the amount
of each letter of credit issued under the B&W PGG Credit
Facility.
The
B&W PGG Credit Facility contains customary financial covenants, including
maintenance of a maximum leverage ratio and a minimum interest coverage ratio
within our Power Generation Systems segment and covenants that, among other
things, restrict the ability of this segment to incur debt, create liens, make
investments and acquisitions, sell assets, pay dividends, prepay subordinated
debt, merge with other entities, engage in transactions with affiliates and make
capital expenditures. The capital expenditure annual limits allow us
to roll forward unspent limit amounts from one year to the
next. However, the amount rolled forward must be spent entirely in
the subsequent year and may not be rolled forward again to future
years. A comparison of the key financial covenants and current
compliance at December 31, 2008 is as follows:
|
Required
|
Actual
|
||
|
(In
millions, except ratios)
|
|||
|
Maximum
leverage ratio
|
2.5
|
0.03
|
|
|
Minimum
interest coverage ratio
|
4.0
|
110.78
|
|
|
Limitation
on capital expenditures
|
$45
|
$7
|
|
|
Capital
expenditure carry forward from 2007
|
$26
|
$26
|
|
At
December 31, 2008, B&W PGG was in compliance with all of the covenants set
forth in the B&W PGG Credit Facility.
As of
December 31, 2008, there were no outstanding borrowings, and letters of credit
issued under the B&W PGG Credit Facility totaled $189.8
million. At December 31, 2008, there was $210.2 million available for
borrowings or to meet letter of credit requirements under the B&W PGG Credit
Facility. If there had been borrowings under this facility, the
applicable interest rate at December 31, 2008 would have been 3.25% per
year.
Bank
Guarantees (Foreign Operations)
Certain
foreign subsidiaries of B&W PGG had credit arrangements with various
commercial banks for the issuance of bank guarantees. The aggregate
value of all such bank guarantees as of December 31, 2008 was $16.6
million.
Surety
Bonds
In June
2008, MII, B&W PGG and McDermott Holding, Inc. jointly executed a general
agreement of indemnity in favor of a surety underwriter relating to surety bonds
that underwriter issued in support of B&W PGG’s contracting
activity. As of December 31, 2008, bonds issued under this
arrangement totaled approximately $58 million. Any claim successfully
asserted against the surety by one or more of the bond obligees would likely be
recoverable from MII, B&W PGG and McDermott Holdings, Inc. under the
indemnity agreement.
Based on
the liquidity position of our Power Generation Systems segment, we believe this
segment has sufficient cash and letter of credit and borrowing capacity to fund
its operating requirements for at least the next 12 months.
OTHER
Pension
Plan
Due to
the extreme volatility and substantial decline experienced in the stock market
in 2008, the assets of our major domestic qualified pension plans have
experienced a loss of approximately 20% for the year ended December 31,
2008. As a result of this decline, we recorded a $332.7 million
reduction in stockholders’ equity in other comprehensive income at December 31,
2008. Our funding obligation for pension plans is expected to total
approximately $46 million in 2009. If our pension plan assets continue to
experience negative returns, it is likely that we will be required to fund
significantly greater amounts in 2010.
Warranty
Claim (Power Generation Systems Segment)
One of
our Canadian subsidiaries has received notice of a warranty claim on one of its
projects on a contract executed in 1998. This situation relates to technical
issues concerning components associated with nuclear steam generators. Data collection and
analysis can only be performed at specific time periods when the power plant is
scheduled to be off-line for maintenance. We also received a notice from the
customer during October 2008, and, during November 2008, we responded to the
notice by disagreeing with the matters stated in the claim and disputing the
claim. This project included a limited-term performance bond totaling
approximately $140 million for which we entered into an indemnity arrangement
with the surety underwriters. It is possible that our subsidiary may incur
warranty costs in excess of amounts provided for as of December 31, 2008. It is
also possible that a claim could be initiated by our subsidiary’s customer
against the surety underwriter should certain events occur. If such a
claim were successful, the surety could seek to recover from our subsidiary the
costs incurred in satisfying the customer claim. If the surety seeks recovery
from our subsidiary, we believe that our subsidiary would have adequate
liquidity to satisfy its obligations. However, the ultimate resolution of this
possible claim is uncertain, and an adverse outcome could have a material
adverse impact on our consolidated financial condition, results of operations or
cash flows.
Cash,
Cash Equivalents and Investments
At
December 31, 2008, we had total restricted cash and cash equivalents of $50.5
million. The restricted cash and cash equivalents include the
following: $1.2 million, which is required to meet reinsurance
reserve requirements of our captive insurance companies, and $49.3 million,
which is held in restricted foreign accounts.
Certain
of our subsidiaries are restricted in their ability to transfer funds to
MII. Such restrictions principally arise from debt covenants,
insurance regulations, national currency controls and the existence of minority
shareholders. We refer to the proportionate share of net assets,
after intercompany eliminations, that may not be
transferred
to MII as a result of these restrictions as “restricted net
assets.” At December 31, 2008, the restricted net assets of our
consolidated subsidiaries were approximately $768 million.
In
aggregate, our cash and cash equivalents, restricted cash and cash equivalents
and investments decreased by approximately $440.4
million to $1,087.9
million at December 31, 2008 from $1,528.3 million at December 31, 2007,
primarily due to (1) cash used in operations related primarily to our net
contracts in progress and advance billings on contracts and pension liabilities,
(2) purchases of property, plant and equipment and (3) business acquisition
activities.
Our
working capital, excluding cash and cash equivalents and restricted cash and
cash equivalents, increased by approximately $376.8 million to a negative $628.4
million at December 31, 2008 from a negative $1,005.2 million at
December 31, 2007, primarily due to the decrease in the net amount of
contracts in progress and advance billings on contracts, partially offset by a
decrease in investments.
Our net
cash provided by (used in) operating activities was approximately $(49.0)
million in the year ended December 31, 2008, compared to approximately $1,316.9
million in the year ended December 31, 2007. This difference was primarily
attributable to changes in net contracts in progress and advance billings on
contracts and a federal tax refund in April 2007 of $274 million reflected in
the change in income taxes receivable.
Our net
cash used in investing activities decreased by approximately $258.3 million to
approximately $420.4 million in the year ended December 31, 2008 from
approximately $678.7 million in the year ended December 31, 2007. This decrease
in net cash used in investing activities was primarily attributable to a greater
use of cash in 2007 relating to acquisitions.
Our net
cash provided by (used in) financing activities changed by approximately $308.8
million to net cash provided by financing activities of $65.5 million in the
year ended December 31, 2008 from net cash used in financing activities of
$243.3 million in the year ended December 31, 2007, primarily due to the
repayment of $250 million in borrowings under the B&W PGG Credit Facility in
April 2007.
At
December 31, 2008, we had investments with a fair value of $450.7
million. Our investment portfolio consists primarily of investments
in government obligations and other highly liquid money market
instruments. As of December 31, 2008, we had pledged approximately
$30.9 million fair value of these investments to secure a letter of credit in
connection with certain reinsurance agreements.
Our
investments are classified as available-for-sale and are carried at fair value
with unrealized gains and losses, net of tax, reported as a component of other
comprehensive loss. Our net unrealized gain/loss on investments is currently in
an unrealized loss position totaling approximately $9.0 million at December 31,
2008. At December 31, 2007, we had unrealized gains on our investments totaling
approximately $1.0 million. The major components of our investments in an
unrealized loss position are corporate bonds, asset-backed obligations and
commercial paper. Based on our analysis of these investments, we believe that
none of our available-for-sale securities are permanently impaired as of
December 31, 2008.
CONTRACTUAL
OBLIGATIONS
Our cash
requirements as of December 31, 2008 under current contractual obligations are
as follows:
|
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
After
5
Years
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Long-term
debt
|
$ | 13,670 | $ | 7,561 | $ | 993 | $ | 4,605 | $ | 511 | ||||||||||
|
Operating
leases
|
$ | 203,447 | $ | 29,869 | $ | 37,657 | $ | 34,697 | $ | 101,224 | ||||||||||
|
Vessel
charters
|
$ | 23,127 | $ | 22,132 | $ | 995 | $ | - | $ | - | ||||||||||
|
Take-or-pay
contract
|
$ | 1,800 | $ | 1,800 | $ | - | $ | - | $ | - | ||||||||||
We have
interest payments on our long-term debt obligations above as follows: less than
one year, $0.4 million; one to three years, $0.1 million; three to five years,
$0.1 million; and after five years, zero, for a total of $0.6 million. These
obligations are based on the debt outstanding at December 31, 2008 and the
stated interest rates. In addition, we
expect
cash requirements totaling approximately $46.0 million to our pension plans,
which include approximately $11.0 million for our Power Generation Systems
segment, $26.1 million for our Government Operations segment, $2.5 million for
our Offshore Oil and Gas Construction segment and $6.4 million for Corporate,
respectively, and $15.0 million to our other postretirement benefit plans in
2009.
Our
contingent commitments under letters of credit and bank guarantees currently
outstanding expire as follows:
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
Thereafter
|
|
(In
thousands)
|
||||
|
$853,054
|
$668,496
|
$171,454
|
$13,104
|
$-
|
In
accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109, we have recorded a
$73.2 million liability as of December 31, 2008 for unrecognized tax benefits
and the payment of related interest and penalties. Due to the
uncertainties related to these tax matters, we are unable to make a reasonably
reliable estimate as to when cash settlement with a taxing authority will
occur. However, we do not anticipate making any cash payments on
these liabilities over the next 12 months.
Our
exposure to market risk from changes in interest rates relates primarily to our
cash equivalents and our investment portfolio, which primarily consists of
investments in U.S. Government obligations and highly liquid money market
instruments denominated in U.S. dollars. We are averse to principal
loss and seek to ensure the safety and preservation of our invested funds by
limiting default risk, market risk and reinvestment risk. All our
investments in debt securities are classified as
available-for-sale.
We have
exposure to changes in interest rates on the JRM Credit Facility, the BWXT
Credit Facility and the B&W PGG Credit Facility (see Item 7 – “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources”). At December 31, 2008, we had no
outstanding borrowings under any of these credit facilities. We have
no material future earnings or cash flow exposures from changes in interest
rates on our other long-term debt obligations, as substantially all of these
obligations have fixed interest rates.
We have
operations in many foreign locations, and, as a result, our financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in those foreign
markets. In order to manage the risks associated with foreign
currency exchange rate fluctuations, we attempt to hedge those risks with
foreign currency derivative instruments. Historically, we have hedged
those risks with foreign currency forward contracts. We have recently
hedged some of those risks with foreign currency option contracts. We
do not enter into speculative derivative positions.
Interest
Rate Sensitivity
The
following tables provide information about our financial instruments that are
sensitive to changes in interest rates. The tables present principal
cash flows and related weighted-average interest rates by expected maturity
dates.
|
Principal
Amount by Expected Maturity
|
||||||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||||||
|
At
December 31, 2008:
|
Fair
Value at
|
|||||||||||||||||||||||||||||||
|
Years
Ending December 31,
|
December
31,
|
|||||||||||||||||||||||||||||||
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
2008
|
|||||||||||||||||||||||||
|
Investments
|
$ | 354,571 | $ | 94,001 | $ | 4,956 | $ | - | $ | - | $ | 6,135 | $ | 459,663 | $ | 450,685 | ||||||||||||||||
|
Average
Interest Rate
|
3.20 | % | 3.40 | % | 4.92 | % | - | - | 2.77 | % | ||||||||||||||||||||||
|
Long-term
Debt – Fixed Rate
|
$ | 4,250 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 4,250 | $ | 4,250 | ||||||||||||||||
|
Average
Interest Rate
|
6.80 | % | - | - | - | - | - | |||||||||||||||||||||||||
|
At
December 31, 2007:
|
Fair
Value at
|
|||||||||||||||||||||||||||||||
|
Years
Ending December 31,
|
December
31
|
|||||||||||||||||||||||||||||||
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
2007
|
|||||||||||||||||||||||||
|
Investments
|
$ | 392,353 | $ | 59,444 | $ | 219 | $ | - | $ | - | $ | 9,161 | $ | 461,177 | $ | 462,161 | ||||||||||||||||
|
Average
Interest Rate
|
4.95 | % | 4.61 | % | 2.58 | % | - | - | 5.18 | % | ||||||||||||||||||||||
|
Long-term
Debt –Fixed Rate
|
$ | 4,250 | $ | 4,250 | $ | - | $ | - | $ | - | $ | - | $ | 8,500 | $ | 8,604 | ||||||||||||||||
|
Average
Interest Rate
|
6.80 | % | 6.80 | % | - | - | - | - | ||||||||||||||||||||||||
Exchange
Rate Sensitivity
The
following table provides information about our foreign currency forward
contracts outstanding at December 31, 2008 and presents such information in
U.S. dollar equivalents. The table presents notional amounts and
related weighted-average exchange rates by expected (contractual) maturity dates
and constitutes a forward-looking statement. These notional amounts
generally are used to calculate the contractual payments to be exchanged under
the contract. The average contractual exchange rates are expressed
using market convention, which is dependent on the currencies being bought and
sold under the forward contract.
|
Forward
Contracts to Purchase Foreign Currencies in U.S. Dollars (in
thousands)
|
||||||||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2009
|
December
31, 2008
|
Exchange
Rate
|
|||||||||
|
Euros
|
$ | 157,424 | $ | (878 | ) | 1.3997 | ||||||
|
Singapore
Dollars
|
$ | 54,665 | $ | (2,228 | ) | 1.3758 | ||||||
|
Canadian
Dollars
|
$ | 39,766 | $ | (6,622 | ) | 1.0125 | ||||||
|
Pound
Sterling
|
$ | 36,485 | $ | (5,208 | ) | 1.7568 | ||||||
|
United
Arab Emirates Dirham
|
$ | 23,604 | $ | (771 | ) | 3.5588 | ||||||
|
Pound
Sterling (selling Euros)
|
$ | 8,494 | $ | (931 | ) | 0.8520 | ||||||
|
Thai
Baht
|
$ | 4,124 | $ | (122 | ) | 34.2086 | ||||||
|
Danish
Krone
|
$ | 2,243 | $ | (58 | ) | 5.2343 | ||||||
|
Norwegian
Krone
|
$ | 1,974 | $ | (229 | ) | 6.1664 | ||||||
|
Pound
Sterling (selling Canadian Dollars)
|
$ | 1,608 | $ | (141 | ) | 1.9776 | ||||||
|
Chinese
Yuan
|
$ | 489 | $ | 3 | 6.8700 | |||||||
|
Indonesian
Rupiah (buying U.S. Dollars)
|
$ | 489 | $ | 71 | 9,695.000 | |||||||
|
Swedish
Krona
|
$ | 170 | $ | (5 | ) | 7.6566 | ||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2010
|
December
31, 2008
|
Exchange
Rate
|
|||||||||
|
Canadian
Dollars
|
$ | 51,958 | $ | (7,623 | ) | 1.0117 | ||||||
|
Japanese
Yen (selling Canadian Dollars)
|
$ | 5,097 | $ | 1,626 | 101.8480 | |||||||
|
Euros
|
$ | 2,087 | $ | (137 | ) | 1.4859 | ||||||
|
Pound
Sterling (selling Canadian Dollars)
|
$ | 345 | $ | (28 | ) | 1.9584 | ||||||
|
Year
Ending
|
Fair
Value at
|
Average
Contractual
|
||||||||||
|
Foreign
Currency
|
December
31, 2011
|
December
31, 2008
|
Exchange
Rate
|
|||||||||
|
Canadian
Dollars
|
$ | 34,612 | $ | (4,331 | ) | 1.0139 | ||||||
|
Japanese
Yen (selling Canadian Dollars)
|
$ | 5,006 | $ | 1,452 | 98.3035 | |||||||
|
Danish
Krone
|
$ | 1,252 | $ | (45 | ) | 5.2195 | ||||||
|
Euros
|
$ | 1,064 | $ | (86 | ) | 1.5190 | ||||||
To the
Board of Directors and Stockholders of McDermott International,
Inc.:
We have
audited the accompanying consolidated balance sheets of McDermott International,
Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2008. Our audits also included the financial statement schedules
listed in the Index at Item 15(2). These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2008 and
2007, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the financial information set forth therein.
As
discussed in Notes 1 and 21 to the consolidated financial statements, on
February 22, 2000, Babcock & Wilcox Power Generation Group, Inc., (“B&W
PGG”), a wholly owned subsidiary of the Company, filed a voluntary petition with
the U.S. Bankruptcy Court to reorganize under Chapter 11 of the U.S. Bankruptcy
Code. On January 17, 2006, the United States District Court for the
Eastern District of Louisiana issued an order confirming B&W’s Chapter 11
Joint Plan of Reorganization and associated settlement agreement and on February
22, 2006 B&W emerged from Chapter 11. B&W and its
subsidiaries’ results of operations have been included in the consolidated
financial statements of the Company effective February 22, 2006. As
further discussed in Notes 1 and 21, due to the Chapter 11 proceedings, B&W
and its subsidiaries’ results of operations were not included in the
consolidated financial statements of the Company from February 22, 2000 through
February 22, 2006.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 2, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
Houston,
Texas
March 2,
2009
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 586,649 | $ | 1,001,394 | ||||
|
Restricted
cash and cash equivalents (Note 1)
|
50,536 | 64,786 | ||||||
|
Investments
(Note 15)
|
131,515 | 300,092 | ||||||
|
Accounts
receivable – trade, net
|
712,055 | 770,024 | ||||||
|
Accounts
and notes receivable – unconsolidated affiliates
|
1,504 | 2,303 | ||||||
|
Accounts
receivable – other
|
139,062 | 116,744 | ||||||
|
Contracts
in progress
|
311,713 | 194,292 | ||||||
|
Inventories
(Note 1)
|
128,383 | 95,208 | ||||||
|
Deferred
income taxes
|
97,069 | 160,783 | ||||||
|
Other
current assets
|
58,499 | 51,874 | ||||||
|
Total
Current Assets
|
2,216,985 | 2,757,500 | ||||||
|
Property,
Plant and Equipment
|
2,234,050 | 2,004,138 | ||||||
|
Less
accumulated depreciation
|
1,155,191 | 1,090,400 | ||||||
|
Net
Property, Plant and Equipment
|
1,078,859 | 913,738 | ||||||
|
Investments
(Note 15)
|
319,170 | 162,069 | ||||||
|
Goodwill
|
298,265 | 158,533 | ||||||
|
Deferred
Income Taxes
|
335,877 | 134,292 | ||||||
|
Investments
in Unconsolidated Affiliates
|
70,304 | 62,241 | ||||||
|
Other
Assets
|
282,233 | 223,113 | ||||||
|
TOTAL
|
$ | 4,601,693 | $ | 4,411,486 | ||||
See
accompanying notes to consolidated financial statements.
McDERMOTT
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Notes
payable and current maturities of long-term debt
|
$ | 9,021 | $ | 6,599 | ||||
|
Accounts
payable
|
551,435 | 455,659 | ||||||
|
Accrued
employee benefits
|
159,541 | 184,211 | ||||||
|
Accrued
pension liability – current portion
|
45,980 | 159,601 | ||||||
|
Accrued
contract cost
|
97,041 | 93,281 | ||||||
|
Advance
billings on contracts
|
951,895 | 1,463,223 | ||||||
|
Accrued
warranty expense
|
120,237 | 101,330 | ||||||
|
Income
taxes payable
|
55,709 | 57,071 | ||||||
|
Accrued
liabilities – other
|
217,486 | 175,557 | ||||||
|
Total
Current Liabilities
|
2,208,345 | 2,696,532 | ||||||
|
Long-Term
Debt
|
6,109 | 10,609 | ||||||
|
Accumulated
Postretirement Benefit Obligation
|
107,567 | 96,253 | ||||||
|
Self-Insurance
|
88,312 | 82,525 | ||||||
|
Pension
Liability
|
682,624 | 188,748 | ||||||
|
Other
Liabilities
|
192,564 | 169,814 | ||||||
|
Commitments
and Contingencies (Note 11)
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
stock, par value $1.00 per share, authorized 400,000,000 shares; issued
234,174,088 and 231,722,659 at December 31, 2008 and 2007,
respectively
|
234,174 | 231,723 | ||||||
|
Capital
in excess of par value
|
1,252,848 | 1,145,829 | ||||||
|
Retained
earnings
|
564,591 | 135,289 | ||||||
|
Treasury
stock at cost, 5,840,314 and 5,852,248 at December 31, 2008 and 2007,
respectively
|
(63,026 | ) | (63,903 | ) | ||||
|
Accumulated
other comprehensive loss
|
(672,415 | ) | (281,933 | ) | ||||
|
Total
Stockholders’ Equity
|
1,316,172 | 1,167,005 | ||||||
|
TOTAL
|
$ | 4,601,693 | $ | 4,411,486 | ||||
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||
|
Revenues
|
$ | 6,572,423 | $ | 5,631,610 | $ | 4,120,141 | ||||||
|
Costs
and Expenses:
|
||||||||||||
|
Cost
of operations
|
5,519,827 | 4,500,897 | 3,362,758 | |||||||||
|
(Gains)
losses on asset disposals and impairments – net
|
(12,202 | ) | (8,371 | ) | 15,042 | |||||||
|
Selling,
general and administrative expenses
|
543,047 | 464,611 | 388,524 | |||||||||
|
Total
Costs and Expenses
|
6,050,672 | 4,957,137 | 3,766,324 | |||||||||
|
Equity
in Income of Investees
|
48,131 | 41,724 | 37,524 | |||||||||
|
Operating
Income
|
569,882 | 716,197 | 391,341 | |||||||||
|
Other
Income (Expense):
|
||||||||||||
|
Interest
income
|
34,353 | 61,980 | 53,562 | |||||||||
|
Interest
expense
|
(7,380 | ) | (22,520 | ) | (30,348 | ) | ||||||
|
IRS
interest expense adjustment
|
- | - | 5,719 | |||||||||
|
Loss
on early retirement of debt
|
- | - | (53,708 | ) | ||||||||
|
Other
expense – net
|
(9,741 | ) | (10,192 | ) | (13,750 | ) | ||||||
|
Total
Other Income (Expense)
|
17,232 | 29,268 | (38,525 | ) | ||||||||
|
Income
from Continuing Operations before Provision for Income
Taxes
|
587,114 | 745,465 | 352,816 | |||||||||
|
Provision
for Income Taxes
|
157,812 | 137,637 | 35,195 | |||||||||
|
Income
from Continuing Operations
|
429,302 | 607,828 | 317,621 | |||||||||
|
Income
from Discontinued Operations
|
- | - | 12,894 | |||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Earnings
per Common Share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
from Continuing Operations
|
$ | 1.89 | $ | 2.72 | $ | 1.46 | ||||||
|
Income
from Discontinued Operations
|
$ | 0.00 | $ | 0.00 | $ | 0.06 | ||||||
|
Net
Income
|
$ | 1.89 | $ | 2.72 | $ | 1.52 | ||||||
|
Diluted:
|
||||||||||||
|
Income
from Continuing Operations
|
$ | 1.86 | $ | 2.66 | $ | 1.39 | ||||||
|
Income
from Discontinued Operations
|
$ | 0.00 | $ | 0.00 | $ | 0.06 | ||||||
|
Net
Income
|
$ | 1.86 | $ | 2.66 | $ | 1.45 | ||||||
|
Shares
used in the computation of earnings per share (Note 20):
|
||||||||||||
|
Basic
|
226,918,776 | 223,511,880 | 217,752,454 | |||||||||
|
Diluted
|
230,393,782 | 228,742,522 | 227,718,784 | |||||||||
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Other
Comprehensive Income (Loss):
|
||||||||||||
|
Currency
translation adjustments:
|
||||||||||||
|
Foreign
currency translation adjustments
|
(38,370 | ) | 13,924 | 10,607 | ||||||||
|
Reclassification
adjustment for impairment of investment
|
- | - | 16,438 | |||||||||
|
Reconsolidation
of Babcock & Wilcox Power Generation Group, Inc.
|
- | - | 15,833 | |||||||||
|
Unrealized
gains (losses) on derivative financial instruments:
|
||||||||||||
|
Unrealized
gains (losses) on derivative financial instruments
|
(28,929 | ) | 15,658 | 10,600 | ||||||||
|
Reclassification
adjustment for gains included in net income
|
(5,185 | ) | (4,226 | ) | (30 | ) | ||||||
|
Reconsolidation
of Babcock & Wilcox Power Generation Group, Inc.
|
- | - | (269 | ) | ||||||||
|
Unrecognized
gains on benefit obligations:
|
||||||||||||
|
Unrecognized
gains (losses) arising during the period
|
(332,687 | ) | 32,272 | - | ||||||||
|
Amortization
of losses included in net income
|
24,651 | 24,892 | - | |||||||||
|
Amortization
of losses included in retained earnings
|
- | 704 | - | |||||||||
|
Minimum
pension liability adjustments:
|
||||||||||||
|
Minimum
pension liability adjustment
|
- | - | 98,371 | |||||||||
|
Reconsolidation
of Babcock & Wilcox Power Generation Group, Inc.
|
- | - | 15,578 | |||||||||
|
Unrealized
gains (losses) on investments:
|
||||||||||||
|
Unrealized
gains (losses) arising during the period
|
(8,470 | ) | 629 | 1,326 | ||||||||
|
Reclassification
adjustment for net gains included in net income
|
(1,492 | ) | (175 | ) | (7 | ) | ||||||
|
Other
Comprehensive Income (Loss)
|
(390,482 | ) | 83,678 | 168,447 | ||||||||
|
Comprehensive
Income
|
$ | 38,820 | $ | 691,506 | $ | 498,962 | ||||||
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
Retained
|
Accumulated
|
Total
|
||||||||||||||||||||||||||
|
Capital
In
|
Earnings
|
Other
|
Stockholders’
|
|||||||||||||||||||||||||
|
Common Stock
|
Excess
of
|
(Accumulated
|
Comprehensive
|
Treasury
|
Equity
|
|||||||||||||||||||||||
|
Shares
|
Par Value(1)
|
Par Value(1)
|
(Deficit)
|
Loss
|
Stock
|
(Deficit)
|
||||||||||||||||||||||
|
(In
thousands, except share amounts)
|
||||||||||||||||||||||||||||
|
Balance
December 31, 2005
|
221,573,766 | $ | 221,574 | $ | 1,035,407 | $ | (796,426 | ) | $ | (420,852 | ) | $ | (56,496 | ) | $ | (16,793 | ) | |||||||||||
|
Net
income
|
- | - | - | 330,515 | - | - | 330,515 | |||||||||||||||||||||
|
Cumulative
adjustment for conversion to equity method (Note 4)
|
- | - | - | 7,025 | - | - | 7,025 | |||||||||||||||||||||
|
Minimum
pension liability, net of tax
|
- | - | - | - | 113,949 | - | 113,949 | |||||||||||||||||||||
|
Unrealized
gain on investments
|
- | - | - | - | 1,319 | - | 1,319 | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | 42,878 | - | 42,878 | |||||||||||||||||||||
|
Unrealized
gain on derivatives
|
- | - | - | - | 10,301 | - | 10,301 | |||||||||||||||||||||
|
Exercise
of stock options
|
5,367,176 | 5,367 | 13,726 | - | - | 2,410 | 21,503 | |||||||||||||||||||||
|
Restricted
stock issuances – net
|
34,530 | 35 | (20 | ) | - | - | (38 | ) | (23 | ) | ||||||||||||||||||
|
Contributions
to thrift plan
|
473,860 | 474 | 8,693 | - | - | - | 9,167 | |||||||||||||||||||||
|
Purchase
of treasury shares
|
253,920 | 254 | 2,758 | - | - | (5,596 | ) | (2,584 | ) | |||||||||||||||||||
|
Stock-based
compensation charges
|
- | - | 39,161 | - | - | - | 39,161 | |||||||||||||||||||||
|
Reclassification
of forfeited shares
|
91,366 | 91 | 770 | - | - | (861 | ) | - | ||||||||||||||||||||
|
Cash
in lieu of fractional shares resulting from stock split (Note
9)
|
- | - | (111 | ) | - | - | - | (111 | ) | |||||||||||||||||||
|
Adoption
of SFAS No. 158 (Note 7)
|
- | - | - | - | (113,206 | ) | - | (113,206 | ) | |||||||||||||||||||
|
Balance
December 31, 2006
|
227,794,618 | 227,795 | 1,100,384 | (458,886 | ) | (365,611 | ) | (60,581 | ) | 443,101 | ||||||||||||||||||
|
Net
income
|
- | - | - | 607,828 | - | - | 607,828 | |||||||||||||||||||||
|
Adoption
of FIN 48 (Note 5)
|
- | - | - | (11,965 | ) | - | - | (11,965 | ) | |||||||||||||||||||
|
Adoption
of SFAS No. 158 (Note 7)
|
- | - | - | (1,688 | ) | 704 | - | (984 | ) | |||||||||||||||||||
|
Amortization
of benefit plan costs
|
- | - | - | - | 24,892 | - | 24,892 | |||||||||||||||||||||
|
Unrecognized
gains on benefit obligations
|
32,272 | 32,272 | ||||||||||||||||||||||||||
|
Unrealized
gain on investments
|
- | - | - | - | 454 | - | 454 | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | 13,924 | - | 13,924 | |||||||||||||||||||||
|
Unrealized
gain on derivatives
|
- | - | - | - | 11,432 | - | 11,432 | |||||||||||||||||||||
|
Exercise
of stock options
|
3,565,266 | 3,565 | 10,575 | - | - | 1,079 | 15,219 | |||||||||||||||||||||
|
Restricted
stock issuances – net
|
28,836 | 29 | (25 | ) | - | - | - | 4 | ||||||||||||||||||||
|
Contributions
to thrift plan
|
333,939 | 334 | 11,178 | - | - | - | 11,512 | |||||||||||||||||||||
|
Purchase
of treasury shares
|
- | - | - | - | - | (4,401 | ) | (4,401 | ) | |||||||||||||||||||
|
Stock-based
compensation charges
|
- | - | 23,717 | - | - | - | 23,717 | |||||||||||||||||||||
|
Balance
December 31, 2007
|
231,722,659 | 231,723 | 1,145,829 | 135,289 | (281,933 | ) | (63,903 | ) | 1,167,005 | |||||||||||||||||||
|
Net
income
|
- | - | - | 429,302 | - | - | 429,302 | |||||||||||||||||||||
|
Amortization
of benefit plan costs
|
- | - | - | - | 24,651 | - | 24,651 | |||||||||||||||||||||
|
Unrecognized
losses on benefit obligations
|
- | - | - | - | (332,687 | ) | - | (332,687 | ) | |||||||||||||||||||
|
Unrealized
loss on investments
|
- | - | - | - | (9,962 | ) | - | (9,962 | ) | |||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | (38,370 | ) | - | (38,370 | ) | |||||||||||||||||||
|
Unrealized
loss on derivatives
|
- | - | - | - | (34,114 | ) | - | (34,114 | ) | |||||||||||||||||||
|
Exercise
of stock options
|
1,687,536 | 1,688 | 825 | - | - | 7,111 | 9,624 | |||||||||||||||||||||
|
Restricted
stock issuances – net
|
350,946 | 351 | (351 | ) | - | - | - | - | ||||||||||||||||||||
|
Contributions
to thrift plan
|
412,947 | 412 | 12,194 | - | - | - | 12,606 | |||||||||||||||||||||
|
Purchase
of treasury shares
|
- | - | - | - | - | (6,234 | ) | (6,234 | ) | |||||||||||||||||||
|
Stock-based
compensation charges
|
- | - | 94,351 | - | - | - | 94,351 | |||||||||||||||||||||
|
Balance
December 31, 2008
|
234,174,088 | $ | 234,174 | $ | 1,252,848 | $ | 564,591 | $ | (672,415 | ) | $ | (63,026 | ) | $ | 1,316,172 | |||||||||||||
(1)
Amounts have been restated to reflect the stock splits effected in September
2007 and May 2006. See Note 9 for additional
information.
