<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
--------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's Common Stock at October 30,
2000 was 60,454,350.
<PAGE> 2
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Income (Loss)
Three and Nine Months Ended September 30, 2000 and 1999 6
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2000 and 1999 7
Condensed Consolidated Statements of Cash Flows
Nine months Ended September 30, 2000 and 1999 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 44
Item 6 - Exhibits and Reports on Form 8-K 48
SIGNATURES 49
Exhibit 27 - Financial Data Schedule
</TABLE>
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PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 111,142 $ 162,734
Investments 34,936 111,104
Accounts receivable - trade, net 201,309 429,573
Accounts receivable - unconsolidated affiliates 14,701 21,406
Accounts receivable - other 35,529 167,291
Environmental and products liabilities recoverable - current 1,281 232,618
Contracts in progress 86,621 159,369
Inventories 11,397 57,488
Deferred income taxes 45,660 93,629
Other current assets 37,741 33,596
------------- -------------
Total Current Assets 580,317 1,468,808
------------- -------------
Property, Plant and Equipment 1,241,609 1,439,496
Less accumulated depreciation 877,584 1,001,699
------------- -------------
Net Property, Plant and Equipment 364,025 437,797
------------- -------------
Investments:
Government obligations 273,057 159,005
Other investments 59,191 105,704
------------- -------------
Total Investments 332,248 264,709
------------- -------------
Products Liabilities Recoverable -- 942,982
------------- -------------
Goodwill less Accumulated Amortization of $45,454,000
at September 30, 2000 and $118,878,000 at December 31, 1999 350,694 444,220
------------- -------------
Prepaid Pension Costs 130,546 111,114
------------- -------------
Investment in The Babcock & Wilcox Company 180,866 --
------------- -------------
Other Assets 89,798 205,261
------------- -------------
TOTAL $ 2,028,494 $ 3,874,891
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 128,738 $ 86,499
Accounts payable 93,437 185,465
Accounts payable to The Babcock & Wilcox Company 24,161 --
Environmental and products liabilities - current 4,851 281,787
Accrued employee benefits 60,268 96,235
Accrued contract costs 21,194 81,586
Advance billings on contracts 59,465 231,421
Other current liabilities 251,752 339,413
------------- -------------
Total Current Liabilities 643,866 1,302,406
------------- -------------
Long-Term Debt 320,138 323,014
------------- -------------
Accumulated Postretirement Benefit Obligation 22,914 112,132
------------- -------------
Environmental and Products Liabilities 10,534 1,072,969
------------- -------------
Other Liabilities 234,365 272,484
------------- -------------
Commitments and Contingencies
Minority Interest -- 28
------------- -------------
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 62,331,339 at
September 30, 2000 and 61,625,434 at December 31, 1999 62,331 61,625
Capital in excess of par value 1,059,802 1,048,848
Accumulated deficit (205,378) (208,904)
Treasury stock at cost, 2,005,042 shares at September 30,
2000 and 2,000,614 at December 31, 1999 (62,736) (62,731)
Accumulated other comprehensive loss (57,342) (46,980)
------------- -------------
Total Stockholders' Equity 796,677 791,858
------------- -------------
TOTAL $ 2,028,494 $ 3,874,891
============= =============
</TABLE>
5
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 390,961 $ 595,870 $ 1,469,960 $ 1,993,122
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 335,019 499,495 1,283,370 1,687,763
Depreciation and amortization 15,943 22,713 47,290 72,620
Selling, general and administrative expenses 37,761 50,292 111,058 160,568
Reorganization charges -- -- 4,072 --
----------- ----------- ----------- -----------
388,723 572,500 1,445,790 1,920,951
----------- ----------- ----------- -----------
Gain (Loss) on Asset Disposals and Impairments - Net 1,096 907 2,213 (20,347)
----------- ----------- ----------- -----------
Operating Income before Income (Loss) from Investees 3,334 24,277 26,383 51,824
Income (Loss) from Investees 5,692 (6,759) (14,582) (13,011)
----------- ----------- ----------- -----------
Operating Income 9,026 17,518 11,801 38,813
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 6,558 9,611 20,596 43,951
Interest expense (12,871) (13,034) (32,672) (39,298)
Minority interest -- (56) -- 11,042
Other-net 3,995 941 14,059 (51,631)
----------- ----------- ----------- -----------
(2,318) (2,538) 1,983 (35,936)
----------- ----------- ----------- -----------
Income before Provision for Income Taxes
and Extraordinary Item 6,708 14,980 13,784 2,877
Provision for Income Taxes 1,086 11,362 10,342 2,600
----------- ----------- ----------- -----------
Income before Extraordinary Item 5,622 3,618 3,442 277
Extraordinary Item -- -- -- (38,719)
----------- ----------- ----------- -----------
Net Income (Loss) $ 5,622 $ 3,618 $ 3,442 $ (38,442)
----------- ----------- ----------- -----------
Earnings per Common Share:
Basic:
Income before Extraordinary Item $ 0.09 $ 0.06 $ 0.06 $ 0.00
Net Income (Loss) $ 0.09 $ 0.06 $ 0.06 $ (0.65)
Diluted:
Income before Extraordinary Item $ 0.09 $ 0.06 $ 0.06 $ 0.00
Net Income (Loss) $ 0.09 $ 0.06 $ 0.06 $ (0.64)
=========== =========== =========== ===========
Cash Dividends:
Per Common Share $ 0.00 $ 0.05 $ 0.10 $ 0.15
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net Income (Loss) $ 5,622 $ 3,618 $ 3,442 $(38,442)
-------- -------- -------- --------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (11,158) 12,120 (14,490) 1,811
Sales of investments in foreign entities -- (5,695) -- (5,695)
Minimum pension liability adjustment -- -- -- (1,066)
Unrealized losses on investments:
Unrealized gains (losses) arising during the period, net of taxes of
($111,000) and ($159,000), respectively, in the three and six months
ending September 30, 2000, and $68,000 and $296,000, respectively, in
the three and nine months ending September 30, 1999 3,385 (1,443) 4,136 (9,894)
Reclassification adjustment for gains
included in net income, net of taxes (benefits) of
($1,000) and $8,000 in the three and nine months,
respectively, ending September 30, 1999 (18) (2) (8) (89)
-------- -------- -------- --------
Other Comprehensive Income (Loss) (7,791) 4,980 (10,362) (14,933)
-------- -------- -------- --------
Comprehensive Income (Loss) $ (2,169) $ 8,598 $ (6,920) $(53,375)
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 3,442 $ (38,442)
--------- ---------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 47,290 72,620
Loss of investees, less dividends 21,449 21,395
Loss (gain) on asset disposals and
impairments - net (2,213) 20,347
Provision for (benefit from) deferred taxes 6,820 (14,973)
Extraordinary loss -- 38,719
Other 6,196 3,604
Changes in assets and liabilities, net of effects
of deconsolidation of B&W:
Accounts receivable 63,799 (42,807)
Net contracts in progress and advance billings (27,587) (49,537)
Accounts payable (7,029) (51,974)
Accrued and other current liabilities (31,277) (36,812)
Products and environmental liabilities (11,157) 125,974
Other, net (113,266) (65,354)
Deconsolidation of The Babcock & Wilcox Company (19,424) --
Proceeds from insurance for products liability claims 26,427 153,889
Payments of products liability claims (23,782) (235,230)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (60,312) (98,581)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of B&W Volund (4,218) --
Purchases of property, plant and equipment (42,117) (68,397)
Purchases of available-for-sale securities (98,706) (240,715)
Purchase of JRM minority interest -- (526,604)
Sales of available-for-sale securities 24,749 704,161
Maturities of available-for-sale securities 87,141 247,135
Proceeds from asset disposals 4,579 17,657
Other 500 (9,450)
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (28,072) 123,787
--------- ---------
</TABLE>
8
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CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (2) $(311,733)
Increase in short-term borrowing 42,278 133,455
Issuance of common stock 2 1,798
Issuance of subsidiary's stock -- 4,063
Dividends paid (8,972) (8,865)
Other 3,920 (2,944)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 37,226 (184,226)
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (434) 2,263
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,592) (156,757)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 162,734 265,309
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 111,142 $ 108,552
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 37,989 $ 53,731
Income taxes - net $ 6,198 $ 44,459
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Deconsolidation of The Babcock & Wilcox Company debt $ 4,760 $ --
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE> 10
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 - BASIS OF PRESENTATION
We have presented our consolidated financial statements in U.S. Dollars in
accordance with accounting principles generally accepted in the United States
("GAAP") for interim financial information. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. We have included all adjustments that we consider necessary for a
fair presentation. These consolidated financial statements include the accounts
of McDermott International, Inc. and its subsidiaries and controlled joint
ventures. We use the equity method to account for investments in joint ventures
and other entities we do not control, but have significant influence over. We
have eliminated all significant intercompany transactions and accounts.
