NOTE 1—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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. Operating in approximately 20 countries across the Americas, Middle East, Asia Pacific, the North Sea and Africa, our integrated resources include approximately 14,000 employees and a diversified fleet of marine vessels, fabrication facilities and engineering offices. We support our activities with comprehensive project management and procurement services, while utilizing our fully integrated capabilities in both shallow water and deepwater construction. 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. We execute our contracts through a variety of methods, principally fixed-price, but also including cost reimbursable, cost-plus, day-rate and unit-rate basis or some combination of those methods. In 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

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, 2013.

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.

Certain 2013 amounts in the condensed consolidated balance sheets and statement of cash flows, reflecting the non cash impacts on gain of foreign exchange, have been reclassified to conform to the 2014 presentation.

Business Segments

In March 2014, we changed our organizational structure to orient around our offshore and subsea business activities through four primary geographic regions. The four geographic regions, which we consider to be our operating segments, consist of Asia Pacific, Americas (previously Atlantic), Middle East and North Sea and Africa. The Caspian is no longer considered an operating segment and will continue to be aggregated in the Middle East reporting segment. The North Sea and Africa operating segment is also 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 continue to report financial results under reporting segments consisting of Asia Pacific, Americas and the Middle East. We also report certain corporate and other non-operating activities under the heading “Corporate and other,” which primarily reflects corporate personnel and activities, incentive compensation programs and other costs that are generally fully allocated to our operating segments. The only corporate costs not allocated to our operating segments are the restructuring costs associated with our corporate reorganization. See Note 9 for summarized financial information on our segments.

Revenue Recognition

We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours, or a cost-to-cost method, as applicable to the activity involved. We include the amount of accumulated contract costs and estimated earnings that exceed billings to customers in contracts in progress. We include billings to customers that exceed accumulated contract costs and estimated earnings in advance billings on contracts. Most long-term contracts contain provisions for progress payments. We expect to invoice customers for 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. 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 (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 we expect to recover or costs incurred. Additionally, to the extent that claims included in backlog, including those that arise from change orders which are under dispute or which have been previously rejected by the customer, are not resolved in our favor, there could be reductions in or reversals of previously reported revenues and profits, and charges against current earnings, which could be material. Unapproved change orders that are disputed by the customer are treated as claims.

As of September 30, 2014, total unapproved change orders included in our estimates at completion aggregated approximately $352.3 million, of which approximately $168.9 million was included in backlog. As of September 30, 2013, total unapproved change orders included in our estimates at completion aggregated approximately $468.0 million, of which approximately $138.0 million was included in backlog.

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 or sea conditions. Claims revenue, when recorded, is only recorded to the extent of the lesser of the amounts we expect 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 unless and until they are disputed by the customer. 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 pending claims as of September 30, 2014 were the subject of any litigation proceedings.

The amount of revenues and costs included in our estimates at completion (i.e., contract values) associated with such claims was $6.5 million and $186.3 million as of September 30, 2014 and September 30, 2013, respectively. All of these claim amounts at September 30, 2014 were related to our Middle East segment. Approximately 41%, 8% and 51% of these claim amounts as of September 30, 2013 were related to our Asia Pacific, Americas and Middle East segments, respectively. For the three- and nine-month periods ended September 30, 2014, no revenues or costs pertaining to claims were included in our condensed consolidated financial statements. For the three- and nine-month periods ended September 30, 2013, $17.6 million and $56.9 million of revenues and costs pertaining to claims were included in our condensed consolidated financial statements, respectively.

Our unconsolidated joint ventures did not include any claims revenue or associated cost in their financial results for the three- and nine-month periods ended September 30, 2014. For the three- and nine-month periods ended September 30, 2013, our unconsolidated joint ventures included nil and $3.7 million, respectively, of claims and associated costs in their financial results.

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. At September 30, 2014, no projects were being accounted for under our deferred profit recognition policy.

