<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 June 30, 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 July 31, 2000
was 60,265,593.
<PAGE> 2
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Income (Loss)
Three and Six Months Ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Six Months Ended June 30, 2000 and 1999 7
Condensed Consolidated Statements of Cash Flows
Six months Ended June 30, 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 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 42
Item 4 - Submission of Matters to a Vote of Security Holders 47
Item 6 - Exhibits and Reports on Form 8-K 47
SIGNATURES 48
Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc.
Exhibit 27 - Financial Data Schedule
</TABLE>
2
<PAGE> 3
PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE> 4
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 85,842 $ 162,734
Investments 54,679 111,104
Accounts receivable - trade, net 178,019 429,573
Accounts receivable - unconsolidated affiliates 13,020 21,406
Accounts receivable - other 40,795 167,291
Environmental and products liabilities recoverable - current 532 232,618
Contracts in progress 106,049 159,369
Inventories 9,735 57,488
Deferred income taxes 47,199 93,629
Other current assets 26,407 33,596
---------- ----------
Total Current Assets 562,277 1,468,808
---------- ----------
Property, Plant and Equipment 1,262,522 1,439,496
Less accumulated depreciation 894,376 1,001,699
---------- ----------
Net Property, Plant and Equipment 368,146 437,797
---------- ----------
Investments:
Government obligations 270,707 159,005
Other investments 52,641 105,704
---------- ----------
Total Investments 323,348 264,709
---------- ----------
Products Liabilities Recoverable -- 942,982
---------- ----------
Goodwill less Accumulated Amortization of $40,664,000
at June 30, 2000 and $118,878,000 at December 31, 1999 355,109 444,220
---------- ----------
Prepaid Pension Costs 110,052 111,114
---------- ----------
Investment in The Babcock & Wilcox Company 180,866 --
---------- ----------
Other Assets 96,228 205,261
---------- ----------
TOTAL $1,996,026 $3,874,891
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 111,318 $ 86,499
Accounts payable 97,097 185,465
Accounts payable to The Babcock & Wilcox Company 12,319 --
Environmental and products liabilities - current 6,996 281,787
Accrued employee benefits 62,297 96,235
Accrued contract costs 33,360 81,586
Advance billings on contracts 52,208 231,421
Other current liabilities 237,656 339,413
----------- -----------
Total Current Liabilities 613,251 1,302,406
----------- -----------
Long-Term Debt 318,314 323,014
----------- -----------
Accumulated Postretirement Benefit Obligation 22,328 112,132
----------- -----------
Environmental and Products Liabilities 11,237 1,072,969
----------- -----------
Other Liabilities 243,738 272,484
----------- -----------
Commitments and Contingencies
Minority Interest 28 28
----------- -----------
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 62,079,733 at
June 30, 2000 and 61,625,434 at December 31, 1999 62,080 61,625
Capital in excess of par value 1,054,409 1,048,848
Accumulated deficit (217,077) (208,904)
Treasury stock at cost, 2,000,614 shares at June 30,
2000 and December 31, 1999 (62,731) (62,731)
Accumulated other comprehensive loss (49,551) (46,980)
----------- -----------
Total Stockholders' Equity 787,130 791,858
----------- -----------
TOTAL $ 1,996,026 $ 3,874,891
=========== ===========
</TABLE>
5
<PAGE> 6
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 487,288 $ 647,884 $ 1,078,999 $ 1,397,252
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 433,361 537,642 948,351 1,188,268
Depreciation and amortization 14,214 21,439 31,347 49,907
Selling, general and administrative expenses 31,403 51,998 73,297 110,276
Reorganization charges 532 -- 4,072 --
----------- ----------- ----------- -----------
479,510 611,079 1,057,067 1,348,451
----------- ----------- ----------- -----------
Gain (Loss) on Asset Disposals and Impairments - Net 58 (2,197) 1,117 (21,254)
----------- ----------- ----------- -----------
Operating Income before Loss from Investees 7,836 34,608 23,049 27,547
Loss from Investees (14,051) (354) (20,274) (6,252)
----------- ----------- ----------- -----------
Operating Income (Loss) (6,215) 34,254 2,775 21,295
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 6,893 15,042 14,038 34,340
Interest expense (10,978) (12,139) (19,801) (26,264)
Minority interest -- (4,229) -- 11,098
Other-net 6,192 (321) 10,064 (52,572)
----------- ----------- ----------- -----------
2,107 (1,647) 4,301 (33,398)
----------- ----------- ----------- -----------
Income (Loss) before Provision for (Benefit from)
Income Taxes and Extraordinary Item (4,108) 32,607 7,076 (12,103)
Provision for (Benefit from) Income Taxes 5,939 12,564 9,256 (8,762)
----------- ----------- ----------- -----------
Income (Loss) before Extraordinary Item (10,047) 20,043 (2,180) (3,341)
Extraordinary Item -- -- -- (38,719)
----------- ----------- ----------- -----------
Net Income (Loss) $ (10,047) $ 20,043 $ (2,180) $ (42,060)
=========== =========== =========== ===========
Earnings per Common Share:
Basic:
Income (Loss) before Extraordinary Item $ (0.17) $ 0.34 $ (0.04) $ (0.06)
Net Income (Loss) $ (0.17) $ 0.34 $ (0.04) $ (0.71)
