-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrzQdUOfilnhz8lAjvktAxQbHGoBgTnSkA1F1VrQE+G9PQgPeSYbvjulISh3bjLQ IijvPIkIaCmSNZG5MlE5Ug== 0000950134-00-004403.txt : 20000515 0000950134-00-004403.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950134-00-004403 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 720593134 STATE OF INCORPORATION: R1 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08430 FILM NUMBER: 629340 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045875400 MAIL ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70161 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to______________ Commission File No. 1-8430 McDERMOTT INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1450 Poydras Street, New Orleans, Louisiana 70112-6050 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (504) 587-5400 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The number of shares outstanding of the Company's Common Stock at April 28, 2000 was 60,029,629. 2 M c D E R M O T T I N T E R N A T I O N A L , I N C. I N D E X - F O R M 1 0 - Q
PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets March 31, 2000 and December 31, 1999 4 Condensed Consolidated Statements of Income (Loss) Three Months Ended March 31, 2000 and 1999 6 Condensed Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2000 and 1999 7 Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and 1999 8 Notes to Condensed Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 27 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 39 Item 6 - Exhibits and Reports on Form 8-K 43 SIGNATURES 44
2 3 PART I McDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 4 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
March 31, December 31, 2000 1999 ---------- ------------ (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 125,740 $ 162,734 Investments 89,442 111,104 Accounts receivable - trade, net 167,862 429,573 Accounts receivable - unconsolidated affiliates 13,950 21,406 Accounts receivable - other 42,480 167,291 Environmental and products liabilities recoverable - current 1,075 232,618 Contracts in progress 98,799 159,369 Inventories 9,842 57,488 Deferred income taxes 51,030 93,629 Other current assets 26,926 33,596 ---------- ---------- Total Current Assets 627,146 1,468,808 ---------- ---------- Property, Plant and Equipment 1,253,116 1,439,496 Less accumulated depreciation 893,891 1,001,699 ---------- ---------- Net Property, Plant and Equipment 359,225 437,797 ---------- ---------- Investments: Government obligations 240,093 159,005 Other investments 48,102 105,704 ---------- ---------- Total Investments 288,195 264,709 ---------- ---------- Products Liabilities Recoverable -- 942,982 ---------- ---------- Goodwill less Accumulated Amortization of $35,874,000 at March 31, 2000 and $118,878,000 at December 31, 1999 359,899 444,220 ---------- ---------- Prepaid Pension Costs 100,895 111,114 ---------- ---------- Investment in The Babcock & Wilcox Company 166,234 -- ---------- ---------- Other Assets 89,890 205,261 ---------- ---------- TOTAL $1,991,484 $3,874,891 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 5 LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, 2000 1999 ------------ ------------ (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 87,266 $ 86,499 Accounts payable 129,377 185,465 Accounts payable to The Babcock & Wilcox Company 5,684 -- Environmental and products liabilities - current 7,622 281,787 Accrued employee benefits 61,338 96,235 Accrued contract costs 42,756 81,586 Advance billings on contracts 53,948 231,421 Other current liabilities 241,870 339,413 ------------ ------------ Total Current Liabilities 629,861 1,302,406 ------------ ------------ Long-Term Debt 318,296 323,014 ------------ ------------ Accumulated Postretirement Benefit Obligation 3,906 112,132 ------------ ------------ Environmental and Products Liabilities 11,989 1,072,969 ------------ ------------ Other Liabilities 225,682 272,484 ------------ ------------ Commitments and Contingencies Minority Interest 28 28 ------------ ------------ Stockholders' Equity: Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 61,849,659 at March 31, 2000 and 61,625,434 at December 31, 1999 61,850 61,625 Capital in excess of par value 1,051,271 1,048,848 Accumulated deficit (204,028) (208,904) Treasury stock at cost, 2,000,614 shares at March 31, 2000 and December 31, 1999 (62,731) (62,731) Accumulated other comprehensive loss (44,640) (46,980) ------------ ------------ Total Stockholders' Equity 801,722 791,858 ------------ ------------ TOTAL $ 1,991,484 $ 3,874,891 ============ ============
5 6 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended March 31, 2000 1999 --------- --------- (Unaudited) (In thousands, except per share amounts) Revenues $ 591,711 $ 749,368 --------- --------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 514,990 650,626 Depreciation and amortization 17,133 28,468 Selling, general and administrative expenses 41,894 58,278 Restructuring charges 3,540 -- --------- --------- 577,557 737,372 --------- --------- Gain (Loss) on Asset Disposals and Impairments - Net 1,059 (19,057) --------- --------- Operating Income (Loss) before Loss from Investees 15,213 (7,061) Loss from Investees (6,223) (5,898) --------- --------- Operating Income (Loss) 8,990 (12,959) --------- --------- Other Income (Expense): Interest income 7,145 19,298 Interest expense (8,823) (14,125) Minority interest -- 15,327 Other-net 3,872 (52,251) --------- --------- 2,194 (31,751) --------- --------- Income (Loss) before Provision for (Benefit from) Income Taxes and Extraordinary Item 11,184 (44,710) Provision for (Benefit from) Income Taxes 3,317 (21,326) --------- --------- Income (Loss) before Extraordinary Item 7,867 (23,384) Extraordinary Item -- (38,719) --------- --------- Net Income (Loss) $ 7,867 $ (62,103) ========= ========= Earnings per Common Share: Basic: Income (Loss) before Extraordinary Item $ 0.13 $ (0.40) Net Income (Loss) $ 0.13 $ (1.06) Diluted: Income (Loss) before Extraordinary Item $ 0.13 $ (0.40) Net Income (Loss) $ 0.13 $ (1.06) ========= ========= Cash Dividends: Per Common Share $ 0.05 $ 0.05 ========= =========
See accompanying notes to condensed consolidated financial statements. 6 7 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended March 31, 2000 1999 -------- --------- (Unaudited) (In thousands) Net Income (Loss) $ 7,867 $ (62,103) -------- --------- Other Comprehensive Income (Loss): Currency translation adjustments: Foreign currency translation adjustments 2,832 (2,526) Minimum pension liability adjustment -- (1,058) Unrealized losses on investments: Unrealized losses arising during the period, net of taxes of $8,000 at March 31, 2000 and ($17,000) at March 31, 1999 (491) (1,791) Reclassification adjustment for gains included in net income, net of taxes of $11,000 at March 31, 1999 (1) (228) -------- --------- Other Comprehensive Income (Loss) 2,340 (5,603) -------- --------- Comprehensive Income (Loss) $ 10,207 $ (67,706) ======== =========
See accompanying notes to condensed consolidated financial statements. 7 8 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 1999 --------- --------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 7,867 $ (62,103) --------- --------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 17,133 28,468 Income or loss of investees, less dividends 7,333 7,380 Loss (gain) on asset disposals and impairments - net (1,059) 19,057 Provision for (benefit from) deferred taxes 8,180 (21,169) Extraordinary loss -- 38,719 Other 2,176 351 Changes in assets and liabilities, net of effects of deconsolidation of B&W: Accounts receivable 81,498 (12,663) Net contracts in progress and advance billings (41,716) (22,290) Accounts payable 15,618 (15,974) Accrued and other current liabilities (32,267) 3,693 Products and environmental liabilities (6,725) 65,647 Other, net (56,447) (8,437) Deconsolidation of The Babcock & Wilcox Company (19,424) -- Proceeds from insurance for products liability claims 26,427 37,234 Payments of products liability claims (23,782) (48,906) --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (15,188) 9,007 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (16,972) (33,493) Purchases of available-for-sale securities (5,229) (147,013) Sales of available-for-sale securities -- 323,938 Maturities of available-for-sale securities 2,997 38,128 Proceeds from asset disposals 1,166 15,030 Other 500 (5,364) --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (17,538) 191,226 --------- ---------
8 9 CONTINUED
