<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
--------------
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the Company's Common Stock at April 28, 2000
was 60,029,629.
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M c D E R M O T T I N T E R N A T I O N A L , I N C.
I N D E X - F O R M 1 0 - Q
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Income (Loss)
Three Months Ended March 31, 2000 and 1999 6
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2000 and 1999 7
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 39
Item 6 - Exhibits and Reports on Form 8-K 43
SIGNATURES 44
</TABLE>
2
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PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 125,740 $ 162,734
Investments 89,442 111,104
Accounts receivable - trade, net 167,862 429,573
Accounts receivable - unconsolidated affiliates 13,950 21,406
Accounts receivable - other 42,480 167,291
Environmental and products liabilities recoverable - current 1,075 232,618
Contracts in progress 98,799 159,369
Inventories 9,842 57,488
Deferred income taxes 51,030 93,629
Other current assets 26,926 33,596
---------- ----------
Total Current Assets 627,146 1,468,808
---------- ----------
Property, Plant and Equipment 1,253,116 1,439,496
Less accumulated depreciation 893,891 1,001,699
---------- ----------
Net Property, Plant and Equipment 359,225 437,797
---------- ----------
Investments:
Government obligations 240,093 159,005
Other investments 48,102 105,704
---------- ----------
Total Investments 288,195 264,709
---------- ----------
Products Liabilities Recoverable -- 942,982
---------- ----------
Goodwill less Accumulated Amortization of $35,874,000
at March 31, 2000 and $118,878,000 at December 31, 1999 359,899 444,220
---------- ----------
Prepaid Pension Costs 100,895 111,114
---------- ----------
Investment in The Babcock & Wilcox Company 166,234 --
---------- ----------
Other Assets 89,890 205,261
---------- ----------
TOTAL $1,991,484 $3,874,891
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 87,266 $ 86,499
Accounts payable 129,377 185,465
Accounts payable to The Babcock & Wilcox Company 5,684 --
Environmental and products liabilities - current 7,622 281,787
Accrued employee benefits 61,338 96,235
Accrued contract costs 42,756 81,586
Advance billings on contracts 53,948 231,421
Other current liabilities 241,870 339,413
------------ ------------
Total Current Liabilities 629,861 1,302,406
------------ ------------
Long-Term Debt 318,296 323,014
------------ ------------
Accumulated Postretirement Benefit Obligation 3,906 112,132
------------ ------------
Environmental and Products Liabilities 11,989 1,072,969
------------ ------------
Other Liabilities 225,682 272,484
------------ ------------
Commitments and Contingencies
Minority Interest 28 28
------------ ------------
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 61,849,659 at
March 31, 2000 and 61,625,434 at December 31, 1999 61,850 61,625
Capital in excess of par value 1,051,271 1,048,848
Accumulated deficit (204,028) (208,904)
Treasury stock at cost, 2,000,614 shares at March 31,
2000 and December 31, 1999 (62,731) (62,731)
Accumulated other comprehensive loss (44,640) (46,980)
------------ ------------
Total Stockholders' Equity 801,722 791,858
------------ ------------
TOTAL $ 1,991,484 $ 3,874,891
============ ============
</TABLE>
5
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
--------- ---------
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C>
Revenues $ 591,711 $ 749,368
--------- ---------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 514,990 650,626
Depreciation and amortization 17,133 28,468
Selling, general and administrative expenses 41,894 58,278
Restructuring charges 3,540 --
--------- ---------
577,557 737,372
--------- ---------
Gain (Loss) on Asset Disposals and Impairments - Net 1,059 (19,057)
--------- ---------
Operating Income (Loss) before
Loss from Investees 15,213 (7,061)
Loss from Investees (6,223) (5,898)
--------- ---------
Operating Income (Loss) 8,990 (12,959)
--------- ---------
Other Income (Expense):
Interest income 7,145 19,298
Interest expense (8,823) (14,125)
Minority interest -- 15,327
Other-net 3,872 (52,251)
--------- ---------
2,194 (31,751)
--------- ---------
Income (Loss) before Provision for (Benefit from) Income Taxes
and Extraordinary Item 11,184 (44,710)
Provision for (Benefit from) Income Taxes 3,317 (21,326)
--------- ---------
Income (Loss) before Extraordinary Item 7,867 (23,384)
Extraordinary Item -- (38,719)
--------- ---------
Net Income (Loss) $ 7,867 $ (62,103)
========= =========
Earnings per Common Share:
Basic:
Income (Loss) before Extraordinary Item $ 0.13 $ (0.40)
Net Income (Loss) $ 0.13 $ (1.06)
Diluted:
Income (Loss) before Extraordinary Item $ 0.13 $ (0.40)
Net Income (Loss) $ 0.13 $ (1.06)
========= =========
Cash Dividends:
Per Common Share $ 0.05 $ 0.05
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Net Income (Loss) $ 7,867 $ (62,103)
-------- ---------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments 2,832 (2,526)
Minimum pension liability adjustment -- (1,058)
Unrealized losses on investments:
Unrealized losses arising during the period,
net of taxes of $8,000 at March 31, 2000 and
($17,000) at March 31, 1999 (491) (1,791)
Reclassification adjustment for gains
included in net income, net of taxes of $11,000
at March 31, 1999 (1) (228)
-------- ---------
Other Comprehensive Income (Loss) 2,340 (5,603)
-------- ---------
Comprehensive Income (Loss) $ 10,207 $ (67,706)
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 7,867 $ (62,103)
--------- ---------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 17,133 28,468
Income or loss of investees, less dividends 7,333 7,380
Loss (gain) on asset disposals and
impairments - net (1,059) 19,057
Provision for (benefit from) deferred taxes 8,180 (21,169)
Extraordinary loss -- 38,719
Other 2,176 351
Changes in assets and liabilities, net of effects
of deconsolidation of B&W:
Accounts receivable 81,498 (12,663)
Net contracts in progress and advance billings (41,716) (22,290)
Accounts payable 15,618 (15,974)
Accrued and other current liabilities (32,267) 3,693
Products and environmental liabilities (6,725) 65,647
Other, net (56,447) (8,437)
Deconsolidation of The Babcock & Wilcox Company (19,424) --
Proceeds from insurance for products liability claims 26,427 37,234
Payments of products liability claims (23,782) (48,906)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (15,188) 9,007
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (16,972) (33,493)
Purchases of available-for-sale securities (5,229) (147,013)
Sales of available-for-sale securities -- 323,938
Maturities of available-for-sale securities 2,997 38,128
Proceeds from asset disposals 1,166 15,030
Other 500 (5,364)
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (17,538) 191,226
--------- ---------
</TABLE>
8
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CONTINUED
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
--------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (2) $ (281,011)
Increase in short-term borrowing 803 --
Issuance of common stock -- 351
Issuance of subsidiary's stock -- 810
Dividends paid (2,979) (2,949)
Other 10 (2,689)
--------- ----------
NET CASH USED IN FINANCING ACTIVITIES (2,168) (285,488)
--------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (2,100) 1,449
--------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (36,994) (83,806)
--------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 162,734 265,309
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 125,740 $ 181,503
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 14,494 $ 27,849
Income taxes - net $ 2,559 $ 13,338
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Deconsolidation of The Babcock & Wilcox Company debt $ 4,760 $ --
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
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McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1 - BASIS OF PRESENTATION
We have presented our consolidated financial statements in U.S. Dollars in
accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information. These consolidated financial
statements include the accounts of McDermott International, Inc. and its
subsidiaries and controlled joint ventures. We use the equity method to account
for investments in joint ventures and other entities we do not control, but have
significant influence over. We have eliminated all significant intercompany
transactions and accounts.