Diluted:
Income (Loss) before Extraordinary Item $ (0.17) $ 0.33 $ (0.04) $ (0.06)
Net Income (Loss) $ (0.17) $ 0.33 $ (0.04) $ (0.71)
----------- ----------- ----------- -----------
Cash Dividends:
Per Common Share $ 0.05 $ 0.05 $ 0.10 $ 0.10
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) $(10,047) $ 20,043 $ (2,180) $(42,060)
-------- -------- -------- --------
Other Comprehensive Loss:
Currency translation adjustments:
Foreign currency translation adjustments (6,164) (7,783) (3,332) (10,309)
Minimum pension liability adjustment -- (8) -- (1,066)
Unrealized losses on investments:
Unrealized gains (losses) arising during the period,
net of taxes of ($39,000) and ($47,000), respectively,
in the three and six months ending June 31, 2000,
and $245,000 and $228,000, respectively, in
the three and six months ending June 30, 1999 1,241 (6,660) 751 (8,451)
Reclassification adjustment for (gains) losses
included in net income, net of taxes (benefits) of
($3,000) and $11,000 in the three and six months,
respectively, ending June 30, 1999 11 141 10 (87)
-------- -------- -------- --------
Other Comprehensive Loss (4,912) (14,310) (2,571) (19,913)
-------- -------- -------- --------
Comprehensive Income (Loss) $(14,959) $ 5,733 $ (4,751) $(61,973)
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months Ended
June 30,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,180) $ (42,060)
--------- ---------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 31,347 49,907
Income or loss of investees, less dividends 24,715 11,582
Loss (gain) on asset disposals and
impairments - net (1,117) 21,254
Benefit from deferred taxes (1,227) (17,385)
Extraordinary loss -- 38,719
Other 4,200 10,464
Changes in assets and liabilities, net of effects
of deconsolidation of B&W:
Accounts receivable 71,961 (70,408)
Net contracts in progress and advance billings (51,145) (61,320)
Accounts payable (8,640) (46,941)
Accrued and other current liabilities (43,433) (10,321)
Products and environmental liabilities (7,560) 134,139
Other, net (58,326) (58,480)
Deconsolidation of The Babcock & Wilcox Company (19,424) --
Proceeds from insurance for products liability claims 26,427 80,196
Payments of products liability claims (23,782) (153,824)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (58,184) (114,478)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of B&W Volund (4,146) --
Purchases of property, plant and equipment (35,013) (53,246)
Purchases of available-for-sale securities (16,415) (442,053)
Purchase of JRM minority interest -- (511,271)
Sales of available-for-sale securities 2,858 607,281
Maturities of available-for-sale securities 12,323 121,884
Proceeds from asset disposals 1,495 15,425
Other 500 (6,085)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (38,398) (268,065)
--------- ---------
</TABLE>
8
<PAGE> 9
CONTINUED
<TABLE>
<CAPTION>
Six months Ended
June 30,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (2) $(283,527)
Increase in short-term borrowing 24,858 534,176
Issuance of common stock 2 1,115
Issuance of subsidiary's stock -- 4,063
Dividends paid (5,970) (5,906)
Other 786 (1,883)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,674 248,038
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 16 1,831
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (76,892) (132,674)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 162,734 265,309
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 85,842 $ 132,635
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 21,280 $ 35,303
Income taxes - net $ 4,104 $ 27,267
========= =========
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
<PAGE> 10
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. To date, this
filing has had no material effect 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 8 for
condensed consolidated income statement and balance sheet information of B&W.
10
<PAGE> 11
We accrue estimated drydock costs for our marine fleet over the period of time
between drydockings, which is generally 3 to 5 years. We accrue drydock costs in
advance of the anticipated future drydocking, commonly known as the "accrue in
advance" method. Actual drydock costs are charged against the liability when
incurred and any differences between actual costs and accrued costs are
recognized over the remaining months of the drydocking cycle.
NOTE 2 - ACQUISITION
During June 2000, we acquired, through our Babcock & Wilcox Volund ApS ("B&W
Volund") subsidiary, various business units of the Ansaldo Volund Group, a group
of companies owned by Finmeccanica S.p.A. of Italy. We acquired waste-to-energy,
biomass, gasification and stoker-fired boiler businesses and projects, as well
as the Esbjerg, Denmark engineering and manufacturing facility from the Ansaldo
Volund Group. B&W Volund is not a subsidiary of B&W, and is therefore not a
party to B&W's Chapter 11 bankruptcy filing.
We are using the purchase method of accounting for this acquisition. A full
application of purchase accounting was not possible at June 30, 2000 due to the
acquisition date. At June 30, 2000, we reported amounts expended to date of
approximately $4,000,000 for this acquisition in other assets. We expect to
finalize the purchase accounting for the acquisition by December 31, 2000.