Three Months Ended March 31, 2000 1999 --------- ---------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (2) $ (281,011) Increase in short-term borrowing 803 -- Issuance of common stock -- 351 Issuance of subsidiary's stock -- 810 Dividends paid (2,979) (2,949) Other 10 (2,689) --------- ---------- NET CASH USED IN FINANCING ACTIVITIES (2,168) (285,488) --------- ---------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH (2,100) 1,449 --------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (36,994) (83,806) --------- ---------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 162,734 265,309 --------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 125,740 $ 181,503 ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 14,494 $ 27,849 Income taxes - net $ 2,559 $ 13,338 ========= ========== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Deconsolidation of The Babcock & Wilcox Company debt $ 4,760 $ -- ========= ==========
See accompanying notes to condensed consolidated financial statements. 9 10 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 NOTE 1 - BASIS OF PRESENTATION We have presented our consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information. These consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled joint ventures. We use the equity method to account for investments in joint ventures and other entities we do not control, but have significant influence over. We have eliminated all significant intercompany transactions and accounts. McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes: o J. Ray McDermott, S.A. ("JRM"), a Panamanian subsidiary of MII, and its consolidated subsidiaries; o McDermott Incorporated ("MI"), a Delaware subsidiary of MII, and its consolidated subsidiaries; o Babcock & Wilcox Investment Company ("BWICO"), a Delaware subsidiary of MI; o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and its consolidated subsidiaries, and o The Babcock & Wilcox Company ("B&W"), an unconsolidated Delaware subsidiary of BWICO. On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S. Bankruptcy Code. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve their asbestos liability. We expect that this filing will have little effect, if any, on B&W's customers, suppliers, employees or retirees. B&W and its subsidiaries are committed to operating their businesses as normal, delivering products and services as usual and pursuing new contracts and growth opportunities. However, as of February 22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy Court and, as a result, our access to cash flows of B&W and its subsidiaries is restricted. Due to the bankruptcy filing, effective February 22, 2000, we no longer consolidate B&W's financial results in our consolidated financial statements, and our investment in B&W is presented on the cost method. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based on the terms of the reorganization plan. See Note 7 for condensed consolidated income statement and balance sheet information of B&W. 10 11 NOTE 2 - INVENTORIES Inventories are summarized below:
March 31, December 31, 2000 1999 --------- ------------ (Unaudited) (In thousands) Raw Materials and Supplies $ 6,071 $ 43,998 Work in Progress 1,823 6,353 Finished Goods 1,948 7,137 ------- -------- $ 9,842 $ 57,488 ======= ========
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss included in stockholders' equity are as follows:
March 31, December 31, 2000 1999 --------- ------------ (Unaudited) (In thousands) Currency Translation Adjustments $ (26,565) $ (29,397) Net Unrealized Loss on Investments (10,221) (9,729) Minimum Pension Liability (7,854) (7,854) --------- --------- $ (44,640) $ (46,980) ========= =========
NOTE 4 - INVESTIGATIONS AND LITIGATION In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of our prompt disclosure of the allegations, both MII and JRM and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the Department of Justice agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees pled guilty to criminal charges by the Department of Justice that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, 11 12 both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. In July 1999, a former JRM officer was indicted by the Department of Justice for participating in an international bid-rigging conspiracy for the sale of marine construction services and pled guilty. We have cooperated with the Department of Justice in its investigation. The Department of Justice also has requested additional information from us relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. In August 1999, Statoil appealed this dismissal to the Fifth Circuit Court of Appeal. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining domestic claims in the lawsuit in order to seek an appeal of the dismissal of their claims on foreign projects. That motion is pending before the Texas district court. In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anti-competitive acts in 12 13 violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. In October 1999, the Shell Litigation plaintiffs filed a motion to amend their complaint to include non-heavy lift marine construction activity claims against the defendants, which motion was granted in April 2000. We are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether MII and JRM may have violated U.S. securities laws in connection with, but not limited to, the matters described above. MII and JRM are subject to a consent decree under a judicial order entered in 1976, with the consent of MI (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint. This decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of this decree could result in substantial civil and/or criminal penalties to the companies. As a result of the initial allegations of wrongdoing in March 1997, we formed and have continued to maintain a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC investigation, our internal investigation, the above-referenced lawsuits or any actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. These matters could result in civil and criminal liability and have a material adverse effect on our consolidated financial position and results of operations. B&W and Atlantic Richfield Company ("ARCO") are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania, involving 13 14 approximately 300 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege among other things, that they suffered personal injury and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the district court set aside the $36,700,000 judgement and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. The claims of the plaintiffs in the Hall Litigation against B&W have been automatically stayed as a result of the B&W bankruptcy filing. B&W has filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against all defendants including ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion. There is a controversy between B&W and its insurers as to the amount of insurance coverage under the insurance policies covering these facilities. B&W has filed an action seeking a judicial determination of this matter, which is currently pending in a Pennsylvania state court. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring. We believe that all claims under the Hall Litigation will be resolved within the limits and coverage of our insurance policies; but our insurance coverage may not be adequate and we may be materially adversely impacted if our liabilities exceed our coverage. In connection with the foregoing, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8,000,000 for which it seeks reimbursement from other parties. From December 1999 through February 2000, several persons who allegedly purchased shares of our common stock during the period from May 21, 1999 through November 11, 1999 filed four purported class action complaints against MII and two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United States District Court for the Eastern District of Louisiana. Each of these complaints alleges that the defendants violated federal securities laws by disseminating materially false and misleading information and/or concealing material adverse information relating to our estimated liability for asbestos-related claims. Each complaint seeks relief, including unspecified compensatory damages and an award for costs and expenses. We filed motions to dismiss three of these complaints for failure to state a claim on which relief can be granted, before they were consolidated before one federal judge in New Orleans. The fourth case has now been consolidated with the others. The plaintiffs have been allowed to file a consolidated amended complaint, which we will respond to after it has been filed. We believe the substantive allegations contained in the original complaints are without merit and intend to defend against these and any substantively similar claims vigorously. 