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 reasonable. However, it is possible that in the time between contract execution and the start of work on a project, we could lose the ability to forecast cost to complete based on intervening events, including, but not limited to, experience on similar projects, civil unrest, strikes and volatility in our expected costs. In such a situation, we would use the completed contract method of accounting for that project. We did not enter into any contracts that we accounted for under the completed contract method during the quarters ended September 30, 2014 and September 30, 2013.

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, subcontractor or supplier performance, pipeline lay rates or steel and other raw material prices. Increases in costs associated with our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows.

As of September 30, 2014, 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.

Of the September 30, 2014 backlog, approximately $385.4 million relates to four active projects that are in loss positions, whereby future revenues are expected to equal costs when recognized. Included in this amount is $169.0 million of backlog associated with an EPCI project in Altamira, which is expected to be completed in the fourth quarter of 2015, and $116.1 million pertaining to a five-year charter of the Agile in Brazil, which began in early 2012, both of which are in our Americas segment. The amount also includes $91.1 million of backlog relating to an EPCI project in Saudi Arabia, which is expected to be completed by early 2016 and $9.2 million relating to another EPCI project in Saudi Arabia scheduled for completion during the fourth quarter of 2014, both of which are being conducted in our Middle East segment. These four projects represent 100% of the backlog amount in a loss position. It is possible that our estimates of gross profit could increase or decrease based on changes in productivity, actual downtime and the resolution of change orders and claims with the customers.

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, subcontractor and supplier delays and other costs. We generally expect to experience a reasonable amount of unanticipated events, and some of these events can result in significant cost increases above cost amounts we previously estimated. As of September 30, 2014, 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.

The following is a discussion of our most significant changes in estimates that impacted operating income for the three months and nine months ended September 30, 2014 and 2013.

Three months ended September 30, 2014

Operating income for the three months ended September 30, 2014 was impacted by changes in cost estimates relating to projects in each of our segments.

The Asia Pacific segment was positively impacted by favorable changes in estimates aggregating approximately $20.2 million from three projects. On a recently completed marine installation project in Brunei, reduction in estimated costs to complete from productivity improvements on marine vessels and offshore support activities resulted in a favorable change of approximately $10.8 million. On two previously completed projects, insurance claim collection and final project close-out adjustments resulted in a combined additional recovery of approximately $9.5 million during the three months ended September 30, 2014.

The Middle East segment deteriorated by a net amount of approximately $5.4 million due to change in estimates during the three months ended September 30, 2014. On one EPCI project in Saudi Arabia, estimated costs to complete increased by $7.9 million, primarily as a result of vessel downtime due to weather and standby delays (which may be recoverable from the customer, but were not recognizable at September 30, 2014). On two other EPCI projects in Saudi Arabia, estimated costs to complete increased by an aggregate of $6.7 million, as a result of revisions to project execution plans, primarily due to extended offshore hookup campaigns, increased vessel mobilization activities, and delays in the completion of onshore activities. On another EPCI project in Saudi Arabia, we increased our overall estimated costs to complete by approximately $8.6 million, reflecting the costs of an incremental mobilization and inefficiencies of executing out-of-sequence work due to a revised execution plan, which resulted from delayed access to the project site. These negative changes were offset by an improvement of approximately $17.8 million on a pipelay project in the Caspian, primarily due to increased cost recovery estimates based on positive developments during the three months ended September 30, 2014 from the ongoing project close-out process with the customer. This project was completed earlier in 2014.

The Americas segment improved by a net $1.5 million from changes in estimates on five projects. On a subsea project in the U.S. Gulf of Mexico completed during the period, project close-out savings on marine spread costs and increased cost recovery based on positive developments from the ongoing negotiations with the customer resulted in a reduction of project losses of $12.4 million during the three months ended September 30, 2014. Two projects completed earlier in 2014 improved by an aggregate of approximately $4.8 million based on positive developments from ongoing project close-out negotiations with the customers. These improvements were partially offset by negative changes of approximately $10.9 million on an EPCI project in Altamira, primarily due to increased cost estimates to complete the project as a result of a revised fabrication execution plan, and reduced cost recovery of approximately $4.8 million on a fabrication project in Morgan City completed during 2013, based on an agreement in principle reached with the customer during the three months ended September 30, 2014, which resulted in lower-than-anticipated recoveries.

