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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended ___________________
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from April 1, 1999 to December 31, 1999
Commission File Number 1-8430
McDERMOTT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
REPUBLIC OF PANAMA 72-0593134
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<S> <C>
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
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1450 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70112-6050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was $549,583,228 as of February 8, 2000.
The number of shares outstanding of the registrant's common stock at February 8,
2000 was 59,822,285.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 in connection with the registrant's 2000 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
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McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART I
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PAGE
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Items 1. & 2. BUSINESS AND PROPERTIES
A. General
Recent Developments 1
Operations 2
B. Marine Construction Services
General 3
Foreign Operations 5
Raw Materials 5
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Power Generation Systems
General 6
Foreign Operations 7
Raw Materials 7
Customers and Competition 7
Backlog 8
Factors Affecting Demand 8
B&W Reorganization 9
D. Government Operations
General 9
Raw Materials 10
Customers and Competition 10
Backlog 10
Factors Affecting Demand 10
E. Industrial Operations
General 11
Foreign Operations 11
Raw Materials 11
Customers and Competition 11
Backlog 12
Factors Affecting Demand 12
F. Patents and Licenses 12
G. Research and Development Activities 12
H. Insurance 12
I. Employees 14
J. Environmental Regulations and Matters 14
K. Cautionary Statement Concerning Forward-Looking Statements 16
</TABLE>
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INDEX - FORM 10-K
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Item 3. LEGAL PROCEEDINGS 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 20
Item 6. SELECTED FINANCIAL DATA 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 21
Nine-Month Period Ended December 31, 1999 vs. Nine-Month Period Ended December 31, 1998 23
Fiscal Year Ended March 31, 1999 vs. Fiscal Year Ended March 31, 1998 25
Effect of B&W Chapter 11 Filing 27
Effects of Inflation and Changing Prices 30
Liquidity and Capital Resources 30
Impact of Year 2000 32
New Accounting Standards 33
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 33
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Report of PricewaterhouseCoopers LLP 36
Report of Ernst & Young LLP 37
Consolidated Balance Sheets - December 31, 1999 and March 31, 1999 38
Consolidated Statements of Income for the Nine-Month Periods Ended
December 31, 1999 and 1998 (Unaudited) and the Two Fiscal
Years Ended March 31, 1999 40
Consolidated Statements of Comprehensive Income (Loss) for the Nine-Month Periods
Ended December 31, 1999 and 1998 (Unaudited) and the Two Fiscal Years Ended March 31, 1999 41
Consolidated Statements of Stockholders' Equity for the Nine-Month Period Ended
December 31, 1999 and the Two Fiscal Years Ended March 31, 1999 42
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended
December 31, 1999 and 1998 (Unaudited) and the Two Fiscal Years Ended March 31, 1999 43
Notes to Consolidated Financial Statements 44
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 83
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 83
Item 11. EXECUTIVE COMPENSATION 83
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INDEX - FORM 10-K
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PAGE
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 83
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 83
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 84
Signatures 86
Exhibit 10.11 - SUPPORT AGREEMENT BETWEEN MCDERMOTT INTERNATIONAL, INC. AND MCDERMOTT INCORPORATED
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
Exhibit 23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP
Exhibit 23.2 - CONSENT OF ERNST & YOUNG LLP
Exhibit 27 - FINANCIAL DATA SCHEDULE
</TABLE>
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Statements we make in this Transition Report on Form 10-K which express a
belief, expectation or intention, as well as those that are not historical fact,
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various risks, uncertainties and assumptions, including those to which we refer
under the heading "Cautionary Statement Concerning Forward-Looking Statements"
in Items 1 and 2 of Part I of this report.
PART I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("MII") was incorporated under the laws of the
Republic of Panama in 1959 and is the parent company of the McDermott group of
companies, 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 The Babcock & Wilcox Company ("B&W"), a Delaware subsidiary of BWICO,
and its consolidated subsidiaries, and
o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and
its consolidated subsidiaries.
In this Transition Report on Form 10-K, unless the context otherwise indicates,
"we," "us" and "our" mean MII and its consolidated subsidiaries.
Recent Developments
On August 3, 1999, our Board of Directors approved the change of our fiscal year
from a year ending on March 31, which was the fiscal year end used in our last
report on Form 10-K filed with the Securities and Exchange Commission, to the
new fiscal year end of December 31. This report for the nine-month period ended
December 31, 1999 covers the transition period.
In the nine-month period ended December 31, 1999, we acquired all of the
publicly held shares of JRM common stock in a two-step acquisition. On June 10,
1999, we purchased 14,353,490 shares in a tender offer for the publicly held
shares of JRM common stock for $35.62 per share. On July 30, 1999, we acquired
the remaining 215,008 shares of JRM common stock for the same price in cash in a
second-step merger and converted 12,340 restricted shares of JRM common stock to
15,836 restricted shares of MII common stock.
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 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 products liability. Included in the filing are B&W and
its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc. and
Diamond Power International, Inc. B&W's and its subsidiaries' businesses remain
solvent and strong and they are committed to operating their businesses as
normal, delivering products and services as usual and pursuing new contracts and
growth opportunities. To ensure that it and its subsidiaries have the capital
necessary to meet letter of credit and cash needs to continue to operate their
businesses, B&W and its subsidiaries entered into a $300 million
debtor-in-possession revolving credit and letter of credit facility with
Citibank, N.A. and Salomon Smith Barney Inc. For additional information
concerning these developments, see Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Effect of B&W Chapter 11
Filing and Notes 1, 11 and 20 to the consolidated financial statements.
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Operations
We operate in four business segments:
o Marine Construction Services includes the results of operations of JRM
and its subsidiaries, which supply worldwide services to customers in
the offshore oil and gas exploration and production and hydrocarbon
processing industries and to other marine construction companies. This
segment's principal activities include the design, engineering,
fabrication and installation of offshore drilling and production
platforms and other specialized structures, modular facilities, marine
pipelines and subsea production systems and procurement activities.
o Power Generation Systems includes the results of operations of the
Power Generation Group, which is conducted primarily through B&W and
its subsidiaries. This segment provides services, equipment and
systems to generate steam and electric power at energy facilities
worldwide.
o Government Operations includes the results of operations of BWXT. This
segment is the sole supplier of nuclear fuel assemblies and major
nuclear reactor components to the U.S. Navy for the Naval Reactors
Program and provides services to the U.S. Government, including
uranium processing, environmental site restoration services and
management and operation services for various U.S. Government-owned
facilities, primarily within the nuclear weapons complex of the
Department of Energy.
o Industrial Operations includes the results of operations of McDermott
Engineers & Constructors (Canada) Ltd. ("MECL"), Hudson Products
Corporation ("HPC") and McDermott Technologies, Inc. ("MTI"). This
segment provides project management, conceptual and process design,
front-end engineering and design, detailed engineering, procurement,
construction management and contract maintenance services to customers
in a wide range of industries. It also provides a variety of
manufactured products for industrial process systems, performs
research activities for our other segments and markets and negotiates
and administers research and development contracts.
The following tables summarize our revenues and operating income for the
nine-month periods ended December 31, 1999 and 1998 and the two fiscal years
ended March 31, 1999 and 1998. See Note 17 to our consolidated financial
statements for additional information with respect to our business segments and
operations in different geographic areas.
<TABLE>
<CAPTION>
Nine-Month Period Fiscal Year
Ended Ended
December 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited)
(In Millions)
<S> <C> <C> <C> <C>
REVENUES
Marine Construction Services $ 490.7 $ 1,033.0 $ 1,279.6 $ 1,855.5
Power Generation Systems 730.0 775.5 1,066.2 1,142.7
Government Operations 306.3 290.5 382.7 370.5
Industrial Operations 366.6 305.6 427.5 337.8
Adjustments and Eliminations (2.5) (4.0) (6.0) (31.9)
----------- ----------- ----------- -----------
$ 1,891.1 $ 2,400.6 $ 3,150.0 $ 3,674.6
=========== =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
Nine-Month Period Fiscal Year
Ended Ended
December 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited)
(In Millions)
<S> <C> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income:
Marine Construction Services $ 31.1 $ 114.2 $ 126.5 $ 107.1
Power Generation Systems 52.1 57.0 90.3 82.5
Government Operations 28.6 18.9 39.4 35.8
Industrial Operations 8.5 14.2 16.9 4.7
----------- ----------- ----------- -----------
$ 120.3 $ 204.3 $ 273.1 $ 230.1
=========== =========== =========== ===========
Gain (Loss) on Asset Disposals
and Impairments - Net:
Marine Construction Services $ (1.7) $ 38.9 $ 18.6 $ (40.1)
Power Generation Systems 1.3 0.9 4.4 (6.1)
Government Operations -- 0.1 0.2 0.5
Industrial Operations -- (0.2) (0.2) 128.2
----------- ----------- ----------- -----------
$ (0.4) $ 39.7 $ 23.0 $ 82.5
=========== =========== =========== ===========
Income (Loss) from Investees:
Marine Construction Services $ (13.2) $ 7.3 $ 10.7 $ 70.2
Power Generation Systems (0.6) 6.3 (4.7) 7.5
Government Operations 4.3 1.8 4.1 4.3
Industrial Operations (1.5) (1.1) (1.7) 3.4
----------- ----------- ----------- -----------
$ (11.0) $ 14.3 $ 8.4 $ 85.4
=========== =========== =========== ===========
Other Unallocated Expenses (6.5) (1.2) (51.0) (5.3)
General Corporate Expenses - Net (27.7) (26.7) (36.1) (37.2)
----------- ----------- ----------- -----------
$ 74.7 $ 230.4 $ 217.4 $ 355.5
=========== =========== =========== ===========
</TABLE>
B. MARINE CONSTRUCTION SERVICES
General
In January 1995, we organized JRM and contributed substantially all of our
marine construction services business to it. JRM then acquired Offshore
Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger with OPI,
JRM was a wholly owned subsidiary of MII; as a result of the merger, JRM became
a majority-owned subsidiary of MII. In the nine-month period ended December 31,
1999, MII acquired all of the publicly held shares of JRM common stock.
The Marine Construction Services segment's business involves the basic and
detailed design, engineering, fabrication and installation of offshore drilling
and production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. As a strategic operating
decision, JRM has transitioned away from installation, particularly heavy-lift
technology, and moved into deepwater subsea technology. This segment also
provides comprehensive project management services, feasibility studies,
procurement activities, and removal, salvage and refurbishment services for
offshore fixed platforms. This segment operates throughout the world in most
major offshore oil and gas producing regions, including the Gulf of Mexico, the
North Sea, West Africa, South America, the Middle East, India and the Far East.
At December 31, 1999, JRM owned or operated five fabrication facilities
throughout the world. Its principal domestic fabrication yard and offshore base
is located on 1,114 leased acres of land near Morgan City, Louisiana. It also
owns or operates fabrication facilities in the following locations: near Corpus
Christi, Texas; near Inverness, Scotland; in Indonesia on Batam Island; and in
Jebel Ali, U.A.E. JRM also owns and operates a ship repair yard in Veracruz,
Mexico.
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JRM's fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM can fabricate a full range of offshore structures, from
conventional jacket-type fixed platforms to deepwater platform configurations
employing compliant-tower, tension leg, floating production platform and spar
technology. JRM also fabricates platform deck structures and modular components,
including complete production processing systems, hydrocarbon separation and
treatment systems, pressure and flow control systems and personnel quarters.
Expiration dates, including renewal options, of leases covering land for JRM's
fabrication yards at December 31, 1999, were as follows:
<TABLE>
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Morgan City, Louisiana Years 2001-2033
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
</TABLE>
JRM owns a large fleet of marine equipment used in major offshore construction.
The nucleus of a "construction spread" is a large derrick barge, pipelaying
barge or combination derrick-pipelaying barge capable of offshore operations for
an extended period of time in remote locations. At December 31, 1999, JRM owned
or, through ownership interests in joint ventures, had interests in five derrick
vessels, one pipelaying vessel and nine combination derrick-pipelaying vessels.
The lifting capacities of the derrick and combination derrick-pipelaying vessels
range from 800 to 5,000 tons. These vessels range in length from 400 to 698 feet
and are fully equipped with stiff leg or revolving cranes, auxiliary cranes,
welding equipment, pile-driving hammers, anchor winches and a variety of
additional gear. JRM's largest vessel is the semi-submersible derrick barge 101.
JRM owns or leases a substantial number of other vessels, such as tugboats,
utility boats, launch barges and cargo barges, to support the operations of its
major marine construction vessels.
This segment also participates in several joint ventures. We account for these
joint ventures using the equity method. JRM's two most significant joint venture
investments were in the HeereMac joint venture and the McDermott-ETPM joint
venture. Both of these joint ventures have recently terminated.
We formed the HeereMac joint venture with Heerema Offshore Construction Group,
Inc. ("Heerema") in January 1989. The joint venture utilized the specialized,
heavy-lift marine construction vessels that were previously owned by the two
parties. Each party had a 50% interest in the joint venture, and Heerema had
responsibility for its day-to-day operations. On December 19, 1997, JRM and
Heerema terminated the joint venture. Heerema acquired and assumed JRM's 50%
interest in the joint venture in exchange for cash of $318,500,000 and title to
several pieces of equipment. The equipment transferred to JRM included two
launch barges and the derrick barge 101, a 3,500-ton lift capacity,
semi-submersible derrick barge. We accounted for our interest in the HeereMac
joint venture using the cost method beginning April 1, 1997.
We formed our initial joint venture with ETPM S.A., McDermott-ETPM, in April
1989 to provide general marine construction services to the petroleum industry
in West Africa, South America, the Middle East and India and to provide offshore
pipelaying services in the North Sea. In March 1995, JRM and ETPM S.A. expanded
the joint venture's operations to include the Far East and began jointly
pursuing subsea contracting work on a worldwide basis. Most of the operating
companies in the McDermott-ETPM joint venture were majority-owned and controlled
by JRM and were consolidated for financial reporting purposes. However, the
operations of McDermott-ETPM West, Inc., which conducts operations in the North
Sea, South America and West Africa, were managed and controlled by ETPM S.A. As
a result, we accounted for those operations using the equity method. On April 3,
1998, JRM and ETPM S.A. terminated the McDermott-ETPM joint venture. As a result
of the termination, JRM received net cash of approximately $105,000,000 and the
derrick/lay barge 1601 and assumed 100% ownership of McDermott-ETPM East, Inc.
and McDermott-ETPM Far East, Inc. ETPM S.A. received the lay barge 200 and took
ownership of McDermott Subsea Constructors Limited ("MSCL") and McDermott-ETPM
West, Inc.
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JRM participates in other joint ventures involving operations in foreign
countries that require majority ownership by local interests. Through a
subsidiary, JRM also participates in an equally owned joint venture with the
Brown & Root Energy Services unit of Halliburton Company ("Brown & Root"), which
was formed in February 1995 to combine the operations of JRM's Inverness and
Brown & Root's Nigg fabrication facilities in Scotland. In addition, JRM owns a
49% interest in Construcciones Maritimas Mexicanas, S.A. de C.V., a Mexican
joint venture, which provides marine installation services in the Gulf of
Mexico.
In May 1998, JRM sold the Aberdeen-based engineering business of McDermott
Engineering (Europe) Limited and announced its intention to withdraw from
traditional European engineering markets. See Note 17 to our consolidated
financial statements for information relating to these events. JRM retains a
presence in the European markets through Mentor Subsea Technology Services, Ltd.
to focus on subsea opportunities. During the fiscal year ended March 31, 1999,
we announced our intention to withdraw from substantially all third-party
engineering activities.
Foreign Operations
JRM's revenues, net of intersegment revenues, segment income derived from
operations located outside of the United States, and the approximate percentages
to our total consolidated revenues and total consolidated segment income,
respectively, follow:
<TABLE>
<CAPTION>
Revenues Segment Income
Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nine-month period ended December 31, 1999 $ 182,120 10% $ (18,724) --
Fiscal year ended March 31, 1999 $ 731,022 23% $ 129,440 43%
Fiscal year ended March 31, 1998 $ 1,112,685 30% $ 317,482 80%
</TABLE>
Raw Materials
Our Marine Construction Services segment uses raw materials, such as carbon and
alloy steels in various forms, welding gases, concrete, fuel oil and gasoline,
that are available from many sources. JRM is not dependent upon any single
supplier or source for any of these materials. Although shortages of some of
these materials and fuels have existed from time to time, no serious shortage
exists at the present time.
Customers and Competition
Our Marine Construction Services segment's principal customers are oil and gas
companies, including several foreign government-owned companies. These customers
contract with JRM for the design, engineering, fabrication and installation of
offshore drilling and production platforms and other specialized structures,
modular facilities, marine pipelines and subsea production systems. Contracts
are usually awarded on a competitive-bid basis. A number of companies compete
effectively with JRM and its joint ventures in each of the separate marine
construction phases in various parts of the world. Examples are Aker Gulf
Marine, Gulf Island Fabrication, Inc., Hyundai Heavy Industries, Stolt Comex
Seaway S.A., Global Industries Ltd., Saipem S.p.A. and Heerema Offshore
Construction Group, Inc.
Backlog
At December 31, 1999 and March 31, 1999, our Marine Construction Services
segment's backlog amounted to $514,822,000 and $406,183,000, respectively. This
represents approximately 16% of our total consolidated backlog. The increase in
backlog is primarily due to the booking of the West Natuna project for Conoco
Indonesia Inc. This increase was offset by reduced backlog in the Gulf of
Mexico. Of the December 31, 1999 backlog, we expect to recognize approximately
$512,922,000 in revenues in 2000 and $1,900,000 in 2001.
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During the nine-month period ended December 31, 1999, Shell Deepwater
Development, Inc. awarded JRM a contract valued at $80,000,000 for the
fabrication of topsides for the Shell Brutus development. Under the contract,
JRM will fabricate five modules that form the deck: the process, drilling,
power, quarters and wellbay modules. The total weight of the topside will be
approximately 22,000 tons, including all process equipment and the drilling rig.
Also during the nine-month period ended December 31, 1999, JRM was awarded a
$37,000,000 contract for the fabrication, transportation and installation of
offshore platforms, pipelines and cables for Saudi Arabian Oil Company.
JRM has historically performed work on a fixed-price, cost-plus or day-rate
basis or a combination thereof. More recently, certain "partnering-type"
contracts have introduced a risk-and-reward element wherein a portion of total
compensation is tied to the overall performance of the alliance partners. Our
Marine Construction Services segment attempts to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts,
either through an estimate of these changes, which is reflected in the original
price, or through price escalation clauses. Most of JRM's long-term contracts
have provisions for progress payments.
Factors Affecting Demand
Our Marine Construction Services segment's activity depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction. Numerous factors influence these expenditures,
including:
o oil and gas prices, along with the cost of production and delivery,
o the terms and conditions of offshore leases,
o the discovery rates of new reserves offshore,
o the ability of businesses in the oil and gas industry to raise
capital, and
o local and international political and economic conditions.
As a result of continued uncertainty in oil and gas prices and a significant
increase in merger activity, we expect oil and gas company capital exploration
and production budgets for calendar year 2000 will continue at low levels
similar to those in calendar year 1999. Economic and political conditions in
Asia have had an adverse effect on overall exploration and production spending.
C. POWER GENERATION SYSTEMS
General
Our Power Generation Systems segment:
o provides engineered-to-order services, products and systems for energy
conversion worldwide and related industrial equipment, such as
burners, pulverizer mills, soot blowers and ash handlers;
o manufactures heavy-pressure equipment for energy conversion, such as
boilers fueled by coal, oil, bitumen, natural gas, solid municipal
waste, biomass and other fuels;
o fabricates steam generators for nuclear power plants;
o designs and supplies environmental control systems, including both wet
and dry scrubbers for flue gas desulfurization, modules for selective
catalytic reduction of nitrogen oxides and electrostatic precipitators
and similar devices;
o supports operating plants with a wide variety of services, including
the installation of new systems and replacement parts, engineering
upgrades, construction, maintenance and field technical services such
as condition assessments;
o provides inventory services to help customers respond quickly to plant
interruptions and assist construction crews in maintaining and
repairing operating equipment; and
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o provides power through cogeneration, refuse-fueled power plants, and
other independent power-producing facilities and participates in this
market as a contractor for engineer-procure-construct services, as an
equipment supplier, as an operations and maintenance contractor and as
an owner.
Our Power Generation Systems segment's principal manufacturing plants are
located in West Point, Mississippi; Lancaster, Ohio; and Cambridge, Ontario,
Canada. B&W owns each of these plants. It closed its Paris, Texas plant during
the fiscal year ended March 31, 1999. This segment also operates an independent
power facility located in Ebensburg, Pennsylvania. This segment's unconsolidated
affiliates' (equity investees') foreign plants are located in Beijing, China;
Batam Island, Indonesia; Pune, India; and Cairo, Egypt.
Foreign Operations
Our Power Generation Systems segment's revenues, net of intersegment revenues,
segment income derived from operations located outside of the United States, and
the approximate percentages to our total consolidated revenues and total
consolidated segment income, respectively, follow:
<TABLE>
<CAPTION>
Revenues Segment Income
Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nine-month period ended December 31, 1999 $ 154,324 8% $ 14,125 13%
Fiscal year ended March 31, 1999 $ 189,148 6% $ 8,283 3%
Fiscal year ended March 31, 1998 $ 196,831 5% $ 25,694 6%
</TABLE>
This segment engineers and builds products for installation at its United States
and Canadian facilities, as well as at the facilities of this segment's equity
investees in China, Indonesia, India and Egypt.
Raw Materials
Our Power Generations Systems segment uses raw materials such as carbon and
alloy steels in various forms, including plates, forgings, structurals, bars,
sheets, strips, heavy wall pipes and tubes. We also purchase many components and
accessories for assembly. We generally purchase these raw materials and
components as needed for individual contracts. Although shortages of some raw
materials have existed from time to time, no serious shortage exists at the
present time. This segment does not depend on a single source of supply for any
significant raw materials.
Customers and Competition
Our Power Generation Systems segment's principal customers are government- and
investor-owned utilities and independent power producers, businesses in various
process industries, such as pulp and paper mills, petrochemical plants, oil
refineries and steel mills, and other steam-using businesses and institutions.
The electric power generation industry accounted for approximately 33%, 26% and
24% of McDermott's total revenues for the nine-month period ended December 31,
1999 and the fiscal years ended March 31, 1999 and 1998, respectively.
Customers normally purchase services, equipment or systems from our Power
Generation Systems segment after an extensive evaluation process based on
competitive bids. We generally submit proposals based on the estimated cost of
each job.
In this segment we primarily compete with:
o a number of domestic and foreign-based companies specializing in
steam-generating systems, equipment and services, including ABB Asea
Brown Bovari Ltd., Mitsui Babcock Energy Limited, Ahlstrom
Corporation, DB Riley, Inc., Foster Wheeler Corporation and Kvaerner
ASA;
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o a number of additional companies in the markets for environmental
control equipment and related specialized industrial equipment and in
the independent power-producing business; and
o other suppliers of steam systems for replacement parts, repair and
alteration and other services required to backfit and maintain
existing systems.
Backlog
At December 31, 1999 and March 31, 1999, the backlog in our Power Generation
Systems segment amounted to $1,202,695,000 and $905,283,000, or approximately
37% and 35%, respectively, of our total consolidated backlog. Backlog in this
segment increased primarily as a result of new bookings in both service and
original equipment markets. Of the December 31, 1999 backlog, we expect to
recognize approximately $680,892,000 in revenues in 2000, $270,016,000 in 2001
and $251,787,000 thereafter, of which we expect to recognize approximately 86%
in 2002 through 2004.
During the nine-month period ended December 31, 1999, this segment was awarded a
contract providing for over $150,000,000 in revenue from Duke Power to supply
six replacement nuclear steam generators at its Oconee Nuclear Power Station.
This segment was also awarded a $185,000,000 contract from Kansas City Power &
Light to engineer, procure and construct a new pulverized coal-fired boiler
island and the balance of plant equipment at its Hawthorne Station. In addition,
Bechtel International, Inc. awarded this segment a $95,000,000 contract to
fabricate two coal-fired boilers for Integran's Millmerran station in
Queensland, Australia.
If, in our management's judgment, it becomes doubtful whether contracts will
proceed, we adjust our backlog accordingly. If contracts are deferred or
cancelled, we are usually entitled to a financial settlement related to the
individual circumstances of the contract. We typically perform operations and
maintenance contracts over an extended period. As a result, we include an
estimate of the revenues from those contracts in our backlog.
We attempt to cover increased costs of anticipated changes in labor, material
and service costs of our long-term contracts through an estimate of those
changes, which we reflect in the original price. Most of our long-term contracts
contain provisions for progress payments.
Factors Affecting Demand
The activity of this segment depends mainly on the capital expenditures of
electric power generating companies, paper companies and other steam-using
industries. Several factors influence these expenditures:
o prices for electricity and paper, along with the cost of production
and distribution,
o demand for electricity, paper and other end products of
steam-generating facilities,
o availability of other sources of electricity, paper or other end
products,
o requirements for environmental improvements,
o level of capacity utilization at operating power plants, paper mills
and other steam-using facilities,
o requirements for maintenance and upkeep at operating power plants and
paper mills to combat the accumulated effects of wear and tear,
o ability of electric generating companies and other steam users to
raise capital, and
o relative prices of fuels used in boilers, compared to prices for fuels
used in gas turbines and other alternative forms of generation.
In recent years, electric utilities in parts of Asia and the Middle East have
been substantial purchasers of new baseload generating units and environmental
control systems as a result of the growth of their economies and the small
existing stock of electrical generating
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capacity in many developing countries in those regions. A currency crisis, which
began in Southeast Asia in the summer of 1997, has slowed the number of
inquiries and orders. With the international markets in an unsettled condition,
several projects in emerging markets have been delayed, suspended or cancelled.
Our Power Generation Systems segment may be negatively affected if the adverse
economic and political conditions in Southeast Asia continue.
As a result of sustained economic growth in the United States, electric
utilities have invested in maintenance, upkeep and environmental improvements at
their power plants. This demand has led to increased service and environmental
work for our Power Generation Systems segment. During the nine-month period
ended December 31, 1999, the U.S. Environmental Protection Agency sued several
of this segment's customers over the proper classification of this maintenance,
upkeep and environmental improvement. Depending on the course of this
litigation, this segment's U.S. customers may be required to reduce their
investment in maintenance, upkeep and environmental improvements at their
operating power plants.
This segment's systems, products and services are capital intensive. As such,
customer demand is heavily affected by the variations in their business cycles
and by the overall economies of their countries. Availability of funds to this
segment's customers for project financing, investment and maintenance varies
with the conditions of their domestic businesses.
B&W Reorganization
B&W and its subsidiaries conduct most of the operations of our Power Generation
Systems segment. 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 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 products liability. We expect that this
filing will have little effect, if any, on B&W's customers, suppliers, employees
or retirees. We are committed to operating the business as normal, delivering
products and services as usual and pursuing new contracts and growth
opportunities for B&W and its subsidiaries. However, as of February 22, 2000,
the B&W 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.
For additional information concerning these developments, see Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Effect of B&W Chapter 11 Filing and Notes 1, 11 and 20 to the
consolidated financial statements.
D. GOVERNMENT OPERATIONS
General
Our Government Operations segment provides nuclear fuel assemblies and nuclear
reactor components to the U.S. Navy for the Naval Reactors Program. This segment
also supplies other equipment and services to the U.S. Government. It is also
proceeding with new government projects and is exploring new programs that
require the technological capabilities it has developed as a government
contractor. Examples of these activities include environmental restoration
services and the management of government-owned facilities, primarily within the
nuclear weapons complex of the Department of Energy.
This segment's principal plants are located in Lynchburg, Virginia and
Barberton, Ohio. Substantially all of the operations of the Government
Operations segment are performed by BWXT.
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Raw Materials
Our Government Operations segment does not depend on a single source of supply
for any significant raw materials, except for uranium, which the U.S. Government
owns and provides to us for use in the nuclear fuel assemblies we supply for the
Naval Reactors Program.
Customers and Competition
Our Government Operations' segment is the sole supplier to the U.S. Navy of all
nuclear fuel assemblies and major nuclear reactor components for the Naval
Reactors Program. There are a limited number of suppliers of small nuclear
components, with one of our subsidiaries, BWXT, being the largest based on
revenues. Through the operations of this segment, we are also involved along
with other companies in the operation of:
o the Idaho National Engineering and Environmental Laboratory near Idaho
Falls, Idaho;
o the Rocky Flats Environmental Technology Site near Boulder, Colorado;
and
o the Savannah River Site in Aiken, South Carolina.
During the fiscal year ended March 31, 1998, we received a large multi-year
contract from the U.S. Department of Energy as the prime contractor to manage
the environmental remediation and site transition project at its Mound Site in
Miamisburg, Ohio. A BWXT subsidiary, Babcock & Wilcox of Ohio, Inc., began
performing under the contract in October 1997. The contract is subject to annual
funding.
