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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)
 6 Months Ended
Jun. 30, 2013
Accounting Policies [Abstract]  
Nature of Operations

Nature of Operations

McDermott International, Inc. (“MII”), a corporation incorporated under the laws of the Republic of Panama in 1959, is a leading engineering, procurement, construction and installation (“EPCI”) company focused on designing and executing complex offshore oil and gas projects worldwide. Providing fully integrated EPCI services, we deliver fixed and floating production facilities, pipeline installations and subsea systems from concept to commissioning. We support these activities with comprehensive project management and procurement services, while utilizing our fully integrated capabilities in both shallow water and deepwater construction. Our customers include national, major integrated and other oil and gas companies, and we operate in most major offshore oil and gas producing regions throughout the world. In these notes to our unaudited condensed consolidated financial statements, unless the context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated subsidiaries.
Basis of Presentation

Basis of Presentation

We have presented our unaudited condensed consolidated financial statements in U.S. Dollars, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim reporting. Financial information and disclosures normally included in our financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and the accompanying notes in our annual report on Form 10-K for the year ended December 31, 2012.

We have included all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation. These condensed consolidated financial statements include the accounts of McDermott International, Inc., its consolidated subsidiaries and controlled entities. We use the equity method to account for investments in entities that we do not control, but over which we have significant influence. We generally refer to these entities as “unconsolidated affiliates” or “joint ventures.” We have eliminated all intercompany transactions and accounts.

During the quarter ended June 30, 2013, we commenced a restructuring of our Atlantic segment. See Note 2 for information relating to that restructuring. On March 19, 2012, we completed the sale of our former charter fleet business, which operated 10 of the 14 vessels acquired in our 2007 acquisition of substantially all of the assets of Secunda International Limited (the “Secunda Acquisition”). The condensed consolidated statements of income, comprehensive income, cash flows and equity reflect the historical operations of the charter fleet business as a discontinued operation through March 19, 2012. Accordingly, we have presented the notes to our condensed consolidated financial statements on the basis of continuing operations. In addition, certain 2012 amounts in the condensed consolidated balance sheet and statement of cash flows have been reclassified to conform to the 2013 presentation.
Business Segments

Business Segments

We operate in four primary operating segments, which consist of Asia Pacific, Atlantic, Caspian and the Middle East. The Caspian and Middle East operating segments are aggregated into the Middle East reporting segment due to the proximity of regions and similarities in the nature of services provided, economic characteristics and oversight responsibilities. Accordingly, we report financial results under reporting segments consisting of Asia Pacific, Atlantic and the Middle East. We also report certain corporate and other non-operating activities under the heading “Corporate and Other.” Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other costs, which are generally fully allocated to our operating segments. See Note 9 for summarized financial information on our segments.
Revenue Recognition

Revenue Recognition

We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours, or a cost-to-cost method, as applicable to the activity involved. We include the amount of accumulated contract costs and estimated earnings that exceed billings to customers in contracts in progress. We include billings to customers that exceed accumulated contract costs and estimated earnings in advance billings on contracts. Most long-term contracts contain provisions for progress payments. We expect to invoice customers and collect all unbilled revenues. Certain costs are generally excluded from the cost-to-cost method of measuring progress, such as significant procurement costs for materials and third-party subcontractors. Costs incurred prior to a project award are generally expensed during the period in which they are incurred. Total estimated project costs, and resulting income, are affected by changes in the expected cost of materials and labor, productivity, vessel costs, 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 and amount of revenue and income recognition.

In addition, change orders, which are a normal and recurring part of our business, can increase (and sometimes substantially) the future scope and cost of a job. Therefore, change order awards (although frequently beneficial in the long term) can have the short-term effect of reducing the job percentage of completion and thus the revenues and profits recognized to date. We regularly review contract price and cost estimates as the work progresses and reflect adjustments in profit, proportionate to the job percentage of completion in the period when those estimates are revised. Revenue from unapproved change orders is generally recognized to the extent of the lesser of amounts management expects to recover or costs incurred. The total unapproved change orders included in our estimates at completion aggregated approximately $445 million, of which approximately $170 million was included in backlog at June 30, 2013. Unapproved change orders that are disputed by the customer are treated as claims.

Deferred Profit Recognition

For contracts as to which we are unable to estimate the final profitability due to their uncommon nature, including first-of-a-kind projects, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these contracts, we only recognize gross margin when reliably estimable and the level of uncertainty has been significantly reduced, which we generally determine to be when the contract is at least 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical as deferred profit recognition contracts. If while being accounted for under our deferred profit recognition policy, a current estimate of total contract costs indicates a loss, the projected loss is recognized in full and the project is accounted for under our normal revenue recognition guidelines.