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which includes:
o J. Ray McDermott, S.A. ("JRM"), a Panamanian subsidiary of MII, and
its consolidated subsidiaries;
o McDermott Incorporated ("MI"), a Delaware subsidiary of MII, and its
consolidated subsidiaries;
o Babcock & Wilcox Investment Company ("BWICO"), a Delaware subsidiary
of MI;
o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and
its consolidated subsidiaries, and
o The Babcock & Wilcox Company ("B&W"), an unconsolidated Delaware
subsidiary of BWICO.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve their asbestos liability. To date, this
filing has had no material effect on B&W's customers, suppliers, employees or
retirees. B&W and its subsidiaries are committed to operating their businesses
as normal, delivering products and services as usual and pursuing new contracts
and growth opportunities. However, as of February 22, 2000, B&W's operations are
subject to the jurisdiction of the Bankruptcy Court and, as a result, our access
to cash flows of B&W and its subsidiaries is restricted.
Due to the bankruptcy filing, effective February 22, 2000, we no longer
consolidate B&W's financial results in our consolidated financial statements,
and our investment in B&W is presented on the cost method. When B&W emerges from
the jurisdiction of the Bankruptcy Court, the subsequent accounting will be
10
<PAGE> 11
determined based upon the applicable circumstances and facts at such time,
including the terms of any plan of reorganization. See Note 8 for condensed
consolidated income statement and balance sheet information of B&W.
We accrue estimated drydock costs for our marine fleet over the period of time
between drydockings, which is generally 3 to 5 years. We accrue drydock costs in
advance of the anticipated future drydocking, commonly known as the "accrue in
advance" method. Actual drydock costs are charged against the liability when
incurred and any differences between actual costs and accrued costs are
recognized over the remaining months of the drydocking cycle.
NOTE 2 - ACQUISITION
During the nine months ended September 30, 2000, we acquired, through our
Babcock & Wilcox Volund ApS ("B&W Volund") subsidiary, various business units of
the Ansaldo Volund Group, a group of companies owned by Finmeccanica S.p.A. of
Italy. We acquired waste-to-energy, biomass, gasification and stoker-fired
boiler businesses and projects, as well as an engineering and manufacturing
facility in Esbjerg, Denmark from the Ansaldo Volund Group. B&W Volund is not a
subsidiary of B&W, and is therefore not a party to B&W's Chapter 11 bankruptcy
filing.
We are using the purchase method of accounting for this acquisition. However, a
full application of purchase accounting was not possible at September 30, 2000.
We have included the operating results of B&W Volund in our consolidated
financial results from the date of acquisition. The preliminary acquisition cost
of approximately $4,200,000, including goodwill of approximately $400,000, is
subject to further adjustment, based on a final valuation of the assets and
liabilities acquired in the purchase. We expect the purchase accounting for the
acquisition to be substantially completed by December 31, 2000.
NOTE 3 - INVENTORIES
Inventories are summarized below:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 7,014 $ 43,998
Work in Progress 2,149 6,353
Finished Goods 2,234 7,137
------------ ------------
$ 11,397 $ 57,488
============ ============
</TABLE>
11
<PAGE> 12
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $ (43,886) $ (29,397)
Net Unrealized Loss on Investments (5,602) (9,729)
Minimum Pension Liability (7,854) (7,854)
------------ ------------
$ (57,342) $ (46,980)
============ ============
</TABLE>
NOTE 5 - INVESTIGATIONS AND LITIGATION
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the Department of Justice that they and others had
participated in a conspiracy to rig bids in connection with the heavy-lift
business of HeereMac in the Gulf of Mexico, the North Sea and the Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the
Department of Justice that he participated in an international bid-rigging
conspiracy for the sale of marine construction services. In May 2000, another
former JRM officer was indicted by the Department of Justice for participating
in a bid-rigging conspiracy for the sale of marine construction services in the
Gulf of Mexico.
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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 was 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 also dismissed the
Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed
this dismissal to the Fifth Circuit Court of Appeal and we are currently
awaiting that court's ruling on oral arguments heard in August 2000 on Statoil's
appeal. In September 1999, the Phillips Plaintiffs filed notice of their request
to dismiss their remaining domestic claims in the lawsuit in order to seek an
appeal of the dismissal of their claims on foreign projects, which request was
subsequently denied. A court hearing to set a trial schedule had been set in the
Phillips Litigation.
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.
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<PAGE> 14
and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.;
Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company;
Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering
Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company,
L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K.
Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum,
S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon
a.s., individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell Litigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign claims of the
plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non-heavy lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims.
We are also cooperating with a Securities and Exchange Commission ("SEC")
investigation into whether MII and JRM may have violated U.S. securities laws in
connection with, but not limited to, the matters described above. MII and JRM
are subject to a consent decree under a judicial order entered in 1976, with the
consent of MI (which at that time was the parent of the McDermott group of
companies), pursuant to an SEC complaint. This decree prohibits the companies
from making false entries in their books, maintaining secret or unrecorded funds
or using corporate funds for unlawful purposes. Violations of this decree could
result in substantial civil and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, we formed
and have continued to maintain a special committee of our Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, our internal investigation, the
above-referenced lawsuits or any actions that may be taken by others as a result
of HeereMac's guilty plea or otherwise. These matters could result in civil and
criminal liability and have a material adverse effect on our consolidated
financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania. The suit involves approximately 300
separate claims for compensatory and punitive damages relating to the operation
of two former nuclear fuel processing facilities located in Pennsylvania (the
"Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other
things, that they suffered personal injury, property damage and
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<PAGE> 15
other damages as a result of radioactive emissions from these facilities. In
September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the
first cases brought to trial, awarding $36,700,000 in compensatory damages. In
June 1999, the district court set aside the $36,700,000 judgment and ordered a
new trial on all issues. In November 1999, the district court allowed an
interlocutory appeal by the plaintiffs of certain issues, including the granting
of the new trial and the court's rulings on certain evidentiary matters, which,
following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined
to accept for review. The plaintiffs' claims against B&W in the Hall Litigation
have been automatically stayed as a result of the B&W bankruptcy filing. B&W
also filed a complaint for declaratory and injunctive relief with the Bankruptcy
Court seeking to stay the pursuit of the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied
in October 2000. B&W has appealed this decision.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8,000,000 for which it seeks reimbursement from other parties.
There is a controversy between B&W and its insurers as to the amount of coverage
available under the liability insurance policies covering the facilities. B&W
filed a declaratory judgment action in a Pennsylvania State Court seeking a
judicial determination as to the amount of coverage available under the
policies. We believe that all claims under the Hall Litigation will be resolved
within the limits and coverage of our insurance policies; but our insurance
coverage may not be adequate and we may be materially adversely impacted if our
liabilities exceed our coverage. B&W transferred the two facilities subject to
the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and
an overall corporate restructuring.
In December 1999 and early 2000, several persons who allegedly purchased shares
of our common stock during the period from May 21, 1999 through November 11,
1999 filed four purported class action complaints against MII and two of its
executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United
States District Court for the Eastern District of Louisiana. Each of the
complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. The four cases were
subsequently consolidated. In June 2000, the plaintiffs filed a consolidated
amended complaint, and in July 2000, we filed a motion to dismiss all claims
asserted in such complaint. In September 2000, the District Court dismissed with
prejudice the plaintiffs' consolidated amended complaint for failure to state a
claim upon which relief can be granted, which dismissal the plaintiffs appealed
to the U.S. Fifth Circuit Court of Appeal in
15
<PAGE> 16
October 2000. We believe the substantive allegations contained in the complaints
are without merit and intend to defend against these and any substantively
similar claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and, in January 2000, JRM instituted an
arbitration proceeding against Texaco seeking the amount owed. Texaco has
countered with a lawsuit, claiming consequential damages for delays resulting
from the incident, as well as costs incurred to complete the project with
another contractor. The court has dismissed Texaco's counterclaims for
consequential damages but the dismissal is on appeal. Texaco has also filed a
lawsuit against a number of other parties, claiming that they are responsible
for the incident. It is our position that the installation contract between the
parties prohibits Texaco's claims against JRM and JRM is entitled to the amount
withheld.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position or results of
operations.
See Note 8 regarding B&W's potential liability for non-employee asbestos claims
and the Chapter 11 reorganization proceedings commenced by B&W and certain of
its subsidiaries on February 22, 2000.
NOTE 6- SEGMENT REPORTING
Our reportable segments are Marine Construction Services, Power Generation
Systems, Government Operations and Industrial Operations. These segments are
managed separately and are unique in technology, services and customer class.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration, production and
hydrocarbon processing industries and to other marine construction companies.
Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production platforms, specialized
structures, modular facilities, marine pipelines and subsea production systems.
JRM also provides project management services, engineering services, procurement
activities, and removal, salvage and refurbishment services of offshore fixed
platforms.