The U.S. Government accounted for approximately 16%, 12% and 10% of our total
consolidated revenues for the nine-month period ended December 31, 1999 and the
fiscal years ended March 31, 1999 and 1998, respectively, including 11%, 8% and
7%, respectively, related to nuclear fuel assemblies and reactor components for
the U.S. Navy.
Backlog
At December 31, 1999 and March 31, 1999, our Government Operations segment's
backlog amounted to $1,151,960,000 and $860,981,000, or approximately 35% and
34%, respectively, of our total consolidated backlog. Of the December 31, 1999
backlog in this segment, we expect to recognize revenues of approximately
$399,507,000 in 2000, $271,104,000 in 2001 and $481,349,000 thereafter, of which
we expect to recognize approximately 88% in 2002 through 2004. At December 31,
1999, this segment's backlog with the U.S. Government was $1,053,826,000 (of
which $9,392,000 had not yet been funded), or approximately 32% of our total
consolidated backlog. The December 31, 1999 U.S. Government backlog includes
only the current year funding for the Department of Energy's Mound Site in
Miamisburg, Ohio. During the nine-month period ended December 31, 1999, the U.S.
Government awarded this segment approximately $500,000,000 of new orders for
aircraft carrier components, new concept steam generators for the newest
submarine design and other non-naval reactor components.
Factors Affecting Demand
This segment's systems are generally capital intensive. This segment may be
impacted by U.S. Government budget restraints.
Even with the maturing of the U.S. Navy's shipbuilding program and recent
reductions in the U.S. Government's defense budget, the demand for nuclear fuel
assemblies and reactor components for the U.S. Navy has continued to comprise a
substantial portion of this segment's backlog. We expect that orders for U.S.
Navy nuclear fuel assemblies and nuclear reactor components will continue to be
a significant part of backlog for the foreseeable future.
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E. INDUSTRIAL OPERATIONS
General
Our Industrial Operations segment includes the results of our engineering and
construction operations, HPC, and MTI. We conduct our engineering and
construction operations primarily through MECL.
MECL provides services, including project management, conceptual and process
design, front-end engineering and design, detailed engineering, procurement,
construction management and contract maintenance services to industries
worldwide, including: oil and gas; power generation; industrial, civil and
marine construction; petrochemical; and pulp and paper. HPC's products include
air-cooled heat exchangers, combination water- and air-cooled systems,
air-cooled vacuum steam condensers, fiberglass-reinforced axial flow fans for
air-cooled heat exchangers and wet cooling towers and fan control systems. MTI
performs research activities for several of our internal operating segments and
markets, negotiates and administers contracts that leverage company research and
development technology needs with external funds.
HPC's principal plant is located near Houston, Texas. One of this segment's
unconsolidated affiliates has a plant in Monterrey, Mexico, which manufactures
axial flow fans and structural components for air-cooled heat exchangers. MTI's
research and development facilities are located in Alliance, Ohio and Lynchburg,
Virginia. MECL's operations are located in Calgary, Alberta, Canada.
Foreign Operations
Our Industrial Operations segment's revenues, net of intersegment revenues,
segment income derived from operations located outside of the United States, and
the approximate percentages to our total consolidated revenues and total
consolidated segment income, respectively, follow:
<TABLE>
<CAPTION>
Revenues Segment Income
Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nine-month period ended December 31, 1999 $ 309,175 16% $ 5,570 5%
Fiscal year ended March 31, 1999 $ 319,937 10% $ 4,592 2%
Fiscal year ended March 31, 1998 $ 195,886 5% $ 90,516 23%
</TABLE>
Raw Materials
Our Industrial Operations segment uses raw materials such as carbon and alloy
steels in various forms, including plates, bars, sheets and pipes, and aluminum
pipes, aluminum strips, fiberglass cloth and epoxy resins. We purchase the
majority of those raw materials and components as needed for individual
contracts. We carry additional quantities of raw materials as base stock for
jobs requiring quick turnaround. Although extended lead times for certain raw
materials have existed from time to time, no serious shortage exists at the
present time, and we do not expect any significant shortage in the foreseeable
future. We do not depend on a single source of supply for any significant raw
materials we use in the operations of this segment.
Customers and Competition
Our Industrial Operations segment's principal customers include oil and natural
gas producers, the electric power generation industry, petrochemical and
chemical processing companies, state and federal government agencies and
nonprofit utility groups.
Our customers typically award equipment orders for items such as air-cooled heat
exchangers after soliciting competitive bids. In both the U.S. and international
markets, this segment competes with a number of domestic and foreign-based
companies specializing in air-cooled heat exchanger equipment. The majority of
the engineering and construction operations contracts we compete for are awarded
in a competitive market in which both price and quality are considerations.
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Backlog
At December 31, 1999 and March 31, 1999, our Industrial Operations segment's
backlog amounted to $415,820,000 and $400,649,000, or approximately 12% and 16%,
respectively, of our total consolidated backlog. Of the December 31, 1999
backlog, we expect that we will recognize approximately $292,534,000 in revenues
in 2000, $93,481,000 in 2001 and $29,805,000 thereafter.
Factors Affecting Demand
The equipment and services we provide through our Industrial Operations segment
are somewhat capital intensive, and the demand for such equipment and services
is affected by variations in the business cycles of this segment's customers'
industries and in the overall economies in their geographic regions. Variations
in business cycles are affected by, among other things, the price of oil.
Legislative and regulatory issues, such as environmental regulation and
fluctuations in U.S. Government funding patterns, also affect the customers of
our Industrial Operations segment. Seasonal plant outages, business cycles and
economic conditions cause variations in availability of funds for investment and
maintenance at customers' facilities.
F. PATENTS AND LICENSES
We currently hold a large number of U.S. and foreign patents and have numerous
pending patent applications. We have acquired patents and licenses and granted
licenses to others when we have considered it advantageous for us to do so.
Although in the aggregate our patents and licenses are important to us, we do
not regard any single patent or license or group of related patents or licenses
as critical or essential to our business as a whole. In general, we depend on
our technological capabilities and the application of know-how rather than
patents and licenses in the conduct of our various businesses.
G. RESEARCH AND DEVELOPMENT ACTIVITIES
We conduct our principal research and development activities at our research
centers in Alliance, Ohio and Lynchburg, Virginia. We also conduct development
activities at our various manufacturing plants and engineering and design
offices. Our research and development activities cost approximately $35,534,000,
$28,064,000 and $37,928,000 in the nine-month period ended December 31, 1999 and
the fiscal years ended March 31, 1999 and 1998, respectively. Contractual
arrangements for customer-sponsored research and development can vary on a
case-by-case basis and include contracts, cooperative agreements and grants. Of
our total research and development expenses, our customers paid for
approximately $18,487,000, $15,752,000 and $22,803,000 in the nine-month period
ended December 31, 1999 and the fiscal years ended March 31, 1999 and 1998,
respectively. Our research and development activities are related to developing
and improving new and existing products and equipment and conceptual and
engineering evaluation for translation into practical applications. We
constructed our multi-million dollar clean environment development facility in
Alliance, Ohio in response to present and future emission pollution standards in
the U.S. and worldwide. At December 31, 1999, we had approximately 160 employees
engaged full time in research and development activities.
H. INSURANCE
We maintain liability and property insurance in amounts we consider adequate for
those risks we consider necessary. Some risks are not insurable or insurance to
cover them is available only at rates that we consider uneconomical. These risks
include war and confiscation of property in some areas of the world, pollution
liability in excess of relatively low limits and, in recent years, asbestos
liability. Depending on competitive conditions and other factors, we endeavor to
obtain contractual protection against uninsured risks from our customers.
Insurance or contractual indemnity protection, when obtained, may not be
sufficient or effective under all circumstances or against all hazards to which
we may be subject.
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Our insurance policies do not insure against liability and property damage
losses resulting from nuclear accidents at reactor facilities of our utility
customers. To protect against liability for damage to a customer's property, we
obtain waivers of subrogation from the customer and its insurer and are usually
named as an additional insured under the utility customer's nuclear property
policy. To protect against liability from claims brought by third parties, we
are insured under the utility customer's nuclear liability policies and have the
benefit of the indemnity and limitation of any applicable liability provision of
the Price-Anderson Act. The Price-Anderson Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of a certain amount. This amount is determined by the sum of commercially
available liability insurance plus certain retrospective premium assessments
payable by operators of commercial nuclear reactors. For those sites where we
provide environmental remediation services, we seek the same protection from our
customers as we do for our other nuclear activities.
Although we do not own or operate any nuclear reactors, we have coverage under
commercially available nuclear liability and property insurance for three of our
four facilities that are licensed to possess special nuclear materials. The
fourth facility operates primarily as a conventional research center. This
facility is licensed to possess special nuclear material and has a small and
limited amount of special nuclear material on the premises. Two of our four
facilities are located at MTI's Lynchburg, Virginia site. These facilities are
insured under a nuclear liability policy that also insures the facility of
Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company, which we sold
during the fiscal year ended March 31, 1993. All three licensed facilities share
the same nuclear liability insurance limit, as the commercial insurer would not
allow FCFC to obtain a separate nuclear liability insurance policy. Due to the
type or quantity of nuclear material present under contract with the U.S.
Government, the two facilities in Lynchburg have statutory indemnity and
limitation of liability under the Price-Anderson Act. In addition, our contracts
to manufacture and supply nuclear fuel or nuclear components to the U.S.
Government contain statutory indemnity clauses under which the U.S. Government
has assumed the risks of public liability claims related to nuclear incidents.
JRM's offshore construction business is subject to the usual risks of operations
at sea. JRM has additional exposure because it uses expensive construction
equipment, sometimes under extreme weather conditions, often in remote areas of
the world. In many cases, JRM also operates on or in proximity to existing
offshore facilities. These facilities are subject to damage that could result in
the escape of oil and gas into the sea.
As a result of the asbestos contained in commercial boilers that B&W sold in
prior decades, B&W is subject to a substantial volume of nonemployee products
liability claims asserting asbestos-related injuries. The vast majority of these
claims relate to exposure to asbestos occurring prior to 1977, the year in which
the U.S. Occupational Safety and Health Administration adopted new regulations
that impose liability on employers for, among other things, job-site exposure to
asbestos.
B&W received its first products liability asbestos claims in 1983. Initially,
B&W's primary insurance carrier, a unit of Travelers Group, handled the claims.
B&W exhausted the limits of its primary insurance coverage in 1989. Since then,
B&W has been handling the claims under a claims-handling program funded
primarily by reimbursements from its excess-coverage insurance carriers. B&W's
excess coverage available for asbestos-related products liability claims runs
from 1949 through March 1986. This coverage has been provided by a total of 136
insurance companies. B&W obtained varying amounts of excess-coverage insurance
for each year within that period, and within each year there are typically
several increments of coverage. For each of those increments, a syndicate of
insurance companies has provided the coverage.
B&W has agreements with the majority of its excess-coverage insurers concerning
the method of allocating products liability asbestos claim payments to the years
of coverage under the applicable policies. We have reflected our estimates of
B&W's liability and its related insurance recoveries as accruals in our
consolidated financial statements. We review these accruals at the end of
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<PAGE> 18
each quarter. To the extent the estimated liability has exceeded the estimated
insurance recoveries, we have recorded a charge against earnings. See Note 11 to
the consolidated financial statements regarding B&W's potential liability for
non-employee products liability asbestos claims.
We have two wholly owned insurance subsidiaries that provide general and
automotive liability, builders' risk within certain limits, marine hull and
workers' compensation insurance to our companies. These insurance subsidiaries
have not provided significant amounts of insurance to unrelated parties.
I. EMPLOYEES
At December 31, 1999, we employed approximately 17,500 persons compared with
20,350 at March 31, 1999. Approximately 6,000 of our employees were members of
labor unions at December 31, 1999, as compared with approximately 7,000 at March
31, 1999. The majority of B&W's and BWXT's manufacturing facilities operate
under union contracts, which we customarily renew every two to three years.
After nine months of negotiations between BWXT and one of its unions, BWXT
temporarily discontinued operations for its nuclear equipment division's union
workforce at its Barberton, Ohio facility on April 23, 1999, because of the
union's refusal to vote on a new labor contract. The union ratified BWXT's final
offer on May 9, 1999, and the union workers returned to work. Three additional
union contracts covering approximately 210 hourly workers at one of B&W's
facilities expired in the nine-month period ended December 31, 1999. The union
workforce ratified the contracts after a twelve-week work stoppage. We have two
union contracts expiring in the next twelve months. We expect to renew our union
contracts without incident. However, if we are unable to negotiate acceptable
new contracts with our unions in the future, we could experience strikes or
other work stoppages by the affected employees, and new contracts could result
in increased operating costs attributable to both union and non-union employees.
If any such strikes or other work stoppages were to occur, or if our other
employees were to become represented by unions, we could experience a
significant disruption of our operations and higher ongoing labor costs.
Currently, we consider our relationship with our employees to be satisfactory.
J. ENVIRONMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A wide range of federal, state, local and foreign laws, ordinances and
regulations apply to our operations, including those relating to:
o constructing and equipping electric power and other industrial
facilities;
o possessing and processing special nuclear materials;
o workplace health and safety; and
o protection of the environment.
We cannot determine the extent to which new legislation, new regulations or
changes in existing laws or regulations may affect our future operations.
Our operations are subject to the existing and evolving legal and regulatory
standards relating to the environment. These standards include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
and similar laws that provide for responses to and liability for releases of
hazardous substances into the environment. These standards also include similar
foreign, state or local counterparts to these federal laws, which regulate air
emissions, water discharges, hazardous substances and waste, and require public
disclosure related to the use of various hazardous substances. Our operations
are also governed by laws and regulations relating to workplace safety and
worker health, primarily the Occupational Safety and Health Act and regulations
promulgated thereunder. We believe that our facilities are in substantial
compliance with current regulatory standards.
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Our compliance with U.S. federal, state and local environmental control and
protection regulations necessitated capital expenditures of $272,000 in the
nine-month period ended December 31, 1999. We expect to spend another $1,765,000
on such capital expenditures over the next five years. Complying with existing
environmental regulations resulted in pretax charges of approximately $7,915,000
in the nine-month period ended December 31, 1999. We cannot predict all of the
environmental requirements or circumstances that will exist in the future but
anticipate that environmental control and protection standards will become
increasingly stringent and costly.
We have been identified as a potentially responsible party at various cleanup
sites under CERCLA. CERCLA and other environmental laws can impose liability for
the entire cost of cleanup on any of the potentially responsible parties,
regardless of fault or the lawfulness of the original conduct. Generally,
however, where there are multiple responsible parties, a final allocation of
costs is made based on the amount and type of wastes disposed of by each party
and the number of financially viable parties, although this may not be the case
with respect to any particular site. We have not been determined to be a major
contributor of wastes to any of these sites. On the basis of our relative
contribution of waste to each site, we expect our share of the ultimate
liability for the various sites will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity in any given
year.
Environmental remediation projects have been and continue to be undertaken at
certain of our current and former plant sites. During the fiscal year ended
March 31, 1995, we decided to close B&W's nuclear manufacturing facilities in
Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities") and B&W
proceeded to decommission the facilities in accordance with its existing Nuclear
Regulatory Commission ("NRC") license. B&W subsequently transferred the
facilities to BWXT in the fiscal year ended March 31, 1998. During the fiscal
year ended March 31, 1999, BWXT reached an agreement with the NRC on a plan that
provides for the completion of facilities dismantlement and soil restoration by
2001 and license termination in 2002. BWXT expects to request approval from the
NRC to release the site for unrestricted use at that time. At December 31, 1999,
the remaining provision for the decontamination, decommissioning and closing of
these facilities was $8,698,000. For a discussion of certain civil litigation we
are involved in concerning the Parks Facilities, see "Item 3--Legal
Proceedings."
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination resulting from previous
operations at the facilities. BWXT now owns these facilities. PADEP has advised
BWXT that it does not intend to assess any monetary sanctions, provided that
BWXT continues its remediation program for the Parks Facilities.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these activities,
we are subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
The NRC's decommissioning regulations require BWXT and MTI to provide financial
assurance that they will be able to pay the expected cost of decommissioning
their facilities at the end of their service lives. BWXT and MTI will continue
to provide financial assurance aggregating $39,327,000 during the fiscal year
ending December 31, 2000 by issuing letters of credit for the ultimate
decommissioning of all their licensed facilities, except one. This facility,
which represents the largest portion of BWXT's eventual decommissioning costs,
has provisions in its government contracts pursuant to which all of its
decommissioning costs and financial assurance obligations are covered by the
U.S. Department of Energy.
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI's NRC licenses for byproduct and source nuclear material was
finalized in December 1999. In conjunction with the transfer of this regulatory
authority and upon notification by NRC, MTI issued decommissioning financial
assurance instruments naming the State of Ohio as the beneficiary.
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At December 31, 1999 and March 31, 1999, we had total environmental reserves
(including provisions for the facilities discussed above), of $23,391,000 and
$31,568,000, respectively. Of our total environmental reserves at December 31,
1999 and March 31, 1999, $11,787,000 and $19,835,000, respectively, were
included in current liabilities. Our estimated recoveries of these costs are
included in environmental and products liability recoverable at December 31,
1999. Inherent in the estimates of those reserves and recoveries are our
expectations regarding the levels of contamination, decommissioning costs and
recoverability from other parties, which may vary significantly as
decommissioning activities progress. Accordingly, changes in estimates could
result in a material adjustment to our operating results, and the ultimate loss
may differ materially from the amounts we have provided for in our consolidated
financial statements.
K. 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 Transition Report on Form 10-K 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. Those forward-looking statements appear in Items 1 and 2 - "Business
and Properties" and Item 3 - "Legal Proceedings" in Part I of this report and in
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the notes to our consolidated financial statements
in Item 8 of Part II of this report and elsewhere in this report. These
forward-looking statements speak only as of the date of this report, we disclaim
any obligation to update these statements, and we caution you not to unduly rely
on them. We have based these forward-looking statements on our current
expectations and assumptions about future events. While our management considers
these expectations and assumptions to be reasonable, they are inherently subject
to significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:
o general economic and business conditions and industry trends;
o the continued strength of the industries in which we are involved;
o decisions about offshore developments to be made by oil and gas
companies;
o the deregulation of the U.S. electric power market;
o the highly competitive nature of our businesses;
o our future financial performance, including availability, terms and
deployment of capital;
o the continued availability of qualified personnel;
o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings, including the results of ongoing governmental
investigations and related civil lawsuits involving alleged
anticompetitive practices in our marine construction business;
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o estimates for pending and future nonemployee asbestos claims against
B&W and potential adverse developments that may occur in the recently
commenced Chapter 11 reorganization proceedings involving B&W and
certain of its subsidiaries;
o changes in existing environmental regulatory matters;
o rapid technological changes;
o continuing uncertainties relating to the recent change over to the
year 2000;
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.
Item 3. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the Department of Justice that they and others had
participated in a conspiracy to rig bids in connection with the heavy-lift
business of HeereMac in the Gulf of Mexico, the North Sea and the Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
In July 1999, a former JRM officer was indicted by the Department of Justice for
participating in an international bid-rigging conspiracy for the sale of marine
construction services and pled guilty.
We have cooperated with the Department of Justice in its investigation. The
Department of Justice also has requested additional information from us relating
to possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with
17
<PAGE> 22
the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM
assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J.
Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates and others, alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants (collectively
"Statoil"), filed a similar lawsuit in the same court (the "Statoil
Litigation"). In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil
Litigation have requested punitive as well as treble damages. In January 1999,
the court dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects. In July 1999, the court dismissed the Statoil
Litigation for lack of subject matter jurisdiction. In August 1999, Statoil
filed its notice of appeal of the dismissal. In September 1999, the Phillips
Plaintiffs filed notice of their request to dismiss their remaining claims in
the lawsuit. That motion is pending.
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. and 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. and 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.
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.
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<PAGE> 23
B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F.
Hall, Mary Ann Hall and others in the United States District Court for the
Western District of Pennsylvania, involving approximately 300 separate cases
relating to the operation of two former nuclear fuel processing facilities
located in Pennsylvania (the "Hall Litigation"), alleging, among other things,
that they suffered personal injury and property damages as a result of
radioactive emissions from these facilities. In September 1998, a jury found B&W
and Atlantic Richfield Company liable to the first eight plaintiffs brought to
trial, awarding $36,700,000 in compensatory damages. In June 1999, the court set
aside the judgement and ordered a new trial on all issues. Recently, the 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. We do not expect any further trials on the other cases until a decision
is rendered on the appeal. There is a controversy between B&W and its insurers
as to the amount of insurance coverage under the insurance policies covering
these facilities. B&W has filed an action seeking a judicial determination of
this matter, which is currently pending in a Pennsylvania court. We believe that
any award and all other claims 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 potential liability exceeds our
coverage. In connection with the foregoing, B&W settled all pending and future
punitive damage claims represented by the plaintiffs' lawyers in the Hall
Litigation for $8,000,000 and seeks reimbursement of this amount from other
parties.
From December 1999 through February 2000, several persons who allegedly
purchased shares of our common stock during the period from May 21, 1999 through
November 11, 1999 filed four purported class action complaints against MII and
two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the
United States District Court for the Eastern District of Louisiana. Each of
these complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. We filed motions to
dismiss three of these complaints for failure to state a claim on which relief
can be granted, before they were consolidated before one federal judge in New
Orleans. The fourth case has now been consolidated with the others. The
plaintiffs have been allowed to file a consolidated amended complaint, which we
will respond to after it has been filed. We believe the substantive allegations
contained in the original complaints are without merit and intend to defend
against these and any substantively similar claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and recently JRM instituted an arbitration
proceeding against Texaco seeking the amount owed. Texaco has countered,
claiming damages for delays resulting from the incident, as well as costs
incurred to complete the project with another contractor. Texaco has also filed
a lawsuit against a number of other parties, claiming that they are responsible
for the incident. It is our position that the installation contract between the
parties prohibits Texaco's claims against JRM and JRM is entitled to the amount
withheld.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes or claims will have a
material adverse effect on our consolidated financial position or results of
operations.
See Items 1. and 2. H and Note 11 to the consolidated financial statements
regarding B&W's potential liability for non-employee products liability asbestos
claims and the Chapter 11 reorganization proceedings recently commenced by B&W
and certain of its subsidiaries.
19
<PAGE> 24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of security holders, through the
solicitation of proxies or otherwise during the quarter ended December 31, 1999.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the New York Stock Exchange. High and low stock
prices and dividends we declared in the fiscal year ended March 31, 1999 and the
nine-month period ended December 31, 1999 were as follows:
FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
SALES PRICE CASH
----------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- --------
<S> <C> <C> <C>
June 30, 1998 $ 43 - 15/16 $ 34 - 3/8 $ 0.05
September 30, 1998 $ 35 $ 19 - 1/4 $ 0.05
December 31, 1998 $ 32 - 5/16 $ 21 - 31/32 $ 0.05
March 31, 1999 $ 27 $ 19 - 1/4 $ 0.05
</TABLE>
NINE-MONTH PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SALES PRICE CASH
----------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- --------
<S> <C> <C> <C>
June 30, 1999 $ 32 - 1/2 $ 24 $ 0.05
September 30, 1999 $ 29 - 7/16 $ 19 - 3/8 $ 0.05
December 31, 1999 $ 20 - 3/4 $ 7 - 1/4 $ 0.05
</TABLE>
As of December 31, 1999, there were approximately 4,396 record holders of our
common stock.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the
Nine-Month
Period Ended
December 31, For the Fiscal Years Ended March 31,
1999 1998 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,891,088 $2,400,617 $3,149,985 $3,674,635 $3,150,850 $3,244,318
Income (Loss) before Extraordinary Item $ 440 $ 215,465 $ 192,081 $ 215,690 $ (206,105) $ 20,625
Net Income (Loss) $ 440 $ 215,465 $ 153,362 $ 215,690 $ (206,105) $ 20,625
Basic Earnings (Loss) per Common Share:
Income (Loss) before Extraordinary Item $ 0.01 $ 3.65 $ 3.25 $ 3.74 $ (3.95) $ 0.23
Net Income (Loss) $ 0.01 $ 3.65 $ 2.60 $ 3.74 $ (3.95) $ 0.23
Diluted Earnings (Loss) per Common Share:
Income (Loss) before Extraordinary Item $ 0.01 $ 3.50 $ 3.16 $ 3.48 $ (3.95) $ 0.23
Net Income (Loss) $ 0.01 $ 3.50 $ 2.53 $ 3.48 $ (3.95) $ 0.23
Total Assets $3,874,891 $3,853,457 $4,305,520 $4,501,130 $4,599,482 $4,387,251
Long-Term Debt $ 323,014 $ 567,802 $ 323,774 $ 598,182 $ 667,174 $ 576,256
Subsidiary's Redeemable Preferred Stocks -- -- -- 155,358 170,983 173,301
---------- ---------- ---------- ---------- ---------- ----------
Total $ 323,014 $ 567,802 $ 323,774 $ 753,540 $ 838,157 $ 749,557
Cash Dividends per Common Share $ 0.15 $ 0.15 $ 0.20 $ 0.20 $ 0.60 $ 1.00
</TABLE>
20
<PAGE> 25
See Note 18 to the consolidated financial statements for significant items
included in the nine-month period ended December 31, 1999 and the fiscal year
ended March 31, 1999.
Our results for the fiscal year ended March 31, 1998 include:
o a gain of $96,059,000 from the sale of our interest in Sakhalin Energy
Investment Company, Ltd.;
o a gain of $33,072,000 from the sale of our interest in Universal
Fabricators Incorporated;
o a gain of $223,651,000 and a $61,637,000 distribution of earnings from
the termination of the HeereMac joint venture;
o impairment losses of $285,427,000, including a write-off of goodwill
associated with the acquisition of OPI of $262,901,000; and
o a $5,419,000 provision for employee severance costs.
Our results for the fiscal year ended March 31, 1997 include:
o asset impairment losses of $54,642,000;
o gains on asset disposals of $72,121,000, including the realization of
$12,271,000 of the deferred gain on the sale of major marine vessels
to HeereMac;
o favorable workers' compensation cost adjustments and other insurance
adjustments of $21,441,000;
o a provision of $72,400,000 for estimated future non-employee products
liability asbestos claims;
o write-downs of equity investments totaling $25,875,000;
o the $12,506,000 write-down of certain claims for which recovery was
not probable; and
o a $10,285,000 provision related to employee severance costs.
Our results for the fiscal year ended March 31, 1996 include:
o an equity income gain of $30,612,000 resulting from the sale of two
power purchase contracts;
o favorable workers' compensation cost adjustments and other insurance
adjustments of $24,640,000;
o a gain of $34,788,000 resulting from the sale of our interest in
Caspian Sea oil fields; and
o the write-off of an insurance claim of $12,600,000 due to an
unfavorable arbitration ruling related to the recovery of cost
incurred for corrective action in certain utility and industrial
installations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS WE MAKE IN THE FOLLOWING DISCUSSION WHICH EXPRESS A BELIEF,
EXPECTATION OR INTENTION, AS WELL AS THOSE THAT ARE NOT HISTORICAL FACT, ARE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS, UNCERTAINTIES AND
ASSUMPTIONS. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, OR INDUSTRY
RESULTS, COULD DIFFER MATERIALLY FROM THOSE WE EXPRESS IN THE FOLLOWING
DISCUSSION AS A RESULT OF A VARIETY OF FACTORS, INCLUDING THE RISKS AND
UNCERTAINTIES WE HAVE REFERRED TO UNDER THE HEADING "CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS" IN ITEMS 1 AND 2 OF PART I OF THIS
REPORT.
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 increased significantly in recent months, there
is a continued uncertainty in the stability of oil and gas prices and a
significant increase in oil company merger activity. As a result, we expect that
our Marine Construction Services' customers' exploration and production spending
will not increase significantly during the next year. 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.
21
<PAGE> 26
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 and its subsidiaries conduct
substantially all of the operations of our Power Generation Systems segment. As
previously discussed, 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 to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. We expect that this filing will have little effect, if any, on
our customers, suppliers, employees or retirees. However, due to the bankruptcy
filing, the B&W operations are subject to the jurisdiction of the Bankruptcy
Court and, as a result, our access to the cash flows of B&W is restricted.
Effective February 22, 2000 and until B&W and the other filing subsidiaries
emerge from the reorganization, we will no longer consolidate B&W's and its
subsidiaries' results of operations in our consolidated financial statements and
our investment in B&W will be presented on the cost method. Accordingly, until
B&W and its filing subsidiaries emerge from the jurisdiction of the bankruptcy
court and the subsequent accounting is determined, Power Generation Systems will
no longer be a reportable segment. See further discussion of the impact of the
filing on our operations in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Effect of B&W Chapter 11 Filing.
The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. Government. As a result of reductions in the
defense budget over the past several years, we do not expect this segment to
experience any significant growth in the next three years. We expect this
segment's backlog to remain relatively constant since it is the sole supplier to
the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components
for the Naval Reactors Program. We currently expect the 2000 operating activity
of this segment will be about the same as in 1999.