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Non-cash
items included in net income:
|
||||||||||||
|
Depreciation
and amortization
|
126,133 | 95,989 | 61,000 | |||||||||
|
(Income)
loss of investees, net of dividends
|
1,545 | 120 | 1,644 | |||||||||
|
(Gains)
losses on asset disposals and impairments – net
|
(12,202 | ) | (8,371 | ) | 15,042 | |||||||
|
Gain
on sale of business
|
- | - | (13,786 | ) | ||||||||
|
Premium
on early retirement of debt
|
- | - | 37,438 | |||||||||
|
Provision
for deferred taxes
|
35,063 | 89,624 | 179,467 | |||||||||
|
Amortization
of pension and postretirement costs
|
38,131 | 50,957 | - | |||||||||
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
(60,901 | ) | (877 | ) | (20,113 | ) | ||||||
|
Other,
net
|
38,372 | 21,726 | 14,660 | |||||||||
|
Changes
in assets and liabilities, net of effects from acquisition and
divestitures:
|
||||||||||||
|
Accounts
receivable
|
71,142 | (82,105 | ) | (49,858 | ) | |||||||
|
Income
taxes receivable
|
(11,476 | ) | 255,165 | (284,494 | ) | |||||||
|
Accounts
payable
|
86,069 | 40,384 | 65,157 | |||||||||
|
Net
contracts in progress and advance billings
|
(630,481 | ) | 382,184 | 330,996 | ||||||||
|
Income
taxes
|
13,046 | (13,216 | ) | 139,497 | ||||||||
|
Accrued
and other current liabilities
|
18,142 | (14,305 | ) | 81,060 | ||||||||
|
Pension
liability and accrued postretirement and employee benefits
|
(205,345 | ) | (74,365 | ) | (119,114 | ) | ||||||
|
Payment
of the B&W PGG bankruptcy settlement
|
- | - | (605,000 | ) | ||||||||
|
Other,
net
|
14,493 | (33,790 | ) | 64,031 | ||||||||
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
(48,967 | ) | 1,316,948 | 228,142 | ||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Decrease
in restricted cash and cash equivalents
|
14,250 | 41,888 | 48,298 | |||||||||
|
Purchases
of property, plant and equipment
|
(255,691 | ) | (233,289 | ) | (132,704 | ) | ||||||
|
Acquisition
of businesses, net of cash acquired
|
(191,940 | ) | (334,457 | ) | - | |||||||
|
Net
(increase) decrease in available-for-sale securities
|
2,009 | (159,350 | ) | 212,082 | ||||||||
|
Proceeds
from asset disposals
|
13,996 | 11,223 | 21,712 | |||||||||
|
Cash
acquired from the reconsolidation of B&W PGG
|
- | - | 164,200 | |||||||||
|
Other,
net
|
(2,996 | ) | (4,696 | ) | (3,193 | ) | ||||||
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(420,372 | ) | (678,681 | ) | 310,395 | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Issuance
of long-term debt
|
- | - | 250,000 | |||||||||
|
Payment
of long-term debt
|
(4,768 | ) | (255,749 | ) | (238,615 | ) | ||||||
|
Payment
of debt issuance costs
|
(1,756 | ) | (3,625 | ) | (10,170 | ) | ||||||
|
Increase
in short-term borrowing
|
1,460 | - | - | |||||||||
|
Issuance
of common stock
|
9,624 | 15,219 | 19,647 | |||||||||
|
Excess
tax benefits from FAS 123(R) stock-based compensation
|
60,901 | 877 | 20,113 | |||||||||
|
Other,
net
|
(2 | ) | 4 | 2,718 | ||||||||
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
65,459 | (243,274 | ) | 43,693 | ||||||||
|
EFFECTS
OF EXCHANGE RATE CHANGES ON CASH
|
(10,865 | ) | 5,558 | (650 | ) | |||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(414,745 | ) | 400,551 | 581,580 | ||||||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
1,001,394 | 600,843 | 19,263 | |||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 586,649 | $ | 1,001,394 | $ | 600,843 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash
paid (received) during the period for:
|
||||||||||||
|
Interest
(net of amount capitalized)
|
$ | 11,978 | $ | 28,066 | $ | 28,588 | ||||||
|
Income
taxes (net of refunds)
|
$ | 68,637 | $ | (208,194 | ) | $ | 63,357 | |||||
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
We have
presented our consolidated financial statements in U.S. Dollars in accordance
with accounting principles generally accepted in the United States
(“GAAP”). These consolidated financial statements include the
accounts of McDermott International, Inc. and its subsidiaries and controlled
entities consistent with Financial Accounting Standards Board (“FASB”)
Interpretation No. 46(R), Consolidation of Variable Interest
Entities (revised December 2003). We use the equity method to
account for investments in entities that we do not control, but over which we
have significant influence. We generally refer to these entities as
“joint ventures.” We have eliminated all significant intercompany
transactions and accounts. We present the notes to our consolidated
financial statements on the basis of continuing operations, unless otherwise
stated.
McDermott
International, Inc. (“MII”) was incorporated under the laws of the Republic of
Panama in 1959 and is the parent company of the McDermott group of companies,
including J. Ray McDermott, S.A. (“JRMSA”) and The Babcock & Wilcox Company
(“B&W”). In these notes to consolidated financial statements,
unless the context otherwise indicates, “we,” “us” and “our” mean MII and its
consolidated subsidiaries.
We
operate in three business segments: Offshore Oil and Gas Construction,
Government Operations and Power Generation Systems, outlined as
follows:
|
·
|
Our
Offshore Oil and Gas Construction segment includes the business and
operations of JRMSA, J. Ray McDermott Holdings, LLC and their respective
subsidiaries. This segment supplies services primarily to
offshore oil and gas field developments worldwide, including the front-end
design and detailed engineering, fabrication and installation of offshore
drilling and production facilities and installation of marine pipelines
and subsea production systems. This segment also provides
comprehensive project management and procurement services. This
segment operates in most major offshore oil and gas producing regions,
including the United States, Mexico, Canada, the Middle East, India, the
Caspian Sea and Asia Pacific.
|
|
·
|
Our
Government Operations segment includes the business and operations of BWX
Technologies, Inc., Babcock & Wilcox Nuclear Operations Group, Inc.,
Babcock & Wilcox Technical Services Group, Inc. and their respective
subsidiaries. This segment supplies nuclear components and provides
various services to the U.S. Government, including uranium processing,
environmental site restoration services and management and operating
services for various U.S. Government-owned facilities, primarily within
the nuclear weapons complex of the U.S. Department of Energy
(“DOE”).
|
|
·
|
Our
Power Generation Systems segment includes the business and operations of
Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”), Babcock
& Wilcox Nuclear Power Generation Group, Inc. and their respective
subsidiaries. This segment supplies fossil-fired boilers,
commercial nuclear steam generators and components, environmental
equipment and components, and related services to customers in different
regions around the world. It designs, engineers, manufactures, constructs
and services large utility and industrial power generation systems,
including boilers used to generate steam in electric power plants, pulp
and paper making, chemical and process applications and other industrial
uses. On February 22, 2006, B&W PGG and three of its
subsidiaries exited from their asbestos-related Chapter 11 bankruptcy
proceedings (the “Chapter 11 Bankruptcy”), which were commenced on
February 22, 2000. Due to the Chapter 11 Bankruptcy, we did not
consolidate the results of operations of these entities and their
subsidiaries in our consolidated financial statements from February 22,
2000 through February 22, 2006. See Note 21 to our consolidated
financial statements included in this report for more information on the
Chapter 11 Bankruptcy.
|
Use
of Estimates
We use
estimates and assumptions to prepare our financial statements in conformity with
GAAP. These estimates and assumptions affect the amounts we report in
our financial statements and accompanying notes. Our actual
results
could
differ from these estimates. Variances could result in a material
effect on our financial condition and results of operations in future
periods.
Earnings
Per Share
We have
computed earnings per common share on the basis of the weighted average number
of common shares, and, where dilutive, common share equivalents, outstanding
during the indicated periods.
Investments
Our
investments, primarily government obligations and other highly liquid money
market instruments, are classified as available-for-sale and are carried at fair
value, with the unrealized gains and losses, net of tax, reported as a component
of accumulated other comprehensive loss. We classify investments
available for current operations in the balance sheet as current assets, while
we classify investments held for long-term purposes as noncurrent
assets. We adjust the amortized cost of debt securities for
amortization of premiums and accretion of discounts to maturity. That
amortization is included in interest income. We include realized
gains and losses on our investments in other income (expense). The
cost of securities sold is based on the specific identification
method. We include interest on securities in interest
income.
Foreign
Currency Translation
We
translate assets and liabilities of our foreign operations, other than
operations in highly inflationary economies, into U.S. Dollars at current
exchange rates, and we translate income statement items at average exchange
rates for the periods presented. We record adjustments resulting from
the translation of foreign currency financial statements as a component of
accumulated other comprehensive loss. We report foreign currency
transaction gains and losses in income. We have included in other
income (expense) transaction gains (losses) of $(9.7) million, $0.7 million and
($6.3) million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Contracts
and Revenue Recognition
We
generally recognize contract revenues and related costs on a
percentage-of-completion method for individual contracts or combinations of
contracts based on work performed, man hours, or a cost-to-cost method, as
applicable to the product or activity involved. Some of our contracts
contain a risk-and-reward element, whereby a portion of total compensation is
tied to the overall performance of several companies working under alliance
arrangements. We include revenues and related costs so recorded, plus
accumulated contract costs that exceed amounts invoiced to customers under the
terms of the contracts, in contracts in progress. We include in
advance billings on contracts billings that exceed accumulated contract costs
and revenues and costs recognized under the percentage-of-completion
method. Most long-term contracts contain provisions for progress
payments. We expect to invoice customers for all unbilled
revenues. We review contract price and cost estimates periodically as
the work progresses and reflect adjustments proportionate to the
percentage-of-completion in income in the period when those estimates are
revised. For all contracts, if a current estimate of total contract
cost indicates a loss on a contract, the projected loss is recognized in full
when determined.
For
contracts as to which we are unable to estimate the final profitability except
to assure that no loss will ultimately be incurred, we recognize equal amounts
of revenue and cost until the final results can be estimated more
precisely. For these deferred profit recognition contracts, we
recognize revenue and cost equally and only recognize gross margin when probable
and reasonably estimable, which we generally determine to be when the contract
is
approximately
70% complete. We treat long-term construction contracts that contain
such a level of risk and uncertainty that estimation of the final outcome is
impractical except to assure that no loss will be incurred, as deferred profit
recognition contracts.
Our
policy is to account for fixed-price contracts under the completed-contract
method if we believe that we are unable to reasonably forecast cost to complete
at start-up. Under the completed-contract method, income is
recognized only when a contract is completed or substantially
complete.
Variations
from estimated contract performance could result in material adjustments to
operating results for any fiscal quarter or year. We include claims
for extra work or changes in scope of work to the extent of costs incurred in
contract revenues when we believe collection is probable.
The
following amounts represent retainages on contracts:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Retainages
expected to be collected within one year
|
$ | 121,870 | $ | 107,397 | ||||
|
Retainages
expected to be collected after one year
|
65,680 | 68,713 | ||||||
|
Total
Retainages
|
$ | 187,550 | $ | 176,110 | ||||
We have included in accounts receivable
– trade retainages expected to be collected in 2009. Retainages
expected to be collected after one year are included in other
assets. Of the long-term retainages at December 31, 2008, we
anticipate collecting $42.4 million in 2010, $22.4 million in 2011 and $0.9
million in 2012.
Comprehensive
Loss
The
components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Currency
translation adjustments
|
$ | (13,042 | ) | $ | 25,328 | |||
|
Net
unrealized gain (loss) on investments
|
(8,978 | ) | 984 | |||||
|
Net
unrealized gain (loss) on derivative financial instruments
|
(13,238 | ) | 20,876 | |||||
|
Unrecognized
losses on benefit obligations
|
(637,157 | ) | (329,121 | ) | ||||
|
Accumulated
other comprehensive loss
|
$ | (672,415 | ) | $ | (281,933 | ) | ||
Warranty
Expense
We accrue
estimated expense to satisfy contractual warranty requirements, primarily of our
Government Operations and Power Generation Systems segments, when we recognize
the associated revenue on the related contracts. We include warranty
costs associated with our Offshore Oil and Gas Construction segment as a
component of our total contract cost estimate to satisfy contractual
requirements. In addition, we make specific provisions where we
expect the actual warranty costs to significantly exceed the accrued
estimates. Such provisions could have a material effect on our
consolidated financial condition, results of operations and cash
flows.
The
following summarizes the changes in the carrying amount of accrued
warranty:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 101,330 | $ | 79,077 | $ | 8,575 | ||||||
|
Reconsolidation
of B&W PGG
|
- | - | 48,329 | |||||||||
|
Additions
and adjustments
|
26,866 | 34,336 | 32,981 | |||||||||
|
Charges
|
(7,959 | ) | (12,083 | ) | (10,808 | ) | ||||||
|
Balance
at end of period
|
$ | 120,237 | $ | 101,330 | $ | 79,077 | ||||||
Asset
Retirement Obligations and Environmental Clean-up Costs
We accrue
for future decommissioning of our nuclear facilities that will permit the
release of these facilities to unrestricted use at the end of each facility's
life, which is a requirement of our licenses from the Nuclear Regulatory
Commission. In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 143, Accounting
for
Asset Retirement Obligations,
we record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. When we initially record such a
liability, we capitalize a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of a liability, we will settle
the obligation for its recorded amount or incur a gain or loss. SFAS
No. 143 applies to environmental liabilities associated with assets that we
currently operate and are obligated to remove from service. For
environmental liabilities associated with assets that we no longer operate, we
have accrued amounts based on the estimated costs of clean-up activities for
which we are responsible, net of any cost-sharing arrangements. We
adjust the estimated costs as further information develops or circumstances
change. An exception to this accounting treatment relates to the work
we perform for one facility for which the U.S. Government is obligated to pay
all of the decommissioning costs.
Substantially
all of our asset retirement obligations relate to the remediation of our nuclear
analytical laboratory and the Nuclear Fuel Services, Inc. facility in our
Government Operations segment. The following table reflects our asset
retirement obligations:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 9,328 | $ | 8,395 | $ | 7,556 | ||||||
|
Acquisition
of Nuclear Fuel Services, Inc. (Note 2)
|
15,281 | - | - | |||||||||
|
Accretion
|
1,038 | 933 | 839 | |||||||||
|
Balance
at end of period
|
$ | 25,647 | $ | 9,328 | $ | 8,395 | ||||||
Research
and Development
Research
and development activities are related to development and improvement of new and
existing products and equipment, as well as conceptual and engineering
evaluation for translation into practical applications. We charge to cost of
operations the costs of research and development unrelated to specific contracts
as incurred. Research and development activities totaled $57.8
million, $52.0 million and $45.2 million in the years ended December 31, 2008,
2007 and 2006, respectively, which include $17.7 million, $16.5 million and
$26.5 million, respectively, related to amounts paid for by our
customers. The net expenses recognized in the years ended December
31, 2008, 2007 and 2006 totaled approximately $40.1 million, $35.5 million and
$18.7 million, respectively.
Inventories
We carry
our inventories at the lower of cost or market. We determine cost
principally on the first-in, first-out basis, except for certain materials
inventories of our Power Generation Systems segment, for which we use the
last-in, first-out (“LIFO”) method. We determined the cost of
approximately 16% and 20% of our total inventories using the LIFO method at
December 31, 2008 and 2007, respectively, and our total LIFO reserve at December
31, 2008 and 2007 was approximately $7.0 and $6.0 million,
respectively. Inventories are summarized below:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Raw
Materials and Supplies
|
$ | 95,593 | $ | 65,857 | ||||
|
Work
in Progress
|
12,157 | 10,757 | ||||||
|
Finished
Goods
|
20,633 | 18,594 | ||||||
|
Total
Inventories
|
$ | 128,383 | $ | 95,208 | ||||
Property,
Plant and Equipment
We carry
our property, plant and equipment at depreciated cost, less any impairment
provisions.
Except
for major marine vessels, we depreciate our property, plant and equipment using
the straight-line method over estimated economic useful lives of eight to 40
years for buildings and two to 28 years for machinery and
equipment. We depreciate major marine vessels using the
units-of-production method based on the utilization of each
vessel. Our
depreciation expense calculated under the units-of-production method may be less
than, equal to, or greater than depreciation expense calculated under the
straight-line method in any period. The annual depreciation based on
utilization of each vessel will not be less than the greater of 25% of annual
straight-line depreciation or 50% of cumulative straight-line
depreciation. Our depreciation expense was $119.7 million, $91.2
million and $60.5 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
We
expense the costs of maintenance, repairs and renewals that do not materially
prolong the useful life of an asset as we incur them, except for drydocking
costs. Through December 31, 2006, we accrued estimated drydocking
costs, including labor, raw materials, equipment costs and regulatory fees, for
our marine fleet over the period of time between drydockings, in accordance with
the method commonly known as the accrue-in-advance method. Effective
January 1, 2007 and pursuant to Financial Accounting Standards Board (“FASB”)
Staff Position (“FSP”) AUG AIR-1, Accounting for Planned Major
Maintenance Activities, we changed our accounting policy from the
accrue-in-advance method to the deferral method. Under the deferral
method, we recognize drydocking costs as a prepaid asset when incurred and
amortize the costs over the period of time between drydockings, generally three
to five years. This Staff Position requires that all periods
presented in our consolidated financial statements reflect the period-specific
adjustments of applying the new accounting principle. As a result of
applying this change, we restated our consolidated balance sheet at January 1,
2006 to reflect an increase to assets and stockholders’ equity of approximately
$41.7 million and $66.5 million, respectively, and a decrease to liabilities of
approximately $24.8 million. Additionally, we restated our
consolidated statements of income for the year ended December 31, 2006 to
reflect an increase in our operating income of approximately $4.2
million. Also for the year ended December 31, 2006, we restated our
consolidated statements of income to reflect an increase in our provision for
income taxes of approximately $16.0 million. The impact on basic and
diluted earnings per share for the year ended December 31, 2006 was $(0.05) per
share.
Goodwill
The
following summarizes the changes in the carrying amount of
goodwill:
|
Offshore
Oil and Gas Construction
|
Government
Operations
|
Power
Generation Systems
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance
at December 31, 2006
|
$ | - | $ | 12,926 | $ | 76,300 | $ | 89,226 | ||||||||
|
Acquisition
of Marine Mechanical Corporation (Note 2)
|
- | 39,005 | - | 39,005 | ||||||||||||
|
Acquisition
of Assets from Secunda International Limited (Note 2)
|
29,066 | - | - | 29,066 | ||||||||||||
|
Currency
translation adjustments
|
457 | - | 779 | 1,236 | ||||||||||||
|
Balance
at December 31, 2007
|
29,523 | 51,931 | 77,079 | 158,533 | ||||||||||||
|
Acquisition
of Nuclear Fuel Services, Inc. (Note 2)
|
- | 123,542 | - | 123,542 | ||||||||||||
|
Acquisition
of the Intech group of companies (Note 2)
|
- | - | 8,151 | 8,151 | ||||||||||||
|
Acquisition
of Delta Power Services, LLC (Note 2)
|
- | - | 3,683 | 3,683 | ||||||||||||
|
Acquisition
of PT Babcock & Wilcox Indonesia (Note 2)
|
1,299 | - | - | 1,299 | ||||||||||||
|
Adjustment
related to the acquisition of Secunda International Limited (Note
2)
|
6,370 | - | - | 6,370 | ||||||||||||
|
Currency
translation adjustments
|
(2,079 | ) | - | (1,234 | ) | (3,313 | ) | |||||||||
|
Balance
at December 31, 2008
|
$ | 35,113 | $ | 175,473 | $ | 87,679 | $ | 298,265 | ||||||||
Other
Intangible Assets
We report
our other intangible assets in other assets. We amortize those
intangible assets which have definite lives to operating expense, using the
straight-line method.
During
the year ended December 31, 2008, we acquired the following intangible assets
subject to amortization (dollars in thousands; periods in years):
|
Intangible Asset Class
|
Amount
|
Weighted-Average
Amortization Period
|
||||||
|
Nuclear
Regulatory Commission (“NRC”) category 1 license
|
$ | 42,370 | 30 | |||||
|
Customer
relationship
|
11,360 | 17 | ||||||
|
Backlog
|
7,740 | 3 | ||||||
|
Unpatented
technology
|
5,600 | 10 | ||||||
|
Patented
technology
|
4,060 | 5 | ||||||
|
Tradenames
|
2,050 | 12 | ||||||
|
Non-compete
agreements
|
3,360 | 5 | ||||||
| $ | 76,540 | 21 | ||||||
None of
these acquired intangible assets have any residual value. See Note 2
for additional details on these acquired intangible assets.
During
the year ended December 31, 2008, we also acquired an indefinite life intangible
asset of $6,090 related to Nuclear Fuel Services, Inc. tradename.
Other
assets include the following other intangible assets:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Amortized
intangible assets:
|
||||||||||||
|
Gross
cost:
|
||||||||||||
|
NRC
category 1 license
|
$ | 42,370 | $ | - | $ | - | ||||||
|
Customer
relationships
|
36,357 | 31,927 | - | |||||||||
|
Acquired
backlog
|
17,280 | 9,540 | - | |||||||||
|
Tradenames
|
3,820 | 1,770 | - | |||||||||
|
Unpatented
technology
|
5,600 | - | - | |||||||||
|
Patented
technology
|
4,060 | - | - | |||||||||
|
All
other
|
10,983 | 7,737 | 9,886 | |||||||||
|
Total
|
$ | 120,470 | $ | 50,974 | $ | 9,886 | ||||||
|
Accumulated
amortization:
|
||||||||||||
|
Customer
relationships
|
$ | (5,427 | ) | $ | (2,578 | ) | $ | - | ||||
|
Acquired
backlog
|
(3,407 | ) | (1,363 | ) | - | |||||||
|
Tradenames
|
(683 | ) | (236 | ) | - | |||||||
|
Unpatented
technology
|
(277 | ) | - | - | ||||||||
|
All
other
|
(4,458 | ) | (3,994 | ) | (5,586 | ) | ||||||
|
Total
|
$ | (14,252 | ) | $ | (8,171 | ) | $ | (5,586 | ) | |||
|
Net
amortized intangible assets
|
$ | 106,218 | $ | 42,803 | $ | 4,300 | ||||||
|
Unamortized
intangible assets:
|
||||||||||||
|
Trademarks
and tradenames
|
$ | 7,395 | $ | 1,305 | $ | 1,305 | ||||||
The
following summarizes the changes in the carrying amount of other intangible
assets:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 44,108 | $ | 5,605 | $ | - | ||||||
|
Reconsolidation
of B&W PGG
|
- | - | 6,071 | |||||||||
|
Business
acquisitions (Note 2)
|
76,260 | 43,030 | - | |||||||||
|
Amortization
expense
|
(6,448 | ) | (4,735 | ) | (466 | ) | ||||||
|
Currency
translation adjustments
|
(307 | ) | 208 | - | ||||||||
|
Balance
at end of period
|
$ | 113,613 | $ | 44,108 | $ | 5,605 | ||||||
The
estimated amortization expense for the next five fiscal years are as
follows:
|
Year Ending December 31,
|
Amount
|
|||
|
2009
|
$ | 11,723 | ||
|
2010
|
$ | 11,076 | ||
|
2011
|
$ | 10,907 | ||
|
2012
|
$ | 5,955 | ||
|
2013
|
$ | 5,837 | ||
Other
Non-Current Assets
We have
included deferred debt issuance costs in other assets. We amortize
deferred debt issuance cost as interest expense over the life of the related
debt. Following are the changes in the carrying amount of these
assets:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of period
|
$ | 14,511 | $ | 19,798 | $ | 11,614 | ||||||
|
Additions
|
1,756 | 3,625 | 10,170 | |||||||||
|
Reconsolidation
of B&W PGG
|
- | - | 9,873 | |||||||||
|
Terminations
and retirements
|
- | - | (7,865 | ) | ||||||||
|
Interest
expense – debt issuance costs
|
(4,667 | ) | (8,912 | ) | (3,994 | ) | ||||||
|
Balance
at end of period
|
$ | 11,600 | $ | 14,511 | $ | 19,798 | ||||||
For the
years ended December 31, 2008 and 2006, additions are deferred debt issuance
costs related to our Offshore Oil and Gas Construction segment and performance
guarantees. For the year ended December 31, 2007, additions are
deferred debt issuance costs related to amendments to the credit facilities of
our Power Generation Systems segment ($2.1 million) and our Offshore Oil and Gas
Construction segment ($1.5 million).
Capitalization
of Interest Cost
We
capitalize interest in accordance with SFAS No. 34, Capitalization of Interest
Cost. We incurred total interest of $15.3 million, $28.5
million and $33.4 million in the years ended December 31, 2008, 2007 and 2006,
respectively, of which we capitalized $7.9 million, $6.0 million and $3.1
million in the years ended December 31, 2008, 2007 and 2006,
respectively.
Restricted
Cash and Cash Equivalents
We record
current cash and cash equivalents as restricted when we are unable to freely use
such cash and cash equivalents for our general operating purposes.
Our cash
equivalents are highly liquid investments, with maturities of three months or
less when we purchase them, which we do not hold as part of our investment
portfolio.
At
December 31, 2008, we had total restricted cash and cash equivalents of $50.5
million. The restricted cash and cash equivalents include the
following: $1.2 million, which is required to meet reinsurance
reserve requirements of our captive insurance companies, and $49.3 million,
which is held in restricted foreign accounts.
Derivative
Financial Instruments
Our
worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments to
reduce the impact of changes in foreign exchange rates on our operating
results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts that are
denominated in currencies other than our operating entities’ functional
currencies. We record these contracts at fair value on our
consolidated balance sheet. Depending on the hedge designation at the
inception of the contract, the related gains and losses on these contracts are
either deferred in stockholders’ equity (deficit) (as a component of accumulated
other comprehensive loss) until the hedged item is recognized in earnings or
offset against the change in fair value of the hedged firm commitment through
earnings. Any ineffective portion of a derivative’s change in fair
value is immediately recognized in earnings. The gain or loss on a
derivative financial instrument not designated as a hedging instrument is also
immediately recognized in earnings. Gains and losses on derivative
financial instruments that require immediate recognition are included as a
component of other income (expense) – net in our consolidated statements of
income.