16
<PAGE> 17
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment provides
aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities. Included in the nine months ended September 30, 2000 are charges of
$23,940,000 to exit certain foreign joint ventures. The Power Generation Systems
segment's operations are conducted primarily through B&W. Due to B&W's Chapter
11 filing, effective February 22, 2000, we no longer consolidate B&W's and its
subsidiaries' results of operations in our consolidated financial statements.
Through February 21, 2000, B&W's and its subsidiaries' results are reported as
Power Generation Systems - B&W in the segment information that follows. See Note
8 for the consolidated results of B&W and its subsidiaries.
Government Operations supplies nuclear reactor components and nuclear fuel
assemblies to the U.S. Government, manages and operates government-owned
facilities and supplies commercial nuclear environmental services and other
government and commercial nuclear services.
Industrial Operations is comprised of the engineering and construction
activities and plant outage maintenance of certain Canadian operations and
manufacturing of auxiliary equipment such as air-cooled heat exchangers and
replacement parts. Industrial Operations also includes contract research
activities.
We account for intersegment sales at prices that we generally establish by
reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses, non-employee products liability asbestos claims provisions, contract
and insurance claims provisions, legal expenses and gains (losses) on sales of
corporate assets. Other reconciling items to income before provision for income
taxes are interest income, interest expense, minority interest and other-net. We
exclude the following assets from segment assets: insurance recoverables for
products liability claims, goodwill, investments in debt securities, prepaid
pension costs and our investment in B&W. We have allocated amortization of
goodwill to the reportable segments for all periods presented. Segment assets
decreased approximately $570,000,000, primarily in the Power Generation segment,
as a result of the deconsolidation of B&W as described in Note 1.
17
<PAGE> 18
Segment Information for the Three and Nine Months Ended September 30, 2000 and
1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Marine Construction Services $ 161,922 $ 175,179 $ 614,699 $ 580,555
Government Operations 95,949 109,357 322,712 294,464
Industrial Operations 120,961 107,039 365,674 361,087
Power Generation Systems - B&W -- 203,578 155,774 761,531
Power Generation Systems 14,829 110 14,975 269
Adjustments and Eliminations (1) (2,700) 607 (3,874) (4,784)
------------ ------------ ------------ ------------
Total Revenues $ 390,961 $ 595,870 $ 1,469,960 $ 1,993,122
============ ============ ============ ============
(1) Segment revenues are net of the following intersegment transfers and other adjustments:
Marine Construction Services Transfers $ 224 $ 528 $ 805 $ 1,672
Government Operations Transfers 226 308 657 791
Industrial Operations Transfers 78 129 181 231
Power Generation Systems - B&W Transfers -- 60 59 1,388
Adjustments and Eliminations 2,172 (1,632) 2,172 702
------------ ------------ ------------ ------------
Total $ 2,700 $ (607) $ 3,874 $ 4,784
============ ============ ============ ============
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income (Loss):
Marine Construction Services $ (9,142) $ 4,013 $(16,930) $ 33,604
Government Operations 9,964 7,194 33,443 37,586
Industrial Operations 4,337 4,364 8,544 11,469
Power Generation Systems - B&W -- 15,829 12,502 66,106
Power Generation Systems (2,055) (164) (2,419) (761)
--------- --------- --------- ---------
Total Segment Operating Income $ 3,104 $ 31,236 $ 35,140 $ 148,004
--------- --------- --------- ---------
Gain (Loss) on Asset Disposals and Impairments - Net:
Marine Construction Services $ 1,087 $ 638 $ 2,028 $ (21,441)
Government Operations 9 (4) 208 41
Industrial Operations -- -- 10 (49)
Power Generation Systems - B&W -- 273 (33) 3,853
Power Generation Systems -- -- -- 950
--------- --------- --------- ---------
Total Gain (Loss) on Asset Disposals and
Impairments - Net $ 1,096 $ 907 $ 2,213 $ (16,646)
--------- --------- --------- ---------
Income (Loss) from Investees:
Marine Construction Services $ 3,143 $ (5,724) $ 136 $ (3,478)
Government Operations 4,483 700 7,762 3,603
Industrial Operations 80 (229) 151 (1,130)
Power Generation Systems - B&W -- 1,125 812 3,028
Power Generation Systems (2,014) (2,631) (23,443) (15,034)
--------- --------- --------- ---------
Total Income (Loss) from Investees $ 5,692 $ (6,759) $(14,582) $ (13,011)
--------- --------- --------- ---------
SEGMENT INCOME (LOSS):
Marine Construction Services $ (4,912) $ (1,073) $(14,766) $ 8,685
Government Operations 14,456 7,890 41,413 41,230
Industrial Operations 4,417 4,135 8,705 10,290
Power Generation Systems - B&W -- 17,227 13,281 72,987
Power Generation Systems (4,069) (2,795) (25,862) (14,845)
--------- --------- --------- ---------
Total Segment Income $ 9,892 $ 25,384 $ 22,771 $ 118,347
--------- --------- --------- ---------
Other Unallocated Items 8,182 1,799 9,998 (49,972)
General Corporate Expenses - Net (9,048) (9,665) (20,968) (29,562)
--------- --------- --------- ---------
Total Operating Income $ 9,026 $ 17,518 $ 11,801 $ 38,813
========= ========= ========= =========
</TABLE>
19
<PAGE> 20
NOTE 7 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C>
Basic:
Income before extraordinary item $ 5,622 $ 3,618 $ 3,442 $ 277
Extraordinary item -- -- -- (38,719)
------------ ------------ ------------ ------------
Net income (loss) $ 5,622 $ 3,618 $ 3,442 $ (38,442)
============ ============ ============ ============
Weighted average common shares 59,908,646 59,035,083 59,657,556 58,916,735
============ ============ ============ ============
Basic earnings (loss) per common share:
Income before extraordinary item $ 0.09 $ 0.06 $ 0.06 $ 0.00
Extraordinary item -- -- -- (0.65)
------------ ------------ ------------ ------------
Net income (loss) $ 0.09 $ 0.06 $ 0.06 $ (0.65)
============ ============ ============ ============
Diluted:
Income before extraordinary item $ 5,622 $ 3,618 $ 3,442 $ 277
Extraordinary item -- -- -- (38,719)
------------ ------------ ------------ ------------
Net income (loss) for diluted computation $ 5,622 $ 3,618 $ 3,442 $ (38,442)
============ ============ ============ ============
Weighted average common shares (basic) 59,908,646 55,035,083 59,657,556 58,916,735
Effect of dilutive securities:
Stock-based compensation arrangements 1,280,288 810,719 894,244 813,528
------------ ------------ ------------ ------------
Adjusted weighted average common
shares and assumed conversions 61,188,934 59,845,802 60,551,800 59,730,263
============ ============ ============ ============
Diluted earnings (loss) per common share:
Income before extraordinary item $ 0.09 $ 0.06 $ 0.06 $ 0.00
Extraordinary item -- -- -- (0.64)
------------ ------------ ------------ ------------
Net income (loss) $ 0.09 $ 0.06 $ 0.06 $ (0.64)
============ ============ ============ ============
</TABLE>
20
<PAGE> 21
NOTE 8 - THE BABCOCK & WILCOX COMPANY
General
As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of non-employee products liability claims
asserting asbestos-related injuries. All of these claims are similar in nature,
the primary difference being the type of alleged injury or illness suffered by
the plaintiff as a result of the exposure to asbestos fibers (e.g.,
mesothelioma, lung cancer, other types of cancer, asbestosis or pleural
changes).
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the Bankruptcy Court to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon,
Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International,
Inc. B&W and these subsidiaries took this action as a means to determine and
comprehensively resolve all pending and future asbestos liability claims against
them. As a result of the filing, the Bankruptcy Court issued a temporary
restraining order prohibiting asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against non-filing affiliates
of B&W, including MI, JRM and MII. The temporary restraining order was converted
to a preliminary injunction, which is subject to periodic hearings before the
Bankruptcy Court for extension. Currently, the preliminary injunction runs
through January 17, 2001, prior to which, we intend to seek a further extension.
Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a
strategy of negotiating and settling asbestos products liability claims brought
against them and billing the settled amounts to insurers for reimbursement. The
average amount per settled claim over the last three calendar years was
approximately $7,900. Reimbursed amounts are subject to varying insurance limits
based upon the year of coverage, insurer solvency and collection delays (due
primarily to agreed payment schedules with specific insurers delaying
reimbursement for three months or more). No claims have been paid since the
bankruptcy filing. Claims paid during the nine-month period ended September 30,
2000, prior to the bankruptcy filing, were $23,640,000 of which $20,121,000 has
been recovered or is due from insurers. At September 30, 2000, receivables of
$38,252,000 were due from insurers for reimbursement of settled claims.