NOTE 3 - INVENTORIES
Inventories are summarized below:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
(Unaudited)
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 5,942 $ 43,998
Work in Progress 1,789 6,353
Finished Goods 2,004 7,137
-------- --------
$ 9,735 $ 57,488
======== ========
</TABLE>
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
(Unaudited)
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $(32,729) $(29,397)
Net Unrealized Loss on Investments (8,968) (9,729)
Minimum Pension Liability (7,854) (7,854)
-------- --------
$(49,551) $(46,980)
======== ========
</TABLE>
11
<PAGE> 12
NOTE 5 - 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, 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 pled guilty to charges brought by the
Department of Justice that he participated in an international bid-rigging
conspiracy for the sale of marine construction services. In May 2000, another
former JRM officer was indicted by the Department of Justice for participating
in a bid rigging conspiracy for the sale of marine construction services in the
Gulf of Mexico.
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
12
<PAGE> 13
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. The Fifth Circuit
has set August 2000 for oral arguments on the Statoil 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, which request was subsequently denied.
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 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,
13
<PAGE> 14
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 a lawsuit filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania. The suit involves 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, property damage 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 plaintiffs' claims against B&W in the Hall Litigation 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 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.
14
<PAGE> 15
In 1998, 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.
There is a controversy between B&W and its insurers as to the amount of coverage
available under the liability insurance policies covering the facilities. B&W
filed a declaratory judgement action in a Pennsylvania State Court seeking a
judicial determination as to the amount of coverage available under the
policies. 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. 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.
In December 1999 and early 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 the
complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. The four cases have
been consolidated. On June 14, 2000 the plaintiffs filed an amended complaint,
and on July 14, 2000, we filed a motion to dismiss all claims asserted in the
original and amended complaints. We believe the substantive allegations
contained in the 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 with a lawsuit, claiming consequential damages for delays resulting
from the incident, as well as costs incurred to complete the project with
another contractor. The court has dismissed Texaco's counterclaims for
consequential damages but the dismissal is on appeal. 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.
15
<PAGE> 16
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 8 regarding B&W's potential liability for non-employee asbestos claims
and the Chapter 11 reorganization proceedings commenced by B&W and certain of
its subsidiaries on February 22, 2000.
NOTE 6 - 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 provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities. Included in the three months ended June 30, 2000 are charges of
$21,600,000 to exit certain foreign joint ventures. 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
8 for the consolidated results of B&W and its subsidiaries.
16
<PAGE> 17
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 $575,000,000, primarily in the Power Generation segment,
as a result of the deconsolidation of B&W as described in Note 1.
Segment Information for the Three and Six Months Ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Marine Construction Services $ 246,142 $ 158,805 $ 452,777 $ 405,376
Government Operations 112,043 92,890 226,763 185,107
Industrial Operations 129,471 132,126 244,713 254,048
Power Generation Systems - B&W -- 267,578 155,774 557,953
Power Generation Systems 64 -- 146 159
Adjustments and Eliminations (1) (432) (3,515) (1,174) (5,391)
----------- ----------- ----------- -----------
Total Revenues $ 487,288 $ 647,884 $ 1,078,999 $ 1,397,252
=========== =========== =========== ===========
(1)Segment revenues are net of the following intersegment transfers and other adjustments:
Marine Construction Services Transfers $ 144 $ 424 $ 581 $ 1,144
Government Operations Transfers 237 313 431 483
Industrial Operations Transfers 51 39 103 102
Power Generation Systems - B&W Transfers -- 1,141 59 1,328
Adjustments and Eliminations -- 1,598 -- 2,334
----------- ----------- ----------- -----------
Total $ 432 $ 3,515 $ 1,174 $ 5,391
=========== =========== =========== ===========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Marine Construction Services $ (2,001) $ 17,308 $ (7,788) $ 29,591
Government Operations 8,506 9,910 23,479 30,392
Industrial Operations 2,527 4,372 4,207 7,105
Power Generation Systems - B&W -- 16,571 12,502 50,277
Power Generation Systems (144) (200) (364) (597)
--------- --------- --------- ---------
Total Segment Operating Income $ 8,888 $ 47,961 $ 32,036 $ 116,768
--------- --------- --------- ---------
Gain (Loss) on Asset Disposals and Impairments - Net:
Marine Construction Services $ (144) $ (1,850) $ 941 $ (22,079)
Government Operations 199 -- 199 45
Industrial Operations 3 1 10 (49)
Power Generation Systems - B&W -- 53 (33) 3,580
Power Generation Systems -- 950 -- 950
--------- --------- --------- ---------
Total Gain (Loss) on Asset Disposals and
Impairments - Net $ 58 $ (846) $ 1,117 $ (17,553)
