-----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, CXT12BZaIy9X0IYxmDNSMpm+gb1RgHE4EvX/0qWbpEKlTOI/uBimshcJ52yRiklm wSayBMmzEe/Aol4cSQmlaQ== /in/edgar/work/20000814/0000950134-00-007001/0000950134-00-007001.txt : 20000921 0000950134-00-007001.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-007001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: [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: 698440 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 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 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 June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to______________ Commission File No. 1-8430 McDERMOTT INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1450 Poydras Street, New Orleans, Louisiana 70112-6050 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (504) 587-5400 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Company's Common Stock at July 31, 2000 was 60,265,593. 2 McDERMOTT INTERNATIONAL, INC. INDEX - FORM 10-Q
PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets June 30, 2000 and December 31, 1999 4 Condensed Consolidated Statements of Income (Loss) Three and Six Months Ended June 30, 2000 and 1999 6 Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Six Months Ended June 30, 2000 and 1999 7 Condensed Consolidated Statements of Cash Flows Six months Ended June 30, 2000 and 1999 8 Notes to Condensed Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 28 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 42 Item 4 - Submission of Matters to a Vote of Security Holders 47 Item 6 - Exhibits and Reports on Form 8-K 47 SIGNATURES 48 Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc. Exhibit 27 - Financial Data Schedule
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
June 30, December 31, 2000 1999 ---------- ------------ (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 85,842 $ 162,734 Investments 54,679 111,104 Accounts receivable - trade, net 178,019 429,573 Accounts receivable - unconsolidated affiliates 13,020 21,406 Accounts receivable - other 40,795 167,291 Environmental and products liabilities recoverable - current 532 232,618 Contracts in progress 106,049 159,369 Inventories 9,735 57,488 Deferred income taxes 47,199 93,629 Other current assets 26,407 33,596 ---------- ---------- Total Current Assets 562,277 1,468,808 ---------- ---------- Property, Plant and Equipment 1,262,522 1,439,496 Less accumulated depreciation 894,376 1,001,699 ---------- ---------- Net Property, Plant and Equipment 368,146 437,797 ---------- ---------- Investments: Government obligations 270,707 159,005 Other investments 52,641 105,704 ---------- ---------- Total Investments 323,348 264,709 ---------- ---------- Products Liabilities Recoverable -- 942,982 ---------- ---------- Goodwill less Accumulated Amortization of $40,664,000 at June 30, 2000 and $118,878,000 at December 31, 1999 355,109 444,220 ---------- ---------- Prepaid Pension Costs 110,052 111,114 ---------- ---------- Investment in The Babcock & Wilcox Company 180,866 -- ---------- ---------- Other Assets 96,228 205,261 ---------- ---------- TOTAL $1,996,026 $3,874,891 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 5 LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31, 2000 1999 ----------- ----------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 111,318 $ 86,499 Accounts payable 97,097 185,465 Accounts payable to The Babcock & Wilcox Company 12,319 -- Environmental and products liabilities - current 6,996 281,787 Accrued employee benefits 62,297 96,235 Accrued contract costs 33,360 81,586 Advance billings on contracts 52,208 231,421 Other current liabilities 237,656 339,413 ----------- ----------- Total Current Liabilities 613,251 1,302,406 ----------- ----------- Long-Term Debt 318,314 323,014 ----------- ----------- Accumulated Postretirement Benefit Obligation 22,328 112,132 ----------- ----------- Environmental and Products Liabilities 11,237 1,072,969 ----------- ----------- Other Liabilities 243,738 272,484 ----------- ----------- Commitments and Contingencies Minority Interest 28 28 ----------- ----------- Stockholders' Equity: Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 62,079,733 at June 30, 2000 and 61,625,434 at December 31, 1999 62,080 61,625 Capital in excess of par value 1,054,409 1,048,848 Accumulated deficit (217,077) (208,904) Treasury stock at cost, 2,000,614 shares at June 30, 2000 and December 31, 1999 (62,731) (62,731) Accumulated other comprehensive loss (49,551) (46,980) ----------- ----------- Total Stockholders' Equity 787,130 791,858 ----------- ----------- TOTAL $ 1,996,026 $ 3,874,891 =========== ===========