Self-Insurance
We have
several wholly owned insurance subsidiaries that provide employer’s liability,
general and automotive liability and workers’ compensation insurance and, from
time to time, builder’s risk insurance (within certain limits) and marine hull
insurance to our companies. We may also, in the future, have these insurance
subsidiaries accept other risks that we cannot or do not wish to transfer to
outside insurance companies. Reserves related to these insurance
programs are based on the facts and circumstances specific to the insurance
claims, our past experience with similar claims, loss factors and the
performance of the outside insurance market for the type of risk at issue. The
actual outcome of insured claims could differ significantly from estimated
amounts. We maintain actuarially determined accruals in our consolidated balance
sheets to cover self-insurance retentions for these coverages. These accruals
are based on assumptions developed utilizing historical data to project future
losses. Loss estimates in the calculation of these accruals are adjusted as
required based upon actual claim settlements and reported claims. These loss
estimates and accruals recorded in our financial statements for claims have
historically been reasonable in light of the actual amount of claims
paid.
Loss
Contingencies
We
estimate liabilities for loss contingencies when it is probable that a liability
has been incurred and the amount of loss is reasonably estimable. We
provide disclosure when there is a reasonable possibility that the ultimate loss
will exceed the recorded provision or if such loss is not reasonably
estimable. We are currently involved in some significant litigation,
as discussed in Note 11. We have accrued our estimates of the
probable losses associated with these matters. However, our losses
are typically resolved over long periods of time and are often difficult to
estimate due to various factors, including the possibility of multiple actions
by third parties. Therefore, it is possible future earnings could be affected by
changes in our estimates related to these matters.
Stock-Based
Compensation
We
expense stock-based compensation in accordance with SFAS No. 123, Share-Based Payment (“SFAS
No. 123(R)”). Under SFAS No. 123(R), the fair value of
equity-classified awards, such as restricted stock, performance shares and stock
options, is determined on the date of grant and is not
remeasured. Grant date fair values for restricted stock and
performance shares are determined using the closing price of our common stock on
the date of grant. Grant date fair values for stock options are
determined using the Black-Scholes option-pricing model
(“Black-Scholes”). The determination of the fair value of a
share-based payment award on the date of grant using an option-pricing model
requires the input of highly subjective assumptions, such as the expected life
of the award and stock price volatility. For liability-classified
awards, such as cash-settled deferred stock units and performance units, fair
values are determined at grant date using the closing price of our common stock
and are remeasured at the end of each reporting period through the date of
settlement.
Under the
provisions of SFAS No. 123(R), we recognize expense based on the grant date fair
value, net of an estimated forfeiture rate, for all share-based awards granted
on a straight-line basis over the requisite service periods of the awards, which
is generally equivalent to the vesting term. SFAS No. 123(R) requires
compensation expense to be recognized, net of an estimate for forfeitures, such
that compensation expense is recorded only for those awards expected to
vest. We will review the estimate for forfeitures periodically and
record any adjustments deemed necessary for each reporting period. If
our actual forfeiture rate is materially different from our estimate, the
stock-based compensation expense could be significantly different from what we
have recorded in the current period.
Additionally,
SFAS No. 123(R) amended SFAS No. 95, Statement of Cash Flows, to
require excess tax benefits to be reported as a financing cash flow, rather than
as a reduction of taxes paid. These excess tax benefits result from
tax deductions in excess of the cumulative compensation expense recognized for
options exercised and other equity-classified awards.
See Note
10 for further discussion on stock-based compensation.
Recently
Adopted Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which is intended to increase consistency and comparability in fair value
measurements by defining fair value, establishing a framework for measuring fair
value and expanding disclosures about fair value measurements. SFAS
No. 157 applies to other accounting pronouncements that require or permit fair
value measurements and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. On January 1, 2008, we adopted the provisions of SFAS No. 157
for our measurement of the fair value of financial instruments and recurring
fair value measurements of nonfinancial assets and liabilities. The
adoption of these provisions did not have a material impact on our consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115. SFAS No. 159 permits companies to choose to measure
certain financial assets and certain other items at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS No. 159 became
effective for us on January 1, 2008. We did not elect the fair value
option for any of our existing financial instruments on the effective date and
have not determined whether or not we will elect the option for any eligible
financial instruments we acquire in the future.
In
February 2008, the FASB issued: (1) FASB Staff Position (“FSP”) 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement Under Statement 13, which removes certain leasing
transactions from the scope of SFAS No. 157 and was effective upon the initial
adoption of SFAS No. 157; and (2) FSP 157-2, Effective Date of FASB Statement
No. 157, which defers the effective date of SFAS No. 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis. We do not expect FSP 157-1 and FSP 157-2 to have a
material impact on our consolidated financial statements.
In
October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. This FSP
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with SFAS No. 157 and
was effective upon issuance. FSP 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that asset is not active. We do not expect FSP 157-3 to have
a material impact on our consolidated financial statements.
SFAS No.
157 establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when
available. The majority of our investments have observable inputs and
are included in the first and second level of the hierarchy. We have
one investment included in the third level of the hierarchy, as pricing of some
of the underlying securities cannot be obtained through either direct quotes or
through quotes from independent pricing vendors. Instead, the
investment is priced using estimates based upon similar securities with
observable pricing data.
Our
derivative financial instruments consist primarily of foreign currency forward
contracts. Fair value is derived using valuation models that take into account
the contract terms, such as maturity, as well as other inputs, such as exchange
rates, foreign currency forward curves and creditworthiness of the counterparty.
The data sources utilized in these valuation models that are significant to the
fair value measurement are in the second level of the hierarchy of the fair
value hierarchy.
New
Accounting Standards
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles in the United States. This
Statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” We do not expect SFAS No. 162 to have a material impact on our
consolidated financial statements.
In
April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
Intangible Assets. FSP 142-3 requires companies estimating the useful
life of a recognized intangible asset to consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, to consider assumptions that market participants would use about
renewals or extensions as adjusted for the entity-specific factors in SFAS
No. 142, Goodwill and
Other Intangible Assets. FSP 142-3 became effective for us
January 1, 2009, and we do not expect FSP 142-3 to have a material impact
on our consolidated financial statements.
In
March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities— an amendment of FASB Statement
No. 133. SFAS No. 161 requires enhanced disclosures about
derivative and hedging activities and is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008. SFAS No. 161 became effective for us January 1,
2009. We do not expect SFAS No. 161 to have a material impact on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No.
51. SFAS No. 160 establishes accounting and reporting
standards pertaining to ownership interests in subsidiaries held by parties
other than the parent, the amount of net income attributable to the parent and
to the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of any retained noncontrolling equity investment when a subsidiary is
deconsolidated. It also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 became effective
for us January 1, 2009, and we do not expect it to have a material effect on our
consolidated financial statements, although we will be required to comply with
the additional disclosure requirements set forth in the statement.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
No. 141(R)”), which amends SFAS No. 141, Business
Combinations. SFAS No. 141(R) broadens the guidance of SFAS
No. 141, extending its applicability to all transactions and events in which one
entity obtains control over one or more other businesses. It broadens
the fair value measurements and recognition of assets acquired, liability
assumed and interests transferred as a result of business
combinations. It also provides disclosure requirements to enable
users of the financial statements to evaluate the nature and financial effects
of business combinations. SFAS No. 141(R) became effective for us
January 1, 2009, and we do not expect SFAS No. 141(R) to have a material impact
on our consolidated financial statements.
NOTE
2 – BUSINESS ACQUISITIONS
Nuclear
Fuel Services, Inc.
On
December 31, 2008, a B&W subsidiary completed its acquisition of Nuclear
Fuel Services, Inc. (“NFS”) for $157.1 million, net of cash
acquired. NFS is a provider of specialty nuclear fuels and related
services and is a leader in the conversion of Cold War-era government stockpiles
of highly enriched uranium into commercial-grade nuclear reactor fuel. NFS
also owns and operates a nuclear fuel fabrication facility licensed by the U.S.
Nuclear Regulatory Commission in Erwin, Tennessee and has approximately 700
employees. In connection with the acquisition of NFS, we recorded goodwill
of $123.5 million, none of which will be deductible for tax
purposes. We also recorded other intangible assets of $63.4
million. Those intangible assets consist of the following (dollar
amounts in thousands):
|
Amortization
|
|||||
|
Amount
|
Period
|
||||
|
NRC
category 1 license
|
$ | 42,370 |
30
years
|
||
|
Backlog
|
$ | 7,740 |
3
years
|
||
|
Tradename
|
$ | 6,090 |
Indefinite
|
||
|
Patented
technology
|
$ | 4,060 |
5
years
|
||
|
Non-compete
agreement
|
$ | 3,120 |
5
years
|
||
Due to
the timing of the acquisition, we are still in the process of reviewing and
analyzing all information, and we expect the purchase price allocation will
change during the year ending December 31, 2009.
The
Intech Group of Companies
On July 15, 2008, certain B&W
subsidiaries completed their acquisition of the Intech group of companies
(“Intech”) for $20.2 million. Intech consists of Intech, Inc.,
Ivey-Cooper Services, L.L.C. and Intech International Inc. Intech,
Inc. provides nuclear inspection and maintenance services, primarily for the
U.S. market. Ivey-Cooper Services, L.L.C. provides non-destructive
inspection services to fossil-fueled power plants, as well as chemical, pulp and
paper, and heavy fabrication facilities. Intech International Inc.
provides non-destructive testing, field engineering and repair and specialized
tooling services, primarily for the Canadian nuclear power generation
industry. In connection with the acquisition of Intech, we recorded
goodwill of $8.2 million. We also recorded other intangible assets of
$10.0 million. Those intangible assets consist of the following
(dollar amounts in thousands):
|
Amortization
|
|||||
|
Amount
|
Period
|
||||
|
Unpatented
technology
|
$ | 5,600 |
10
years
|
||
|
Customer
relationships
|
$ | 2,600 |
10
years
|
||
|
Tradename
|
$ | 1,800 |
10
years
|
||
Delta
Power Services, LLC
On August
1, 2008, a B&W subsidiary completed its acquisition of Delta Power Services,
LLC (“DPS”) for $13.5 million. DPS is a provider of operation and
maintenance services for the U.S. power generation
industry. Headquartered in Houston, Texas, DPS has approximately 200
employees at nine gas, biomass or coal-fired power plants in Virginia,
California, Texas, Florida, Michigan and Massachusetts. In connection
with the acquisition of DPS, we recorded goodwill of $3.7 million. We
also recorded other intangible assets of $9.3 million. Those
intangible assets consist of the following (dollar amounts in
thousands):
|
Amortization
|
|||||
|
Amount
|
Period
|
||||
|
Customer
relationships
|
$ | 8,760 |
1.4-20
years
|
||
|
Tradename
|
$ | 250 |
25
years
|
||
|
Non-compete
agreement
|
$ | 240 |
3
years
|
||
Marine
Mechanical Corporation
On May 1, 2007, our Government
Operations segment completed its acquisition of Marine Mechanical Corporation
(“MMC”) for $71.5 million in cash. We recorded goodwill of $39.0
million in connection with this acquisition, none of which will be deductible
for tax purposes. Headquartered in Euclid, Ohio, MMC designs,
manufactures and supplies electro-mechanical equipment used by the U.S.
Navy. In addition to the goodwill, we recorded identifiable
intangible assets of $31.1 million. Those intangible assets consist
of the following (amounts in thousands):
|
Amortization
|
|||||
|
Amount
|
Period
|
||||
|
Customer
relationships
|
$ | 19,790 |
20.0
years
|
||
|
Backlog
|
$ | 9,540 |
4.7
years
|
||
|
Tradename
|
$ | 1,770 |
5.0
years
|
||
Secunda
International Limited
On July
27, 2007, our Offshore Oil and Gas Construction segment completed its
acquisition of substantially all of the assets of Secunda International Limited,
including 14 harsh-weather, multi-functional vessels, with capabilities which
include subsea construction, pipelay, cable lay and dive support, as well as its
shore-based operations, for $263.0 million in cash. We recorded
goodwill of $35.4 million in connection with this acquisition, including a $6.4
million adjustment recorded during the year ended December 31,
2008. None of the goodwill will be deductible for tax
purposes. In addition to the goodwill, we recorded identifiable
intangible assets of approximately $5.6 million related to contractual customer
relationships.
NOTE
3 – DISCONTINUED OPERATIONS
In April
2006, we completed the sale of our Mexican subsidiary, Talleres Navales del
Golfo, S.A. de C.V. (“TNG”), previously a component of our Offshore Oil and Gas
Construction segment. As a result of that sale, we received proceeds
of $19.5 million and recorded a gain of $13.8 million. The gain is
included in discontinued operations in our consolidated statement of income for
the year ended December 31, 2006.
Condensed
financial information for our operations reported in discontinued operations for
the year ended December 31, 2006 was as follows (in thousands):
|
Revenues
|
$ | 4,466 | ||
|
Loss
before Provision for Income Taxes
|
$ | (802 | ) |
NOTE
4 – EQUITY METHOD INVESTMENTS
We have
investments in entities that we account for using the equity
method. The undistributed earnings of our equity method investees
were $37.6 million and $33.5 million at December 31, 2008 and 2007,
respectively.
Summarized
below is combined balance sheet and income statement information, based on the
most recent financial information, for investments in entities we accounted for
using the equity method:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Current
Assets
|
$ | 266,220 | $ | 228,213 | ||||
|
Noncurrent
assets
|
138,569 | 117,400 | ||||||
|
Total
Assets
|
$ | 404,789 | $ | 345,613 | ||||
|
Current
Liabilities
|
$ | 159,369 | $ | 121,244 | ||||
|
Noncurrent
Liabilities
|
73,855 | 82,418 | ||||||
|
Owners’
Equity
|
171,565 | 141,951 | ||||||
|
Total
Liabilities and Owners’ Equity
|
$ | 404,789 | $ | 345,613 | ||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Revenues
|
$ | 2,089,280 | $ | 1,889,273 | $ | 1,829,688 | ||||||
|
Gross
Profit
|
$ | 182,507 | $ | 152,063 | $ | 138,312 | ||||||
|
Income
before Provision for Income Taxes
|
$ | 132,407 | $ | 114,551 | $ | 101,743 | ||||||
|
Provision
for Income Taxes
|
15,947 | 15,916 | 10,732 | |||||||||
|
Net
Income
|
$ | 116,460 | $ | 98,635 | $ | 91,011 | ||||||
Revenues
of equity method investees include $1,584.6 million, $1,519.9 million and
$1,403.4 million of reimbursable costs recorded by limited liability companies
in our Government Operations segment at December 31, 2008, 2007 and 2006,
respectively. Our investment in equity method investees was less than
our underlying equity in net assets of those investees based on stated ownership
percentages by $4.8 million at December 31, 2008. These differences
were primarily related to the timing of distribution of dividends and various
adjustments under U.S. GAAP.
The
provision for income taxes is based on the tax laws and rates in the countries
in which our investees operate. There is no expected relationship
between the provision for income taxes and income before provision for
income
taxes. The
taxation regimes vary not only by their nominal rates, but also by the
allowability of deductions, credits and other benefits. For some of our U.S.
investees, U.S. income taxes are the responsibility of the respective
owners.
Reconciliation
of net income per combined income statement information to equity in income from
investees per our consolidated statements of income is as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Equity
income based on stated ownership percentages
|
$ | 53,025 | $ | 46,966 | $ | 42,366 | ||||||
|
Impairment
of investment
|
- | - | (2,609 | ) | ||||||||
|
All
other adjustments due to amortization of basis differences, timing of GAAP
adjustments and other adjustments
|
(4,894 | ) | (5,242 | ) | (2,233 | ) | ||||||
|
Equity
in income from investees
|
$ | 48,131 | $ | 41,724 | $ | 37,524 | ||||||
Our
transactions with unconsolidated affiliates include the following:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Sales
to
|
$ | 23,196 | $ | 9,750 | $ | 48,407 | ||||||
|
Purchases
from
|
$ | 39,963 | $ | 42,686 | $ | 31,602 | ||||||
|
Leasing
activities (included in sales to)
|
$ | - | $ | - | $ | 36,020 | ||||||
|
Dividends
received
|
$ | 49,676 | $ | 41,844 | $ | 39,072 | ||||||
During
the year ended December 31, 2006, we leased certain marine equipment to an
unconsolidated affiliate, and we disposed of our interest in that unconsolidated
affiliate. We sold the vessel DB17 to that unconsolidated affiliate
during the year ended December 31, 2004. However, we deferred
recognition of the gain on that sale until the receivables were
settled. Such settlement occurred during the year ended December 31,
2007, and we recognized the gain on sale of approximately $5.4
million.
Effective
January 1, 2006, we converted the accounting for our investment in Babcock &
Wilcox Beijing Company, Ltd., a Chinese entity, from the cost method to the
equity method. As a result of this conversion, we recorded
adjustments to retained earnings of $7.0 million and to cumulative translation
adjustment of $0.2 million at January 1, 2006. For the years ended
December 31, 2008, 2007 and 2006, we recognized $5.7 million, $10.3 million and
$8.3 million, respectively, of equity income related to this
entity.
NOTE
5 – INCOME TAXES
We
provide for income taxes based on the tax laws and rates in the countries in
which we conduct our operations. MII is a Panamanian corporation that has earned
all of its income outside of Panama. As a result, we are not subject to income
tax in Panama. We operate in the U.S. taxing jurisdiction and various other
taxing jurisdictions around the world. Each of these jurisdictions has a regime
of taxation that varies from the others. The taxation regimes vary not only with
respect to nominal rates, but also with respect to the basis on which these
rates are applied. These variances, along with variances in our mix of income
from these jurisdictions, contribute to shifts in our effective tax
rate.
On
December 31, 2006, we completed a reorganization of our U.S. tax groups into a
single consolidated U.S. tax group. This reorganization provides us
with administrative efficiencies, the opportunity to increase the flexibility of
our financial structure and returns us to a more tax-efficient legal
structure. Beginning January 1, 2007, the results of the former separate
U.S. tax groups are consolidated.
On
December 10, 2008, we reached an agreement with the Joint Committee on Taxation
closing out the McDermott group’s audit for the years 1993 through 2000 and J.
Ray’s tax years 1996 through 2003. The IRS has also audited the years
2001 and 2003 for the McDermott group, and these years are awaiting review by
the Joint Committee. The IRS has also commenced an examination for
the years 2004 through 2006 for the McDermott group. We anticipate
all of the current federal audit activity will be resolved in the next 12
months.
We
conduct business globally, and as a result, we or one or more of our
subsidiaries file income tax returns in the U.S. federal jurisdiction and in
many state and foreign jurisdictions. In the normal course of
business, we are subject to examination by taxing authorities throughout the
world, including such major jurisdictions as Canada,
Indonesia,
Malaysia, China, Singapore, Saudi Arabia, Kuwait, India, Qatar, Azerbaijan and
the United States. With few exceptions, we are no longer subject to
non-U.S. tax examinations for years prior to 2006.
State
income tax returns are generally subject to examination for a period of three to
five years after filing the respective returns. With few exceptions,
we do not have any state returns under examination for years prior to
2002.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). As a result of this adoption, we recognized
a charge of approximately $12.0 million to our accumulated deficit component of
stockholders’ equity at January 1, 2007. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (amounts
in millions):
|
Balance
at December 31, 2007
|
$ | 64,810 | ||
|
Increases
based on tax positions taken in the current year
|
13,575 | |||
|
Increases
based on tax positions taken in the prior years
|
704 | |||
|
Decreases
based on tax positions taken in the prior years
|
(6,166 | ) | ||
|
Decreases
due to settlements with tax authorities
|
(15,027 | ) | ||
|
Decreases
due to lapse of applicable statute of limitations
|
(412 | ) | ||
|
Balance
at December 31, 2008
|
$ | 57,484 |
Approximately
$56.4 million of the balance of unrecognized tax benefits at December 31, 2008
would reduce our effective tax rate if recognized. The
remaining balance relates to positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an earlier
period.
As part
of the adoption of FIN 48, we began to recognize interest and penalties related
to unrecognized tax benefits in income tax expense. At January 1,
2007, we recorded liabilities of approximately $27.3 million for the payment of
tax-related interest and penalties. At December 31, 2008 and 2007, we
recorded liabilities of approximately $15.7 million and $20.4 million,
respectively, for the payment of tax-related interest and
penalties. The $4.7 million change during the year ended December 31,
2008 was attributable to the settlement of certain audits and the reassessment
of related tax positions. The $6.9 million change during the year
ended December 31, 2007 was attributable to the reassessment of certain tax
positions from the U.S. federal audits, as well as payment of interest to the
state of Virginia from a prior audit settlement.
Deferred
income taxes reflect the net tax effects of temporary differences between the
financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of December 31, 2008 and
2007 were as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Pension
liability
|
$ | 225,514 | $ | 93,393 | ||||
|
Accrued
liabilities for self-insurance
(including
postretirement health care benefits)
|
54,674 | 52,057 | ||||||
|
Accrued
liabilities for executive and employee incentive
compensation
|
50,736 | 62,733 | ||||||
|
Net
operating loss carryforward
|
49,406 | 20,007 | ||||||
|
Accrued
warranty expense
|
44,662 | 36,318 | ||||||
|
State
tax net operating loss carryforward
|
43,878 | 67,473 | ||||||
|
Environmental
and products liabilities
|
31,674 | 29,068 | ||||||
|
Minimum
tax credit carryforward
|
28,591 | 26,536 | ||||||
|
Foreign
tax credit carryforward
|
19,178 | 18,583 | ||||||
|
Long-term
contracts
|
17,445 | 16,459 | ||||||
|
Accrued
vacation pay
|
13,118 | 11,209 | ||||||
|
Investments
in joint ventures and affiliated companies
|
2,618 | 1,667 | ||||||
|
Accrued
interest
|
- | 1,602 | ||||||
|
Other
|
21,779 | 15,290 | ||||||
|
Total
deferred tax assets
|
603,273 | 452,395 | ||||||
|
Valuation
allowance for deferred tax assets
|
(78,249 | ) | (100,617 | ) | ||||
|
Deferred
tax assets
|
525,024 | 351,778 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property,
plant and equipment
|
38,024 | 27,430 | ||||||
|
Intangibles
|
35,325 | 15,183 | ||||||
|
Prepaid
drydock
|
13,102 | 9,832 | ||||||
|
Investments
in joint ventures and affiliated companies
|
5,633 | 7,883 | ||||||
|
Other
|
7,149 | 7,146 | ||||||
|
Total
deferred tax liabilities
|
99,233 | 67,474 | ||||||
|
Net
deferred tax assets
|
$ | 425,791 | $ | 284,304 | ||||
Income
from continuing operations before provision for income taxes was as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
U.S.
|
$ | 346,447 | $ | 266,984 | $ | 89,910 | ||||||
|
Other
than U.S.
|
240,667 | 478,481 | 262,906 | |||||||||
|
Income
from continuing operations before provision for income
taxes
|
$ | 587,114 | $ | 745,465 | $ | 352,816 | ||||||
The
provision for income taxes consisted of:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
U.S.
– Federal
|
$ | 29,498 | $ | (16,872 | ) | $ | (207,675 | ) | ||||
|
U.S.
– State and local
|
15,482 | 6,621 | 12,829 | |||||||||
|
Other
than U.S.
|
77,769 | 58,264 | 50,574 | |||||||||
|
Total
current
|
122,749 | 48,013 | (144,272 | ) | ||||||||
|
Deferred:
|
||||||||||||
|
U.S.
– Federal
|
58,833 | 93,815 | 186,721 | |||||||||
|
U.S.
– State and local
|
(29,530 | ) | 687 | (321 | ) | |||||||
|
Other
than U.S.
|
5,760 | (4,878 | ) | (6,933 | ) | |||||||
|
Total
deferred
|
35,063 | 89,624 | 179,467 | |||||||||
|
Provision
for income taxes
|
$ | 157,812 | $ | 137,637 | $ | 35,195 | ||||||
The
following is a reconciliation of the U.S. statutory federal tax rate (35%) to
the consolidated effective tax rate:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
U.S.
federal statutory (benefit) rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
and local income taxes
|
2.6 | 0.8 | 2.1 | |||||||||
|
Non-U.S.
operations
|
(6.8 | ) | (13.7 | ) | (9.4 | ) | ||||||
|
Valuation
allowance for deferred tax assets
|
0.2 | (2.0 | ) | (22.8 | ) | |||||||
|
Audit
settlements
|
(3.7 | ) | - | - | ||||||||
|
Expiration
of foreign tax credits
|
- | - | 3.0 | |||||||||
|
Other
|
(0.4 | ) | (1.6 | ) | 2.1 | |||||||
|
Effective
tax rate attributable to continuing operations
|
26.9 | % | 18.5 | % | 10.0 | % | ||||||
For the
year ended December 31, 2006, we reduced the valuation allowance $78.1 million
on various deferred assets and recorded a benefit to the provision as a result
of the reorganization of our U.S. legal entities.
At
December 31, 2008, we had a valuation allowance of $78.2 million for
deferred tax assets, which we expect cannot be realized through carrybacks,
future reversals of existing taxable temporary differences and our estimate of
future taxable income. We believe that our remaining deferred tax assets are
more likely than not realizable through carrybacks, future reversals of existing
taxable temporary differences and our estimate of future taxable income. Any
changes to our estimated valuation allowance could be material to our
consolidated financial statements.
We have
foreign net operating loss carryforwards of approximately $147.8 million
available to offset future taxable income in foreign jurisdictions.
Approximately $79.1 million of the foreign net operating loss carryforwards
is scheduled to expire in 2009 to 2011. The foreign net operating losses have a
valuation allowance of $43.8 million against the related deferred taxes. We have
U.S. federal net operating loss carryforwards of approximately
$7.0 million, which carry a $1.4 million valuation allowance. These net
operating loss carryforwards are scheduled to expire in years 2009 to 2027. We
have state net operating losses of $1,034.5 million available to offset
future taxable income in various states. The state net operating loss
carryforwards begin to expire in the year 2009. We are carrying a valuation
allowance of $25.8 million against the deferred tax asset related to the state
loss carryforwards.
We would
be subject to withholding taxes if we were to distribute earnings from our U.S.
subsidiaries and certain foreign subsidiaries. For the year ended
December 31, 2008, the undistributed earnings of these subsidiaries were
$441.7 million. Unrecognized deferred income tax liabilities, including
withholding taxes, of approximately $130.4 million
would be payable upon distribution of these earnings. We have provided $3.1
million of taxes on earnings we intend to remit. All other earnings
are considered permanently reinvested.
NOTE
6 – LONG-TERM DEBT AND NOTES PAYABLE
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Long-term
debt consists of:
|
||||||||
|
Unsecured
Debt:
|
||||||||
|
Other
notes payable through 2012 (interest at various rates up to
6.8%)
|
$ | 11,548 | $ | 14,824 | ||||
|
Secured
Debt:
|
||||||||
|
Power
Generation Systems – various notes payable
|
1,945 | 2,384 | ||||||
|
Capitalized
lease obligations
|
177 | - | ||||||
| 13,670 | 17,208 | |||||||
|
Less: Amounts
due within one year
|
7,561 | 6,599 | ||||||
|
Long-term
debt
|
$ | 6,109 | $ | 10,609 | ||||
|
Notes
payable and current maturities of long-term debt consist
of:
|
||||||||
|
Short-term
lines of credit
|
$ | 1,460 | $ | - | ||||
|
Current
maturities of long-term debt
|
7,561 | 6,599 | ||||||
|
Total
|
$ | 9,021 | $ | 6,599 | ||||
|
Weighted
average interest rate on short-term borrowing
|
7.2 | % | - | |||||
Maturities
of long-term debt during the five years subsequent to December 31, 2008 are as
follows: 2009 – $7.6 million; 2010 – $0.6 million; 2011 – $0.4 million; 2012 –
$4.4 million; and 2013 – $0.2 million.
Offshore
Oil and Gas Construction
Credit
Facility
On June
6, 2006, our subsidiary, J. Ray McDermott, S.A., entered into a senior secured
credit facility with a syndicate of lenders (the “JRMSA Credit
Facility”). As amended to date, the JRMSA Credit Facility provides
for borrowings and issuances of letters of credit in an aggregate amount of up
to $800 million and matures on June 6, 2011. The proceeds of the
JRMSA Credit Facility are available for working capital needs and other general
corporate purposes of our Offshore Oil and Gas Construction
segment.
JRMSA’s
obligations under the JRMSA Credit Facility are unconditionally guaranteed by
substantially all of our wholly owned subsidiaries comprising our Offshore Oil
and Gas Construction segment and secured by liens on substantially all the
assets of those subsidiaries (other than cash, cash equivalents, equipment and
certain foreign assets), including their major marine vessels.
Other
than customary mandatory prepayments on certain contingent events, the JRMSA
Credit Facility requires only interest payments on a quarterly basis until
maturity. JRMSA is permitted to prepay amounts outstanding under the
JRMSA Credit Facility at any time without penalty.
Loans
outstanding under the JRMSA Credit Facility bear interest at either the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. The
applicable margin for revolving loans varies depending on credit ratings of the
JRMSA Credit Facility. JRMSA is charged a commitment fee on the
unused portions of the JRMSA Credit Facility, and that fee varies between 0.25%
and 0.375% per year depending on credit ratings of the JRMSA Credit
Facility. Additionally, JRMSA is charged a letter of credit fee of
between 1.00% and 1.75% per year with respect to the amount of each letter of
credit issued under the JRMSA Credit Facility depending on credit ratings of the
JRMSA Credit Facility. An additional 0.125% annual fee is charged on
the amount of each letter of credit issued under the JRMSA Credit
Facility.