--------- --------- --------- ---------
Income (Loss) from Investees:
Marine Construction Services $ 4,539 $ (1,089) $ (3,007) $ 2,246
Government Operations 1,927 639 3,279 2,903
Industrial Operations 47 (392) 71 (901)
Power Generation Systems - B&W -- 1,722 812 1,903
Power Generation Systems (20,564) (1,234) (21,429) (12,403)
--------- --------- --------- ---------
Total Loss from Investees $ (14,051) $ (354) $(20,274) $ (6,252)
--------- --------- --------- ---------
SEGMENT INCOME (LOSS):
Marine Construction Services $ 2,394 $ 14,369 $ (9,854) $ 9,758
Government Operations 10,632 10,549 26,957 33,340
Industrial Operations 2,577 3,981 4,288 6,155
Power Generation Systems - B&W -- 18,346 13,281 55,760
Power Generation Systems (20,708) (484) (21,793) (12,050)
--------- --------- --------- ---------
Total Segment Income (Loss) $ (5,105) $ 46,761 $ 12,879 $ 92,963
--------- --------- --------- ---------
Other Unallocated Items 7,438 (1,995) 1,816 (51,771)
General Corporate Expenses - Net (8,548) (10,512) (11,920) (19,897)
--------- --------- --------- ---------
Total Operating Income (Loss) $ (6,215) $ 34,254 $ 2,775 $ 21,295
========= ========= ========= =========
</TABLE>
18
<PAGE> 19
NOTE 7 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C>
Basic:
Income (loss) before extraordinary item $ (10,047) $ 20,043 $ (2,180) $ 3,341)
Extraordinary item -- -- -- (38,719)
------------ ------------ ------------ ------------
Net income (loss) $ (10,047) $ 20,043 $ (2,180) $ (42,060)
============ ============ ============ ============
Weighted average common shares 59,667,689 58,942,070 59,532,010 58,857,561
============ ============ ============ ============
Basic earnings (loss) per common share:
Income (loss) before extraordinary item $ (0.17) $ 0.34 $ (0.04) $ (0.06)
Extraordinary item -- -- -- (0.65)
------------ ------------ ------------ ------------
Net income (loss) $ (0.17) $ 0.34 $ (0.04) $ (0.71)
============ ============ ============ ============
Diluted:
Income (loss) before extraordinary item $ (10,047) $ 20,043 $ (2,180) $ (3,341)
Extraordinary item -- -- -- (38,719)
------------ ------------ ------------ ------------
Net income (loss) for diluted computation $ (10,047) $ 20,043 $ (2,180) $ (42,060)
============ ============ ============ ============
Weighted average common shares (basic) 59,667,689 58,942,070 59,532,010 58,857,561
Effect of dilutive securities:
Stock-based compensation arrangements -- 992,818 -- --
------------ ------------ ------------ ------------
Adjusted weighted average common
shares and assumed conversions 59,667,689 59,934,888 59,532,010 58,857,561
============ ============ ============ ============
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ (0.17) $ 0.33 $ (0.04) $ (0.06)
Extraordinary item -- -- -- (0.65)
------------ ------------ ------------ ------------
Net income (loss) $ (0.17) $ 0.33 $ (0.04) $ (0.71)
============ ============ ============ ============
</TABLE>
19
<PAGE> 20
NOTE 8 - 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 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
October 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 was
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). No claims have been paid since the
bankruptcy filing. Claims paid during the six-month period ended June 30, 2000,
prior to the bankruptcy filing, were $23,640,000 of which $20,121,000 has been
recovered or is due from insurers. At June 30, 2000, receivables of $51,678,000
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,
20
<PAGE> 21
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, 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 early 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 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.
21
<PAGE> 22
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 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 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 June 30,
2000, approximately $58,183,000 in letters of credit have been issued under the
DIP Credit Facility of which approximately $48,215,000 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
Accountants' 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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 298,246 $ 266,040 $ 570,813 $ 555,858
--------- --------- --------- ---------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 283,887 230,941 517,412 503,181
Depreciation and amortization 4,018 4,539 8,168 11,269
Selling, general and administrative
expenses 15,086 18,382 33,273 35,220
Reorganization charges 4,043 -- 7,965 --
--------- --------- --------- ---------
307,034 253,862 566,818 549,670
--------- --------- --------- ---------
Gain (Loss) on Asset Disposals 1,319 (666) 1,309 1,869
--------- --------- --------- ---------
Operating Income (Loss) before Income
from Investees (7,469) 11,512 5,304 8,057
Income from Investees 1,264 1,722 2,697 1,903
--------- --------- --------- ---------
Operating Income (Loss) (6,205) 13,234 8,001 9,960
--------- --------- --------- ---------
Other Income:
Interest income 1,829 1,721 2,792 10,758
Interest expense (1,216) (177) (1,390) (665)
Other-net (1,234) 131 36 (50,839)
--------- --------- --------- ---------
(621) 1,675 1,438 (40,746)
--------- --------- --------- ---------
Income (Loss) before Provision for
(Benefit from) Income Taxes (6,826) 14,909 9,439 (30,786)
Provision for (Benefit from) Income Taxes (3,445) 6,444 3,185 (5,329)
--------- --------- --------- ---------
Net Income (Loss) $ (3,381) $ 8,465 $ 6,254 $ (25,457)
========= ========= ========= =========
</TABLE>
23
<PAGE> 24
THE BABCOCK & WILCOX COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000
(Unaudited)
(In thousands)
<S> <C>
Assets:
Current Assets $ 521,811
Property, Plant and Equipment 82,743
Products Liabilities Recoverable 1,153,761
Goodwill 77,329
Prepaid Pension Costs 19,613
Other Assets 101,304
-----------
Total Assets $ 1,956,561
===========
Liabilities:
Current Liabilities $ 287,538
Liabilities Subject to Compromise 1,489,459(A)
Stockholder's Equity:
Common Stock 1,001
Capital in Excess of Par Value 128,633
Retained Earnings 71,386
Accumulated Other Comprehensive Loss (21,456)
-----------
Total Liabilities and Stockholder's Equity $ 1,956,561
===========
(A) Liabilities subject to compromise consist of the following:
Accounts payable $ 11,416
Provision for warranty 24,777
Other current liabilities 35,672
Environmental and products liabilities 1,307,725
Accumulated postretirement benefit
obligation 89,132
Other long-term liabilities 20,737
-----------
$ 1,489,459
===========
</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
$51,350,000 and pre-petition inter-company receivables from other entities
within the McDermott group of companies (other than subsidiaries of B&W) of
approximately $58,143,000. 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. In addition to this indemnity, these
two surety companies requested and, in June 2000, obtained from the Bankruptcy
Court, subject to DIP Credit Agreement and certain professional fees,
super-priority administrative expense status in bankruptcy for their claims
against B&W and its filing subsidiaries resulting from their exposure under any
bond issued post-bankruptcy filing for B&W's and its subsidiaries' businesses.
At June 30, 2000, the total value of B&W's and its subsidiaries' customer
contracts yet to be completed covered by such indemnity arrangements was
approximately $151,500,000 of which approximately $12,000,000 relates to bonds
issued after February 21, 2000.
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,
increased to $180,866,000 due to post-bankruptcy filing adjustments to the net
assets of B&W and 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
25
<PAGE> 26
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.
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 487,288 $ 381,844 $ 923,284 $ 841,394
Operating Income (Loss) $ (6,215) $ 21,020 $ (5,176) $ 11,335
Income (Loss) before Provision for
(Benefit from) Income Taxes $ (4,108) $ 17,698 $ (2,218) $ 18,683
Net Income (Loss) $ (10,047) $ 11,578 $ (7,685) $ (16,603)
Earnings (Loss) per Common Share:
Basic $ (0.17) $ 0.20 $ (0.13) $ (0.28)
Diluted $ (0.17) $ 0.19 $ (0.13) $ (0.28)
</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 9 - 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
26
<PAGE> 27
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.
NOTE 10 - 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," which adds to the guidance related to accounting for
derivative instruments and hedging activities. We have not yet determined the
effect SFAS No. 133, as amended by SFAS No. 138, 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.
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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.
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
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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 Chapter
11 reorganization proceeding involving B&W and certain of its
subsidiaries;
o changes in existing environmental regulatory matters;
o rapid technological changes;
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
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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 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 its filing subsidiaries emerge
from the Chapter 11 reorganization proceeding 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 6 to the consolidated financial statements.) B&W and its
consolidated subsidiaries pre-bankruptcy filing revenues of $155,774,000 and
operating income of $7,951,000 are included in our consolidated financial
results for the six-month period ended June 30, 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.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS
ENDED JUNE 30, 1999
Marine Construction Services
Revenues increased $87,337,000 to $246,142,000 due to higher volume in offshore
activities in the Far East relating to the West Natuna project and in North
American fabrication activities. These increases were partially offset by lower
volume in North American offshore and Eastern Hemisphere fabrication activities.
Segment operating income decreased $19,309,000 from income of $17,308,000 to a
loss of $2,001,000, primarily due to lower volume and margins in North American
offshore and Eastern Hemisphere fabrication activities.. There were also lower
margins in our Mexican ship repair business and in our engineering activities.
In addition, there was the amortization of the goodwill associated with our
purchase of the minority interest in JRM. These decreases were partially offset
by higher volume in Eastern Hemisphere offshore activities.
Loss on asset disposals and impairments-net decreased from $1,850,000 to
$144,000. The loss in the prior period was due to impairment losses on oil and
gas investments and a write-off of goodwill associated with a Mexican shipyard.
Income (loss) from investees increased $5,628,000 from a loss of $1,089,000 to
income of $4,539,000, primarily due to a revision of withholding taxes
associated with a Mexican joint venture and improvement in our European joint
venture over the prior period. In addition, there were lower operating results
from our Gulf of Mexico joint ventures in the prior period.
Government Operations
Revenues increased $19,153,000 to $112,043,000, primarily due to higher volumes
from nuclear fuel assemblies and reactor components for the U.S. Government.
Segment operating income decreased $1,404,000 to $8,506,000, primarily due to
lower margins from management and operation contracts for U.S. Government-owned
facilities and commercial nuclear environmental services. These decreases were
partially offset by higher volume from nuclear fuel assemblies and reactor
components for the U. S. Government and lower sales and marketing expenses.