5 6 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Unaudited) (In thousands, except per share amounts) Revenues $ 487,288 $ 647,884 $ 1,078,999 $ 1,397,252 ----------- ----------- ----------- ----------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 433,361 537,642 948,351 1,188,268 Depreciation and amortization 14,214 21,439 31,347 49,907 Selling, general and administrative expenses 31,403 51,998 73,297 110,276 Reorganization charges 532 -- 4,072 -- ----------- ----------- ----------- ----------- 479,510 611,079 1,057,067 1,348,451 ----------- ----------- ----------- ----------- Gain (Loss) on Asset Disposals and Impairments - Net 58 (2,197) 1,117 (21,254) ----------- ----------- ----------- ----------- Operating Income before Loss from Investees 7,836 34,608 23,049 27,547 Loss from Investees (14,051) (354) (20,274) (6,252) ----------- ----------- ----------- ----------- Operating Income (Loss) (6,215) 34,254 2,775 21,295 ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 6,893 15,042 14,038 34,340 Interest expense (10,978) (12,139) (19,801) (26,264) Minority interest -- (4,229) -- 11,098 Other-net 6,192 (321) 10,064 (52,572) ----------- ----------- ----------- ----------- 2,107 (1,647) 4,301 (33,398) ----------- ----------- ----------- ----------- Income (Loss) before Provision for (Benefit from) Income Taxes and Extraordinary Item (4,108) 32,607 7,076 (12,103) Provision for (Benefit from) Income Taxes 5,939 12,564 9,256 (8,762) ----------- ----------- ----------- ----------- Income (Loss) before Extraordinary Item (10,047) 20,043 (2,180) (3,341) Extraordinary Item -- -- -- (38,719) ----------- ----------- ----------- ----------- Net Income (Loss) $ (10,047) $ 20,043 $ (2,180) $ (42,060) =========== =========== =========== =========== Earnings per Common Share: Basic: Income (Loss) before Extraordinary Item $ (0.17) $ 0.34 $ (0.04) $ (0.06) Net Income (Loss) $ (0.17) $ 0.34 $ (0.04) $ (0.71) Diluted: Income (Loss) before Extraordinary Item $ (0.17) $ 0.33 $ (0.04) $ (0.06) Net Income (Loss) $ (0.17) $ 0.33 $ (0.04) $ (0.71) ----------- ----------- ----------- ----------- Cash Dividends: Per Common Share $ 0.05 $ 0.05 $ 0.10 $ 0.10 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 6 7 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- (Unaudited) (In thousands) Net Income (Loss) $(10,047) $ 20,043 $ (2,180) $(42,060) -------- -------- -------- -------- Other Comprehensive Loss: Currency translation adjustments: Foreign currency translation adjustments (6,164) (7,783) (3,332) (10,309) Minimum pension liability adjustment -- (8) -- (1,066) Unrealized losses on investments: Unrealized gains (losses) arising during the period, net of taxes of ($39,000) and ($47,000), respectively, in the three and six months ending June 31, 2000, and $245,000 and $228,000, respectively, in the three and six months ending June 30, 1999 1,241 (6,660) 751 (8,451) Reclassification adjustment for (gains) losses included in net income, net of taxes (benefits) of ($3,000) and $11,000 in the three and six months, respectively, ending June 30, 1999 11 141 10 (87) -------- -------- -------- -------- Other Comprehensive Loss (4,912) (14,310) (2,571) (19,913) -------- -------- -------- -------- Comprehensive Income (Loss) $(14,959) $ 5,733 $ (4,751) $(61,973) ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 7 8 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months Ended June 30, 2000 1999 --------- --------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (2,180) $ (42,060) --------- --------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 31,347 49,907 Income or loss of investees, less dividends 24,715 11,582 Loss (gain) on asset disposals and impairments - net (1,117) 21,254 Benefit from deferred taxes (1,227) (17,385) Extraordinary loss -- 38,719 Other 4,200 10,464 Changes in assets and liabilities, net of effects of deconsolidation of B&W: Accounts receivable 71,961 (70,408) Net contracts in progress and advance billings (51,145) (61,320) Accounts payable (8,640) (46,941) Accrued and other current liabilities (43,433) (10,321) Products and environmental liabilities (7,560) 134,139 Other, net (58,326) (58,480) Deconsolidation of The Babcock & Wilcox Company (19,424) -- Proceeds from insurance for products liability claims 26,427 80,196 Payments of products liability claims (23,782) (153,824) --------- --------- NET CASH USED IN OPERATING ACTIVITIES (58,184) (114,478) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of B&W Volund (4,146) -- Purchases of property, plant and equipment (35,013) (53,246) Purchases of available-for-sale securities (16,415) (442,053) Purchase of JRM minority interest -- (511,271) Sales of available-for-sale securities 2,858 607,281 Maturities of available-for-sale securities 12,323 121,884 Proceeds from asset disposals 1,495 15,425 Other 500 (6,085) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (38,398) (268,065) --------- ---------
8 9 CONTINUED
Six months Ended June 30, 2000 1999 --------- --------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (2) $(283,527) Increase in short-term borrowing 24,858 534,176 Issuance of common stock 2 1,115 Issuance of subsidiary's stock -- 4,063 Dividends paid (5,970) (5,906) Other 786 (1,883) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 19,674 248,038 --------- --------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 16 1,831 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (76,892) (132,674) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 162,734 265,309 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 85,842 $ 132,635 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 21,280 $ 35,303 Income taxes - net $ 4,104 $ 27,267 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Deconsolidation of The Babcock & Wilcox Company debt $ 4,760 $ -- ========= =========