The JRMSA
Credit Facility contains customary financial covenants relating to leverage and
interest coverage and includes covenants that restrict, among other things, debt
incurrence, liens, investments, acquisitions, asset dispositions, dividends,
prepayments of subordinated debt, mergers, transactions with affiliates and
capital expenditures. The capital expenditure annual limits allow us
to roll forward unspent limit amounts from one year to the
next. However, the amount rolled forward must be spent entirely in
the subsequent year and may not be rolled forward again to
future
years. At
December 31, 2008, JRMSA was in compliance with all of the covenants set forth
in the JRMSA Credit Facility.
At
December 31, 2008, there were no borrowings outstanding and letters of credit
issued under the JRMSA Credit Facility totaled $282.9 million. At December 31,
2008, there was $517.1 million available for borrowings or to meet letter of
credit requirements under the JRMSA Credit Facility. If there had
been borrowings under this facility, the applicable interest rate at December
31, 2008 would have been 3.75% per year. In addition, JRMSA and its
subsidiaries had $288.3 million in outstanding unsecured letters of credit and
bank guarantees under separate arrangements with financial institutions at
December 31, 2008.
Unsecured
Performance Guarantee (Middle East Operations)
In
December 2005, JRMSA, as guarantor, and its subsidiary, J. Ray McDermott Middle
East, Inc. (“JRM Middle East”), entered into a $105.2 million unsecured
performance guarantee issuance facility with a syndicate of commercial banking
institutions to provide credit support for bank guarantees issued in connection
with three major projects. On February 3, 2008, JRM Middle East entered into a
new $88.8 million unsecured performance guarantee issuance facility to replace
the $105.2 million facility, which it terminated on February 14,
2008. The outstanding amount under the new facility is included in
the $288.3 million of outstanding letters of credit referenced
above. This new facility continues to provide credit support for bank
guarantees for the duration of the three projects. On an annualized basis, the
average commission rate of the new facility is less than 1.5%, compared to less
than 4.5% for the former facility. JRMSA is also a guarantor of the
new facility.
Surety
Bonds (Mexico Operations)
In 2007,
JRMSA executed a general agreement of indemnity in favor of a surety underwriter
based in Mexico relating to surety bonds that underwriter issued in support of
contracting activity of J. Ray McDermott de Mèxico, S.A. de C.V., a subsidiary
of JRMSA. As of December 31, 2008, bonds issued under this
arrangement totaled $3.3 million.
11%
Senior Secured Notes
On June
6, 2006, JRMSA completed a cash tender offer for all its outstanding 11% senior
secured notes due 2013 (the “Secured Notes”). The tender offer
consideration was based on a fixed-spread over specified U.S. Treasury
securities, which equated to an offer price of approximately 119% of the
principal amount of the notes. JRMSA used cash on hand to purchase
the entire $200 million in aggregate principal amount of the Secured Notes
outstanding for approximately $249.0 million, including accrued interest of
approximately $10.9 million. As a result of this early retirement of
debt, we recognized $49.0 million of expense during the year ended December 31,
2006.
Government
Operations
Credit
Facility
On
December 9, 2003, our subsidiary, BWX Technologies, Inc. (“BWXT”), entered into
a senior unsecured credit facility with a syndicate of lenders (the “BWXT Credit
Facility”), which is currently scheduled to mature March 18,
2010. This facility provides for borrowings and issuances of letters
of credit in an aggregate amount of up to $135 million. The proceeds of the BWXT
Credit Facility are available for working capital needs and other general
corporate purposes of our Government Operations segment.
The BWXT
Credit Facility only requires interest payments on a quarterly basis until
maturity. Amounts outstanding under the BWXT Credit Facility may be
prepaid at any time without penalty.
Loans
outstanding under the BWXT Credit Facility bear interest at either the
Eurodollar rate plus a margin ranging from 1.25% to 1.75% per year or the base
rate plus a margin ranging from 0.25% and 0.75% per year. The
applicable margin for revolving loans varies depending on the leverage ratio of
our Government Operations segment as of the last day of the preceding fiscal
quarter. BWXT is charged an annual commitment fee of 0.375%, which is
payable quarterly. Additionally, BWXT is charged a letter of credit
fee of between 1.25% and 1.75% per year with respect to
the
amount of each letter of credit issued, depending on the leverage ratio of our
Government Operations segment as of the last day of the preceding fiscal
quarter. An additional 0.125% per year fee is charged on the amount
of each letter of credit issued.
The BWXT
Credit Facility contains customary financial and nonfinancial covenants and
reporting requirements. The financial covenants require maintenance
of a maximum leverage ratio, a minimum fixed charge coverage ratio and a maximum
debt to capitalization ratio within our Government Operations
segment. At December 31, 2008, BWXT was in compliance with all of the
covenants set forth in the BWXT Credit Facility.
At
December 31, 2008, there were no borrowings outstanding and letters of credit
issued under the BWXT Credit Facility totaled $71.6 million. At
December 31, 2008, there was $63.4 million available for borrowings or to meet
letter of credit requirements under the BWXT Credit Facility. If
there had been borrowings under this facility, the applicable interest rate at
December 31, 2008 would have been 3.50% per year.
Letters
of Credit (Nuclear Fuel Services, Inc.)
At
December 31, 2008, Nuclear Fuel Services, Inc., a subsidiary of B&W, had
approximately $3.7 million in letters of credit issued by various commercial
banks on its behalf. The obligations to the commercial banks issuing
such letters of credit are secured by cash, short-term certificates of deposit
and certain real and intangible assets.
Power
Generation Systems
Credit
Facility
On
February 22, 2006, our subsidiary, Babcock & Wilcox Power Generation Group,
Inc., entered into a senior secured credit facility with a syndicate of lenders
(the “B&W PGG Credit Facility”). As amended to date, this facility provides
for borrowings and issuances of letters of credit in an aggregate amount of up
to $400 million and matures on February 22, 2011. The proceeds of the
B&W PGG Credit Facility are available for working capital needs and other
similar corporate purposes of our Power Generation Systems segment.
B&W
PGG’s obligations under the B&W PGG Credit Facility are unconditionally
guaranteed by all of our domestic subsidiaries included in our Power Generation
Systems segment and secured by liens on substantially all the assets of those
subsidiaries, excluding cash and cash equivalents.
The
B&W PGG Credit Facility only requires interest payments on a quarterly basis
until maturity. Amounts outstanding under the B&W PGG Credit
Facility may be prepaid at any time without penalty.
Loans
outstanding under the revolving credit subfacility bear interest at either the
Eurodollar rate plus a margin ranging from 1.00% to 1.75% per year or the base
rate plus a margin ranging from 0.00% to 0.75% per year. The
applicable margin for revolving loans varies depending on credit ratings of the
B&W PGG Credit Facility. B&W PGG is charged a commitment fee
on the unused portion of the B&W PGG Credit Facility, and that fee varies
between 0.25% and 0.375% per year depending on credit ratings of the B&W PGG
Credit Facility. Additionally, B&W PGG is charged a letter of
credit fee of between 1.00% and 1.75% per year with respect to the amount of
each letter of credit issued under the B&W PGG Credit
Facility. An additional 0.125% per year fee is charged on the amount
of each letter of credit issued under the B&W PGG Credit
Facility.
The
B&W PGG Credit Facility contains customary financial covenants, including
maintenance of a maximum leverage ratio and a minimum interest coverage ratio
within our Power Generation Systems segment and covenants that, among other
things, restrict the ability of this segment to incur debt, create liens, make
investments and acquisitions, sell assets, pay dividends, prepay subordinated
debt, merge with other entities, engage in transactions with affiliates and make
capital expenditures. The capital expenditure annual limits allow us
to roll forward unspent limit amounts from one year to the
next. However, the amount rolled forward must be spent entirely in
the subsequent year and may not be rolled forward again to future
years. At December 31, 2008, B&W PGG was in compliance with all
of the covenants set forth in the B&W PGG Credit Facility.
As of
December 31, 2008, there were no outstanding borrowings and letters of credit
issued under the B&W PGG Credit Facility totaled $189.8
million. At December 31, 2008, there was $210.2 million available
for
borrowings
or to meet letter of credit requirements under the B&W PGG Credit
Facility. If there had been borrowings under this facility, the
applicable interest rate at December 31, 2008 would have been 3.25% per
year.
Bank
Guarantees (Foreign Operations)
Certain
foreign subsidiaries of B&W PGG had credit arrangements with various
commercial banks for the issuance of bank guarantees. The aggregate
value of all such bank guarantees as of December 31, 2008 was $16.6
million.
Restricted
Net Assets
Certain
of our subsidiaries are restricted in their ability to transfer funds to
MII. Such restrictions principally arise from debt covenants,
insurance regulations, national currency controls and the existence of minority
shareholders. We refer to the proportionate share of net assets,
after intercompany eliminations, that may not be transferred to MII as a result
of these restrictions, as “restricted net assets.” At December 31,
2008, the restricted net assets of our consolidated subsidiaries were
approximately $768 million.
NOTE
7 – PENSION PLANS AND POSTRETIREMENT BENEFITS
We have
historically provided defined benefit retirement benefits, primarily through
noncontributory pension plans, for most of our regular employees. As
of 2006, our retirement plans for U.S.-based employees were closed to new
entrants for our Offshore Oil and Gas Construction segment and corporate office
and were closed to new salaried entrants for our Government Operations and Power
Generation Systems segments. Effective December 31, 2007, the
salaried retirement plan acquired with MMC in May 2007 was closed to new
entrants and benefit accruals were frozen for existing participants who were not
vested as of December 31, 2007. Effective October 31, 2008, the
salaried and hourly retirement plans acquired with MMC were merged into the
retirement plan for our Government Operations segment. Effective
December 31, 2008, we acquired the retirement plans and postretirement benefit
plans of NFS.
We do not
provide retirement benefits to certain non-resident alien employees of foreign
subsidiaries. Retirement benefits for salaried employees who accrue benefits in
a defined benefit plan are based on final average compensation and years of
service, while benefits for hourly paid employees are based on a flat benefit
rate and years of service. Our funding policy is to fund the plans as
recommended by the respective plan actuaries and in accordance with the Employee
Retirement Income Security Act of 1974, as amended, or other applicable law. The
Pension Protection Act of 2006 replaces the current funding provisions for
single-employer defined benefit plans. Funding provisions under the Pension
Protection Act accelerate funding requirements to ensure full funding of
benefits accrued. The Pension Protection Act became effective in 2008 and had no
impact on our consolidated financial condition or cash flows for 2008, and we do
not anticipate any material impact on our consolidated financial condition or
cash flows in the future as a result of this legislation.
Effective
December 31, 2007, we adopted the measurement date provision of SFAS No. 158,
Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, for our plans
that were not on a calendar year measurement. In accordance with this provision,
we recorded a reduction in retained earnings of $1.7 million, net of a related
tax benefit of $0.8 million.
Effective
December 31, 2006, we adopted the recognition and disclosure provisions of SFAS
No. 158. In accordance with SFAS No. 158, the funded status of our
defined benefit pension plans and postretirement plans has been recognized on
our consolidated balance sheets. The initial impact of the standard was to
recognize in accumulated other comprehensive loss all unrecognized prior service
costs and net actuarial gains and losses. Furthermore, additional minimum
pension liabilities and associated intangible assets required under previous
accounting rules were reversed.
We make
available other benefits which include postretirement health care and life
insurance benefits to certain salaried and union retirees based on their union
contracts. Certain subsidiaries provide these benefits to unionized and salaried
future retirees.
Obligations
and Funded Status
|
Pension
Benefits
Year
Ended
December
31,
|
Other
Benefits
Year
Ended
December
31,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Change
in benefit obligation:
|
||||||||||||||||
|
Benefit
obligation at beginning of period
|
$ | 2,605,717 | $ | 2,521,895 | $ | 103,570 | $ | 108,697 | ||||||||
|
Service
cost
|
37,707 | 37,766 | 282 | 331 | ||||||||||||
|
Interest
cost
|
153,787 | 149,329 | 5,567 | 5,993 | ||||||||||||
|
Measurement
date change
|
- | 4,203 | - | 189 | ||||||||||||
|
Acquisitions
|
94,082 | 24,830 | 45,080 | 1,681 | ||||||||||||
|
Plan
participants’ contributions
|
283 | 319 | - | - | ||||||||||||
|
Amendments
|
100 | (26,381 | ) | - | - | |||||||||||
|
Settlements
|
(1,216 | ) | - | - | - | |||||||||||
|
Medicare
reimbursement
|
- | - | - | 19 | ||||||||||||
|
Actuarial
(gain) loss
|
(35,303 | ) | 10,197 | 1,958 | (2,530 | ) | ||||||||||
|
Foreign
currency exchange rate changes
|
(36,882 | ) | 28,436 | (1,447 | ) | 1,332 | ||||||||||
|
Benefits
paid
|
(145,580 | ) | (144,877 | ) | (13,047 | ) | (12,142 | ) | ||||||||
|
Benefit
obligation at end of period
|
$ | 2,672,695 | $ | 2,605,717 | $ | 141,963 | $ | 103,570 | ||||||||
|
Change
in plan assets:
|
||||||||||||||||
|
Fair
value of plan assets at beginning of period
|
$ | 2,279,984 | $ | 2,050,215 | $ | - | $ | - | ||||||||
|
Actual
return on plan assets
|
(372,553 | ) | 191,203 | - | - | |||||||||||
|
Measurement
date change
|
- | 3,027 | - | - | ||||||||||||
|
Acquisitions
|
67,321 | 16,466 | 27,079 | - | ||||||||||||
|
Plan
participants’ contributions
|
283 | 319 | - | - | ||||||||||||
|
Company
contributions
|
160,298 | 138,630 | 13,047 | 12,142 | ||||||||||||
|
Foreign
currency exchange rate changes
|
(38,748 | ) | 25,001 | - | - | |||||||||||
|
Benefits
paid
|
(145,580 | ) | (144,877 | ) | (13,047 | ) | (12,142 | ) | ||||||||
|
Fair
value of plan assets at the end of period
|
1,951,005 | 2,279,984 | 27,079 | - | ||||||||||||
|
Funded
status
|
$ | (721,690 | ) | $ | (325,733 | ) | $ | (114,884 | ) | $ | (103,570 | ) | ||||
|
Amounts
recognized in the balance sheet consist of:
|
||||||||||||||||
|
Accrued
employee benefits
|
$ | - | $ | - | $ | (7,317 | ) | $ | (7,317 | ) | ||||||
|
Accrued
pension liability – current portion
|
(45,980 | ) | (159,601 | ) | - | - | ||||||||||
|
Accumulated
postretirement benefit obligation
|
- | - | (107,567 | ) | (96,253 | ) | ||||||||||
|
Pension
liability
|
(678,866 | ) | (182,739 | ) | - | - | ||||||||||
|
Prepaid
pension
|
3,156 | 16,607 | - | - | ||||||||||||
|
Accrued
benefit liability, net
|
$ | (721,690 | ) | $ | (325,733 | ) | $ | (114,884 | ) | $ | (103,570 | ) | ||||
|
Amounts
recognized in accumulated comprehensive loss:
|
||||||||||||||||
|
Net
actuarial loss
|
$ | 855,546 | $ | 367,057 | $ | 14,906 | $ | 14,413 | ||||||||
|
Prior
service cost
|
13,176 | 17,401 | 399 | 473 | ||||||||||||
|
Unrecognized
transition obligation
|
- | - | 889 | 1,156 | ||||||||||||
|
Total
before taxes
|
$ | 868,722 | $ | 384,458 | $ | 16,194 | $ | 16,042 | ||||||||
The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $2,596.8 million, $2,483.2 million and $1,871.9 million,
respectively, at December 31, 2008 for plans with accumulated benefit obligation
in excess of plan assets. The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets were $75.9 million, $67.8 million and
$79.1 million, respectively, at December 31, 2008 for plans with plan assets in
excess of the accumulated benefit obligation. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets were $2,364.4
million, $2,266.2 million and $2,046.1 million, respectively, at December 31,
2007 for plans with accumulated benefit obligation in excess of plan assets. The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $241.3 million, $218.4 million and $233.9 million,
respectively, at December 31, 2007 for plans with plan assets in excess of the
accumulated benefit obligation.
|
Pension
Benefits
Year
Ended
December
31,
|
Other
Benefits
Year
Ended
December
31,
|
|||||||||||||||||||||||
|
2008
|
2007(1)
|
2006
|
2008
|
2007(1)
|
2006
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Components
of net periodic benefit cost:
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 37,707 | $ | 37,766 | $ | 37,724 | $ | 282 | $ | 331 | $ | 129 | ||||||||||||
|
Interest
cost
|
153,787 | 149,329 | 133,176 | 5,567 | 5,993 | 5,269 | ||||||||||||||||||
|
Expected
return on plan assets
|
(184,267 | ) | (172,087 | ) | (143,674 | ) | - | - | - | |||||||||||||||
|
Amortization
of transition obligation
|
- | - | - | 282 | 273 | 222 | ||||||||||||||||||
|
Amortization
of prior service cost
|
2,773 | 3,091 | 3,142 | 73 | 71 | 58 | ||||||||||||||||||
|
Recognized
net actuarial loss
|
33,551 | 45,799 | 63,183 | 1,452 | 1,723 | 1,402 | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 43,551 | $ | 63,898 | $ | 93,551 | $ | 7,656 | $ | 8,391 | $ | 7,080 | ||||||||||||
|
(1) Excludes approximately $2.2
million and $0.3 million of net benefit cost for pension benefits and
other benefits, respectively, which have been recorded as adjustments to
beginning-of-year retained earnings.
|
||||||||||||||||||||||||
Additional
Information
|
Pension
Benefits
Year
Ended
December
31,
|
Other
Benefits
Year
Ended
December
31,
|
||||
|
2008
|
2007
|
2008
|
2007
|
||
|
(In
thousands)
|
|||||
|
Increase
(decrease) in accumulated other comprehensive loss due to actuarial losses
(gains) - before taxes
|
$520,589
|
$(34,625)
|
$1,958
|
$(2,487)
|
|
We have
recognized in the current fiscal year, and expect to recognize in the next
fiscal year, the following amounts in other comprehensive loss as components of
net periodic benefit cost:
|
Recognized
in the
Year
Ended
December
31, 2008
|
To
Be Recognized in the
Year
Ending
December
31, 2009
|
|||||||||||||||
|
Pension
|
Other
|
Pension
|
Other
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Pension
cost in accumulated other comprehensive loss:
|
||||||||||||||||
|
Net
actuarial loss
|
$ | 33,551 | $ | 1,452 | $ | 83,070 | $ | 4,141 | ||||||||
|
Prior
service cost
|
2,773 | 73 | 2,824 | (3,431 | ) | |||||||||||
|
Transition
obligation
|
- | 282 | - | 242 | ||||||||||||
| $ | 36,324 | $ | 1,807 | $ | 85,894 | $ | 952 | |||||||||
Assumptions
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Weighted
average assumptions used to determine net periodic benefit obligations at
December 31:
|
||||||||||||||||
|
Discount
rate
|
6.16 | % | 6.14 | % | 6.14 | % | 5.74 | % | ||||||||
|
Rate
of compensation increase
|
3.99 | % | 3.96 | % | - | - | ||||||||||
|
Weighted
average assumptions used to determine net periodic benefit cost for the
years ended December 31:
|
||||||||||||||||
|
Discount
rate
|
6.13 | % | 5.89 | % | 5.74 | % | 5.70 | % | ||||||||
|
Expected
return on plan assets
|
7.96 | % | 8.33 | % | - | - | ||||||||||
|
Rate
of compensation increase
|
3.98 | % | 3.93 | % | - | - | ||||||||||
The
expected rate of return on plan assets assumption is based on the long-term
expected returns for the investment mix of assets currently in the
portfolio. In setting this rate, we use a building-block
approach. Historic real return trends for the various asset classes
in the plan’s portfolio are combined with anticipated future market conditions
to estimate the real rate of return for each class. These rates
are then adjusted for anticipated future inflation to determine
estimated
nominal
rates of return for each class. The expected rate of return on plan assets is
determined to be the weighted average of the nominal returns based on the
weightings of the classes within the total asset portfolio. We have
been using an expected return on plan assets assumption of 8.5% for the majority
of our existing pension plan assets (approximately 76% of our total pension
assets at December 31, 2008), which is consistent with the long-term asset
returns of the portfolio.
Our
existing other benefit plans are unfunded. Effective with the
acquisition of NFS, we have acquired postretirement benefit plans which are
funded, primarily through VEBAs, to cover health care benefits for certain
retirees. As with our existing pension plan assets, investments will be
evaluated for the various asset classes in order to maintain liquidity
sufficient to pay current benefits when due.
|
2008(1)
|
2007
|
|||||||
|
Assumed
health-care cost trend rates at December 31
|
||||||||
|
Health-care
cost trend rate assumed for next year
|
8.50% - 8.60 | % | 8.00% - 9.00 | % | ||||
|
Rates
to which the cost trend rate is assumed to decline (ultimate trend
rate)
|
4.50 | % | 4.50 | % | ||||
|
Year
that the rate reaches ultimate trend rate
|
2016 – 2028 | 2012 – 2013 | ||||||
|
(1) Assumed
health-care cost trend rate for our existing plans is 8.50%, reaching the
ultimate trend rate in 2016. The assumed health-care cost trend rate
for our plans acquired with NFS is 8.60%, reaching the ultimate trend rate
in 2028.
|
||||||||
Assumed
health-care cost trend rates have a significant effect on the amounts we report
for our health-care plan. A one-percentage-point change in our
assumed health-care cost trend rates would have the following
effects:
|
One-Percentage-
Point Increase
|
One-Percentage-
Point Decrease
|
|||||||
|
Effect
on total of service and interest cost
|
$ | 253 | $ | (237 | ) | |||
|
Effect
on postretirement benefit obligation
|
$ | 9,771 | $ | (8,551 | ) | |||
Investment
Goals
General
The
overall investment strategy of the pension trusts is to achieve long-term growth
of principal, while avoiding excessive risk and to minimize the probability of
loss of principal over the long term. The specific investment goals
that have been set for the pension trusts in the aggregate are (1) to ensure
that plan liabilities are met when due and (2) to achieve an investment return
on trust assets consistent with a reasonable level of risk.
Allocations
to each asset class for both domestic and foreign plans are reviewed
periodically and rebalanced, if appropriate, to assure the continued relevance
of the goals, objectives and strategies. The pension trusts for both our
domestic and foreign plans employ a professional investment advisor and a number
of professional investment managers whose individual benchmarks are, in the
aggregate, consistent with the plan’s overall investment
objectives.
The goals
of each investment manager are (1) to meet (in the case of passive accounts) or
exceed (for actively managed accounts) the benchmark selected and agreed upon by
the manager and the Trust and (2) to display an overall level of risk in its
portfolio that is consistent with the risk associated with the agreed upon
benchmark.
The
investment performance of total portfolios, as well as asset class components,
is periodically measured against commonly accepted benchmarks, including the
individual investment manager benchmarks. In evaluating investment
manager performance, consideration is also given to personnel, strategy,
research capabilities, organizational and business matters, adherence to
discipline and other qualitative factors that may impact ability to achieve
desired investment results.
Domestic Plans
We
sponsor the following domestic defined benefit plans:
|
·
|
Retirement
Plan for Employees of McDermott Incorporated and Participating Subsidiary
and Affiliated Companies (covering corporate
employees);
|
|
·
|
Retirement
Plan for Employees of J. Ray McDermott Holdings, LLC and Participating
Subsidiary and Affiliated Companies (the “J. Ray Plan,” covering Offshore
Oil and Gas Construction segment
employees);
|
|
·
|
Retirement
Plan for Employees of The Babcock & Wilcox Company and Participating
Subsidiary and Affiliated Companies (covering Power Generation Systems
segment employees);
|
|
·
|
Retirement
Plan for Employees of BWX Technologies, Inc. (covering Government
Operations segment employees); and
|
|
·
|
Nuclear
Fuel Services, Inc. Retirement Plan for Salaried Employees and Nuclear
Fuel Services, Inc. Retirement Plan for Hourly Employees acquired with NFS
(the “NFS Plans”).
|
With the
exception of the newly-acquired NFS Plans, the assets of the domestic pension
plans are commingled for investment purposes and held by the Trustee, The Bank
of New York Mellon, in the McDermott Incorporated Master Trust (the “Master
Trust”). Substantially all of the assets of the J. Ray Plan, a
participating plan in the Master trust, have been invested in a fixed income
securities pool, the average duration of which generally matches the average
duration of the liabilities of the Plan. For the years ended December 31, 2008
and 2007, the investment (loss) return on domestic plan assets of the Master
Trust (before deductions for management fees) was approximately (19.8%) and
10.2%, respectively. The investment loss for the year ended December 31, 2008
excludes the J. Ray Plan.
The
following is a summary of the domestic pension plans’ asset allocations at
December 31, 2008 and 2007 by asset category. The changes in the allocation of
assets at December 31, 2008 compared to December 31, 2007 is partially a result
of the market volatility in 2008 and does not represent a change in investment
strategy. The allocation of assets at December 31, 2008 is a weighted average
allocation that includes the acquired pension plan assets of NFS.
|
2008
|
2007
|
|||||||
|
Asset
Category:
|
||||||||
|
Debt Securities
|
32 | % | 33 | % | ||||
|
Equity Securities
|
25 | % | 34 | % | ||||
| U.S. Government Securities | 17 | % | 10 | % | ||||
|
Partnerships
with Security Holdings
|
11 | % | 12 | % | ||||
|
Real
Estate
|
6 | % | 8 | % | ||||
|
Mutual
Funds
|
4 | % | 2 | % | ||||
|
Other
|
5 | % | 1 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
The
target allocation for 2009 for the domestic plans, by asset class, is as
follows:
|
J. RAY Plan
|
NFS Plans
|
Other Plans
|
||||||||||
|
Asset
Class:
|
||||||||||||
|
Public
Equity
|
- | % | 60 | % | 42.5 | % | ||||||
|
Private
Equity
|
- | % | - | % | 10.0 | % | ||||||
|
Fixed
Income
|
98.0 | % | 40 | % | 38.0 | % | ||||||
|
Real
Estate
|
- | % | - | % | 5.0 | % | ||||||
|
Other
|
2.0 | % | - | % | 4.5 | % | ||||||
Foreign Plans
We
sponsor various plans through certain of our foreign subsidiaries. These plans
are the J. Ray McDermott, S.A. TCN Employees Pension Plan (the “TCN Plan”),
various plans of Babcock & Wilcox Canada, Ltd. (the “Canadian Plans”) and
the Diamond Power Specialty Limited Retirement Benefits Plan (the “Diamond UK
Plan”).
The
weighted average asset allocations of these plans at December 31, 2008 and 2007
by asset category were as follows:
|
2008
|
2007
|
|||||||
|
Asset
Category:
|
||||||||
|
Debt
Securities
|
51 | % | 35 | % | ||||
|
Equity
Securities
|
47 | % | 62 | % | ||||
|
Other
|
2 | % | 3 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
The
target allocation for 2009 for the foreign plans, by asset class, is as
follows:
|
TCN Plan
|
Canadian
Plans
|
Diamond
UK Plan
|
||||||||||
|
Asset
Class:
|
||||||||||||
|
U.
S. Equity
|
40 | % | 15 | % | 10 | % | ||||||
|
Global
Equity
|
30 | % | 50 | % | 45 | % | ||||||
|
Fixed
Income
|
30 | % | 35 | % | 45 | % | ||||||
Cash
Flows
|
Domestic
Plans
|
Foreign
Plans
|
|||||||||||||||
|
Pension Benefits
|
Other Benefits
|
Pension Benefits
|
Other
Benefits
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Expected
employer contributions to trusts of defined benefit plans:
|
||||||||||||||||
|
2009
|
$ | 29,100 | N/A | $ | 12,524 | N/A | ||||||||||
|
Expected
benefit payments:
|
||||||||||||||||
|
2009
|
$ | 148,314 | $ | 14,486 | $ | 13,843 | $ | 457 | ||||||||
|
2010
|
$ | 155,865 | $ | 14,397 | $ | 14,139 | $ | 496 | ||||||||
|
2011
|
$ | 162,943 | $ | 14,260 | $ | 13,678 | $ | 536 | ||||||||
|
2012
|
$ | 170,870 | $ | 13,778 | $ | 13,736 | $ | 576 | ||||||||
|
2013
|
$ | 177,415 | $ | 13,319 | $ | 15,336 | $ | 616 | ||||||||
|
2014-2018
|
$ | 961,542 | $ | 56,491 | $ | 91,272 | $ | 3,666 | ||||||||
The
expected employer contributions to trusts for 2009 are included in current
liabilities at December 31, 2008.
Defined
Contribution Plans
We
provide benefits under the McDermott International, Inc. Supplemental Executive
Retirement Plan (“SERP Plan”), which is a defined contribution
plan. We recorded income (expense) related to the SERP Plan of
approximately $1.3 million, $(1.1) million and $(2.9) million in the years ended
December 31, 2008, 2007 and 2006, respectively.