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which includes:
o J. Ray McDermott, S.A. ("JRM"), a Panamanian subsidiary of MII, and its
consolidated subsidiaries;
o McDermott Incorporated ("MI"), a Delaware subsidiary of MII, and its
consolidated subsidiaries;
o Babcock & Wilcox Investment Company ("BWICO"), a Delaware subsidiary of
MI;
o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and its
consolidated subsidiaries,
and
o The Babcock & Wilcox Company ("B&W"), an unconsolidated Delaware
subsidiary of BWICO.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve their asbestos liability. We expect that
this filing will have little effect, if any, on B&W's customers, suppliers,
employees or retirees. B&W and its subsidiaries are committed to operating their
businesses as normal, delivering products and services as usual and pursuing new
contracts and growth opportunities. However, as of February 22, 2000, B&W's
operations are subject to the jurisdiction of the Bankruptcy Court and, as a
result, our access to cash flows of B&W and its subsidiaries is restricted.
Due to the bankruptcy filing, effective February 22, 2000, we no longer
consolidate B&W's financial results in our consolidated financial statements,
and our investment in B&W is presented on the cost method. When B&W emerges from
the jurisdiction of the Bankruptcy Court, the subsequent accounting will be
determined based on the terms of the reorganization plan. See Note 7 for
condensed consolidated income statement and balance sheet information of B&W.
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NOTE 2 - INVENTORIES
Inventories are summarized below:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 6,071 $ 43,998
Work in Progress 1,823 6,353
Finished Goods 1,948 7,137
------- --------
$ 9,842 $ 57,488
======= ========
</TABLE>
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $ (26,565) $ (29,397)
Net Unrealized Loss on Investments (10,221) (9,729)
Minimum Pension Liability (7,854) (7,854)
--------- ---------
$ (44,640) $ (46,980)
========= =========
</TABLE>
NOTE 4 - INVESTIGATIONS AND LITIGATION
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the Department of Justice that they and others had
participated in a conspiracy to rig bids in connection with the heavy-lift
business of HeereMac in the Gulf of Mexico, the North Sea and the Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea,
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both HeereMac and certain employees of HeereMac agreed to cooperate fully with
the Department of Justice investigation. Neither MII, JRM nor any of their
officers, directors or employees was a party to those proceedings.
In July 1999, a former JRM officer was indicted by the Department of Justice for
participating in an international bid-rigging conspiracy for the sale of marine
construction services and pled guilty.
We have cooperated with the Department of Justice in its investigation. The
Department of Justice also has requested additional information from us relating
to possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM
assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J.
Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates and others, alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants (collectively
"Statoil"), filed a similar lawsuit in the same court (the "Statoil
Litigation"). In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil
Litigation have requested punitive as well as treble damages. In January 1999,
the court dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects. In July 1999, the court dismissed the Statoil
Litigation for lack of subject matter jurisdiction. In August 1999, Statoil
appealed this dismissal to the Fifth Circuit Court of Appeal. In September 1999,
the Phillips Plaintiffs filed notice of their request to dismiss their remaining
domestic claims in the lawsuit in order to seek an appeal of the dismissal of
their claims on foreign projects. That motion is pending before the Texas
district court.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others, alleging that the defendants engaged in anti-competitive
acts in
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violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequently, the following parties (acting for themselves and, if applicable,
on behalf of their respective co-venturers and for whom they operate) intervened
as plaintiffs in the Shell Litigation: Amoco Production Company and B.P.
Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of
its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources
Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company
and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green
Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A.
Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its
affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December
1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and
on behalf of their respective co-venturers, filed similar lawsuits in the same
court, which lawsuits were consolidated with the Shell Litigation. In addition
to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs
in the Shell Litigation request treble damages. In February 1999, we filed a
motion to dismiss the foreign claims of the plaintiffs in the Shell Litigation
due to the Texas district court's lack of subject matter jurisdiction, which
motion is pending before the court. In October 1999, the Shell Litigation
plaintiffs filed a motion to amend their complaint to include non-heavy lift
marine construction activity claims against the defendants, which motion was
granted in April 2000.
We are also cooperating with a Securities and Exchange Commission ("SEC")
investigation into whether MII and JRM may have violated U.S. securities laws in
connection with, but not limited to, the matters described above. MII and JRM
are subject to a consent decree under a judicial order entered in 1976, with the
consent of MI (which at that time was the parent of the McDermott group of
companies), pursuant to an SEC complaint. This decree prohibits the companies
from making false entries in their books, maintaining secret or unrecorded funds
or using corporate funds for unlawful purposes. Violations of this decree could
result in substantial civil and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, we formed
and have continued to maintain a special committee of our Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, our internal investigation, the
above-referenced lawsuits or any actions that may be taken by others as a result
of HeereMac's guilty plea or otherwise. These matters could result in civil and
criminal liability and have a material adverse effect on our consolidated
financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in lawsuits filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania, involving
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approximately 300 separate claims for compensatory and punitive damages relating
to the operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation
allege among other things, that they suffered personal injury and other damages
as a result of radioactive emissions from these facilities. In September 1998, a
jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to
trial, awarding $36,700,000 in compensatory damages. In June 1999, the district
court set aside the $36,700,000 judgement and ordered a new trial on all issues.
In November 1999, the district court allowed an interlocutory appeal by the
plaintiffs of certain issues, including the granting of the new trial and the
court's rulings on certain evidentiary matters, which, following B&W's
bankruptcy filing, the Third Circuit Court of Appeals declined to accept for
review. The claims of the plaintiffs in the Hall Litigation against B&W have
been automatically stayed as a result of the B&W bankruptcy filing. B&W has
filed a complaint for declaratory and injunctive relief with the Bankruptcy
Court seeking to stay the pursuit of the Hall Litigation against all defendants
including ARCO during the pendency of B&W's bankruptcy proceeding due to common
insurance coverage and the risk to B&W of issue or claim preclusion. There is a
controversy between B&W and its insurers as to the amount of insurance coverage
under the insurance policies covering these facilities. B&W has filed an action
seeking a judicial determination of this matter, which is currently pending in a
Pennsylvania state court. B&W transferred the two facilities subject to the Hall
Litigation to BWXT in June 1997 in connection with BWXT's formation and an
overall corporate restructuring. We believe that all claims under the Hall
Litigation will be resolved within the limits and coverage of our insurance
policies; but our insurance coverage may not be adequate and we may be
materially adversely impacted if our liabilities exceed our coverage. In
connection with the foregoing, B&W settled all pending and future punitive
damage claims in the Hall Litigation for $8,000,000 for which it seeks
reimbursement from other parties.
From December 1999 through February 2000, several persons who allegedly
purchased shares of our common stock during the period from May 21, 1999 through
November 11, 1999 filed four purported class action complaints against MII and
two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the
United States District Court for the Eastern District of Louisiana. Each of
these complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. We filed motions to
dismiss three of these complaints for failure to state a claim on which relief
can be granted, before they were consolidated before one federal judge in New
Orleans. The fourth case has now been consolidated with the others. The
plaintiffs have been allowed to file a consolidated amended complaint, which we
will respond to after it has been filed. We believe the substantive allegations
contained in the original complaints are without merit and intend to defend
against these and any substantively similar claims vigorously.
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In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and, in January 2000, JRM instituted an
arbitration proceeding against Texaco seeking the amount owed. Texaco has
countered, claiming damages for delays resulting from the incident, as well as
costs incurred to complete the project with another contractor. Texaco has also
filed a lawsuit against a number of other parties, claiming that they are
responsible for the incident. It is our position that the installation contract
between the parties prohibits Texaco's claims against JRM and JRM is entitled to
the amount withheld.
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 performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position or results of
operations.
See Note 7 regarding B&W's potential liability for non-employee asbestos claims
and the Chapter 11 reorganization proceedings recently commenced by B&W and
certain of its subsidiaries.