See accompanying notes to condensed consolidated financial statements. 9 10 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 NOTE 1 - BASIS OF PRESENTATION We have presented our consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information. These consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled joint ventures. We use the equity method to account for investments in joint ventures and other entities we do not control, but have significant influence over. We have eliminated all significant intercompany transactions and accounts. McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes: o J. Ray McDermott, S.A. ("JRM"), a Panamanian subsidiary of MII, and its consolidated subsidiaries; o McDermott Incorporated ("MI"), a Delaware subsidiary of MII, and its consolidated subsidiaries; o Babcock & Wilcox Investment Company ("BWICO"), a Delaware subsidiary of MI; o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and its consolidated subsidiaries, and o The Babcock & Wilcox Company ("B&W"), an unconsolidated Delaware subsidiary of BWICO. On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S. Bankruptcy Code. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve their asbestos liability. To date, this filing has had no material effect on B&W's customers, suppliers, employees or retirees. B&W and its subsidiaries are committed to operating their businesses as normal, delivering products and services as usual and pursuing new contracts and growth opportunities. However, as of February 22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy Court and, as a result, our access to cash flows of B&W and its subsidiaries is restricted. Due to the bankruptcy filing, effective February 22, 2000, we no longer consolidate B&W's financial results in our consolidated financial statements, and our investment in B&W is presented on the cost method. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based on the terms of the reorganization plan. See Note 8 for condensed consolidated income statement and balance sheet information of B&W. 10 11 We accrue estimated drydock costs for our marine fleet over the period of time between drydockings, which is generally 3 to 5 years. We accrue drydock costs in advance of the anticipated future drydocking, commonly known as the "accrue in advance" method. Actual drydock costs are charged against the liability when incurred and any differences between actual costs and accrued costs are recognized over the remaining months of the drydocking cycle. NOTE 2 - ACQUISITION During June 2000, we acquired, through our Babcock & Wilcox Volund ApS ("B&W Volund") subsidiary, various business units of the Ansaldo Volund Group, a group of companies owned by Finmeccanica S.p.A. of Italy. We acquired waste-to-energy, biomass, gasification and stoker-fired boiler businesses and projects, as well as the Esbjerg, Denmark engineering and manufacturing facility from the Ansaldo Volund Group. B&W Volund is not a subsidiary of B&W, and is therefore not a party to B&W's Chapter 11 bankruptcy filing. We are using the purchase method of accounting for this acquisition. A full application of purchase accounting was not possible at June 30, 2000 due to the acquisition date. At June 30, 2000, we reported amounts expended to date of approximately $4,000,000 for this acquisition in other assets. We expect to finalize the purchase accounting for the acquisition by December 31, 2000. NOTE 3 - INVENTORIES Inventories are summarized below:
June 30, December 31, 2000 1999 -------- ----------- (Unaudited) (In thousands) Raw Materials and Supplies $ 5,942 $ 43,998 Work in Progress 1,789 6,353 Finished Goods 2,004 7,137 -------- -------- $ 9,735 $ 57,488 ======== ========
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss included in stockholders' equity are as follows:
June 30, December 31, 2000 1999 -------- ----------- (Unaudited) (In thousands) Currency Translation Adjustments $(32,729) $(29,397) Net Unrealized Loss on Investments (8,968) (9,729) Minimum Pension Liability (7,854) (7,854) -------- -------- $(49,551) $(46,980) ======== ========
11 12 NOTE 5 - INVESTIGATIONS AND LITIGATION In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of our prompt disclosure of the allegations, both MII and JRM and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the Department of Justice agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees pled guilty to criminal charges by the Department of Justice that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. In July 1999, a former JRM officer pled guilty to charges brought by the Department of Justice that he participated in an international bid-rigging conspiracy for the sale of marine construction services. In May 2000, another former JRM officer was indicted by the Department of Justice for participating in a bid rigging conspiracy for the sale of marine construction services in the Gulf of Mexico. We have cooperated with the Department of Justice in its investigation. The Department of Justice also has requested additional information from us relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern 12 13 District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. In August 1999, Statoil appealed this dismissal to the Fifth Circuit Court of Appeal. The Fifth Circuit has set August 2000 for oral arguments on the Statoil appeal. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining domestic claims in the lawsuit in order to seek an appeal of the dismissal of their claims on foreign projects, which request was subsequently denied. In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. In October 1999, 13 14 the Shell Litigation plaintiffs filed a motion to amend their complaint to include non-heavy lift marine construction activity claims against the defendants, which motion was granted in April 2000. We are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether MII and JRM may have violated U.S. securities laws in connection with, but not limited to, the matters described above. MII and JRM are subject to a consent decree under a judicial order entered in 1976, with the consent of MI (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint. This decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of this decree could result in substantial civil and/or criminal penalties to the companies. As a result of the initial allegations of wrongdoing in March 1997, we formed and have continued to maintain a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC investigation, our internal investigation, the above-referenced lawsuits or any actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. These matters could result in civil and criminal liability and have a material adverse effect on our consolidated financial position and results of operations. B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania. The suit involves approximately 300 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the district court set aside the $36,700,000 judgement and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. The plaintiffs' claims against B&W in the Hall Litigation have been automatically stayed as a result of the B&W bankruptcy filing. B&W has filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion. 14 15 In 1998, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8,000,000 for which it seeks reimbursement from other parties. There is a controversy between B&W and its insurers as to the amount of coverage available under the liability insurance policies covering the facilities. B&W filed a declaratory judgement action in a Pennsylvania State Court seeking a judicial determination as to the amount of coverage available under the policies. We believe that all claims under the Hall Litigation will be resolved within the limits and coverage of our insurance policies; but our insurance coverage may not be adequate and we may be materially adversely impacted if our liabilities exceed our coverage. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring. In December 1999 and early 2000, several persons who allegedly purchased shares of our common stock during the period from May 21, 1999 through November 11, 1999 filed four purported class action complaints against MII and two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United States District Court for the Eastern District of Louisiana. Each of the complaints alleges that the defendants violated federal securities laws by disseminating materially false and misleading information and/or concealing material adverse information relating to our estimated liability for asbestos-related claims. Each complaint seeks relief, including unspecified compensatory damages and an award for costs and expenses. The four cases have been consolidated. On June 14, 2000 the plaintiffs filed an amended complaint, and on July 14, 2000, we filed a motion to dismiss all claims asserted in the original and amended complaints. We believe the substantive allegations contained in the complaints are without merit and intend to defend against these and any substantively similar claims vigorously. In December 1998, JRM was in the process of installing a deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due under the installation contract, and, in January 2000, JRM instituted an arbitration proceeding against Texaco seeking the amount owed. Texaco has countered with a lawsuit, claiming consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor. The court has dismissed Texaco's counterclaims for consequential damages but the dismissal is on appeal. Texaco has also filed a lawsuit against a number of other parties, claiming that they are responsible for the incident. It is our position that the installation contract between the parties prohibits Texaco's claims against JRM and JRM is entitled to the amount withheld. 