14 15 In December 1998, JRM was in the process of installing a deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due under the installation contract, and, in January 2000, JRM instituted an arbitration proceeding against Texaco seeking the amount owed. Texaco has countered, claiming damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor. Texaco has also filed a lawsuit against a number of other parties, claiming that they are responsible for the incident. It is our position that the installation contract between the parties prohibits Texaco's claims against JRM and JRM is entitled to the amount withheld. Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance or warranty related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position or results of operations. See Note 7 regarding B&W's potential liability for non-employee asbestos claims and the Chapter 11 reorganization proceedings recently commenced by B&W and certain of its subsidiaries. NOTE 5 - SEGMENT REPORTING Our reportable segments are Marine Construction Services, Power Generation Systems, Government Operations and Industrial Operations. These segments are managed separately and are unique in technology, services and customer class. Marine Construction Services, which includes the results of JRM, supplies worldwide services for the offshore oil and gas exploration, production and hydrocarbon processing industries and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms, specialized structures, modular facilities, marine pipelines and subsea production systems. JRM also provides project management services, engineering services, procurement activities, and removal, salvage and refurbishment services of offshore fixed platforms. Power Generation Systems supplies engineered-to-order services, products and systems for energy conversion, and fabricates replacement nuclear steam generators and environmental control systems. In addition, this segment provides aftermarket services including replacement parts, engineered upgrades, construction, maintenance and field technical services to electric power plants and industrial facilities. This segment also 15 16 provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities. The Power Generation Systems segment's operations are conducted primarily through B&W. Due to B&W's Chapter 11 filing, effective February 22, 2000, we no longer consolidate B&W's and its subsidiaries' results of operations in our consolidated financial statements. Through February 21, 2000, B&W's and its subsidiaries' results are reported as Power Generation Systems - B&W in the segment information that follows. See Note 7 for the consolidated results of B&W and its subsidiaries. Government Operations supplies nuclear reactor components and nuclear fuel assemblies to the U.S. Government, manages and operates government-owned facilities and supplies commercial nuclear environmental services and other government and commercial nuclear services. Industrial Operations is comprised of the engineering and construction activities and plant outage maintenance of certain Canadian operations and manufacturing of auxiliary equipment such as air-cooled heat exchangers and replacement parts. Industrial Operations also includes contract research activities. We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, non-employee products liability asbestos claims provisions, contract and insurance claims provisions, legal expenses and gains (losses) on sales of corporate assets. Other reconciling items to income before provision for income taxes are interest income, interest expense, minority interest and other-net. We exclude the following assets from segment assets: insurance recoverables for products liability claims, goodwill, investments in debt securities, prepaid pension costs and our investment in B&W. We have allocated amortization of goodwill to the reportable segments for all periods presented. Segment assets decreased approximately $600,000,000, primarily in the Power Generation segment, as a result of the deconsolidation of B&W as described in Note 1. 16 17 Segment Information for the Three Months Ended March 31, 2000 and 1999.
Three Months Ended March 31, 2000 1999 --------- --------- (Unaudited) (In thousands) REVENUES: Marine Construction Services $ 206,635 $ 246,571 Government Operations 114,720 92,217 Industrial Operations 115,242 121,922 Power Generation Systems - B&W 155,774 290,375 Power Generation Systems 82 283 Adjustments and Eliminations(1) (742) (2,000) --------- --------- Total Revenues $ 591,711 $ 749,368 ========= =========
(1) Segment revenues are net of the following intersegment transfers and other adjustments: Marine Construction Services Transfers $ 437 $ 720 Government Operations Transfers 194 170 Industrial Operations Transfers 52 63 Power Generation Systems - B&W Transfers 59 187 Adjustments and Eliminations -- 860 --------- --------- Total $ 742 $ 2,000 ========= =========
17 18
Three Months Ended March 31, 2000 1999 --------- --------- (Unaudited) (In thousands) OPERATING INCOME (LOSS): Segment Operating Income (Loss): Marine Construction Services $ (5,787) $ 12,283 Government Operations 14,973 20,482 Industrial Operations 1,680 2,733 Power Generation Systems - B&W 12,502 33,706 Power Generation Systems (220) (397) --------- --------- Total Segment Operating Income $ 23,148 $ 68,807 --------- --------- Gain (Loss) on Asset Disposals and Impairments - Net: Marine Construction Services $ 1,085 $ (20,229) Government Operations -- 45 Industrial Operations 7 (50) Power Generation Systems - B&W (33) 3,527 --------- --------- Total Gain (Loss) on Asset Disposals and Impairments - Net $ 1,059 $ (16,707) --------- --------- Income (Loss) from Investees: Marine Construction Services $ (7,546) $ 3,335 Government Operations 1,352 2,264 Industrial Operations 24 (509) Power Generation Systems - B&W 812 181 Power Generation Systems (865) (11,169) --------- --------- Total Loss from Investees $ (6,223) $ (5,898) --------- --------- SEGMENT INCOME: Marine Construction Services $ (12,248) $ (4,611) Government Operations 16,325 22,791 Industrial Operations 1,711 2,174 Power Generation Systems - B&W 13,281 37,414 Power Generation Systems (1,085) (11,566) --------- --------- Total Segment Income 17,984 46,202 --------- --------- Other Unallocated Items (5,622) (49,776) General Corporate Expenses - Net (3,372) (9,385) --------- --------- Total Operating Income (Loss) $ 8,990 $ (12,959) ========= =========
18 19 NOTE 6 - EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended March 31, 2000 1999 ---- ---- (Unaudited) (In thousands, except shares and per share amounts) Basic: Income (loss) before extraordinary item $ 7,867 $ (23,384) Extraordinary item -- (38,719) ------------ ------------ Net income (loss) $ 7,867 $ (62,103) ============ ============ Weighted average common shares 59,396,332 58,773,052 ============ ============ Basic earnings (loss) per common share: Income (loss) before extraordinary item $ 0.13 $ (0.40) Extraordinary item -- (0.66) ------------ ------------ Net income (loss) $ 0.13 $ (1.06) ============ ============ Diluted: Income (loss) before extraordinary item $ 7,867 $ (23,384) Extraordinary item -- (38,719) ------------ ------------ Net income (loss) for diluted computation $ 7,867 $ (62,103) ============ ============ Weighted average common shares (basic) 59,396,332 58,773,052 Effect of dilutive securities: Stock-based compensation arrangements 435,908 -- ------------ ------------ Adjusted weighted average common shares and assumed conversions 59,832,240 58,773,052 ============ ============ Diluted earnings (loss) per common share: Income (loss) before extraordinary item $ 0.13 $ (0.40) Extraordinary item -- (0.66) ------------ ------------ Net income (loss) $ 0.13 $ (1.06) ============ ============
NOTE 7 - THE BABCOCK & WILCOX COMPANY General As a result of asbestos-containing commercial boilers and other products B&W and certain of its subsidiaries sold, installed or serviced in prior decades, B&W is subject to a substantial volume of non-employee products liability claims asserting asbestos-related injuries. All of these claims are similar in nature, the primary difference 19 20 being the type of alleged injury or illness suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes). On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the Bankruptcy Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve all pending and future asbestos products liability claims against them. As a result of the filing, the Bankruptcy Court issued a temporary restraining order which has been converted to a preliminary injunction prohibiting asbestos products liability lawsuits and other actions for which there is shared insurance from being brought against non-filing affiliates of B&W, including MI, JRM and MII. The preliminary injunction will run through July 17, 2000, at which time a further extension will be considered by the Bankruptcy Court. Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a strategy of negotiating and settling asbestos products liability claims brought against them and billing the settled amounts to insurers for reimbursement. The average amount per settled claim over the last three calendar years is approximately $7,900. Reimbursed amounts are subject to varying insurance limits based upon the year of coverage, insurer solvency and collection delays (due primarily to agreed payment schedules with specific insurers delaying reimbursement for three months or more). Claims paid during the three-month period ended March 31, 2000 were $23,640,000 of which $20,121,000 has been recovered or is due from insurers. At March 31, 2000, receivables of $65,643,000 were due from insurers for reimbursement of settled claims. To date, the bankruptcy filing has not negatively affected B&W's ability to recover amounts due from insurers for settled claims as they become due and payable and B&W does not expect it to in the future. At February 21, 2000, the day prior to the bankruptcy filing, B&W had recorded asbestos products liability of $1,307,583,000 and asbestos products liability insurance recoverable of $1,153,619,000. Historically, B&W's estimated liabilities for pending and future non-employee products liability asbestos claims have been derived from its prior claims history. Inherent in the estimate of such liabilities were expected trend claim severity, frequency, and other factors. B&W's estimated liabilities were based on the assumption that B&W would continue to settle claims rather than litigate them, that new claims would conclude by 2012, that there would be a significant decline in new claims received after 2003, and that the average cost per claim would continue to increase only moderately. During the fiscal year ended March 31, 1999, we revised our estimate of the liability for pending and future non-employee asbestos claims and recorded an additional liability of $817,662,000, 20 21 additional estimated insurance recoveries of $732,477,000 and a loss of $85,185,000 for future claims for which recovery from insurance carriers was not considered probable. Beginning in the third quarter of calendar 1999, B&W experienced a significant increase in the amount demanded by several plaintiffs' attorneys to settle certain types of asbestos products liability claims. These increased demands significantly impaired B&W's ability to continue to resolve its asbestos products liability through out-of-court settlements. As a result, B&W undertook the bankruptcy filing because it believes that a Chapter 11 proceeding offers the only viable legal process through which it and its subsidiaries can seek a comprehensive resolution of their asbestos products liability. The filing increases the uncertainty with respect to the manner in which such liabilities will ultimately be settled. The Chapter 11 proceeding is in its initial stages. While the Bankruptcy Court has approved B&W's debtor-in-possession financing and the assumption of all pre-filing contracts presented for approval, there are a number of other issues and matters to be resolved. B&W has not yet filed a plan of reorganization and the Bankruptcy Court has not set a bar date for asserting claims. Remaining issues and matters to be resolved include, but are not limited to, B&W's ultimate asbestos liability, the formation of a trust to satisfy such liability and the funding of such a trust. The timing and ultimate outcome of the Chapter 11 proceeding is uncertain. Any changes in the estimate of B&W's non-employee asbestos products liability and insurance recoverables, and differences between the proportion of such liabilities covered by insurance and that experienced in the past, could result in material adjustments to the B&W financial statements and could negatively impact our ability to realize our net investment in B&W. Debtor-In-Possession Financing In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into a $300,000,000 debtor-in-possession revolving credit and letter of credit facility with Citibank, N.A. and Salomon Smith Barney Inc. (the "DIP Credit Facility") with a three-year term. The Bankruptcy Court has approved the full amount of this facility, giving all amounts owed under the facility a super-priority administrative expense status in bankruptcy. B&W's and its filing subsidiaries' obligations under the facility are (1) guaranteed by substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by a security interest on B&W Canada Ltd.'s assets. Additionally, B&W and substantially all of its domestic subsidiaries executed a pledge and security agreement pursuant to which they have granted a security interest in their assets to the lenders under the DIP Credit Facility upon the defeasance or refinancing of MI's public debt. The DIP Credit Facility generally provides for borrowings by B&W and its filing subsidiaries for working capital and other general corporate purposes and the issuance of letters of credit, except that the total of all borrowings and non-performance letters 21 22 of credit issued under the facility cannot exceed $100,000,000 in the aggregate. The DIP Credit Facility imposes certain financial and non-financial covenants on B&W and its subsidiaries. A permitted use of the DIP Credit Facility is the issuance of new letters of credit to backstop or replace, as they expire, pre-existing letters of credit issued in connection with B&W's and its subsidiaries' business operations, but for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000, the aggregate amount of all such pre-existing letters of credit totaled approximately $172,000,000 (the "Pre-existing LCs"). Each of MII, MI and BWICO have agreed to indemnify and reimburse B&W and its filing subsidiaries for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any Pre-existing LC for which it already has exposure and for the associated letter of credit fees paid under the facility. As of March 31, 2000, approximately $15,215,000 in letters of credit have been issued under the DIP Credit Facility of which approximately $11,659,000 were to replace or backstop Pre-existing LCs. Financial Results and Reorganization Items The B&W condensed consolidated financial statements set forth below have been prepared in conformity with the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP 90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date and identification of all transactions and events that are directly associated with the reorganization. Liabilities subject to compromise include prepetition unsecured claims, which may be settled at amounts which differ from those recorded in the B&W condensed consolidated financial statements. 22 23 THE BABCOCK & WILCOX COMPANY CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended March 31, 2000 1999 ---- ---- (Unaudited) (In thousands) Revenues $ 272,567 $ 289,818 --------- --------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 233,525 272,240 Depreciation and amortization 4,150 6,730 Selling, general and administrative expenses 18,187 16,838 Restructuring charges 3,922 -- --------- --------- 259,784 295,808 --------- --------- Gain (Loss) on Asset Disposals (10) 2,535 --------- --------- Operating Income (Loss) before Income from Investees 12,773 (3,455) --------- --------- Income from Investees 1,433 181 --------- --------- Operating Income (Loss) 14,206 (3,274) --------- --------- Other Income: Interest income 963 9,037 Interest expense (174) (488) Other-net 1,270 (50,970) --------- --------- 2,059 (42,421) --------- --------- Income (Loss) before Provision for (Benefit from) Income Taxes 16,265 (45,695) Provision for (Benefit from) Income Taxes 6,630 (11,773) --------- --------- Net Income (Loss) $ 9,635 $ (33,922) ========= =========
23 24 THE BABCOCK & WILCOX COMPANY BALANCE SHEET
March 31, 2000 (Unaudited) (In thousands) Assets: Current Assets $ 547,134 Property, Plant and Equipment 83,935 Products Liabilities Recoverable 1,153,761 Goodwill 78,430 Prepaid Pension Costs 20,681 Other Assets 125,524 ----------- Total Assets $ 2,009,465 =========== Liabilities: Current Liabilities 282,142 Liabilities Subject to Compromise 1,557,074(A) Stockholder's Equity: Common Stock 1,001 Capital in Excess of Par Value 116,432 Retained Earnings 74,767 Accumulated Other Comprehensive Loss (21,951) ----------- Total Liabilities and Stockholder's Equity $ 2,009,465 ===========
(A) Liabilities subject to compromise consist of the following: Accounts payable $ 22,563 Provision for warranty 26,914 Other current liabilities 47,283 Environmental and products liabilities 1,307,725 Accumulated postretirement benefit obligation 108,403 Other long-term liabilities 44,186 ----------- $ 1,557,074 ===========