The revenues of our Industrial Operations segment are affected by variations in
the business cycles in its customers' industries and the overall economy.
Legislative and regulatory issues such as environmental 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.
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 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.
22
<PAGE> 27
NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 VS. NINE-MONTH PERIOD ENDED
DECEMBER 31, 1998 (UNAUDITED)
Marine Construction Services
Revenues decreased $542,280,000 to $490,719,000 due to lower volume in
essentially all geographic areas.
Segment operating income decreased $83,121,000 to $31,078,000, primarily due to
the lower volume and the amortization of the goodwill associated with our
purchase of the public minority interest in JRM. These decreases were partially
offset by higher margins in North American offshore activities, higher margins
in Middle Eastern procurement activities and lower general and administrative
expenses.
Gain (loss) on asset disposals and impairments - net decreased $40,501,000 from
a gain of $38,849,000 to a loss of $1,652,000. The gain in the prior period was
primarily due to the termination of the McDermott-ETPM joint venture and the
sale of three vessels.
Income (loss) from investees decreased $20,543,000 from income of $7,335,000 to
a loss of $13,208,000, primarily due to lower operating results from our Mexican
joint venture and the gain we realized in the prior period on the sale of assets
in a Malaysian joint venture.
Backlog for the Marine Construction Services segment at December 31, 1999 and
March 31, 1999 was $514,822,000 and $406,183,000, respectively. The backlog
increased primarily because of the contract Conoco Indonesia, Inc. awarded us
relating to the West Natuna pipeline transportation system project.
Power Generation Systems
Revenues decreased $45,590,000 to $729,969,000, primarily due to lower volumes
from the fabrication, repair and retrofit of existing facilities, boiler
cleaning equipment, private power systems projects and industrial boilers. These
decreases were partially offset by higher volumes from replacement parts,
nuclear services and replacement nuclear steam generators.
Segment operating income decreased $4,914,000 to $52,095,00, primarily due to
lower volumes and margins from boiler cleaning equipment and private power
systems projects, lower margins from the fabrication and erection of fossil fuel
steam and environmental control systems and a lower volume of sales of
industrial boilers. In addition, this segment's selling and marketing expenses
were higher. These decreases in segment operating income were partially offset
by higher volumes and margins from replacement parts and nuclear services and
higher margins from fabrication, repair and retrofit services provided for
existing facilities.
Income (loss) from investees decreased $6,893,000 from income of $6,255,000 to a
loss of $638,000, primarily due to lower operating results in three foreign
joint ventures and a payment we made relating to our decision to exit a joint
venture in Turkey. These decreases were partially offset by higher operating
results from a joint venture operating in Pennsylvania.
Backlog for our Power Generation Systems segment at December 31, 1999 and March
31, 1999 was $1,202,695,000 and $905,283,000, respectively. Suspensions of power
projects in Southeast Asia and Pakistan have adversely impacted this segment's
backlog. In addition, the U.S. market for industrial and utility boilers remains
weak. However, we expect the U.S. market for services and replacement nuclear
steam generators to remain strong and continue making significant contributions
to our operating income.
Government Operations
Revenues increased $15,793,000 to $306,282,000, primarily due to higher volumes
from management and operation contracts for U.S. Government-owned facilities,
nuclear fuel assemblies and reactor components for the U.S. Government and other
government operations.
23
<PAGE> 28
Segment operating income increased $9,710,000 to $28,581,000, primarily due to
the $8,000,000 settlement we recorded in the prior period for punitive damages
in a civil suit associated with a formerly operated Pennsylvania facility. We
also generated higher margins from our commercial nuclear environmental
services. These increases were partially offset by the lower margins we received
from management and operation contracts for U.S. Government-owned facilities and
other government operations.
Income from investees increased $2,498,000 to $4,322,000, primarily due to
higher operating results from three joint ventures.
Backlog for our Government Operations segment at December 31, 1999 and March 31,
1999 was $1,151,960,000 and $860,981,000, respectively. At December 31, 1999,
this segment's backlog with the U.S. Government was $1,053,826,000, of which
$9,392,000 had not yet been funded.
Industrial Operations
Revenues increased $60,984,000 to $366,582,000, primarily due to higher volumes
of engineering and plant maintenance activities in our Canadian operations.
These increases were partially offset by lower sales volumes from air-cooled
heat exchangers and parts.
Segment operating income decreased $5,660,000 to $8,513,000, primarily due to
lower sales volumes and margins from air-cooled heat exchangers and parts and
higher general and administrative expenses. These decreases in operating income
were partially offset by the increased volume of engineering and plant
maintenance activities in our Canadian operations and reduced selling and
marketing expenses.
Backlog for Industrial Operations at December 31, 1999 and March 31, 1999 was
$415,820,000 and $400,649,000, respectively.
Other Unallocated Expenses
Other unallocated expenses increased $5,280,000 to $6,509,000, primarily due to
higher research and development and legal expenses. These increases were
partially offset by lower employee benefit expenses.
Other Income Statement Items
Interest income decreased $46,541,000 to $32,126,000, primarily due to interest
income we recorded on settlement of disputed tax items with the IRS in the prior
period and decreases in investments.
Interest expense decreased $13,394,000 to $35,743,000, primarily due to
reductions in debt obligations and prevailing interest rates.
Minority interest expense decreased $55,690,000 to $5,679,000, primarily due to
our purchase of the remaining publicly held shares of JRM by MII.
Our provision for income taxes increased $18,135,000 to $34,658,000, while our
income before the provision for income taxes decreased $196,890,000 to
$35,098,000. The change in the relationship of pretax income to the provision
for income taxes primarily resulted from (1) a decrease in our tax expense of
$17,925,000 in the prior period due to the change in our valuation allowance for
deferred tax assets and (2) $21,367,000 we recorded in the prior year as a
result of favorable tax settlements of disputed items in foreign jurisdictions.
A decrease in income in non-tax jurisdictions also contributed to the change.
The provision for the nine-month period ended December 31, 1999 reflects a
non-deductible loss of $37,810,000 on the curtailment of a foreign pension plan
and non-deductible amortization of goodwill of $9,929,000 created by the premium
we paid on the acquisition of the minority interest in JRM. We operate in many
different tax jurisdictions. Within these jurisdictions, tax provisions vary
because of nominal rates, allowability of deductions, credits and other
24
<PAGE> 29
benefits and tax basis (for example, revenues versus income). These variances,
along with variances in our mix of income from these jurisdictions, are
responsible for shifts in our effective tax rate.
FISCAL YEAR ENDED MARCH 31, 1999 VS. FISCAL YEAR ENDED MARCH 31, 1998
Marine Construction Services
Revenues decreased $575,916,000 to $1,279,570,000, primarily due to lower volume
in Europe as a result of the withdrawal from the traditional European
engineering markets and from lower volume in essentially all activities in North
America, the Middle East and in worldwide engineering. These decreases were
partially offset by higher volume in the Far East.
Segment operating income increased $19,360,000 to $126,482,000, primarily due to
higher volume and margins in all this segment's activities in the Far East and a
favorable settlement of contract claims in that area. There were also higher
margins in our Middle East fabrication operations and lower general and
administrative expenses. In addition, the prior period results included
amortization of OPI goodwill of $16,318,000. These increases were partially
offset by lower volume in essentially all activities in North America and the
Middle East and in worldwide engineering. There were also higher net operating
expenses and a charge to restructure foreign joint ventures.
Gain (loss) on asset disposals and impairments-net was a gain of $18,620,000
compared to a loss of $40,119,000 in the prior period. This was primarily due to
gains recognized from the termination of the McDermott-ETPM joint venture and
the sale of three Gulf of Mexico vessels, partially offset by impairment losses
on fabrication facilities and goodwill associated with worldwide engineering and
a Mexican shipyard. The loss in the prior period was primarily due to the
write-off of $262,901,000 of goodwill associated with the acquisition of OPI,
partially offset by the $224,472,000 gain recognized from the termination of the
HeereMac joint venture.
Income from investees decreased $59,566,000 to $10,670,000, primarily due to a
$61,637,000 distribution of earnings related to the termination of the HeereMac
joint venture in the prior period. There were also lower operating results from
Brown & Root McDermott Fabricators Limited and a joint venture in Mexico. These
decreases were partially offset by a gain on the sale of assets in a Malaysian
joint venture. In addition, McDermott-ETPM West, Inc. recorded losses in the
prior period.
Power Generation Systems
Revenues decreased $76,504,000 to $1,066,217,000, primarily due to lower
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, replacement nuclear steam generators and industrial boilers.
These decreases were partially offset by higher revenues from repair and
alteration of existing fossil fuel steam systems and plant enhancement projects.
Segment operating income increased $7,887,000 to $90,318,000, primarily due to
higher volume and margins from repair and alteration of existing fossil fuel
steam systems and operation and maintenance contracts. There were also higher
margins from industrial boilers, higher volume from plant enhancement projects
and lower net operating expenses. These increases were partially offset by lower
volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems, lower volume from replacement nuclear steam
generators and higher general and administrative expenses.
Gain (loss) on asset disposals and impairments-net increased $10,551,000 to a
gain of $4,465,000 compared to a loss of $6,086,000 in the prior period. The
gain was primarily due to gains recognized from the sale of a domestic
manufacturing facility. The loss in the prior period was primarily due to asset
impairments in this facility.
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Income (loss) from investees decreased $12,274,000 from income of $7,541,000 to
a loss of $4,733,000, primarily due to lower operating results from a foreign
joint venture located in Egypt and the write-off of notes and accounts
receivable from a foreign joint venture located in Turkey.
Government Operations
Revenues increased $12,187,000 to $382,706,000, primarily due to higher revenues
from management and operation contracts for U.S. Government-owned facilities.
These increases were partially offset by lower revenues from commercial
operations, commercial nuclear environmental services, other government
operations and nuclear fuel assemblies and reactor components for the U.S.
Government.
Segment operating income increased $3,537,000 to $39,353,000, primarily due to a
settlement relating to environmental restoration costs. In addition, there was
higher volume from management and operation contracts for U.S. Government-owned
facilities and lower general and administrative expenses. These increases were
partially offset by a lower volume and margin from nuclear fuel assemblies and
reactor components for the U.S. Government and a lower margin from commercial
nuclear environmental services. In addition, there was an $8,000,000 settlement
of punitive damage claims relating to a civil suit associated with a
Pennsylvania facility formerly operated by B&W.
Industrial Operations
Revenues increased $89,733,000 to $427,520,000, primarily due to higher revenues
from engineering activities in Canadian operations. This increase was partially
offset by lower revenues from domestic engineering and construction activities
and from the disposition of a non-core business.
Segment operating income increased $12,227,000 to $16,906,000, primarily due to
higher volume from engineering activities in Canadian operations and higher
margins from air-cooled heat exchangers. There were also losses in a non-core
business disposed of in the prior period. These increases were partially offset
by higher general and administrative expenses.
Gain (loss) on asset disposals and impairments-net decreased $128,473,000 from
income of $128,239,000 to a loss of $234,000. The prior period gains were
primarily due to the sale of our interests in Sakhalin Energy Investment Company
Ltd. and Universal Fabricators Incorporated.
Income (loss) from investees decreased by $5,022,000 from income of $3,376,000
to a loss of $1,646,000, primarily due to lower operating results from a
domestic joint venture in Colorado and the shutdown of two foreign joint
ventures in the former Soviet Union.
Other Unallocated Expenses
Other unallocated expenses increased $45,719,000 to $51,005,000, primarily due
to provisions for estimated future non-employee products liability asbestos
claims, higher legal expenses and higher general and administrative expenses.
These increases were partially offset by lower employee benefit expenses.
Other Income Statement Items
Interest income increased $35,430,000 to $97,965,000, primarily due to increases
in investments in government obligations and other debt securities and interest
income on domestic tax refunds. These increases were partially offset by a
decrease in interest income due to the collection of a promissory note received
from the sale of the derrick barges 101 and 102.
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<PAGE> 31
Interest expense decreased $18,192,000 to $63,262,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Other-net decreased $46,917,000 from income of $6,178,000 to expense of
$40,739,000, primarily due to a loss of $45,535,000 for insolvent insurers
providing coverage for estimated future non-employee products liability asbestos
claims.
The provision for (benefit from) income taxes decreased $80,920,000 from a
provision of $76,117,000 to a benefit of $4,803,000, while income before
provision for (benefit from) income taxes and extraordinary item decreased
$104,529,000 to $187,278,000. The decrease in the provision for income taxes was
primarily the result of a benefit of $25,456,000 recorded as a result of the
decrease in the valuation allowance for deferred taxes, favorable tax
settlements totaling $30,429,000 of prior years' disputed items in various
jurisdictions and a decrease in income. 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, revenues versus income). These variances, along with
variances in the mix of income within jurisdictions, are responsible for shifts
in the effective tax rate.
EFFECT OF B&W CHAPTER 11 FILING
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. 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 their asbestos products liability. As a result of the
filing, the Bankruptcy Court issued a temporary restraining order enjoining
asbestos products liability lawsuits from being brought against B&W, its
subsidiaries and B&W's affiliates, including MI, JRM and MII, subject to a
hearing on a permanent injunction enjoining such lawsuits during the pendency of
the bankruptcy case.
Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a
strategy of negotiating and settling asbestos products liability claims brought
against them and billing the settled amounts to insurers for reimbursement. The
average amount per settled claim over the last three calendar years is
approximately $7,900. Reimbursed amounts are subject to varying insurance limits
based upon the year of coverage, insurer solvency and collection delays (due
primarily to agreed payment schedules with specific insurers delaying
reimbursement for three months or more). However, none of these circumstances
have impaired B&W's liquidity. Claims paid during the nine months ended December
31, 1999 were $230,998,000 of which $192,981,000 has been recovered or is due
from insurers. At December 31, 1999, receivables of $108,867,000 were due from
insurers for reimbursement of settled claims.
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. B&W does not
expect that the bankruptcy filing will negatively affect its ability to recover
amounts due from insurers for settled claims as they become due and payable. At
February 22, 2000, receivables of $102,703,000 were due from insurers for
reimbursement of settled claims.
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. 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. 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
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<PAGE> 32
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. We expect the DIP Credit Facility will receive "superpriority" status
from the Bankruptcy Court. The DIP Credit Facility imposes certain financial and
non-financial covenants on B&W and its subsidiaries. A permitted use of the DIP
Credit Facility is the issuance of new letters of credit to backstop or replace,
as they expire, pre-existing letters of credit issued in connection with B&W's
and its subsidiaries' business operations, but for which MII, MI or BWICO was a
maker or guarantor. As of February 22, 2000, the aggregate amount of all such
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 the associated letter of credit fees paid under the
facility. $100,000,000 of the DIP Credit Facility has been approved by the
Bankruptcy Court on an interim basis, subject to final court approval of the
full amount of the facility.
B&W's financial results are included in our consolidated results at December 31,
1999. 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
will require 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 approximately
$161,000,000 as of February 22, 2000 will be 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 below has been prepared
on a going concern basis which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. As a result of the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
a plan of reorganization, or rejection thereof, could change the amounts
reported in the B&W financial statements and cause a material decrease in the
carrying amount of our investment.
Following are the condensed consolidated Statements of Income and Balance Sheet
data for B&W:
<TABLE>
<CAPTION>
For the
Nine-Month For the
Period Ended Fiscal Year Ended
December 31, March 31,
1999 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 729,713 $ 1,061,377 $ 1,132,123
Operating Income $ 39,464 $ 43,784 $ 70,439
Income from Continuing Operations
before Provision for
(Benefit from) Income Taxes $ 46,960 $ 369 $ 56,415
Income from Continuing Operations $ 26,083 $ 3,448 $ 30,198
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---- ----
(In thousands)
<S> <C> <C>
Current Assets $ 713,168 $ 466,781
Property, Plant and Equipment $ 86,151 $ 89,898
Environmental and Products Liabilities
Recoverable $ 942,982 $ 1,167,113
Total Assets $ 2,006,388 $ 2,198,899
Current Liabilities $ 629,549 $ 566,101
Environmental and Products Liabilities $ 1,061,365 $ 1,323,343
Total Stockholder's Equity $ 160,728 $ 136,451
Total Liabilities and Stockholder's Equity $ 2,006,388 $ 2,198,899
</TABLE>
Following are our condensed Pro Forma consolidated Statements of Income and
Balance Sheet data, assuming the deconsolidation of B&W:
<TABLE>
<CAPTION>
For the For the
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999
---- ----
(In thousands)
<S> <C> <C>
Revenues $ 1,161,375 $ 2,088,608
Operating Income $ 35,243 $ 173,632
Income (Loss) before Provision for
(Benefit from) Income Taxes $ (11,862) $ 186,909
Net Income (Loss) $ (25,643) $ 188,633
Earnings (Loss) per Common Share:
Basic $ (0.43) $ 3.20
Diluted $ (0.43) $ 3.11
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---- ----
(In thousands)
<S> <C> <C>
Current Assets $ 755,640 $ 908,585
Property, Plant and Equipment $ 351,646 $ 344,063
Investment in B&W $ 160,728 $ 136,451
Total Assets $ 2,082,954 $ 2,474,985
Current Liabilities $ 672,857 $ 700,310
Environmental and Products Liabilities $ 11,604 $ 10,753
Total Stockholder's Equity $ 791,858 $ 793,734
Total Liabilities and Stockholder's Equity $ 2,082,954 $ 2,474,985
</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. As a result of its bankruptcy filing, B&W and its 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. Moreover, no assurances can be given that any of the
Pre-Petition Inter-company Payables will be paid or otherwise satisfied in
connection with the confirmation of a B&W plan of reorganization. As of December
31, 1999, B&W and its filing subsidiaries had Pre-Petition Inter-company
Payables to other entities within the McDermott group of companies in the
aggregate amount of approximately $18,000,000. In the course of the conduct of
B&W's and its subsidiaries' business, MII and MI have agreed to indemnify two
surety companies for B&W's and its subsidiaries' obligations under surety bonds
issued in connection with their customer contracts. At February 22, 2000, the
total value of B&W's and its subsidiaries' customer contracts yet to be
completed that were covered by such indemnity arrangements was approximately
$161,000,000.
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<PAGE> 34
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.
EFFECTS OF INFLATION AND CHANGING PRICES
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, using historical U.S. dollar
accounting ("historical cost"). Statements based on historical cost, however, do
not adequately reflect the cumulative effect of increasing costs and changes in
the purchasing power of the dollar, especially during times of significant and
continued inflation.
In order to minimize the negative impact of inflation on our operations, we
attempt to cover the increased cost of anticipated changes in labor, material
and service costs, either through an estimate of those changes, which we reflect
in the original price, or through price escalation clauses in our contracts.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended December 31, 1999, our cash and cash
equivalents decreased $18,769,000 to $162,734,000 and total debt increased
$54,613,000 to $409,513,000, primarily due to an increase in short-term
borrowings of $86,412,000 offset by repayments of long-term debt aggregating
$30,868,000. During this period, we received cash proceeds of $520,685,000 from
the net sales and maturities of investments, and $3,577,000 from asset
disposals. We used cash of $5,218,000 in our operating activities, $528,215,000
for the acquisition of minority interest in JRM, $52,801,000 for additions to
property, plant and equipment, $8,889,000 for dividends on our common and
preferred stock and $7,190,000 for investments in investees.
At December 31, 1999, we had total cash, cash equivalents and investments of
$538,547,000. Our investment portfolio consists primarily of government
obligations and other investments in debt securities. The fair value of short-
and long-term investments at December 31, 1999 was $375,813,000. As of December
31, 1999, we had pledged approximately $47,897,000 fair value of these
obligations to secure a letter of credit in connection with certain reinsurance
agreements and $81,180,000 fair value of these obligations to secure borrowings
of $82,264,000 that are incurred under repurchase agreements.
At December 31, 1999 and March 31, 1999, we had available various uncommitted
short-term lines of credit from banks totaling $72,766,000 and $87,578,000,
respectively. At December 31, 1999, borrowings against these lines of credit
were $4,148,000. There were no borrowings against these lines at March 31, 1999.
As of December 31, 1999, BWICO, B&W, and BWXT, were parties to a $200,000,000
unsecured credit agreement (the "BWICO Credit Agreement") with a group of banks.
There were no borrowings under the agreement at December 31, 1999 or March 31,
1999.
At December 31, 1999, JRM and certain of its subsidiaries were parties to a
$200,000,000 unsecured credit agreement (the "JRM Credit Agreement") with a
group of banks. There were no borrowings under the JRM Credit Agreement at
December 31, 1999 or March 31, 1999.
On February 21, 2000, B&W and certain of its subsidiaries entered into their
$300,000,000 DIP Credit Facility to satisfy their working capital and letter of
credit needs during the pendency of their bankruptcy case. In addition to funds
available from their operating activities and cash and cash equivalents on hand,
B&W and its subsidiaries believe that they have sufficient liquidity to meet
their capital expenditure, working capital and debt maturity requirements for
the next three years.
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<PAGE> 35
On February 21, 2000, we also entered into other financing arrangements
providing for up to $500,000,000 of financing to the balance of our operations.
This financing consists of a $200,000,000 credit facility for MII, BWXT and HPC
(the "New MII Credit Facility") and a $300,000,000 credit facility for JRM and
some of its subsidiaries (the "New 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 of the letters of credit outstanding under each facility.
We are proceeding to terminate the JRM Credit Agreement as soon as practical. As
a result of the B&W bankruptcy filing, the BWICO Credit Agreement is in default
and we are working with Citibank, N.A., the administrative agent for that
facility as well as the DIP Credit Facility, to terminate the BWICO Credit
Agreement on mutually acceptable terms.
The New 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 for advances or issuances of letters of credit for the account of
the borrowers and for the benefit of the borrowers and their subsidiaries (other
than B&W and the subsidiaries of B&W that filed Chapter 11 cases). Borrowings
under this facility may be used for working capital and general corporate
purposes. The second tranche provides for up to $200,000,000 to reimburse
issuers for drawings under outstanding letters of credit issued for the benefit
of B&W and its subsidiaries and to issue new letters of credit for the account
of MII to renew or extend any of those outstanding letters of credit on their
scheduled expiration dates. The aggregate amount of loans and amounts available
for drawing under letters of credit outstanding under the New MII Credit
Facility may not exceed $200,000,000. Both facilities are secured by a
collateral account funded with cash and various government securities with a
marked-to-market value equal to 105% of the aggregate amount available for
drawing under letters of credit and revolving credit borrowings then
outstanding.
The New JRM Credit Facility also consists of two tranches. One is a revolving
credit facility that provides for up to $100,000,000 for advances or issuances
of letters of credit for the account of the borrowers and for the benefit of the
borrowers and their subsidiaries. Borrowings under this facility may be used for
working capital and general corporate purposes. The second tranche is a
$200,000,000 three-year term-loan facility with a 364-day initial availability
period, subject to extension under some circumstances. The term-loan facility
may only be used for purposes the lenders approve. The facility is subject to
certain financial and non-financial covenants.
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 December 31, 1999, substantially all the net assets of MI were
subject to those restrictions. At December 31, 1999, JRM and its subsidiaries
could make unsecured loans to or investments in MII and its other subsidiaries
of approximately $72,000,000. The New JRM Credit Facility continues to restrict
JRM's ability to make unsecured loans to or investments in MII or its other
subsidiaries.
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 December 31, 1999, we had a valuation allowance for deferred tax assets of
$34,794,000, which cannot be realized through carrybacks and future reversals of
existing taxable temporary differences. We believe that our remaining deferred
tax assets are realizable through carrybacks and future reversals of existing
taxable temporary differences, future taxable income and, if necessary, the
implementation of tax planning strategies involving sales of appreciated assets.
Uncertainties that affect the ultimate realization of our deferred tax assets
include the risk of incurring losses in the future and the possibility of
declines in value of appreciated assets involved in the tax planning
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<PAGE> 36
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 dividends on our common stock are $0.05 per share.
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. We are not currently a party to any agreement or
understanding relating to any such prospective transaction.
IMPACT OF YEAR 2000
The century date change did not materially impact our critical systems and
facilities.
All tasks associated with our company-wide Year 2000 project that were scheduled
to be completed prior to December 31, 1999 were completed as planned. The
project addressed information technology components (hardware and software) in
our internal business systems and infrastructure and the embedded systems in our
offices and plants and the products we deliver to customers. In addition, we
performed an analysis of critical suppliers to ensure the supply of materials
and services that are important to our ongoing business operations. The final
phase of our Year 2000 preparation included the development of contingency plans
to further minimize the risk and mitigate the impact of the date change.
The cost associated with the modifications to our critical systems and other
compliance activities has not had a material impact on our consolidated
financial condition, cash flows or results of operations. The total cost of our
Year 2000 project was $38,000,000 and was funded through operating cash flows.
Of the total project cost, we used $8,000,000 to purchase hardware and software,
which we capitalized, and we expensed the remaining $30,000,000 as incurred.
Our Year 2000 project began with a planning phase during the latter part of 1996
followed by a company-wide assessment, which we completed in early 1997. Based
on the results of that assessment and the diverse nature of our product lines,
we developed strategies for business systems that fit the requirements of each
of our business units. Some of our units replaced legacy systems with commercial
enterprise systems, others employed a combination of proprietary and third party
client/server systems or remediated their legacy applications.
A consistent work breakdown structure for the project was employed throughout
McDermott:
o Business Applications and IT Infrastructure ("IT Systems")
o Facilities (office buildings)
o Embedded Systems (in plants and construction equipment)
o Customer Products (embedded systems in customer products)
o Critical Suppliers
The general phases of the project common to all of the above functions were:
o establish priorities,
o inventory items with potential Year 2000 impact,
o assess and create a solution strategy for those items determined to be
material to McDermott,
o implement solutions defined for those items assessed to have Year 2000
impact,
o test and validate solutions, and
o develop contingency plans.
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As an alternative to our remediation of the legacy payroll systems, we elected
to outsource our payroll function. We completed the transfer of the
responsibility to the payroll service provider on October 31, 1999.
With respect to the status of our Year 2000 Project, all remediation, testing
and contingency planning tasks were completed prior to December 31,1999.
Rollover activities commenced December 30,1999 and were completed January 4,
2000. Those tasks included, but were not limited to, preparing and verifying IT
System backups, powering down certain systems operations, controlling restart of
IT Systems and Embedded Systems, and testing and verifying all critical
operations.
Although it appears that we have not been impacted by the transition to the Year
2000, some risk of failure will continue to exist until we encounter other
critical dates in 2000, and until we execute all our software and other systems
through complete business and operational cycles.
Our Year 2000 compliance also depends on the success of external agents and
third-party suppliers achieving Year 2000 readiness. After two and a half months
of operations in Year 2000, we have not experienced, nor at this point are we
anticipating, any failure of our agents or suppliers with respect to Year 2000
compliance of products or services supplied to us.
The general uncertainty inherent in the Year 2000 problem results in part from
the uncertainty of the Year 2000 readiness of third parties and the
interconnection of global businesses. We believe that our Year 2000 project,
including contingency plans, has significantly reduced the adverse effect that
any such disruption may have.
This disclosure is subject to protection under the Year 2000 Information and
Readiness Disclosure Act of 1998 as a "Year 2000 Statement" and "Year 2000
Readiness Disclosure" as that Act defines those terms.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require us to recognize
all derivatives on our consolidated balance sheet at their fair values.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. We have not yet determined the effect SFAS No. 133 will have on our
consolidated financial position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk from changes in interest rates relates primarily to
our investment portfolio, which is primarily comprised of investments in U.S.
government obligations and other highly liquid debt securities denominated in
U.S. dollars. We are averse to principal loss and ensure the safety and
preservation of our invested funds by limiting default risk, market risk and
reinvestment risk. All our investments in debt securities are classified as
available-for-sale. During the nine-month period ended December 31, 1999, we
reduced our investment portfolio by approximately $545,000,000, primarily to
fund the acquisition of the public minority interest in JRM.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of these
obligations have fixed interest rates. We have exposure to changes in interest
rates on our short-term
33
<PAGE> 38
uncommitted lines of credit and our unsecured and committed revolving credit
facilities (see Liquidity and Capital Resources). At December 31, 1999, we had
borrowed $4,148,000 against these short-term facilities. At March 31, 1999, we
had no borrowings against these facilities.
We have operations in many foreign locations, and, as a result, our financial
results could be significantly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in those foreign markets. In
order to manage the risks associated with foreign currency exchange
fluctuations, we regularly hedge those risks with foreign currency forward
exchange contracts (principally to hedge our Canadian dollar exposure). We do
not enter into speculative forward exchange contracts.
Interest Rate Sensitivity
The following tables provide information about our financial instruments that
are sensitive to changes in interest rates. The tables present principal cash
flows and related weighted-average interest rates by expected maturity dates.