We currently account for an Atlantic segment project under our deferred profit recognition policy. This project was awarded to one of our joint ventures, and the Atlantic segment’s backlog includes a subcontract from that joint venture, of which $211.9 million relating to this project remains in backlog at June 30, 2013. This project contributed revenues and costs equally, totaling approximately $37.0 million and $7.9 million for the three-month periods ended June 30, 2013 and 2012, respectively, and approximately $42.1 million and $13.1 million for the six-month periods ended June 30, 2013 and 2012, respectively.

 

Completed Contract Method

Under the completed contract method, revenue and gross profit is recognized only when a contract is completed or substantially complete. We generally do not enter into fixed-price contracts without an estimate of cost to complete that we believe to be accurate. However, it is possible that in the time between contract award and the commencement of work on a project, we could lose the ability to adequately forecast costs 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 currently do not have any contracts that we account for under the completed contract method.

Claims Revenue

Claims revenue may relate to various factors, including the procurement of materials, equipment performance failures, change order disputes or schedule disruptions and other delays, including those associated with weather conditions. Claims revenue, when recorded, is only recorded to the extent of the lesser of the amounts management expects to recover or the associated costs incurred in our consolidated financial statements. We include certain unapproved claims in the applicable contract values when we have a legal basis to do so, consider collection to be probable and believe we can reliably estimate the ultimate value. Amounts attributable to unapproved change orders are not included in claims. We continue to actively engage in negotiations with our customers on our outstanding claims. However, these claims may be resolved at amounts that differ from our current estimates, which could result in increases or decreases in future estimated contract profits or losses. Claims are generally negotiated over the course of the respective projects and many of our projects are long-term in nature. None of the claims at June 30, 2013 were involved in litigation.

The amount of revenues and costs included in our estimates at completion (i.e., contract values) associated with such claims was $173.4 million and $29.0 million as of June 30, 2013 and 2012, respectively. Approximately 44%, 10% and 46% of those claim amounts at June 30, 2013 were related to our Asia Pacific, Atlantic and Middle East segments, respectively. These amounts are determined based on various factors, including our analysis of the underlying contractual language and our experience in making and resolving claims. For the three months ended June 30, 2013 and 2012, $11.0 million and $29.0 million, respectively, of revenues and costs are included in our financial statements. For the six months ended June 30, 2013 and 2012, $39.4 million and $38.5 million, respectively, of revenues and costs are reflected in our financial statements pertaining to claims. Approximately 14%, 13% and 73% of those claim amounts are related to our Asia Pacific, Atlantic and Middle East segments, respectively.

Our unconsolidated joint ventures also included an aggregate of $3.7 million of claims revenue and costs in their financial results for the six months ended June 30, 2013, with no amounts recognized during the three months ended June 30, 2013. For the three months and six months ended June 30, 2012, our joint ventures included approximately $1.0 million and $5.0 million, respectively of claims revenue and costs in their financial results.

Loss Recognition

A risk associated with fixed-priced contracts is that revenue from customers may not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor and vessel productivity, vessel repair requirements, weather downtime, supplier performance, pipeline lay rates or steel and other raw material prices. Increases in costs associated with our fixed-priced contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows.

As of June 30, 2013, we have provided for our estimated costs to complete on all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when determined.

We currently have three active projects in our backlog that are in loss positions at June 30, 2013, whereby future revenues are expected to equal costs when recognized. Included in these projects are a marine project in our Asia Pacific segment, which we began in 2012 and expect to complete by mid-2014, and a five-year charter in Brazil, which we began in early 2012 and we are conducting through our Atlantic segment. These two projects represent the majority of our contract value in a loss position.
Use of Estimates

Use of Estimates

We use estimates and assumptions to prepare our financial statements in conformity with GAAP. These estimates and assumptions affect the amounts we report in our financial statements and accompanying notes. Our actual results could differ from these estimates, and variances could materially affect our financial condition and results of operations in future periods. Changes in project estimates generally exclude change orders and changes in scope, but may include, without limitation, unexpected changes in weather conditions, productivity, unanticipated vessel repair requirements, customer and vendor delays and other costs. We generally expect to experience a variety of unanticipated events, and some of these events can result in significant cost increases above cost amounts we previously estimated. Variations from estimated contract performance could result in material adjustments to operating results.