Currently, certain insurers are refusing to reimburse B&W for settled claims
until B&W's assumption, in bankruptcy, of its pre-bankruptcy filing contractual
reimbursement arrangements with such insurers. To date, this has not had a
material adverse impact on B&W's liquidity or the conduct of its business and we
do not expect it to in the future. We anticipate that B&W will eventually
recover these insurance reimbursements.
21
<PAGE> 22
At February 21, 2000, the day prior to the bankruptcy filing, B&W had recorded
an asbestos products liability of $1,307,583,000 and an asbestos products
liability insurance recoverable of $1,153,619,000. Historically, B&W's estimated
liabilities for pending and future non-employee products liability asbestos
claims have been derived from its prior claims history. Inherent in the estimate
of such liabilities were expected trend claim severity, frequency, and other
factors. B&W's estimated liabilities were based on the assumption that B&W would
continue to settle claims rather than litigate them, that new claims would
conclude by 2012, that there would be a significant decline in new claims
received after 2003, and that the average cost per claim would continue to
increase only moderately. During the fiscal year ended March 31, 1999, we
revised our estimate of the liability for pending and future non-employee
asbestos claims and recorded an additional liability of $817,662,000, additional
estimated insurance recoveries of $732,477,000 and a loss of $85,185,000 for
future claims for which recovery from insurance carriers was not considered
probable.
Beginning in the third quarter of calendar 1999, B&W experienced a significant
increase in the amount demanded by several plaintiffs' attorneys to settle
certain types of asbestos products liability claims. These increased demands
significantly impaired B&W's ability to continue to resolve its asbestos
products liability through out-of-court settlements. As a result, B&W undertook
the bankruptcy filing because it believes that a Chapter 11 proceeding offers
the only viable legal process through which it and its subsidiaries can seek a
comprehensive resolution of their asbestos liability. The filing increases the
uncertainty with respect to the manner in which such liabilities will ultimately
be settled.
In October 2000, the Bankruptcy Court extended B&W's and its filing
subsidiaries' exclusivity period to submit a plan of reorganization for approval
to February 22, 2001. Moreover, the Bankruptcy Court set a March 29, 2001 bar
date for the submission of allegedly settled asbestos claims and a July 30, 2001
bar date for all other personal injury claims including unsettled asbestos
claims against B&W and its filing subsidiaries. While the B&W Chapter 11
reorganization proceeding continues to progress, there are a number of issues
and matters to be resolved prior to its emergence from the proceeding. Remaining
issues and matters to be resolved include, but are not limited to, B&W's
ultimate asbestos liability, the formation of a trust to satisfy such liability
and the funding of such a trust, including negotiations with insurers as to the
funding of their insurance obligations with respect to such asbestos liability.
The timing and ultimate outcome of the Chapter 11 proceeding is uncertain. Any
changes in the estimate of B&W's non-employee asbestos products liability and
insurance recoverables, and differences between the proportion of such
liabilities covered by insurance and that experienced in the past, could result
in material adjustments to the B&W financial statements and could negatively
impact our ability to realize our net investment in B&W.
22
<PAGE> 23
Debtor-In-Possession Financing
In connection with the bankruptcy filing, B&W and its filing subsidiaries
entered into a $300,000,000 debtor-in-possession revolving credit and letter of
credit facility with Citibank, N.A. and Salomon Smith Barney Inc. (the "DIP
Credit Facility") with a three-year term. The Bankruptcy Court approved the full
amount of this facility, giving all amounts owed under the facility a
super-priority administrative expense status in bankruptcy. B&W's and its filing
subsidiaries' obligations under the facility are (1) guaranteed by substantially
all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by
a security interest on B&W Canada Ltd.'s assets. Additionally, B&W and
substantially all of its domestic subsidiaries executed a pledge and security
agreement pursuant to which they have granted a security interest in their
assets to the lenders under the DIP Credit Facility upon the defeasance or
refinancing of MI's public debt. The DIP Credit Facility generally provides for
borrowings by B&W and its filing subsidiaries for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and non-performance letters of credit issued under
the facility cannot exceed $100,000,000 in the aggregate. The DIP Credit
Facility also imposes certain financial and non-financial covenants on B&W and
its subsidiaries. A permitted use of the DIP Credit Facility is the issuance of
new letters of credit to backstop or replace pre-existing letters of credit
issued in connection with B&W's and its subsidiaries' business operations, but
for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000,
the aggregate amount of all such pre-existing letters of credit totaled
approximately $172,000,000 (the "Pre-existing LCs"). Each of MII, MI and BWICO
have agreed to indemnify and reimburse B&W and its filing subsidiaries for any
customer draw on any letter of credit issued under the DIP Credit Facility to
backstop or replace any Pre-existing LC for which it already has exposure and
for the associated letter of credit fees paid under the facility. As of
September 30, 2000, approximately $71,574,000 in letters of credit have been
issued under the DIP Credit Facility of which approximately $61,766,000 were to
replace or backstop Pre-existing LCs.
Financial Results and Reorganization Items
The B&W condensed consolidated financial statements set forth below have been
prepared in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP
90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by
the Bankruptcy Court as of the bankruptcy filing date and identification of all
transactions and events that are directly associated with the reorganization.
Liabilities subject to compromise include prepetition unsecured claims, which
may be settled at amounts which differ from those recorded in the B&W condensed
consolidated financial statements.
23
<PAGE> 24
THE BABCOCK & WILCOX COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 250,385 $ 205,319 $ 821,198 $ 761,177
--------- --------- --------- ---------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 225,174 170,126 742,586 673,307
Depreciation and amortization 4,043 3,885 12,211 15,154
Selling, general and administrative
expenses 16,033 16,252 49,306 51,472
Reorganization charges 4,834 -- 12,799 --
--------- --------- --------- ---------
250,084 190,263 816,902 739,933
--------- --------- --------- ---------
Gain on Asset Disposals -- 273 1,309 2,142
--------- --------- --------- ---------
Operating Income before Income
from Investees 301 15,329 5,605 23,386
Income from Investees 1,217 1,125 3,914 3,028
--------- --------- --------- ---------
Operating Income 1,518 16,454 9,519 26,414
--------- --------- --------- ---------
Other Income:
Interest income 2,761 858 5,553 11,616
Interest expense (1,107) (345) (2,497) (1,010)
Other-net 1,103 853 1,139 (49,986)
--------- --------- --------- ---------
2,757 1,366 4,195 (39,380)
--------- --------- --------- ---------
Income (Loss) before Provision for
Income Taxes 4,275 17,820 13,714 (12,966)
Provision for Income Taxes 5,532 8,411 8,717 3,082
--------- --------- --------- ---------
Net Income (Loss) $ (1,257) $ 9,409 $ 4,997 $ (16,048)
========= ========= ========= =========
</TABLE>
24
<PAGE> 25
THE BABCOCK & WILCOX COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 2000
(Unaudited)
(In thousands)
<S> <C>
Assets:
Current Assets $ 569,835
Property, Plant and Equipment 81,661
Products Liabilities Recoverable 1,153,761
Goodwill 76,227
Prepaid Pension Costs 19,178
Other Assets 98,220
------------
Total Assets $ 1,998,882
============
Liabilities:
Current Liabilities $ 345,549
Liabilities Subject to Compromise 1,477,087(A)
Stockholder's Equity:
Common Stock 1,001
Capital in Excess of Par Value 128,633
Retained Earnings 70,129
Accumulated Other Comprehensive Loss (23,517)
------------
Total Liabilities and Stockholder's Equity $ 1,998,882
============
(A) Liabilities subject to compromise consist of the following:
Accounts payable $ 3,404
Provision for warranty 23,361
Other current liabilities 31,915
Environmental and products liabilities 1,307,725
Accumulated postretirement benefit
obligation 89,132
Other long-term liabilities 21,550
------------
$ 1,477,087
============
</TABLE>
B&W and its subsidiaries routinely engage in intercompany transactions with
other entities within the McDermott group of companies in the ordinary course of
business. These transactions include services received by B&W and its
subsidiaries from MII and MI under a support services agreement. These services
include the following: accounting, treasury, tax administration, and other
financial services; human relations; public relations; corporate secretarial;
and corporate officer services. In addition, B&W is responsible for its share of
federal income taxes included in MI's federal tax return under a tax-sharing
arrangement. As a result of its bankruptcy filing, B&W and its filing
subsidiaries are precluded from paying dividends to shareholders and making
payments on any pre-bankruptcy filing accounts or notes payable that are due and
owing to any other entity within the McDermott group of companies (the
"Pre-Petition Inter-company Payables") and other creditors during the pendency
of the bankruptcy case, without the Bankruptcy Court's approval.