Principal Amount by Expected Maturity
(In thousands)
<TABLE>
<CAPTION>
Years Ending December 31, Fair Value
-------------------------------------------------------------------------- at December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
--------- --------- -------- -------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $ 101,056 $ 120,831 $ 39,220 $ 97,740 $ 10,278 $17,544 $ 386,669 $ 375,745
Average Interest Rate 5.08% 5.64% 5.19% 5.20% 6.01% 5.50%
Long-term Debt-
Fixed Rate -- -- $225,000 $ 9,500 -- $84,175 $ 318,675 $ 317,650
Average Interest Rate 9.375% 9.00% 8.24%
Long-term Debt-
Variable Rate $ 25 $ 25 $ 25 $ 25 $ 25 $ 4,634 $ 4,759 $ 4,759
Average Interest Rate 5.65% 5.65% 5.65% 5.65% 5.65% 5.65%
</TABLE>
<TABLE>
<CAPTION>
Fair Value
Years Ending March 31, at March 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
--------- --------- -------- -------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $ 366,304 $ 294,400 $118,960 $ 67,000 $ 75,540 $ -- $ 922,204 $ 921,070
Average Interest Rate 4.91% 5.48% 6.10% 5.47% 5.13%
Long-term Debt-
Fixed Rate $ 30,640 -- $225,000 -- $ 9,500 $ 84,175 $ 349,315 $ 360,997
Average Interest Rate 8.22% 9.375 9.00% 8.24%
Long-term Debt-
Variable Rate $ 25 $ 25 $ 25 $ 25 $ 25 $ 4,652 $ 4,777 $ 4,777
Average Interest Rate 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%
</TABLE>
34
<PAGE> 39
Exchange Rate Sensitivity
The following tables provide information about our foreign currency forward
exchange contracts and present such information in U.S. dollar equivalents. The
tables present notional amounts and related weighted-average exchange rates by
expected (contractual) maturity dates and constitute a forward-looking
statement. These notional amounts generally are used to calculate the
contractual payments to be exchanged under the contract.
Contract Amount by Expected Maturity
(In thousands)
<TABLE>
<CAPTION>
Years Ending December 31, Fair Value
--------------------------------------------------------------- at December 31,
2000 2001 2002 2003 2004 Total 1999
-------- -------- --------- -------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Forward Contracts to Purchase Foreign Currencies for U.S. Dollars:
Canadian Dollar $ 42,961 $ 74,329 $ 46,664 $ 9,530 $ 11,562 $185,046 $187,043
Average Contractual
Exchange Rate 1.465 1.453 1.467 1.470 1.466
Japanese Yen $ 3,665 -- -- -- -- $ 3,665 $ 3,735
Average Contractual
Exchange Rate 103.8
Singapore Dollar $ 3,027 -- -- -- -- $ 3,027 $ 3,066
Average Contractual
Exchange Rate 1.685
Indo Rupiah $ 1,441 -- -- -- -- $ 1,441 $ 1,756
Average Contractual
Exchange Rate 8666.1
Euro $ 514 -- -- -- -- $ 514 $ 475
Average Contractual
Exchange Rate 1.101
Forward Contracts to Sell Foreign Currencies for U.S. Dollars:
Canadian Dollar $ 19,658 $ 15,972 $ 9,152 -- -- $ 44,782 $ 44,752
Average Contractual
Exchange Rate 1.436 1.457 1.457
French Franc $ 1,318 $ 2,423 -- -- -- $ 3,741 $ 3,423
Average Contractual
Exchange Rate 5.872 5.745
</TABLE>
<TABLE>
<CAPTION>
Years Ending March 31, Fair Value
--------------------------------------------------------------- at March 31,
2000 2001 2002 2003 2004 Total 1999
-------- --------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Forward Contracts to Purchase Foreign Currencies for U.S. Dollars:
Canadian Dollar $ 49,955 $ 9,292 $ 31,041 -- -- $ 90,288 $ 86,426
Average Contractual
Exchange Rate 1.442 1.421 1.415
Japanese Yen $ 3,260 -- -- -- -- $ 3,260 $ 3,193
Average Contractual
Exchange Rate 116.7
Danish Kroner $ 153 -- -- -- -- $ 153 $ 145
Average Contractual
Exchange Rate 6.557
Forward Contracts to Sell Foreign Currencies for U.S. Dollars:
Canadian Dollar $ 14,880 -- -- -- -- $ 14,880 $ 13,920
Average Contractual
Exchange Rate 1.402
French Franc $ 720 $ 604 $ 2,423 -- -- $ 3,747 $ 3,691
Average Contractual
Exchange Rate 5.884 5.794 5.745
</TABLE>
35
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
McDermott International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income (loss), stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of McDermott International, Inc. and subsidiaries (the "Company") at
December 31, 1999 and March 31, 1999, and the results of their operations and
their cash flows for the nine-month period ended December 31, 1999 and the year
ended March 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 11 and 20 to the consolidated financial statements, in
late 1999, The Babcock & Wilcox Company ("B&W"), a subsidiary of the Company,
experienced a greater-than-anticipated increase in the amounts demanded to
settle certain asbestos-related claims. As a result, on February 22, 2000, B&W
filed a voluntary petition with the U.S. Bankruptcy Court to reorganize under
Chapter 11 of the U.S. Bankruptcy Code. The recent increased demands related to
asbestos claims and the Chapter 11 filing result in increased uncertainty with
respect to the amounts for which the claims will be ultimately settled and the
recovery of the Company's investment in B&W. B&W and its subsidiaries are
precluded from paying dividends to the Company or making any payments on any
pre-petition accounts or notes payable. Additionally, management's plans
regarding the Company's liquidity are described in Note 20 to the consolidated
financial statements.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
February 22, 2000
36
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
McDermott International, Inc.
We have audited the accompanying consolidated statements of income (loss),
comprehensive income, stockholders' equity and cash flows of McDermott
International, Inc. for the year ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
McDermott International, Inc. for the year ended March 31, 1998, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 19, 1998
37
<PAGE> 42
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
-------------- --------------
<S> <C> <C>
(In thousands)
Current Assets:
Cash and cash equivalents $ 162,734 $ 181,503
Investments 111,104 55,646
Accounts receivable - trade, net 429,573 281,667
Accounts receivable - unconsolidated affiliates 21,406 165,154
Accounts receivable - other 167,291 125,631
Environmental and products liabilities recoverable - current 232,618 228,738
Contracts in progress 159,369 179,310
Inventories 57,488 52,656
Deferred income taxes 93,629 73,364
Other current assets 33,596 31,697
-------------- --------------
Total Current Assets 1,468,808 1,375,366
-------------- --------------
Property, Plant and Equipment:
Land 22,689 22,670
Buildings 200,348 197,902
Machinery and equipment 1,140,338 1,198,381
Property under construction 76,121 41,686
-------------- --------------
1,439,496 1,460,639
Less accumulated depreciation 1,001,699 1,026,678
-------------- --------------
Net Property, Plant and Equipment 437,797 433,961
-------------- --------------
Investments:
Government obligations 159,005 473,072
Other investments 105,704 378,181
-------------- --------------
Total Investments 264,709 851,253
-------------- --------------
Environmental and Products Liabilities Recoverable 942,982 1,167,113
-------------- --------------
Goodwill Less Accumulated Amortization
of $118,878,000 at December 31,1999
and $104,444,000 at March 31, 1999 444,220 125,436
-------------- --------------
Prepaid Pension Costs 111,114 130,437
-------------- --------------
Other Assets 205,261 221,954
-------------- --------------
TOTAL $ 3,874,891 $ 4,305,520
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 43
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---- ----
<S> <C> <C>
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 86,499 $ 31,126
Accounts payable 185,465 198,500
Environmental and products liabilities - current 281,787 259,836
Accrued employee benefits 96,235 132,105
Accrued liabilities - other 301,105 318,631
Accrued contract cost 81,586 51,619
Advance billings on contracts 231,421 240,380
U.S. and foreign income taxes payable 38,308 34,214
-------------- --------------
Total Current Liabilities 1,302,406 1,266,411
-------------- --------------
Long-Term Debt 323,014 323,774
-------------- --------------
Accumulated Postretirement Benefit Obligation 112,132 128,188
-------------- --------------
Environmental and Products Liabilities 1,072,969 1,334,096
-------------- --------------
Other Liabilities 272,484 263,950
-------------- --------------
Commitments and Contingencies.
Minority Interest 28 195,367
-------------- --------------
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued
61,625,434 at December 31, 1999 and 61,147,775
at March 31, 1999 61,625 61,148
Capital in excess of par value 1,048,848 1,028,393
Accumulated deficit (208,904) (200,432)
Treasury stock at cost, 2,000,614 shares at December 31, 1999
and March 31, 1999 (62,731) (62,731)
Accumulated other comprehensive loss (46,980) (32,644)
-------------- --------------
Total Stockholders' Equity 791,858 793,734
-------------- --------------
TOTAL $ 3,874,891 $ 4,305,520
============== ==============
</TABLE>
39
<PAGE> 44
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 1,891,088 $ 2,400,617 $ 3,149,985 $ 3,674,635
------------ ------------ ------------ -------------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 1,583,195 1,984,603 2,635,229 3,117,279
Depreciation and amortization 67,649 72,922 101,390 142,301
Selling, general and administrative expenses 152,835 163,961 222,239 224,045
------------ ------------ ------------ -------------
1,803,679 2,221,486 2,958,858 3,483,625
------------ ------------ ------------ -------------
Gain (Loss) on Asset Disposals and Impairments - Net (1,720) 36,967 17,910 79,065
------------ ------------ ------------ -------------
Operating Income before Income (Loss)
from Investees 85,689 216,098 209,037 270,075
------------ ------------ ------------ -------------
Income (Loss) from Investees (10,982) 14,277 8,379 85,382
------------ ------------ ------------ -------------
Operating Income 74,707 230,375 217,416 355,457
------------ ------------ ------------ -------------
Other Income (Expense):
Interest income 32,126 78,667 97,965 62,535
Interest expense (35,743) (49,137) (63,262) (81,454)
Minority interest (5,679) (61,369) (46,042) (47,984)
Curtailments and settlements of
employee benefit plans (37,028) 27,642 21,940 (2,925)
Other-net 6,715 5,810 (40,739) 6,178
------------ ------------ ------------ -------------
(39,609) 1,613 (30,138) (63,650)
------------ ------------ ------------ -------------
Income before Provision for (Benefit from)
Income Taxes and Extraordinary Item 35,098 231,988 187,278 291,807
Provision for (Benefit from) Income Taxes 34,658 16,523 (4,803) 76,117
------------ ------------ ------------ -------------
Income before Extraordinary Item 440 215,465 192,081 215,690
Extraordinary Item - - (38,719) -
------------ ------------ ------------ -------------
Net Income $ 440 $ 215,465 $ 153,362 $ 215,690
------------ ------------ ------------ -------------
Net Income Applicable to Common Stockholders
(after Preferred Stock Dividends) $ 440 $ 215,465 $ 153,362 $ 207,424
------------ ------------ ------------ -------------
Earnings per Common Share:
Basic:
Income before Extraordinary Item $ 0.01 $ 3.65 $ 3.25 $ 3.74
Net Income $ 0.01 $ 3.65 $ 2.60 $ 3.74
Diluted:
Income before Extraordinary Item $ 0.01 $ 3.50 $ 3.16 $ 3.48
Net Income $ 0.01 $ 3.50 $ 2.53 $ 3.48
------------ ------------ ------------ -------------
Cash Dividends:
Per Common Share $ 0.15 $ 0.15 $ 0.20 $ 0.20
Per Preferred Share $ - $ - $ - $ 2.88
------------ ------------ ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 45
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
December 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net Income $ 440 $ 215,465 $ 153,362 $ 215,690
----------- ---------- ---------- ----------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments 4,061 1,671 (856)
Foreign currency translation adjustments, net of
reclassification adjustments (3,689)
Reclassification adjustment for purchase of
minority interest in JRM in the nine-month period
ended December 31, 1999 (5,695)
Reclassification adjustments for sales of investments
in foreign entities 15,596 15,596
Minimum pension liability adjustment,
net of taxes of $1,417,000, $791,000 and $1,547,000
in the nine-month period ended December 31, 1999 and the
fiscal years ended March 31, 1999 and 1998, respectively (2,066) -- (1,058) (2,582)
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period,
net of taxes (benefits) of ($391,000) and $3,000 in the
nine-month period ended December 31, 1999 and the
fiscal year ended March 31,1999, respectively (10,804) 1,887
Unrealized gains, net of reclassification adjustments
arising during the period, net of taxes of $20,000 in the
nine-month period ended December 31, 1998 and $360,000
in the fiscal year ended March 31, 1998 3,679 4,807
Reclassification adjustment for (gains) losses included in
net income, net of taxes (benefits) of ($3,000) and $11,000
in the nine-month period ended December 31, 1999 and the
fiscal year ended March 31, 1999, respectively 169 (1,428) (1,656)
----------- ---------- ---------- ----------
Other Comprehensive Income (Loss) (14,335) 19,518 13,913 (1,464)
----------- ---------- ---------- ----------
Comprehensive Income (Loss) $ (13,895) $ 234,983 $ 167,275 $ 214,226
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 46
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Capital
Series C Common Stock in Excess Accumulated
Shares Par Value Shares Par Value of Par Value Deficit
--------- --------- ------------ --------- ------------ -----------
(In thousands, except for share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 1997 2,875,000 $2,875 54,936,956 $54,937 $ 962,445 $(538,163)
--------- ------ ---------- ------- --------- ---------
Net income -- -- -- -- -- 215,690
Minimum pension liability -- -- -- -- -- --
Gain on investments -- -- -- -- -- --
Translation adjustments -- -- -- -- -- --
Common stock dividends -- -- -- -- -- (11,177)
Preferred stock dividends -- -- -- -- -- (8,266)
JRM equity transactions -- -- -- -- 3,431 --
Exercise of stock options -- -- 1,450,593 1,451 30,005 --
Tax benefit on stock options -- -- -- -- 4,916 --
Restricted stock purchases - net -- -- 90 -- (24) --
Redemption of preferred shares -- -- 100 -- 221 --
Contributions to thrift plan -- -- 191,058 191 5,795 --
Purchase of treasury shares -- -- -- -- -- --
Deferred career executive stock plan expense -- -- -- -- 4,576 --
Termination of directors' retirement plan -- -- 32,040 32 1,057 --
Cancellation of shares -- -- (2,976) (3) (84) --
--------- ------ ---------- ------- --------- ---------
Balance March 31, 1998 2,875,000 2,875 56,607,861 56,608 1,012,338 (341,916)
Net income -- -- -- -- -- 153,362
Minimum pension liability -- -- -- -- -- --
Gain on investments -- -- -- -- -- --
Translation adjustments -- -- -- -- -- --
Common stock dividends -- -- -- -- -- (11,878)
JRM equity transactions -- -- -- -- 2,495 --
Exercise of stock options -- -- 188,768 189 3,543 --
Tax benefit on stock options -- -- -- -- 1,013 --
Restricted stock purchases - net -- -- 2,025 2 -- --
Directors' stock plan -- -- 18,735 19 421 --
Redemption of preferred shares -- -- 23,251 23 701 --
Conversion of Series C Preferred stock (2,875,000) (2,875) 4,077,890 4,078 (1,203) --
Contributions to thrift plan -- -- 229,245 229 5,813 --
Purchase of treasury shares -- -- -- -- -- --
Deferred career executive stock plan expense -- -- -- -- 3,272 --
--------- ------ ---------- ------- --------- ---------
Balance March 31, 1999 -- -- 61,147,775 61,148 1,028,393 (200,432)
Net income -- -- -- -- -- 440
Minimum pension liability -- -- -- -- -- --
Loss on investments -- -- -- -- -- --
Translation adjustments -- -- -- -- -- --
Common stock dividends -- -- -- -- -- (8,912)
JRM equity transactions -- -- -- -- 656 --
JRM merger -- -- 15,836 16 12,983 --
Exercise of stock options -- -- 68,532 69 1,376 --
Tax benefit on stock options -- -- -- -- 684 --
Restricted stock purchases - net -- -- 93,785 93 -- --
Contributions to thrift plan -- -- 299,506 299 4,686 --
Deferred career executive stock plan expense -- -- -- -- 70 --
--------- ------ ---------- ------- --------- ---------
Balance December 31, 1999 -- $ -- 61,625,434 $61,625 $1,048,848 $(208,904)
========= ====== ========== ======= ========= =========
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Loss Stock Equity
------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1997 $(45,093) $ -- $437,001
-------- --------- --------
Net income -- -- 215,690
Minimum pension liability (2,582) -- (2,582)
Gain on investments 4,807 -- 4,807
Translation adjustments (3,689) -- (3,689)
Common stock dividends -- -- (11,177)
Preferred stock dividends -- -- (8,266)
JRM equity transactions -- -- 3,431
Exercise of stock options -- -- 31,456
Tax benefit on stock options -- -- 4,916
Restricted stock purchases - net -- -- (24)
Redemption of preferred shares -- -- 221
Contributions to thrift plan -- -- 5,986
Purchase of treasury shares -- (3,662) (3,662)
Deferred career executive stock plan expense -- -- 4,576
Termination of directors' retirement plan -- -- 1,089
Cancellation of shares -- 87 --
-------- --------- --------
Balance March 31, 1998 (46,557) (3,575) 679,773
Net income -- -- 153,362
Minimum pension liability (1,058) -- (1,058)
Gain on investments 231 -- 231
Translation adjustments 14,740 -- 14,740
Common stock dividends -- -- (11,878)
JRM equity transactions -- -- 2,495
Exercise of stock options -- -- 3,732
Tax benefit on stock options -- -- 1,013
Restricted stock purchases - net -- -- 2
Directors' stock plan -- -- 440
Redemption of preferred shares -- -- 724
Conversion of Series C Preferred stock -- -- --
Contributions to thrift plan -- -- 6,042
Purchase of treasury shares -- (59,156) (59,156)
Deferred career executive stock plan expense -- -- 3,272
-------- --------- --------
Balance March 31, 1999 (32,644) (62,731) 793,734
Net income -- -- 440
Minimum pension liability (2,066) -- (2,066)
Loss on investments (10,635) -- (10,635)
Translation adjustments (1,635) -- (1,635)
Common stock dividends -- -- (8,912)
JRM equity transactions -- -- 656
JRM merger -- -- 12,999
Exercise of stock options -- -- 1,445
Tax benefit on stock options -- -- 684
Restricted stock purchases - net -- -- 93
Contributions to thrift plan -- -- 4,985
Deferred career executive stock plan expense -- -- 70
-------- --------- --------
Balance December 31, 1999 $(46,980) $ (62,731) $ 791,858
======== ========= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
42
<PAGE> 47
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
December 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 440 $ 215,465 $ 153,362 $ 215,690
-------- --------- --------- ---------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 67,649 72,922 101,390 142,301
Income or loss of investees, less dividends 15,188 12,891 20,271 (13,913)
(Gain) loss on asset disposals and impairments - net 1,720 (36,967) (17,910) (79,065)
Provision for (benefit from) deferred taxes 5,432 (8,556) (29,725) 9,521
Extraordinary loss -- -- 38,719 --
Other 1,858 3,454 3,805 15,372
Changes in assets and liabilities, net of effects from acquisitions and
divestitures:
Accounts receivable (43,704) 92,216 79,553 28,596
Accounts payable (13,194) (84,861) (100,835) 31,712
Inventories (4,784) 4,930 10,305 1,974
Net contracts in progress and advance billings 10,641 53,760 31,470 152,097
Income taxes (2,943) 3,639 627 (47,356)
Accrued liabilities 11,031 37,545 41,238 30,746
Products and environmental liabilities 42,550 (16,514) 49,133 11,524
Other, net (35,627) (34,870) (45,670) 116,973
Proceeds from insurance for products liability claims 169,523 154,494 191,728 157,656
Payments of products liability claims (230,998) (178,270) (227,176) (196,091)
-------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,218) 291,278 300,285 577,737
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of minority interest (528,215) -- -- (6,627)
Purchases of property, plant and equipment (52,801) (45,294) (78,787) (45,090)
Purchases of available-for-sale securities (97,627) (680,358) (827,371) (788,503)
Maturities of available-for-sale securities 404,982 275,917 664,183 112,369
Sales of available-for-sale securities 213,330 365,678 339,478 95,430
Proceeds from asset disposals 3,577 130,131 145,161 457,337
Investments in equity investees (7,190) 5,452 88 (4,391)
Returns from investees -- -- -- 2,124
-------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (63,944) 51,526 242,752 (177,351)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (30,868) (45,910) (326,921) (152,116)
Increase (decrease) in short-term borrowing 86,412 (30,954) (30,954) (208,759)
Issuance of common stock 1,538 3,822 4,173 31,431
Issuance of subsidiary's stock 3,253 1,317 2,127 5,599
Acquisition of subsidiary's common stock -- (58,272) (58,272) (13,537)
Acquisition of subsidiary's preferred stock -- (154,631) (154,633) (15,406)
Dividends paid (8,889) (10,861) (13,810) (19,367)
Purchase of McDermott International, Inc. stock -- (59,156) (59,156) (3,662)
Other (1,436) (999) (3,686) (5,102)
-------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 50,010 (355,644) (641,132) (380,919)
-------- --------- --------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 383 273 1,722 626
-------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,769) (12,567) (96,373) 20,093
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 181,503 277,876 277,876 257,783
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 162,734 $ 265,309 $ 181,503 $ 277,876
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 31,548 $ 40,468 $ 68,317 $ 87,514
Income taxes (net of refunds) $ 42,262 $ 30,706 $ 44,044 $ 15,571
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Transfer of accounts receivables sold under a purchase and
sale agreement from secured borrowings to sales treatment $ -- $ 56,929 $ 56,929 $ --
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 48
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
We have presented our consolidated financial statements in U.S. Dollars in
accordance with accounting principles generally accepted in the United States
("GAAP"). These consolidated financial statements include the accounts of
McDermott International, Inc. and its subsidiaries and controlled 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. We have
reclassified certain amounts previously reported to conform with the
presentation at December 31, 1999.
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 The Babcock & Wilcox Company ("B&W"), a Delaware subsidiary of BWICO,
and its consolidated subsidiaries; and
o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and
its consolidated subsidiaries.
On August 3, 1999, our Board of Directors approved the change of our fiscal year
from a year ending on March 31 to the new fiscal year end of December 31. This
report for the nine-month period ended December 31, 1999 covers the transition
period. The accompanying consolidated financial statements for the nine-month
period ended December 31, 1998 are unaudited. In our opinion, all normal
recurring adjustments that are necessary for a fair statement of our operations
have been reflected in the consolidated financial statements for these periods.
The operating results for the nine-month periods ended December 31, 1999 and
1998 do not necessarily indicate the results that can be expected for a
twelve-month period.
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 to reorganize under Chapter 11 of the U.S. Bankruptcy Code. B&W and
these subsidiaries took this action as a means to determine and comprehensively
resolve their asbestos liability. We expect that this filing will have little
effect, if any, on B&W's customers, suppliers, employees or retirees. B&W and
its subsidiaries are committed to operating their businesses as normal,
delivering products and services as usual and pursuing new contracts and growth
opportunities. However, as of February 22, 2000, the B&W 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 will no longer
consolidate B&W's financial results in our consolidated financial statements and
our investment in B&W will be 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 20 for
condensed consolidated income statement and balance sheet information of B&W and
for condensed pro forma consolidated income statement and balance sheet
information assuming the deconsolidation of B&W.
Use of Estimates
We use estimates and assumptions to prepare our financial statements in
conformity with generally accepted accounting principles. These estimates and
assumptions affect the amounts we report in our financial statements and
accompanying notes. Our actual results could differ from those estimates.
44
<PAGE> 49
Earnings Per Share
We have computed earnings per common share on the basis of the weighted average
number of common shares, and, where dilutive, common share equivalents,
outstanding during the indicated periods.
Investments
Our investments, primarily government obligations and other debt securities, are
classified as available-for-sale and are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a component of accumulated
other comprehensive loss. We classify investments available for current
operations in the balance sheet as current assets, while we classify investments
held for long-term purposes as non-current assets. We adjust the amortized cost
of debt securities for amortization of premiums and accretion of discounts to
maturity. That amortization is included in interest income. We include realized
gains and losses on our investments in other income. The cost of securities sold
is based on the specific identification method. We include interest on
securities in interest income.
Foreign Currency Translation
We translate assets and liabilities of our foreign operations, other than
operations in highly inflationary economies, into U.S. Dollars at current
exchange rates, and we translate income statement items at average exchange
rates for the periods presented. We record adjustments resulting from the
translation of foreign currency financial statements as a component of
accumulated other comprehensive loss. We report foreign currency transaction
adjustments in income. We have included in other income (expense) transaction
gains (losses) of ($1,651,000), $3,384,000 and $5,200,000 for the nine-month
period ended December 31, 1999 and the fiscal years ended March 31, 1999 and
1998, respectively. In fiscal years ended March 31, 1999 and 1998, we
transferred a loss of $15,596,000 and a gain of $1,005,000, respectively, from
currency translation adjustments to gain (loss) on asset disposals and
impairments - net due to the sale of foreign investments.
Contracts and Revenue Recognition
We generally recognize contract revenues and related costs on a
percentage-of-completion method for individual contracts or combinations of
contracts based on work performed, man hours, or a cost-to-cost method, as
applicable to the product or activity involved. Certain partnering contracts
contain a risk-and-reward element, whereby a portion of total compensation is
tied to the overall performance of the alliance partners. We include revenues
and related costs so recorded, plus accumulated contract costs that exceed
amounts invoiced to customers under the terms of the contracts, in contracts in
progress. We include in advance billings on contracts billings that exceed
accumulated contract costs and revenues and costs recognized under the
percentage-of-completion method. Most long-term contracts contain provisions for
progress payments. We expect to invoice customers for all unbilled revenues. We
review contract price and cost estimates periodically as the work progresses and
reflect adjustments proportionate to the percentage-of-completion in income in
the period when those estimates are revised. We make provisions for all known or
anticipated losses. Variations from estimated contract performance could result
in a material adjustment to operating results for any fiscal quarter or year. We
include claims for extra work or changes in scope of work to the extent of costs
incurred in contract revenues when collection is probable. We have included in
accounts receivable and contracts in progress approximately $11,614,000 and
$15,535,000 relating to commercial and U.S. Government contracts claims whose
final settlement is subject to future determination through negotiations or
other procedures which had not been completed at December 31, 1999 and March 31,
1999, respectively.
45
<PAGE> 50
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ------------
(In thousands)
<S> <C> <C>
We have included in Contracts in Progress:
Costs incurred less costs of revenue recognized $ 53,762 $ 46,942
Revenues recognized less billings to customers 105,607 132,368
------------ ------------
Contracts in Progress $ 159,369 $ 179,310
------------ ------------
We have included in Advance Billings on Contracts:
Billings to customers less revenues recognized $ 363,630 $ 320,523
Costs incurred less costs of revenue recognized (132,209) (80,143)
------------ ------------
Advance Billings on Contracts $ 231,421 $ 240,380
------------ ------------
</TABLE>
We are usually entitled to financial settlements relative to the individual
circumstances of deferrals or cancellations of Power Generation Systems'
contracts. We do not recognize those settlements or claims for additional
compensation until we reach final settlements with our customers.
We have included in accounts receivable - trade the following amounts
representing retainages on contracts:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ------------
(In thousands)
<S> <C> <C>
Retainages $ 83,285 $ 108,605
------------ ------------
Retainages expected to be collected after one year $ 35,756 $ 29,246
------------ ------------
</TABLE>
Of the long-term retainages at December 31, 1999, we anticipate collecting
$31,424,000 in 2001, $1,578,000 in 2002 and $2,754,000 in 2003.
Inventories
We carry our inventories at the lower of cost or market. We determine cost on an
average cost basis except for certain materials inventories, for which we use
the last-in first-out ("LIFO") method. We determined the cost of approximately
17% and 16% of our total inventories using the LIFO method at December 31, 1999
and March 31, 1999, respectively. Inventories are summarized below:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---------- ----------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 43,998 $ 37,481
Work in Progress 6,353 7,606
Finished Goods 7,137 7,569
---------- ----------
Total Inventories $ 57,488 $ 52,656
---------- ----------
</TABLE>
Comprehensive Income (Loss)
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---------- ----------
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $ (29,397) $ (27,762)
Net Unrealized Gain (Loss) on Investments (9,729) 906
Minimum Pension Liability (7,854) (5,788)
---------- ----------
Accumulated Other Comprehensive Loss $ (46,980) $ (32,644)
---------- ----------
</TABLE>
46
<PAGE> 51
Warranty Expense
We accrue estimated expense to satisfy contractual warranty requirements,
primarily of our Power Generation Systems segment, when we recognize the
associated revenue on the related contracts. With respect to JRM, we include
warranty costs as a component of our total contract cost estimate to satisfy
contractual requirements. In addition, we make specific provisions where we
expect the costs of warranty to significantly exceed the accruals.