NOTE 5 - SEGMENT REPORTING
Our reportable segments are Marine Construction Services, Power Generation
Systems, Government Operations and Industrial Operations. These segments are
managed separately and are unique in technology, services and customer class.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration, production and
hydrocarbon processing industries and to other marine construction companies.
Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production platforms, specialized
structures, modular facilities, marine pipelines and subsea production systems.
JRM also provides project management services, engineering services, procurement
activities, and removal, salvage and refurbishment services of offshore fixed
platforms.
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment provides
aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also
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<PAGE> 16
provides power through cogeneration, refuse-fueled power plants and other
independent power producing facilities. The Power Generation Systems segment's
operations are conducted primarily through B&W. Due to B&W's Chapter 11 filing,
effective February 22, 2000, we no longer consolidate B&W's and its
subsidiaries' results of operations in our consolidated financial statements.
Through February 21, 2000, B&W's and its subsidiaries' results are reported as
Power Generation Systems - B&W in the segment information that follows. See Note
7 for the consolidated results of B&W and its subsidiaries.
Government Operations supplies nuclear reactor components and nuclear fuel
assemblies to the U.S. Government, manages and operates government-owned
facilities and supplies commercial nuclear environmental services and other
government and commercial nuclear services.
Industrial Operations is comprised of the engineering and construction
activities and plant outage maintenance of certain Canadian operations and
manufacturing of auxiliary equipment such as air-cooled heat exchangers and
replacement parts. Industrial Operations also includes contract research
activities.
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, non-employee products liability asbestos claims provisions, contract
and insurance claims provisions, legal expenses and gains (losses) on sales of
corporate assets. Other reconciling items to income before provision for income
taxes are interest income, interest expense, minority interest and other-net. We
exclude the following assets from segment assets: insurance recoverables for
products liability claims, goodwill, investments in debt securities, prepaid
pension costs and our investment in B&W. We have allocated amortization of
goodwill to the reportable segments for all periods presented. Segment assets
decreased approximately $600,000,000, primarily in the Power Generation segment,
as a result of the deconsolidation of B&W as described in Note 1.
16
<PAGE> 17
Segment Information for the Three Months Ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
REVENUES:
Marine Construction Services $ 206,635 $ 246,571
Government Operations 114,720 92,217
Industrial Operations 115,242 121,922
Power Generation Systems - B&W 155,774 290,375
Power Generation Systems 82 283
Adjustments and Eliminations(1) (742) (2,000)
--------- ---------
Total Revenues $ 591,711 $ 749,368
========= =========
</TABLE>
(1) Segment revenues are net of the following intersegment transfers and other
adjustments:
<TABLE>
<S> <C> <C>
Marine Construction Services Transfers $ 437 $ 720
Government Operations Transfers 194 170
Industrial Operations Transfers 52 63
Power Generation Systems - B&W Transfers 59 187
Adjustments and Eliminations -- 860
--------- ---------
Total $ 742 $ 2,000
========= =========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Marine Construction Services $ (5,787) $ 12,283
Government Operations 14,973 20,482
Industrial Operations 1,680 2,733
Power Generation Systems - B&W 12,502 33,706
Power Generation Systems (220) (397)
--------- ---------
Total Segment Operating Income $ 23,148 $ 68,807
--------- ---------
Gain (Loss) on Asset Disposals and Impairments - Net:
Marine Construction Services $ 1,085 $ (20,229)
Government Operations -- 45
Industrial Operations 7 (50)
Power Generation Systems - B&W (33) 3,527
--------- ---------
Total Gain (Loss) on Asset Disposals and
Impairments - Net $ 1,059 $ (16,707)
--------- ---------
Income (Loss) from Investees:
Marine Construction Services $ (7,546) $ 3,335
Government Operations 1,352 2,264
Industrial Operations 24 (509)
Power Generation Systems - B&W 812 181
Power Generation Systems (865) (11,169)
--------- ---------
Total Loss from Investees $ (6,223) $ (5,898)
--------- ---------
SEGMENT INCOME:
Marine Construction Services $ (12,248) $ (4,611)
Government Operations 16,325 22,791
Industrial Operations 1,711 2,174
Power Generation Systems - B&W 13,281 37,414
Power Generation Systems (1,085) (11,566)
--------- ---------
Total Segment Income 17,984 46,202
--------- ---------
Other Unallocated Items (5,622) (49,776)
General Corporate Expenses - Net (3,372) (9,385)
--------- ---------
Total Operating Income (Loss) $ 8,990 $ (12,959)
========= =========
</TABLE>
18
<PAGE> 19
NOTE 6 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(Unaudited)
(In thousands, except shares
and per share amounts)
<S> <C> <C>
Basic:
Income (loss) before extraordinary item $ 7,867 $ (23,384)
Extraordinary item -- (38,719)
------------ ------------
Net income (loss) $ 7,867 $ (62,103)
============ ============
Weighted average common shares 59,396,332 58,773,052
============ ============
Basic earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.13 $ (0.40)
Extraordinary item -- (0.66)
------------ ------------
Net income (loss) $ 0.13 $ (1.06)
============ ============
Diluted:
Income (loss) before extraordinary item $ 7,867 $ (23,384)
Extraordinary item -- (38,719)
------------ ------------
Net income (loss) for diluted computation $ 7,867 $ (62,103)
============ ============
Weighted average common shares (basic) 59,396,332 58,773,052
Effect of dilutive securities:
Stock-based compensation arrangements 435,908 --
------------ ------------
Adjusted weighted average common
shares and assumed conversions 59,832,240 58,773,052
============ ============
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ 0.13 $ (0.40)
Extraordinary item -- (0.66)
------------ ------------
Net income (loss) $ 0.13 $ (1.06)
============ ============
</TABLE>
NOTE 7 - THE BABCOCK & WILCOX COMPANY
General
As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of non-employee products liability claims
asserting asbestos-related injuries. All of these claims are similar in nature,
the primary difference
19
<PAGE> 20
being the type of alleged injury or illness suffered by the plaintiff as a
result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer,
other types of cancer, asbestosis or pleural changes).
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the Bankruptcy Court to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon,
Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International,
Inc. B&W and these subsidiaries took this action as a means to determine and
comprehensively resolve all pending and future asbestos products liability
claims against them. As a result of the filing, the Bankruptcy Court issued a
temporary restraining order which has been converted to a preliminary injunction
prohibiting asbestos products liability lawsuits and other actions for which
there is shared insurance from being brought against non-filing affiliates of
B&W, including MI, JRM and MII. The preliminary injunction will run through July
17, 2000, at which time a further extension will be considered by the Bankruptcy
Court.
Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a
strategy of negotiating and settling asbestos products liability claims brought
against them and billing the settled amounts to insurers for reimbursement. The
average amount per settled claim over the last three calendar years is
approximately $7,900. Reimbursed amounts are subject to varying insurance limits
based upon the year of coverage, insurer solvency and collection delays (due
primarily to agreed payment schedules with specific insurers delaying
reimbursement for three months or more). Claims paid during the three-month
period ended March 31, 2000 were $23,640,000 of which $20,121,000 has been
recovered or is due from insurers. At March 31, 2000, receivables of $65,643,000
were due from insurers for reimbursement of settled claims. To date, the
bankruptcy filing has not negatively affected B&W's ability to recover amounts
due from insurers for settled claims as they become due and payable and B&W does
not expect it to in the future.
At February 21, 2000, the day prior to the bankruptcy filing, B&W had recorded
asbestos products liability of $1,307,583,000 and asbestos products liability
insurance recoverable of $1,153,619,000. Historically, B&W's estimated
liabilities for pending and future non-employee products liability asbestos
claims have been derived from its prior claims history. Inherent in the estimate
of such liabilities were expected trend claim severity, frequency, and other
factors. B&W's estimated liabilities were based on the assumption that B&W would
continue to settle claims rather than litigate them, that new claims would
conclude by 2012, that there would be a significant decline in new claims
received after 2003, and that the average cost per claim would continue to
increase only moderately. During the fiscal year ended March 31, 1999, we
revised our estimate of the liability for pending and future non-employee
asbestos claims and recorded an additional liability of $817,662,000,
20
<PAGE> 21
additional estimated insurance recoveries of $732,477,000 and a loss of
$85,185,000 for future claims for which recovery from insurance carriers was not
considered probable.