Income from investees increased $1,288,000 to $1,927,000, primarily due to
higher operating results from a joint venture in Idaho.
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Industrial Operations
Revenues decreased $2,655,000 to $129,471,000, primarily due to lower volumes
from engineering activities in Canadian operations and air-cooled heat
exchangers. These decreases were partially offset by higher volumes from plant
maintenance activities in Canadian operations.
Segment operating income decreased $1,845,000 to $2,527,000, primarily due to
lower sales volumes and margins from engineering activities in Canadian
operations and air-cooled heat exchangers. These decreases were partially offset
by higher volumes from plant maintenance activities in Canadian activities and
lower general and administrative expenses.
Power Generation Systems
Loss from investees increased $19,330,000 to $20,564,000, primarily due to
charges of $21,600,000, including approximately $12,000,000 related to financial
guarantees, to exit certain foreign joint ventures.
Other Unallocated Items
Other unallocated items improved $9,433,000 from expense of $1,995,000 to income
of $7,438,000, primarily due to lower employee benefit, general and
administrative and research and development expenses.
General Corporate Expenses - Net
General corporate expenses decreased $1,964,000 primarily due to the
deconsolidation of B&W.
Other Income Statement Items
Interest income decreased $8,149,000 to $6,893,000, primarily due to a decrease
in investments.
Interest expense decreased $1,161,000 to $10,978,000, primarily due to changes
in debt obligations and prevailing interest rates.
We no longer have minority interest, primarily due to the acquisition of the
minority interest in JRM in the prior year.
Other-net improved $6,513,000 from expense of $321,000 to income of $6,192,000.
This improvement was primarily due to income attributable to over funded pension
plans from discontinued operations and foreign currency transaction gains in the
current period compared to foreign currency transaction losses in the prior
period.
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The provision for income taxes decreased $6,625,000 to $5,939,000, while income
before provision for income taxes and extraordinary item decreased $36,715,000
from income of $32,607,000 to a loss of $4,108,000. The change in the
relationship of pretax income to the provision for income taxes was primarily
the result of a decrease in income during the current period. The provision for
the three months ended June 30, 2000, reflects non-deductible amortization of
goodwill of $4,502,000 created by the premium we paid on the acquisition of
minority interest in JRM. The loss before provision for income taxes for the
three months ended June 30, 2000 includes charges of $21,600,000 to exit certain
foreign joint ventures which have no associated tax benefits. 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED
JUNE 30, 1999
Marine Construction Services
Revenues increased $47,401,000 to $452,777,000 due to higher volume in offshore
activities in the Far East relating to the West Natuna project. This increase
was partially offset by lower volumes in essentially all geographic areas.
Segment operating income decreased $37,379,000 from income of $29,591,000 to a
loss of $7,788,000, primarily due to lower volume and margins in North American
activities including our Mexican ship repair business and lower margins in the
Eastern Hemisphere. There was also 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 $23,020,000 from a
loss of $22,079,000 to income of $941,000. The loss in the prior period was due
to impairment losses on fabrication facilities and fabrication and marine
equipment. There was also a write-off of goodwill associated with worldwide
engineering and a Mexican shipyard.
Income (loss) from investees decreased $5,253,000 from income of $2,246,000 to a
loss of $3,007,000, primarily due to lower operating results from our Mexican
joint venture (partially offset by a benefit recognized on revisions of
withholding taxes) and higher operating results from our Far East joint venture
in the prior period. These lower operating results were partially offset by
lower operating results from a Gulf of Mexico joint venture in the prior period.
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Government Operations
Revenues increased $41,656,000 to $226,763,000, primarily due to higher volumes
from nuclear fuel assemblies and reactor components for the U.S. Government and
from management and operation contracts for U. S. Government-owned facilities.
Segment operating income decreased $6,913,000 to $23,479,000, primarily due to a
settlement relating to environmental restoration costs recorded in the prior
period. There were also lower margins from management and operation contracts
for U.S. Government-owned facilities. These decreases were partially offset by
higher volume from nuclear fuel assemblies and reactor components for the U. S.
Government.
Industrial Operations
Revenues decreased $9,335,000 to $244,713,000, primarily due to lower volumes
from engineering activities in Canadian operations and air-cooled heat
exchangers. These decreases were partially offset by higher volumes from plant
maintenance activities in Canadian operations.
Segment operating income decreased $2,898,000 to $4,207,000, primarily due to
lower sales volumes and margins from engineering activities in Canadian
operations and air-cooled heat exchangers. These decreases were partially offset
by higher volumes and margins from plant maintenance activities in Canadian
operations and lower general and administrative expenses.
Power Generation Systems
Loss from investees increased $9,026,000 to $21,429,000, primarily due to
charges of $21,600,000, including approximately $12,000,000 related to financial
guarantees, to exit certain foreign joint ventures. The loss in the prior period
was primarily due to the write-off of notes and accounts receivable from a
foreign joint venture in Turkey.