Environmental Clean-Up Costs
We accrue for future decommissioning of our nuclear facilities that will permit
the release of these facilities to unrestricted use at the end of each
facility's life, which is a condition of our licenses from the Nuclear
Regulatory Commission. We reflect the accruals, based on the estimated cost of
those activities and net of any cost-sharing arrangements, over the economic
useful life of each facility, which we typically estimate at 40 years. We adjust
the estimated costs as further information develops or circumstances change. We
do not discount costs of future expenditures for environmental clean up to their
present value. An exception to the accounting treatment described above relates
to the work we perform for one facility, for which the U.S. Government will pay
all the decommissioning costs. We recognize recoveries of environmental clean-up
costs from other parties as assets when we determine their receipt is probable.
Research And Development
Research and development activities are related to development and improvement
of new and existing products and equipment and conceptual and engineering
evaluation for translation into practical applications. We charge to operations
the costs of research and development that is not performed on specific
contracts as we incur them. These expenses totaled approximately $17,047,000,
$12,312,000 and $15,125,000 in the nine-month period ended December 31, 1999 and
the fiscal years ended March 31, 1999 and 1998, respectively. In addition, our
customers paid for expenditures we made on research and development activities
of approximately $18,487,000, $15,752,000 and $22,803,000 in the nine-month
period ended December 31, 1999 and the fiscal years ended March 31, 1999 and
1998, respectively.
Minority Interest
Minority interest expense includes dividends on MI preferred stock (see Note 8)
and the recognition of minority shareholder participation in the results of
operations of less-than-wholly owned subsidiaries.
Long-Lived Assets
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.
Property, Plant And Equipment
We carry our property, plant and equipment at cost, reduced by provisions to
recognize economic impairment when we determine impairment has occurred.
Except for major marine vessels, we depreciate our property, plant and equipment
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. We depreciate
major marine vessels using the units-of-production method based on the
utilization of each vessel. Our depreciation expense calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line
47
<PAGE> 52
depreciation, and 50% of cumulative straight-line depreciation. Our depreciation
expense was $47,415,000, $84,404,000 and $106,305,000 for the nine-month period
ended December 31, 1999 and the fiscal years ended March 31, 1999 and 1998,
respectively.
We expense the costs of maintenance, repairs and renewals which do not
materially prolong the useful life of an asset as we incur them except for
drydocking costs for the marine fleet, which we estimate and accrue over the
period of time between drydockings, generally 3 to 5 years. We charge those
accruals to operations currently.
Goodwill and Other Intangible Assets
The majority of our goodwill pertains to the acquisition of minority interest in
JRM (see Note 2). We amortize goodwill on a straight-line basis, using a
twenty-year period for the JRM minority interest acquisition, a forty-year
period for the B&W acquisition, and periods of ten to twenty years for all other
goodwill. Our acquisition of the JRM minority interest resulted in additional
goodwill of $333,219,000 during the nine-month period ended December 31, 1999
and $27,231,000 during the fiscal year ended March 31, 1999. We recorded a
reduction of goodwill of $9,267,000 relating to the sale of McDermott Subsea
Constructors Limited during the fiscal year ended March 31, 1999 (see Note 3).
We recorded impairments of goodwill of $10,461,000 and $272,610,000,
respectively, in the fiscal years ended March 31, 1999 and 1998 (see Note 7).
Our goodwill amortization expense was $14,434,000, $8,290,000 and $25,026,000
for the nine-month period ended December 31, 1999 and the fiscal years ended
March 31, 1999 and 1998, respectively.
We have included other intangible assets of $14,347,000 and $22,638,000 in other
assets at December 31, 1999 and March 31, 1999, respectively. These intangible
assets consist primarily of trademarks, rights to use technology, investments in
oil and gas properties and non-competition agreements. Amortization expense for
these intangible assets was $4,086,000, $6,909,000 and $8,229,000, for the
nine-month period ended December 31, 1999 and the fiscal years ended March 31,
1999 and 1998, respectively. This amortization expense includes $2,409,000 for
the nine-month period ended December 31, 1999 and $3,212,000 in each of the
fiscal years ended March 31, 1999 and March 31, 1998 for non-competition
agreements. At December 31, 1999, the unamortized balance of the non-competition
agreements was $287,000.
Capitalization of Interest Cost
Interest is capitalized in accordance with SFAS No. 34, "Capitalization of
Interest Cost." We incurred total interest of $37,678,000 in the nine-month
period ended December 31, 1999, $63,839,000 in the fiscal year ended March 31,
1999 and $82,347,000 in the fiscal year ended March 31, 1998, of which we
capitalized $1,936,000 in the nine-month period ended December 31, 1999,
$578,000 in the fiscal year ended March 31, 1999 and $893,000 in the fiscal year
ended March 31, 1998.
Cash Equivalents
Our cash equivalents are highly liquid investments, with maturities of three
months or less when purchased, which we do not hold as part of our investment
portfolio.
Derivative Financial Instruments
We attempt to minimize our exposure to changes in foreign currency exchange
rates by matching 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 derivatives,
primarily forward exchange contracts, to reduce the impact of foreign exchange
rate movements on operating results. Gains and losses on forward exchange
contracts that qualify as hedges of firm purchase and sale commitments are
deferred and recognized in income or as adjustments of carrying amounts when the
hedged transactions occur. Gains
48
<PAGE> 53
and losses on forward exchange contracts that hedge foreign currency assets or
liabilities are recognized in income as incurred. Those amounts effectively
offset gains and losses on the foreign currency assets or liabilities that are
hedged.
Stock-Based Compensation
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") and related Interpretations in accounting for
our employee stock plans. Under APB 25, if the exercise price of the employee
stock options equals or exceeds the fair value of the underlying stock on the
measurement date, no compensation expense is recognized. If the measurement date
is later than the date of grant, compensation expense is recorded to the
measurement date based on the quoted market price of the underlying stock at the
end of each reporting period.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require us to recognize
all derivatives on our consolidated balance sheet at their fair values.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. We have not yet determined the effect SFAS No. 133 will have on our
consolidated financial position or results of operations.
NOTE 2 - ACQUISITION OF MINORITY INTEREST
During the nine-month period ended December 31, 1999, MII acquired all of the
publicly held shares of JRM common stock in a two-step acquisition. On June 10,
1999, MII purchased 14,353,490 shares in a tender offer for the publicly held
shares of JRM for $35.62 per share in cash. Together with the 24,668,297 shares
held by MII, the tendered shares represented approximately 99.5% of the shares
of JRM common stock outstanding at the expiration of the tender offer. On July
30, 1999, the remaining 215,008 shares of JRM common stock were acquired for the
same price in cash in a second-step merger. Also on that date, 12,340 restricted
shares of JRM common stock were converted to 15,836 restricted shares of MII
common stock. Outstanding restricted shares of JRM were either acquired for cash
or converted to restricted shares of MII in accordance with the terms of the
merger agreement. In addition, MII assumed 542,221 options to purchase JRM
common stock and converted them into 696,000 options to purchase MII common
stock. These options are included in the disclosures in Note 10.
The acquisition and the allocation of the purchase price were accounted for
using the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16. The aggregate purchase price was approximately
$536,027,000, including direct acquisition costs of approximately $9,335,000.
The aggregate purchase price also includes the fair value of the options assumed
of approximately $7,323,000 and the fair value of the restricted shares issued
of approximately $439,000. The goodwill acquired approximated $333,219,000. We
are amortizing this goodwill over twenty years.
This acquisition eliminated the minority interest in JRM. We recorded minority
interest expense of $4,005,000, $45,137,000 and $31,467,000 related to JRM
during the three-month period ended June 30, 1999 and the fiscal years ended
March 31, 1999 and 1998, respectively.
49
<PAGE> 54
In the fiscal years ended March 31, 1999 and 1998, we acquired a portion of the
outstanding minority interest of JRM, as a result of JRM's purchase of treasury
shares. During the fiscal year ended March 31, 1998, one of our subsidiaries
acquired the minority ownership in Diamond Power Specialty U.K. We used the
purchase method to account for these acquisitions.
NOTE 3 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
We have included in other assets investments in joint ventures and other
entities that we account for using the equity method of $63,606,000 and
$61,393,000 at December 31, 1999 and March 31, 1999, respectively. The
undistributed earnings of our equity method investees were $33,977,000 and
$38,088,000 at December 31, 1999 and March 31, 1999, respectively.
Summarized below is combined balance sheet and income statement information,
based on the most recent financial information, for investments in entities we
accounted for using the equity method:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
----------- -----------
(In thousands)
<S> <C> <C>
Current Assets $ 428,304 $ 448,558
Non-Current Assets 193,747 205,562
----------- -----------
Total Assets $ 622,051 $ 654,120
----------- -----------
Current Liabilities $ 386,639 $ 361,058
Non-Current Liabilities 102,628 124,521
Owners' Equity 132,784 168,541
----------- -----------
Total Liabilities and Owners' Equity $ 622,051 $ 654,120
----------- -----------
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
December 31, March 31,
1999 1999 1998
----------- ----------- -----------
(In thousands)
Revenues $ 758,450 $ 1,100,224 $ 1,535,987
Gross Profit $ 21,379 $ 64,645 $ 172,349
Income (Loss) before Provision for Income Taxes $ (1,473) $ 37,031 $ 90,564
Provision for Income Taxes 5,302 4,398 27,460
----------- ----------- -----------
Net Income (Loss) $ (6,775) $ 32,633 $ 63,104
----------- ----------- -----------
</TABLE>
Our investment in equity method investees was greater than our underlying equity
in net assets of those investees based on stated ownership percentages by
$2,336,000 at December 31, 1999 and less than our underlying equity in net
assets by $18,824,000 at March 31, 1999. These differences are primarily related
to the liquidation of an investee, cumulative losses, the timing of distribution
of dividends and various adjustments under generally accepted accounting
principles.
We have investments in several joint ventures and other entities on a worldwide
basis. None of these investees was significant for the periods presented.
50
<PAGE> 55
Reconciliation of net income per combined income statement information to income
(loss) from investees per consolidated statement of income is as follows:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
December 31, March 31,
1999 1999 1998
------------ ------- --------
(In thousands)
<S> <C> <C> <C>
Equity income (loss) based on stated
ownership percentages $ (8,220) $ 12,768 $ 25,192
Distribution of earnings from HeereMac joint venture
received as part of termination -- -- 61,637
Impairment of advances to investee -- (4,823) --
Termination payment to exit joint venture (2,584) -- --
All other adjustments due to amortization of basis
differences, timing of GAAP adjustments
and other adjustments (178) 434 (1,447)
--------- -------- ---------
Income (loss) from investees $ (10,982) $ 8,379 $ 85,382
--------- -------- ---------
</TABLE>
During the fiscal year ended March 31, 1998, JRM and its joint venture partner,
Heerema Offshore Construction Group, Inc. ("Heerema"), terminated the HeereMac
joint venture. Each party had a 50% interest in the joint venture. Heerema had
responsibility for its day-to-day operations.
In connection with the termination of the joint venture, Heerema acquired and
assumed JRM's 50% interest in the joint venture. JRM received $318,500,000 in
cash and title to several pieces of equipment. The cash received included a
$61,637,000 distribution of earnings and approximately $100,000,000 of principal
and interest owed to JRM under a promissory note. The equipment JRM received
included two launch barges and the derrick barge 101, a semi-submersible derrick
barge with a 3,500-ton lift capacity. As a result of the termination, JRM
recorded a gain on asset disposal of $224,472,000 and income from investees of
$61,637,000.
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture, and JRM recognized a gain on the termination of $37,353,000.
Pursuant to the termination, JRM received cash of approximately $105,000,000,
ETPM S.A.'s derrick/lay barge 1601 and ETPM S.A.'s interest in McDermott-ETPM
East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received JRM's lay barge
200 and JRM's interest in McDermott Subsea Constructors Limited ("MSCL") and
McDermott-ETPM West, Inc. The consolidated statement of income includes revenues
of $74,096,000 and operating income of $18,751,000 for the fiscal year ended
March 31, 1998 attributable to operations transferred to ETPM S.A.
During the fiscal year ended March 31, 1999, JRM's Malaysian joint venture sold
two combination pipelay and derrick barges. The joint venture, in which JRM
holds a 49% interest, received approximately $47,000,000 in cash for the barges.
During the nine-month period ended December 31, 1999, JRM acquired an additional
interest in its Deep Oil Technology joint venture for $2,575,000 in cash. In
addition, the purchase agreement includes additional contingent consideration of
up to $2,860,000 plus interest, based on future performance levels over the next
fifteen years. As of December 31, 1999, contingent consideration of $1,360,000
was considered likely to be met and was included in the purchase price.
Our transactions with unconsolidated affiliates included the following:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
December 31, March 31,
1999 1999 1998
------------ --------- ---------
(In thousands)
<S> <C> <C> <C>
Sales to $ 92,052 $ 136,737 $ 164,501
Leasing activities (included in Sales to) $ 73,019 $ 42,154 $ 10,491
Purchases from $ 6,341 $ 12,223 $ 33,544
Dividends received $ 4,206 $ 28,650 $ 9,832
</TABLE>
51
<PAGE> 56
Our other assets include non-current accounts receivable from unconsolidated
affiliates of $2,702,000 and $2,819,000 at December 31, 1999 and March 31, 1999,
respectively. Our accounts payable includes payables to unconsolidated
affiliates of $17,986,000 and $28,314,000 at December 31, 1999 and March 31,
1999, respectively. Our property, plant and equipment includes cost of
$63,704,000 and $63,594,000 and accumulated depreciation of $34,119,000 and
$29,497,000, respectively, at December 31, 1999 and March 31, 1999 of marine
equipment that was leased to an unconsolidated affiliate.
NOTE 4 - INCOME TAXES
We have provided for income taxes based on the tax laws and rates in the
countries in which we conduct our operations. We have earned all of our income
outside of Panama, and we are not subject to income tax in Panama on income
earned outside of Panama. Therefore, there is no expected relationship between
the provision for, or benefit from, income taxes and income, or loss, before
income taxes. The major reason for the variations in these amounts is that
income is earned within and subject to the taxation laws of various countries,
each of which has a regime of taxation which varies from the others. The
taxation regimes vary not only with respect to nominal rate, but also with
respect to the allowability of deductions, credits and other benefits.
Variations also exist because the proportional extent to which income is earned
in, and subject to tax by, any particular country or countries varies from year
to year. MII and certain of its subsidiaries keep books and file tax returns on
the completed contract method of accounting.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of December 31, 1999 and
March 31, 1999 were as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued warranty expense $ 15,447 $ 15,848
Accrued vacation pay 8,315 8,234
Accrued liabilities for self-insurance
(including postretirement health care benefits) 57,597 69,025
Accrued liabilities for executive and employee incentive compensation 26,328 30,972
Investments in joint ventures and affiliated companies 5,000 6,419
Operating loss carryforwards 13,490 13,458
Environmental and products liabilities 527,462 620,992
Long-term contracts 17,363 --
Other 34,985 29,489
----------- ----------
Total deferred tax assets 705,987 794,437
Valuation allowance for deferred tax assets (34,794) (39,961)
----------- ----------
Deferred tax assets 671,193 754,476
----------- ----------
Deferred tax liabilities:
Property, plant and equipment 24,629 21,644
Prepaid pension costs 9,742 11,493
Investments in joint ventures and affiliated companies 11,167 15,243
Insurance and other recoverables 458,484 544,382
Long-term contracts - 1,224
Other 3,772 4,302
----------- ----------
Total deferred tax liabilities 507,794 598,288
----------- ----------
Net deferred tax assets $ 163,399 $ 156,188
=========== ==========
</TABLE>
52
<PAGE> 57
Income before provision for (benefit from) income taxes and extraordinary item
was as follows:
<TABLE>
<CAPTION>
Nine-Month
Period Ended Fiscal Year Ended
December 31, March
1999 1999 1998
------------ ------- ------
(In thousands)
<S> <C> <C> <C>
U.S. $ 43,281 $ 63,361 $ (125,441)
Other than U.S. (8,183) 123,917 417,248
---------- ---------- ----------
Income before provision for (benefit from)
income taxes and extraordinary item $ 35,098 $ 187,278 $ 291,807
========== ========== ==========
The provision for (benefit from) income taxes consisted of:
Current:
U.S. - Federal $ 4,026 $ 18,582 $ 54,340
U.S. - State and local 2,214 7,983 8,541
Other than U.S. 22,986 (1,643) 3,715
---------- ---------- ----------
Total current 29,226 24,922 66,596
---------- ---------- ----------
Deferred
U.S. - Federal 8,434 (37,152) (147)
U.S. - State and local 2,695 2,823 69
Other than U.S. (5,697) 4,604 9,599
---------- ---------- ----------
Total deferred 5,432 (29,725) 9,521
---------- ---------- ----------
Provision for (benefit from) income taxes $ 34,658 $ (4,803) $ 76,117
========== ========== ==========
</TABLE>
There is no provision for (benefit from) income taxes associated with the
extraordinary item of $38,719,000 recorded by JRM in the fiscal year ended March
31, 1999.
Our current provision for other than U.S. income taxes in the fiscal years ended
March 31, 1999 and 1998 includes a reduction of $525,000 and $10,427,000,
respectively, for the benefit of net operating loss carryforwards. The provision
for the nine-month period ended December 31, 1999 reflects a non-deductible loss
of $37,810,000 on the curtailment of a foreign pension plan and non-deductible
amortization of goodwill of $9,929,000 created by the premium we paid on the
acquisition of the minority interest in JRM. The provision for the fiscal year
ended March 31, 1999 also includes a benefit totaling approximately $25,456,000
for a reduction in the valuation allowance for deferred taxes. This reduction is
the result of tax planning strategies, use of operating loss carrybacks and
forecast taxable income. Included in the reduction of the valuation allowance
was an amount that resulted from the sale of a foreign subsidiary, which
generated no tax benefit. In addition, the fiscal year ended March 31, 1999 also
reflects favorable tax settlements in U.S. and foreign jurisdictions totaling
approximately $30,429,000.
MII and JRM would be subject to withholding taxes on distributions of earnings
from their U.S. subsidiaries and certain foreign subsidiaries. We have not
provided for any taxes, as we treat these earnings as indefinitely reinvested.
For the nine-month period ended December 31, 1999, the undistributed earnings of
foreign subsidiaries of MI and J. Ray McDermott Holdings, Inc. amounted to
approximately $52,500,000. We estimate the unrecognized deferred income tax
liability on these earnings is approximately $20,500,000. Withholding taxes of
approximately $4,700,000 would be payable to the applicable foreign
jurisdictions upon remittance of all previously unremitted earnings. It is not
practicable to estimate the tax liability on the undistributed earnings of our
other U.S. and foreign subsidiaries.
We reached settlements with the Internal Revenue Service ("IRS") concerning MI's
U.S. income tax liability through the fiscal year ended March 31, 1990,
disposing of all U.S. federal income tax issues. The IRS has issued notices for
the fiscal years ended March 31, 1991 and March 31, 1992 asserting deficiencies
in the amount of taxes reported, based on issues substantially similar to those
raised in earlier years. We believe that any income taxes ultimately assessed
against MI will not exceed amounts we have already provided for.
53
<PAGE> 58
We have provided a valuation allowance ($34,794,000 at December 31, 1999) for
deferred tax assets that cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. We believe that our
remaining deferred tax assets at December 31, 1999 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 the sales of appreciated assets. Uncertainties that affect
the ultimate realization of our deferred tax assets include the risk of
incurring losses in the future and the possibility of declines in value of
appreciated assets involved in the tax planning strategies we have identified.
We have considered these factors in determining the valuation allowance. We will
continue to assess the adequacy of the valuation allowance on a quarterly basis.
We have foreign net operating loss carryforwards of approximately $32,700,000
available to offset future taxable income in foreign jurisdictions.
Approximately $9,700,000 of the foreign net operating loss carryforwards expire
in 2000 to 2006. We have domestic net operating loss carryforwards of
approximately $21,500,000 available to offset future taxable income in domestic
jurisdictions. The domestic net operating loss carryforwards expire in 2009 to
2019.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"),
MI has the right to sell to MII and MII has the right to buy from MI, 100,000
units, each of which consists of one share of MII Common Stock and one share of
MII Series A Participating Preferred Stock held by MI since prior to the 1982
reorganization transaction under which MII became the parent of MI. The price is
based on (1) the stockholders' equity of MII at the close of the fiscal year
preceding the date at which the right to sell or buy, as the case may be, is
exercised and (2) the price-to-book value of the Dow Jones Industrial Average.
At January 1, 2000, the aggregate unit value for MI's 100,000 units was
$287,334,000. The net proceeds to MI from the exercise of any rights under the
Intercompany Agreement would be subject to U.S. federal, state and other
applicable taxes. We have not established any tax provisions for this
arrangement, because there is no present intention by either party to exercise
their rights under the Intercompany Agreement. The indentures relating to the
notes issued by MI (see Note 5) limit our ability to amend the Intercompany
Agreement.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(In thousands)
<S> <C> <C>
Long-term debt consists of:
Unsecured Debt:
Series A Medium Term Notes (maturing in 2003; interest at
various rates ranging from 8.20% to 9.00%) $ 9,500 $ 40,000
Series B Medium Term Notes (maturities ranging from 5 to 23
years; interest at various rates ranging from 6.50% to 8.75%) 64,000 64,000
9.375% Notes due 2002 ($225,000,000 principal amount) 224,798 224,739
9.375% Senior Subordinated Notes due 2006
($1,234,000 principal amount) 1,213 1,397
Other notes payable through 2012 (interest at
various rates ranging to 10%) 23,453 23,667
Secured Debt:
Capitalized lease obligations 137 1,097
--------- ---------
323,101 354,900
Less: Amounts due within one year 87 31,126
--------- ---------
Long-term debt $ 323,014 $ 323,774
--------- ---------
Notes payable and current maturities of long-term debt consist of:
Short-term lines of credit - unsecured $ 4,148 $ -
Secured borrowings 82,264 -
Current maturities of long-term debt 87 31,126
--------- ---------
Total $ 86,499 $ 31,126
--------- ---------
Weighted average interest rate on short-term borrowings 6.17% 8.20%
--------- ---------
</TABLE>
54
<PAGE> 59
The indentures relating to the 9.375% Notes due 2002 and the Series A and B
Medium Term Notes contain certain restrictive covenants, including limitations
on indebtedness, liens securing indebtedness, and dividends and loans.
On March 5, 1999, JRM completed an offer to purchase all its outstanding 9.375%
Senior Subordinated Notes at a purchase price of 113.046% of their principal
amount ($1,130.46 per $1,000 principal amount), plus accrued and unpaid
interest. On that date, JRM purchased $248,575,000 in principal amount of the
notes for a total purchase price of $284,564,000, including accrued interest of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchase of the notes, JRM received consents to certain
amendments that amended or eliminated certain restrictive covenants and other
provisions contained in the indenture relating to the notes. Specifically, the
covenants contained in the indenture that restricted JRM's ability to pay
dividends, repurchase or redeem its capital stock or transfer funds through
unsecured loans to or investments in MII were eliminated.
Maturities of long-term debt during the five years subsequent to December 31,
1999 are as follows: 2000 - $87,000; 2001 - $90,000; 2002 - $224,823,000; 2003
- - $9,525,000; 2004 - $25,000.
At December 31, 1999 and March 31, 1999, we had available various uncommitted
short-term lines of credit from banks totaling $72,766,000 and $87,578,000,
respectively. At December 31, 1999, our outstanding borrowings under these lines
of credit were $4,148,000. There were no borrowings under these lines at March
31, 1999. As of December 31, 1999 and March 31, 1999, B&W, jointly and severally
with BWICO and BWXT, were parties to an unsecured credit agreement with a group
of banks (the "BWICO Credit Agreement"). There were no borrowings under the
agreement at December 31, 1999 or March 31, 1999. Commitment fees under the
agreement totaled approximately $611,000, $733,000 and $412,000 for the
nine-month period ended December 31, 1999 and the fiscal years ended March 31,
1999 and 1998, respectively.
At December 31, 1999, JRM and certain of its subsidiaries were parties to an
unsecured credit agreement with a group of banks (the "JRM Credit Agreement").
There were no borrowings under the JRM Credit Agreement at December 31, 1999 or
March 31, 1999. Commitment fees under the agreement totaled approximately
$508,000, $610,000 and $380,000 for the nine-month period ended December 31,
1999 and the fiscal years ended March 31, 1999 and 1998, respectively.
In conjunction with its Chapter 11 filing and subject to U.S. Bankruptcy Court
approval, B&W has entered into a three-year, $300,000,000 unsecured
Debtor-in-Possession revolving credit facility ("DIP Credit Facility") with
Citibank, N.A. The DIP Credit Facility has a maximum limit for cash advances and
certain types of letters of credit of $100,000,000. The DIP Credit Facility is
expected to receive "superpriority" status from the Bankruptcy Court and will be
subject to certain financial and non-financial covenants. See further discussion
of B&W's Chapter 11 filing in Note 20.
On February 21, 2000, we also entered into other financing arrangements
providing for up to $500,000,000 of financing to the balance of our operations.
This financing consists of a $200,000,000 credit facility for MII, BWXT and HPC
(the "New MII Credit Facility") and a $300,000,000 credit facility for JRM and
some of its subsidiaries (the "New 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 of the letters of credit outstanding under each facility.
We are proceeding to terminate the JRM Credit Agreement as soon as practical. As
a result of the B&W bankruptcy filing, the BWICO Credit Agreement is in default
and we are working with Citibank, N.A., the administrative agent for that
facility as well as the DIP Credit Facility, to terminate the BWICO Credit
Agreement on mutually acceptable terms.
The New 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 for advances or issuances of letters of credit for the account of
the borrowers and for the benefit of the borrowers and their subsidiaries (other
than B&W and the subsidiaries of B&W that filed Chapter 11 cases). 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
55
<PAGE> 60
drawings under outstanding letters of credit issued for the benefit of B&W and
its subsidiaries and to issue new letters of credit for the account of MII to
renew or extend any of those outstanding letters of credit on their scheduled
expiration dates. The aggregate amount of loans and amounts available for
drawing under letters of credit outstanding under the New MII Credit Facility
may not exceed $200,000,000. Both facilities are secured by a collateral account
funded with cash and various government securities with a marked-to-market value
equal to 105% of the aggregate amount available for drawing under letters of
credit and revolving credit borrowings then outstanding.
The New JRM Credit Facility also consists of two tranches. One is a revolving
credit facility that provides for up to $100,000,000 for advances or issuances
of letters of credit for the account of the borrowers and for the benefit of the
borrowers and their subsidiaries. Borrowings under this facility may be used for
working capital and general corporate purposes. The second tranche is a
$200,000,000 three-year term-loan facility with a 364-day initial availability
period, subject to extension under some circumstances. The term-loan facility
may only be used for purposes the lenders approve. The facility is subject to
certain financial and non-financial covenants.
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 December 31, 1999, substantially all the net assets of MI were
subject to those restrictions. At December 31, 1999, JRM and its subsidiaries
could make unsecured loans to or investments in MII and its other subsidiaries
of approximately $72,000,000. The New JRM Credit Facility continues to restrict
JRM's ability to make unsecured loans to or investments in MII or its other
subsidiaries.
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. We do not believe that this or B&W's bankruptcy filing will
materially impact our immediate working capital and liquidity requirements for
the balance of our other operations. 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.
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
We provide retirement benefits, primarily through non-contributory pension
plans, for substantially all our regular full-time employees. We do not provide
retirement benefits to certain non-resident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada or the United Kingdom. We base our
salaried plan benefits on final average compensation and years of service, while
we base our hourly plan benefits on a flat benefit rate and years of service.
Our funding policy is to fund applicable pension plans to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974
("ERISA") and, generally, to fund other pension plans as recommended by the
respective plan actuaries and in accordance with applicable law.
We supply postretirement health care and life insurance benefits to our union
employees based on our union contracts. Effective April 1, 1998, we terminated
all postretirement benefits for non-union employees. On the same date, we
amended the pension plans for the employees affected by the termination to
increase the benefits payable to the participants to offset the cost of
postretirement health care and life insurance. We measured the decrease in our
postretirement benefit obligation against the increase in our projected benefit
obligation of the pension plans, and recognized a resulting curtailment gain of
$21,940,000 in the fiscal year ended March 31, 1999.
In the nine-month period ended December 31, 1999, we curtailed a pension plan in
the United Kingdom and increased the benefits payable to the employees affected
by the curtailment. As a result, we recognized a curtailment loss of
$37,810,000, of which $14,168,000 related to estimated excise taxes payable. We
are continuing to negotiate a settlement, but we do not believe the ultimate
settlement loss will be significantly different from the amounts already
provided for in the consolidated financial statements.