25
<PAGE> 26
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 February 21, 2000, the day prior to the
bankruptcy filing, B&W and its filing subsidiaries had Pre-Petition
Inter-company Payables of approximately $51,350,000 and pre-petition
inter-company receivables from other entities within the McDermott group of
companies (other than subsidiaries of B&W) of approximately $58,143,000. In the
course of the conduct of B&W's and its subsidiaries' business, MII and MI have
agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. In addition to this indemnity, these two surety companies requested
and, in June 2000, obtained from the Bankruptcy Court, subject to DIP Credit
Agreement and certain professional fees, super-priority administrative expense
status in bankruptcy for their claims against B&W and its filing subsidiaries
resulting from their exposure under any bond issued post-bankruptcy filing for
B&W's and its subsidiaries' businesses. At September 30, 2000, the total value
of B&W's and its subsidiaries' customer contracts yet to be completed covered by
such indemnity arrangements was approximately $172,807,000 of which
approximately $55,788,000 relates to bonds issued after February 21, 2000.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $166,234,000, as of February 21, 2000,
increased to $180,866,000 due to post-bankruptcy filing adjustments to the net
assets of B&W and is subject to periodic reviews for recoverability. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based upon the applicable circumstances and facts at such
time, including the terms of any plan of reorganization.
We have assessed B&W's liquidity position as a result of the bankruptcy filing
and believe that B&W can continue to fund its and its subsidiaries' operating
activities and meet its debt and capital requirements for the foreseeable
future. However, the ability of B&W to continue as a going concern is dependent
upon its ability to settle its ultimate asbestos liability from its net assets,
future profits and cash flow and available insurance proceeds, whether through
the confirmation of a plan of reorganization or otherwise. The B&W condensed
consolidated financial information set forth above has been prepared on a going
concern basis which contemplates continuity of operations, realization of
assets, and liquidation of liabilities in the ordinary course
26
<PAGE> 27
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 our condensed Pro Forma consolidated Statements of Income (Loss)
and Balance Sheet data, assuming the deconsolidation of B&W for all periods
presented.
Assumes deconsolidation as of the beginning of the period presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 390,961 $ 390,551 $ 1,314,245 $ 1,231,945
Operating Income $ 9,026 $ 1,064 $ 3,850 $ 12,399
Income (Loss) before Provision for
(Benefit from) Income Taxes and
Extraordinary Item $ 6,708 $ (2,840) $ 4,490 $ 15,843
Net Income (Loss) $ 5,622 $ (5,791) $ (2,063) $ (22,394)
Earnings (Loss) per Common Share:
Basic $ 0.09 $ (0.10) $ (0.03) $ (0.38)
Diluted $ 0.09 $ (0.10) $ (0.03) $ (0.38)
</TABLE>
Assumes deconsolidation as of the balance sheet date:
<TABLE>
<CAPTION>
December 31,
1999
------------
(In thousands)
<S> <C>
Current Assets $ 755,640
Property, Plant and Equipment $ 351,646
Investment in B&W $ 160,728
Total Assets $ 2,082,954
Current Liabilities $ 672,857
Environmental and Products Liabilities $ 11,604
Total Stockholders' Equity $ 791,858
Total Liabilities and Stockholders' Equity $ 2,082,954
</TABLE>
NOTE 9 - 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
27
<PAGE> 28
will require us to recognize all derivatives on our consolidated balance sheet
at their fair values. Derivatives that are not hedges must be adjusted to fair
value through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133," which adds to the guidance related to
accounting for derivative instruments and hedging activities. We have not yet
determined the effect SFAS No. 133, as amended by SFAS No. 138, will have on our
consolidated financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," for certain issues including (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. Generally, the provisions of this
Interpretation are effective July 1, 2000 and shall be applied prospectively.
However, certain requirements apply to events that occur after December 15, 1998
or January 12, 2000 but prior to July 1, 2000. The effects of such events also
shall be recognized on a prospective basis beginning July 1, 2000. The adoption
of Interpretation No. 44 has had no material effect on our consolidated
financial position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
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From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are generally
accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "plan," "goal" or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we will
specifically describe a statement as being a forward-looking statement and refer
to this cautionary statement.
In addition, various statements this Form 10-Q contains, including those that
express a belief, expectation or intention, as well as those that are not
statements of historical fact, are forward-looking statements. These
forward-looking statements speak only as of the date of this report, we disclaim
any obligation to update these statements, and we caution you not to unduly rely
on them. We have based these forward-looking statements on our current
expectations and assumptions about future events. While our management considers
these expectations and assumptions to be reasonable, they are inherently subject
to significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:
o general economic and business conditions and industry trends;
o the continued strength of the industries in which we are involved;
o decisions about offshore developments to be made by oil and gas
companies;
o the deregulation of the U.S. electric power market;
o the highly competitive nature of our businesses;
o our future financial performance, including availability, terms and
deployment of capital;
o the continued availability of qualified personnel;
o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings, including the results of ongoing governmental
investigations and related civil lawsuits involving alleged
anticompetitive practices in our marine construction business;
o estimates for pending and future nonemployee asbestos claims against
B&W and potential adverse developments that may occur in the Chapter
11 reorganization proceeding involving B&W and certain of its
subsidiaries;
o changes in existing environmental regulatory matters;
o rapid technological changes;
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o difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions; and
o social, political and economic situations in foreign countries where
we do business.
We believe the items we have outlined above are important factors that could
cause our actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by us or on our
behalf. We have discussed many of these factors in more detail elsewhere in this
report. These factors are not necessarily all the important factors that could
affect us. Unpredictable or unknown factors we have not discussed in this report
could also have material adverse effects on actual results of matters that are
the subject of our forward-looking statements. We do not intend to update our
description of important factors each time a potential important factor arises.
We advise our security holders that they should (1) be aware that important
factors not referred to above could affect the accuracy of our forward-looking
statements and (2) use caution and common sense when considering our
forward-looking statements.
GENERAL
The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant development projects.
Although oil and gas prices have continued to increase in recent months, this
has yet to have a significant impact on our Marine Construction Services'
customers' exploration and production spending for the remainder of 2000 and the
first half of 2001. Consequently, we do not expect our Marine Construction
Services segment's revenues to increase significantly until the second half of
2001. During 2001, we should begin to see modest benefits from stronger marine
construction results, followed by more substantial improvements in 2002.
Although the timing of the award of many marine construction projects remains
uncertain, the segment's backlog should continue to increase for the foreseeable
future.
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.
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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.
As the West Natuna project is completed in the Far East, the volume of work at
JRM in each of the next two quarters is expected to be about 20% below the
volume reported for the September quarter. Under these conditions, it is not
likely that the Marine Construction Services segment will generate sufficient
revenues to cover its costs in either the December 2000 or March 2001 quarter.
However, operating income in our Government and Industrial Operations segments
should offset these losses. We expect profitability to improve in each of the
final three quarters of 2001 as JRM markets recover and as the Y-12 and Pantex
contracts recently awarded to BWXT increase income from investees in Government
Operations during the second half of the year.
After net interest expense, other expenses and taxes, we expect net results to
be no better than breakeven in each of the next two quarters. We are currently
completing plans for the reorganization of corporate functions. These plans,
which are expected to be complete by the end of the year, could require
provisions which would create a net loss in the December quarter. We also
continue to review the possibility of restructuring several unconsolidated
foreign joint ventures in which we are not the managing partner, which may also
affect the fourth quarter.
Effective February 22, 2000 and until B&W and its filing subsidiaries emerge
from the Chapter 11 reorganization proceeding and the subsequent accounting is
determined, we no longer consolidate B&W's and its subsidiaries' results of
operations in our consolidated financial statements and our investment in B&W is
presented on the cost method. Through February 21, 2000, B&W's and its
subsidiaries' results are included in our segment results under Power Generation
Systems - B&W (see Note 6 to the consolidated financial statements.) B&W and its
consolidated subsidiaries pre-bankruptcy filing revenues of $155,774,000 and
operating income of $7,951,000 are included in our consolidated financial
results for the nine-month period ended September 30, 2000.
In general, each of our business segments is composed of capital-intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
We evaluate the realizability of our long-lived assets, including property,
plant and equipment and goodwill, whenever events or changes in circumstances
indicate that we may not be able to recover the carrying amounts
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of those assets. We carry our property, plant and equipment at cost, reduced by
provisions to recognize economic impairment when we determine impairment has
occurred.
We derive a significant portion of our revenues from foreign operations. As a
result, international factors, including variations in local economies and
changes in foreign currency exchange rates affect our revenues and operating
results. We attempt to limit our exposure to changes in foreign currency
exchange rates by attempting to match anticipated foreign currency contract
receipts with like foreign currency disbursements. To the extent that we are
unable to match the foreign currency receipts and disbursements related to our
contracts, we enter into forward exchange contracts to reduce the impact of
foreign exchange rate movements on our operating results. Because we generally
do not hedge beyond our contract exposure, we believe this practice minimizes
the impact of foreign exchange rate movements on our operating results.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1999
Marine Construction Services
Revenues decreased $13,257,000 to $161,922,000 due to lower volume in North
American offshore and Eastern Hemisphere fabrication activities. These decreases
were partially offset by higher volume in offshore activities in the Far East
relating to the West Natuna project and in engineering activities.