We also
provide benefits under the Thrift Plan for Employees of McDermott Incorporated
and Participating Subsidiary and Affiliated Companies (“Thrift Plan”). The
Thrift Plan generally provides for matching employer contributions of 50% of
participants’ contributions up to 6 percent of compensation. These matching
employer contributions are typically made in shares of MII common stock. The
Thrift Plan also provides for unmatched employer cash contributions to certain
employees of our Offshore Oil and Gas Construction segment as well as
service-based contributions to salaried corporate employees and salaried
employees within our Power Generation Systems and Government Operations
segments. Amounts charged to expense for employer contributions under the Thrift
Plan totaled approximately $18.1 million, $18.6 million and $14.6 million in the
years ended December 31, 2008, 2007 and 2006, respectively.
Multiemployer
Plans
One of
the subsidiaries in our Power Generation Systems segment contributes to various
multiemployer plans. The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $30.4 and $32.6 million in the
years ended December 31, 2008 and 2007, respectively, and $24.4 million in the
period ended December 31, 2006, since the reconsolidation of B&W PGG and its
subsidiaries as of February 22, 2006.
NOTE
8 – ASSET SALES AND IMPAIRMENT OF LONG-LIVED ASSETS
We had
gains on the sale of assets totaling $12.2 million during the year ended
December 31, 2008, primarily in our Power Generation Systems segment, including
a gain of $9.6 million associated with the sale of the former location for our
Dumbarton, Scotland facility, which was moved to a new location in
Dumbarton.
We had
losses on the sale of assets totaling $15.0 million in 2006, primarily in our
Offshore Oil and Gas Construction segment, which includes a loss of $16.4
million associated with currency translation losses recorded in accumulated
other comprehensive loss for our former joint venture in Mexico, offset by gains
on sales of various non-strategic assets, primarily in our Government Operations
segment.
During
the years ended December 31, 2008, 2007 and 2006, we did not record any
impairments of property, plant and equipment.
NOTE
9 – CAPITAL STOCK
The
Panamanian regulations that relate to acquisitions of securities of companies
registered with the Panamanian National Securities Commission, such as MII,
require, among other matters, that detailed disclosure concerning an offeror be
finalized before that person acquires beneficial ownership of more than 5% of
the outstanding shares of any class of our stock. The detailed
disclosure is subject to review by either the Panamanian National Securities
Commission or our Board of Directors. Transfers of shares of common
stock in violation of these regulations are invalid and cannot be registered for
transfer.
We issue
shares of our common stock in connection with our 2001 Directors and Officers
Long-Term Incentive Plan, our 1996 Officer Long-Term Incentive Plan (and its
predecessor programs) and contributions to our Thrift Plan. At
December 31, 2008 and 2007, 12,484,618 and 13,829,901 shares of common
stock, respectively, were reserved for issuance in connection with those
plans.
Increase
in Authorized Shares
On May 4,
2007, our shareholders approved an amendment to our articles of
incorporation increasing the number of authorized shares of
common stock from 150 million to 400 million. The amendment became
effective on August 6, 2007 upon filing of a certificate of amendment in
the Public Registry Office of the Republic of Panama.
Stock
Splits
On August
7, 2007, our Board of Directors declared a two-for-one stock split effected in
the form of a stock dividend. The shares issued in the dividend were
distributed on September 10, 2007 to stockholders of record as of the close of
business on August 20, 2007. On May 3, 2006, our Board of Directors
declared a three-for-two stock split effected in the form of a stock
dividend. The shares issued in the dividend were distributed on May
31, 2006 to stockholders of record as of the close of business on May 17,
2006. All share and per share information in the accompanying
financial statements and notes has been retroactively adjusted to reflect these
stock splits.
NOTE
10 – STOCK PLANS
At
December 31, 2008, we had a stock-based employee compensation plan, which is
described below. Where required, disclosures have been adjusted for our stock
splits effected in the form of a stock dividend in September 2007 and May 2006.
See Note 9 for further information regarding our stock splits.
2001
Directors and Officers Long-Term Incentive Plan
In May 2006, our shareholders approved
the amended and restated 2001 Directors and Officers Long-Term Incentive
Plan. Members of the Board of Directors, executive officers, key
employees and consultants are eligible to participate in the
plan. The Compensation Committee of the Board of Directors selects
the participants for the plan. The plan provides for a number of
forms of stock-based compensation, including nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock, deferred
stock units, performance shares and performance units, subject to satisfaction
of specific performance goals. In addition to shares previously available under
this plan that have not been awarded, or that were subject to awards under this
and other plans that have been canceled, terminated, forfeited, expired, settled
in cash, or exchanged for consideration not involving shares, up to 7,500,000
additional shares of our common stock were authorized for issuance through the
plan in May 2006. Options to purchase shares are granted at not less
than 100% of the fair market value (average of the high and low trading price)
on the date of grant, become exercisable at such time or times as determined
when granted and expire not more than seven years after the date of the
grant. Options granted prior to the amendment of this plan expire not
more than ten years after the date of the grant.
At
December 31, 2008, we had a total of 6,465,314 shares of our common stock
available for award under the 2001 Directors and Officers Long-Term Incentive
Plan.
1997
Director Stock Program
Until 2007, we also maintained a 1997
Director Stock Program. Under this program, nonmanagement directors were
entitled to receive a grant of options to purchase 2,700 shares of our common
stock in the first year of a director's term and a grant of options to purchase
900 shares in subsequent years of such term at a purchase price equal to the
fair market value of one share of our common stock on the date of
grant. These options become exercisable, in full, six months after the
date of grant and expire ten years from the date of grant. In addition,
nonmanagement directors are entitled to receive a grant 1,350 shares
of restricted stock in the first year of a director's term and 450 shares
in subsequent years of such term. The shares of restricted stock are
subject to payment by the director of a purchase price at par value ($1.00
per share) and to transfer restrictions that lapse at the end of the director's
term. By the terms of the 1997 Director Stock Program, no award may be
granted under the program beginning June 6, 2007. As a result, we made our
final grants of stock options and restricted stock under the 1997 Directors
Stock Program in connection with our Annual Meeting of Stockholders in May
2007. The shares of common stock available to be awarded under the 1997
Director Stock Program are available under the terms of the 2001
Directors and Officers Long-Term Incentive Plan and have been included in
the amount available for grant discussed above.
In the
event of a change in control of our company, all of these stock-based
compensation programs have provisions that may cause restrictions to lapse and
accelerate the exercisability of outstanding options.
Total
compensation expense recognized for the years ended December 31, 2008, 2007 and
2006 was as follows:
|
Compensation
Expense
|
Tax
Benefit
|
Net
Impact
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Year
Ended December 31, 2008
|
||||||||||||
|
Stock
options
|
$ | 780 | $ | (239 | ) | $ | 541 | |||||
|
Restricted
stock
|
4,438 | (1,046 | ) | 3,392 | ||||||||
|
Performance
shares
|
28,232 | (9,121 | ) | 19,111 | ||||||||
|
Performance
and deferred stock units
|
2,534 | (828 | ) | 1,706 | ||||||||
|
TOTAL
|
$ | 35,984 | $ | (11,234 | ) | $ | 24,750 | |||||
|
Year
Ended December 31, 2007
|
||||||||||||
|
Stock
options
|
$ | 2,740 | $ | (747 | ) | $ | 1,993 | |||||
|
Restricted
stock
|
904 | (21 | ) | 883 | ||||||||
|
Performance
shares
|
19,196 | (6,085 | ) | 13,111 | ||||||||
|
Performance
and deferred stock units
|
7,165 | (2,314 | ) | 4,851 | ||||||||
|
TOTAL
|
$ | 30,005 | $ | (9,167 | ) | $ | 20,838 | |||||
|
Year
Ended December 31, 2006
|
||||||||||||
|
Stock
options
|
$ | 4,352 | $ | (971 | ) | $ | 3,381 | |||||
|
Restricted
stock
|
1,199 | (122 | ) | 1,077 | ||||||||
|
Performance
shares
|
4,826 | (1,329 | ) | 3,497 | ||||||||
|
Performance
and deferred stock units
|
8,434 | (2,195 | ) | 6,239 | ||||||||
|
TOTAL
|
$ | 18,811 | $ | (4,617 | ) | $ | 14,194 | |||||
The
impact on basic earnings per share of stock-based compensation expense
recognized for the years ended December 31, 2008, 2007 and 2006 was $0.11, $0.09
and $0.07 per share, respectively, and on diluted earnings per share was $0.11,
$0.09 and $0.06 per share, respectively.
As of
December 31, 2008, total unrecognized estimated compensation expense related to
nonvested awards was $23.8 million, net of estimated tax benefits of $11.5
million. The components of the total gross unrecognized estimated
compensation expense of $35.3 million and their expected weighted-average
periods for expense recognition are as follows (amounts in millions; periods in
years):
|
Amount
|
Weighted-Average
Period
|
|||||||
|
Stock
options
|
$ | - | - | |||||
|
Restricted
stock
|
$ | 10.5 | 2.3 | |||||
|
Performance
shares
|
$ | 23.2 | 1.2 | |||||
|
Performance
and deferred stock units
|
$ | 1.6 | 1.3 | |||||
Stock
Options
The fair value of each option grant was
estimated at the date of grant using Black-Scholes, with the following
weighted-average assumptions:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Risk-free
interest rate
|
N/A | 4.51 | % | 4.99 | % | |||||||
|
Expected
volatility
|
N/A | 0.50 | 0.50 | |||||||||
|
Expected
life of the option in years
|
N/A | 5.28 | 4.94 | |||||||||
|
Expected
dividend yield
|
N/A | 0.0 | % | 0.0 | % | |||||||
The
risk-free interest rate is based on the implied yield on a U.S. Treasury
zero-coupon issue with a remaining term equal to the expected life of the
option. The expected volatility is based on historical implied
volatility from publicly traded options on our common stock, historical implied
volatility of the price of our common stock and other factors. The
expected life of the option is based on observed historical
patterns. The expected dividend yield is based on the projected
annual dividend payment per share divided by the stock price at the date of
grant. This amount is zero because we have not paid cash dividends in
recent years and do not expect to pay cash dividends at this time.
The
following table summarizes activity for our stock options for the year ended
December 31, 2008 (share data in thousands):
|
Number
of
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
(in
millions)
|
||||||||||
|
Outstanding,
beginning of year
|
3,129 | $ | 4.99 | ||||||||||
|
Granted
|
- | - | |||||||||||
|
Exercised
|
(1,807 | ) | 5.32 | ||||||||||
|
Cancelled/expired/forfeited
|
(2 | ) | 6.73 | ||||||||||
|
Outstanding,
end of year
|
1,320 | $ | 4.52 |
4.2
Years
|
$ | 7.3 | |||||||
|
Exercisable,
end of year
|
1,320 | $ | 4.52 |
4.2
Years
|
$ | 7.3 | |||||||
The
aggregate intrinsic value included in the table above represents the total
pretax intrinsic value that would have been received by the option holders had
all option holders exercised their options on December 31, 2008. The
intrinsic value is calculated as the total number of option shares multiplied by
the difference between the closing price of our common stock on the last trading
day of each period and the exercise price of the options. This amount
changes based on the fair market value of our common stock.
The
weighted-average fair value of the stock options granted in the years ended
December 31, 2007 and 2006 was $14.48 and $10.32, respectively. There
were no stock options granted in the year ended December 31,
2008. The total fair value of shares vested during the years ended
December 31, 2008, 2007 and 2006 was $2.2 million, $4.3 million and $5.0
million, respectively.
During
the years ended December 31, 2008, 2007 and 2006, the total intrinsic value of
stock options exercised was $81.5 million, $134.9 million and $102.4 million,
respectively. We recorded cash received in the years ended December
31, 2008, 2007 and 2006 from the exercise of these stock options totaling $9.6
million, $15.2 million and $21.5 million, respectively.
The
actual tax benefits realized related to the stock options exercised during the
years ended December 31, 2008 and 2006 were $17.2 million and $17.9 million,
respectively. Tax benefits related to stock options exercised and
restricted stock lapses were deferred at December 31, 2007 until utilization of
the net operating losses caused the benefits to be
realized. Therefore, no actual tax benefits were recognized during
the year ended December 31, 2007.
During
the year ended December 31, 2008, the net operating losses, inclusive of all
benefits from prior years, were utilized, and deferred benefits totaling $40.4
million were recognized.
Restricted
Stock
Nonvested
restricted stock awards as of December 31, 2008 and changes during the year
ended December 31, 2008 were as follows (share data in thousands):
|
Number
of
Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Nonvested,
beginning of year
|
377 | $ | 1.87 | |||||
|
Granted
|
356 | 42.36 | ||||||
|
Lapsed
|
(385 | ) | 3.76 | |||||
|
Cancelled/forfeited
|
(5 | ) | 52.65 | |||||
|
Nonvested,
end of year
|
343 | $ | 40.94 | |||||
The
actual tax benefits realized related to the restricted stock lapsed during the
years ended December 31, 2008 and 2006 were $3.3 million and $2.2 million,
respectively. As discussed above, tax benefits related to stock
options exercised and restricted stock lapses were deferred at December 31, 2007
until utilization of the net operating losses caused the benefits to be
realized. Therefore, no actual tax benefits were recognized during
the year ended December 31, 2007.
Performance
Shares
Nonvested
performance share awards as of December 31, 2008 and changes during the year
ended December 31, 2008 were as follows (share data in thousands):
|
Number
of
Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Nonvested,
beginning of year
|
1,768 | $ | 29.22 | |||||
|
Granted
|
633 | 45.34 | ||||||
|
Vested
|
- | - | ||||||
|
Cancelled/forfeited
|
(60 | ) | 37.76 | |||||
|
Nonvested,
end of year
|
2,341 | $ | 33.41 | |||||
The actual number of shares earned by
each participant is dependent upon achievement of certain consolidated operating
income targets over the three-year performance periods. The awards
actually earned will range from zero to 150% of the targeted number of
performance shares, to be determined upon completion of the three-year
performance period.
No performance shares vested during the
years ended December 31, 2008, 2007 and 2006.
Performance
and Deferred Stock Units
Nonvested
performance and deferred stock unit awards as of December 31, 2008 and changes
during the year ended December 31, 2008 were as follows (share data in
thousands):
|
Number
of
Units
|
Aggregate
Intrinsic Value
(in
millions)
|
||||
|
Nonvested,
beginning of year
|
374 | ||||
|
Granted
|
- | ||||
|
Vested
|
(121 | ) | |||
|
Cancelled/forfeited
|
(14 | ) | |||
|
Nonvested,
end of year
|
239 |
$2.4
|
|||
The aggregate intrinsic value included
in the table above represents the total pretax intrinsic value recorded as a
liability at December 31, 2008 in the consolidated balance
sheets. During the years ended December 31, 2008, 2007 and 2006, we
paid $6.5 million, $4.7 million and $26.2 million, respectively, for the
settlement of vested performance and deferred stock units.
Thrift
Plan
On
November 12, 1991, 15,000,000 of the authorized and unissued shares of MII
common stock were reserved for issuance for the employer match to the Thrift
Plan for Employees of McDermott Incorporated and Participating Subsidiary and
Affiliated Companies (the "Thrift Plan"). On October 11, 2002, an
additional 15,000,000 of the authorized and unissued shares of MII common stock
were reserved for issuance for the employer match to the Thrift
Plan. Those matching employer contributions equal 50% of the first 6%
of compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are nonforfeitable after three years of service or upon
retirement, death, lay-off or approved disability. The Thrift Plan
allows employees to sell their interest in MII’s common stock fund at any time,
except as limited by applicable securities laws and regulations. During the
years ended December 31, 2008, 2007 and 2006, we issued 412,947, 333,939 and
473,860 shares, respectively, of MII's common stock as employer contributions
pursuant to the Thrift Plan. At December 31, 2008, 6,019,304 shares
of MII's common stock remained available for issuance under the Thrift
Plan.
NOTE
11 – CONTINGENCIES AND COMMITMENTS
Investigations
and Litigation
The
matter of Donald F. Hall and
Mary Ann Hall, et al., v. Babcock & Wilcox Company, et al. (the “Hall
Litigation”) was filed in June 1994 and is pending in the United States District
Court for the Western District of Pennsylvania (the “District
Court”). The Hall Litigation, which has been amended from time
to time, presently involves approximately 500 separate claims for compensatory
damages against B&W PGG and Babcock & Wilcox Technical Services Group,
Inc., formerly known as B&W Nuclear Environmental Services, Inc., (“B&W
TSG” together with B&W PGG, the “B&W Parties”), alleging, among other
things, death, personal injury, property damage and other damages as a result of
alleged radioactive and non-radioactive emissions from two former nuclear fuel
processing facilities located in Apollo and Parks Township, Pennsylvania. These
facilities were previously owned by Nuclear Materials and Equipment Company
(“Numec”), a subsidiary of Atlantic Richfield Company (“ARCO”), a former
defendant in the Hall Litigation.
In
September 1998, a jury found B&W PGG and ARCO liable to eight
plaintiffs in the first cases brought to trial, awarding $36.7 million in
compensatory damages. During the trial, B&W PGG settled all pending punitive
damages claims in the Hall Litigation for $8.0 million. In June 1999, the
Pennsylvania District Court set aside the $36.7 million judgment and
ordered a new trial on all issues. In February 2008, the plaintiffs
and ARCO reached an agreement to settle ARCO’s exposure in the Hall
Litigation.
In
September 2008, the remaining parties advised the District Court that they were
pursuing an amicable resolution of the Hall Litigation and requested that the
Court suspend all pre-trial requirements and obligations. The parties
negotiated the principal terms of a settlement that, if consummated, would
resolve all claims against the B&W Parties. Specifically,
the settlement contemplates, among other things:
|
·
|
The
B&W Parties would be provided releases from each of the
“Apollo/Parks Township Releasors,” a term that will be defined in the
final settlement agreement generally to mean the existing claimants in the
Hall Litigation;
|
|
·
|
The
B&W Parties would be provided full and complete releases from each of
the Apollo/Parks Township Releasors asserting personal injury claims in
the Hall Litigation and a limited release from each of the Apollo/Parks
Township Releasors asserting property damage only
claims;
|
|
·
|
The
B&W Parties would make a $52.5 million cash payment to the
Apollo/Parks Township Releasors after certain conditions precedent to such
payment, as set forth in the final written settlement agreement, have been
satisfied; and
|
|
·
|
The
B&W Parties would retain all insurance rights and may pursue its
insurers to collect any of the amounts paid in
settlement.
|
A binding
settlement remains subject to the negotiation and execution of a final
settlement agreement and the satisfaction of all conditions
precedent. B&W PGG previously has negotiated prior settlement
arrangements with the Apollo/Parks Township Releasors that have not been
consummated. The proposed settlement is within amounts provided for
in Other Liabilities at December 31, 2008.
At the
time of ARCO’s sale of Numec to B&W PGG, B&W PGG received an indemnity
and hold harmless agreement from ARCO from claims or liabilities arising as a
result of pre-closing Numec or ARCO actions. In December 2007,
B&W PGG filed an action against ARCO for breach of contract and seeking a
declaratory judgment that ARCO is obligated to indemnify B&W PGG under the
indemnity agreement between the two parties against any losses that B&W PGG
may incur arising out of the nuclear fuel processing facilities at issue in the
Hall Litigation (the “Indemnity Action”). The Indemnity Action is
also pending in the United States District Court for the Western District of
Pennsylvania.
In
September 2008, B&W PGG and ARCO advised the District Court that they were
pursuing an amicable resolution of the Indemnity Action. The parties
negotiated the principal terms of a settlement that, if consummated, would
resolve all claims between ARCO and B&W PGG with respect to the claims of
the present Apollo/Parks Township Releasors. Specifically, the settlement
contemplates, among other things, that:
|
·
|
ARCO
would assign to B&W PGG its rights to recover insurance
proceeds/amounts arising out of the claims alleged in the Hall Litigation
in the amount of not less than $17,500,000, which amount would increase if
the total ARCO insurance proceeds recovered exceed $30
million;
|
|
·
|
ARCO
would retain its rights to recover insurance proceeds/amounts arising out
of the claims alleged in the Hall Litigation in the amount of not less
than $12,500,000, which amount would increase if the total ARCO insurance
proceeds recovered exceed $30 million;
and
|
|
·
|
The
parties would dismiss with prejudice and release all claims between
B&W PGG and ARCO that arise out of the present claims of the
Apollo/Parks Township Releasors; any other claims between ARCO and B&W
PGG are preserved and are unaffected by the proposed
agreement.
|
A binding
settlement remains subject to the negotiation and execution of a final
settlement agreement and the satisfaction of all conditions
precedent.
Other
Litigation and Settlements
On
November 17, 2008, December 5, 2008 and January 20, 2009, three separate alleged
purchasers of our common stock during the period from February 27, 2008 through
November 5, 2008 filed purported class action complaints against MII, Bruce
Wilkinson (MII’s former Chief Executive Officer and Chairman of the Board), and
Michael S. Taff (the Chief Financial Officer of MII) in the United States
District Court for the Southern District of New York. Each of the complaints
alleges that the defendants violated federal securities laws by disseminating
materially false and misleading information and/or concealing material adverse
information relating to the operational and financial status of three ongoing
construction contracts in our Offshore Oil and Gas Construction segment for the
installation of pipelines off the coast of Qatar. Each complaint seeks relief,
including unspecified compensatory damages and an award for costs and expenses.
The three cases have been consolidated. On February 9, 2009, MII filed a motion
to transfer the consolidated cases to the Southern District of Texas. We believe
the substantive allegations contained in the consolidated complaints are without
merit, and we intend to defend against these claims vigorously.
By letter
dated February 24, 2009, the United States Securities and Exchange Commission
notified us that it was conducting an inquiry regarding the three construction
contracts and the events leading to the related writedowns we have
recorded. We intend to cooperate with the SEC in this
inquiry.
On or
about August 23, 2004, a declaratory judgment action entitled Certain Underwriters at Lloyd’s
London, et al v. J. Ray McDermott, Inc. et al , was filed by certain
underwriters at Lloyd’s, London and Threadneedle Insurance Company Limited (the
“London Insurers”), in the 23rd Judicial District Court, Assumption Parish,
Louisiana, against MII, JRMI and two insurer defendants, Travelers and INA,
seeking a declaration that the London Insurers have no obligation to indemnify
MII and JRMI for certain bodily injury claims, including claims for asbestos and
welding rod fume personal injury which have been filed by claimants in various
state courts, and an environmental claim involving B&W PGG. Additionally,
Travelers filed a cross-claim requesting a declaration of non-coverage in
approximately 20 underlying matters. This proceeding was stayed by the court on
January 3, 2005.
The
matter of Iroquois Falls Power
Corp. v. Jacobs Canada Inc., et al., was filed in the Superior Court of
Justice, in Ontario, Canada, on June 1, 2005. Iroquois Falls Power
Corp. (“Iroquois”) seeks damages of approximately $14 million (Canadian) as a
result of an alleged breach by one of our former subsidiaries in connection with
the supply and installation of heat recovery steam
generators. McDermott Incorporated, which provided a guarantee to
certain obligations of the former subsidiary, and two bonding companies with
whom MII entered into an indemnity arrangement, were also named as
defendants. In March 2007, the Superior Court granted summary
judgment in favor of all defendants and dismissed all claims of Iroquois, which
appealed the ruling. In April 2008, the Court of Appeals for Ontario
upheld the summary judgment, but sent the case back to the Superior Court of
Justice to allow Iroquois an opportunity to amend its complaint to assert new
claims. On October 30, 2008, the Superior Court of Justice denied the
request of Iroquois to amend its complaint and assert new claims against the
defendants based on a breach of contractual warranty. Iroquois filed
a notice of appeal, however, no date has been set for the hearing of the
appeal.
In a
proceeding entitled Antoine,
et al. vs. J. Ray McDermott, Inc., et al., filed in the 24th
Judicial District Court, Jefferson Parish, Louisiana, approximately 88
plaintiffs filed suit against approximately 215 defendants, including JRMI and
Delta Hudson Engineering Corporation (“DHEC”), another affiliate of ours,
generally alleging injuries for exposure to asbestos, and unspecified chemicals,
metals and noise while the plaintiffs were allegedly employed as Jones Act
seamen. On January 10, 2007, the District Court dismissed the Plaintiffs’
claims, without prejudice to their right to refile their claims. On
January 29, 2007, in a matter entitled Boudreaux, et al v. McDermott,
Inc., et al, originally filed in the United States District Court for the
Southern District of Texas, 21 plaintiffs originally named in the Antoine matter filed suit
against JRMI, MI and approximately 30 other employer defendants, alleging Jones
Act seaman status and generally alleging exposure to welding fumes, solvents,
dyes, industrial paints and noise. Boudreaux was transferred to
the United States District Court for the Eastern District of Louisiana on May 2,
2007. The District Court entered an order in September 2007 staying the matter
until further order of the court due to the bankruptcy filing of one of the
co-defendants. Additionally, on January 29, 2007, in a matter
entitled Antoine,
et al. v. McDermott, Inc., et al., filed in the 164
th Judicial District Court for Harris County, Texas, 43
plaintiffs originally named in the Antoine matter filed suit
against JRMI, MI and approximately 65 other employer defendants and 42 maritime
products defendants, alleging Jones Act seaman status and generally alleging
personal injuries for exposure to asbestos and noise. On April 27,
2007, the District Court entered an order staying all activity
and
deadlines
in this matter other than service of process and answer/appearance dates until
further order of the court. The plaintiffs filed a motion to lift the
stay on February 20, 2009, which is pending before the District Court. The
plaintiffs seek monetary damages in an unspecified amount in both cases and
attorneys’ fees in the new Antoine case.
In 2003,
we received a favorable arbitration award for one of our claims related to a
project in India completed in the 1980’s. The award, which with interest and
costs then had a value of approximately $50 million, was appealed to the Supreme
Court of India. On May 28, 2005, we received a favorable award for the
remainder of our claim in the approximate amount of $48 million, including
interest and costs, which was also appealed. The Supreme Court of India heard
the consolidated appeal in late October 2005 and, in May 2006, issued
a decision reducing the total of the awards to approximately $90 million,
including interest and costs, but otherwise affirming the awards. On
November 3, 2008, we executed a binding settlement agreement for our claims
related to a project in India completed in the 1980’s. The gross
settlement totals approximately $45 million and our expenses and related taxes
associated with the settlement were approximately 35% of the award. We received
the cash proceeds on November 4, 2008 and recorded the settlement in our
statement of income in the three months ended December 31, 2008.
Additionally,
due to the nature of our business, we are, from time to time, involved in
routine litigation or subject to disputes 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, premises liability claims and other
claims.
|
Based
upon our prior experience, we do not expect that any of these other litigation
proceedings, disputes and claims will have a material adverse effect on our
consolidated financial condition, results of operations or cash
flows.
Environmental
Matters
We have
been identified as a potentially responsible party at various cleanup sites
under the Comprehensive Environmental Response, Compensation, and Liability Act,
as amended (“CERCLA”). CERCLA and other environmental laws can impose liability
for the entire cost of cleanup on any of the potentially responsible parties,
regardless of fault or the lawfulness of the original
conduct. Generally, however, where there are multiple responsible
parties, a final allocation of costs is made based on the amount and type of
wastes disposed of by each party and the number of financially viable parties,
although this may not be the case with respect to any particular
site. We have not been determined to be a major contributor of wastes
to any of these sites. On the basis of our relative contribution of
waste to each site, we expect our share of the ultimate liability for the
various sites will not have a material adverse effect on our consolidated
financial condition, results of operations or cash flows in any given
year.
The
Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised us in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The
relief sought is related to potential groundwater contamination resulting from
previous operations at the facilities. These facilities are currently
owned by a subsidiary in our Government Operations segment. PADEP has
advised us that it does not intend to assess any monetary sanctions, provided
our Government Operations segment continues its remediation program for the
Parks Facilities. Whether additional nonradiation contamination
remediation will be required at the Parks Facility remains
unclear. Results from sampling completed by our Government Operations
segment have indicated that such remediation may not be
necessary. Our Government Operations segment continues to evaluate
closure of the groundwater issues pursuant to applicable Pennsylvania
law.
We
perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these
activities, we are subject to continuing reviews by governmental agencies,
including the Environmental Protection Agency and the Nuclear Regulatory
Commission (the “NRC”).
The NRC’s
decommissioning regulations require our Government Operations segment to provide
financial assurance that it will be able to pay the expected cost of
decommissioning each of its facilities at the end of its service
life. We will continue to provide financial assurance aggregating
$28.9 million during the year ending December 31, 2009 with existing letters of
credit for the ultimate decommissioning of all of these licensed facilities,
except two. These two facilities, which represent the largest portion
of our eventual decommissioning costs, have provisions in their government
contracts pursuant to which substantially all of our decommissioning costs and
financial assurance
obligations
are covered by the U.S. Department of Energy, including the costs to complete
the decommissioning projects underway at the facility in Erwin,
Tennessee.
At
December 31, 2008 and 2007, we had total environmental reserves (including
provisions for the facilities discussed above) of $41.9 million and $18.8
million, respectively. Of our total environmental reserves at
December 31, 2008 and 2007, $8.9 million and $7.0 million, respectively, were
included in current liabilities. Inherent in the estimates of those reserves and
recoveries are our expectations regarding the levels of contamination,
decommissioning costs and recoverability from other parties, which may vary
significantly as decommissioning activities progress. Accordingly,
changes in estimates could result in material adjustments to our operating
results, and the ultimate loss may differ materially from the amounts that we
have provided for in our consolidated financial statements.