Beginning in the third quarter of calendar 1999, B&W experienced a significant
increase in the amount demanded by several plaintiffs' attorneys to settle
certain types of asbestos products liability claims. These increased demands
significantly impaired B&W's ability to continue to resolve its asbestos
products liability through out-of-court settlements. As a result, B&W undertook
the bankruptcy filing because it believes that a Chapter 11 proceeding offers
the only viable legal process through which it and its subsidiaries can seek a
comprehensive resolution of their asbestos products liability. The filing
increases the uncertainty with respect to the manner in which such liabilities
will ultimately be settled.
The Chapter 11 proceeding is in its initial stages. While the Bankruptcy Court
has approved B&W's debtor-in-possession financing and the assumption of all
pre-filing contracts presented for approval, there are a number of other issues
and matters to be resolved. B&W has not yet filed a plan of reorganization and
the Bankruptcy Court has not set a bar date for asserting claims. Remaining
issues and matters to be resolved include, but are not limited to, B&W's
ultimate asbestos liability, the formation of a trust to satisfy such liability
and the funding of such a trust. The timing and ultimate outcome of the Chapter
11 proceeding is uncertain. Any changes in the estimate of B&W's non-employee
asbestos products liability and insurance recoverables, and differences between
the proportion of such liabilities covered by insurance and that experienced in
the past, could result in material adjustments to the B&W financial statements
and could negatively impact our ability to realize our net investment in B&W.
Debtor-In-Possession Financing
In connection with the bankruptcy filing, B&W and its filing subsidiaries
entered into a $300,000,000 debtor-in-possession revolving credit and letter of
credit facility with Citibank, N.A. and Salomon Smith Barney Inc. (the "DIP
Credit Facility") with a three-year term. The Bankruptcy Court has approved the
full amount of this facility, giving all amounts owed under the facility a
super-priority administrative expense status in bankruptcy. B&W's and its filing
subsidiaries' obligations under the facility are (1) guaranteed by substantially
all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by
a security interest on B&W Canada Ltd.'s assets. Additionally, B&W and
substantially all of its domestic subsidiaries executed a pledge and security
agreement pursuant to which they have granted a security interest in their
assets to the lenders under the DIP Credit Facility upon the defeasance or
refinancing of MI's public debt. The DIP Credit Facility generally provides for
borrowings by B&W and its filing subsidiaries for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and non-performance letters
21
<PAGE> 22
of credit issued under the facility cannot exceed $100,000,000 in the aggregate.
The DIP Credit Facility imposes certain financial and non-financial covenants on
B&W and its subsidiaries. A permitted use of the DIP Credit Facility is the
issuance of new letters of credit to backstop or replace, as they expire,
pre-existing letters of credit issued in connection with B&W's and its
subsidiaries' business operations, but for which MII, MI or BWICO was a maker or
guarantor. As of February 22, 2000, the aggregate amount of all such
pre-existing letters of credit totaled approximately $172,000,000 (the
"Pre-existing LCs"). Each of MII, MI and BWICO have agreed to indemnify and
reimburse B&W and its filing subsidiaries for any customer draw on any letter of
credit issued under the DIP Credit Facility to backstop or replace any
Pre-existing LC for which it already has exposure and for the associated letter
of credit fees paid under the facility. As of March 31, 2000, approximately
$15,215,000 in letters of credit have been issued under the DIP Credit Facility
of which approximately $11,659,000 were to replace or backstop Pre-existing LCs.
Financial Results and Reorganization Items
The B&W condensed consolidated financial statements set forth below have been
prepared in conformity with the American Institute of Certified Public
Accountant's Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP
90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by
the Bankruptcy Court as of the bankruptcy filing date and identification of all
transactions and events that are directly associated with the reorganization.
Liabilities subject to compromise include prepetition unsecured claims, which
may be settled at amounts which differ from those recorded in the B&W condensed
consolidated financial statements.
22
<PAGE> 23
THE BABCOCK & WILCOX COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 272,567 $ 289,818
--------- ---------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 233,525 272,240
Depreciation and amortization 4,150 6,730
Selling, general and administrative
expenses 18,187 16,838
Restructuring charges 3,922 --
--------- ---------
259,784 295,808
--------- ---------
Gain (Loss) on Asset Disposals (10) 2,535
--------- ---------
Operating Income (Loss) before Income
from Investees 12,773 (3,455)
--------- ---------
Income from Investees 1,433 181
--------- ---------
Operating Income (Loss) 14,206 (3,274)
--------- ---------
Other Income:
Interest income 963 9,037
Interest expense (174) (488)
Other-net 1,270 (50,970)
--------- ---------
2,059 (42,421)
--------- ---------
Income (Loss) before Provision for
(Benefit from) Income Taxes 16,265 (45,695)
Provision for (Benefit from) Income Taxes 6,630 (11,773)
--------- ---------
Net Income (Loss) $ 9,635 $ (33,922)
========= =========
</TABLE>
23
<PAGE> 24
THE BABCOCK & WILCOX COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 2000
(Unaudited)
(In thousands)
<S> <C>
Assets:
Current Assets $ 547,134
Property, Plant and Equipment 83,935
Products Liabilities Recoverable 1,153,761
Goodwill 78,430
Prepaid Pension Costs 20,681
Other Assets 125,524
-----------
Total Assets $ 2,009,465
===========
Liabilities:
Current Liabilities 282,142
Liabilities Subject to Compromise 1,557,074(A)
Stockholder's Equity:
Common Stock 1,001
Capital in Excess of Par Value 116,432
Retained Earnings 74,767
Accumulated Other Comprehensive Loss (21,951)
-----------
Total Liabilities and Stockholder's Equity $ 2,009,465
===========
</TABLE>
(A) Liabilities subject to compromise consist of the following:
<TABLE>
<S> <C>
Accounts payable $ 22,563
Provision for warranty 26,914
Other current liabilities 47,283
Environmental and products liabilities 1,307,725
Accumulated postretirement benefit
obligation 108,403
Other long-term liabilities 44,186
-----------
$ 1,557,074
===========
</TABLE>
B&W and its subsidiaries routinely engage in intercompany transactions with
other entities within the McDermott group of companies in the ordinary course of
business. These transactions include services received by B&W and its
subsidiaries from MII and MI under a support services agreement. These services
include the following: accounting, treasury, tax administration, and other
financial services; human relations; public relations; corporate secretarial;
and corporate officer services. In addition, B&W is responsible for its share of
federal income taxes included in MI's federal tax return under a tax-sharing
arrangement. As a result of its bankruptcy filing, B&W and its filing
subsidiaries are precluded from paying dividends to shareholders and making
payments on any pre-bankruptcy filing accounts or notes payable that are due and
owing to any other entity within the McDermott group of companies (the
"Pre-Petition Inter-company Payables") and other creditors during the pendency
of the bankruptcy case, without the Bankruptcy Court's approval. Moreover, no
assurances can be given that any of the Pre-Petition Inter-company Payables will
be paid or otherwise satisfied in
24
<PAGE> 25
connection with the confirmation of a B&W plan of reorganization. As of February
21, 2000, the day prior to the bankruptcy filing, B&W and its filing
subsidiaries had Pre-Petition Inter-company Payables of approximately
$57,785,000 and pre-petition inter-company receivables from other entities
within the McDermott group of companies (other than subsidiaries of B&W) of
approximately $58,856,000. In the course of the conduct of B&W's and its
subsidiaries' business, MII and MI have agreed to indemnify two surety companies
for B&W's and its subsidiaries' obligations under surety bonds issued in
connection with their customer contracts. At March 31, 2000, the total value of
B&W's and its subsidiaries' customer contracts yet to be completed covered by
such indemnity arrangements was approximately $150,000,000.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $166,234,000, as of February 21, 2000
and unchanged through March 31, 2000, is subject to periodic reviews for
recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court,
the subsequent accounting will be determined based upon the applicable
circumstances and facts at such time, including the terms of any plan of
reorganization.