15 16 Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance or warranty related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position or results of operations. See Note 8 regarding B&W's potential liability for non-employee asbestos claims and the Chapter 11 reorganization proceedings commenced by B&W and certain of its subsidiaries on February 22, 2000. NOTE 6 - SEGMENT REPORTING Our reportable segments are Marine Construction Services, Power Generation Systems, Government Operations and Industrial Operations. These segments are managed separately and are unique in technology, services and customer class. Marine Construction Services, which includes the results of JRM, supplies worldwide services for the offshore oil and gas exploration, production and hydrocarbon processing industries and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms, specialized structures, modular facilities, marine pipelines and subsea production systems. JRM also provides project management services, engineering services, procurement activities, and removal, salvage and refurbishment services of offshore fixed platforms. Power Generation Systems supplies engineered-to-order services, products and systems for energy conversion, and fabricates replacement nuclear steam generators and environmental control systems. In addition, this segment provides aftermarket services including replacement parts, engineered upgrades, construction, maintenance and field technical services to electric power plants and industrial facilities. This segment also provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities. Included in the three months ended June 30, 2000 are charges of $21,600,000 to exit certain foreign joint ventures. The Power Generation Systems segment's operations are conducted primarily through B&W. Due to B&W's Chapter 11 filing, effective February 22, 2000, we no longer consolidate B&W's and its subsidiaries' results of operations in our consolidated financial statements. Through February 21, 2000, B&W's and its subsidiaries' results are reported as Power Generation Systems - B&W in the segment information that follows. See Note 8 for the consolidated results of B&W and its subsidiaries. 16 17 Government Operations supplies nuclear reactor components and nuclear fuel assemblies to the U.S. Government, manages and operates government-owned facilities and supplies commercial nuclear environmental services and other government and commercial nuclear services. Industrial Operations is comprised of the engineering and construction activities and plant outage maintenance of certain Canadian operations and manufacturing of auxiliary equipment such as air-cooled heat exchangers and replacement parts. Industrial Operations also includes contract research activities. We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, non-employee products liability asbestos claims provisions, contract and insurance claims provisions, legal expenses and gains (losses) on sales of corporate assets. Other reconciling items to income before provision for income taxes are interest income, interest expense, minority interest and other-net. We exclude the following assets from segment assets: insurance recoverables for products liability claims, goodwill, investments in debt securities, prepaid pension costs and our investment in B&W. We have allocated amortization of goodwill to the reportable segments for all periods presented. Segment assets decreased approximately $575,000,000, primarily in the Power Generation segment, as a result of the deconsolidation of B&W as described in Note 1. Segment Information for the Three and Six Months Ended June 30, 2000 and 1999.
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Unaudited) (In thousands) REVENUES: Marine Construction Services $ 246,142 $ 158,805 $ 452,777 $ 405,376 Government Operations 112,043 92,890 226,763 185,107 Industrial Operations 129,471 132,126 244,713 254,048 Power Generation Systems - B&W -- 267,578 155,774 557,953 Power Generation Systems 64 -- 146 159 Adjustments and Eliminations (1) (432) (3,515) (1,174) (5,391) ----------- ----------- ----------- ----------- Total Revenues $ 487,288 $ 647,884 $ 1,078,999 $ 1,397,252 =========== =========== =========== =========== (1)Segment revenues are net of the following intersegment transfers and other adjustments: Marine Construction Services Transfers $ 144 $ 424 $ 581 $ 1,144 Government Operations Transfers 237 313 431 483 Industrial Operations Transfers 51 39 103 102 Power Generation Systems - B&W Transfers -- 1,141 59 1,328 Adjustments and Eliminations -- 1,598 -- 2,334 ----------- ----------- ----------- ----------- Total $ 432 $ 3,515 $ 1,174 $ 5,391 =========== =========== =========== ===========
17 18
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- (Unaudited) (In thousands) OPERATING INCOME (LOSS): Segment Operating Income (Loss): Marine Construction Services $ (2,001) $ 17,308 $ (7,788) $ 29,591 Government Operations 8,506 9,910 23,479 30,392 Industrial Operations 2,527 4,372 4,207 7,105 Power Generation Systems - B&W -- 16,571 12,502 50,277 Power Generation Systems (144) (200) (364) (597) --------- --------- --------- --------- Total Segment Operating Income $ 8,888 $ 47,961 $ 32,036 $ 116,768 --------- --------- --------- --------- Gain (Loss) on Asset Disposals and Impairments - Net: Marine Construction Services $ (144) $ (1,850) $ 941 $ (22,079) Government Operations 199 -- 199 45 Industrial Operations 3 1 10 (49) Power Generation Systems - B&W -- 53 (33) 3,580 Power Generation Systems -- 950 -- 950 --------- --------- --------- --------- Total Gain (Loss) on Asset Disposals and Impairments - Net $ 58 $ (846) $ 1,117 $ (17,553) --------- --------- --------- --------- Income (Loss) from Investees: Marine Construction Services $ 4,539 $ (1,089) $ (3,007) $ 2,246 Government Operations 1,927 639 3,279 2,903 Industrial Operations 47 (392) 71 (901) Power Generation Systems - B&W -- 1,722 812 1,903 Power Generation