Operating
Leases
Future
minimum payments required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year at December 31, 2008 are as
follows (in thousands):
|
Fiscal Year Ending December
31,
|
Amount
|
|||
|
2009
|
$ | 29,869 | ||
|
2010
|
$ | 17,799 | ||
|
2011
|
$ | 19,858 | ||
|
2012
|
$ | 17,615 | ||
|
2013
|
$ | 17,082 | ||
|
Thereafter
|
$ | 101,224 | ||
Total
rental expense for the years ended December 31, 2008, 2007 and 2006 was $75.7
million, $66.9 million and $52.0 million, respectively. These expense
amounts include contingent rentals and are net of sublease income, neither of
which is material.
Other
Warranty
Claim (Power Generation Systems Segment)
One of
our Canadian subsidiaries has received notice of a warranty claim on one of its
projects on a contract executed in 1998. This situation relates to technical
issues concerning components associated with nuclear steam generators. Data collection and
analysis can only be performed at specific time periods when the power plant is
scheduled to be off-line for maintenance. We also received a notice from the
customer during October 2008, and, during November 2008, we responded to the
notice by disagreeing with the matters stated in the claim and disputing the
claim. This project included a limited-term performance bond totaling
approximately $140 million for which we entered into an indemnity arrangement
with the surety underwriters. It is possible that our subsidiary may incur
warranty costs in excess of amounts provided for as of December 31, 2008. It is
also possible that a claim could be initiated by our subsidiary’s customer
against the surety underwriter should certain events occur. If such a
claim were successful, the surety could seek to recover from our subsidiary the
costs incurred in satisfying the customer claim. If the surety seeks recovery
from our subsidiary, we believe that our subsidiary would have adequate
liquidity to satisfy its obligations. However, the ultimate resolution of this
possible claim is uncertain, and an adverse outcome could have a material
adverse impact on our consolidated financial condition, results of operations
and cash flows.
Surety
Bonds (Power Generation Systems Segment)
In June
2008, MII, B&W PGG and McDermott Holding, Inc. jointly executed a general
agreement of indemnity in favor of a surety underwriter relating to surety bonds
that underwriter issued in support of B&W PGG’s contracting
activity. As of December 31, 2008, bonds issued under this
arrangement totaled approximately $58 million. Any claim successfully
asserted against the surety by one or more of the bond obligees would likely be
recoverable from MII, B&W PGG and McDermott Holdings, Inc. under the
indemnity agreement.
Proposed
Unfavorable Tax Adjustments
We were
advised in 2006 by the IRS of proposed unfavorable tax adjustments related to
the 2001 through 2003 tax years. We reviewed the IRS positions and
disagreed with certain proposed adjustments. Accordingly, we filed a
protest with the IRS regarding the resolution of these issues, and the process
has proceeded through an appeals hearing with an IRS appellate
conferee. We have provided for any amounts that we believe will
ultimately be payable for these proposed adjustments. However, the ultimate
resolution of these proposed adjustments are uncertain, and an adverse outcome
could have a material adverse impact on our consolidated financial condition,
results of operations and cash flows.
NOTE
12 – RELATED-PARTY TRANSACTIONS
We are a
large business organization with worldwide operations, and we engage in numerous
purchase, sale and other transactions annually. We have various types of
business arrangements with corporations and other organizations in which an
executive officer, director or nominee for director may also be a director,
executive or investor, or have some other direct or indirect relationship. We
enter into these arrangements in the ordinary course of our business, and
they
typically involve us receiving or providing some good or service on a
nonexclusive basis and at arm’s-length negotiated rates or in accordance with
regulated price schedules.
Each of
the following executive officers of our company has irrevocably elected to
satisfy withholding obligations relating to all or a portion of any applicable
federal, state or other taxes that may be due on the vesting in the year ending
December 31, 2009 of certain shares of restricted stock and performance shares
awarded under various long-term incentive plans by returning to us the number of
such vested shares having a fair market value equal to the amount of such
taxes: John A. Fees, Robert A. Deason, Brandon C. Bethards, Preston
Johnson, Jr., James C. Lewis, John T. Nesser III, Michael S. Taff, Dennis S.
Baldwin and Liane K. Hinrichs and our former executive officer James R.
Easter. These elections, which apply to an aggregate of 79,440,
38,540, 16,310, 900, 12,664, 31,337, 18,797, 700, 13,350 and 13,500 shares
vesting in the year ending December 31, 2009 and held by Messrs. Fees, Deason,
Bethards, Johnson, Lewis, Nesser, Taff and Baldwin, Ms. Hinrichs and Messr.
Easter, respectively, are subject to approval of the Compensation Committee of
our Board of Directors, which approval was granted. For performance
shares vesting in 2009, our Board of Directors also granted approval for any
incremental shares that vest during 2009 based upon achievement of specified
performance criteria, as discussed further in Note 10. In the year
ended December 31, 2008, each of Robert A. Deason and John T. Nesser III and our
former executive officers Bruce W. Wilkinson, James R. Easter, Francis S. Kalman
and Louis J. Sannino made a similar election, which applied to an aggregate of
75,000, 28,200, 82,200, 11,700, 43,500 and 18,300 shares, respectively, that
vested in the year ended December 31, 2008. Those elections also were
approved by the Compensation Committee. We expect any transfers
reflecting shares of restricted stock returned to us will be reported in the SEC
filings made by those transferring holders who are obligated to report
transactions in our securities under Section 16 of the Securities Exchange Act
of 1934.
See Note
4 for additional transactions with unconsolidated affiliates.
NOTE
13 – RISKS AND UNCERTAINTIES
Percentage-of-Completion
Accounting
As of
December 31, 2008, in accordance with the percentage-of-completion method of
accounting, we have provided for our estimated costs to complete all of our
ongoing contracts. However, it is possible that current estimates could change
due to unforeseen events, which could result in adjustments to overall contract
costs. The risk on fixed-priced contracts is that revenue from the customer does
not rise to cover increases in our costs. It is possible that current estimates
could materially change for various reasons, including, but not limited to,
fluctuations in forecasted labor productivity, pipeline lay rates or steel and
other raw material prices. Increases in costs on our fixed-price contracts could
have a material adverse impact on our consolidated financial condition, results
of operations and cash flows. Alternatively, reductions in overall contract
costs at completion could materially improve our consolidated financial
condition, results of operations and cash flows.
Liquidated
Damages (Offshore Oil and Gas Construction Segment)
Some of
our contracts contain penalty provisions that require us to pay liquidated
damages if we are responsible for the failure to meet specified contractual
milestone dates and the applicable customer asserts a claim under these
provisions. These contracts define the conditions under which our customers may
make claims against us for liquidated damages. In many cases in which we have
had potential exposure for liquidated damages, such damages ultimately were not
asserted by our customers. As of December 31, 2008, we had not
accrued for approximately $108 million of potential liquidated damages that we
believe we could incur based upon our current expectations of the time to
complete certain projects in our Offshore Oil and Gas Construction
segment. We do not believe any claims for these potential liquidated
damages are probable of being assessed. The trigger dates for the majority of
these potential liquidated damages occurred during the fourth quarter of 2008.
We are in active discussions with our customers on the issues giving rise to
delays in these projects, and we believe we will be successful in obtaining
schedule extensions that should resolve the potential for liquidated damages
being assessed. However, we may not achieve relief on some or all of the issues.
For certain other projects in our Offshore Oil and Gas Construction segment, we
have currently provided for approximately $23 million in liquidated damages in
our estimates of revenues and gross profit, of which approximately $17 million
has been recognized in our financial statements to date, as we believe, based on
the individual facts and circumstances, that these liquidated damages are
probable.
Contract
Losses (Middle East Projects)
During
the year ended December 31, 2008, we recorded contract losses of approximately
$146 million attributable to changes in our estimates on the expected costs to
complete various projects, primarily in our Middle East operations.
Tax
Group Reorganization
The
reorganization of our U.S. tax groups, which was completed on December 31, 2006,
resulted in a material, favorable impact on our consolidated financial results
for the year ended December 31, 2006. Although we believe
that the
tax result of the reorganization as reported in our consolidated financial
statements is accurate, the tax results derived will likely be subject to audit,
or other challenge, by the IRS. Should the IRS’ interpretation of the
tax law in this regard differ from our interpretation and that of our outside
tax advisors, such that adjustments are proposed or sustained by the IRS, there
could be a material adverse effect on our consolidated financial results as
reported and our expected future cash flows.
|
|
NOTE
14 – FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK
|
Our
Offshore Oil and Gas Construction segment's principal customers are businesses
in the offshore oil, natural gas and hydrocarbon processing industries and other
offshore construction companies. The primary customer of our
Government Operations segment is the U.S. Government, including its
contractors. Our Power Generation Systems segment’s major customers
are large utilities. These concentrations of customers may impact our
overall exposure to credit risk, either positively or negatively, in that our
customers may be similarly affected by changes in economic or other
conditions. In addition, we and many of our customers operate
worldwide and are therefore exposed to risks associated with the economic and
political forces of various countries and geographic areas. Approximately 50% of
our trade receivables are due from foreign customers. See Note 18 for additional
information about our operations in different geographic areas. We generally do
not obtain any collateral for our receivables.
We
believe that our provision for possible losses on uncollectible accounts
receivable is adequate for our credit loss exposure. At December 31,
2008 and 2007, the allowance for possible losses that we deducted from accounts
receivable – trade on the accompanying balance sheet was $2.7 million and $5.2
million, respectively.
NOTE
15 – INVESTMENTS
The
following is a summary of our available-for-sale securities at December 31,
2008:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
$ | 282,509 | $ | 2,911 | $ | - | $ | 285,420 | ||||||||
|
Money
market instruments and short-term investments
|
59,894 | - | (547 | ) | 59,347 | |||||||||||
|
Asset-Backed
Securities and Collateralized Mortgage Obligations(1)
|
21,298 | - | (9,923 | ) | 11,375 | |||||||||||
|
Corporate
and Foreign Government Bonds and Notes
|
95,962 | - | (1,419 | ) | 94,543 | |||||||||||
|
Total(2)
|
$ | 459,663 | $ | 2,911 | $ | (11,889 | ) | $ | 450,685 | |||||||
|
(1) Included
in our Asset-Backed Securities and Collateralized Mortgage Obligations is
approximately $6 million of commercial paper secured by prime mortgaged
backed securities. These investments originally matured in August 2007 but
were extended.
We
changed our investment policy effective in August 2007 to no longer invest
in asset-backed securities or asset-backed commercial paper. These
investments represented approximately 1.1% of our total cash and cash
equivalents and investments at December 31, 2008.
|
||||||||||||||||
|
(2) Fair
value of $30.9 million pledged to secure payments under certain
reinsurance agreements.
|
||||||||||||||||
The
following is a summary of our available-for-sale securities at December 31,
2007:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of U.S. Government
agencies
|
$ | 91,845 | $ | 907 | $ | - | $ | 92,752 | ||||||||
|
Money
market instruments and short-term investments
|
341,777 | 1,532 | - | 343,309 | ||||||||||||
|
Asset-Backed
Securities and Collateralized Mortgage Obligations(1)
|
27,555 | - | (1,455 | ) | 26,100 | |||||||||||
|
Total(2)
|
$ | 461,177 | $ | 2,439 | $ | (1,455 | ) | $ | 462,161 | |||||||
|
(1) Included
in our Asset-Backed Securities and Collateralized Mortgage Obligations is
approximately $18 million of commercial paper secured by prime mortgaged
backed securities. These investments originally matured in August of 2007
but were extended.
We
changed our investment policy effective in August 2007 to no longer invest
in asset-backed securities or asset-backed commercial paper. These
investments represented approximately 1.7% of our total cash and cash
equivalents and investments at December 31, 2007.
|
||||||||||||||||
|
(2) Fair
value of $30.7 million pledged to secure payments under certain
reinsurance agreements.
|
||||||||||||||||
At
December 31, 2008, our available-for-sale debt securities had contractual
maturities primarily in 2009 and 2010.
Proceeds,
gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows:
|
Proceeds
|
Gross
Realized Gains
|
Gross
Realized Losses
|
||||||||||
|
Year
Ended December 31, 2008
|
$ | 1,529,068 | $ | 1,492 | $ | - | ||||||
|
Year
Ended December 31, 2007
|
$ | 2,311,730 | $ | 177 | $ | - | ||||||
|
Year
Ended December 31, 2006
|
$ | 1,730,838 | $ | 7 | $ | - | ||||||
NOTE
16 – DERIVATIVE FINANCIAL INSTRUMENTS
Our
worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments to
reduce the impact of changes in foreign exchange rates on our operating
results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts and other cash flow
exposures that are denominated in currencies other than our operating entities’
functional currencies. We do not hold or issue financial instruments
for trading or other speculative purposes.
We enter
into derivative financial instruments primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. We
record these contracts at fair value on our consolidated balance
sheets. Depending on the hedge designation at the inception of the
contract, the related gains and losses on these contracts are either deferred in
stockholders’ equity (deficit), as a component of accumulated other
comprehensive loss, until the hedged item is recognized in earnings or offset
against the change in fair value of the hedged firm commitment through
earnings. The ineffective portion of a derivative’s change in fair
value and any portion excluded from the assessment of effectiveness are
immediately recognized in earnings. The gain or loss on a derivative
instrument not designated as a hedging instrument is also immediately recognized
in earnings. Gains and losses on derivative financial instruments
that require immediate recognition are included as a component of other income
(expense) – net in our consolidated statements of income.
At
December 31, 2008, we had forward contracts to purchase or sell a total notional
value of $433.0 million in foreign currencies, primarily Euros and Canadian
Dollars, at varying maturities through December 2011. At December 31,
2007, we had forward contracts to purchase or sell a net total notional value of
$368.7 million in foreign currencies, primarily Euros and Canadian Dollars, at
varying maturities through December 2011.
At
December 31, 2007, we had a foreign currency option contract outstanding to
purchase 0.9 million Euros at a strike price of 1.34 with varying expiration
dates extending to October 2008. Also at December 31, 2007, we had a
foreign currency option contract to purchase 427.1 million Japanese Yen at a
strike price of 110.0 with an expiration date of February 29, 2008.
We have
designated substantially all of our forward and option contracts as cash flow
hedging instruments. For the option contracts, the hedged risk is the
risk of changes in forecasted U.S. dollar equivalent cash flows related to
long-term contracts attributable to movements in the exchange rate above the
strike prices. We assess effectiveness based upon total changes in
cash flows of the option contracts. For forward contracts, the
hedged risk is the risk of changes in functional-currency-equivalent cash flows
attributable to changes in spot exchange rates of forecasted transactions
related to long-term contracts. We exclude from our assessment of
effectiveness the portion of the fair value of the forward contracts
attributable to the difference between spot exchange rates and forward exchange
rates. At December 31, 2008 and 2007, we have deferred
approximately $(13.2) million and $20.9 million, respectively, of net gains
(losses) on these derivative financial instruments. Of the deferred amount at
December 31, 2008, we expect to recognize substantially all of it in income over
the next 12 months, primarily in accordance with the percentage-of-completion
method of accounting. For the years ended December 31, 2008, 2007 and
2006, we immediately recognized net gains (losses) of approximately $4.5
million, $(2.1) million and $(4.1) million, respectively, which primarily
represent changes in the fair value of forward contracts excluded from hedge
effectiveness.
We are
exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. We mitigate this
risk by using major financial institutions with high credit
ratings.
NOTE
17 – FAIR VALUES OF FINANCIAL INSTRUMENTS
We
adopted SFAS No. 157 on January 1, 2008 for fair value measurement of financial
instruments and recurring fair value measurements of nonfinancial assets and
liabilities. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements.
SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurement date. SFAS No. 157 also
expands the disclosure requirements around fair value and establishes a
hierarchy for valuation inputs that emphasizes the use of observable inputs when
measuring fair value. A financial instrument’s categorization within
the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The fair value hierarchy
established by SFAS No. 157 is broken down as follows:
· Level 1 –
inputs are based upon quoted prices for identical instruments traded in active
markets.
|
·
|
Level
2 – inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for similar or identical instruments in inactive
markets and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets and
liabilities.
|
|
·
|
Level
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 sections describe the valuation methodologies we use to measure the
fair values of our available-for-sale securities and derivatives.
Available-for-Sale-Securities
Investments
other than derivatives primarily include U.S. Government and agency securities,
money-market funds, mortgage-backed securities and corporate notes and
bonds.
In
general, and where applicable, we use a pricing service that principally uses a
composite of observable prices and quoted prices in active markets for identical
assets or liabilities to determine fair value. This pricing
methodology applies to our Level 1 and 2 investments. Our Level 3
investment consists of asset-backed commercial paper note backed by a pool of
mortgage-backed securities. The fair value of this Level 3 investment was based
on the calculation of an overall weighted-average valuation, using the prices of
the underlying individual securities. Individual securities in the
pool were valued based on market observed prices, where available. If market
prices were not available, prices of similar securities backed by similar assets
were used. This Level 3 investment did not have any market activity
during 2008, and, therefore, the market for this investment was deemed to be
inactive as of December 31, 2008. However, the underlying collateral
continues to perform favorably, and the investment continues to pay interest on
time and in accordance with the terms of the investment.
Our net
unrealized gain/loss on investments is currently in an unrealized loss position
totaling approximately $9.0 million at December 31, 2008. At December 31, 2007,
we had unrealized gains on our investments totaling approximately $1.0 million.
The major components of our investments in an unrealized loss position are
corporate bonds, asset-backed obligations and commercial paper. Based on our
analysis of these investments, we believe that none of our available-for-sale
securities were other than temporarily impaired at December 31,
2008.
Derivatives
Level 2
derivative assets and liabilities primarily include over-the-counter options and
forwards. These currently consist of foreign exchange rate
derivatives. Where applicable, the value of these derivative assets and
liabilities is computed by discounting the projected future cash flow amounts to
present value using market-based observable inputs including foreign exchange
forward and spot rates, interest rates and counterparty performance risk
adjustments.
At
December 31, 2008, we had forward contracts outstanding to purchase or sell
foreign currencies, primarily Euros and Canadian Dollars, with a total notional
value of $433.0 million and a total fair value of $(26.3) million.
Fair
Value Measurements
The
following is a summary of our available-for-sale securities measured at fair
value at December 31, 2008 (in thousands):
|
12/31/08
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Mutual
funds
|
$ | 4,253 | $ | - | $ | 4,253 | $ | - | ||||||||
|
Commercial
paper
|
19,080 | - | 19,080 | - | ||||||||||||
|
Certificates
of deposit
|
36,014 | - | 36,014 | - | ||||||||||||
|
U.S.
Government and agency securities
|
285,420 | 242,204 | 43,216 | - | ||||||||||||
|
Foreign
government bonds
|
5,000 | - | 5,000 | - | ||||||||||||
|
Asset-backed
securities and collateralized mortgage obligations
|
11,375 | - | 3,919 | 7,456 | ||||||||||||
|
Corporate
notes and bonds
|
89,543 | - | 89,543 | - | ||||||||||||
|
Total
|
$ | 450,685 | $ | 242,204 | $ | 201,025 | $ | 7,456 | ||||||||
Changes
in Level 3 Instrument
The
following is a summary of the changes in our Level 3 instrument measured on a
recurring basis for the year ended December 31, 2008 (in
thousands):
|
Balance,
beginning of the year
|
$ | 18,174 | ||
|
Total
realized and unrealized gains (losses):
|
||||
|
Included
in other income (expense)
|
- | |||
|
Included
in other comprehensive income
|
(7,707 | ) | ||
|
Purchases,
issuances, and settlements
|
6 | |||
|
Principal
repayments
|
(3,017 | ) | ||
|
Balance,
end of year
|
$ | 7,456 |
Other
Financial Instruments
We used
the following methods and assumptions in estimating our fair value disclosures
for our other financial instruments, as follows:
Cash and cash equivalents and
restricted cash and cash equivalents. The carrying amounts
that we have reported in the accompanying consolidated balance sheets for cash
and cash equivalents approximate their fair values.
Long- and short-term
debt. We base the fair values of debt instruments on quoted
market prices. Where quoted prices are not available, we base the
fair values on the present value of future cash flows discounted at estimated
borrowing rates for similar debt instruments or on estimated prices based on
current yields for debt issues of similar quality and terms.
The
estimated fair values of our financial instruments are as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
Carrying
Amount
|
Fair Value
|
Carrying
Amount
|
Fair Value
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance Sheet Instruments
|
||||||||||||||||
|
Cash
and Cash equivalents
|
$ | 586,649 | $ | 586,649 | $ | 1,001,394 | $ | 1,001,394 | ||||||||
|
Restricted
cash and cash equivalents
|
$ | 50,536 | $ | 50,536 | $ | 64,786 | $ | 64,786 | ||||||||
|
Investments
|
$ | 450,685 | $ | 450,685 | $ | 462,161 | $ | 462,161 | ||||||||
|
Debt
|
$ | 15,130 | $ | 15,221 | $ | 17,208 | $ | 17,421 | ||||||||
NOTE
18 – SEGMENT REPORTING
Our
reportable segments are Offshore Oil and Gas Construction, Government Operations
and Power Generation Systems, as described in Note 1. The operations
of our segments are managed separately and each has unique technology, services
and customer class.
We
account for intersegment sales at prices that we generally establish by
reference to similar transactions with unaffiliated
customers. Reportable segments are measured based on operating income
exclusive of general corporate
expenses,
contract and insurance claims provisions, legal expenses and gains (losses) on
sales of corporate assets. Other reconciling items to income from
continuing operations before provision for income taxes are interest income,
interest expense, minority interest and other income (expense) –
net.
Due to
the Chapter 11 Bankruptcy, we did not consolidate the results of operations for
the primary operating subsidiaries in our Power Generation Systems segment from
February 22, 2000 through February 22, 2006.
SEGMENT
INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006.
1. Information
about Operations in our Different Industry Segments:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
REVENUES
(1):
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 3,181,238 | $ | 2,445,675 | $ | 1,610,307 | ||||||
|
Government
Operations
|
851,019 | 694,024 | 630,067 | |||||||||
|
Power
Generation Systems
|
2,550,854 | 2,504,225 | 1,888,636 | |||||||||
|
Adjustments
and Eliminations
|
(10,688 | ) | (12,314 | ) | (8,869 | ) | ||||||
| $ | 6,572,423 | $ | 5,631,610 | $ | 4,120,141 | |||||||
|
(1)
Segment revenues are net of the following intersegment transfers and other
adjustments:
|
||||||||||||
|
Offshore
Oil and Gas Construction Transfers
|
$ | 9,388 | $ | 11,415 | $ | 7,770 | ||||||
|
Government
Operations Transfers
|
1,245 | 776 | 784 | |||||||||
|
Power
Generation Systems Transfers
|
55 | 123 | 315 | |||||||||
| $ | 10,688 | $ | 12,314 | $ | 8,869 | |||||||
|
(2) Due to the Chapter 11
Bankruptcy, we did not consolidate the results of operations for the
primary operating subsidiaries in our Power Generation Systems segment
from February 22, 2000 through February 22, 2006.
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
OPERATING
INCOME:
|
||||||||||||
|
Segment
Operating Income:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 147,242 | $ | 397,560 | $ | 214,105 | ||||||
|
Government
Operations
|
108,851 | 90,022 | 82,744 | |||||||||
|
Power
Generation Systems
|
295,345 | 219,734 | 101,904 | |||||||||
| $ | 551,438 | $ | 707,316 | $ | 398,753 | |||||||
|
Gains
(Losses) on Asset Disposal and Impairments – Net:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 2,599 | $ | 6,765 | $ | (16,175 | ) | |||||
|
Government
Operations
|
- | 1,631 | 1,123 | |||||||||
|
Power
Generation Systems
|
9,606 | (25 | ) | 65 | ||||||||
| $ | 12,205 | $ | 8,371 | $ | (14,987 | ) | ||||||
|
Equity
in Income (Loss) of Investees:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | (3,661 | ) | $ | (3,923 | ) | $ | (2,882 | ) | |||
|
Government
Operations
|
41,381 | 31,288 | 27,768 | |||||||||
|
Power
Generation Systems
|
10,411 | 14,359 | 12,638 | |||||||||
| $ | 48,131 | $ | 41,724 | $ | 37,524 | |||||||
|
SEGMENT
INCOME:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 146,180 | $ | 400,402 | $ | 195,048 | ||||||
|
Government
Operations
|
150,232 | 122,941 | 111,635 | |||||||||
|
Power
Generation Systems
|
315,362 | 234,068 | 114,607 | |||||||||
| $ | 611,774 | $ | 757,411 | $ | 421,290 | |||||||
|
Unallocated
Corporate
|
(41,892 | ) | (41,214 | ) | (29,949 | ) | ||||||
| $ | 569,882 | $ | 716,197 | $ | 391,341 | |||||||
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
SEGMENT
ASSETS:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 1,570,307 | $ | 2,044,740 | $ | 1,299,883 | ||||||
|
Government
Operations
|
771,627 | 494,707 | 336,750 | |||||||||
|
Power
Generation Systems
|
1,493,495 | 1,420,162 | 1,433,551 | |||||||||
|
Total
Segment Assets
|
3,835,429 | 3,959,609 | 3,070,184 | |||||||||
|
Corporate
Assets
|
766,264 | 451,877 | 563,578 | |||||||||
|
Total
Assets
|
$ | 4,601,693 | $ | 4,411,486 | $ | 3,633,762 | ||||||
|
CAPITAL
EXPENDITURES:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 193,736 | $ | 172,580 | $ | 89,501 | ||||||
|
Government
Operations
|
16,348 | 14,117 | 16,608 | |||||||||
|
Power
Generation Systems
|
33,896 | 40,218 | 23,718 | |||||||||
|
Segment
Capital Expenditures
|
243,980 | 226,915 | 129,827 | |||||||||
|
Corporate
Capital Expenditures
|
11,711 | 6,374 | 2,877 | |||||||||
|
Total
Capital Expenditures
|
$ | 255,691 | $ | 233,289 | $ | 132,704 | ||||||
|
DEPRECIATION
AND AMORTIZATION:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 80,148 | $ | 54,318 | $ | 28,515 | ||||||
|
Government
Operations
|
22,445 | 19,269 | 14,833 | |||||||||
|
Power
Generation Systems
|
22,080 | 21,266 | 16,342 | |||||||||
|
Segment
Depreciation and Amortization
|
124,673 | 94,853 | 59,690 | |||||||||
|
Corporate
Depreciation and Amortization
|
1,460 | 1,136 | 1,310 | |||||||||
|
Total
Depreciation and Amortization
|
$ | 126,133 | $ | 95,989 | $ | 61,000 | ||||||
|
INVESTMENT
IN UNCONSOLIDATED AFFILIATES:
|
||||||||||||
|
Offshore
Oil and Gas Construction
|
$ | 8,677 | $ | 7,339 | $ | 6,662 | ||||||
|
Government
Operations
|
3,926 | 3,983 | 4,404 | |||||||||
|
Power
Generation Systems
|
57,701 | 50,919 | 41,735 | |||||||||
|
Total Investment
in Unconsolidated Affiliates
|
$ | 70,304 | $ | 62,241 | $ | 52,801 | ||||||
2. Information
about our Product and Service Lines:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
REVENUES:
|
||||||||||||
|
Offshore
Oil and Gas Construction:
|
||||||||||||
|
Offshore
Operations
|
$ | 1,262,921 | $ | 1,126,609 | $ | 661,231 | ||||||
|
Fabrication
Operations
|
420,958 | 413,940 | 307,759 | |||||||||
|
Project
Services and Engineering Operations
|
407,441 | 303,671 | 241,102 | |||||||||
|
Procurement
Activities
|
1,111,795 | 618,795 | 417,905 | |||||||||
|
Eliminations
|
(21,877 | ) | (17,340 | ) | (17,690 | ) | ||||||
| 3,181,238 | 2,445,675 | 1,610,307 | ||||||||||
|
Government
Operations:
|
||||||||||||
|
Nuclear
Component Program
|
705,442 | 619,154 | 533,468 | |||||||||
|
Commercial
Operations
|
89,857 | 3,853 | 11,879 | |||||||||
|
Nuclear
Environmental Services
|
40,352 | 51,703 | 44,833 | |||||||||
|
Management
& Operation Contracts of U.S. Government Facilities
|
15,779 | 18,776 | 10,628 | |||||||||
|
Contract
Research
|
46 | 1,877 | 5,426 | |||||||||
|
Other
Government Operations
|
821 | 708 | 25,830 | |||||||||
|
Other
Industrial Operations
|
- | - | 913 | |||||||||
|
Eliminations
|
(1,278 | ) | (2,047 | ) | (2,910 | ) | ||||||
| 851,019 | 694,024 | 630,067 | ||||||||||
|
Power
Generation Systems:
|
||||||||||||
|
Original
Equipment Manufacturers’ Operations
|
1,185,305 | 1,371,427 | 916,889 | |||||||||
|
Aftermarket
Goods and Services
|
974,730 | 829,185 | 693,578 | |||||||||
|
Nuclear
Equipment Operations
|
187,312 | 137,864 | 135,403 | |||||||||
|
Boiler
Auxiliary Equipment
|
138,192 | 115,855 | 106,121 | |||||||||
|
Operations
and Maintenance
|
60,171 | 54,854 | 47,057 | |||||||||
|
Eliminations/Other
|
5,144 | (4,960 | ) | (10,412 | ) | |||||||
| 2,550,854 | 2,504,225 | 1,888,636 | ||||||||||
|
Eliminations
|
(10,688 | ) | (12,314 | ) | (8,869 | ) | ||||||
| $ | 6,572,423 | $ | 5,631,610 | $ | 4,120,141 | |||||||
3.