Nine months ended September 30, 2014

Operating income for the nine months ended September 30, 2014 was impacted by changes in cost estimates relating to projects in each of our segments.

The Asia Pacific segment experienced net favorable changes in estimates aggregating approximately $53.5 million, due to changes in estimates on four projects. Changes in estimates on a subsea project in Malaysia resulted in improvements of approximately $31.5 million during the nine months ended September 30, 2014, primarily related to productivity improvements on our marine vessels and offshore support activities, as well as project close-out savings. On a recently completed marine installation project in Brunei, a reduction in estimated costs to complete from productivity improvements on marine vessels and offshore support activities resulted in a favorable change of approximately $11.8 million. On two previously completed projects, insurance claim collection and final project close-out adjustments resulted in a combined additional recovery of approximately $10.3 million during the nine months ended September 30, 2014.

The Middle East segment was negatively impacted by net unfavorable changes aggregating approximately $10.7 million, due to changes in four projects. On two EPCI projects in Saudi Arabia, we increased our estimated costs at completion by approximately $42.4 million, primarily as a result of vessel downtime due to weather and standby delays (which may be recoverable from the customer, but which were not recognizable at September 30, 2014) and reduced productivity levels and increased cost estimates to complete the onshore scope of one of the projects. On another EPCI project in Saudi Arabia, we increased our overall estimated costs to complete by approximately $15.2 million, to reflect cost overruns related to (1) the onshore work, which was substantially completed in July 2014, and (2) delays in completing the offshore work, due to delayed access to the project site, resulting in a revised execution plan. The revised execution plan included the costs of an incremental mobilization and reflected inefficiencies of executing out-of-sequence work. These negative changes were partially offset by approximately $46.9 million of increased cost recovery estimates on a pipelay project in the Caspian, based on positive developments during the nine months ended September 30, 2014 from the ongoing project close-out process with the customer. This project was substantially completed in June 2014.

The Americas segment was negatively impacted by net unfavorable changes in estimates aggregating approximately $41.5 million associated with five projects. On an EPCI project in Altamira, we increased our estimated costs to complete by approximately $66.3 million, due to liquidated damages and extended project management costs arising from unexpected project delays and projected fabrication cost increases reflecting reduced productivity and execution plan changes to mitigate further project delays, as well as procurement and marine installation cost increases. This project is in a loss position and is estimated to be completed in the fourth quarter of 2015. On a subsea project in the U. S. Gulf of Mexico, we increased our estimated costs to complete by a net amount of approximately $10.1 million, primarily due to increased costs from equipment downtime issues on the North Ocean 102 (the “NO 102”), our primary vessel working on the project, partially offset by project close-out savings on marine spread costs and increased cost recovery estimates based on positive developments from the ongoing negotiations with the customer. This project, which was in a loss position, was completed during the nine months ended September 30, 2014. On a fabrication project in Morgan City completed during 2013, we reduced our cost recovery estimates by approximately $7.8 million, mainly based on an agreement in principle with the customer during the nine months ended September 30, 2014, which resulted in lower-than-anticipated recoveries. These negative impacts were partially offset by $37.4 million of project close-out improvements on an EPCI project in Brazil, from marine cost reductions upon completion of activities and increased recoveries due to successful developments from ongoing approval process for additional weather-related compensation. We also recognized $5.2 million cost reductions, mainly due to project close-out improvements, on a marine installation project in the U. S. Gulf of Mexico.