We have assessed B&W's liquidity position as a result of the bankruptcy filing
and believe that B&W can continue to fund its and its subsidiaries operating
activities and meet its debt and capital requirements for the foreseeable
future. However, the ability of B&W to continue as a going concern is dependent
upon its ability to settle its ultimate asbestos products liability from its net
assets, future profits and cash flow and available insurance proceeds, whether
through the confirmation of a plan of reorganization or otherwise. The B&W
condensed consolidated financial information set forth above has been prepared
on a going concern basis which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. As a result of the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
a plan of reorganization, or rejection thereof, could change the amounts
reported in the B&W financial statements and cause a material decrease in the
carrying amount of our investment.
25
<PAGE> 26
Following are our condensed Pro Forma consolidated Statements of Income (Loss)
and Balance Sheet data, assuming the deconsolidation of B&W for all periods
presented:
Assumes deconsolidation as of the beginning of the period presented:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 435,996 $ 459,737
Operating Income (Loss) $ 1,039 $ (9,685)
Income (Loss) before Provision for
(Benefit from) Income Taxes $ 1,890 $ 985
Net Income (Loss) $ 2,362 $ (28,181)
Earnings (Loss) per Common Share:
Basic $ 0.04 $ (0.48)
Diluted $ 0.04 $ (0.48)
</TABLE>
Assumes deconsolidation as of the balance sheet date:
<TABLE>
<CAPTION>
December 31,
1999
----
(In thousands)
<S> <C>
Current Assets $ 755,640
Property, Plant and Equipment $ 351,646
Investment in B&W $ 160,728
Total Assets $ 2,082,954
Current Liabilities $ 672,857
Environmental and Products Liabilities $ 11,604
Total Stockholders' Equity $ 791,858
Total Liabilities and Stockholders' Equity $ 2,082,954
</TABLE>
NOTE 8 - MODIFICATION OF FINANCIAL ARRANGEMENTS
On February 21, 2000, we entered into financing arrangements providing for up to
$200,000,000 of financing to MII, BWXT and Hudson Products Corporation (the "MII
Credit Facility"), and up to $300,000,000 to JRM and its subsidiaries (the "JRM
Credit Facility"). This financing, for which Citibank, N.A. is the
administrative agent, provides revolving credit facilities and advances for
letters of credit. On April 24, 2000, these financing arrangements were amended
and restated and the JRM Credit Facility was reduced to $200,000,000. Borrowings
on the MII Credit Facility bear interest at LIBOR plus 42.5 basis points, or the
prime rate, depending upon the duration of the borrowing, and this facility has
an annual fee of $400,000. Borrowings on the JRM Credit Facility bear interest
at LIBOR plus 137.5 basis points, or the prime rate plus 25 basis points,
depending upon the duration of the borrowings, and this facility has an annual
fee of $750,000.
26
<PAGE> 27
NOTE 9 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require us to recognize
all derivatives on our consolidated balance sheet at their fair values.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. We have not yet determined the effect SFAS No. 133 will have on our
consolidated financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," for certain issues including (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. Generally, the provisions of this
Interpretation are effective July 1, 2000 and shall be applied prospectively.
However, certain requirements apply to events that occur after December 15, 1998
or January 12, 2000 but prior to July 1, 2000. The effects of such events also
shall be recognized on a prospective basis beginning July 1, 2000. We have
determined that the adoption of Interpretation No. 44 will have no material
effect on our consolidated financial position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
27
<PAGE> 28
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 this Form 10-Q contains, including those that
express a belief, expectation or intention, as well as those that are not
statements of historical fact, are forward-looking statements. These
forward-looking statements speak only as of the date of this report, we disclaim
any obligation to update these statements, and we caution you not to unduly rely
on them. 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:
o general economic and business conditions and industry trends;
o the continued strength of the industries in which we are involved;
o decisions about offshore developments to be made by oil and gas
companies;
o the deregulation of the U.S. electric power market;
o the highly competitive nature of our businesses;
o our future financial performance, including availability, terms
and deployment of capital;
o the continued availability of qualified personnel;
o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings, including the results of ongoing governmental
investigations and related civil lawsuits involving alleged
anticompetitive practices in our marine construction business;
o estimates for pending and future nonemployee asbestos claims
against B&W and potential adverse developments that may occur in
the recently commenced Chapter 11 reorganization proceeding
involving B&W and certain of its subsidiaries;
o changes in existing environmental regulatory matters;
o rapid technological changes;
28
<PAGE> 29
o difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions; and
o social, political and economic situations in foreign countries
where we do business.
We believe the items we have outlined above are important factors that could
cause our actual results to differ materially from 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 important factors that could
affect us. Unpredictable or unknown 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.
We advise our security holders that they should (1) be aware that important
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.
GENERAL
The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant development projects.
Although oil and gas prices have somewhat stabilized in recent months and oil
company merger activity has reduced, these have yet to have an impact on our
Marine Construction Services' customers' exploration and production spending for
the remainder of 2000. Economic and political instability in Asia has also had
an adverse effect on the timing of exploration and production spending.
Consequently, we do not expect our Marine Construction Services segment's
revenues to increase significantly in 2000.
The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. Government. As a result of reductions in the
defense budget over the past several years, we do not expect this segment to
experience any significant growth in the next three years. We expect this
segment's backlog to remain relatively constant since it is the sole supplier to
the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components
for the Naval Reactors Program. We currently expect the 2000 operating activity
of this segment will be about the same as in 1999.
The revenues of our Industrial Operations segment are affected by variations in
the business cycles in its customers' industries and the overall economy.
Legislative and regulatory issues such as environmental
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regulations and fluctuations in U.S. Government funding patterns also affect
this segment. We currently expect the 2000 operating activity of this segment
will be about the same as in 1999.
Effective February 22, 2000 and until B&W and the other filing subsidiaries
emerge from the reorganization and the subsequent accounting is determined, we
no longer consolidate B&W's and its subsidiaries' results of operations in our
consolidated financial statements and our investment in B&W is presented on the
cost method. Through February 21, 2000, B&W's and its subsidiaries' results are
included in our segment results under Power Generation Systems - B&W (see Note 5
to the consolidated financial statements.) B&W and its consolidated subsidiaries
pre-bankruptcy revenues of $155,774,000 and operating income of $7,951,000 are
included in our consolidated financial results for the three-month period ended
March 31, 2000.
In general, each of our business segments is composed of capital-intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
We evaluate the realizability of our long-lived assets, including property,
plant and equipment and goodwill, whenever events or changes in circumstances
indicate that we may not be able to recover the carrying amounts of those
assets. We carry our property, plant and equipment at cost, reduced by
provisions to recognize economic impairment when we determine impairment has
occurred.
We derive a significant portion of our revenues from foreign operations. As a
result, international factors, including variations in local economies and
changes in foreign currency exchange rates affect our revenues and operating
results. We attempt to limit our exposure to changes in foreign currency
exchange rates by attempting to match anticipated foreign currency contract
receipts with like foreign currency disbursements. To the extent that we are
unable to match the foreign currency receipts and disbursements related to our
contracts, we enter into forward exchange contracts to reduce the impact of
foreign exchange rate movements on our operating results. Because we generally
do not hedge beyond our contract exposure, we believe this practice minimizes
the impact of foreign exchange rate movements on our operating results.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED
MARCH 31, 1999
Marine Construction Services
Revenues decreased $39,936,000 to $206,635,000 due to lower volume in
essentially all geographic areas, except in offshore activities in the Far East
relating to the West Natuna project.