Segment operating income decreased $13,155,000 from income of $4,013,000 to a
loss of $9,142,000, primarily due to lower volume and margins in North American
offshore and Eastern Hemisphere fabrication activities. There were also lower
margins in our North American fabrication and Mexican ship repair business.
These decreases were partially offset by higher volume and margins in Eastern
Hemisphere offshore activities.
Income (loss) from investees increased $8,867,000 from a loss of $5,724,000 to
income of $3,143,000, primarily due to favorable contract adjustments from our
Gulf of Mexico joint venture.
Government Operations
Revenues decreased $13,408,000 to $95,949,000, primarily due to lower volumes
from management and operation contracts for U.S. Government-owned facilities,
commercial nuclear environmental services and other government operations.
Segment operating income increased $2,770,000 to $9,964,000, primarily due to
higher margins from nuclear fuel assemblies and reactor components for the U. S.
Government and contract adjustments on a commercial nuclear environmental
services contract in the prior period. These increases were partially offset by
lower
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volume and margins from management and operation contracts for U.S.
Government-owned facilities and from other government operations.
Income from investees increased $3,783,000 to $4,483,000, primarily due to
higher operating results from joint ventures in Idaho and Colorado.
Industrial Operations
Revenues increased $13,922,000 to $120,961,000, primarily due to higher volumes
from plant maintenance activities in Canadian operations and air-cooled heat
exchangers. These increases were partially offset by lower volumes from
engineering activities in Canadian operations.
Power Generation Systems
Revenues increased $14,719,000 to $14,829,000, primarily due to the acquisition
of the Ansaldo Volund Group, an international power generation operation.
Segment operating loss increased $1,891,000 to $2,055,000, primarily due to
costs incurred in the initial transition of the Ansaldo Volund Group.
Loss from investees decreased $617,000 to $2,014,000, primarily due to
provisions to exit certain foreign joint ventures.
Other Unallocated Items
Other unallocated items improved $6,383,000 to $8,182,000, primarily due to
favorable employee benefit adjustments, partially offset by provisions for
foreign claims settlements.
General Corporate Expenses - Net
General corporate expenses decreased $617,000, primarily due to the
deconsolidation of B&W, partially offset by severance provisions.
Other Income Statement Items
Interest income decreased $3,053,000 to $6,558,000, primarily due to a decrease
in investments.
Other-net improved $3,054,000 to $3,995,000. This improvement was primarily due
to income attributable to over funded pension plans from discontinued
operations.
The provision for income taxes decreased $10,276,000 to $1,086,000, while income
before provision for income taxes and extraordinary item decreased $8,272,000 to
$6,708,000. The decrease in the provision for income
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taxes was primarily the result of a decrease in income in the current period.
Additionally, the change in the relationship of pretax income to the provision
for income taxes primarily resulted from losses and charges on foreign joint
ventures with no corresponding tax benefits of $2,340,000 and $2,584,000 in the
three-month periods ended September 30, 2000 and 1999, respectively.
Non-deductible amortization of goodwill of $4,502,000 and $4,403,000,
respectively, is included in the three-month periods ended September 30, 2000
and 1999. The goodwill was created by the premium we paid on the acquisition of
the minority interest in JRM in June 1999. We operate in many different tax
jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits and tax
bases (for example, revenue versus income). These variances, along with
variances in our mix of income from these jurisdictions, are responsible for
shifts in our effective tax rate.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS
ENDED SEPTEMBER 30, 1999
Marine Construction Services
Revenues increased $34,144,000 to $614,699,000 due to higher volume in offshore
activities in the Far East relating to the West Natuna project. This increase
was partially offset by lower volumes in essentially all other geographic areas.
Segment operating income decreased $50,534,000 from income of $33,604,000 to a
loss of $16,930,000, primarily due to lower volume and margins in North American
activities including our Mexican ship repair business and lower margins in the
Eastern Hemisphere. There was also the impact of the amortization of the
goodwill commencing in June 1999 associated with our purchase of the minority
interest in JRM. These decreases were partially offset by higher margins in
engineering activities and potential litigation settlements recorded in the
prior period.
Gain (loss) on asset disposals and impairments-net increased $23,469,000 from a
loss of $21,441,000 to income of $2,028,000. The loss in the prior period was
due to impairment losses on fabrication facilities and fabrication and marine
equipment. The prior period also included a write-off of goodwill associated
with worldwide engineering and a Mexican shipyard.
Income (loss) from investees increased $3,614,000 from a loss of $3,478,000 to
income of $136,000, primarily due to higher operating results from our Gulf of
Mexico joint venture as a result of a benefit recognized on revisions of
withholding taxes. There were also lower operating results from this joint
venture in the prior period. These higher operating results were partially
offset by higher operating results from our Far East joint venture in the prior
period.
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Government Operations
Revenues increased $28,248,000 to $322,712,000, primarily due to higher volumes
from nuclear fuel assemblies and reactor components for the U.S. Government.
Segment operating income decreased $4,143,000 to $33,443,000, primarily due to a
settlement relating to environmental restoration costs recorded in the prior
period. There were also lower margins from management and operation contracts
for U.S. Government-owned facilities. These decreases were partially offset by
higher volume and margins from nuclear fuel assemblies and reactor components
for the U. S. Government and contract adjustments on a commercial nuclear
environmental services contract in the prior period.
Income from investees increased $4,159,000 to $7,762,000, primarily due to
higher operating results from a joint venture in Idaho.
Industrial Operations
Revenues increased $4,587,000 to $365,674,000, primarily due to higher volumes
from plant maintenance activities in Canadian operations. These increases were
partially offset by lower volumes from engineering activities in Canadian
operations.
Segment operating income decreased $2,925,000 to $8,544,000, primarily due to
lower sales volumes and margins from engineering activities in Canadian
operations and lower margins from air-cooled heat exchangers. These decreases
were partially offset by higher volumes and margins from plant maintenance
activities in Canadian operations and lower general and administrative expenses.
Income (loss) from investees increased $1,281,000 from a loss of $1,130,000 to
income of $151,000, primarily due to losses in the prior period from our joint
venture located in Utah.
Power Generation Systems
Revenues increased $14,706,000 to $14,975,000, primarily due to the acquisition
of the Ansaldo Volund Group, an international power generation operation.
Segment operating loss increased $1,658,000 to $2,419,000, primarily due to
costs incurred in the initial transition of the Ansaldo Volund Group.
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Loss from investees increased $8,409,000 to $23,443,000, primarily due to
charges of $23,940,000, including approximately $12,000,000 related to financial
guarantees, to exit certain foreign joint ventures. The prior period included
the write-off of notes and accounts receivable from a foreign joint venture in
Turkey.
Other Unallocated Items
Other unallocated items improved $59,970,000 from expense of $49,972,000 to
income of $9,998,000, primarily due to provisions for estimated future
non-employee products liability asbestos claims and reserves for potential
litigation settlements recorded in the prior period. There were also favorable
employee benefit adjustments and lower general and administrative expenses.
These improvements were partially offset by the initial reorganization expenses
incurred by MII associated with the B&W Chapter 11 filing and provisions for
foreign claims settlements.
General Corporate Expenses - Net
General corporate expenses decreased $8,594,000, primarily due to the
deconsolidation of B&W, partially offset by severance provisions.
Other Income Statement Items
Interest income decreased $23,355,000 to $20,596,000, primarily due to a
decrease in investments.
Interest expense decreased $6,626,000 to $32,672,000, primarily due to changes
in debt obligations and prevailing interest rates.
We no longer have minority interest, primarily due to the acquisition of the
minority interest in JRM in the prior year.
Other-net improved $65,690,000 from expense of $51,631,000 to income of
$14,059,000. This improvement was primarily due to a loss of $45,535,000 for
insolvent insurers providing coverage for estimated future non-employee products
liability asbestos claims and a net loss on the settlement and curtailment of
postretirement benefit plans recorded in the prior period. In addition, there
were foreign currency transaction gains in the current period compared to
foreign currency transaction losses in the prior period and income attributable
to over funded pension plans from discontinued operations.