Systems (20,564) (1,234) (21,429) (12,403) --------- --------- --------- --------- Total Loss from Investees $ (14,051) $ (354) $(20,274) $ (6,252) --------- --------- --------- --------- SEGMENT INCOME (LOSS): Marine Construction Services $ 2,394 $ 14,369 $ (9,854) $ 9,758 Government Operations 10,632 10,549 26,957 33,340 Industrial Operations 2,577 3,981 4,288 6,155 Power Generation Systems - B&W -- 18,346 13,281 55,760 Power Generation Systems (20,708) (484) (21,793) (12,050) --------- --------- --------- --------- Total Segment Income (Loss) $ (5,105) $ 46,761 $ 12,879 $ 92,963 --------- --------- --------- --------- Other Unallocated Items 7,438 (1,995) 1,816 (51,771) General Corporate Expenses - Net (8,548) (10,512) (11,920) (19,897) --------- --------- --------- --------- Total Operating Income (Loss) $ (6,215) $ 34,254 $ 2,775 $ 21,295 ========= ========= ========= =========
18 19 NOTE 7 - EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (Unaudited) (In thousands, except shares and per share amounts) Basic: Income (loss) before extraordinary item $ (10,047) $ 20,043 $ (2,180) $ 3,341) Extraordinary item -- -- -- (38,719) ------------ ------------ ------------ ------------ Net income (loss) $ (10,047) $ 20,043 $ (2,180) $ (42,060) ============ ============ ============ ============ Weighted average common shares 59,667,689 58,942,070 59,532,010 58,857,561 ============ ============ ============ ============ Basic earnings (loss) per common share: Income (loss) before extraordinary item $ (0.17) $ 0.34 $ (0.04) $ (0.06) Extraordinary item -- -- -- (0.65) ------------ ------------ ------------ ------------ Net income (loss) $ (0.17) $ 0.34 $ (0.04) $ (0.71) ============ ============ ============ ============ Diluted: Income (loss) before extraordinary item $ (10,047) $ 20,043 $ (2,180) $ (3,341) Extraordinary item -- -- -- (38,719) ------------ ------------ ------------ ------------ Net income (loss) for diluted computation $ (10,047) $ 20,043 $ (2,180) $ (42,060) ============ ============ ============ ============ Weighted average common shares (basic) 59,667,689 58,942,070 59,532,010 58,857,561 Effect of dilutive securities: Stock-based compensation arrangements -- 992,818 -- -- ------------ ------------ ------------ ------------ Adjusted weighted average common shares and assumed conversions 59,667,689 59,934,888 59,532,010 58,857,561 ============ ============ ============ ============ Diluted earnings (loss) per common share: Income (loss) before extraordinary item $ (0.17) $ 0.33 $ (0.04) $ (0.06) Extraordinary item -- -- -- (0.65) ------------ ------------ ------------ ------------ Net income (loss) $ (0.17) $ 0.33 $ (0.04) $ (0.71) ============ ============ ============ ============
19 20 NOTE 8 - THE BABCOCK & WILCOX COMPANY General As a result of asbestos-containing commercial boilers and other products B&W and certain of its subsidiaries sold, installed or serviced in prior decades, B&W is subject to a substantial volume of non-employee products liability claims asserting asbestos-related injuries. All of these claims are similar in nature, the primary difference being the type of alleged injury or illness suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes). On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the Bankruptcy Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve all pending and future asbestos products liability claims against them. As a result of the filing, the Bankruptcy Court issued a temporary restraining order which has been converted to a preliminary injunction prohibiting asbestos products liability lawsuits and other actions for which there is shared insurance from being brought against non-filing affiliates of B&W, including MI, JRM and MII. The preliminary injunction will run through October 17, 2000, at which time a further extension will be considered by the Bankruptcy Court. Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a strategy of negotiating and settling asbestos products liability claims brought against them and billing the settled amounts to insurers for reimbursement. The average amount per settled claim over the last three calendar years was approximately $7,900. Reimbursed amounts are subject to varying insurance limits based upon the year of coverage, insurer solvency and collection delays (due primarily to agreed payment schedules with specific insurers delaying reimbursement for three months or more). No claims have been paid since the bankruptcy filing. Claims paid during the six-month period ended June 30, 2000, prior to the bankruptcy filing, were $23,640,000 of which $20,121,000 has been recovered or is due from insurers. At June 30, 2000, receivables of $51,678,000 were due from insurers for reimbursement of settled claims. To date, the bankruptcy filing has not negatively affected B&W's ability to recover amounts due from insurers for settled claims as they become due and payable and B&W does not expect it to in the future. At February 21, 2000, the day prior to the bankruptcy filing, B&W had recorded asbestos products liability of $1,307,583,000 and asbestos products liability insurance recoverable of $1,153,619,000. Historically, B&W's estimated liabilities for pending and future non-employee products liability asbestos claims