Three months ended September 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 $66 million in the three months ended September 30, 2013, primarily due to an accelerated project execution schedule agreed with the customer and further delays in vessel availability related to downtime for the Lay Vessel North Ocean 105 (the “NO 105”). The change in cost estimate was partially offset by approximately $33 million of improvements resulting from commercial negotiations with our customer in which we agreed to expedite project completion by returning to a single marine campaign project execution plan, including working in adverse weather periods on a best-efforts basis, with reimbursable weather downtime, and the customer agreed to re-establish the project completion date and waive liquidated damages. The $66 million of additional costs were driven by several factors, including continued NO 105 major pipe-lay system commissioning problems and the additional cost impacts of the commercial negotiations noted above, which required a revised execution plan transferring work scope from the NO 105 to the NO 102 and the Emerald Sea, which were added to the fleet of vessels working on the project. This resulted in increased costs from additional vessel mobilizations, increased daily operating costs and decreased productivity from working in adverse weather periods. This project was completed during the three months ended June 30, 2014.

The Middle East segment was impacted by changes in estimates on a pipelay project in the Caspian. We increased our cost recovery estimates by approximately $29.0 million during the three months ended September 30, 2013, based on preliminary verbal agreements and then-recent commercial negotiations with the customer. Based on information available at that time, it was our opinion that the cost recovery was probable and the contractual negotiations would be completed as planned. This project was completed during the three months ended March 31, 2014.

The Americas segment was impacted by changes in estimates on one project in Mexico. On that project, we recognized approximately $9.0 million of project losses in the three months ended September 30, 2013, primarily due to increased fabrication costs associated with increases to the scope of the project and incremental costs associated with labor productivity. The project is currently in a loss position and is expected to be completed in the fourth quarter of 2015.

Nine months ended September 30, 2013

The Asia Pacific segment was primarily impacted by changes in estimates on three projects. On one project (the project in Malaysia described above), in the nine months ended September 30, 2013 we increased our estimated cost at completion by a net of approximately $99 million. An aggregate of $132.0 million of increased cost to complete the project was primarily due to delays resulting from direct and indirect impacts of the equipment modification problems during the final commissioning stage of the major pipelay systems upgrade to the NO 105 and the other cost increase factors described above. Those items were partially offset by a $33 million improvement resulting from the commercial negotiations described above. On two EPCI projects completed during the first half of 2013, we benefited in the aggregate from approximately $14 million of reduced at-completion costs, primarily due to efficiencies associated with marine campaigns.

The Middle East segment was impacted by changes in estimates on an EPCI project in Saudi Arabia and a pipelay project in the Caspian. On the EPCI project in Saudi Arabia, we increased our estimated costs at completion by approximately $38.0 million in the nine months ended September 30, 2013, primarily as a result of revisions to the project’s execution plan, increases in our estimated costs 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 nine months ended September 30, 2013, it remains in an overall profitable position. On the pipelay project in the Caspian, we increased our cost recovery estimates by approximately $47.7 million during the nine months ended September 30, 2013 based on preliminary verbal agreements and then-recent commercial negotiations with the customer. Based on information available at that time, it was our opinion that the cost recovery was probable and the contractual negotiations would be completed as planned. This project was completed during the three months ended March 31, 2014.

The Americas segment was impacted by changes in estimates on a fabrication project in Morgan City and an EPCI project in Altamira. On those two projects, we recognized an aggregate of approximately $21.0 million of incremental project losses in the nine months ended September 30, 2013, primarily due to lower-than-expected labor productivity and incremental fabrication costs. The fabrication project in Morgan City that experienced lower labor productivity was completed during the fourth quarter of 2013, while the EPCI project in Altamira that recognized additional fabrication costs is expected to be completed in the fourth quarter of 2015. That project is in a loss position.

Loss Contingencies

We record liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such loss is not reasonably estimable. We are currently involved in litigation and other proceedings, as discussed in Note 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

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. A majority of our restricted cash and cash equivalents represents collateralizing letters of credit as further discussed in Note 3.

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

We generally use the equity method of accounting for affiliates in which our investment ownership ranges from 20% to 50%, and in which we do not exercise control over the entity. Currently, most of our investments in affiliates that are not consolidated are recorded using the equity method.