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Segment operating income decreased $18,070,000 from income of $12,283,000 to a
loss of $5,787,000, primarily due to lower margins in the Eastern Hemisphere,
lower volume and margins in our Mexican ship repair business, and the
amortization of the goodwill associated with our purchase of the minority
interest in JRM. These decreases were partially offset by higher margins in
engineering activities and potential litigation settlements recorded in the
prior period.
Gain (loss) on asset disposals and impairments-net increased $21,314,000 from a
loss of $20,229,000 to a gain of $1,085,000. The loss in the prior period was
due to impairment losses on fabrication facilities and equipment. There was also
a write-off of goodwill associated with worldwide engineering and a Mexican
shipyard in the prior period.
Income (loss) from investees decreased $10,881,000 from income of $3,335,000 to
a loss of $7,546,000, primarily due to lower operating results from our Mexican
and European joint ventures and higher operating results from our Far East joint
venture in the prior period.
Government Operations
Revenues increased $22,503,000 to $114,720,000, primarily due to higher volumes
from nuclear fuel assemblies and reactor components for the U.S. Government,
from management and operation contracts for U. S. Government-owned facilities
and from other government operations.
Segment operating income decreased $5,509,000 to $14,973,000, primarily due to a
settlement relating to environmental restoration costs recorded in the prior
period. This decrease was partially offset by higher volume and margins from
nuclear fuel assemblies and reactor components for the U. S. Government and
higher margins from commercial nuclear environmental services.
Income from investees decreased $912,000 to $1,352,000, primarily due to lower
operating results from a joint venture in Colorado, partially offset by higher
operating results from a joint venture in Idaho.
Industrial Operations
Revenues decreased $6,680,000 to $115,242,000, primarily due to lower volumes
from air-cooled heat exchangers and plant maintenance activities in Canadian
operations.
Segment operating income decreased $1,053,000 to $1,680,000, primarily due to
lower sales volumes and margins from air-cooled heat exchangers.
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Other Unallocated Items
Other unallocated items decreased $44,154,000 to $5,622,000, primarily due to
provisions for estimated future non-employee products liability asbestos claims
and reserves for potential litigation settlements recorded in the prior period.
These decreases were partially offset by higher employee benefit expenses and
initial reorganization expenses associated with the B&W Chapter 11 filing.
Other Income Statement Items
Interest income decreased $12,153,000 to $7,145,000, primarily due to the
decrease in investments.
Interest expense decreased $5,302,000 to $8,823,000, primarily due to changes in
debt obligations and prevailing interest rates.
We no longer have minority interest expense due to the acquisition of the
minority interest in JRM in the prior year.
Other-net increased $56,123,000 from a loss of $52,251,000 to income of
$3,872,000. This increase was primarily due to a loss of $45,535,000 for
insolvent insurers providing coverage for estimated future non-employee products
liability asbestos claims and a net loss on the settlement and curtailment of
postretirement benefit plans recorded in the prior period.
The provision for income taxes increased $24,643,000 from a benefit of
$21,326,000 to a provision of $3,317,000, while income before provision for
income taxes and extraordinary item increased $55,894,000 from a loss of
$44,710,000 to income of $11,184,000. The change in the relationship of pretax
income to the provision for income taxes was primarily the result of (1) an
increase in income, (2) a decrease in our tax expense of $7,531,000 in the prior
period due to the change in our valuation allowance for deferred tax assets and
(3) $9,062,000 we recorded in the prior period as a result of favorable tax
settlements of disputed items in foreign jurisdictions. The provision for the
three months ended March 31, 2000 reflects non-deductible amortization of
goodwill of $4,502,000 created by the premium we paid on the acquisition of the
minority interest in JRM and a benefit of $5,500,000 from a favorable tax
settlement in a foreign jurisdiction. Income taxes in the March 31, 2000 quarter
also include a provision of $3,800,000 for B&W for the pre-filing period. We
operate in many different tax jurisdictions. Within these jurisdictions, tax
provisions vary because of nominal rates, allowability of deductions, credits
and other benefits and tax bases (for example, revenue versus income). These
variances, along with variances in our mix of income from these jurisdictions,
are responsible for shifts in our effective tax rate.
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Backlog
<TABLE>
<CAPTION>
3/31/00 12/31/99
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Marine Construction Services $ 430,633 $ 514,822
Government Operations 1,069,516 1,151,960
Industrial Operations 361,524 415,820
Power Generation Systems -- 1,202,695
----------- -----------
TOTAL BACKLOG $ 1,861,673 $ 3,285,297
=========== ===========
</TABLE>
Due to the deconsolidation of B&W (see Note 7 to the condensed consolidated
financial statements), backlog from Power Generation Systems totaling
$1,135,034,000 is no longer included in our consolidated total at March 31,
2000.
In general, all of McDermott's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
Backlog for the Marine Construction Services segment decreased primarily because
of delays in awards of new offshore construction programs.
At March 31, 2000, Government Operations' backlog with the U. S. Government was
$974,134,000 (of which $16,335,000 had not been funded). This segment's backlog
is not expected to experience significant growth as a result of reductions in
defense budgets. However, management expects this segment's backlog to remain
relatively constant since it is the sole source provider of nuclear fuel
assemblies and nuclear reactor components for the U. S. Government.
Liquidity and Capital Resources
During the three months ended March 31, 2000, our cash and cash equivalents
decreased $36,994,000 to $125,740,000 and total debt decreased $3,951,000 to
$405,562,000, primarily due to the deconsolidation of B&W. During this period,
we received cash of $2,997,000 from maturities of investments and $1,166,000
from the sale of assets. We used cash of $15,188,000 in operating activities,
$16,972,000 for additions to property, plant and equipment, $5,229,000 for the
purchase of investments and $2,979,000 for dividends on MII's common stock.
Expenditures for property, plant and equipment decreased $16,521,000 to
$16,972,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
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At March 31, 2000 and December 31, 1999, we had available various uncommitted
short-term lines of credit from banks totaling $36,995,000 and $72,766,000,
respectively. At March 31, 2000 and December 31, 1999, borrowings against these
lines of credit were $500,000 and $4,148,000, respectively.
On February 21, 2000, B&W and certain of its subsidiaries entered into their
$300,000,000 debtor-in-possession revolving credit and letter of credit facility
to satisfy their working capital and letter of credit needs during the pendency
of their bankruptcy case. See Note 7 to the condensed consolidated financial
statements.
On February 21, 2000, we also entered into other financing arrangements
providing financing to the balance of our operations. This financing, as amended
on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and
Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000
credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each
facility is with a group of lenders, for which Citibank, N.A. is acting as the
administrative agent to the amounts outstanding under each facility. There were
no borrowings outstanding against these facilities at March 31, 2000.
The MII Credit Facility consists of two tranches, each of which has a three-year
term. One is a revolving credit facility that provides for up to $100,000,000 to
the borrowers. Borrowings under this facility may be used for working capital
and general corporate purposes. The second tranche provides for up to
$200,000,000 to reimburse issuers for drawings under outstanding letters of
credit issued for the benefit of B&W and its subsidiaries and to issue new
letters of credit for the account of MII to renew or extend any of those
outstanding letters of credit on their scheduled expiration dates. The aggregate
amount of loans and amounts available for drawing under letters of credit
outstanding under the MII Credit Facility may not exceed $200,000,000. This
facility is secured by a collateral account funded with various U.S. government
securities with a marked-to-market value equal to 105% of the aggregate amount
available for drawing under letters of credit and revolving credit borrowings
then outstanding.