Information about our Operations in Different Geographic Areas:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006(2)
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
REVENUES(3):
|
||||||||||||
|
United
States
|
$ | 2,988,726 | $ | 2,986,442 | $ | 2,197,368 | ||||||
|
Qatar
|
804,552 | 365,410 | 262,681 | |||||||||
|
Vietnam
|
369,047 | 131,438 | 102,680 | |||||||||
|
India
|
357,026 | 246,881 | 25,752 | |||||||||
|
Canada
|
339,372 | 239,181 | 228,246 | |||||||||
|
Saudi
Arabia
|
298,701 | 367,651 | 256,484 | |||||||||
|
Australia
|
189,111 | 172,838 | 7,201 | |||||||||
|
Malaysia
|
186,277 | 167,125 | 75,513 | |||||||||
|
Trinidad
|
164,241 | 36,220 | 27,213 | |||||||||
|
Azerbaijan
|
146,587 | 469,984 | 406,510 | |||||||||
|
Brazil
|
140,259 | 4,536 | 1,994 | |||||||||
|
Thailand
|
120,671 | 130,419 | 129,753 | |||||||||
|
Indonesia
|
98,423 | 102,560 | 161,023 | |||||||||
|
Russia
|
56,315 | 1,165 | 4,477 | |||||||||
|
China
|
50,196 | 32,903 | 42,199 | |||||||||
|
Sweden
|
42,576 | 41,754 | 49,286 | |||||||||
|
Mexico
|
42,263 | 3,657 | 39,204 | |||||||||
|
Denmark
|
31,333 | 36,382 | 45,438 | |||||||||
|
Belgium
|
22,777 | 17,416 | 424 | |||||||||
|
United
Kingdom
|
17,754 | 10,142 | 8,040 | |||||||||
|
Germany
|
12,893 | 8,815 | 4,627 | |||||||||
|
Norway
|
11,467 | 1,457 | 105 | |||||||||
|
Other
Countries
|
81,856 | 57,234 | 43,923 | |||||||||
| $ | 6,572,423 | $ | 5,631,610 | $ | 4,120,141 | |||||||
|
(3) We
allocate geographic revenues based on the location of the customer’s
operations.
|
||||||||||||
|
PROPERTY,
PLANT AND EQUIPMENT, NET(4):
|
||||||||||||
|
United
States
|
$ | 386,389 | $ | 333,815 | $ | 279,095 | ||||||
|
Indonesia
|
210,409 | 145,549 | 74,259 | |||||||||
|
United
Arab Emirates
|
148,635 | 154,113 | 60,707 | |||||||||
|
Canada
|
72,443 | 114,472 | 34,529 | |||||||||
|
Qatar
|
57,556 | - | - | |||||||||
|
Mexico
|
48,871 | 42,607 | 3,523 | |||||||||
|
United
Kingdom
|
46,753 | 31,412 | 5,340 | |||||||||
|
Singapore
|
36,835 | 9,315 | 1,203 | |||||||||
|
Dubai
|
27,879 | - | - | |||||||||
|
Saudi
Arabia
|
12,812 | - | 19,667 | |||||||||
|
Trinidad
|
12,178 | 12,763 | - | |||||||||
|
Denmark
|
8,549 | 8,943 | 8,403 | |||||||||
|
India
|
1,126 | 18,912 | 21,183 | |||||||||
|
Australia
|
64 | 25,458 | 72 | |||||||||
|
Other
Countries
|
8,360 | 16,379 | 5,513 | |||||||||
| $ | 1,078,859 | $ | 913,738 | $ | 513,494 | |||||||
|
(4)
Our marine vessels are included in the country in which they were
operating as of December 31, 2008.
|
||||||||||||
4. Information
about our Major Customers:
In the
years ended December 31, 2008, 2007 and 2006, the U.S. Government accounted for
approximately 12%, 12% and 15%, respectively, of our total
revenues. We have included these revenues in our Government
Operations segment.
NOTE
19 – QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following tables set forth selected unaudited quarterly financial information
for the years ended December 31, 2008 and 2007:
|
Year
Ended December 31, 2008
Quarter
Ended
|
||||||||||||||||
|
March
31,
2008
|
June
30,
2008
|
Sept.
30,
2008
|
Dec.
31,
2008
|
|||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Revenues
|
$ | 1,450,426 | $ | 1,792,646 | $ | 1,664,851 | $ | 1,664,500 | ||||||||
|
Operating
income
(1)
|
$ | 157,112 | $ | 231,124 | $ | 91,973 | $ | 89,673 | ||||||||
|
Equity
in income from investees
|
$ | 10,670 | $ | 9,252 | $ | 12,521 | $ | 15,688 | ||||||||
|
Net
income
|
$ | 123,190 | $ | 177,539 | $ | 85,571 | $ | 43,002 | ||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net
income
|
$ | 0.55 | $ | 0.78 | $ | 0.38 | $ | 0.19 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Net
income
|
$ | 0.54 | $ | 0.77 | $ | 0.37 | $ | 0.19 | ||||||||
|
(1) Includes
equity in income from investees.
|
||||||||||||||||
|
Year
Ended December 31, 2007
Quarter
Ended
|
||||||||||||||||
|
March
31,
2007
|
June
30,
2007
|
Sept.
30,
2007
|
Dec.
31,
2007
|
|||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Revenues
|
$ | 1,363,430 | $ | 1,418,146 | $ | 1,324,018 | $ | 1,526,016 | ||||||||
|
Operating
income
(1)
|
$ | 192,478 | $ | 181,792 | $ | 155,150 | $ | 186,777 | ||||||||
|
Equity
in income from investees
|
$ | 7,241 | $ | 7,308 | $ | 12,477 | $ | 14,698 | ||||||||
|
Net
income
|
$ | 158,061 | $ | 149,374 | $ | 140,408 | $ | 159,985 | ||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net
income
|
$ | 0.72 | $ | 0.67 | $ | 0.63 | $ | 0.71 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Net
income
|
$ | 0.69 | $ | 0.66 | $ | 0.61 | $ | 0.70 | ||||||||
|
(1) Includes
equity in income from investees.
|
||||||||||||||||
NOTE
20 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands, except shares and per share amounts)
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
from continuing operations
|
$ | 429,302 | $ | 607,828 | $ | 317,621 | ||||||
|
Income
from discontinued operations
|
- | - | 12,894 | |||||||||
|
Net
income for basic computation
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Weighted
average common shares
|
226,918,776 | 223,511,880 | 217,752,454 | |||||||||
|
Basic
earnings per common share:
|
||||||||||||
|
Income
from continuing operations
|
$ | 1.89 | $ | 2.72 | $ | 1.46 | ||||||
|
Income
from discontinued operations
|
0.00 | 0.00 | 0.06 | |||||||||
|
Net
income
|
$ | 1.89 | $ | 2.72 | $ | 1.52 | ||||||
|
Diluted:
|
||||||||||||
|
Income
from continuing operations
|
$ | 429,302 | $ | 607,828 | $ | 317,621 | ||||||
|
Income
from discontinued operations
|
- | - | 12,894 | |||||||||
|
Net
income for diluted computation
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Weighted
average common shares (basic)
|
226,918,776 | 223,511,880 | 217,752,454 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options, restricted stock and performance shares(1)
|
3,475,006 | 5,230,642 | 9,966,330 | |||||||||
|
Adjusted
weighted average common shares
|
230,393,782 | 228,742,522 | 227,718,784 | |||||||||
|
Diluted
earnings per common share:
|
||||||||||||
|
Income
from continuing operations
|
$ | 1.86 | $ | 2.66 | $ | 1.39 | ||||||
|
Income
from discontinued operations
|
0.00 | 0.00 | 0.06 | |||||||||
|
Net
income
|
$ | 1.86 | $ | 2.66 | $ | 1.45 | ||||||
|
(1)
|
At
December 31, 2008, we excluded from the diluted share calculation 22,500
shares related to stock options, as their effect would have been
antidilutive.
|
NOTE
21 – PRO FORMA CONSOLIDATION (UNAUDITED)
On
February 22, 2006, several subsidiaries included in our Power Generation Systems
segment exited from the Chapter 11 Bankruptcy, which commenced on February 22,
2000. Due to the Chapter 11 Bankruptcy, we did not consolidate the
results of operations for these subsidiaries in our consolidated financial
statements from February 22, 2000 through February 22, 2006. The pro
forma information below presents combined results of operations as if these
subsidiaries had been reconsolidated at the beginning of the year ended December
31, 2006. This pro forma information is not necessarily indicative of the
results of operations of the combined entities had the combination occurred at
the beginning of the periods presented, nor is it indicative of future
results.
|
Year
Ended December 31,
|
||||
|
2006
|
||||
|
(In
thousands)
|
||||
|
Revenues
|
$ | 4,378,408 | ||
|
Operating
Income
|
$ | 393,019 | ||
|
Net
Income
|
$ | 332,307 | ||
|
Diluted
Earnings Per Share
|
$ | 1.46 | ||
None
|
Item
9A.
|
As of the
end of the period covered by this annual report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures (as that term
is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our
disclosure controls and procedures were developed through a process in which our
management applied its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding the control objectives. You should note that the design of
any system of disclosure controls and procedures is based in part upon various
assumptions about the likelihood of future events, and we cannot assure you that
any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. Based on the evaluation referred to above,
our Chief Executive Officer and the Chief Financial Officer concluded that the
design and operation of our disclosure controls and procedures are effective as
of December 31, 2008 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 its
principal executives and principal financial officers or persons performing
similar functions as appropriate to allow timely decisions regarding required
disclosure.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as that term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)
and for our assessment of the effectiveness of internal control over financial
reporting.
Our
internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of our consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of our
management and Board of Directors; and
(3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the consolidated financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
has conducted an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on the framework
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
This assessment included an evaluation of the design of our internal control
over financial reporting and testing of the operational effectiveness of those
controls. Based on our assessment under the criteria described above,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2008. Deloitte & Touche LLP has
audited our internal control over financial reporting as of December 31, 2008,
and their report is included in Item 9A.
We
completed the purchase of all of the capital stock of Nuclear Fuel
Services, Inc. on December 31, 2008, Delta Power Services, LLC on August 1, 2008
and the Intech group of companies on July 15, 2008. In conducting the
Company’s evaluation of the effectiveness of its internal control over financial
reporting, management excluded these acquired businesses from its 2008
internal control assessment, as permitted by rules adopted by the Securities and
Exchange Commission. As of December 31, 2008, these acquired
businesses represented approximately 0.2% of our
consolidated revenues and approximately 4.2% of our
consolidated total assets.
There has
been no change in our internal control over financial reporting during the
quarter ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
To the
Board of Directors and Stockholders of McDermott International,
Inc.:
We have
audited the internal control over financial reporting of McDermott
International, Inc. and subsidiaries (the "Company") as of December 31, 2008,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. As described in Management’s Report on Internal
Control Over Financial Reporting, management excluded from its assessment the
internal control over financial reporting at Nuclear Fuel Services, Inc., Delta
Power Services, LLC, and the Intech group of companies, acquired on
December 31, 2008; August 1, 2008; and July 15, 2008; respectively, and
whose financial statements constitute 4.2% of consolidated total assets, and a
combined 0.2% of consolidated revenues of the consolidated financial statement
amounts as of and for the year ended December 31, 2008. Accordingly, our
audit did not include the internal control over financial reporting at Nuclear
Fuel Services, Inc., Delta Power Services, LLC, and the Intech group of
companies. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules as of and for the year ended December 31, 2008 of
the Company and our report dated March 2, 2009 expressed an unqualified opinion
on those financial statements and financial statement schedules.
/s/
DELOITTE & TOUCHE LLP
Houston,
Texas
March 2,
2009
|
Item
9B.
|
Robert A.
Deason, the President and Chief Executive Officer of our subsidiary, JRMSA,
notified the Board of Directors (the “Board”) of his intention to retire in
2009. Following discussions, our Compensation Committee of the Board
at its February 26, 2009 meeting awarded Mr. Deason a retention grant of 100,000
deferred stock units, which will vest December 31, 2009 and be paid in shares of
MII common stock, provided that he is an employee of MII or one of our
subsidiaries at that time. A copy of the form of grant agreement is
included as an exhibit to this annual report.
The
Compensation Committee of our Board (the “Compensation Committee”) administers
the Executive Incentive Compensation Plan (“EICP”), a cash bonus plan under
which our executive officers participate. The payment amount, if any,
of an EICP award is determined based on: (1) the attainment of financial
performance measures, (2) the attainment of individual performance measures and
(3) the exercise of the Compensation Committee’s discretionary
authority.
On
February 26, 2009, our Compensation Committee established 2009 target award
opportunities and confidential financial performance measures relative to those
opportunities for our named executive officers, Messrs. John A. Fees, Michael S.
Taff, Brandon C. Bethards, Robert A. Deason and John T. Nesser
III. For the year ending December 31, 2009, the target award
opportunities for these named executive officers are as follows:
|
Named
Executive Officer
|
Target
Award Opportunity (as a percentage of 2009 base salary)
|
|
John
A. Fees
|
100%
|
|
Michael
S. Taff
|
70%
|
|
Brandon
C. Bethards
|
70%
|
|
Robert
A. Deason
|
70%
|
|
John
T. Nesser III
|
70%
|
For 2009,
70% of the target award opportunity is attributable to financial performance
measures established by the Compensation Committee and 30% of the target award
opportunity is attributable to individual performance measures determined by our
Chief Executive Officer. The Compensation Committee retained its
discretion to increase or decrease an award in its discretion.
The
Compensation Committee established three levels of financial performance for
determining the minimum, target and maximum payment under the financial
performance component of the 2009 EICP award for these named executive
officers. For our 2009 EICP awards, the Compensation Committee set
the target level financial performance based on management's internal
estimates of 2009 operating income. For Messrs. Bethards and
Deason, the Compensation Committee divided the financial performance measure
between segment and consolidated operation income, with 50% attributable to the
operating income of their respective segment, B&W or JRMSA, respectively,
and 20% attributable to MII’s consolidated operating income.
The
following individual performance goals were established for these named
executive officers for the 2009 EICP:
For John
A. Fees, our Chief Executive Officer:
|
·
|
achieve
specific levels of company-wide health, safety and environmental
performance averages; and
|
|
·
|
positive
assessment by the Board regarding six performance categories selected by
the Board.
|
For
Michael S. Taff, our Senior Vice President and Chief Financial
Officer:
|
·
|
achieve
specific levels of company-wide health, safety and environmental
performance averages;
|
|
·
|
develop
and implement plan to address the credit facility that matures in 2010;
and
|
|
·
|
develop
strategic multi-year plan regarding information
technology.
|
For
Brandon C. Bethards, President and Chief Executive Officer of
B&W:
|
·
|
achieve
specific levels of health, safety and environmental performance averages
at our Power Generation Systems and Government Operations
segments;
|
|
·
|
successfully
manage the completion of the initial phase of a strategic global financial
implementation project as it relates B&W entities;
and
|
|
·
|
achieve
successful integration of specified acquisition as defined by the
integration plan milestones.
|
For
Robert A. Deason, President and Chief Executive Officer of JRMSA:
|
·
|
achieve
specific levels of health, safety and environmental performance averages
at our Offshore Oil and Gas Construction
segment;
|
|
·
|
implement
a comprehensive strategic contracting control
plan;
|
|
·
|
implement
plan to cut non-productive expenses;
and
|
|
·
|
develop
human resource management plan for our Offshore Oil and Gas Construction
segment.
|
For John
T. Nesser III, Executive Vice President, Chief Operating Officer of
JRMSA:
|
·
|
achieve
specific levels of health, safety and environmental performance averages
at our Offshore Oil and Gas Construction
segment;
|
|
·
|
implement
a comprehensive strategic contracting control
plan;
|
|
·
|
implement
strategic plan for the marine division of our Offshore Oil and Gas
Construction segment; and
|
|
·
|
achieve
specific cost reduction goals.
|
Additionally,
on February 26, 2009, our Compensation Committee approved the form of grant
agreements to be used in connection with grants of performance shares, deferred
stock units and stock options to our officers and key employees pursuant to our
2001 Directors and Officers Long-Term Incentive Plan, as amended to
date. A copy of the general form of agreements is included as
exhibits to this annual report.
The
information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers," respectively, in the
Proxy Statement for our 2009 Annual Meeting of Stockholders. The
information required by this item with respect to compliance with section 16(a)
of the Securities and Exchange Act of 1934, as amended, is incorporated by
reference to the material appearing under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement for our 2009 Annual
Meeting of Stockholders. The information required by this item with
respect to the Audit Committee and Audit Committee financial experts is
incorporated by reference to the material appearing in the “Committee” and
“Audit Committee” sections under the heading “Corporate Governance – Board of
Directors and Its Committees” in the Proxy Statement for our 2009 Annual Meeting
of Stockholders.
We have
adopted a Code of Business Conduct for our employees and directors, including,
specifically, our chief executive officer, our chief financial officer, our
chief accounting officer, and our other executive officers. Our code satisfies
the requirements for a “code of ethics” within the meaning of SEC rules. A copy
of the code is posted on our website, www.mcdermott.com/
under "Corporate Governance – Governance Policies – Code of Ethics for Chief
Executive Officer and Senior Financial Officers."
The
information required by this item is incorporated by reference to the material
appearing under the headings “Compensation Discussion and Analysis,”
“Compensation of Directors,” "Compensation of Executive Officers," “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee
Report” in the Proxy Statement for our 2009 Annual Meeting of
Stockholders.
|
Item
12.
|
The
information required by this item is incorporated by reference to (1) the Equity
Compensation Plan Information table appearing in Item 5 – “Market for the
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities” in Part II of this report and (2) the material appearing
under the headings "Security Ownership of Directors and Executive Officers" and
"Security Ownership of Certain Beneficial Owners" in the Proxy Statement for our
2009 Annual Meeting of Stockholders.
The
information in Note 12 to our consolidated financial statements included in this
report is incorporated by reference. Additional information required
by this item is incorporated by reference to the material appearing under the
heading “Corporate Governance – Director Independence” in the Proxy Statement
for our 2009 Annual Meeting of Stockholders.
The
information required by this item is incorporated by reference to the material
appearing under the heading “Ratification of Appointment of Independent
Registered Public Accounting Firm for Year Ending December 31, 2009” in the
Proxy Statement for our 2009 Annual Meeting of Stockholders.
The
following documents are filed as part of this Annual Report or incorporated by
reference:
|
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
||
|
Report
of Independent Registered Public Accounting Firm
|
|||
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
|||
|
Consolidated
Statements of Income for the Years Ended December 31, 2008, 2007 and
2006
|
|||
|
Consolidated
Statements of Comprehensive Income for the Years Ended December 31, 2008,
2007 and 2006
|
|||
|
Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2008,
2007 and 2006
|
|||
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
|||
|
Notes
to Consolidated Financial Statements for the Years Ended December 31,
2008, 2007 and 2006
|
|||
|
2.
|
CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES
|
||
|
Schedules
I and II are filed with this report. All other schedules for which
provision is made of the applicable regulations of the SEC have been
omitted because they are not required under the relevant instructions or
because the required information is included in the financial statements
or the related footnotes contained in this report.
|
|||
|
3.
|
EXHIBITS
|
||
|
Exhibit
Number
|
Description
|
||
|
3.1
|
McDermott
International, Inc.'s Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to McDermott International,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
2008 (File No. 1-08430)).
|
||
|
3.2
|
McDermott
International, Inc.'s Amended and Restated By-laws (incorporated by
reference to Exhibit 3.1 to McDermott International, Inc.’s Current Report
on Form 8-K dated May 3, 2006 (File No. 1-08430)).
|
||
|
3.3
|
Amended
and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.3 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-08430)).
|
||
|
4.1
|
Revolving
Credit Agreement dated as of December 9, 2003 among BWX Technologies,
Inc., as borrower, certain subsidiaries of BWX Technologies, Inc., as
guarantors, the initial lenders named therein, Credit Lyonnais New York
Branch, as administrative agent, and Credit Lyonnais Securities, as lead
arranger and sole bookrunner (incorporated by reference to Exhibit 4.8 of
McDermott International, Inc.’s Annual Report on Form 10-K, as amended,
for the year ended December 31, 2003 (File No.
1-08430)).
|
||
|
4.2
|
First
Amendment, dated as of March 18, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated March 18, 2005 (File No.
1-08430)).
|
|
|
4.3
|
Second
Amendment, dated as of November 7, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2005 (File No. 1-08430)).
|
|
|
4.4
|
Third
Amendment, dated as of December 22, 2006, to the Revolving Credit
Agreement dated as of December 9, 2003 among BWX Technologies, Inc., as
borrower, certain subsidiaries of BWX Technologies, Inc., as guarantors,
the initial lenders named therein, Calyon, New York Branch (formerly known
as Credit Lyonnais New York Branch), as administrative agent and lender,
as amended (incorporated by reference to Exhibit 4.4 to McDermott
International, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 1-08430)).
|
|
|
4.5
|
Fourth
Amendment, dated as of March 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007
(File No. 1-08430)).
|
|
|
4.6
|
Fifth
Amendment, dated as of October 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated October 29, 2007 (File No.
1-08430)).
|
|
|
4.7
|
Sixth
Amendment dated as of December 11, 2008, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as
amended.
|
|
|
4.8
|
Credit
Agreement dated as of June 6, 2006, by and among J. Ray McDermott, S.A.,
credit lenders, synthetic investors and issuers party thereto, Credit
Suisse, Cayman Islands Branch, Bank of America, N.A., Calyon New York
Branch, Fortis Capital Corp. and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
|
4.9
|
First
Amendment to Credit Agreement, dated as of August 4, 2006, by and among J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.8 to McDermott International,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007
(File No. 1-08430)).
|
|
|
4.10
|
Second
Amendment to Credit Agreement, dated as of December 1, 2006, by and among
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.9 to McDermott International,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007
(File No. 1-08430)).
|
|
|
4.11
|
Third
Amendment to Credit Agreement, dated as of July 9, 2007, by and among J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
|
4.12
|
Fourth
Amendment to Credit Agreement, dated as of July 20, 2007, by and among J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated July 20, 2007 (File No.
1-08430)).
|
|
|
4.13
|
Fifth
Amendment to Credit Agreement, dated as of April 7, 2008, by and between
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated April 7, 2008 (File No.
1-08430)).
|
|
|
4.14
|
Pledge
and Security Agreement by J. Ray McDermott, S.A. and certain of its
subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of June 6, 2006
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
|
4.15
|
Credit
Agreement dated as of February 22, 2006, by and among The Babcock
& Wilcox Company, certain lenders, synthetic investors and issuers
party thereto, Credit Suisse, Cayman Islands Branch, Credit Suisse
Securities (USA) LLC, JPMorgan Chase Bank, National Association, Wachovia
Bank, National Association and The Bank of Nova Scotia (incorporated by
reference to Exhibit 10.4 to McDermott International, Inc.’s Current
Report on Form 8-K dated February 21, 2006 (File
No. 1-08430)).
|
|
|
4.16
|
First
Amendment to Credit Agreement, dated as of July 9, 2007, by and among The
Babcock & Wilcox Company, certain guarantors thereto, certain lenders
and issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.3 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
|
4.17
|
Second
Amendment to Credit Agreement, dated as of July 20, 2007, by and among The
Babcock & Wilcox Company, certain guarantors thereto, certain lenders
and issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated July 20, 2007 (File No.
1-08430)).
|
|
|
4.18
|
Pledge
and Security Agreement by The Babcock & Wilcox Company and certain of
its subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of February 22,
2006 (incorporated by reference to Exhibit 10.5 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 21,
2006 (File No. 1-08430)).
|
|
|
We
and certain of our consolidated subsidiaries are parties to other debt
instruments under which the total amount of securities authorized does not
exceed 10% of our total consolidated assets. Pursuant to
paragraph 4(iii)(A) of Item 601 (b) of Regulation S-K, we agree to furnish
a copy of those instruments to the Commission on
request.
|
||
|
10.1*
|
McDermott
International, Inc.'s Executive Incentive Compensation Plan (incorporated
by reference to Appendix C to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on May 3, 2006, as
filed with the Commission under a Schedule 14A (File No.
1-08430)).
|
|
|
10.2*
|
McDermott
International, Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s Annual Report on Form10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994 (File No.
1-08430)).
|
|
|
10.3*
|
McDermott
International, Inc.'s Restated 1996 Officer Long-Term Incentive Plan, as
amended (incorporated by reference to Appendix B to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997, as filed with the Commission under
a Schedule 14A (File No. 1-08430)).
|
|
|
10.4*
|
McDermott
International, Inc.'s 1997 Director Stock Program (incorporated by
reference to Appendix A to McDermott International, Inc.'s Proxy Statement
for its Annual Meeting of Stockholders held on September 2, 1997, as filed
with the Commission under a Schedule 14A (File No.
1-08430)).
|
|
|
10.5*
|
McDermott
International, Inc.’s Amended and Restated 2001 Directors & Officers
Long-Term Incentive Plan (incorporated by reference to Appendix B to
McDermott International, Inc.’s Proxy Statement for its Annual Meeting of
Stockholders held on May 3, 2006, as filed with the Commission under a
Schedule 14A (File No. 1-08430)).
|
|
|
10.6*
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.20 to
McDermott International, Inc.’s Annual Report on Form 10-K for
the year ended December 31, 2004 (File No. 1-08430)).
|
|
|
10.7*
|
McDermott
International, Inc. Executive Compensation Incentive Plan 2008 target
award opportunities and financial performance goals (incorporated by
reference to Part II, Item 9B of McDermott International, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2007 (File No.
1-08430)).
|
|
|
10.8*
|
Notice
of Grant (Stock Options and Deferred Stock Units) (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K filed May 18, 2005 (File No.
1-08430)).
|
|
|
10.9*
|
Form
of 2001 LTIP Stock Option Grant Agreement (incorporated by reference to
Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K
filed May 18, 2005 (File No. 1-08430)).
|
|
|
10.10*
|
Form
of 2001 LTIP Deferred Stock Unit Grant Agreement (incorporated by
reference to Exhibit 10.3 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
|
|
10.11*
|
Form
of 2001 LTIP Stock Option Grant Agreement to Nonemployee Directors
(incorporated by reference to Exhibit 10.5 to McDermott International,
Inc.’s Current Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
|
|
10.12*
|
Form
of 2001 LTIP 2006 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.2 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 3, 2006 (File No.
1-08430)).
|
|
|
10.13*
|
Form
of 2001 LTIP 2007 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K dated April 30, 2007 (File No.
1-08430)).
|
|
|
10.14*
|
Separation
Agreement between McDermott Incorporated and Francis S. Kalman dated
February 8, 2008 (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 14, 2008
(File No. 1-08430)).
|
|
|
10.15*
|
Consultancy
Agreement dated March 1, 2008 by and between the Governance Committee of
the Board of Directors of McDermott International, Inc. and Francis S.
Kalman (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated March 3, 2008 (File
No. 1-08430)).
|
|
|
10.16*
|
Form
of 2001 LTIP 2008 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.26 to McDermott International, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2007 (File No.
1-08430)).
|
|
|
10.17*
|
Form
of 2001 LTIP 2008 Restricted Stock Grant Agreement (incorporated by
reference to Exhibit 10.27 to McDermott International, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2007 (File No.
1-08430)).
|
|
|
10.18*
|
Separation
Agreement dated as of September 30, 2008 by and between McDermott
Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit
10.1 to McDermott International, Inc.’s Current Report on Form 8-K dated
September 30, 2008 (File No. 1-08430)).
|
|
|
10.19*
|
Consultancy
Agreement dated as of October 1, 2008 by and between McDermott
Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit
10.2 to McDermott International, Inc.’s Current Report on Form 8-K dated
September 30, 2008 (File No. 1-08430)).
|
|
|
10.20*
|
Form
of Change-In-Control Agreement entered into between McDermott
International, Inc. and John A. Fees (incorporated by reference to Exhibit
10.3 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008 (File No.
1-08430)).
|
|
|
10.21*
|
Form
of Change-In-Control Agreement entered into between McDermott
International, Inc. and several of its executive officers (incorporated by
reference to Exhibit 10.4 to McDermott International, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 (File No.
1-08430)).
|
|
|
10.22*
|
McDermott
International, Inc. Amended and Restated Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.5 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 (File No. 1-08430)).
|
|
|
10.23*
|
Summary
of Named Executive Officer 2009 Salaries and EICP Award
Opportunities.
|
|
|
10.24*
|
Form
of 2001 LTIP 2009 Deferred Stock Grant Agreement.
|
|
|
10.25*
|
Form
of 2001 LTIP 2009 Performance Shares Grant Agreement.
|
|
|
10.26*
|
Form
of 2001 LTIP 2009 Stock Options Grant Agreement.
|
|
|
10.27*
|
2001
LTIP 2009 Deferred Stock Grant Agreement with Mr.
Deason.
|
|
|
12.1
|
Ratio
of Earnings to Fixed Charges.
|
|
|
21.1
|
Significant
Subsidiaries of the Registrant.
|
|
|
23.1
|
Consent
of Deloitte & Touche LLP.