Accounts Receivable

Accounts Receivable—Trade, Net

A summary of contract receivables is as follows:

	September 30, 2014			December 31, 2013

	(in thousands)
Contract receivables:
Contracts in progress	$	176,754		$	192,745
Completed contracts		34,821			77,248
Retainages		86,883			127,698
Unbilled		4,304			14,571
Less allowances		(31,743	)		(30,404	)
Accounts receivable—trade, net	$	271,019		$	381,858

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:

	September 30, 2014		December 31, 2013

	(in thousands)

Retainages expected to be collected within one year	$	86,883	$	127,698
Retainages expected to be collected after one year		132,248		65,365

Total retainages	$	219,131	$	193,063

We have included in accounts receivable—trade, net, retainages expected to be collected within one year.

Accounts Receivable—Other

A summary of accounts receivable— other is as follows:

	September 30, 2014		December 31, 2013

	(In thousands)
Other taxes receivable	$	26,874	$	14,934
Receivables from unconsolidated affiliates		19,842		36,181
Accrued unbilled revenue		13,278		15,696
Intercompany unbilled cost		7,248		5,373
Employee receivables		4,286		4,532
Foreign currency forward contracts		328		11,641
Other		3,885		916
Accounts receivable-other	$	75,741	$	89,273

Employee receivables 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 September 30, 2014 and December 31, 2013, no such allowance for doubtful accounts was recorded.

Contracts in Progress and Advance Billings on Contracts

Contracts in progress were $336.9 million and $426.0 million at September 30, 2014 and December 31, 2013, respectively. Advance billings on contracts were $200.3 million at September 30, 2014 and $278.9 million at December 31, 2013. A detail of the components of contracts in progress and advance billings on contracts is as follows:

	September 30, 2014			December 31, 2013

	(In thousands)
Costs incurred less costs of revenue recognized	$	103,467		$	65,113
Revenues recognized less billings to customers		233,453			360,873

Contracts in Progress	$	336,920		$	425,986

	September 30, 2014			December 31, 2013

	(In thousands)

Billings to customers less revenue recognized	$	680,962		$	466,205
Costs incurred less costs of revenue recognized		(480,704	)		(187,276	)

Advance Billings on Contracts	$	200,258		$	278,929

Other Non-Current Assets

We have included debt issuance costs in other non-current assets. The current portion of debt-issuance costs has been included in other current assets. We amortize debt issuance costs as interest expense on a straight-line basis over the life of the related debt. The following summarizes the changes in the carrying amount of these assets:

	Nine months ended September 30, 2014			Year ended December 31, 2013

	(In thousands)
Balance at beginning of period	$	14,951		$	13,761
Debt issuance costs		46,914			4,905
Former Credit Agreement debt issuance cost write off		(11,913	)		-
Amortization of interest expense		(7,628	)		(3,715	)
		42,324			14,951
Less: Current portion		(11,244	)		-
Noncurrent portion	$	31,080		$	14,951

Also included in other non-current assets is long-term deferred drydock expenses, long-term prepaid rent and other prepaid expenses.

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 the Company’s 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 on quoted prices for identical instruments traded in active markets.

Level 2—inputs are based on quoted prices for similar instruments in active markets, quoted prices for similar or identical instruments in inactive markets and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar valuation techniques.

The 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

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

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

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

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

	September 30, 2014			December 31, 2013

	(In thousands)

Foreign currency translation adjustments	$	(5,276	)	$	(2,562	)
Net gain on investments		238			238
Net loss on derivative financial instruments		(63,003	)		(45,386	)
Unrecognized losses on benefit obligations		(82,123	)		(92,421	)
Accumulated other comprehensive loss	$	(150,164	)	$	(140,131	)

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

2014 period

For the three months ended September 30, 2014	Foreign currency gain (loss)			Unrealized holding loss on investment			Deferred gain (loss) on derivatives⁽¹⁾			Defined benefit pension plans loss⁽²⁾			TOTAL

	(in thousands)

Balance, June 30, 2014	$	(3,821	)	$	245		$	(30,090	)	$	(85,555	)	$	(119,221	)