56
<PAGE> 61
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
Nine-Month Fiscal Year Nine-Month Fiscal Year
Period Ended Ended Period Ended Ended
December 31, March 31, December 31, March 31,
1999 1999 1999 1999
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 1,799,443 $ 1,411,512 $ 153,947 $ 349,288
Service cost 24,080 33,341 91 203
Interest cost 86,186 112,822 6,631 9,478
Plan participants' contributions 90 136 -- --
Curtailments 25,551 1,452 (19,745) (215,751)
Amendments 26,186 245,306 -- --
Change in assumptions (208,918) 101,387 -- 3,012
Actuarial (gain) loss 79,572 9,210 (10,112) 29,049
Foreign currency exchange rate changes 3,626 (7,014) 90 --
Benefits paid (93,567) (108,709) (10,307) (21,332)
----------- ----------- ----------- -----------
Benefit obligation at end of period 1,742,249 1,799,443 120,595 153,947
----------- ----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of period 1,913,246 1,822,166 -- --
Actual return on plan assets 216,776 190,586 -- --
Company contributions 12,712 14,602 10,307 21,332
Plan participants' contributions 90 136 -- --
Foreign currency exchange rate changes 3,409 (12,898) -- --
Benefits paid (93,567) (101,346) (10,307) (21,332)
----------- ----------- ----------- -----------
Fair value of plan assets at the end of period 2,052,666 1,913,246 -- --
----------- ----------- ----------- -----------
Funded status 310,417 113,803 (120,595) (153,947)
Unrecognized net obligation (281,442) (25,456) 2,635 2,712
Unrecognized prior service cost 18,123 14,689 -- --
Unrecognized actuarial (gain) loss (9,851) (42,866) (4,293) 1,879
----------- ----------- ----------- -----------
Net amount recognized $ 37,247 $ 60,170 $ (122,253) $ (149,356)
=========== =========== =========== ===========
Amounts recognized in the balance sheet:
Prepaid benefit cost $ 111,114 $ 130,437 $ -- $ --
Accrued benefit liability (88,353) (81,727) (122,253) (149,356)
Intangible asset 1,986 2,435 -- --
Accumulated other comprehensive income 12,500 9,025 -- --
----------- ----------- ----------- -----------
Net amount recognized $ 37,247 $ 60,170 $ (122,253) $ (149,356)
=========== =========== =========== ===========
Weighted average assumptions:
Discount rate 7.63% 7.01% 7.58% 6.60%
Expected return on plan assets 8.24% 8.13% -- --
Rate of compensation increase 4.50% 4.50% -- --
</TABLE>
For measurement purposes, a five-percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to four percent in 2005 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
Nine Nine
Months Fiscal Year Months Fiscal Year
Ended Ended Ended Ended
December 31, March 31, December 31, March 31,
1999 1999 1998 1999 1999 1998
------------ --------- --------- ------------ --------- ---------
(In thousands)
Components of net periodic
benefit cost (income):
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 24,080 $ 33,341 $ 29,002 $ 91 $ 203 $ 3,487
Interest cost 86,186 112,822 94,182 6,631 9,478 26,480
Expected return on plan assets (113,943) (146,990) (130,317) -- -- --
Amortization of prior service cost 2,234 2,522 2,430 -- -- --
Recognized net actuarial loss (gain) (4,727) (11,792) (7,493) $ 644 (1,109) (4,416)
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost (income) $ (6,170) $ (10,097) $ (12,196) $ 7,366 $ 8,572 $ 25,551
========= ========= ========= ========= ========= =========
</TABLE>
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<PAGE> 62
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $170,642,000, $134,812,000 and $87,681,000,
respectively, for the nine-month period ended December 31, 1999 and
$253,434,000, $207,549,000 and $152,700,000, respectively, for the fiscal year
ended March 31, 1999.
Assumed health care cost trend rates have a significant effect on the amounts we
report for our health care plan. A one-percentage-point change in our assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
--------------- ---------------
(In thousands)
<S> <C> <C>
Effect on total of service and interest
cost components $ 269 $ (259)
Effect on postretirement benefit obligation $ 3,232 $ (3,123)
</TABLE>
Multiemployer Plans
One of our subsidiaries contributes to various multiemployer plans. The plans
generally provide defined benefits to substantially all unionized workers in
this subsidiary. Amounts charged to pension cost and contributed to the plans
were $5,336,000, $11,295,000 and $5,151,000 in the nine-month period ended
December 31, 1999 and the fiscal years ended March 31, 1999 and 1998,
respectively.
NOTE 7 - IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Impairment losses to write-down property, plant and equipment to estimated fair
values and to write-off goodwill are summarized by segment as follows:
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Property, plant and equipment and other assets:
Assets to be held and used:
Marine Construction Services $ 1,456 $ 16,458 $ 2,891
Power Generation Systems -- -- 8,704
Assets to be disposed of:
Marine Construction Services 766 877 7,000
Industrial Operations -- 261 --
Goodwill:
Marine Construction Services -- 10,461 262,901
Power Generation Systems -- -- 1,611
Industrial Operations -- -- 8,098
---------- ---------- ----------
Total $ 2,222 $ 28,057 $ 291,205
---------- ---------- ----------
</TABLE>
Property, plant and equipment and other assets - assets to be held and used
During the nine-month period ended December 31, 1999 and the fiscal years ended
March 31, 1999 and 1998, we identified certain long-lived assets that were no
longer expected to recover their entire carrying value through future cash
flows. We generally determined fair values based on sales prices of comparable
assets. The assets include non-core, surplus and obsolete property and equipment
and fabrication facilities in our Marine Construction Services segment, and
manufacturing facilities and related equipment in our Power Generation Systems
segment.
Property, plant and equipment - assets to be disposed of
During the nine-month period ended December 31, 1999, our Marine Construction
Services segment recorded an impairment loss of $676,000 to reduce a building
near London to its fair value less cost to sell. In the fiscal year ended March
31, 1999, we recognized an impairment loss of $877,000 for this building. Prior
to impairment, the building had a net book value of approximately $7,549,000. We
decided to sell the building as a result of our withdrawal from traditional
European engineering operations. We expect to sell this
58
<PAGE> 63
building in 2000. Also during the nine-month period ended December 31, 1999,
this segment recognized $90,000 of impairment losses on leasehold improvements.
In the fiscal year ended March 31, 1998, our Marine Construction Services
segment recorded a loss of $7,000,000 to reduce a Floating Production, Storage
and Offloading System ("FPSO") to its estimated fair value less cost to sell.
Prior to recognition of the impairment loss, the FPSO had a net book value of
approximately $21,500,000. We determined the estimated fair value based on our
best estimate, as these types of vessels are somewhat unique in nature. We
decided to sell the FPSO following our strategic decision to exit this market.
Excluding the impairment loss, the FPSO generated $2,774,000 of net income for
the fiscal year ended March 31, 1998. We sold the FPSO during the fiscal year
ended March 31, 1999 and recorded a resulting loss on asset disposal of
approximately $2,382,000.
Goodwill
In the fiscal year ended March 31, 1999, our Marine Construction Services
segment wrote off $4,834,000 associated with the acquisition of a Mexican
shipyard we acquired in a prior year. We determined that the goodwill related to
the Mexican shipyard had no continuing value as the facility's intended use was
as a new-build facility, and the facility had been engaged primarily in ship
repair. Also in the fiscal year ended March 31, 1999, our Marine Construction
Services segment wrote off $5,627,000 related to an engineering business we
acquired in a prior year. We determined that the business had no continuing
value, based on our decision to withdraw from the third-party engineering
business. Annual amortization of this goodwill totaled $1,524,000.
In the fiscal year ended March 31, 1998, our Marine Construction Services
segment wrote off $262,901,000 associated with the acquisition of Offshore
Pipelines, Inc. ("OPI"). In December 1997, we decided to exit the traditional
shallow water business, and abandoned work previously associated with the OPI
business. We based this decision on the industry outlook, the departure of key
OPI executives, the termination or disposal of significant OPI joint ventures
and the disposal of major OPI vessels. Annual amortization of the OPI goodwill
was approximately $21,800,000. In addition, in the fiscal year ended March 31,
1998, our Industrial Operations segment wrote off $8,098,000 associated with the
acquisition of McDermott Engineers and Constructors (Canada) Limited ("MECL") in
a prior year. We concluded that the goodwill had no continuing value due to that
subsidiary's reduced asset utilization and deteriorating market conditions.
Also, in the fiscal year ended March 31, 1998, we wrote off $1,611,000 of
goodwill related to our Power Generation Systems segment's manufacturing
facilities and related equipment.
NOTE 8 - SUBSIDIARIES' STOCKS
JRM
During the nine-month period ended December 31, 1999, MII acquired all of the
publicly held shares of JRM common stock (see Note 2).
During the fiscal year ended March 31, 1998, JRM's Board of Directors approved
the repurchase of up to two million shares of its common stock on the open
market or through negotiated transactions. JRM repurchased 362,500 shares at an
average share price of $37.31 during the fiscal year ended March 31, 1998.
During the fiscal year ended March 31, 1999, JRM's Board of Directors authorized
the repurchase of up to an additional one million shares. JRM repurchased
another 1,837,700 shares of its common stock at an average share price of $31.67
through October 8, 1998, at which time JRM ceased making share repurchases.
At March 31, 1999, JRM had outstanding 3,200,000 shares of Series A $2.25
Cumulative Convertible Preferred Stock, all of which were owned by MII. At March
31, 1999, 14,538,270 shares of JRM Common Stock were reserved for issuance in
connection with the
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<PAGE> 64
conversion of JRM Series A Preferred Stock, the exercise of stock options and
awards of restricted stock under JRM's stock incentive plans and contributions
to the Thrift Plan described in Note 10.
MI
During the fiscal year ended March 31, 1999, MI redeemed all of its Series A
Cumulative Convertible Preferred Stock and Series B Cumulative Preferred Stock.
Preferred dividends of $4,400,000 and $12,722,000 were included as a component
of minority interest in other income (expense) in the fiscal years ended March
31, 1999 and 1998, respectively.
NOTE 9 - CAPITAL STOCK
The Panamanian regulations that relate to acquisitions of securities of
companies registered with the National Securities Commission, such as MII, have
certain requirements. They require, among other matters, that detailed
disclosure concerning an offeror be finalized before that person acquires
beneficial ownership of more than five percent of the outstanding shares of any
class of our stock pursuant to a tender offer. The detailed disclosure is
subject to review by either the Panamanian National Securities Commission or our
Board of Directors. Transfers of shares of common stock in violation of these
regulations are invalid and cannot be registered for transfer.
We issue shares of our common stock in connection with our 1996 Officer
Long-Term Incentive Plan (and its predecessor programs), our 1997 Director Stock
Program, our 1992 Senior Management Stock Option Plan and contributions to our
Thrift Plan. At December 31, 1999 and March 31, 1999, 11,624,584 and 10,465,688
shares of common stock, respectively, were reserved for issuance in connection
with those plans.
During the fiscal year ended March 31, 1998, our Board of Directors approved our
repurchase of up to two million shares of our common stock from time to time on
the open market or through negotiated transactions, depending on the
availability of cash and market conditions. The purpose of the repurchases was
to offset dilution created by the issuance of shares pursuant to our stock
compensation and thrift plans. We completed our two million share repurchase
program in August 1998. During the fiscal year ended March 31, 1999, we
repurchased 1,900,000 shares of our common stock at an average share price of
$31.10.
MII Preferred Stock
On April 6, 1998, we called for redemption our non-voting Series C Cumulative
Convertible Preferred Stock. On April 21, 1998, all 2,875,000 shares of Series C
Preferred Stock were converted into shares of common stock at a rate of 1.4184
shares of our common stock for each share of Series C Preferred Stock, resulting
in 4,077,890 shares of common stock being issued.
At December 31, 1999 and March 31, 1999, 100,000 shares of our non-voting Series
A Participating Preferred Stock (the "Participating Preferred Stock") and 20,000
and 30,000 shares of Series B Non-Voting Preferred Stock (the "Non-Voting
Preferred Stock"), respectively, were issued and owned by MI. The Non-Voting
Preferred Stock is currently callable at $275 per share, and we are redeeming
10,000 shares each year at $250 per share under the applicable mandatory
redemption provisions. The annual per share dividend rates for the Participating
Preferred Stock and the Non-Voting Preferred Stock are $10 and $20,
respectively, payable quarterly, and dividends on those shares are cumulative to
the extent not paid. The annual per share dividend rate for the Participating
Preferred Stock is limited to no more than ten times the amount of the per share
dividend on our common stock. In addition, shares of Participating Preferred
Stock (1) are entitled to receive additional dividends whenever dividends in
excess of $3.00 per share on our common stock are declared (or deemed to have
been declared) in any fiscal year and (2) share equally with the shares of our
common stock upon liquidation, with each share of Participating Preferred Stock
being equivalent to 350 shares of common stock for these purposes. For our
consolidated financial reporting purposes, the Participating Preferred Stock and
the Non-Voting Preferred Stock are considered constructively retired. The shares
of Participating Preferred Stock are subject to the Intercompany Agreement (see
Note 4).
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<PAGE> 65
On December 5, 1995, we designated 702,652 shares of our authorized but unissued
preferred stock as Series D Participating Preferred Stock in connection with our
adoption of a Stockholders Rights Plan. As of December 31, 1999, no shares of
Series D Participating Preferred Stock were outstanding.
Our issuance of additional shares of preferred stock in the future and the
specific terms thereof, such as the dividend rights, conversion rights, voting
rights, redemption prices and similar matters, may be authorized by our Board of
Directors without stockholder approval.
MII Rights
Under our Stockholder Rights Plan, our stockholders have one right for each
outstanding share of Common Stock held. The rights currently trade with the
common stock and each right entitles the holder thereof to purchase one
one-hundredth of a share of our Series D Participating Preferred Stock for $50
per share subject to anti-dilution adjustments. The rights become exercisable
and detach from the common stock within a specified period of time after a
person or a group either becomes the beneficial owner of 15 percent or more of
our outstanding common stock, or commences or announces an intention to commence
a tender or exchange offer for 15 percent or more of our outstanding common
stock (an "Acquiring Person"). Once exercisable, each right entitles the holder
thereof (other than an Acquiring Person) to purchase at the $50 exercise price
the number of shares of common stock that have a market value equal to twice the
exercise price. If our company merges with or transfers 50 percent or more of
its assets or earnings to any person after the rights become exercisable,
holders of rights may purchase that number of shares of common stock of the
acquiring entity that have a market value equal to twice the exercise price. We
may redeem the rights at a price of $0.01 per right for a specified period of
time after a person or group becomes an Acquiring Person. The Stockholder Rights
Plan, which was amended and restated on April 15, 1999, is currently scheduled
to expire on January 2, 2001.
NOTE 10 - STOCK PLANS
1996 Officer Long-Term Incentive Plan
At December 31, 1999, we had a total of 2,403,425 shares of our common stock
(including shares that were not awarded under predecessor plans) available for
stock option grants and restricted stock awards to officers and key employees
under our 1996 Officer Long-Term Incentive Plan. That plan permits grants of
nonqualified stock options, incentive stock options and restricted stock.
Options to purchase shares are granted at not less than 100% of the fair market
value on the date of grant, become exercisable at such time or times as
determined when granted, and expire not more than ten years after the date of
the grant. Under the plan, eligible employees may be granted rights to purchase
shares of common stock at par value ($1.00 per share), which shares are subject
to restrictions on transfer that lapse at such times and circumstances as
specified when granted. As of December 31, 1999, we had 672,081 shares of common
stock available for award as restricted stock. During the nine-month period
ended December 31, 1999 and the fiscal years ended March 31, 1999 and 1998, we
granted performance-based restricted stock awards under the plan to certain
officers and key employees. Under the provisions of the performance-based
awards, no shares are issued at the time of the initial award, and the number of
shares which will ultimately be issued will be determined based on the change in
the market value of our common stock over a specified performance period. The
performance-based awards in the nine-month period ended December 31, 1999 and
the fiscal years ended March 31, 1999 and 1998 were represented by initial
notional grants totaling 22,190, 129,510 and 86,400 rights to purchase
restricted shares of common stock, respectively. These rights had weighted
average fair values of $7.22, $28.52 and $33.00 on their respective dates of
grant during the nine-month period ended December 31, 1999 and the fiscal years
ended March 31, 1999 and 1998. Through December 31, 1999, we issued a total of
1,228,410 shares of restricted stock under the plan (and a predecessor plan).
During the nine-month period ended December 31, 1999, we issued 106,470
restricted shares in accordance with the terms of the JRM merger. These shares
had a weighted average fair value of $27.19 per share. No restricted shares were
issued in the fiscal years ended March 31, 1999 or 1998.
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<PAGE> 66
1997 Director Stock Program
At December 31, 1999, we had a total of 78,662 shares of our common stock
(including approved shares that were not awarded under a predecessor plan)
available for grants of options and rights to purchase restricted shares to
non-employee directors under our 1997 Director Stock Program. Under this
program, we grant options to purchase 900, 300 and 300 shares on the first,
second and third years, respectively, of a director's term at not less than 100%
of the fair market value on the date of grant. These options become exercisable,
in full, six months after the date of the grant and expire ten years and one day
after the date of grant. Under this program, we grant rights to purchase 450,
150, and 150 shares on the first, second and third years, respectively, of a
director's term, at par value ($1.00 per share), which shares are subject to
restrictions on transfer that lapse at the end of such term. Through December
31, 1999, we issued a total of 22,901 shares of restricted stock under the 1997
Director Stock Plan (and its predecessor plan) including 1,026 shares we issued
in connection with the JRM merger.
1992 Senior Management Stock Option Plan
At December 31, 1999, we had a total of 1,733,926 shares of common stock
available for stock option grants under our 1992 Senior Management Stock Option
Plan. Our Board of Directors determines the total number of shares available for
grant from time to time. Under this plan, options to purchase shares are granted
at not less than 100% of the fair market value on the date of grant, become
exercisable at such time or times as determined when granted and expire not more
than ten years after the date of grant.
In the event of a change in control of our company, all three programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of outstanding options.
In accordance with the terms of the JRM merger, we issued a total of 696,000
options to senior management employees, officers and directors of JRM who held
JRM stock options at the effective time of the merger. These options have the
same terms and conditions as the options originally granted by JRM except that
they are fully vested and their exercise prices are not equal to the market
price on the date of grant. The number of options we issued and their exercise
prices were determined in accordance with the merger agreement. These options
have a weighted average exercise price of $22.72 and a range of exercise prices
from $4.47 to $30.12. The weighted average fair value of these options at the
date of grant was $12.17.
The following table summarizes activity for MII's stock option plans (share data
in thousands):
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, April 1 4,245 $ 24.76 3,904 $ 23.66 5,260 $ 22.55
Granted 758 21.64 651 29.40 363 33.99
Exercised (68) 21.08 (187) 19.76 (1,451) 21.68
Cancelled/forfeited (123) 22.53 (123) 21.83 (268) 26.67
----- -------- ----- -------- ----- ---------
Outstanding, end of period 4,812 $ 24.38 4,245 $ 24.76 3,904 $ 23.66
----- -------- ----- -------- ----- ---------
Exercisable, end of period 4,097 $ 24.04 3,101 $ 23.82 2,358 $ 22.95
===== ======== ===== ======== ===== =========
</TABLE>
The following tables summarize the range of exercise prices and the
weighted-average remaining contractual life of the options outstanding and the
range of exercise prices for the options exercisable at December 31, 1999 (share
data in thousands):
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<PAGE> 67
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
--------------- ----------- ------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 4.67 - 19.14 237 6.8 $ 12.32 179 $ 13.65
19.31 - 24.00 1,779 5.3 21.29 1,564 21.23
24.13 - 29.06 1,646 3.7 24.98 1,642 24.97
29.24 - 38.25 1,150 3.6 30.78 712 30.66
----- -----
$ 4.67 - 38.25 4,812 4.4 $ 24.38 4,097 $ 24.04
===== =====
</TABLE>
As discussed in Note 1, we apply APB 25 and related interpretations in
accounting for our stock-based compensation plans. Charges to income related to
stock plan awards totaled approximately $535,000, $4,276,000 and $6,288,000 for
the nine-month period ended December 31, 1999 and the fiscal years ended March
31, 1999 and 1998, respectively. If we had accounted for our stock plan awards
using the alternative fair value method of accounting under SFAS No. 123,
"Accounting for Stock-Based Compensation," our net income (loss) and earnings
(loss) per share would have been the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Net income (loss):
As reported $ 440 $153,362 $215,690
Pro forma $(3,398) $148,629 $214,991
Basic earnings (loss) per share:
As reported $ 0.01 $ 2.60 $ 3.74
Pro forma $ (0.06) $ 2.52 $ 3.73
Diluted earnings (loss) per share:
As reported $ 0.01 $ 2.54 $ 3.48
Pro forma $ (0.06) $ 2.46 3.48
</TABLE>
The above pro forma information is not indicative of future pro forma amounts.
SFAS 123 does not apply to awards prior to the fiscal year ended March 31,
1996, and we anticipate additional awards in future years. The fair value of
each option grant was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.79% 4.67% 5.48%
Volatility factor of the expected market
price of MII's common stock .49 .46 .36
Expected life of the option in years 2.8 3.5 3.6
Expected dividend yield of MII's common stock 0.7% 0.8% 0.6%
</TABLE>
The weighted average fair value of the stock options granted in the nine-month
period ended December 31, 1999 and the fiscal years ended March 31, 1999 and
1998 was $11.59, $10.80 and $10.85, respectively. During the nine-month period
ended December 31, 1999, weighted average exercise prices and weighted average
fair values of options whose exercise prices were equal to, greater than or less
than the market price of the stock on the grant date were as follows:
<TABLE>
<CAPTION>
Weighed Average
---------------
Exercise Fair
Price Value
------- -------
<S> <C> <C>
Equal to $ 9.61 $ 5.11
Greater than $ 29.25 $ 9.26
Less than $ 20.60 $ 13.11
</TABLE>
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<PAGE> 68
Thrift Plan
On November 12, 1991 and June 5, 1995, respectively, 5,000,000 of the authorized
and unissued shares of each of the MII and JRM common stock were reserved for
issuance for the employer match to the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift
Plan"). Those matching employer contributions equal 50% of the first 6% of
compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are non-forfeitable after five years of service or upon
retirement, death, lay-off or approved disability. During the nine-month period
ended December 31, 1999 and the fiscal years ended March 31, 1999 and 1998,
299,506, 229,245 and 191,058 shares, respectively, of MII's common stock were
issued as employer contributions pursuant to the Thrift Plan. During the
nine-month period ended December 31, 1999 (prior to the JRM merger) and the
fiscal years ended March 31, 1999 and 1998, 4,336, 68,104 and 65,727 shares,
respectively, of JRM's common stock were issued as employer contributions
pursuant to the Thrift Plan. During the nine-month period ended December 31,
1999, MII completed its acquisition of all outstanding shares of JRM, and JRM
shares are no longer issued as an employer's matching contribution. At December
31, 1999, 2,597,036 shares of MII's common stock remained available for issuance
under the Thrift Plan.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
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 was indicted by the Department of Justice for
participating in an international bid-rigging conspiracy for the sale of marine
construction services and pled guilty.
We have cooperated with the Department of Justice in its investigation. The
Department of Justice also has requested additional information from us relating
to possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM
assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J.
Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates and others, alleging that the defendants
engaged in anti-
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<PAGE> 69
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
filed its notice of appeal of the dismissal. In September 1999, the Phillips
Plaintiffs filed notice of their request to dismiss their remaining claims in
the lawsuit. That motion is pending.
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.
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 are defendants in lawsuits filed by Donald F.
Hall, Mary Ann Hall and others in the United States District Court for the
Western District of Pennsylvania, involving approximately 300 separate cases
relating to the operation of two former nuclear fuel processing facilities
located in Pennsylvania (the "Hall Litigation"), alleging, among other things,
that they suffered personal injury and other damages as a result of radioactive
emissions from these facilities. In September 1998, a jury found B&W and
Atlantic Richfield Company liable to the plaintiffs in the first eight cases
brought to trial, awarding $36,700,000 in compensatory
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<PAGE> 70
damages. In June 1999, the court set aside the judgement and ordered a new trial
on all issues. Recently, the 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. We do not expect any further
trials on the other cases until a decision is rendered on the appeal. There is a
controversy between B&W and its insurers as to the amount of insurance coverage
under the insurance policies covering these facilities. B&W has filed an action
seeking a judicial determination of this matter, which is currently pending in a
Pennsylvania court. We believe that any award and all other claims will be
resolved within the limits and coverage of our insurance policies; but our
insurance coverage may not be adequate and we may be materially adversely
impacted if our liabilities exceed our coverage. In connection with the
foregoing, B&W settled all pending and future punitive damage claims represented
by the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks
reimbursement of this amount from other parties.
From December 1999 through February 2000, several persons who allegedly
purchased shares of our common stock during the period from May 21, 1999 through
November 11, 1999 filed four purported class action complaints against MII and
two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the
United States District Court for the Eastern District of Louisiana. Each of
these complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. We filed motions to
dismiss three of these complaints for failure to state a claim on which relief
can be granted, before they were consolidated before one federal judge in New
Orleans. The fourth case has now been consolidated with the others. The
plaintiffs have been allowed to file a consolidated amended complaint, which we
will respond to after it has been filed. We believe the substantive allegations
contained in the original complaints are without merit and intend to defend
against these and any substantively similar claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and recently JRM instituted an arbitration
proceeding against Texaco seeking the amount owed. Texaco has countered,
claiming damages for delays resulting from the incident, as well as costs
incurred to complete the project with another contractor. Texaco has also filed
a lawsuit against a number of other parties, claiming that they are responsible
for the incident. It is our position that the installation contract between the
parties prohibits Texaco's claims against JRM and JRM is entitled to the amount
withheld.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position or results of
operations.
Products Liability
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).
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<PAGE> 71
Personal injury claim activity was as follows:
<TABLE>
<CAPTION>
For the
Nine-Month
Period Ended For the Fiscal Year Ended
December 31, March 31,
1999 1999 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Claims outstanding, beginning of period 41,721 43,826 45,253
New claims 27,809 24,278 30,004
Settlements (24,958) (26,383) (31,431)
------- ------- -------
Claims outstanding, end of period 44,572 41,721 43,826
======= ======= =======
</TABLE>
We have insurance coverage for these asbestos product liability claims against
B&W, which coverage is subject to varying insurance limits that are dependent
upon the year involved. Pursuant to agreements with the majority of our
principal insurers concerning the method of allocation of claim payments to the
years of coverage, B&W historically negotiated and settled these claims and
billed the appropriate amounts to the insurers. Ever since these claims began in
the early 1980's, B&W has adopted a strategy of grouping claims that met certain
basic criteria and settling them at the lowest possible average cost per claim.
We have recognized provisions in our consolidated financial statements to the
extent that settled claim payments are not deemed recoverable from insurers.
At December 31, 1999 and March 31, 1999, we had recorded the following with
respect to asbestos products liability claims and related insurance recoveries:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(In thousands)
<S> <C> <C>
Asbestos products liability:
Current $ 270,000 $ 240,000
Non-current 1,061,365 1,322,363
----------- -----------
Total $ 1,331,365 $ 1,562,363
=========== ===========
Asbestos products liability insurance recoverable:
Current $ 230,900 $ 199,750
Non-current 942,982 1,167,113
----------- -----------
Total $ 1,173,882 $ 1,366,863
=========== ===========
</TABLE>
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 have been expected trend
claim severity, frequency, and other factors. B&W's estimated liabilities have
been based on the assumption that B&W will continue to settle claims rather than
litigate, that new claims will conclude in 2012, that there will be a
significant decline in new claims received after 2003, and that the average cost
per claim will 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.
However, in late 1999, B&W experienced an increase in the amounts demanded by
certain claimants to settle mesothelioma, lung cancer, and asbestosis claims.
The demanded amounts significantly exceeded the average amount of B&W's
historical settlement payments for these types of claims. As a result, on
February 22, 2000, B&W filed a voluntary petition for Chapter 11 reorganization
in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New
Orleans. Under a proposed plan of reorganization, which will be subject to
approval by the court, B&W intends to establish a trust that will provide a
process through which future asbestos claims will be evaluated and resolved. We
believe this is the only viable means to determine and comprehensively resolve
B&W's and its subsidiaries' asbestos products liability. Although the filing
increases the uncertainty with respect to the manner in which such
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liabilities will ultimately be settled, we believe the amount that B&W has
provided for asbestos products liability claims at December 31, 1999, continues
to represent our best estimate of B&W's ultimate liability for asbestos claims.
B&W's ultimate liability still remains uncertain until a plan of reorganization
is negotiated and approved by the bankruptcy court. In addition, any changes in
the estimate of liability and insurance recoverables, and differences between
the proportion of any additional non-employee asbestos products 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. See the discussion regarding the
accounting for B&W subsequent to the filing in Note 20.
Environmental Matters
We have been identified as a potentially responsible party at various cleanup
sites under the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended. We have not been determined to be a major contributor
of waste to these sites. However, each potentially responsible party or
contributor may face assertions of joint and several liability. Generally,
however, a final allocation of costs is made based on relative contribution of
wastes to each site. Based on our relative contribution of waste to each site,
we expect our share of the ultimate liability for the various sites will not
have a material adverse effect on our consolidated financial position or results
of operations.