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) certification of Chief Executive
Officer.
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) certification of Chief Financial
Officer.
|
|
|
32.1
|
Section
1350 certification of Chief Executive Officer.
|
|
|
32.2
|
Section
1350 certification of Chief Financial
Officer.
|
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
McDERMOTT
INTERNATIONAL, INC.
|
||
|
/s/
John A. Fees
|
||
|
March
2, 2009
|
By:
|
John
A. Fees
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated and on the date indicated.
|
Signature
|
Title
|
|
|
/s/
John A. Fees
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
|
John
A. Fees
|
||
|
/s/
Michael S. Taff
|
Senior
Vice President and Chief Financial Officer
(Principal
Financial Officer and Duly Authorized Representative)
|
|
|
Michael
S. Taff
|
||
|
/s/
Dennis S. Baldwin
|
Vice
President and Chief Accounting Officer
(Principal
Accounting Officer and Duly Authorized Representative)
|
|
|
Dennis
S. Baldwin
|
||
|
/s/
John F. Bookout, III
|
Director
|
|
|
John
F. Bookout, III
|
||
|
/s/
Roger A. Brown
|
Director
|
|
|
Roger
A. Brown
|
||
|
/s/
Ronald C. Cambre
|
Chairman
of the Board and Director
|
|
|
Ronald
C. Cambre
|
||
|
/s/
Robert W. Goldman
|
Director
|
|
|
Robert
W. Goldman
|
||
|
/s/
Robert L. Howard
|
Director
|
|
|
Robert
L. Howard
|
||
|
/s/
Oliver D. Kingsley, Jr.
|
Director
|
|
|
Oliver
D. Kingsley, Jr.
|
||
|
/s/
D. Bradley McWilliams
|
Director
|
|
|
D.
Bradley McWilliams
|
||
|
/s/
Richard W. Mies
|
Director
|
|
|
Richard
W. Mies
|
||
|
/s/
Thomas C. Schievelbein
|
Director
|
|
|
Thomas
C. Schievelbein
|
||
March 2,
2009
Schedule
I
McDERMOTT INTERNATIONAL, INC.
(PARENT
COMPANY ONLY)
CONDENSED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 432 | $ | 51 | ||||
|
Restricted
cash and cash equivalents
|
1,000 | 1,545 | ||||||
|
Accounts
receivable – other
|
167 | 145 | ||||||
|
Accounts
receivable from subsidiaries
|
386,763 | 177,014 | ||||||
|
Other
current assets
|
214 | 221 | ||||||
|
Total
Current Assets
|
388,576 | 178,976 | ||||||
|
Investments
in Subsidiaries and Other Investees, at Equity
|
984,176 | 1,051,332 | ||||||
|
Notes
Receivable from Subsidiaries
|
- | 50 | ||||||
|
Property,
Plant and Equipment
|
66 | 66 | ||||||
|
Less
accumulated depreciation
|
65 | 64 | ||||||
|
Net
Property, Plant and Equipment
|
1 | 2 | ||||||
|
Investments
|
29,657 | 31,066 | ||||||
|
Other
Assets
|
60 | 28 | ||||||
|
TOTAL
|
$ | 1,402,470 | $ | 1,261,454 | ||||
See
accompanying notes to condensed financial information.
Schedule
I (continued)
McDERMOTT
INTERNATIONAL, INC.
(PARENT
COMPANY ONLY)
CONDENSED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands)
|
||||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 38 | $ | 76 | ||||
|
Accrued
liabilities – other
|
608 | 1,437 | ||||||
|
Income
taxes payable
|
1,621 | 1,600 | ||||||
|
Total
Current Liabilities
|
2,267 | 3,113 | ||||||
|
Notes
Payable to Subsidiaries
|
7,000 | 7,000 | ||||||
|
Accounts
Payable to Subsidiaries
|
76,023 | 82,196 | ||||||
|
Other
Liabilities
|
1,008 | 2,140 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
stock, par value $1.00 per share, authorized 400,000,000 shares; issued
234,174,088 and 231,722,659 at December 31, 2008 and 2007,
respectively
|
234,174 | 231,723 | ||||||
|
Capital
in excess of par value
|
1,252,848 | 1,145,829 | ||||||
|
Retained
earnings
|
564,591 | 135,289 | ||||||
|
Treasury
stock at cost, 5,840,314 and 5,852,248 at December 31, 2008 and 2007,
respectively
|
(63,026 | ) | (63,903 | ) | ||||
|
Accumulated
other comprehensive loss
|
(672,415 | ) | (281,933 | ) | ||||
|
Total
Stockholders’ Equity
|
1,316,172 | 1,167,005 | ||||||
|
TOTAL
|
$ | 1,402,470 | $ | 1,261,454 | ||||
See
accompanying notes to condensed financial information.
Schedule
I (continued)
McDERMOTT
INTERNATIONAL, INC.
(PARENT
COMPANY ONLY)
CONDENSED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Costs
and Expenses:
|
||||||||||||
|
Cost
of operations
|
$ | (755 | ) | $ | 17 | $ | (1,517 | ) | ||||
|
Selling,
general and administrative expenses
|
21,950 | 22,248 | 14,520 | |||||||||
|
Total
Costs and Expenses
|
21,195 | 22,265 | 13,003 | |||||||||
|
Equity
in Income of Subsidiaries and Other Investees
|
449,314 | 633,296 | 345,081 | |||||||||
|
Operating
Income
|
428,119 | 611,031 | 332,078 | |||||||||
|
Other
Income (Expense):
|
||||||||||||
|
Interest
income
|
743 | 1,248 | 1,752 | |||||||||
|
Interest
expense
|
(867 | ) | (5,216 | ) | (4,905 | ) | ||||||
|
Other
income – net
|
1,359 | 1,006 | 4,586 | |||||||||
|
Total
Other Income (Expense)
|
1,235 | (2,962 | ) | 1,433 | ||||||||
|
Income
before Provision for Income Taxes
|
429,354 | 608,069 | 333,511 | |||||||||
|
Provision
for Income Taxes
|
52 | 241 | 2,996 | |||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
See
accompanying notes to condensed financial information.
Schedule
I (continued)
MCDERMOTT
INTERNATIONAL, INC.
(PARENT
COMPANY ONLY)
CONDENSED
STATEMENTS OF COMPREHENSIVE INCOME
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Other
Comprehensive Income (Loss):
|
||||||||||||
|
Equity
in other comprehensive income (loss) of subsidiaries and other
investees
|
(392,402 | ) | 83,053 | 167,776 | ||||||||
|
Unrecognized
gains on benefit obligations:
|
||||||||||||
|
Amortization
of gains included in net income
|
- | (9 | ) | - | ||||||||
|
Minimum
pension liability adjustments
|
- | - | 35 | |||||||||
|
Unrealized
gains on investments:
|
||||||||||||
|
Unrealized
gains arising during the period
|
1,926 | 635 | 636 | |||||||||
|
Reclassification
adjustment for net gains included in net income
|
(6 | ) | (1 | ) | - | |||||||
|
Other
Comprehensive Income (Loss)
|
(390,482 | ) | 83,678 | 168,447 | ||||||||
|
Comprehensive
Income
|
$ | 38,820 | $ | 691,506 | $ | 498,962 | ||||||
See
accompanying notes to condensed financial information.
Schedule
I (continued)
McDERMOTT
INTERNATIONAL, INC.
(PARENT
COMPANY ONLY)
CONDENSED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$ | 429,302 | $ | 607,828 | $ | 330,515 | ||||||
|
Non-cash
items included in net income:
|
||||||||||||
|
Depreciation
and amortization
|
1 | 1 | 742 | |||||||||
|
Equity
in income of subsidiaries and other investees, net of
dividends
|
(424,914 | ) | (633,296 | ) | (222,427 | ) | ||||||
|
Provision
for deferred taxes
|
- | (240 | ) | - | ||||||||
|
Other,
net
|
39,885 | 28,598 | 18,035 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
and notes receivable
|
(209,771 | ) | (134,748 | ) | 8,736 | |||||||
|
Accounts
payable
|
(6,211 | ) | 12,006 | (130,187 | ) | |||||||
| Payable to subsidiaries | - | (4,824 | ) | (49,937 | ) | |||||||
|
Income
taxes
|
21 | (2,460 | ) | 2,940 | ||||||||
|
Other,
net
|
(1,986 | ) | (6,516 | ) | 6,913 | |||||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(173,673 | ) | (133,651 | ) | (34,670 | ) | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
(Increase)
decrease in restricted cash and cash equivalents
|
545 | (539 | ) | (1,006 | ) | |||||||
|
Net
(increase) decrease in available-for-sale securities
|
(555 | ) | 4,113 | 6,496 | ||||||||
|
Investments
in equity investees
|
- | (1 | ) | (355,016 | ) | |||||||
|
Return
of capital from equity investees
|
164,654 | 113,613 | 249,998 | |||||||||
|
Sale
of investment in equity investee
|
(293 | ) | - | - | ||||||||
|
Increase
in loans to subsidiaries
|
50 | - | 119,234 | |||||||||
|
Other,
net
|
29 | - | (3,440 | ) | ||||||||
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
164,430 | 117,186 | 16,266 | |||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Issuance
of common stock
|
9,624 | 15,219 | 19,647 | |||||||||
|
Other,
net
|
- | 4 | (50 | ) | ||||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
9,624 | 15,223 | 19,597 | |||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
381 | (1,242 | ) | 1,193 | ||||||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
51 | 1,293 | 100 | |||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 432 | $ | 51 | $ | 1,293 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest,
including intercompany interest (net of amount
capitalized)
|
$ | 867 | $ | 5,216 | $ | 4,905 | ||||||
|
Income
taxes (net of refunds)
|
$ | 32 | $ | - | $ | 56 | ||||||
See
accompanying notes to condensed financial information.
Schedule
I (continued)
McDERMOTT
INTERNATIONAL, INC.
(PARENT
COMPANY ONLY)
NOTES
TO CONDENSED FINANCIAL INFORMATION
DECEMBER
31, 2008
NOTE
1 - BASIS OF PRESENTATION
The
accompanying financial statements have been prepared to present the
unconsolidated financial position, results of operations and cash flows of
McDermott International, Inc. (“MII”). Investments in subsidiaries and other
investees are stated under the equity basis of accounting, which is at cost plus
equity in undistributed earnings from date of acquisition. These Parent Company
Only financial statements should be read in conjunction with McDermott
International, Inc.'s consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Effective
January 1, 2007 and pursuant to Financial Accounting Standards Board (“FASB”)
Staff Position (“FSP”) AUG AIR-1, Accounting for Planned Major
Maintenance Activities, our consolidated subsidiaries changed their
accounting policy from the accrue-in-advance method to the deferral
method. Under the deferral method, drydocking costs are recognized as
a prepaid asset when incurred, and the costs are amortized over the period of
time between drydockings, generally three to five years. This Staff
Position requires that all periods presented in our consolidated financial
statements reflect the period-specific adjustments of applying the new
accounting principle. As a result of applying this change, we have
restated our consolidated statements of income for the year ended December 31,
2006 to reflect a decrease in our equity in income of subsidiaries and other
investees of approximately $11.8 million.
Certain
of our subsidiaries are restricted in their ability to transfer funds to
MII. Such restrictions principally arise from debt covenants,
insurance regulations, national currency controls and the existence of minority
shareholders. We refer to the proportionate share of net assets,
after intercompany eliminations, that may not be transferred to MII as a result
of these restrictions as “restricted net assets.” At December 31,
2008, the restricted net assets of our consolidated subsidiaries were
approximately $768 million.
NOTE
2 - CONTINGENCIES
As of
December 31, 2008, MII had outstanding performance guarantees for two contracts
executed by one of the Canadian subsidiaries of Babcock & Wilcox Power
Generation Group, Inc. (“B&W PGG”). The total contract value of
these projects was approximately $286 million, and the warranty periods extend
to the years 2023 and 2024. These projects have been completed and
are in the warranty periods.
Additionally,
as of December 31, 2008, MII had an outstanding performance guarantee for a
contract executed by B&W PGG with TXU Corp. The total contract
value of this project is approximately $138 million, and the warranty period is
expected to expire during or before 2014.
Also, as
of December 31, 2008, MII had an outstanding performance guarantee for an
operating and management contract executed by one of B&W PGG’s
subsidiaries. The original contract was entered into in 1989 and will
expire in September 2009. B&W PGG is also a guarantor on this
contract. The estimated revenues subject to the guarantee are
approximately $30 million per year. In June 2007, the contract was
extended for two consecutive ten year periods, with some opt-out provisions, and
the full renewal of the contract will occur in 2009.
In June
2008, MII, B&W PGG and McDermott Holding, Inc. jointly executed a general
agreement of indemnity in favor of a surety underwriter relating to surety bonds
that underwriter issued in support of B&W PGG’s contracting
activity. As of December 31, 2008, bonds issued under this
arrangement totaled approximately $58 million. Any claim successfully
asserted against the surety by one or more of the bond obligees would likely be
recoverable from MII, B&W PGG and McDermott Holdings, Inc. under the
indemnity agreement.
MII has
agreed to indemnify certain surety companies for obligations of various
subsidiaries of MII under surety bonds issued to meet various contracting and
statutory requirements. As of December 31, 2008, the aggregate
outstanding amount of surety bonds that were guaranteed by MII and issued in
connection with the business operations of its subsidiaries was approximately
$8.1 million.
Schedule
I (continued)
One of
our Canadian subsidiaries has received notice of a possible warranty claim on
one of its projects on a contract executed in 1998. This situation relates to
technical issues concerning components associated with nuclear steam
generators. Data
collection and analysis can only be performed at specific time periods when the
power plant is scheduled to be off-line for maintenance. A scheduled outage of
this facility occurred in October 2008, and we are presently collecting and
analyzing data obtained during this most recent outage. We also
received a notice from the customer during October 2008, and, during November
2008, we responded to the notice by disagreeing with the matters stated in the
claim and disputing the claim. This project included a limited-term
performance bond totaling approximately $140 million for which we entered
into an indemnity
arrangement with the surety underwriters. It is possible that our subsidiary may
incur warranty costs in excess of amounts provided for as of December 31, 2008.
It is also possible that a claim could be initiated by our subsidiary’s customer
against the surety underwriter should certain events occur. If such a
claim were successful, the surety could seek to recover from our subsidiary the
costs incurred in satisfying the customer claim. If the surety seeks recovery
from our subsidiary, we believe that our subsidiary would have adequate
liquidity to satisfy its obligations. However, the ultimate resolution of this
possible claim is uncertain, and an adverse outcome could have a material
adverse impact on our consolidated financial condition, results of operations or
cash flows.
On
November 17, 2008, December 5, 2008 and January 20, 2009, three separate alleged
purchasers of our common stock during the period from February 27, 2008 through
November 5, 2008 filed purported class action complaints against MII, Bruce
Wilkinson (MII’s former Chief Executive Officer and Chairman of the Board), and
Michael S. Taff (the Chief Financial Officer of MII) in the United States
District Court for the Southern District of New York. Each of the complaints
alleges that the defendants violated federal securities laws by disseminating
materially false and misleading information and/or concealing material adverse
information relating to the operational and financial status of three ongoing
construction contracts in our Offshore Oil and Gas Construction segment for the
installation of pipelines off the coast of Qatar. Each complaint seeks relief,
including unspecified compensatory damages and an award for costs and expenses.
The three cases have been consolidated. On February 9, 2009, MII filed a motion
to transfer the consolidated cases to the Southern District of Texas. We believe
the substantive allegations contained in the consolidated complaints are without
merit, and we intend to defend against these claims vigorously.
By letter
dated February 24, 2009, the United States Securities and Exchange Commission
notified us that it was conducting an inquiry regarding the three construction
contracts and the events leading to the related writedowns we have
recorded. We intend to cooperate with the SEC in this
inquiry.
NOTE
3 - DIVIDENDS RECEIVED
MII
received dividends from its consolidated subsidiaries of $24.4 million and
$122.7 million for the years ended December 31, 2008 and 2006,
respectively. No such dividends were received during the year ended
December 31, 2007.
NOTE
4 – DISCONTINUED OPERATIONS
In April
2006, J. Ray McDermott, S.A., a wholly owned subsidiary of MII, completed the
sale of its Mexican subsidiary, Talleres Navales del Golfo, S.A. de C.V.
(“TNG”). Income from discontinued operations related to TNG of $12.9
million was included in equity in income of subsidiaries and other investees for
the year ended December 31, 2006.
NOTE
5 – COMMON STOCK SPLIT
On August
7, 2007, the Board of Directors declared a two-for-one stock split effected in
the form of a stock dividend. The shares issued in the dividend were
distributed on September 10, 2007 to stockholders of record as of the close of
business on August 20, 2007. On May 3, 2006, the Board of Directors
declared a three-for-two stock split effected in the form of a stock
dividend. The shares issued in the dividend were distributed on May
31, 2006 to stockholders of record as of the close of business on May 17,
2006.
Schedule
II
McDERMOTT
INTERNATIONAL, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
Additions
|
||||||||||||||||
|
Description
|
Balance
at
Beginning
of Period
|
Charged
to
Costs
and Expenses
(1)
|
Charged
to Other
Accounts
|
Balance
at
End
of Period
|
||||||||||||
|
Valuation
Allowance for Deferred Tax Assets (2)
|
||||||||||||||||
|
Year
Ended December 31, 2008
|
$ | (100,617 | ) | $ | 22,707 | $ | (339 | ) | $ | (78,249 | ) | |||||
|
Year
Ended December 31, 2007
|
$ | (152,950 | ) | $ | 52,333 | $ | - | $ | (100,617 | ) | ||||||
|
Year
Ended December 31, 2006
|
$ | (126,613 | ) | $ | (26,337 | ) | $ | - | $ | (152,950 | ) | |||||
|
(1) Net
of reductions and other adjustments, all of which are charged to costs and
expenses.
|
||||||||||||||||
|
(2) Amounts
charged to other accounts included in other comprehensive income (minimum
pension liability).
|
||||||||||||||||
INDEX
TO EXHIBITS
|
Exhibit
Number
|
Description
|
Sequentially
Numbered
Pages
|
|
3.1
|
McDermott
International, Inc.'s Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to McDermott International,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
2008 (File No. 1-08430)).
|
|
3.2
|
McDermott
International, Inc.'s Amended and Restated By-laws (incorporated by
reference to Exhibit 3.1 to McDermott International, Inc.’s Current Report
on Form 8-K dated May 3, 2006 (File No. 1-08430)).
|
|
3.3
|
Amended
and Restated Certificate of Designation of Series D Participating
Preferred Stock (incorporated by reference to Exhibit 3.3 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-08430)).
|
|
4.1
|
Revolving
Credit Agreement dated as of December 9, 2003 among BWX Technologies,
Inc., as borrower, certain subsidiaries of BWX Technologies, Inc., as
guarantors, the initial lenders named therein, Credit Lyonnais New York
Branch, as administrative agent, and Credit Lyonnais Securities, as lead
arranger and sole bookrunner) (incorporated by reference to Exhibit 4.8 of
McDermott International, Inc.’s Annual Report on Form 10-K, as amended,
for the year ended December 31, 2003 (File No.
1-08430)).
|
|
4.2
|
First
Amendment, dated as of March 18, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8- K dated March 18, 2005 (File No.
1-08430)).
|
|
4.3
|
Second
Amendment, dated as of November 7, 2005, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2005 (File No. 1-08430)).
|
|
4.4
|
Third
Amendment, dated as of December 22, 2006, to the Revolving Credit
Agreement dated as of December 9, 2003 among BWX Technologies, Inc., as
borrower, certain subsidiaries of BWX Technologies, Inc., as guarantors,
the initial lenders named therein, Calyon, New York Branch (formerly known
as Credit Lyonnais New York Branch), as administrative agent and lender,
as amended (incorporated by reference to Exhibit 4.4 to McDermott
International, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 1-08430)).
|
|
4.5
|
Fourth
Amendment, dated as of March 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007
(File No. 1-08430)).
|
|
4.6
|
Fifth
Amendment, dated as of October 29, 2007, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies, Inc., as borrower,
certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders named therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as amended
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated October 29, 2007 (File No.
1-08430)).
|
|
4.7
|
Sixth
amendment dated as of December 11, 2008, to the Revolving Credit Agreement
dated as of December 9, 2003 among BWX Technologies Inc., as borrower,
Certain subsidiaries of BWX Technologies, Inc., as guarantors, the initial
lenders listed therein, Calyon, New York Branch (formerly known as Credit
Lyonnais New York Branch), as administrative agent and lender, as
amended.
|
|
4.8
|
Credit
Agreement dated as of June 6, 2006, by and among J. Ray McDermott, S.A.,
credit lenders, synthetic investors and issuers party thereto, Credit
Suisse, Cayman Islands Branch, Bank of America, N.A., Calyon New York
Branch, Fortis Capital Corp. and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
4.9
|
First
Amendment to Credit Agreement, dated as of August 4, 2006, by and among J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.8 to McDermott International,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007
(File No. 1-08430)).
|
|
4.10
|
Second
Amendment to Credit Agreement, dated as of December 1, 2006, by and among
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.9 to McDermott International,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007
(File No. 1-08430)).
|
|
4.11
|
Third
Amendment to Credit Agreement, dated as of July 9, 2007, by and among J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.1 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
4.12
|
Fourth
Amendment to Credit Agreement, dated as of July 20, 2007, by and among J.
Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated July 20, 2007 (File No.
1-08430)).
|
|
4.13
|
Fifth
Amendment to Credit Agreement, dated as of April 7, 2008, by and between
J. Ray McDermott, S.A., certain guarantors thereto, certain lenders and
issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 10.1 to McDermott International,
Inc.’s Current Report on Form 8-K dated April 7, 2008 (File No.
1-08430)).
|
|
4.14
|
Pledge
and Security Agreement by J. Ray McDermott, S.A. and certain of its
subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of June 6, 2006
(incorporated by reference to Exhibit 10.2 to McDermott International,
Inc.’s Current Report on Form 8-K dated June 6, 2006 (File No.
1-08430)).
|
|
4.15
|
Credit
Agreement dated as of February 22, 2006, by and among The Babcock
& Wilcox Company, certain lenders, synthetic investors and issuers
party thereto, Credit Suisse, Cayman Islands Branch, Credit Suisse
Securities (USA) LLC, JPMorgan Chase Bank, National Association, Wachovia
Bank, National Association and The Bank of Nova Scotia (incorporated by
reference to Exhibit 10.4 to McDermott International, Inc.’s Current
Report on Form 8-K dated February 21, 2006 (File
No. 1-08430)).
|
|
4.16
|
First
Amendment to Credit Agreement, dated as of July 9, 2007, by and among The
Babcock & Wilcox Company, certain guarantors thereto, certain lenders
and issuers party thereto, Credit Suisse, Cayman Islands Branch, as
administrative agent and collateral agent, and other agents party thereto
(incorporated by reference to Exhibit 4.3 to McDermott International,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
(File No. 1-08430)).
|
|
4.17
|
Second
Amendment to Credit Agreement, dated as of July 20, 2007, by and among,
The Babcock & Wilcox Company, certain guarantors thereto, certain
lenders and issuers party thereto, Credit Suisse, Cayman Islands Branch,
as administrative agent and collateral agent, and other agents party
thereto (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated July 20, 2007 (File
No. 1-08430)).
|
|
4.18
|
Pledge
and Security Agreement by The Babcock & Wilcox Company and certain of
its subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent, dated as of February 22,
2006 (incorporated by reference to Exhibit 10.5 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 21,
2006 (File No. 1-08430)).
|
|
10.1
|
McDermott
International, Inc.'s Executive Incentive Compensation Plan (incorporated
by reference to Appendix C to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on May 3, 2006, as
filed with the Commission under a Schedule 14A (File No.
1-08430)).
|
|
10.2
|
McDermott
International, Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s Annual Report on Form10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994 (File No.
1-08430)).
|
|
10.3
|
McDermott
International, Inc.'s Restated 1996 Officer Long-Term Incentive Plan, as
amended (incorporated by reference to Appendix B to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997, as filed with the Commission under
a Schedule 14A (File No. 1-08430)).
|
|
10.4
|
McDermott
International, Inc.'s 1997 Director Stock Program (incorporated by
reference to Appendix A to McDermott International, Inc.'s Proxy Statement
for its Annual Meeting of Stockholders held on September 2, 1997, as filed
with the Commission under a Schedule 14A (File No.
1-08430)).
|
|
10.5
|
McDermott
International, Inc.’s Amended and Restated 2001 Directors & Officers
Long-Term Incentive Plan (incorporated by reference to Appendix B to
McDermott International, Inc.’s Proxy Statement for its Annual Meeting of
Stockholders held on May 3, 2006, as filed with the Commission under a
Schedule 14A (File No. 1-08430)).
|
|
10.6
|
Change
in Control Agreement dated March 30, 2005 between McDermott International,
Inc. and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.20 to
McDermott International, Inc’s Annual Report on Form 10-K for the year
ended December 31, 2007 (File No. 1-08430)).
|
|
10.7
|
McDermott
International, Inc. Executive Compensation Incentive Plan 2008 target
award opportunities and financial goals (incorporated by reference to Part
II, Item 9B of McDermott International, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 2007 (File No.
1-08430)).
|
|
10.8
|
Notice
of Grant (Stock Options and Deferred Stock Units) (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K filed May 18, 2005 (File No.
1-08430)).
|
|
10.9
|
Form
of 2001 LTIP Stock Option Grant Agreement (incorporated by reference to
Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K
filed May 18, 2005 (File No. 1-08430)).
|
|
10.10
|
Form
of 2001 LTIP Deferred Stock Unit Grant Agreement (incorporated by
reference to Exhibit 10.3 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
|
10.11
|
Form
of 2001 LTIP Stock Option Grant Agreement to Nonemployee Directors
(incorporated by reference to Exhibit 10.5 to McDermott International,
Inc.’s Current Report on Form 8-K dated May 12, 2005 (File No.
1-08430)).
|
|
10.12
|
Form
of 2001 LTIP 2006 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.2 to McDermott International, Inc.’s Current
Report on Form 8-K dated May 3, 2006 (File No.
1-08430)).
|
|
10.13
|
Form
of 2001 LTIP 2007 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.1 to McDermott International, Inc.’s Current
Report on Form 8-K dated April 30, 2007 (File No.
1-08430)).
|
|
10.14
|
Separation
Agreement between McDermott Incorporated and Francis S. Kalman dated
February 8, 2008 (incorporated by reference to Exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated February 14, 2008
(File No. 1-08430)).
|
|
10.15
|
Consultancy
agreement dated March 1, 2008 by and between the Governance Committee of
the Board of Directors of McDermott International, Inc. and Francis S.
Kalman (incorporated by reference to exhibit 10.1 to McDermott
International, Inc.’s Current Report on Form 8-K dated March 3, 2008 (File
No. 1-08430)).
|
|
10.16
|
Form
of 2001 LTIP 2008 Performance Shares Grant Agreement (incorporated by
reference to Exhibit 10.26 to McDermott International, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2007 (File No.
1-08430)).
|
|
10.17
|
Form
of 2001 LTIP 2008 Restricted Stock Grant Agreement (incorporated by
reference to Exhibit 10.27 to McDermott International, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2007 (File No.
1-08430)).
|
|
10.18
|
Separation
Agreement dated as of September 30, 2008 by and between McDermott
Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit
10.1 to McDermott International, Inc.’s Current Report on Form 8-K dated
September 30, 2008 (File No. 1-08430)).
|
|
10.19
|
Consultancy
Agreement dated as of October 1, 2008 by and between McDermott
Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit
10.2 to McDermott International, Inc.’s Current Report on Form 8-K dated
September 30, 2008 (File No. 1-08430)).
|
|
10.20
|
Form
of Change-In-Control Agreement to be entered into between McDermott
International, Inc. and John A. Fees (incorporated by reference to Exhibit
10.3 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008 (File No.
1-08430)).
|
|
10.21
|
Form
of Change-In-Control Agreement to be entered into between McDermott
International, Inc. and several of its executive officers (incorporated by
reference to Exhibit 10.4 to McDermott International, Inc.’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 (File No.
1-08430)).
|
|
10.22
|
McDermott
International, Inc. Amended and Restated Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.5 to McDermott
International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 (File No. 1-08430)).
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10.23
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Summary
of Named Executive Officer 2009 Salaries and EICP Award
Opportunities.
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10.24
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Form
of 2001 LTIP 2009 Deferred Stock Grant Agreement.
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10.25
|
Form
of 2001 LTIP 2009 Performance Shares Grant Agreement.
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10.26
|
Form
of 2001 LTIP 2009 Stock Options Grant Agreement.
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10.27
|
2001
LTIP 2009 Deferred Stock Grant Agreement with Mr.
Deason.
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12.1
|
Ratio
of Earnings to Fixed Charges.
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21.1
|
Significant
Subsidiaries of the Registrant.
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23.1
|
Consent
of Deloitte & Touche LLP.
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31.1
|
Rule
13a-14(a)/15d-14(a) certification of Chief Executive
Officer.
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31.2
|
Rule
13a-14(a)/15d-14(a) certification of Chief Financial
Officer.
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32.1
|
Section
1350 certification of Chief Executive Officer.
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32.2
|
Section
1350 certification of Chief Financial
Officer.
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