have been derived from its prior claims history. Inherent in the estimate of such liabilities were expected trend claim severity, 20 21 frequency, and other factors. B&W's estimated liabilities were based on the assumption that B&W would continue to settle claims rather than litigate them, that new claims would conclude by 2012, that there would be a significant decline in new claims received after 2003, and that the average cost per claim would continue to increase only moderately. During the fiscal year ended March 31, 1999, we revised our estimate of the liability for pending and future non-employee asbestos claims and recorded an additional liability of $817,662,000, additional estimated insurance recoveries of $732,477,000 and a loss of $85,185,000 for future claims for which recovery from insurance carriers was not considered probable. Beginning in the third quarter of calendar 1999, B&W experienced a significant increase in the amount demanded by several plaintiffs' attorneys to settle certain types of asbestos products liability claims. These increased demands significantly impaired B&W's ability to continue to resolve its asbestos products liability through out-of-court settlements. As a result, B&W undertook the bankruptcy filing because it believes that a Chapter 11 proceeding offers the only viable legal process through which it and its subsidiaries can seek a comprehensive resolution of their asbestos products liability. The filing increases the uncertainty with respect to the manner in which such liabilities will ultimately be settled. The Chapter 11 proceeding is in its early stages. While the Bankruptcy Court has approved B&W's debtor-in-possession financing and the assumption of all pre-filing contracts presented for approval, there are a number of other issues and matters to be resolved. B&W has not yet filed a plan of reorganization and the Bankruptcy Court has not set a bar date for asserting claims. Remaining issues and matters to be resolved include, but are not limited to, B&W's ultimate asbestos liability, the formation of a trust to satisfy such liability and the funding of such a trust. The timing and ultimate outcome of the Chapter 11 proceeding is uncertain. Any changes in the estimate of B&W's non-employee asbestos products liability and insurance recoverables, and differences between the proportion of such liabilities covered by insurance and that experienced in the past, could result in material adjustments to the B&W financial statements and could negatively impact our ability to realize our net investment in B&W. Debtor-In-Possession Financing In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into a $300,000,000 debtor-in-possession revolving credit and letter of credit facility with Citibank, N.A. and Salomon Smith Barney Inc. (the "DIP Credit Facility") with a three-year term. The Bankruptcy Court approved the full amount of this facility, giving all amounts owed under the facility a super-priority administrative expense status in bankruptcy. B&W's and its filing subsidiaries' obligations under the facility are (1) guaranteed by substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by a security interest on B&W Canada Ltd.'s assets. 21 22 Additionally, B&W and substantially all of its domestic subsidiaries executed a pledge and security agreement pursuant to which they have granted a security interest in their assets to the lenders under the DIP Credit Facility upon the defeasance or refinancing of MI's public debt. The DIP Credit Facility generally provides for borrowings by B&W and its filing subsidiaries for working capital and other general corporate purposes and the issuance of letters of credit, except that the total of all borrowings and non-performance letters of credit issued under the facility cannot exceed $100,000,000 in the aggregate. The DIP Credit Facility imposes certain financial and non-financial covenants on B&W and its subsidiaries. A permitted use of the DIP Credit Facility is the issuance of new letters of credit to backstop or replace pre-existing letters of credit issued in connection with B&W's and its subsidiaries' business operations, but for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000, the aggregate amount of all such pre-existing letters of credit totaled approximately $172,000,000 (the "Pre-existing LCs"). Each of MII, MI and BWICO have agreed to indemnify and reimburse B&W and its filing subsidiaries for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any Pre-existing LC for which it already has exposure and for the associated letter of credit fees paid under the facility. As of June 30, 2000, approximately $58,183,000 in letters of credit have been issued under the DIP Credit Facility of which approximately $48,215,000 were to replace or backstop Pre-existing LCs. Financial Results and Reorganization Items The B&W condensed consolidated financial statements set forth below have been prepared in conformity with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP 90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date and identification of all transactions and events that are directly associated with the reorganization. Liabilities subject to compromise include prepetition unsecured claims, which may be settled at amounts which differ from those recorded in the B&W condensed consolidated financial statements. 