The JRM Credit Facility also consists of two tranches. One is a revolving credit
facility that provides for up to $100,000,000 for advances to borrowers.
Borrowings under this facility may be used for working capital and general
corporate purposes. The second tranche provides for up to $200,000,000 to
reimburse issuers for drawings under JRM's outstanding letters of credit and to
issue new letters of credit to renew or extend any of those outstanding letters
of credit on their scheduled expiration dates. The facility is subject to
certain financial and non-financial covenants.
At March 31, 2000, we had total cash, cash equivalents and investments of
$503,377,000. Our investment portfolio consists primarily of government
obligations and other investments in debt securities. The fair value
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of our investments at March 31, 2000 was $377,637,000. As of March 31, 2000, we
had pledged approximately $44,541,000 fair value of these obligations to secure
a letter of credit in connection with certain reinsurance agreements and
$89,442,000 fair value of these obligations to secure borrowings of $86,715,000
that are incurred under repurchase agreements. In addition, approximately
$201,006,000 fair value of these obligations secured the MII Credit Facility
In connection with B&W's bankruptcy filing, MII entered into a support agreement
pursuant to which it agreed to provide MI with standby financial support on its
interest payments on its (i) $225,000,000 in aggregate principal amount of
9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A
Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of
Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in
principal amount under a Pollution Control Note due 2009. MI is required to pay
MII $5,000 per month under the support agreement which expires on March 15,
2002.
MI and JRM and their respective subsidiaries are restricted, as a result of
covenants in debt instruments, in their ability to transfer funds to MII and its
other subsidiaries through cash dividends or through unsecured loans or
investments. At March 31, 2000, substantially all the net assets of MI were
subject to those restrictions. At March 31, 2000, JRM and its subsidiaries could
make unsecured loans to or investments in MII and its other subsidiaries of
approximately $72,000,000.
As a result of MI's reclassification of its investment in MII to a reduction of
stockholder's equity on March 31, 1999, MI and its subsidiaries are unable to
incur any additional long-term debt obligations under one of MI's public debt
indentures. Moreover, as a result of B&W's bankruptcy filing, B&W and its
subsidiaries are precluded from paying dividends, making payments on
pre-bankruptcy accounts or notes payable or loans to, or investments in, MI, MII
or MII's other subsidiaries. We do not believe MI's and its subsidiaries
inability to incur long-term debt or B&W's bankruptcy filing will materially
impact our working capital and liquidity requirements for the foreseeable
future. We expect to obtain funds to meet capital expenditure, working capital
and debt maturity requirements from operating activities, cash and cash
equivalents, and short-term borrowings.
At March 31, 2000, we had a valuation allowance for deferred tax assets of
$18,283,000, which cannot be realized through carrybacks and future reversals of
existing taxable temporary differences. We believe that our remaining deferred
tax assets are realizable through carrybacks and future reversals of existing
taxable temporary differences, future taxable income and, if necessary, the
implementation of tax planning strategies involving sales of appreciated assets.
Uncertainties that affect the ultimate realization of our deferred tax assets
include the risk of incurring losses in the future and the possibility of
declines in value of appreciated assets involved in the tax
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<PAGE> 36
planning strategies we have identified. We have considered these factors in
determining our valuation allowance. We will continue to assess the adequacy of
our valuation allowance on a quarterly basis.
Our quarterly dividend on our common stock was $0.05 per share. We have a
continuing program for reviewing our quarterly dividend.
We have evaluated and expect to continue evaluating possible strategic
acquisitions, some of which may be material. At any given time we may be engaged
in discussions or negotiations or enter into agreements relating to potential
acquisition transactions.
Working capital decreased $169,117,000 from $166,402,000 at December 31, 1999 to
($2,715,000) at March 31, 2000. During the remainder of 2000, we expect to
obtain funds to meet capital expenditure, working capital and debt maturity
requirements from operating activities, cash and cash equivalents, and
short-term borrowings. Leasing agreements for equipment, which are short-term in
nature, are not expected to impact our liquidity or capital resources.
The Babcock & Wilcox Company
B&W and its subsidiaries conduct substantially all of the operations of our
Power Generation Systems segment. The amount of revenues we generate from our
Power Generation Systems segment primarily depends on capital spending by
customers in the electric power generation industry. In that industry,
persistent economic growth in the United States has brought the supply of
electricity into approximate balance with energy demand, except during periods
of peak demand. Electric power producers have generally been meeting these peaks
with new combustion turbines rather than new base-load capacity. New U.S.
emissions requirements have also prompted some customers to place orders for
environmental equipment. Domestic demand for electrical power generation
industry services and replacement nuclear steam generators continues at strong
levels. In the process industries, demand for services remains strong, and the
pulp and paper industry have recently increased their inquiries relating to the
refurbishment or replacement of their existing recovery boilers. The
international markets remain unsettled. Economic and political instability in
Asia has caused projects there to be delayed, suspended or cancelled. We
currently expect the 2000 operating activity of this segment will be about the
same as in 1999.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively
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deconsolidated from the parent and presented on the cost method. The cost method
requires us to present the net assets of B&W at February 22, 2000 as an
investment and not recognize any income or loss from B&W in our results of
operations during the reorganization period. This investment of $166,234,000 as
of March 31, 2000 is subject to periodic reviews for recoverability. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based upon the applicable circumstances and facts at such
time, including the terms of any plan of reorganization. See Note 7 to the
condensed consolidated financial statements for B&W's financial information at
March 31, 2000.
B&W's revenues decreased $17,251,000 to $272,567,000, primarily due to lower
volumes from the fabrication, repair and retrofit of existing facilities,
industrial boilers, replacement nuclear steam generators and boiler cleaning
equipment. These decreases were partially offset by higher volumes from
fabrication and erection of fossil fuel steam and environmental control systems.
B&W's operating income (loss) increased $17,480,000 from a loss of $3,274,000 to
income of $14,206,000, primarily due to provisions for estimated future
non-employee products liability asbestos claims in the prior period. In
addition, there were lower general and administrative expenses. These increases
were partially offset by lower volumes and margins from the fabrication, repair
and retrofit of existing facilities, lower margins from the fabrication and
erection of fossil fuel steam and environmental control systems and lower
volumes of sales of industrial boilers. In addition, there were higher employee
benefit expenses and reorganization expenses associated with the Chapter 11
filing. B&W expects the initial reorganization expenses for the remaining
quarters of 2000 to be approximately the same as what was incurred this quarter.
In addition, B&W paid approximately $7,500,000 in debt issue costs related to
the debtor-in-possession financing. This amount will be amortized over three
years.
Interest income decreased $8,074,000 to $963,000, primarily due to interest
income on domestic tax refunds in the prior period.
Other-net increased $52,240,000 from expense of $50,970,000 to income of
$1,270,000, primarily due to a loss of $45,535,000 for insolvent insurers
providing coverage for estimated future non-employee products liability asbestos
claims in the prior period.
B&W's backlog at March 31, 2000 and December 31, 1999 was $1,135,034,000 and
$1,202,949,000, respectively.
In connection with the bankruptcy filing, B&W and its filing subsidiaries
entered into a $300,000,000 debtor-in-possession revolving credit and letter of
credit facility with Citibank, N.A. and Salomon Smith Barney Inc. with a
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<PAGE> 38
three-year term. We have assessed B&W's liquidity position as a result of the
bankruptcy filing and believe that B&W can continue to fund its and its
subsidiaries operating activities and meet its debt and capital requirements for
the foreseeable future. However, the ability of B&W to continue as a going
concern is dependent upon its ability to settle its ultimate asbestos products
liability from its net assets, future profits and cash flow and available
insurance proceeds, whether through the confirmation of a plan of reorganization
or otherwise. As a result of the bankruptcy filing and related events, there is
no assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
a plan of reorganization, or rejection thereof, could change the amounts
reported in the B&W financial statements and cause a material decrease in the
carrying amount of our investment. See Note 7 to the condensed consolidated
financial statements for more information about B&W's Chapter 11 bankruptcy
proceeding.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require us to recognize
all derivatives on our consolidated balance sheet at their fair values.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. We have not yet determined the effect SFAS No. 133 will have on our
consolidated financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" for certain issues including (a) the definition of employee
for purposes of applying Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and (d) the accounting for an exchange of stock compensation
awards in a business combination. Generally, the provisions of this
Interpretation are effective July 1, 2000 and shall be applied prospectively.