The following is a discussion of our most significant changes in estimates, which impacted operating income in each of our segments for the three and six months ended June 30, 2013 and 2012.

Three months ended June 30, 2013

The Asia Pacific segment was primarily impacted by changes in estimates on one subsea project in Malaysia. On that project, we increased our estimated cost at completion by approximately $62.0 million in the three months ended June 30, 2013, primarily due to project delays related to the availability of the marine vessel dedicated for this project, which required certain vessel upgrades. Marine campaign activities are now planned to occur in two phases to avoid anticipated adverse weather periods. As a result, the project will require two vessel mobilizations, resulting in increases to the estimated costs to complete, including costs associated with forecasted liquidated damages. The marine campaign has also been impacted by third-party vessel mechanical downtime. In consideration of these factors, the expected completion date for the project was extended from the fourth quarter of 2013 to the middle of 2014.

The Middle East segment was impacted by changes in estimates on one of our EPCI projects in Saudi Arabia. On that project, we increased our estimated cost at completion by approximately $38.0 million in the three months ended June 30, 2013, primarily as a result of revisions to the project’s execution plan, increases in our estimated cost to complete due to an extended offshore hookup campaign requiring multiple vessel mobilizations and, to a lesser extent, delays in the completion of onshore activities. While the project recognized losses in the three months ended June 30, 2013, it remains in an overall profitable position and is expected to be completed during the first half of 2014, subject to customer deliverables and concurrence on execution plans.

The Atlantic segment was impacted by changes in estimates on two projects. On one of those projects, we recognized approximately $7.0 million of incremental project losses in the three months ended June 30, 2013, primarily due to lower than expected labor productivity. That project is currently in a loss position and is expected to be completed by the end of 2013. We also recognized project losses of approximately $3.0 million in the three months ended June 30, 2013 on a fabrication project in Morgan City, which was completed during the quarter ended June 30, 2013.

 

Six months ended June 30, 2013

The Asia Pacific segment was primarily impacted by changes in estimates on one project. On this project (the project in Malaysia described above), we increased our estimated cost at completion by approximately $66.0 million in the six months ended June 30, 2013, primarily due to project delays related to the availability of the marine vessel dedicated for this project, which required certain vessel upgrades. Marine campaign activities are now planned to occur in two phases to avoid anticipated adverse weather periods. As a result, the project will require two vessel mobilizations, resulting in increases to the estimated costs to complete, including costs associated with forecasted liquidated damages. The marine campaign has also been impacted by third-party vessel mechanical downtime.

The Middle East segment was impacted by changes in estimates on the EPCI project in Saudi Arabia discussed above. On that project, we increased our estimated cost at completion by approximately $43.0 million in the six months ended June 30, 2013, primarily as a result of revisions to the project’s execution plan, increases in our estimated cost to complete due to an extended offshore hookup campaign requiring multiple vessel mobilizations and, to a lesser extent, delays in the completion of onshore activities. While the project recognized losses in the six months ended June 30, 2013, it remains in an overall profitable position and is expected to be completed during the first half of 2014, subject to customer deliverables and concurrence on execution plans.

The Atlantic segment was impacted by changes in estimates on one project. On that project, we recognized approximately $14.0 million of incremental project losses in the six months ended June 30, 2013, primarily due to lower than expected labor productivity. That project is currently in a loss position and is expected to be completed by the end of 2013.

2012 Periods

Operating income for each of the three-month and six-month periods ended June 30, 2012 was not significantly affected by changes in estimates.
Loss Contingencies

Loss Contingencies

We record liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such loss is not reasonably estimable. We are currently involved in litigation and other proceedings, as discussed in Note 10. We have accrued our estimates of the probable losses associated with these matters, and associated legal costs are generally recognized in selling, general and administrative expenses as incurred. However, our losses are typically resolved over long periods of time and are often difficult to estimate due to various factors, including the possibility of multiple actions by third parties. Therefore, it is possible future earnings could be affected by changes in our estimates related to these matters.
Cash and Cash Equivalents

Cash and Cash Equivalents

Our cash and cash equivalents are highly liquid investments with maturities of three months or less when we purchase them. We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes. At June 30, 2013, all of our restricted cash was held in restricted foreign-entity accounts.
Investments

Investments

We classify investments available for current operations as current assets in the accompanying balance sheets, and we classify investments held for long-term purposes as noncurrent assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in other income (expense)—net. The cost of securities sold is based on the specific identification method. We include interest earned on securities in interest income.
Investments in Unconsolidated Affiliates