Other Unallocated Items
Other unallocated items improved $53,587,000 from expense of $51,771,000 to
income of $1,816,000, primarily due to provisions for estimated future
non-employee products liability asbestos claims and reserves for potential
litigation settlements recorded in the prior period and lower general and
administrative expenses. These improvements were partially offset by the initial
reorganization expenses incurred by MII associated with the B&W Chapter 11
filing.
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Other Income Statement Items
Interest income decreased $20,302,000 to $14,038,000, primarily due to a
decrease in investments. Interest expense decreased $6,463,000 to $19,801,000,
primarily due to changes in debt obligations and prevailing interest rates.
We no longer have minority interest, primarily due to the acquisition of the
minority interest in JRM in the prior year.
Other-net improved $62,636,000 from expense of $52,572,000 to income of
$10,064,000. This improvement 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. In addition, there
were foreign currency transaction gains in the current period compared to
foreign currency transaction losses in the prior period and income attributable
to over funded pension plans from discontinued operations.
The provision for income taxes increased $18,018,000 from a benefit of
$8,762,000 to a provision of $9,256,000, while income before provision for
income taxes and extraordinary item increased $19,179,000 from a loss of
$12,103,000 to income of $7,076,000. 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 $7,851,000 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
six months ended June 30, 2000 reflects non-deductible amortization of goodwill
of $9,004,000 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 six months ended June 30, 2000 also
include a provision of $3,800,000 for B&W for the pre-filing period. The loss
before provision for income taxes for the six months ended June 30, 2000
includes charges of $21,600,000 to exit certain joint ventures which have no
associated tax benefit. 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>
6/30/00 12/31/99
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Marine Construction Services $ 311,527 $ 514,822
Government Operations 981,054 1,151,960
Industrial Operations 357,289 415,820
Power Generation Systems -- 1,202,695
---------- ----------
TOTAL BACKLOG $1,649,870 $3,285,297
========== ==========
</TABLE>
Due to the deconsolidation of B&W (see Note 8 to the condensed consolidated
financial statements), backlog from Power Generation Systems totaling
$1,105,549,000 is no longer included in our consolidated total at June 30, 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 June 30, 2000, Government Operations' backlog with the U. S. Government was
$867,816,000 (of which $16,465,000 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 six months ended June 30, 2000, our cash and cash equivalents
decreased $76,892,000 to $85,842,000 and total debt increased $20,119,000 to
$429,632,000, primarily due to an increase in short-term borrowings of
$24,858,000. During this period, we received cash of $15,181,000 from sales and
maturities of investments and $1,495,000 from the sale of assets. We used cash
of $58,184,000 in operating activities, $35,013,000 for additions to property,
plant and equipment, $16,415,000 for the purchase of investments, $5,970,000 for
dividends on MII's common stock and $4,146,000 for B&W Volund's acquisition of
certain business units of the Ansaldo Volund Group.
Expenditures for property, plant and equipment decreased $18,233,000 to
$35,013,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
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At June 30, 2000 and December 31, 1999, we had available various uncommitted
short-term lines of credit from banks totaling $26,424,000 and $72,766,000,
respectively. At June 30, 2000 and December 31, 1999, borrowings against these
lines of credit were $836,000 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 8 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.
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 certain outstanding letters
of credit totaling $48,975,000 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. Borrowings against this facility
at June 30, 2000 were $30,000,000. As of August 10, 2000, we have borrowed an
additional $20,000,000 against this facility.
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 aggregate amount of loans and
amounts available for drawing under letters of credit outstanding under the JRM
Credit Facility may not exceed $200,000,000. The facility is subject to certain
financial and non-financial covenants. Borrowings against this facility at June
30, 2000 were $20,000,000.
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At June 30, 2000, we had total cash, cash equivalents and investments of
$463,869,000. Our investment portfolio consists primarily of government
obligations and other investments in debt securities. The fair value of our
investments at June 30, 2000 was $378,027,000. As of June 30, 2000, we had
pledged approximately $43,456,000 fair value of these obligations to secure a
letter of credit in connection with certain reinsurance agreements and
$54,679,000 fair value of these obligations to secure borrowings of $55,434,000
that are incurred under repurchase agreements. In addition, approximately
$201,749,000 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 June 30, 2000, substantially all the net assets of MI were
subject to those restrictions. At June 30, 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 June 30, 2000, we had a valuation allowance for deferred tax assets of
$18,326,000, 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
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of incurring losses in the future and the possibility of declines in value of
appreciated assets involved in the tax 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. At the
recommendation of management, on August 1, 2000, MII's Board of Directors voted
to eliminate the quarterly common stock dividend with the intention of
conserving cash for future corporate and operational uses.
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 $217,376,000 from $166,402,000 at December 31, 1999 to
a deficit of $50,974,000 at June 30, 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
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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 $180,866,000 as of June 30, 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 8 to the condensed
consolidated financial statements for B&W's financial information at June 30,
2000.