Other comprehensive income (loss) before reclassification		(1,455	)		(7	)		(39,563	)		-			(41,025	)
Amounts reclassified from AOCI		-			-			6,650			3,432			10,082
Net current period other comprehensive income (loss)		(1,455	)		(7	)		(32,913	)		3,432			(30,943	)

Balance, September 30, 2014	$	(5,276	)	$	238		$	(63,003	)	$	(82,123	)	$	(150,164	)

For the nine months ended September 30, 2014	Foreign currency gain (loss)			Unrealized holding loss on investment			Deferred gain (loss) on derivatives⁽¹⁾			Defined benefit pension plans loss⁽²⁾			TOTAL

	(in thousands)

Balance, December 31, 2013	$	(2,562	)	$	238		$	(45,386	)	$	(92,421	)	$	(140,131	)

Other comprehensive income (loss) before reclassification		(2,714	)		-			(26,764	)		-			(29,478	)
Amounts reclassified from AOCI		-			-			9,147			10,298			19,445
Net current period other comprehensive income (loss)		(2,714	)		-			(17,617	)		10,298			(10,033	)

Balance, September 30, 2014	$	(5,276	)	$	238		$	(63,003	)	$	(82,123	)	$	(150,164	)

2013 period

For the three months ended September 30, 2013	Foreign currency gain (loss)			Unrealized holding loss on investment			Deferred gain (loss) on derivatives⁽¹⁾			Defined benefit pension plans loss⁽²⁾			TOTAL



Balance, June 30, 2013	$	(2,886	)	$	(1,875	)	$	(58,316	)	$	(93,596	)	$	(156,673	)

Other comprehensive income (loss) before reclassification		(1,245	)		158			24,767			-		$	23,680
Amounts reclassified from AOCI		-			-			320			3,438		$	3,758
Net current period other comprehensive income (loss)		(1,245	)		158			25,087			3,438			27,438

Balance, September 30, 2013	$	(4,131	)	$	(1,717	)	$	(33,229	)	$	(90,158	)	$	(129,235	)

For the nine months ended September 30, 2013	Foreign currency gain (loss)			Unrealized holding loss on investment			Deferred gain (loss) on derivatives⁽¹⁾			Defined benefit pension plans loss⁽²⁾			TOTAL

	(in thousands)

Balance, December 31, 2012	$	(3,366	)	$	(2,316	)	$	11,735		$	(100,466	)	$	(94,413	)

Other comprehensive income (loss) before reclassification		(765	)		599			(46,246	)		-		$	(46,412	)
Amounts reclassified from AOCI		-			-			1,282			10,308		$	11,590
Net current period other comprehensive income (loss)		(765	)		599			(44,964	)		10,308			(34,822	)

Balance, September 30, 2013	$	(4,131	)	$	(1,717	)	$	(33,229	)	$	(90,158	)	$	(129,235	)

(1)	Refer to Note 5 for additional details.

(2)	Refer to Note 4 for additional details.

(3)	Reclassified to cost of operations and gain on foreign currency, net.

(4)	Reclassified to selling, general and administrative expenses.

Recently Issued Accounting Standards

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern” ("ASU 2014-15"). Currently, there is no guidance in effect under U.S. GAAP regarding management's responsibility to assess whether there is substantial doubt about an entity's ability to continue as a going concern. Under ASU 2014-15, we will be required to assess our ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about our ability to continue as a going concern, including management's plan to alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter with early adoption permitted. We are currently assessing the impact of the adoption of ASU 2014-15 on our future financial statements and related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. It also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 is effective for us for annual and interim reporting periods beginning after December 15, 2016, with early application not permitted. We have the choice to apply it either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying it at the date of initial application (January 1, 2017) and not adjusting comparative information. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which amends the definition of a discontinued operation by raising the threshold for a disposal to qualify as discontinued operations. ASU 2014-08 will also require entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The pronouncement is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. We are currently assessing the impact of the adoption of ASU 2014-08 on our future financial statements and related disclosures.