Investments in Unconsolidated Affiliates

We generally use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50%. Currently, most of our significant investments in affiliates that are not consolidated are recorded using the equity method
Accounts Receivable

Accounts Receivable

Accounts Receivable—Trade, Net

A summary of contract receivables is as follows:

 

     June 30,
2013		     December 31,
2012		  
     (Unaudited)  
     (In thousands)  

Contract receivables:

     

Contracts in progress

    $ 209,880      $ 273,729   

Completed contracts

      61,450        38,858   

Retainages

      64,839        133,619   

Unbilled

      5,087        4,710   

Less allowances

      (22,531 )      (22,116 ) 
  

 

 

    

 

 

  

Accounts receivable—trade, net

    $ 318,725      $ 428,800   
  

 

 

    

 

 

  

We expect to invoice our unbilled receivables once certain milestones or other metrics are reached, and we expect to collect all unbilled amounts. We believe that our provision for losses on uncollectible accounts receivable is adequate for our credit loss exposure.

Contract retainages generally represent amounts withheld by our customers until project completion, in accordance with the terms of the applicable contracts. The following is a summary of retainages on our contracts:

 

     June 30,
2013		      December 31,
2012		  
     (Unaudited)  
     (In thousands)  

Retainages expected to be collected within one year

    $ 64,839       $ 133,619   

Retainages expected to be collected after one year

      95,286         32,085   
  

 

 

     

 

 

  

Total retainages

    $ 160,125       $ 165,704   
  

 

 

     

 

 

  

We have included in accounts receivable—trade, net, retainages expected to be collected within one year. Retainages expected to be collected after one year are included in other assets.

Accounts Receivable—Other

Accounts receivable—other was $65.6 million and $75.5 million at June 30, 2013 and December 31, 2012, respectively. The balance primarily relates to transactions with unconsolidated affiliates, receivables associated with our hedging activities and value-added tax. These amounts are expected to be collected within 12 months, and any allowance for doubtful accounts on our accounts receivable—other is based on our estimate of the amount of probable losses due to the inability to collect these amounts (based on historical collection experience and other available information). As of June 30, 2013 and December 31, 2012, no such allowance for doubtful accounts was recorded.
Contracts in Progress and Advance Billings on Contracts

Contracts in Progress and Advance Billings on Contracts

Contracts in progress was $623.9 million and $560.1 million at June 30, 2013 and December 31, 2012, respectively. Advance billings on contracts was $301.4 million and $241.7 million at June 30, 2013 and December 31, 2012, respectively. A detail of the components of contracts in progress and advance billings on contracts is as follows:

 

     June 30,
2013		      December 31,
2012		  
     (Unaudited)  
     (In thousands)  

Costs incurred less costs of revenue recognized

    $ 83,354       $ 65,321   

Revenues recognized less billings to customers

      540,576         494,833   
  

 

 

     

 

 

  

Contracts in Progress

    $ 623,930       $ 560,154   
  

 

 

     

 

 

  

 

     June 30,
2013		     December 31,
2012		  
     (Unaudited)  
     (In thousands)  

Billings to customers less revenue recognized

    $ 467,049      $ 394,352   

Costs incurred less costs of revenue recognized

      (165,623 )      (152,656 ) 
  

 

 

    

 

 

  

Advance Billings on Contracts

    $ 301,426      $ 241,696   
  

 

 

    

 

 

  
Fair Value of Financial Instruments

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. An established hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect our assumptions about the factors that market participants would use in valuing the asset or liability.

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

  •  

Level 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 carrying amounts that we have reported for financial instruments, including cash and cash equivalents, accounts receivables and accounts payable approximate their fair values. See Note 6 for additional information regarding fair value measurements.
Derivative Financial Instruments

Derivative Financial Instruments

Our worldwide operations give rise to exposure to changes in certain market conditions, which may adversely impact our financial performance. When we deem it appropriate, we use derivatives as a risk management tool to mitigate the potential impacts of certain market risks. The primary market risk we manage through the use of derivative instruments is movement in foreign currency exchange rates. We use foreign currency derivative contracts to reduce the impact of changes in foreign currency exchange rates on our operating results. We use these instruments to hedge our exposure associated with revenues and/or costs on our long-term contracts and other cash flow exposures that are denominated in currencies other than our operating entities’ functional currencies. We do not hold or issue financial instruments for trading or other speculative purposes.