B&W and its subsidiaries routinely engage in intercompany transactions with other entities within the McDermott group of companies in the ordinary course of business. These transactions include services received by B&W and its subsidiaries from MII and MI under a support services agreement. These services include the following: accounting, treasury, tax administration, and other financial services; human relations; public relations; corporate secretarial; and corporate officer services. In addition, B&W is responsible for its share of federal income taxes included in MI's federal tax return under a tax-sharing arrangement. As a result of its bankruptcy filing, B&W and its filing subsidiaries are precluded from paying dividends to shareholders and making payments on any pre-bankruptcy filing accounts or notes payable that are due and owing to any other entity within the McDermott group of companies (the "Pre-Petition Inter-company Payables") and other creditors during the pendency of the bankruptcy case, without the Bankruptcy Court's approval. Moreover, no assurances can be given that any of the Pre-Petition Inter-company Payables will be paid or otherwise satisfied in 24 25 connection with the confirmation of a B&W plan of reorganization. As of February 21, 2000, the day prior to the bankruptcy filing, B&W and its filing subsidiaries had Pre-Petition Inter-company Payables of approximately $57,785,000 and pre-petition inter-company receivables from other entities within the McDermott group of companies (other than subsidiaries of B&W) of approximately $58,856,000. In the course of the conduct of B&W's and its subsidiaries' business, MII and MI have agreed to indemnify two surety companies for B&W's and its subsidiaries' obligations under surety bonds issued in connection with their customer contracts. At March 31, 2000, the total value of B&W's and its subsidiaries' customer contracts yet to be completed covered by such indemnity arrangements was approximately $150,000,000. B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $166,234,000, as of February 21, 2000 and unchanged through March 31, 2000, is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization. We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries operating activities and meet its debt and capital requirements for the foreseeable future. However, the ability of B&W to continue as a going concern is dependent upon its ability to settle its ultimate asbestos products liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. The B&W condensed consolidated financial information set forth above has been prepared on a going concern basis which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment. 25 26 Following are our condensed Pro Forma consolidated Statements of Income (Loss) and Balance Sheet data, assuming the deconsolidation of B&W for all periods presented: Assumes deconsolidation as of the beginning of the period presented:
Three Months Ended March 31, 2000 1999 ---- ---- (Unaudited) (In thousands) Revenues $ 435,996 $ 459,737 Operating Income (Loss) $ 1,039 $ (9,685) Income (Loss) before Provision for (Benefit from) Income Taxes $ 1,890 $ 985 Net Income (Loss) $ 2,362 $ (28,181) Earnings (Loss) per Common Share: Basic $ 0.04 $ (0.48) Diluted $ 0.04 $ (0.48)
Assumes deconsolidation as of the balance sheet date:
December 31, 1999 ---- (In thousands) 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
NOTE 8 - MODIFICATION OF FINANCIAL ARRANGEMENTS On February 21, 2000, we entered into financing arrangements providing for up to $200,000,000 of financing to MII, BWXT and Hudson Products Corporation (the "MII Credit Facility"), and up to $300,000,000 to JRM and its subsidiaries (the "JRM Credit Facility"). This financing, for which Citibank, N.A. is the administrative agent, provides revolving credit facilities and advances for letters of credit. On April 24, 2000, these financing arrangements were amended and restated and the JRM Credit Facility was reduced to $200,000,000. Borrowings on the MII Credit Facility bear interest at LIBOR plus 42.5 basis points, or the prime rate, depending upon the duration of the borrowing, and this facility has an annual fee of $400,000. Borrowings on the JRM Credit Facility bear interest at LIBOR plus 137.5 basis points, or the prime rate plus 25 basis points, depending upon the duration of the borrowings, and this facility has an annual fee of $750,000. 26 27 NOTE 9 - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require us to recognize all derivatives on our consolidated balance sheet at their fair values. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. We have not yet determined the effect SFAS No. 133 will have on our consolidated financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for certain issues including (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. Generally, the provisions of this Interpretation are effective July 1, 2000 and shall be applied prospectively. However, certain requirements apply to events that occur after December 15, 1998 or January 12, 2000 but prior to July 1, 2000. The effects of such events also shall be recognized on a prospective basis beginning July 1, 2000. We have determined that the adoption of Interpretation No. 44 will have no material effect on our consolidated financial position or results of operations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities law affords. 27 28 From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement. In addition, various statements this Form 10-Q contains, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report, we disclaim any obligation to update these statements, and we caution you not to unduly rely on them. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following: o general economic and business conditions and industry trends; o the continued strength of the industries in which we are involved; o decisions about offshore developments to be made by oil and gas companies; o the deregulation of the U.S. electric power market; o the highly competitive nature of our businesses; o our future financial performance, including availability, terms and deployment of capital; o the continued availability of qualified personnel; o changes in, or our failure or inability to comply with, government regulations and adverse outcomes from legal and regulatory proceedings, including the results of ongoing governmental investigations and related civil lawsuits involving alleged anticompetitive practices in our marine construction business; o estimates for pending and future nonemployee asbestos claims against B&W and potential adverse developments that may occur in the recently commenced Chapter 11 reorganization proceeding involving B&W and certain of its subsidiaries; o changes in existing environmental regulatory matters; o rapid technological changes; 28 29 o difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions; and o social, political and economic situations in foreign countries where we do business. We believe the items we have outlined above are important factors that could cause our actual results to differ materially from those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises. We advise our security holders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements. GENERAL The amount of revenues we generate from our Marine Construction Services segment largely depends on the level of oil and gas development activity in the world's major hydrocarbon producing regions. Our revenues from this segment reflect the variability associated with the timing of significant development projects. Although oil and gas prices have somewhat stabilized in recent months and oil company merger activity has reduced, these have yet to have an impact on our Marine Construction Services' customers' exploration and production spending for the remainder of 2000. Economic and political instability in Asia has also had an adverse effect on the timing of exploration and production spending. Consequently, we do not expect our Marine Construction Services segment's revenues to increase significantly in 2000. The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a result of reductions in the defense budget over the past several years, we do not expect this segment to experience any significant growth in the next three years. We expect this segment's backlog to remain relatively constant since it is the sole supplier to the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components for the Naval Reactors Program. We currently expect the 2000 operating activity of this segment will be about the same as in 1999. The revenues of our Industrial Operations segment are affected by variations in the business cycles in its customers' industries and the overall economy. Legislative and regulatory issues such as environmental 29 30 regulations and fluctuations in U.S. Government funding patterns also affect this segment. We currently expect the 2000 operating activity of this segment will be about the same as in 1999. Effective February 22, 2000 and until B&W and the other filing subsidiaries emerge from the reorganization and the subsequent accounting is determined, we no longer consolidate B&W's and its subsidiaries' results of operations in our consolidated financial statements and our investment in B&W is presented on the cost method. Through February 21, 