The provision for income taxes increased $7,742,000 to $10,342,000, while income
before provision for income taxes and extraordinary item increased $10,907,000
to $13,784,000. The increase in the provision for income taxes was primarily the
result of an increase in income. Additionally, the change in the relationship of
pretax income to the provision for income taxes primarily resulted from losses
on foreign joint ventures with no
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corresponding tax benefits of $23,940,000 and $2,044,000 in the nine-month
periods ended September 30, 2000 and 1999, respectively. Non-deductible
amortization of goodwill of $13,506,000 and $5,403,000, respectively, is
included in the nine-month periods ended September 30, 2000 and 1999. The
goodwill was created by the premium we paid on the acquisition of the minority
interest in JRM in June 1999. The current period also includes a benefit of
$5,500,000 from a favorable tax settlement in a foreign jurisdiction. Income
taxes in the nine-month period ended September 30, 2000 also include a provision
of $3,800,000 for B&W for the pre-filing period and a tax benefit of $1,400,000
from the use of certain tax attributes in a foreign joint venture. We operate in
many different tax jurisdictions. Within these jurisdictions, tax provisions
vary because of nominal rates, allowability of deductions, credits and other
benefits and tax bases (for example, revenue versus income). These variances,
along with variances in our mix of income from these jurisdictions, are
responsible for shifts in our effective tax rate.
Backlog
<TABLE>
<CAPTION>
9/30/00 12/31/99
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Marine Construction Services $ 554,411 $ 514,822
Government Operations 965,176 1,151,960
Industrial Operations 438,981 415,820
Power Generation Systems 51,540 1,202,695
---------- ----------
TOTAL BACKLOG $2,010,108 $3,285,297
========== ==========
</TABLE>
Due to the deconsolidation of B&W (see Note 8 to the condensed consolidated
financial statements), backlog from Power Generation Systems totaling
$1,057,904,000 is no longer included in our consolidated total at September 30,
2000.
In general, all of our business segments are capital intensive businesses that
rely on large contracts for a substantial amount of their revenues.
Backlog for the Marine Construction Services segment increased primarily because
of recent awards of new offshore construction contracts.
At September 30, 2000, Government Operations' backlog with the U. S. Government
was $904,305,000 (of which $16,336,000 had not been funded). This segment's
backlog is not expected to experience significant growth as a result of
reductions in defense budgets. However, management expects this segment's
backlog to remain relatively constant since it is the sole source provider of
nuclear fuel assemblies and nuclear reactor components for the U. S. Government.
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Liquidity and Capital Resources
During the nine months ended September 30, 2000, our cash and cash equivalents
decreased $51,592,000 to $111,142,000 and total debt increased $39,363,000 to
$448,876,000, primarily due to an increase in short-term borrowings of
$42,278,000. During this period, we received cash of $111,890,000 from sales and
maturities of investments and $4,579,000 from the sale of assets. We used cash
of $98,706,000 for the purchase of investments, $60,312,000 in operating
activities, $42,117,000 for additions to property, plant and equipment,
$8,972,000 for dividends on MII's common stock and $4,218,000 for B&W Volund's
acquisition of certain business units of the Ansaldo Volund Group.
Expenditures for property, plant and equipment decreased $26,280,000 to
$42,117,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
At September 30, 2000 and December 31, 1999, we had available various
uncommitted short-term lines of credit from banks totaling $15,927,000 and
$72,766,000, respectively. At September 30, 2000 and December 31, 1999,
borrowings against these lines of credit were $1,111,000 and $4,148,000,
respectively.
On February 21, 2000, B&W and certain of its subsidiaries entered into their
$300,000,000 debtor-in-possession revolving credit and letter of credit facility
to satisfy their working capital and letter of credit needs during the pendency
of their bankruptcy case. See Note 8 to the condensed consolidated financial
statements.
On February 21, 2000, we also entered into other financing arrangements
providing financing to the balance of our operations. This financing, as amended
on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and
Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000
credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each
facility is with a group of lenders, for which Citibank, N.A. is acting as the
administrative agent to the amounts outstanding under each facility.
The MII Credit Facility consists of two tranches, each of which has a three-year
term. One is a revolving credit facility that provides for up to $100,000,000 to
the borrowers. Borrowings under this facility may be used for working capital
and general corporate purposes. The second tranche provides for up to
$200,000,000 of letters of credit and may be used to reimburse issuers for
drawings under certain outstanding letters of credit totaling $38,292,000 issued
for the benefit of B&W and its subsidiaries. The aggregate amount of loans and
amounts available for drawing under letters of credit outstanding under the MII
Credit Facility may not exceed $200,000,000. This facility is secured by a
collateral account funded with various U.S.
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government securities with a marked-to-market value equal to 105% of the
aggregate amount available for drawing under letters of credit and revolving
credit borrowings then outstanding. Borrowings against this facility at
September 30, 2000 were $50,000,000. As of November 7, 2000, we have borrowed an
additional $10,000,000 against this facility.
The JRM Credit Facility also consists of two tranches. One is a revolving credit
facility that provides for up to $100,000,000 for advances to borrowers.
Borrowings under this facility may be used for working capital and general
corporate purposes. The second tranche provides for up to $200,000,000 of
letters of credit. The aggregate amount of loans and amounts available for
drawing under letters of credit outstanding under the JRM Credit Facility may
not exceed $200,000,000. The facility is subject to certain financial and
non-financial covenants. Borrowings against this facility at September 30, 2000
were $40,000,000. As of November 7, 2000, we have borrowed an additional
$10,000,000 against this facility.
At September 30, 2000, we had total cash, cash equivalents and investments of
$478,326,000. Our investment portfolio consists primarily of government
obligations and other investments in debt securities. The fair value of our
investments at September 30, 2000 was $367,184,000. As of September 30, 2000, we
had pledged approximately $43,937,000 fair value of these investments to secure
a letter of credit in connection with certain reinsurance agreements and
$34,936,000 fair value of these investments to secure borrowings of $35,329,000
under repurchase agreements. In addition, approximately $204,048,000 fair value
of these investments were pledged to secure the MII Credit Facility.
In connection with B&W's bankruptcy filing, MII entered into a support agreement
pursuant to which it agreed to provide MI with standby financial support on its
interest payments on its (i) $225,000,000 in aggregate principal amount of
9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A
Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of
Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in
principal amount under a Pollution Control Note due 2009. MI is required to pay
MII $5,000 per month under the support agreement which expires on March 15,
2002.
MI and JRM and their respective subsidiaries are restricted, as a result of
covenants in debt instruments, in their ability to transfer funds to MII and its
other subsidiaries through cash dividends or through unsecured loans or
investments. At September 30, 2000, substantially all the net assets of MI were
subject to those restrictions. At September 30, 2000, JRM and its subsidiaries
could make unsecured loans to or investments in MII and its other subsidiaries
of approximately $72,000,000.
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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 September 30, 2000, we had a valuation allowance for deferred tax assets of
$17,073,000, 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 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.
We have evaluated and expect to continue evaluating possible strategic
acquisitions, some of which may be material. At any given time we may be engaged
in discussions or negotiations or enter into agreements relating to potential
acquisition transactions.
Working capital decreased $229,951,000 from $166,402,000 at December 31, 1999 to
a deficit of $63,549,000 at September 30, 2000. During the remainder of 2000, we
expect to obtain funds to meet capital expenditure, working capital and debt
maturity requirements from operating activities, cash and cash equivalents, and
short-term borrowings. Leasing agreements for equipment, which are short-term in
nature, are not expected to impact our liquidity or capital resources.
The Babcock & Wilcox Company
B&W and its subsidiaries conduct substantially all of the operations of our
Power Generation Systems segment. The amount of revenues we generate from our
Power Generation Systems segment primarily depends on capital spending by
customers in the electric power generation industry. In that industry,
persistent economic growth in the United States has brought the supply of
electricity into approximate
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balance with energy demand, except during periods of peak demand. Electric power
producers have generally been meeting these peaks with new combustion turbines
rather than new base-load capacity. New U.S. emissions requirements have also
prompted some customers to place orders for environmental equipment. Domestic
demand for electrical power generation industry services and replacement nuclear
steam generators continues at strong levels. In the process industries, demand
for services remains strong, and the pulp and paper industry have recently
increased their inquiries relating to the refurbishment or replacement of their
existing recovery boilers. The international markets remain unsettled. Economic
and political instability in Asia has caused projects there to be delayed,
suspended or cancelled. We currently expect the 2000 operating activity of this
segment will be about the same as in 1999.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $180,866,000 as of September 30, 2000
is subject to periodic reviews for recoverability. When B&W emerges from the
jurisdiction of the Bankruptcy Court, the subsequent accounting will be
determined based upon the applicable circumstances and facts at such time,
including the terms of any plan of reorganization. See Note 8 to the condensed
consolidated financial statements for B&W's financial information at September
30, 2000.
In the three months ended September 30, 2000:
B&W's revenues increased $45,066,000 to $250,385,000, primarily due to
higher volumes from the fabrication and erection of fossil fuel steam and
environmental control systems. This increase was partially offset by lower
volumes from the fabrication, repair and retrofit of existing facilities
and from nuclear services;
B&W's operating income decreased $14,936,000 to $1,518,000, primarily due
to lower volumes and margins from the fabrication, repair and retrofit of
existing facilities, operation and maintenance contracts, private power
systems and industrial boilers. In addition, there were lower margins from
replacement nuclear steam generators and reorganization expenses associated
with the Chapter 11 filing. These decreases were partially offset by higher
margins from fabrication and erection of fossil fuel steam and
environmental control systems.