In certain cases, contracts with our customers contain provisions under which some payments from our customers are denominated in U.S. Dollars and other payments are denominated in a foreign currency. In general, the payments denominated in a foreign currency are designed to compensate us for costs that we expect to incur in such foreign currency. In these cases, we may use derivative instruments to reduce the risks associated with foreign currency exchange rate fluctuations arising from differences in timing of our foreign currency cash inflows and outflows. See Note 5 for additional information regarding derivative financial instruments.
Foreign Currency Translation

Foreign Currency Translation

We translate assets and liabilities of our foreign operations, other than operations in highly inflationary economies, into U.S. Dollars at period-end 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 income (loss) (“AOCI”), net of tax.
Earnings per Share

Earnings per Share

We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. See Note 8 for our earnings per share computations.
Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss

The components of AOCI included in stockholders’ equity are as follows:

 

     June 30,
2013		     December 31,
2012		  
     (Unaudited)  
     (In thousands)  

Foreign currency translation adjustments

    $ (2,886 )    $ (3,366 ) 

Net loss on investments

      (1,875 )      (2,316 ) 

Net gain (loss) on derivative financial instruments

      (58,316 )      11,735   

Unrecognized losses on benefit obligations

      (93,596 )      (100,466 ) 
  

 

 

    

 

 

  

Accumulated other comprehensive loss

    $ (156,673 )    $ (94,413 ) 
  

 

 

    

 

 

  

 

The following tables present the components of AOCI and the amounts that were reclassified during the period:

 

For the three months ended
June 30, 2013

   Unrealized holding
gain (loss) on
investment		     Deferred gain
(loss) on
derivatives(1)		     Foreign
currency gain
(loss)		     Defined benefit
pension plans gain (loss)(2)		     Total  
    (Unaudited)  
    (In thousands)  

Balance, March 31, 2013

   $ (1,915 )    $ (5,819 )    $ 3,848      $ (96,811 )    $ (100,697 ) 

Other comprehensive income (loss)

     40        (55,563 )      (6,734 )      —         (62,257 ) 

Amounts reclassified from AOCI

     —         3,066 (3)      —         3,215 (4)      6,281   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net current period other comprehensive income (loss)

     40        (52,497 )      (6,734 )      3,215        (55,976 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance, June 30, 2013

   $ (1,875 )    $ (58,316 )    $ (2,886 )    $ (93,596 )    $ (156,673 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

For the three months ended
June 30, 2012

   Unrealized holding
gain (loss) on
investment		     Deferred gain
(loss) on
derivatives(1)		     Foreign
currency gain
(loss)		     Defined benefit
pension plans gain (loss)(2)		     Total  
   

(Unaudited)

(In thousands)

  

Balance, March 31, 2012

   $ (3,706 )    $ (1,657 )    $ (9,325 )    $ (85,233 )    $ (99,921 ) 

Other comprehensive income

     431        (18,164 )      3,326        —         (14,407 ) 

Amounts reclassified from AOCI

     —         1,107 (3)      —         2,681 (4)      3,788   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net current period other comprehensive income

     431        (17,057 )      3,326        2,681        (10,619 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance, June 30, 2012

   $ (3,275 )    $ (18,714 )    $ (5,999 )    $ (82,552 )    $ (110,540 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

For the six months ended June 30,
2013

   Unrealized holding
gain (loss) on
investment		     Deferred gain
(loss) on
derivatives(1)		     Foreign
currency gain
(loss)		     Defined benefit
pension plans gain (loss)(2)		     Total  
    (Unaudited)  
    (In thousands)  

Balance, December 31, 2012

   $ (2,316 )    $ 11,735      $ (3,366 )    $ (100,466 )    $ (94,413 ) 

Other comprehensive income (loss)

     441        (71,013 )      480        —         (70,092 ) 

Amounts reclassified from AOCI

     —         962 (3)      —         6,870 (4)      7,832   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net current period other comprehensive income (loss)

     441        (70,051 )      480        6,870        (62,260 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance, June 30, 2013

   $ (1,875 )    $ (58,316 )    $ (2,886 )    $ (93,596 )    $ (156,673 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

For the six months ended June 30,
2012

   Unrealized holding
gain (loss) on
investment		     Deferred gain
(loss) on
derivatives(1)		     Foreign
currency gain
(loss)		     Defined benefit
pension plans gain (loss)(2)		     Total  
   

(Unaudited)

(In thousands)