2000, B&W's and its subsidiaries' results are included in our segment results under Power Generation Systems - B&W (see Note 5 to the consolidated financial statements.) B&W and its consolidated subsidiaries pre-bankruptcy revenues of $155,774,000 and operating income of $7,951,000 are included in our consolidated financial results for the three-month period ended March 31, 2000. In general, each of our business segments is composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues. We evaluate the realizability of our long-lived assets, including property, plant and equipment and goodwill, whenever events or changes in circumstances indicate that we may not be able to recover the carrying amounts of those assets. We carry our property, plant and equipment at cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. We derive a significant portion of our revenues from foreign operations. As a result, international factors, including variations in local economies and changes in foreign currency exchange rates affect our revenues and operating results. We attempt to limit our exposure to changes in foreign currency exchange rates by attempting to match anticipated foreign currency contract receipts with like foreign currency disbursements. To the extent that we are unable to match the foreign currency receipts and disbursements related to our contracts, we enter into forward exchange contracts to reduce the impact of foreign exchange rate movements on our operating results. Because we generally do not hedge beyond our contract exposure, we believe this practice minimizes the impact of foreign exchange rate movements on our operating results. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999 Marine Construction Services Revenues decreased $39,936,000 to $206,635,000 due to lower volume in essentially all geographic areas, except in offshore activities in the Far East relating to the West Natuna project. 30 31 Segment operating income decreased $18,070,000 from income of $12,283,000 to a loss of $5,787,000, primarily due to lower margins in the Eastern Hemisphere, lower volume and margins in our Mexican ship repair business, and the amortization of the goodwill associated with our purchase of the minority interest in JRM. These decreases were partially offset by higher margins in engineering activities and potential litigation settlements recorded in the prior period. Gain (loss) on asset disposals and impairments-net increased $21,314,000 from a loss of $20,229,000 to a gain of $1,085,000. The loss in the prior period was due to impairment losses on fabrication facilities and equipment. There was also a write-off of goodwill associated with worldwide engineering and a Mexican shipyard in the prior period. Income (loss) from investees decreased $10,881,000 from income of $3,335,000 to a loss of $7,546,000, primarily due to lower operating results from our Mexican and European joint ventures and higher operating results from our Far East joint venture in the prior period. Government Operations Revenues increased $22,503,000 to $114,720,000, primarily due to higher volumes from nuclear fuel assemblies and reactor components for the U.S. Government, from management and operation contracts for U. S. Government-owned facilities and from other government operations. Segment operating income decreased $5,509,000 to $14,973,000, primarily due to a settlement relating to environmental restoration costs recorded in the prior period. This decrease was partially offset by higher volume and margins from nuclear fuel assemblies and reactor components for the U. S. Government and higher margins from commercial nuclear environmental services. Income from investees decreased $912,000 to $1,352,000, primarily due to lower operating results from a joint venture in Colorado, partially offset by higher operating results from a joint venture in Idaho. Industrial Operations Revenues decreased $6,680,000 to $115,242,000, primarily due to lower volumes from air-cooled heat exchangers and plant maintenance activities in Canadian operations. Segment operating income decreased $1,053,000 to $1,680,000, primarily due to lower sales volumes and margins from air-cooled heat exchangers. 31 32 Other Unallocated Items Other unallocated items decreased $44,154,000 to $5,622,000, primarily due to provisions for estimated future non-employee products liability asbestos claims and reserves for potential litigation settlements recorded in the prior period. These decreases were partially offset by higher employee benefit expenses and initial reorganization expenses associated with the B&W Chapter 11 filing. Other Income Statement Items Interest income decreased $12,153,000 to $7,145,000, primarily due to the decrease in investments. Interest expense decreased $5,302,000 to $8,823,000, primarily due to changes in debt obligations and prevailing interest rates. We no longer have minority interest expense due to the acquisition of the minority interest in JRM in the prior year. Other-net increased $56,123,000 from a loss of $52,251,000 to income of $3,872,000. This increase was primarily due to a loss of $45,535,000 for insolvent insurers providing coverage for estimated future non-employee products liability asbestos claims and a net loss on the settlement and curtailment of postretirement benefit plans recorded in the prior period. The provision for income taxes increased $24,643,000 from a benefit of $21,326,000 to a provision of $3,317,000, while income before provision for income taxes and extraordinary item increased $55,894,000 from a loss of $44,710,000 to income of $11,184,000. The change in the relationship of pretax income to the provision for income taxes was primarily the result of (1) an increase in income, (2) a decrease in our tax expense of $7,531,000 in the prior period due to the change in our valuation allowance for deferred tax assets and (3) $9,062,000 we recorded in the prior period as a result of favorable tax settlements of disputed items in foreign jurisdictions. The provision for the three months ended March 31, 2000 reflects non-deductible amortization of goodwill of $4,502,000 created by the premium we paid on the acquisition of the minority interest in JRM and a benefit of $5,500,000 from a favorable tax settlement in a foreign jurisdiction. Income taxes in the March 31, 2000 quarter also include a provision of $3,800,000 for B&W for the pre-filing period. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate. 32 33 Backlog
3/31/00 12/31/99 ------- -------- (Unaudited) (In thousands) Marine Construction Services $ 430,633 $ 514,822 Government Operations 1,069,516 1,151,960 Industrial Operations 361,524 415,820 Power Generation Systems -- 1,202,695 ----------- ----------- TOTAL BACKLOG $ 1,861,673 $ 3,285,297 =========== ===========
Due to the deconsolidation of B&W (see Note 7 to the condensed consolidated financial statements), backlog from Power Generation Systems totaling $1,135,034,000 is no longer included in our consolidated total at March 31, 2000. In general, all of McDermott's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues. Backlog for the Marine Construction Services segment decreased primarily because of delays in awards of new offshore construction programs. At March 31, 2000, Government Operations' backlog with the U. S. Government was $974,134,000 (of which $16,335,000 had not been funded). This segment's backlog is not expected to experience significant growth as a result of reductions in defense budgets. However, management expects this segment's backlog to remain relatively constant since it is the sole source provider of nuclear fuel assemblies and nuclear reactor components for the U. S. Government. Liquidity and Capital Resources During the three months ended March 31, 2000, our cash and cash equivalents decreased $36,994,000 to $125,740,000 and total debt decreased $3,951,000 to $405,562,000, primarily due to the deconsolidation of B&W. During this period, we received cash of $2,997,000 from maturities of investments and $1,166,000 from the sale of assets. We used cash of $15,188,000 in operating activities, $16,972,000 for additions to property, plant and equipment, $5,229,000 for the purchase of investments and $2,979,000 for dividends on MII's common stock. Expenditures for property, plant and equipment decreased $16,521,000 to $16,972,000. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. 