During the fiscal year ended March 31, 1995, we decided to close B&W's nuclear
manufacturing facilities in Parks Township, Armstrong County, Pennsylvania (the
"Parks Facilities"). B&W is proceeding with decontamination as the existing NRC
license permits. B&W submitted a decommissioning plan to the NRC for review and
approval in January 1996. B&W transferred the facilities to BWXT in the fiscal
year ended March 31, 1998. BWXT reached agreement with the NRC in the fiscal
year ended March 31, 1999 on a plan that provides for the completion of
facilities dismantlement and soil restoration by 2001 and license termination in
2002. BWXT expects to request approval from the NRC to release the site for
unrestricted use at that time. At December 31, 1999, the remaining provision for
the decontamination, decommissioning and closing of these facilities was
$8,698,000.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination resulting from previous
operations at the facilities. PADEP has advised BWXT that it does not intend to
assess any monetary sanctions provided that BWXT continues its remediation
program of the Parks Facilities.
At December 31, 1999 and March 31, 1999, we had total environmental reserves
(including provision for the facilities discussed above) of $23,391,000 and
$31,568,000, of which $11,787,000 and $19,835,000, respectively, were included
in current liabilities. Our estimated recoveries of these costs are included in
environmental and products liabilities recoverable at December 31, 1999.
Inherent in the estimates of those reserves and recoveries are our expectations
regarding the levels of contamination, decommissioning costs and recoverability
from other parties, which may vary significantly as decommissioning activities
progress. Accordingly, changes in estimates may differ from the amounts we have
provided for in our consolidated financial statements, however, we do not
believe that these differences will have a material effect on our operating
results.
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<PAGE> 73
Operating Leases
Future minimum payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending December 31, Amount
------------------------------- ------------
<S> <C>
2000 $ 11,519,000
2001 $ 7,917,000
2002 $ 5,986,000
2003 $ 4,113,000
2004 $ 2,070,000
thereafter $ 42,860,000
</TABLE>
Total rental expense for the nine-month period ended December 31, 1999 and the
fiscal years ended March 31, 1999 and 1998 was $34,850,000, $96,816,000 and
$93,057,000, respectively. These expense amounts include contingent rentals and
are net of sublease income, neither of which is material.
Other
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts. As a result, various aspects of our operations are
subject to continuing reviews by governmental agencies.
We maintain liability and property insurance against such risk and in such
amounts as we consider adequate. However, certain risks are either not insurable
or insurance is available only at rates we consider uneconomical.
We are contingently liable under standby letters of credit totaling $434,998,000
at December 31, 1999, all of which were issued in the normal course of business.
We have guaranteed $11,732,000 of loans to and $1,173,000 of standby letters of
credit issued by our unconsolidated foreign joint ventures at December 31, 1999.
In addition, we have a limited guarantee of approximately $46,700,000 of debt
incurred by an unconsolidated foreign joint venture. At December 31, 1999, we
had pledged approximately $47,897,000 fair value of government obligations and
corporate bonds to secure payments under and in connection with certain
reinsurance agreements and $81,180,000 fair value of these obligations to secure
borrowings of $82,264,000 that are incurred under repurchase agreements.
Our Construcciones Maritimas Mexicanas, S.A. de C.V. ("CMM") joint venture is
currently in default under its primary borrowing arrangement at December 31,
1999, without which it lacks the funds to complete its contracts. An extension
of the financing agreement is currently being negotiated. We have an investment
in CMM of approximately $5,300,000 and accounts receivable due from CMM of
approximately $14,300,000 at December 31, 1999, all of which may be impaired if
CMM is unable to negotiate an extension of the financing agreement.
NOTE 12 - RELATED PARTY TRANSACTIONS
A company affiliated with one of our directors, who became a director in June
1999, manages and operates an offshore producing oil and gas property for JRM.
The management and operation agreement requires JRM to pay an operations
management fee of approximately $10,000 per month, a marketing service fee based
on production, a minimum accounting and property supervision fee of $5,000 per
month, and certain other costs incurred in connection with the agreement. JRM
paid approximately $464,000 in fees and costs under the agreement during the
nine-month period ended December 31,1999. JRM has also periodically entered into
agreements to design, fabricate and install offshore pipelines for the same
company. JRM received approximately $1,900,000 for work performed on those
agreements in the nine-month period ended December 31, 1999.
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<PAGE> 74
Under a non-competition agreement JRM entered into in connection with its
acquisition of OPI, a former director of JRM, who resigned in April 1996,
received $1,500,000 in the nine-month period ended December 31, 1999 and in each
of the fiscal years ended March 31, 1999 and 1998.
JRM has a right to production payments in an offshore oil and gas property owned
by an affiliate of a former director of JRM, whose term as director ended in
August 1997, that allows it to share in up to $8,000,000 of the net proceeds
based on a percentage of its original interest in such property. JRM earned
approximately $1,262,000 in payments in the fiscal year ended March 31, 1998. In
addition, during the fiscal year ended March 31, 1998, JRM sold its investment
in common stock of this affiliate and its interest in a limited partnership,
which is also an affiliate of this former director.
See Note 3 for transactions with unconsolidated affiliates.
NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
Our Marine Construction Services segment's principal customers are businesses in
the offshore oil, natural gas and hydrocarbon processing industries and other
marine construction companies. The principal customers of our Power Generation
Systems segment are principally businesses and utilities in the electric power
generation industry (including government-owned utilities and independent power
producers) and the pulp and paper industry and other process industries, such as
oil refineries and steel mills. The primary customer of our Government
Operations segment is the U.S. Government (including its contractors). The
principal customers of our Industrial Operations segment are oil and natural gas
producers, and businesses in the electric power generation industry and the
petrochemical and chemical processing industries. These concentrations of
customers may impact our overall exposure to credit risk, either positively or
negatively, in that our customers may be similarly affected by changes in
economic or other conditions. In addition, we and many of our customers operate
worldwide and are therefore exposed to risks associated with the economic and
political forces of various countries and geographic areas. Approximately 50% of
our trade receivables are due from foreign customers. (See Note 17 for
additional information about our operations in different geographic areas.) We
generally do not obtain any collateral for our receivables.
We believe that our provision for possible losses on uncollectible accounts
receivable is adequate for our credit loss exposure. At December 31, 1999 and
March 31, 1999, the allowance for possible losses we deducted from accounts
receivable-trade on the accompanying balance sheet was $3,657,000 and
$5,544,000, respectively.
NOTE 14 - INVESTMENTS
The following is a summary of our available-for-sale securities at December 31,
1999:
<TABLE>
<CAPTION>
Amortized Gross Estimated
Cost Unrealized Losses Fair Value
---------- ----------------- ----------
(In thousands)
<S> <C> <C> <C>
Debt securities:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 277,582 $ 7,473 $ 270,109
Corporate notes and bonds 58,423 1,712 56,711
Other debt securities 49,734 809 48,925
---------- -------- ----------
Total debt securities 385,739 9,994 375,745
Equity securities 205 137 68
---------- -------- ----------
Total $ 385,944 $ 10,131 $ 375,813
========== ======== ==========
</TABLE>
70
<PAGE> 75
The following is a summary of our available-for-sale securities at March
31,1999:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 472,217 $ 2,326 $ 1,471 $ 473,072
Corporate notes and bonds 228,642 679 202 229,119
Other debt securities 136,259 104 63 136,300
---------- -------- -------- ----------
Total $ 837,118 $ 3,109 $ 1,736 $ 838,491
========== ========= ========= ==========
</TABLE>
The amortized cost and estimated fair value amounts of debt securities at March
31, 1999 include $14,171,000 in other debt securities that we have reported as
cash equivalents. At March 31, 1999, our investments also included $82,579,000
in time deposits.
Proceeds, gross realized gains and gross realized losses on sales of
available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Proceeds Realized Gains Realized Losses
-------- -------------- ---------------
(In thousands)
<S> <C> <C> <C>
Nine-Month Period Ended December 31, 1999 $ 404,811 $ 199 $ 370
Fiscal Year Ended March 31, 1999 $ 339,478 $ 1,792 $ 125
Fiscal Year Ended March 31, 1998 $ 95,430 $ 118 $ 766
</TABLE>
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1999, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 100,992 $ 100,174
Due after one through three years 160,208 157,179
Due after three years 124,539 118,392
------------ ------------
Total $ 385,739 $ 375,745
============ ============
</TABLE>
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
Our worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments, primarily
forward exchange contracts, to reduce those risks. We do not hold or issue
financial instruments for trading purposes.
We enter into forward exchange contracts primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. At December 31,
1999, we had forward exchange contracts to purchase $193,693,000 in foreign
currencies (primarily Canadian Dollars), and to sell $48,523,000 in foreign
currencies (primarily Canadian Dollars), at varying maturities from 2000 through
2004. At March 31, 1999, we had forward exchange contracts to purchase
$93,700,000 in foreign currencies (primarily Canadian Dollars) and to sell
$18,626,000 in foreign currencies (primarily Canadian Dollars), at varying
maturities from 1999 through 2002.
We have included deferred realized and unrealized gains and losses from hedging
firm purchase and sale commitments on a net basis in the accompanying balance
sheet as a component of either contracts in progress or advance billings on
contracts or as a component of either other current assets or accrued
liabilities. We recognize these gains and losses as part of the purchase or sale
transaction when it is recognized, or as other gains or losses when we no longer
expect a hedged transaction to occur. At December 31, 1999 and March 31, 1999,
we had deferred gains of $1,818,000 and $137,000, respectively, and deferred
losses of $2,082,000 and $5,377,000, respectively, related to forward exchange
contracts, most of which we will recognize in accordance with the
percentage-of-completion method of accounting.
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<PAGE> 76
We are exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments, but we do not anticipate
nonperformance by any of these counterparties. The amount of such exposure is
generally the unrealized gains in these contracts.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts we have reported in the
accompanying balance sheet for cash and cash equivalents approximate their fair
values.
Investments: We estimate the fair values of investments based on quoted market
prices. For investments for which there are no quoted market prices, we derive
fair values from available yield curves for investments of similar quality and
terms.
Long- and short-term debt: We base the fair values of debt instruments on quoted
market prices. Where quoted prices are not available, we base the fair values on
the present value of future cash flows discounted at estimated borrowing rates
for similar debt instruments or on estimated prices based on current yields for
debt issues of similar quality and terms.
Foreign currency exchange contracts: We estimate the fair values of foreign
currency forward exchange contracts by obtaining quotes from brokers. At
December 31, 1999 and March 31, 1999, we had net forward exchange contracts
outstanding to purchase foreign currencies with notional values of $145,170,000
and $75,074,000, respectively, and fair values of $147,900,000 and $72,153,000,
respectively.
The estimated fair values of our financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Instruments
Cash and cash equivalents $ 162,734 $ 162,734 $ 181,503 $ 181,503
Investments $ 375,813 $ 375,813 $ 906,899 $ 906,899
Debt excluding capital leases $ 409,376 $ 408,821 $ 353,803 $ 365,774
</TABLE>
NOTE 17 - 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 customers in the offshore oil and gas exploration,
production and hydrocarbon processing industries and to other marine
construction companies. Its 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 for 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. Substantially all of the operations of our Power Generation Systems
segment are conducted by B&W. As previously discussed, on February 22, 2000,
B&W, and certain of its subsidiaries, filed a voluntary petition in the U.S.
Bankruptcy Court for the
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<PAGE> 77
Eastern District of Louisiana in New Orleans to reorganize under Chapter 11 of
the U.S. Bankruptcy Code. We expect that this filing will have little effect, if
any, on our customers, suppliers, employees or retirees. However, due to the
bankruptcy filing, effective February 22, 2000 we will no longer consolidate
B&W's results of operations in our consolidated financial statements and our
investment in B&W will be presented on the cost method. Accordingly, until B&W
emerges from the jurisdiction of the Bankruptcy Court, Power Generation Systems
will no longer be a reportable segment.
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 of our Canadian operations
and the manufacturing of auxiliary equipment such as air-cooled heat exchangers
and replacement parts. Industrial Operations also includes our 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 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 and prepaid pension
costs. We have allocated amortization of goodwill to the reportable segments for
all periods presented.
On May 7, 1998, JRM sold its interest in McDermott Engineering (Europe) Limited.
Management also intends to exit other European engineering operations. In the
fiscal years ended March 31, 1999 and 1998, these operations generated revenues
of $89,347,000 and $288,687,000, respectively, and operating income (loss) of
($7,138,000) and $6,177,000, respectively. Operating income for the fiscal years
ended March 31, 1999 and 1998 includes closure costs and other disposition
losses of $2,818,000 and $4,200,000, respectively.
In the nine-month period ended December 31, 1999 and the fiscal years ended
March 31, 1999 and 1998, the U.S. Government accounted for approximately 16%,
12% and 10%, respectively, of our total revenues. We have included most of these
revenues in our Government Operations segment.
During the fiscal year ended March 31, 1999, JRM recorded a $2,400,000 severance
accrual related to our decision to exit the third-party engineering business.
However, due to engineering performed on other types of contracts, the
downsizing did not occur and a substantial portion of the accrual was reversed
in the nine-month period ended December 31, 1999.
In the fiscal year ended March 31, 1999, we recognized a gain of $37,353,000
from the termination of the McDermott-ETPM joint venture, which increased Marine
Construction Services' segment income. This increase was partially offset by a
net decrease to segment income of $17,749,000, primarily pertaining to
impairment losses on fabrication facilities and goodwill. A $5,214,000 gain we
recognized from the sale of a manufacturing facility resulted in an increase in
Power Generation Systems' segment income in the fiscal year ended March 31,
1999.
In the fiscal year ended March 31, 1998, asset impairment losses of
$280,171,000, primarily due to the write-off of $262,901,000 of goodwill
associated with JRM's acquisition of OPI and the write-down of marine vessels
included in property, plant and equipment of $9,891,000, decreased Marine
Construction Services' segment income. These decreases were offset by increases
in segment income resulting from the termination of the HeereMac joint venture,
a gain of $224,472,000 recognized from the termination and $61,637,000
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<PAGE> 78
from the distribution of earnings. Asset impairment losses, primarily associated
with manufacturing facilities, resulted in a decrease in Power Generation
Systems' segment income of $6,395,000 in fiscal 1998. A net increase in
Industrial Operations' income of $124,816,000 was a result of gains on the sale
of our interest in Sakhalin Energy Investment Company Ltd. and Universal
Fabricators Incorporated, offset by impairment losses, primarily the write-off
of goodwill associated with the acquisition of MECL.
SEGMENT INFORMATION FOR THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 AND THE
TWO FISCAL YEARS ENDED MARCH 31, 1999.
1. Information about Operations in our Different Industry Segments
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
---------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
REVENUES (1)
Marine Construction Services $ 490,719 $ 1,279,570 $ 1,855,486
Power Generation Systems 729,969 1,066,217 1,142,721
Government Operations 306,282 382,706 370,519
Industrial Operations 366,582 427,520 337,787
Adjustments and Eliminations (2,464) (6,028) (31,878)
---------- ----------- ------------
$1,891,088 $ 3,149,985 $ 3,674,635
========== =========== ============
(1) Segment revenues are net of the following intersegment transfers and other adjustments:
Marine Construction Services Transfers $ 1,379 $ 3,233 $ 20,743
Power Generation Systems Transfers 1,328 731 5,027
Government Operations Transfers 830 506 4,070
Industrial Operations Transfers 183 236 5,925
Adjustments and Eliminations (1,256) 1,322 (3,887)
---------- ----------- ------------
$ 2,464 $ 6,028 $ 31,878
========== =========== ============
</TABLE>
74
<PAGE> 79
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
------------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income:
Marine Construction Services $ 31,078 $ 126,482 $ 107,122
Power Generation Systems 52,095 90,318 82,431
Government Operations 28,581 39,353 35,816
Industrial Operations 8,513 16,906 4,679
------------- ----------- ------------
$ 120,267 $ 273,059 $ 230,048
------------- ----------- ------------
Gain (Loss) on Asset Disposal and
Impairments - Net:
Marine Construction Services $ (1,652) $ 18,620 $ (40,119)
Power Generation Systems 1,261 4,465 (6,086)
Government Operations 26 183 523
Industrial Operations (5) (234) 128,239
------------- ----------- ------------
$ (370) $ 23,034 $ 82,557
------------- ----------- ------------
Income (Loss) from Investees: (1)
Marine Construction Services $ (13,208) $ 10,670 $ 70,236
Power Generation Systems (638) (4,733) 7,541
Government Operations 4,322 4,088 4,236
Industrial Operations (1,458) (1,646) 3,376
------------- ----------- ------------
$ (10,982) $ 8,379 $ 85,389
------------- ----------- ------------
SEGMENT INCOME:
Marine Construction Services $ 16,218 $ 155,772 $ 137,239
Power Generation Systems 52,718 90,050 83,886
Government Operations 32,929 43,624 40,575
Industrial Operations 7,050 15,026 136,294
------------- ----------- ------------
108,915 304,472 397,994
Other Unallocated Expenses (2) (6,509) (51,005) (5,286)
General Corporate Expenses-Net (27,699) (36,051) (37,251)
------------- ----------- ------------
$ 74,707 $ 217,416 $ 355,457
============= =========== ============
(1) Other unallocated expenses include loss from investees of $7,000 for the
fiscal year ended March 31, 1998.
(2) Other unallocated expenses include the following:
Non-Employee Products Asbestos
Claim Provisions $ -- $ (39,650) $ --
Research & Development Expenses (6,802) (729) (5)
Employee Benefits & Insurance Income 7,691 18,519 7,303
Legal Expenses (3,656) (13,133) (4,729)
General and Administrative Expenses (5,668) (9,623) (2,422)
Other 1,926 (6,389) (5,433)
------------- ----------- ------------
Total $ (6,509) $ (51,005) $ (5,286)
============= =========== ============
</TABLE>
75
<PAGE> 80
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
------------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
SEGMENT ASSETS:
Marine Construction Services $ 569,549 $ 586,003 $ 874,143
Power Generation Systems 545,570 558,951 559,162
Government Operations 184,083 211,683 178,958
Industrial Operations 115,647 114,656 124,547
------------- ----------- ------------
Total Segment Assets 1,414,849 1,471,293 1,736,810
Other Assets 1,445,069 1,570,374 1,280,975
Corporate Assets 1,014,973 1,263,853 1,483,345
------------- ----------- ------------
Total Assets $ 3,874,891 $ 4,305,520 $ 4,501,130
============= =========== ============
CAPITAL EXPENDITURES:
Marine Construction Services (1) $ 34,756 $ 84,416 $ 57,704
Power Generation Systems 5,171 11,847 9,315
Government Operations 10,590 11,095 4,312
Industrial Operations 2,146 4,093 3,278
------------- ----------- ------------
Segment Capital Expenditures 52,663 111,451 74,609
Corporate and Other Capital Expenditures 138 336 1,040
------------- ----------- ------------
Total Capital Expenditures $ 52,801 $ 111,787 $ 75,649
============= =========== ============
DEPRECIATION AND AMORTIZATION:
Marine Construction Services $ 43,017 $ 56,761 $ 93,843
Power Generation Systems 12,570 21,899 19,569
Government Operations 7,750 13,265 12,481
Industrial Operations 2,693 4,885 6,712
------------- ----------- ------------
Segment Depreciation and Amortization 66,030 96,810 132,605
Corporate and Other Depreciation and
Amortization 1,619 4,580 9,696
------------- ----------- ------------
Total Depreciation and Amortization $ 67,649 $ 101,390 $ 142,301
============= =========== ============
INVESTMENT IN UNCONSOLIDATED AFFILIATES:
Marine Construction Services $ 17,047 $ 13,648 $ 29,069
Power Generation Systems 40,306 44,248 40,159
Government Operations 3,823 2,282 2,090
Industrial Operations 2,430 2,308 4,965
------------- ----------- ------------
Total Investment in Unconsolidated
Affiliates $ 63,606 $ 62,486 $ 76,283
============= =========== ============
</TABLE>
(1) Includes property, plant and equipment of $33,000,000 in the
fiscal year ended March 31, 1999 acquired through
termination of the McDermott-ETPM joint venture and of
$30,559,000 in the fiscal year ended March 31, 1998 acquired
through termination of the HeereMac joint venture.
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<PAGE> 81
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
------------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
2. Information about our Product and Service Lines:
REVENUES:
Marine Construction Services:
Offshore Operations $ 311,544 $ 605,024 $ 743,114
Fabrication Operations 109,493 376,450 455,306
Engineering Operations 39,518 115,594 276,422
Procurement Activities 51,004 273,308 425,440
Adjustments and Eliminations (20,840) (90,806) (44,796)
------------- ----------- ------------
490,719 1,279,570 1,855,486
------------- ----------- ------------
Power Generation Systems:
Original Equipment Manufacturers'
Operations 130,449 212,999 471,363
Nuclear Equipment Operations 71,208 78,023 89,816
Aftermarket Goods and Services 469,054 791,619 508,895
Operations and Maintenance 32,726 41,602 37,988
Boiler Auxiliary Equipment 38,707 85,969 86,355
Adjustments and Eliminations (12,175) (143,995) (51,696)
------------- ----------- ------------
729,969 1,066,217 1,142,721
------------- ----------- ------------
Government Operations:
Naval Reactor Program 189,197 245,508 249,365
Nuclear Environmental Services 9,245 19,932 26,177
Management & Operation Contracts
of U.S. Government Facilities 82,488 99,053 64,226
Other Government Operations 17,025 18,673 23,359
Other Commercial Operations 10,141 10,519 18,883
Adjustments and Eliminations (1,814) (10,979) (11,491)
------------- ----------- ------------
306,282 382,706 370,519
------------- ----------- ------------
Industrial Operations:
Engineering & Construction 182,187 174,894 62,448
Plant Outage Maintenance 131,535 150,263 151,050
Shipbuilding Operations - - 10,746
Contract Research 9,436 9,172 17,180
Auxiliary Equipment 46,790 93,065 97,640
All Others (3,364) 362 31
Adjustments and Eliminations (2) (236) (1,308)
------------- ----------- ------------
366,582 427,520 337,787
------------- ----------- ------------
Adjustments and Eliminations (2,464) (6,028) (31,878)
------------- ----------- ------------
$ 1,891,088 $ 3,149,985 $ 3,674,635
============= =========== ============
3. Information about our Operations in Different Geographic Areas.
REVENUES: (1)
United States $ 1,139,010 $ 1,573,896 $ 1,688,388
Canada 277,917 437,363 264,846
Mexico 97,467 78,496 35,836
United Kingdom 50,456 133,403 364,894
Indonesia 35,369 220,124 230,825
Saudi Arabia 32,701 5,664 7,128
Qatar 29,948 132,509 264,397
China 27,607 72,217 139,403
India 26,202 46,972 32,905
Trinidad 11,268 57,905 66,460
Myanmar 4,582 80,130 110,692
Thailand - 31,674 73,223
Other Countries 158,561 279,632 395,638
------------- ----------- ------------
$ 1,891,088 $ 3,149,985 $ 3,674,635
============= =========== ============
</TABLE>
(1) We allocate geographic revenues based on the location of the
customer.
77
<PAGE> 82
<TABLE>
<CAPTION>
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999 1998
------------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, NET:
United States $ 256,332 $ 259,549 $ 280,472
Indonesia 66,508 37,309 13,091
Mexico 37,811 48,246 23,803
Canada 33,197 31,456 36,275
United Arab Emirates 20,890 20,089 23,508
United Kingdom 6,671 8,202 75,956
Netherlands - - 45,347
Other Countries 16,388 29,110 35,242
------------- ----------- ------------
$ 437,797 $ 433,961 $ 533,694
============= =========== ============
</TABLE>
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the nine-month period ended December 31, 1999 and the fiscal
year ended March 31, 1999:
<TABLE>
<CAPTION>
Nine-Month Period Ended December 31, 1999
Quarter Ended
-----------------------------------------
June 30, Sept. 30, Dec. 31,
1999 1999 1999
-----------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues $ 647,884 $ 595,870 $ 647,334
Operating income $ 34,254 $ 17,518 $ 22,935
Net income (loss) $ 20,043 $ 3,618 $ (23,221)
Earnings (loss) per common share:
Basic $ 0.34 $ 0.06 $ (0.39)
Diluted $ 0.33 $ 0.06 $ (0.39)
</TABLE>
Pretax results for the three months ended December 31, 1999 include a loss on
the curtailment of a foreign pension plan of $37,810,000.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1999
Quarter Ended
-----------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
1998 1998 1998 1999
-----------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 819,809 $ 779,983 $ 800,825 $ 749,368
Operating income (loss) $ 118,413 $ 65,652 $ 46,310 $ (12,959)
Income (loss) before
extraordinary item $ 121,561 $ 51,615 $ 42,289 $ (23,384)
Net income (loss) $ 121,561 $ 51,615 $ 42,289 $ (62,103)
Earnings (loss) per common share:
Basic
Income (loss) before
extraordinary item $ 2.03 $ 0.88 $ 0.72 $ (0.40)
Net income (loss) $ 2.03 $ 0.88 $ 0.72 $ (1.06)
Diluted
Income (loss) before
extraordinary item $ 1.88 $ 0.85 $ 0.71 $ (0.40)
Net income (loss) $ 1.88 $ 0.85 $ 0.71 $ (1.06)
</TABLE>
Pretax results for the quarter ended June 30, 1998 include:
o a gain on the dissolution of a joint venture of $37,390,000;
o a gain on the settlement and curtailment of postretirement benefit plans
of $38,900,000;
o interest income of $12,207,000 on domestic tax refunds; and
o a gain of $12,000,000 from the sale of assets of a joint venture.
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<PAGE> 83
Pretax results for the quarter ended September 30, 1998 include:
o a loss on the settlement and curtailment of postretirement
benefit plans of $11,258,000;
o interest income of $6,423,000 on domestic tax refunds; and
o an $8,000,000 settlement of punitive damage claims in a civil suit associated
with a Pennsylvania facility we formerly operated.
Pretax results for the quarter ended December 31, 1998 include a $9,600,000
charge to restructure foreign joint ventures.
Pretax results for the quarter ended March 31, 1999 include:
o an extraordinary loss on the retirement of debt of $38,719,000;
o a loss of $85,185,000 for estimated costs relating to estimated future
non-employee asbestos claims;
o losses of $21,897,000 related to impairment of assets and goodwill;
o various provisions of $20,327,000 related to potential settlements of
litigation and contract disputes; and
o the write-off of $12,600,000 of receivables from a joint venture.
NOTE 19 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Nine-Month Period Fiscal Year
Ended December 31, Ended March 31,
1999 1999 1998
------------ ------------ ------------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C>
Basic:
Income before extraordinary item $ 440 $ 192,081 $ 215,690
Dividends on preferred stock, Series C -- -- (8,266)
------------ ------------ ------------
Income for basic computation 440 192,081 207,424
Extraordinary item -- (38,719) --
------------ ------------ ------------
Net income for basic computation $ 440 $ 153,362 $ 207,424
============ ============ ============
Weighted average common shares 59,033,154 59,015,091 55,432,949
------------ ------------ ------------
Basic earnings per common share:
Income before extraordinary item $ 0.01 $ 3.25 $ 3.74
Extraordinary item -- (0.65) --
------------ ------------ ------------
Net Income $ 0.01 $ 2.60 $ 3.74
============ ============ ============
Diluted:
Income before extraordinary item $ 440 $ 192,081 $ 215,690
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock -- 2,752 6,200
------------ ------------ ------------
Income for diluted computation 440 194,833 221,890
Extraordinary item -- (38,719) --
------------ ------------ ------------
Net income for diluted computation $ 440 $ 156,114 $ 221,890
============ ============ ============
Weighted average common shares (basic) 59,033,154 59,015,091 55,432,949
Effect of dilutive securities:
Stock options and restricted stock 724,089 1,172,496 1,446,585
Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock -- 1,256,151 2,818,679
Series C $2.875 Cumulative Convertible
Preferred Stock -- 190,457 4,078,014
------------ ------------ ------------
Adjusted weighted average common shares
and assumed conversions 59,757,243 61,634,195 63,776,227
------------ ------------ ------------
Diluted earnings per common share:
Income before extraordinary item $ 0.01 $ 3.16 $ 3.48
Extraordinary item -- (0.63) --
------------ ------------ ------------
Net income $ 0.01 $ 2.53 $ 3.48
============ ============ ============
</TABLE>
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<PAGE> 84
NOTE 20 - SUBSEQUENT EVENT
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. 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 their asbestos products liability. As a result of the
filing, the Bankruptcy Court issued a temporary restraining order enjoining
asbestos products liability lawsuits from being brought against B&W, its
subsidiaries and B&W's affiliates, including MI, JRM and MII, subject to a
hearing on a permanent injunction enjoining such lawsuits during the pendency of
the bankruptcy case.
Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a
strategy of negotiating and settling asbestos products liability claims brought
against them and billing the settled amounts to insurers for reimbursement. The
average amount per settled claim over the last three calendar years is
approximately $7,900. Reimbursed amounts are subject to varying insurance limits
based upon the year of coverage, insurer solvency and collection delays (due
primarily to agreed payment schedules with specific insurers delaying
reimbursement for three months or more). However, none of these circumstances
have impaired B&W's liquidity. Claims paid during the nine-month period ended
December 31, 1999 were $230,998,000 of which $192,981,000 has been recovered or
is due from insurers. At December 31, 1999, receivables of $108,867,000 were due
from insurers for reimbursement of settled claims.