  

Balance, December 31, 2011

   $ (4,402 )    $ 3,088      $ (12,438 )    $ (88,278 )    $ (102,030 ) 

Other comprehensive income

     1,127        (24,051 )      6,439        —         (16,485 ) 

Amounts reclassified from AOCI

     —         2,249 (3)      —         5,726 (4)      7,975   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net current period other comprehensive income

     1,127        (21,802 )      6,439        5,726        (8,510 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance, June 30, 2012

   $ (3,275 )    $ (18,714 )    $ (5,999 )    $ (82,552 )    $ (110,540 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) Refer to Note 5 for additional details
(2) Refer to Note 4 for additional details
(3) Reclassified to cost of operations
(4) Reclassified to selling, general and administrative expenses
Impairment Review

Impairment Review

We review goodwill for impairment on an annual basis or more frequently if circumstances indicate that impairment may exist. The annual impairment review involves comparing the fair value to the net book value of each applicable reporting unit and, therefore, is significantly impacted by estimates and judgments.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation is required, the fair value of each applicable asset is compared to its carrying value. Factors that impact our determination of potential impairment include forecasted utilization of equipment and estimates of forecasted cash flows from projects expected to be performed in future periods. Our estimates of cash flow may differ from actual cash flow due to, among other things, 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.
Income Taxes

Income Taxes

We provide for income taxes based on the tax laws and rates in the countries in which we conduct our operations. MII is a Panamanian corporation that earns all of its income outside of Panama. As a result, we are not subject to income tax in Panama. We operate in various taxing jurisdictions around the world. Each of these jurisdictions has a regime of taxation that varies, not only with respect to nominal rates, but also with respect to the basis on which these rates are applied. These variations, along with changes in our mix of income or loss from these jurisdictions, may contribute to shifts, sometimes significant, in our effective tax rate.

Three months ended June 30, 2013

For the three months ended June 30, 2013, we recognized a loss before provision for income taxes of $140.2 million, compared to income of $82.3 million in the three months ended June 30, 2012. In the aggregate, the provision for income taxes was $5.9 million and $28.3 million for the three months ended June 30, 2013 and 2012, respectively. The decline in the provision for income taxes was principally driven by lower taxable income, which was partially offset by losses in certain tax jurisdictions where we do not expect to receive a tax benefit (primarily the United States, the United Arab Emirates and Malaysia).

 

Six months ended June 30, 2013

For the six months ended June 30, 2013, we recognized a loss before provision for income taxes of $88.6 million, compared to income of $172.9 million in the six months ended June 30, 2012. In the aggregate, the provision for income taxes was $33.2 million and $57.1 million for the six months ended June 30, 2013 and 2012, respectively. The decline in the provision for income taxes was principally driven by lower taxable income, which was partially offset by losses in certain tax jurisdictions where we do not expect to receive a tax benefit (primarily the United States, the United Arab Emirates and Malaysia).

At June 30, 2013, we had foreign net operating loss carryforwards available to offset future taxable income in foreign jurisdictions, with a valuation allowance of $69 million against $78 million of the related deferred taxes. The remaining $9 million of foreign deferred taxes is expected to be realized through future foreign taxable income. At June 30, 2013, we had U.S. federal net operating loss carryforwards but have fully reserved the $133 million deferred tax asset.
Recently Issued Accounting Standards

Recently Issued Accounting Standards

On July 18, 2013, the Financial Accounting Standards Board (“FASB”) issued an update to the topic Income Taxes. The update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where these items are not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The update is effective for reporting periods after December 15, 2013 and the adoption of this update is not expected to have a material impact on our condensed consolidated financial statements.

In February 2013, the FASB issued an update to the topic Comprehensive Income. The update requires companies to provide additional information about the nature and amount of certain reclassifications out of AOCI, which impact the income statement. While the amendment does not change current reporting requirements, companies are required to provide information about the amounts reclassified out of AOCI by the respective line item. The update is effective for reporting periods after December 15, 2012 and the adoption of this update did not have a material impact on our condensed consolidated financial statements.

In January 2013, the FASB issued an update to the topic Balance Sheet. This update requires new disclosures presenting detailed information regarding both the gross and net basis of derivatives and other financial instruments that are eligible for offset in the balance sheet or that are subject to a master netting arrangement. The update is effective for the first quarter of 2013 and is to be applied retrospectively. As this new guidance relates to presentation only, the adoption of this update did not have a material impact on our condensed consolidated financial statements.