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Interest income increased $1,903,000 to $2,761,000, primarily due to an
increase in investments;
In the nine months ended September 30, 2000:
B&W's revenues increased $60,021,000 to $821,198,000, primarily due to
higher volumes from the fabrication and erection of fossil fuel steam and
environmental control systems. This increase was partially offset by lower
volumes from fabrication, repair and retrofit of existing facilities,
industrial boilers, replacement nuclear steam generators, private power
systems, nuclear services and boiler cleaning equipment;
B&W's operating income decreased $16,895,000 to $9,519,000, primarily due
to lower volumes and margins from the fabrication, repair and retrofit of
existing facilities, industrial boilers, replacement nuclear steam
generators, private power systems and boiler cleaning equipment. In
addition, there were write-downs and adjustments to substantially completed
original equipment contracts still under warranty or in dispute resolution
with various customers - primarily international, higher employee benefit
expenses and reorganization expenses associated with the Chapter 11 filing.
These decreases were partially offset by provisions for estimated future
non-employee products liability asbestos claims in the prior period. In
addition, there were lower general and administrative expenses;
Interest income decreased $6,063,000 to $5,553,000, primarily due to
interest income on domestic tax refunds in the prior period;
Other-net improved $51,125,000 from expense of $49,986,000 to income of
$1,139,000, primarily due to a loss of $45,535,000 for insolvent insurers
providing coverage for estimated future non-employee products liability
asbestos claims in the prior period.
B&W's backlog at September 30, 2000 and December 31, 1999 was $1,057,904,000 and
$1,202,949,000, respectively.
In connection with the bankruptcy filing, B&W and its filing subsidiaries
entered into a $300,000,000 debtor-in-possession revolving credit and letter of
credit facility with a group of lenders, with Citibank, N.A. as administrative
agent, for a three-year term. The facility is subject to certain financial and
non-financial covenants. 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 liability
from its net assets, future profits and cash flow and available insurance
proceeds, whether through the confirmation of a plan of
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reorganization or otherwise. As a result of the bankruptcy filing and related
events, there is no assurance that the carrying amounts of assets will be
realized or that liabilities will be liquidated or settled for the amounts
recorded. In addition, a plan of reorganization, or rejection thereof, could
change the amounts reported in the B&W financial statements and cause a material
decrease in the carrying amount of our investment. See Note 8 to the condensed
consolidated financial statements for more information.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require us to recognize
all derivatives on our consolidated balance sheet at their fair values.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133," which adds to the guidance related to accounting for
derivative instruments and hedging activities. We have not yet determined the
effect SFAS No. 133, as amended by SFAS No. 138, will have on our consolidated
financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" for certain issues including (a) the definition of employee
for purposes of applying Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and (d) the accounting for an exchange of stock compensation
awards in a business combination. Generally, the provisions of this
Interpretation are effective July 1, 2000 and shall be applied prospectively.
However, certain requirements apply to events that occur after December 15, 1998
or January 12, 2000 but prior to July 1, 2000. The effects of such events also
shall be recognized on a prospective basis beginning July 1, 2000. The adoption
of Interpretation No. 44 has had no material effect on our consolidated
financial position or results of operations.
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PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the Department of Justice that they and others had
participated in a conspiracy to rig bids in connection with the heavy-lift
business of HeereMac in the Gulf of Mexico, the North Sea and the Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the
Department of Justice that he participated in an international bid-rigging
conspiracy for the sale of marine construction services. In May 2000, another
former JRM officer was indicted by the Department of Justice for participating
in a bid-rigging conspiracy for the sale of marine construction services in the
Gulf of Mexico.
We have cooperated with the Department of Justice in its investigation. The
Department of Justice also has requested additional information from us relating
to possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with the termination of the
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McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of
McDermott-ETPM East, Inc., which was 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 also dismissed the
Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed
this dismissal to the Fifth Circuit Court of Appeal and we are currently
awaiting that court's ruling on oral arguments heard in August 2000 on Statoil's
appeal. In September 1999, the Phillips Plaintiffs filed notice of their request
to dismiss their remaining domestic claims in the lawsuit in order to seek an
appeal of the dismissal of their claims on foreign projects, which request was
subsequently denied. A court hearing to set a trial schedule has been set in the
Phillips Litigation.
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
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and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A..
Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell Litigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign claims of the
plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non-heavy lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims.
We are also cooperating with a Securities and Exchange Commission ("SEC")
investigation into whether MII and JRM may have violated U.S. securities laws in
connection with, but not limited to, the matters described above. MII and JRM
are subject to a consent decree under a judicial order entered in 1976, with the
consent of MI (which at that time was the parent of the McDermott group of
companies), pursuant to an SEC complaint. This decree prohibits the companies
from making false entries in their books, maintaining secret or unrecorded funds
or using corporate funds for unlawful purposes. Violations of this decree could
result in substantial civil and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, we formed
and have continued to maintain a special committee of our Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, our internal investigation, the
above-referenced lawsuits or any actions that may be taken by others as a result
of HeereMac's guilty plea or otherwise. These matters could result in civil and
criminal liability and have a material adverse effect on our consolidated
financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania. The suit involves approximately 300
separate claims for compensatory and punitive damages relating to the operation
of two former nuclear fuel processing facilities located in Pennsylvania (the
"Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other
things, that they suffered personal injury, property damage and other damages as
a result of radioactive emissions from these facilities. In September 1998, a
jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to
trial, awarding $36,700,000 in compensatory damages. In June 1999, the district
court set aside the $36,700,000 judgment and ordered a new trial on all issues.
In November 1999, the district court allowed an interlocutory appeal by the
plaintiffs
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of certain issues, including the granting of the new trial and the court's
rulings on certain evidentiary matters, which, following B&W's bankruptcy
filing, the Third Circuit Court of Appeals declined to accept for review. The
plaintiffs' claims against B&W in the Hall Litigation have been automatically
stayed as a result of the B&W bankruptcy filing. B&W has also filed a complaint
for declaratory and injunctive relief with the Bankruptcy Court seeking to stay
the pursuit of the Hall Litigation against ARCO during the pendency of B&W's
bankruptcy proceeding due to common insurance coverage and the risk to B&W of
issue or claim preclusion, which stay the Bankruptcy Court denied in October
2000. B&W has appealed this decision.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8,000,000 for which it seeks reimbursement from other parties.
There is a controversy between B&W and its insurers as to the amount of coverage
available under the liability insurance policies covering the facilities. B&W
filed a declaratory judgment action in a Pennsylvania State Court seeking a
judicial determination as to the amount of coverage available under the
policies. We believe that all claims under the Hall Litigation will be resolved
within the limits and coverage of our insurance policies; but our insurance
coverage may not be adequate and we may be materially adversely impacted if our
liabilities exceed our coverage. B&W transferred the two facilities subject to
the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and
an overall corporate restructuring.
In December 1999 and early 2000, several persons who allegedly purchased shares
of our common stock during the period from May 21, 1999 through November 11,
1999 filed four purported class action complaints against MII and two of its
executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United
States District Court for the Eastern District of Louisiana. Each of the
complaints alleges that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint seeks relief, including unspecified
compensatory damages and an award for costs and expenses. The four cases were
subsequently consolidated. In June 2000, the plaintiffs filed a consolidated
amended complaint, and in July 2000, we filed a motion to dismiss all claims
asserted in such complaint. In September 2000, the District Court dismissed with
prejudice the plaintiffs' consolidated amended complaint for failure to state a
claim upon which relief can be granted, which dismissal the plaintiffs appealed
to the U.S. Fifth Circuit Court of Appeal in October 2000. We believe the
substantive allegations contained in the complaints are without merit and intend
to defend against these and any substantively similar claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting
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in the loss of the module. As a result, Texaco has withheld payment to JRM of
$23,000,000 due under the installation contract, and, in January 2000, JRM
instituted an arbitration proceeding against Texaco seeking the amount owed.
Texaco has countered with a lawsuit, claiming consequential damages for delays
resulting from the incident, as well as costs incurred to complete the project
with another contractor. The court has dismissed Texaco's counterclaims for
consequential damages but the dismissal is on appeal. Texaco has also filed a
lawsuit against a number of other parties, claiming that they are responsible
for the incident. It is our position that the installation contract between the
parties prohibits Texaco's claims against JRM and JRM is entitled to the amount
withheld.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position or results of
operations.
See Note 8 regarding B&W's potential liability for non-employee asbestos claims
and the Chapter 11 reorganization proceedings commenced by B&W and certain of
its subsidiaries on February 22, 2000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30,2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/ Daniel R. Gaubert
-------------------------------
By: Daniel R. Gaubert
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer and
Duly Authorized Representative)
November 7, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
50