33 34 At March 31, 2000 and December 31, 1999, we had available various uncommitted short-term lines of credit from banks totaling $36,995,000 and $72,766,000, respectively. At March 31, 2000 and December 31, 1999, borrowings against these lines of credit were $500,000 and $4,148,000, respectively. On February 21, 2000, B&W and certain of its subsidiaries entered into their $300,000,000 debtor-in-possession revolving credit and letter of credit facility to satisfy their working capital and letter of credit needs during the pendency of their bankruptcy case. See Note 7 to the condensed consolidated financial statements. On February 21, 2000, we also entered into other financing arrangements providing financing to the balance of our operations. This financing, as amended on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000 credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each facility is with a group of lenders, for which Citibank, N.A. is acting as the administrative agent to the amounts outstanding under each facility. There were no borrowings outstanding against these facilities at March 31, 2000. The MII Credit Facility consists of two tranches, each of which has a three-year term. One is a revolving credit facility that provides for up to $100,000,000 to the borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 to reimburse issuers for drawings under outstanding letters of credit issued for the benefit of B&W and its subsidiaries and to issue new letters of credit for the account of MII to renew or extend any of those outstanding letters of credit on their scheduled expiration dates. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the MII Credit Facility may not exceed $200,000,000. This facility is secured by a collateral account funded with various U.S. government securities with a marked-to-market value equal to 105% of the aggregate amount available for drawing under letters of credit and revolving credit borrowings then outstanding. The JRM Credit Facility also consists of two tranches. One is a revolving credit facility that provides for up to $100,000,000 for advances to borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 to reimburse issuers for drawings under JRM's outstanding letters of credit and to issue new letters of credit to renew or extend any of those outstanding letters of credit on their scheduled expiration dates. The facility is subject to certain financial and non-financial covenants. At March 31, 2000, we had total cash, cash equivalents and investments of $503,377,000. Our investment portfolio consists primarily of government obligations and other investments in debt securities. The fair value 34 35 of our investments at March 31, 2000 was $377,637,000. As of March 31, 2000, we had pledged approximately $44,541,000 fair value of these obligations to secure a letter of credit in connection with certain reinsurance agreements and $89,442,000 fair value of these obligations to secure borrowings of $86,715,000 that are incurred under repurchase agreements. In addition, approximately $201,006,000 fair value of these obligations secured the MII Credit Facility In connection with B&W's bankruptcy filing, MII entered into a support agreement pursuant to which it agreed to provide MI with standby financial support on its interest payments on its (i) $225,000,000 in aggregate principal amount of 9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in principal amount under a Pollution Control Note due 2009. MI is required to pay MII $5,000 per month under the support agreement which expires on March 15, 2002. MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. At March 31, 2000, substantially all the net assets of MI were subject to those restrictions. At March 31, 2000, JRM and its subsidiaries could make unsecured loans to or investments in MII and its other subsidiaries of approximately $72,000,000. As a result of MI's reclassification of its investment in MII to a reduction of stockholder's equity on March 31, 1999, MI and its subsidiaries are unable to incur any additional long-term debt obligations under one of MI's public debt indentures. Moreover, as a result of B&W's bankruptcy filing, B&W and its subsidiaries are precluded from paying dividends, making payments on pre-bankruptcy accounts or notes payable or loans to, or investments in, MI, MII or MII's other subsidiaries. We do not believe MI's and its subsidiaries inability to incur long-term debt or B&W's bankruptcy filing will materially impact our working capital and liquidity requirements for the foreseeable future. We expect to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, cash and cash equivalents, and short-term borrowings. At March 31, 2000, we had a valuation allowance for deferred tax assets of $18,283,000, which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that our remaining deferred tax assets are realizable through carrybacks and future reversals of existing taxable temporary differences, future taxable income and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. Uncertainties that affect the ultimate realization of our deferred tax assets include the risk of incurring losses in the future and the possibility of declines in value of appreciated assets involved in the tax 35 36 planning strategies we have identified. We have considered these factors in determining our valuation allowance. We will continue to assess the adequacy of our valuation allowance on a quarterly basis. Our quarterly dividend on our common stock was $0.05 per share. We have a continuing program for reviewing our quarterly dividend. We have evaluated and expect to continue evaluating possible strategic acquisitions, some of which may be material. At any given time we may be engaged in discussions or negotiations or enter into agreements relating to potential acquisition transactions. Working capital decreased $169,117,000 from $166,402,000 at December 31, 1999 to ($2,715,000) at March 31, 2000. During the remainder of 2000, we expect to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, cash and cash equivalents, and short-term borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact our liquidity or capital resources. The Babcock & Wilcox Company B&W and its subsidiaries conduct substantially all of the operations of our Power Generation Systems segment. The amount of revenues we generate from our Power Generation Systems segment primarily depends on capital spending by customers in the electric power generation industry. In that industry, persistent economic growth in the United States has brought the supply of electricity into approximate balance with energy demand, except during periods of peak demand. Electric power producers have generally been meeting these peaks with new combustion turbines rather than new base-load capacity. New U.S. emissions requirements have also prompted some customers to place orders for environmental equipment. Domestic demand for electrical power generation industry services and replacement nuclear steam generators continues at strong levels. In the process industries, demand for services remains strong, and the pulp and paper industry have recently increased their inquiries relating to the refurbishment or replacement of their existing recovery boilers. The international markets remain unsettled. Economic and political instability in Asia has caused projects there to be delayed, suspended or cancelled. We currently expect the 2000 operating activity of this segment will be about the same as in 1999. B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively 36 37 deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $166,234,000 as of March 31, 2000 is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization. See Note 7 to the condensed consolidated financial statements for B&W's financial information at March 31, 2000. B&W's revenues decreased $17,251,000 to $272,567,000, primarily due to lower volumes from the fabrication, repair and retrofit of existing facilities, industrial boilers, replacement nuclear steam generators and boiler cleaning equipment. These decreases were partially offset by higher volumes from fabrication and erection of fossil fuel steam and environmental control systems. B&W's operating income (loss) increased $17,480,000 from a loss of $3,274,000 to income of $14,206,000, primarily due to provisions for estimated future non-employee products liability asbestos claims in the prior period. In addition, there were lower general and administrative expenses. These increases were partially offset by lower volumes and margins from the fabrication, repair and retrofit of existing facilities, lower margins from the fabrication and erection of fossil fuel steam and environmental control systems and lower volumes of sales of industrial boilers. In addition, there were higher employee benefit expenses and reorganization expenses associated with the Chapter 11 filing. B&W expects the initial reorganization expenses for the remaining quarters of 2000 to be approximately the same as what was incurred this quarter. In addition, B&W paid approximately $7,500,000 in debt issue costs related to the debtor-in-possession financing. This amount will be amortized over three years. Interest income decreased $8,074,000 to $963,000, primarily due to interest income on domestic tax refunds in the prior period. Other-net increased $52,240,000 from expense of $50,970,000 to income of $1,270,000, primarily due to a loss of $45,535,000 for insolvent insurers providing coverage for estimated future non-employee products liability asbestos claims in the prior period. B&W's backlog at March 31, 2000 and December 31, 1999 was $1,135,034,000 and $1,202,949,000, respectively. In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into a $300,000,000 debtor-in-possession revolving credit and letter of credit facility with Citibank, N.A. and Salomon Smith Barney Inc. with a 37 38 three-year term. We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries operating activities and meet its debt and capital requirements for the foreseeable future. However, the ability of B&W to continue as a going concern is dependent upon its ability to settle its ultimate asbestos products liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment. See Note 7 to the condensed consolidated financial statements for more information about B&W's Chapter 11 bankruptcy proceeding. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require us to recognize all derivatives on our consolidated balance sheet at their fair values. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. We have not yet determined the effect SFAS No. 133 will have on our consolidated financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for certain issues including (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. Generally, the provisions of this Interpretation are effective July 1, 2000 and shall be applied prospectively. However, certain requirements apply to events that occur after December 15, 1998 or January 12, 2000 but prior to July 1, 2000. The effects of such events also shall be recognized on a prospective basis 38 39 beginning July 1, 2000. We have determined that the adoption of Interpretation No. 44 will have no material effect on our consolidated financial position or results of operations. PART II McDERMOTT INTERNATIONAL, INC. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of our prompt disclosure of the allegations, both MII and JRM and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the Department of Justice agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees pled guilty to criminal charges by the Department of Justice that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. In July 1999, a former JRM officer was indicted by the Department of Justice for participating in an international bid-rigging conspiracy for the sale of marine construction services and pled guilty. We have cooperated with the Department of Justice in its investigation. The Department of Justice also has requested additional information from us relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the 39 40 McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. In August 1999, Statoil appealed this dismissal to the Fifth Circuit Court of Appeal. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining domestic claims in the lawsuit in order to seek an appeal of the dismissal of their claims on foreign projects. That motion is pending before the Texas district court. In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the 40 41 same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. In October 1999, the Shell Litigation plaintiffs filed a motion to amend their complaint to include non-heavy lift marine construction activity claims against the defendants, which motion was granted in April 2000. We are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether MII and JRM may have violated U.S. securities laws in connection with, but not limited to, the matters described above. MII and JRM are subject to a consent decree under a judicial order entered in 1976, with the consent of MI (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint. This decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of this decree could result in substantial civil and/or criminal penalties to the companies. As a result of the initial allegations of wrongdoing in March 1997, we formed and have continued to maintain a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC investigation, our internal investigation, the above-referenced lawsuits or any actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. These matters could result in civil and criminal liability and have a material adverse effect on our consolidated financial position and results of operations. B&W and Atlantic Richfield Company ("ARCO") are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania, involving approximately 300 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege among other things, that they suffered personal injury and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the district court set aside the $36,700,000 judgement and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. The claims of the plaintiffs in the Hall Litigation against B&W have been automatically stayed as a result of the B&W bankruptcy filing. B&W has filed a complaint for 41 42 declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against all defendants including ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion. There is a controversy between B&W and its insurers as to the amount of insurance coverage under the insurance policies covering these facilities. B&W has filed an action seeking a judicial determination of this matter, which is currently pending in a Pennsylvania state court. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring. We believe that all claims under the Hall Litigation will be resolved within the limits and coverage of our insurance policies; but our insurance coverage may not be adequate and we may be materially adversely impacted if our liabilities exceed our coverage. In connection with the foregoing, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8,000,000 for which it seeks reimbursement from other parties. From December 1999 through February 2000, several persons who allegedly purchased shares of our common stock during the period from May 21, 1999 through November 11, 1999 filed four purported class action complaints against MII and two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United States District Court for the Eastern District of Louisiana. Each of these complaints alleges that the defendants violated federal securities laws by disseminating materially false and misleading information and/or concealing material adverse information relating to our estimated liability for asbestos-related claims. Each complaint seeks relief, including unspecified compensatory damages and an award for costs and expenses. We filed motions to dismiss three of these complaints for failure to state a claim on which relief can be granted, before they were consolidated before one federal judge in New Orleans. The fourth case has now been consolidated with the others. The plaintiffs have been allowed to file a consolidated amended complaint, which we will respond to after it has been filed. We believe the substantive allegations contained in the original complaints are without merit and intend to defend against these and any substantively similar claims vigorously. In December 1998, JRM was in the process of installing a deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due under the installation contract, and, in January 2000, JRM instituted an arbitration proceeding against Texaco seeking the amount owed. Texaco has countered, claiming damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor. Texaco has also filed a lawsuit against a number of other parties, claiming that they are responsible for the incident. It is our position that the installation contract between the parties prohibits Texaco's claims against JRM and JRM is entitled to the amount withheld. 42 43 Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance or warranty related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position or results of operations. See Note 7 regarding B&W's potential liability for non-employee asbestos claims and the Chapter 11 reorganization proceedings recently commenced by B&W and certain of its subsidiaries. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K A current report on Form 8-K, Item 5, dated February 22, 2000 was filed on February 28, 2000. 43 44 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McDERMOTT INTERNATIONAL, INC. /s/ Daniel R. Gaubert -------------------------------------------------- By: Daniel R. Gaubert Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) May 12, 2000 44 45 EXHIBIT INDEX
Exhibit Description - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S MARCH 31, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 125,740 89,442 230,651 48,839 108,641 627,146 1,253,116 893,891 1,991,484 629,861 318,296 0 0 61,850 739,872 1,991,484 591,711 591,711 577,557 577,557 0 0 8,823 11,184 3,317 7,867 0 0 0 7,867 0.13 0.13
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