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. B&W does not
expect that the bankruptcy filing will negatively affect its ability to recover
amounts due from insurers for settled claims as they become due and payable. At
February 22, 2000, receivables of $102,703,000 were due from insurers for
reimbursement of settled claims.
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. 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. 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. We expect the DIP
Credit Facility will receive "superpriority" status from the Bankruptcy Court.
The DIP Credit Facility imposes certain financial and non-financial covenants on
B&W and its subsidiaries. A permitted use of the DIP Credit Facility is the
issuance of new letters of credit to backstop or replace, as they expire,
pre-existing letters of credit issued in connection with B&W's and its
subsidiaries' business operations, but for which MII, MI or BWICO was a maker or
guarantor. As of February 22, 2000, the aggregate amount of all such 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 the associated letter of credit fees paid under the facility.
$100,000,000 of the DIP Credit Facility has been approved by the Bankruptcy
Court on an interim basis, subject to final court approval of the full amount of
the facility.
B&W's financial results are included in our consolidated results at December 31,
1999. 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
80
<PAGE> 85
deconsolidated from the parent and presented on the cost method. The cost method
will require 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 approximately
$161,000,000 as of February 22, 2000 will be 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 below has been prepared
on a going concern basis which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. As a result of the bankruptcy filing and related events, there is no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
a plan of reorganization, or rejection thereof, could change the amounts
reported in the B&W financial statements and cause a material decrease in the
carrying amount of our investment.
Following are the condensed consolidated Statements of Income and Balance Sheet
data for B&W:
<TABLE>
<CAPTION>
For the
Nine-Month For the
Period Ended Fiscal Year Ended
December 31, March 31,
1999 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues $ 729,713 $ 1,061,377 $ 1,132,123
Operating Income $ 39,464 $ 43,784 $ 70,439
Income from Continuing Operations
before Provision for (Benefit from)
Income Taxes $ 46,960 $ 369 $ 56,415
Income from Continuing Operations $ 26,083 $ 3,448 $ 30,198
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31
1999 1999
---- ----
(In thousands)
<S> <C> <C>
Current Assets $ 713,168 $ 466,781
Property, Plant and Equipment $ 86,151 $ 89,898
Environmental and Products Liabilities
Recoverable $ 942,982 $ 1,167,113
Total Assets $ 2,006,388 $ 2,198,899
Current Liabilities $ 629,549 $ 566,101
Environmental and Products Liabilities $ 1,061,365 $ 1,323,343
Total Stockholder's Equity $ 160,728 $ 136,451
Total Liabilities and Stockholder's Equity $ 2,006,388 $ 2,198,899
</TABLE>
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<PAGE> 86
Following are our condensed Pro Forma consolidated Statements of Income and
Balance Sheet data, assuming the deconsolidation of B&W:
<TABLE>
<CAPTION>
For the For the
Nine-Month Fiscal Year
Period Ended Ended
December 31, March 31,
1999 1999
---- ----
(In thousands)
<S> <C> <C>
Revenues $ 1,161,375 $ 2,088,608
Operating Income $ 35,243 $ 173,632
Income (Loss) before Provision for
(Benefit from) Income Taxes $ (11,862) $ 186,909
Net Income (Loss) $ (25,643) $ 188,633
Earnings (Loss) per Common Share:
Basic $ (0.43) $ 3.20
Diluted $ (0.43) $ 3.11
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---- ----
(In thousands)
<S> <C> <C>
Current Assets $ 755,640 $ 908,585
Property, Plant and Equipment $ 351,646 $ 344,063
Investment in B&W $ 160,728 $ 136,451
Total Assets $ 2,082,954 $ 2,474,985
Current Liabilities $ 672,857 $ 700,310
Environmental and Products Liabilities $ 11,604 $ 10,753
Total Stockholder's Equity $ 791,858 $ 793,734
Total Liabilities and Stockholder's Equity $ 2,082,954 $ 2,474,985
</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. As a result of its bankruptcy filing, B&W and its 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. Moreover, no assurances can be given that any of the
Pre-Petition Inter-company Payables will be paid or otherwise satisfied in
connection with the confirmation of a B&W plan of reorganization. As of December
31, 1999, B&W and its filing subsidiaries had Pre-Petition Inter-company
Payables to other entities within the McDermott group of companies in the
aggregate amount of approximately $18,000,000. In the course of the conduct of
B&W's and its subsidiaries' business, MII and MI have agreed to indemnify two
surety companies for B&W's and its subsidiaries' obligations under surety bonds
issued in connection with their customer contracts. At February 22, 2000, the
total value of B&W's and its subsidiaries' customer contracts yet to be
completed that were covered by such indemnity arrangements was approximately
$161,000,000.
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 March 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.
As discussed above, there are various uncertainties surrounding the filing.
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. However, we have entered into various financing arrangements that
we believe will
82
<PAGE> 87
allow us to address any unexpected cash outflows or restrictions on operating
cash flows. We do not believe MI's and its subsidiaries' inability to incur
additional long-term debt under one of MI's public debt indentures (see Note 2)
or B&W's bankruptcy filing will materially impair our ability to meet 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.
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Ernst & Young LLP ("E&Y") was our outside auditing firm for the fiscal year
ended March 31, 1998 and prior years. On July 24, 1998, our Board of Directors
selected PricewaterhouseCoopers LLP as E&Y's replacement.
For the fiscal year ended March 31, 1998, we had no disagreements with E&Y on
any matters of accounting principles or practice, financial statement disclosure
or auditing scope or procedure, which, if not resolved to the satisfaction of
E&Y, would have caused it to make a reference to the subject matter of the
disagreement in connection with its report on the audit for that year. E&Y has
not advised us of any reportable events. E&Y's report on our financial
statements for the fiscal year ended March 31, 1998 did not contain an adverse
opinion or a disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles.
For the nine-month period ended December 31, 1999 and the fiscal year ended
March 31, 1999, we had no disagreements with PricewaterhouseCoopers LLP on any
accounting or financial disclosure issues.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers" in the Proxy Statement
for our 2000 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" in the Proxy
Statement for our 2000 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in MII's Proxy
Statement for our 2000 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Note 12 to our consolidated financial statements included in
this report is incorporated by reference.
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<PAGE> 88
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheets December 31, 1999 and March 31, 1999
Consolidated Statements of Income For the Nine-Month Periods
Ended December 31, 1999 and 1998 and the Two Fiscal Years
Ended March 31, 1999
Consolidated Statements of Comprehensive Income (Loss) For the
Nine-Month Periods Ended December 31, 1999 and 1998 and the
Two Fiscal Years Ended March 31, 1999
Consolidated Statements of Stockholders' Equity For the
Nine-Month Period Ended December 31, 1999 and the Two Fiscal
Years Ended March 31, 1999
Consolidated Statements of Cash Flows For the Nine-Month Periods
Ended December 31, 1999 and 1998 and the Two Fiscal Years
Ended March 31, 1999
Notes to Consolidated Financial Statements For the Nine-Month
Period Ended December 31, 1999 and the Two Fiscal Years
Ended March 31, 1999
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required financial statement schedules will be filed by
amendment to this Form 10-K on Form 10-K/A.
3. EXHIBITS
Exhibit Description
Number
2.1 Agreement and Plan of Merger dated as of May 7, 1999
between McDermott International, Inc. and J. Ray
McDermott, S.A. (incorporated by reference to Annex A
of Exhibit (a)(1) to the Schedule 14D-1 filed by
McDermott International, Inc. with the Commission on
May 13, 1999).
3.1 McDermott International, Inc.'s Articles of
Incorporation, as amended (incorporated by reference to
Exhibit 3.1 of McDermott International, Inc.'s Form
10-K for the fiscal year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated
By-Laws (incorporated by reference to Exhibit 3.2 of
McDermott International, Inc.'s Form 10-Q for the
quarter ended September 30, 1999).
We and certain of our consolidated subsidiaries are parties
to debt instruments under which the total amount of
securities authorized does not exceed 10% of our total
consolidated assets. Pursuant to paragraph 4(iii)(A) of Item
601 (b) of Regulation S-K, we agree to furnish a copy of
those instruments to the Commission on request.
10.1* McDermott International, Inc.'s Supplemental Executive
Retirement Plan, as amended (incorporated by reference
to Exhibit 10 of McDermott International, Inc.'s 10-K/A
for fiscal year ended March 31, 1994 filed with the
Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year
ended March 31, 1983).
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<PAGE> 89
10.3* Trust for Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1990).
10.4* McDermott International, Inc.'s 1994 Variable
Supplemental Compensation Plan (incorporated by
reference to Exhibit A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the
Commission under a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term
Performance Incentive Compensation Program
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1988).
10.6* McDermott International, Inc.'s 1992 Senior Management
Stock Option Plan (incorporated by reference to Exhibit
10 of McDermott International, Inc.'s 10-K/A for fiscal
year ended March 31, 1994 filed with the Commission on
June 27, 1994).
10.7* McDermott International, Inc.'s 1992 Officer Stock
Incentive Program (incorporated by reference to Exhibit
10 to McDermott International, Inc.'s annual report on
Form 10-K, as amended for the fiscal year ended March
31, 1992).
10.8* McDermott International, Inc.'s 1992 Directors Stock
Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form
10-K, as amended, for the fiscal year ended March 31,
1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer
Long-Term Incentive Plan, as amended (incorporated by
reference to Appendix B to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997 as filed with
the Commission under a Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock
Program (incorporated by reference to Appendix A to
McDermott International, Inc.'s Proxy Statement for its
Annual Meeting of Stockholders held on September 2,
1997 as filed with the Commission under a Schedule
14A).
10.11 Support Agreement between McDermott International,
Inc. and McDermott Incorporated.
21 Significant Subsidiaries of the Registrant.
23.1 Consents of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during the three months ended
December 31, 1999.
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<PAGE> 90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/ Roger E. Tetrault
----------------------------------
March 15, 2000 By: Roger E. Tetrault
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Roger E. Tetrault Chairman of the Board, Chief Executive Officer
- ----------------------------- and Director (Principal Executive Officer)
Roger E. Tetrault
/s/ Daniel R. Gaubert Senior Vice President and Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
Daniel R. Gaubert
- ---------------------------- Director
Phillip J. Burguieres
/s/ Bruce Demars Director
- ----------------------------
Bruce Demars
Director
- ----------------------------
Joe B. Foster
/s/ Robert L. Howard Director
- ----------------------------
Robert L. Howard
/s/ John W. Johnstone, Jr. Director
- ----------------------------
John W. Johnstone, Jr.
- ---------------------------- Director
Kathryn D. Sullivan
/s/ John N. Turner Director
- ----------------------------
John N. Turner
/s/ Richard E. Woolbert Director
- ----------------------------
Richard E. Woolbert
</TABLE>
March 15, 2000
86
<PAGE> 91
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of May 7, 1999 between McDermott
International, Inc. and J. Ray McDermott, S.A. (incorporated by
reference to Annex A of Exhibit (a)(1) to the Schedule 14D-1 filed by
McDermott International, Inc. with the Commission on May 13, 1999).
3.1 McDermott International, Inc.'s Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 of McDermott International,
Inc.'s Form 10-K for the fiscal year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated By-Laws
(incorporated by reference to Exhibit 3.2 of McDermott International,
Inc.'s Form 10-Q for the quarter ended September 30, 1999).
10.1* McDermott International, Inc.'s Supplemental Executive Retirement
Plan, as amended (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s 10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1983).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year ended March 31,
1990).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental
Compensation Plan (incorporated by reference to Exhibit A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the Commission under
a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive
Compensation Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1988).
10.6* McDermott International Inc.'s 1992 Senior Management Stock Option
Plan (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s 10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994).
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term
Incentive Plan, as amended (incorporated by reference to Appendix B to
McDermott International, Inc.'s Proxy Statement for its Annual Meeting
of Stockholders held on July 28, 1997 as filed with the Commission
under a Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on
September 2, 1997 as filed with the Commission under a Schedule 14A).
10.11 Support Agreement between McDermott International, Inc. and McDermott
Incorporated.
21 Significant Subsidiaries of the Registrant.
</TABLE>
<PAGE> 92
<TABLE>
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
Management contract or compensatory plan or arrangement required to be filed as
an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
<PAGE> 1
Exhibit 10.11
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (this "Agreement") is made as of the
Effective Date (as Section 3.1 defines that term) by and between McDermott
International, Inc., a corporation organized under the laws of the Republic of
Panama ("MII"), and McDermott Incorporated, a corporation organized under the
laws of the State of Delaware and a wholly owned subsidiary of MII ("MI").
PRELIMINARY STATEMENT
MI is a party to an Indenture dated as of March 1, 1992, as
amended, with United States Trust Company of New York, as Trustee, under which
MI has issued and outstanding approximately $225 million in aggregate principal
amount of its 9.375% Notes due 2002 (the "9.375% Notes") and approximately $9.5
million in aggregate principal amount of its Series "A" Medium Term Notes due
2003 (the "Series A MTNs"). MI also is a party to an Indenture dated as of
November 1, 1992, as amended, with Citibank, N.A., as Successor Trustee, under
which MI has issued and outstanding approximately $64 million in aggregate
principal amount of its Series "B" Medium Term Notes due on various dates in
2005, 2008 and 2023 (the "Series B MTNs"). Under a Pollution Control Financing
Agreement dated as of February 1, 1979 with Beaver County Industrial Development
Authority, MI has issued and outstanding a Pollution Control Note due 2009 in
the principal amount of $17 million (the "Pollution Control Note" and,
collectively with the 9.375% Notes, the Series A MTNs and the Series B MTNs, the
"MI Debt Securities").
MI and MII are parties to a Stock Purchase and Sale Agreement
dated as of November 17, 1982 (the "Put/Call Agreement") under which MI has the
option to put to MII certain securities issued by MII and held by MI (the "MI
Put Option") and MII has the option to call those securities (the "MII Call
Option"), in each case at a cash price determined in accordance with the
Put/Call Agreement. MI's exercise of the MI Put Option or MII's exercise of the
MII Call Option would result in a taxable gain to MI.
MI has requested MII to provide MI with standby financial
support, as an alternative to the exercise of the MI Put Option or the MII Call
Option, to assist MI in meeting its interest payment obligations with respect to
the MI Debt Securities, if and to the extent MI is unable to fund the payment of
those obligations from its consolidated cash flows and its investing and
financing activities, and MII is willing to provide that support on the terms
and subject to the conditions this Agreement sets forth.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements this Agreement contains, the parties hereto hereby agree as
follows:
ARTICLE I
FINANCIAL SUPPORT
Section I.1. Advances. Subject to the terms and conditions of
this Agreement, MII will make advances (each, an "Advance") to MI from time to
time between the date hereof and the Termination Date (as Section 3.2 defines
that term), in such amounts as MI may request under the provisions of Section
1.3, for the sole purpose of funding the payment of the interest on the MI Debt
Securities when due, in each case (i) as those interest payment obligations
mature in accordance with their respective amortization schedules (without
giving effect to any repurchase or redemption commitment made by MI or any
acceleration of maturity) and (ii) only to the extent MI is unable (after the
exercise of its best efforts) to fund the payment of those obligations through
its cash flows (determined on a consolidated basis to include its subsidiaries)
from operations and from its investing and financing activities.
<PAGE> 2
Section I.2. Limitations on MII's Obligation To Make Advances.
(a) In no event will MII's obligations under this Agreement exceed an amount
equal to the sum of (i) the aggregate amount of the accrued and unpaid interest
on the MI Debt Securities as of the Effective Date and (ii) the aggregate amount
of interest that accrues on the MI Debt Securities from and after the Effective
Date through the Termination Date.
(b) Any other provision this Agreement contains to the
contrary notwithstanding, MII's obligations under this Agreement will terminate
immediately on any exercise of the MI Put Option or the MII Call Option. This
Agreement is not intended to, and shall not be deemed, construed or interpreted
to, alter or otherwise affect MI's and MII's respective rights, duties and
obligations under the Put/Call Agreement, including MI's right to exercise the
MI Put Option and MII's right to exercise the MII Call Option at any time.
(c) MII will not be obligated to make any requested Advance
unless, on the date it is to make that Advance (and after giving effect to the
requested Advance), no Default or Event of Default (as Section 2.1 defines those
terms) has occurred and is continuing.
Section I.3. Procedures for Advances. Between the date hereof
and the Termination Date, MI may request an Advance hereunder by delivering a
written request for that Advance (each, a "Request for Advance") to MII. A
Request for Advance must set forth in reasonable detail the interest payment
obligations with respect to the MI Debt Securities that MI will fund by the
requested Advance (the "Funded Obligations"). MII may decline to make any
Advance hereunder if it concludes, in its sole discretion, that it is not
required to do so under the provisions of Sections 1.1 and 1.2. Subject to the
following provisions of this Section 1.3, if MII determines that this Agreement
requires it to make a requested Advance hereunder, it will do so within 60 days
of its receipt of the related Request for Advance. At the option of MII, the
Advance will take the form of either (i) a contribution to the capital of MI or
(ii) a loan evidenced by a promissory note in form and substance satisfactory to
MII (a "Promissory Note"). If MII determines to make an Advance in the form of a
loan, MII will so notify MI in writing within 30 days of its receipt of the
related Request for Advance. In the absence of such notification, MII will be
deemed to have elected to treat the Advance as a capital contribution to MI. If
MII determines to make an Advance in the form of a loan and timely notifies MI
of that determination in accordance with the foregoing provisions, (i) MI and
MII will promptly meet for the purpose of negotiating mutually satisfactory
terms for the related Promissory Note and (ii) MII will not be obligated to make
that Advance until it has received the related Promissory Note, duly executed
and delivered by MI. If the parties are unable to agree on the terms of the
Promissory Note to evidence any Advance in accordance with the foregoing
provisions, MII will not be obligated to make that Advance. MI will cause the
proceeds of each Advance MII makes hereunder to be applied to the payment of the
Funded Obligations to which the related Request for Advance refers.
Section I.4. Financial Support Fee. In consideration of MII's
agreement to make Advances under the terms and conditions of this Agreement, MI
will pay MII a fee in the amount of $5,000 per month, payable on the first day
of each month during the term of this Agreement, except that the first monthly
fee will be $2,500 and will be payable on the date hereof.
ARTICLE II
EVENTS OF DEFAULT AND THEIR CONSEQUENCES
Section II.1. Events of Default. For purposes of this
Agreement, the occurrence of any one or more of the following events is an
"Event of Default" (and the occurrence of an event that, but for the passage of
time or the giving of notice or both, would be an Event of Default is a
"Default"):
(i) MI fails to pay any amount due under any Promissory Note
(including any accrued and unpaid interest thereon) or under Section
1.4 when it becomes due;
(ii) MI fails to cause the proceeds of any Advance to be
applied in accordance with Section 1.3;
-2-
<PAGE> 3
(iii) (A) MI seeks or suffers the appointment of a custodian,
receiver, trustee or similar fiduciary with respect to any material
part of its assets, (B) any petition for an order of relief is filed
against MI under the United States Bankruptcy Code, as amended (or any
successor thereto), and continues unstayed for more than 60 days or MI
petitions for any such order, (C) MI makes any offer of settlement,
extension or composition to its unsecured creditors generally, makes a
general assignment for the benefit of creditors or acknowledges in
writing its inability to pay its debts as they become due or (D) MI
takes any action to authorize any of the foregoing; or
(iv) any event that allows any holders (or their respective
representatives) to accelerate the maturity of any of the MI Debt
Securities occurs and continues.
Section II.2. Consequences. If an Event of Default Section
2.1(iii) describes exists, MII's commitment to make Advances automatically will
terminate and the entire unpaid amount of each outstanding Promissory Note,
including the interest accrued thereon, automatically will become due and
payable without any action of any kind by MII. If any other Event of Default
exists, MII may do any one or more of the following: (i) declare the entire
unpaid amount of each outstanding Promissory Note, including the interest
accrued thereon, immediately due and payable; (ii) reduce any claim to judgment;
and (iii) exercise any and all other legal or equitable rights this Agreement,
the Promissory Notes or applicable laws afford to it. MI waives presentment and
demand for payment, protest, notice of intention to accelerate, notice of
acceleration and notice of protest and nonpayment. No waiver of a Default or an
Event of Default by MII will be deemed a waiver of any other then existing or
subsequent Default or Event of Default. No delay or omission by MII in
exercising any right under this Agreement or any Promissory Note will impair
that right or be construed as a waiver of that right, nor will any single
partial exercise of any right preclude any other or further exercise of that or
any other right.
ARTICLE III
EFFECTIVE DATE AND TERMINATION DATE
Section III.1. Effective Date. This Agreement will become
effective as of the date MI executes and delivers a counterpart hereof to MII
(the "Effective Date").
Section III.2. Termination Date. The obligation of MII to make
Advances will terminate at 5:00 p.m., New Orleans time, on March 15, 2002 (the
"Termination Date").
ARTICLE IV
MISCELLANEOUS
Section IV.1. Entire Agreement; Amendment; Waivers. This
Agreement constitutes the entire agreement and understanding between MI and MII
and supersedes all prior agreements and understandings, both written and oral,
relating to the subject matter of this Agreement. This Agreement may be amended,
modified or supplemented, and any right hereunder may be waived, if, but only
if, that amendment, modification, supplement or waiver is in writing and signed
by both MII and MI. The waiver of any of the terms and conditions hereof shall
not be construed or interpreted as, or deemed to be, a waiver of any other term
or condition hereof.
Section IV.2. Parties Bound; Assignment; No Third-Party
Beneficiaries. This Agreement will be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Neither
party hereto may assign this Agreement or any of its rights hereunder without
the prior written consent of the other party hereto. This Agreement is not
intended, and shall not be construed, deemed or interpreted, to confer on any
person not a party hereto any rights or remedies hereunder.
Section IV.3. Notices. All notices or other communications
required or permitted hereunder must be in writing and will be deemed to be
delivered and received (i) if personally delivered or if delivered by telex,
telegram, facsimile or courier service, when actually received by the party to
whom notice is sent, or (ii) if delivered by mail (whether actually received or
not), at the close of business on the third business day next following the day
when placed in the mail, postage prepaid, certified or registered, addressed to
the appropriate
-3-
<PAGE> 4
party, at the address of that party set forth below (or at such other address as
that party may designate by written notice to the other party in accordance with
this Section 4.3):
(i) if to MII, addressed to it at:
McDermott International, Inc.
1450 Poydras Street
Post Office Box 61961
New Orleans, Louisiana 70161-1961
Attn.: President and Chief Executive Officer
(ii) if to MI, addressed to it at:
McDermott Incorporated
1450 Poydras Street
Post Office Box 61961
New Orleans, Louisiana 70161-1961
Attn.: President and Chief Executive Officer
Section IV.4. Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the substantive laws of the State of Louisiana,
without regard to any conflicts of law provisions thereof that would cause the
laws of any other jurisdiction to apply.
Section IV.5. Exercise of Rights and Remedies. No delay or
omission in the exercise of any right, power or remedy accruing to either party
hereto as a result of any breach or default hereunder by the other party hereto
will impair any such right, power or remedy, nor will it be construed, deemed or
interpreted as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor will any waiver of any single
breach or default be construed, deemed or interpreted as a waiver of any other
breach or default hereunder which occurs before or after that waiver. No remedy
any provision of this Agreement confers is intended by either party hereto to be
exclusive of any other remedy, and each and every remedy will be cumulative and
in addition to every other remedy given hereunder or now or hereafter existing
at law or in equity or by statute or otherwise. The election of any one or more
remedies by either party hereto will not constitute a waiver of the right to
pursue other available remedies.
Section IV.6. Reformation and Severability. If any provision
of this Agreement is invalid, illegal or unenforceable, that provision will, to
the extent possible, be modified in such manner as to be valid, legal and
enforceable but so as to most nearly retain the intent of the parties hereto as
expressed herein, and if such a modification is not possible, that provision
will be severed from this Agreement, and in either case the validity, legality
and enforceability of the remaining provisions of this Agreement will not in any
way be affected or impaired thereby.
Section IV.7. Interpretation and Construction. When used in
this Agreement, the words "herein," "hereof" and "hereunder" and words of
similar import refer to this Agreement as a whole and not to any provision of
this Agreement, and the words "Article" and "Section" refer to Articles and
Sections of this Agreement unless otherwise specified. Whenever the context so
requires, the singular number includes the plural and vice versa. The word
"including" (and, with correlative meaning, the word "include") means including,
without limiting the generality of any description preceding such word, and the
words "shall" and "will" are used interchangeably and have the same meaning. For
purposes of this Agreement, (i) the term "person" means any natural person,
entity, estate, trust, union or employee organization or governmental authority
and (ii) the term "entity" means any sole proprietorship, corporation,
partnership of any kind having a separate legal status, limited liability
company, business trust, unincorporated organization or association, mutual
company, joint stock company or joint venture. Captions to Articles and Sections
of this Agreement are included for convenience of reference only, and such
captions shall not constitute a part of this Agreement for any other purpose or
in any way affect the meaning or
-4-
<PAGE> 5
construction of any provision hereof. The language this Agreement uses shall be
deemed to be the language the parties hereto have selected to express their
mutual intent, and no rule of strict construction shall be applied against
either party.
Section IV.8. Multiple Counterparts. This Agreement may be
executed in multiple counterparts, each of which will be deemed an original, but
all of which together will constitute one and the same agreement.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the respective dates indicated below.
McDERMOTT INTERNATIONAL, INC.
Dated: February 21, 2000 By: /s/ Roger E. Tetrault
---------------------------------
Roger E. Tetrault
Chairman of the Board and
Chief Executive Officer
McDERMOTT INCORPORATED
Dated: February 25, 2000 By: /s/ Daniel R. Gaubert
---------------------------------
Daniel R. Gaubert
Senior Vice President and
Chief Financial Officer
-6-
<PAGE> 1
EXHIBIT 21
MCDERMOTT INTERNATIONAL INC.
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1999
<TABLE>
<CAPTION>
JURISDICTION PERCENTAGE
OF OF OWNERSHIP
NAME OF COMPANY ORGANIZATION INTEREST
<S> <C> <C>
J. Ray McDermott, S.A. Panama 100
McDermott Far East, Inc. Panama 100
P.T. McDermott Indonesia Indonesia 100
McDermott South East Asia Pte. Ltd. Singapore 100
J. Ray McDermott Holdings, Inc. Delaware 100
McDermott Trade Corporation Delaware 100
J. Ray McDermott, Inc. Delaware 100
J. Ray McDermott International, Inc. Panama 100
J. Ray McDermott Contractors, Inc. Panama 100
J. Ray McDermott Middle East, Inc. Panama 100
J. Ray McDermott Far East, Inc. Panama 100
McDermott Incorporated Delaware 100
Babcock & Wilcox Investment Company Delaware 100
BWX Technologies, Inc. Delaware 100
BWXT Services, Inc. Delaware 100
BWXT Federal Services, Inc. Delaware 100
The Babcock & Wilcox Company Delaware 100
Babcock & Wilcox Canada Ltd. Canada 100
Diamond Power International, Inc. Delaware 100
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894,
No. 33-63832, No. 33-55341, No. 33-60499, No. 333-12531, No. 333-39087, and No.
333-39089) of McDermott International, Inc. and the Registration Statement on
Form S-3 (No. 33-54940) of McDermott Incorporated and in the related
Prospectuses of our report dated February 22, 2000 relating to the consolidated
financial statements of McDermott International, Inc. which appears in this Form
10-K.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
March 24, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894, No. 33-63832,
No. 33-55341, No. 33-60499, No. 333-12531, No. 333-39087, and No. 333-39089) of
McDermott International, Inc. and Registration Statement (Form S-3 No. 33-54940)
of McDermott Incorporated and in the related Prospectuses of our report dated
May 19, 1998 with respect to the consolidated financial statements of McDermott
International, Inc. included in this Transition Report (Form 10-K) for the
period ended December 31, 1999.
ERNST & YOUNG LLP
New Orleans, Louisiana
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S SEPTEMBER 30, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 162,734
<SECURITIES> 111,104
<RECEIVABLES> 504,070
<ALLOWANCES> 53,091
<INVENTORY> 216,857
<CURRENT-ASSETS> 1,468,808
<PP&E> 1,439,496
<DEPRECIATION> 1,001,699
<TOTAL-ASSETS> 3,874,891
<CURRENT-LIABILITIES> 1,302,406
<BONDS> 323,014
0
0
<COMMON> 61,625
<OTHER-SE> 730,233
<TOTAL-LIABILITY-AND-EQUITY> 3,874,891
<SALES> 1,891,088
<TOTAL-REVENUES> 1,891,088
<CGS> 1,803,679
<TOTAL-COSTS> 1,803,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,743
<INCOME-PRETAX> 35,098
<INCOME-TAX> 34,658
<INCOME-CONTINUING> 440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 440
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