In the three months ending June 30, 2000:
B&W's revenues increased $32,206,000 to $298,246,000, primarily due to
higher volumes from the fabrication and erection of fossil fuel steam
and environmental control systems. This increase was partially offset
by lower volumes from fabrication, repair and retrofit of existing
facilities, private power systems, replacement nuclear steam
generators and industrial boilers;
B&W's operating income (loss) decreased $19,439,000 from income of
$13,234,000 to a loss of $6,205,000, primarily due to write-downs and
adjustments to substantially completed original equipment contracts
still under warranty or in dispute resolution with various customers -
primarily international and lower volumes and margins from the
fabrication, repair and retrofit of existing facilities, industrial
boilers and replacement nuclear steam generators. In addition, there
were lower margins from private power systems. Selling, general and
administrative expenses were lower due to revisions in the amount
billed from MI.
Interest income increased $108,000 to $1,829,000, primarily due to an
increase in investments;
Other-net decreased $1,365,000 from income of $131,000 to expense of
$1,234,000, primarily due to employee benefit expenses.
In the six months ending June 30, 2000:
B&W's revenues increased $14,955,000 to $570,813,000, primarily due to
higher volumes from the fabrication and erection of fossil fuel steam
and environmental control systems. This increase was partially offset
by lower volumes from fabrication, repair and retrofit of existing
facilities, industrial boilers, replacement nuclear steam generators,
boiler cleaning equipment and private power systems;
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B&W's operating income decreased $1,959,000 to $8,001,000, primarily
due to lower volumes and margins from the fabrication, repair and
retrofit of existing facilities, industrial boilers, replacement
nuclear steam generators, private power systems and boiler cleaning
equipment. In addition, there were write-downs and adjustments to
substantially completed original equipment contracts still under
warranty or in dispute resolution with various customers - primarily
international, higher employee benefit expenses and reorganization
expenses associated with the Chapter 11 filing. These decreases were
partially offset by provisions for estimated future non-employee
products liability asbestos claims in the prior period. In addition,
there were lower general and administrative expenses;
Interest income decreased $7,966,000 to $2,792,000, primarily due to
interest income on domestic tax refunds in the prior period;
Other-net improved $50,875,000 from expense of $50,839,000 to income
of $36,000, 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 June 30, 2000 and December 31, 1999 was $1,105,549,000 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
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 8 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
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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. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133," which adds to the guidance related to accounting for derivative
instruments and hedging activities. We have not yet determined the effect SFAS
No. 133, as amended by SFAS No. 138, 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.
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
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<PAGE> 43
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 pled guilty to charges brought by the
Department of Justice that he participated in an international bid-rigging
conspiracy for the sale of marine construction services. In May 2000, another
former JRM officer was indicted by the Department of Justice for participating
in a bid rigging conspiracy for the sale of marine construction services in the
Gulf of Mexico.
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
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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. The Fifth Circuit
has set August 2000 for oral arguments on the Statoil 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, which request was subsequently denied.
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 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
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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 a lawsuit filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania. The suit involves 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, property damage 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 plaintiffs' claims against B&W in the Hall Litigation 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 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.
In 1998, 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.
There is a controversy between B&W and its insurers as to the amount of coverage
available under the liability insurance policies covering the facilities. B&W
filed a declaratory judgement action in a Pennsylvania State Court seeking a
judicial determination as to the amount of coverage available under the
policies. 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
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we may be materially adversely impacted if our liabilities exceed our coverage.
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.
In December 1999 and early 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 the
complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. The four cases have
been consolidated. On June 14, 2000 the plaintiffs filed an amended complaint,
and on July 14, 2000, we filed a motion to dismiss all claims asserted in the
original and amended complaints. We believe the substantive allegations
contained in the 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 with a lawsuit, claiming consequential damages for delays resulting
from the incident, as well as costs incurred to complete the project with
another contractor. The court has dismissed Texaco's counterclaims for
consequential damages but the dismissal is on appeal. 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 8 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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on May 2, 2000, we submitted the
following matters to our shareholders with voting as follows:
(a) The election of three directors:
Class III - For a three-year term
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- ---------- --------------
<S> <C> <C>
Robert L. Howard 53,102,578 689,099
Roger E. Tetrault 53,090,487 701,190
John N. Turner 53,094,103 697,574
</TABLE>
Joe B. Foster, Philip J. Burguieres, Bruce DeMars, John W.
Johnstone, Jr., Kathryn D. Sullivan and Richard E. Woolbert also
continued as directors immediately after the meeting.
(b) A proposal to retain PricewaterhouseCoopers LLP as our
independent accountants for the fiscal year ending December 31,
2000:
Votes For Votes Against
---------- -------------
53,341,181 126,595
On August 1, 2000, Roger E. Tetrault retired as MII's Chairman of the Board and
Chief Executive Officer and Bruce W. Wilkinson was elected by MII's Board of
Directors to replace him.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.2 - Amended and Restated By-Laws of McDermott International,
Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
June 30, 2000.
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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)
August 11, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3.2 Amended and Restated By-laws of McDermott International, Inc.
27 Financial Data Schedule
</TABLE>
49