However, certain requirements apply to events that occur after December 15, 1998
or January 12, 2000 but prior to July 1, 2000. The effects of such events also
shall be recognized on a prospective basis
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beginning July 1, 2000. We have determined that the adoption of Interpretation
No. 44 will have no material effect on our consolidated financial position or
results of operations.
PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the Department of Justice that they and others had
participated in a conspiracy to rig bids in connection with the heavy-lift
business of HeereMac in the Gulf of Mexico, the North Sea and the Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
In July 1999, a former JRM officer was indicted by the Department of Justice for
participating in an international bid-rigging conspiracy for the sale of marine
construction services and pled guilty.
We have cooperated with the Department of Justice in its investigation. The
Department of Justice also has requested additional information from us relating
to possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with the termination of the
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McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of
McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East,
Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates and others, alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants (collectively
"Statoil"), filed a similar lawsuit in the same court (the "Statoil
Litigation"). In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil
Litigation have requested punitive as well as treble damages. In January 1999,
the court dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects. In July 1999, the court dismissed the Statoil
Litigation for lack of subject matter jurisdiction. In August 1999, Statoil
appealed this dismissal to the Fifth Circuit Court of Appeal. In September 1999,
the Phillips Plaintiffs filed notice of their request to dismiss their remaining
domestic claims in the lawsuit in order to seek an appeal of the dismissal of
their claims on foreign projects. That motion is pending before the Texas
district court.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others, alleging that the defendants engaged in anti-competitive
acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell
Litigation"). Subsequently, the following parties (acting for themselves and, if
applicable, on behalf of their respective co-venturers and for whom they
operate) intervened as plaintiffs in the Shell Litigation: Amoco Production
Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc.
and certain of its affiliates; Texaco Exploration and Production Inc. and
certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington
Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil
Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.,
Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron
U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain
of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in
December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the
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same court, which lawsuits were consolidated with the Shell Litigation. In
addition to seeking injunctive relief, actual damages and attorneys' fees, the
plaintiffs in the Shell Litigation request treble damages. In February 1999, we
filed a motion to dismiss the foreign claims of the plaintiffs in the Shell
Litigation due to the Texas district court's lack of subject matter
jurisdiction, which motion is pending before the court. In October 1999, the
Shell Litigation plaintiffs filed a motion to amend their complaint to include
non-heavy lift marine construction activity claims against the defendants, which
motion was granted in April 2000.
We are also cooperating with a Securities and Exchange Commission ("SEC")
investigation into whether MII and JRM may have violated U.S. securities laws in
connection with, but not limited to, the matters described above. MII and JRM
are subject to a consent decree under a judicial order entered in 1976, with the
consent of MI (which at that time was the parent of the McDermott group of
companies), pursuant to an SEC complaint. This decree prohibits the companies
from making false entries in their books, maintaining secret or unrecorded funds
or using corporate funds for unlawful purposes. Violations of this decree could
result in substantial civil and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, we formed
and have continued to maintain a special committee of our Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, our internal investigation, the
above-referenced lawsuits or any actions that may be taken by others as a result
of HeereMac's guilty plea or otherwise. These matters could result in civil and
criminal liability and have a material adverse effect on our consolidated
financial position and results of operations. B&W and Atlantic Richfield Company
("ARCO") are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and
others in the United States District Court for the Western District of
Pennsylvania, involving approximately 300 separate claims for compensatory and
punitive damages relating to the operation of two former nuclear fuel processing
facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in
the Hall Litigation allege among other things, that they suffered personal
injury and other damages as a result of radioactive emissions from these
facilities. In September 1998, a jury found B&W and ARCO liable to eight
plaintiffs in the first cases brought to trial, awarding $36,700,000 in
compensatory damages. In June 1999, the district court set aside the $36,700,000
judgement and ordered a new trial on all issues. In November 1999, the district
court allowed an interlocutory appeal by the plaintiffs of certain issues,
including the granting of the new trial and the court's rulings on certain
evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit
Court of Appeals declined to accept for review. The claims of the plaintiffs in
the Hall Litigation against B&W have been automatically stayed as a result of
the B&W bankruptcy filing. B&W has filed a complaint for
41
<PAGE> 42
declaratory and injunctive relief with the Bankruptcy Court seeking to stay the
pursuit of the Hall Litigation against all defendants including ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion. There is a controversy between B&W and
its insurers as to the amount of insurance coverage under the insurance policies
covering these facilities. B&W has filed an action seeking a judicial
determination of this matter, which is currently pending in a Pennsylvania state
court. B&W transferred the two facilities subject to the Hall Litigation to BWXT
in June 1997 in connection with BWXT's formation and an overall corporate
restructuring. We believe that all claims under the Hall Litigation will be
resolved within the limits and coverage of our insurance policies; but our
insurance coverage may not be adequate and we may be materially adversely
impacted if our liabilities exceed our coverage. In connection with the
foregoing, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8,000,000 for which it seeks reimbursement from other parties.
From December 1999 through February 2000, several persons who allegedly
purchased shares of our common stock during the period from May 21, 1999 through
November 11, 1999 filed four purported class action complaints against MII and
two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the
United States District Court for the Eastern District of Louisiana. Each of
these complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. We filed motions to
dismiss three of these complaints for failure to state a claim on which relief
can be granted, before they were consolidated before one federal judge in New
Orleans. The fourth case has now been consolidated with the others. The
plaintiffs have been allowed to file a consolidated amended complaint, which we
will respond to after it has been filed. We believe the substantive allegations
contained in the original complaints are without merit and intend to defend
against these and any substantively similar claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and, in January 2000, JRM instituted an
arbitration proceeding against Texaco seeking the amount owed. Texaco has
countered, claiming damages for delays resulting from the incident, as well as
costs incurred to complete the project with another contractor. Texaco has also
filed a lawsuit against a number of other parties, claiming that they are
responsible for the incident. It is our position that the installation contract
between the parties prohibits Texaco's claims against JRM and JRM is entitled to
the amount withheld.
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<PAGE> 43
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 performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position or results of
operations.
See Note 7 regarding B&W's potential liability for non-employee asbestos claims
and the Chapter 11 reorganization proceedings recently commenced by B&W and
certain of its subsidiaries.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K, Item 5, dated February 22, 2000 was
filed on February 28, 2000.
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<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/ Daniel R. Gaubert
--------------------------------------------------
By: Daniel R. Gaubert
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Representative)
May 12, 2000
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S MARCH 31, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 125,740
<SECURITIES> 89,442
<RECEIVABLES> 230,651
<ALLOWANCES> 48,839
<INVENTORY> 108,641
<CURRENT-ASSETS> 627,146
<PP&E> 1,253,116
<DEPRECIATION> 893,891
<TOTAL-ASSETS> 1,991,484
<CURRENT-LIABILITIES> 629,861
<BONDS> 318,296
0
0
<COMMON> 61,850
<OTHER-SE> 739,872
<TOTAL-LIABILITY-AND-EQUITY> 1,991,484
<SALES> 591,711
<TOTAL-REVENUES> 591,711
<CGS> 577,557
<TOTAL-COSTS> 577,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,823
<INCOME-PRETAX> 11,184
<INCOME-TAX> 3,317
<INCOME-CONTINUING> 7,867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,867
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
</TABLE>