22 23 THE BABCOCK & WILCOX COMPANY CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- (Unaudited) (In thousands) Revenues $ 298,246 $ 266,040 $ 570,813 $ 555,858 --------- --------- --------- --------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 283,887 230,941 517,412 503,181 Depreciation and amortization 4,018 4,539 8,168 11,269 Selling, general and administrative expenses 15,086 18,382 33,273 35,220 Reorganization charges 4,043 -- 7,965 -- --------- --------- --------- --------- 307,034 253,862 566,818 549,670 --------- --------- --------- --------- Gain (Loss) on Asset Disposals 1,319 (666) 1,309 1,869 --------- --------- --------- --------- Operating Income (Loss) before Income from Investees (7,469) 11,512 5,304 8,057 Income from Investees 1,264 1,722 2,697 1,903 --------- --------- --------- --------- Operating Income (Loss) (6,205) 13,234 8,001 9,960 --------- --------- --------- --------- Other Income: Interest income 1,829 1,721 2,792 10,758 Interest expense (1,216) (177) (1,390) (665) Other-net (1,234) 131 36 (50,839) --------- --------- --------- --------- (621) 1,675 1,438 (40,746) --------- --------- --------- --------- Income (Loss) before Provision for (Benefit from) Income Taxes (6,826) 14,909 9,439 (30,786) Provision for (Benefit from) Income Taxes (3,445) 6,444 3,185 (5,329) --------- --------- --------- --------- Net Income (Loss) $ (3,381) $ 8,465 $ 6,254 $ (25,457) ========= ========= ========= =========
23 24 THE BABCOCK & WILCOX COMPANY BALANCE SHEET
June 30, 2000 (Unaudited) (In thousands) Assets: Current Assets $ 521,811 Property, Plant and Equipment 82,743 Products Liabilities Recoverable 1,153,761 Goodwill 77,329 Prepaid Pension Costs 19,613 Other Assets 101,304 ----------- Total Assets $ 1,956,561 =========== Liabilities: Current Liabilities $ 287,538 Liabilities Subject to Compromise 1,489,459(A) Stockholder's Equity: Common Stock 1,001 Capital in Excess of Par Value 128,633 Retained Earnings 71,386 Accumulated Other Comprehensive Loss (21,456) ----------- Total Liabilities and Stockholder's Equity $ 1,956,561 =========== (A) Liabilities subject to compromise consist of the following: Accounts payable $ 11,416 Provision for warranty 24,777 Other current liabilities 35,672 Environmental and products liabilities 1,307,725 Accumulated postretirement benefit obligation 89,132 Other long-term liabilities 20,737 ----------- $ 1,489,459 ===========
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 $51,350,000 and pre-petition inter-company receivables from other entities within the McDermott group of companies (other than subsidiaries of B&W) of approximately $58,143,000. In the course of the conduct of B&W's and its subsidiaries' business, MII and MI have agreed to indemnify two surety companies for B&W's and its subsidiaries' obligations under surety bonds issued in connection with their customer contracts. In addition to this indemnity, these two surety companies requested and, in June 2000, obtained from the Bankruptcy Court, subject to DIP Credit Agreement and certain professional fees, super-priority administrative expense status in bankruptcy for their claims against B&W and its filing subsidiaries resulting from their exposure under any bond issued post-bankruptcy filing for B&W's and its subsidiaries' businesses. At June 30, 2000, the total value of B&W's and its subsidiaries' customer contracts yet to be completed covered by such indemnity arrangements was approximately $151,500,000 of which approximately $12,000,000 relates to bonds issued after February 21, 2000. B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $166,234,000, as of February 21, 2000, increased to $180,866,000 due to post-bankruptcy filing adjustments to the net assets of B&W and is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization. We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries' operating activities and meet its debt and capital requirements for the foreseeable future. However, the ability of B&W to continue as a going concern is dependent upon its ability to settle its ultimate asbestos products liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. The B&W condensed consolidated financial information set forth above has been prepared on a going concern basis which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts 25 26 of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment. Following are our condensed Pro Forma consolidated Statements of Income (Loss) and Balance Sheet data, assuming the deconsolidation of B&W for all periods presented. Assumes deconsolidation as of the beginning of the period presented:
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- (Unaudited) (In thousands) Revenues $ 487,288 $ 381,844 $ 923,284 $ 841,394 Operating Income (Loss) $ (6,215) $ 21,020 $ (5,176) $ 11,335 Income (Loss) before Provision for (Benefit from) Income Taxes $ (4,108) $ 17,698 $ (2,218) $ 18,683 Net Income (Loss) $ (10,047) $ 11,578 $ (7,685) $ (16,603) Earnings (Loss) per Common Share: Basic $ (0.17) $ 0.20 $ (0.13) $ (0.28) Diluted $ (0.17) $ 0.19 $ (0.13) $ (0.28)
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 9 - MODIFICATION OF FINANCIAL ARRANGEMENTS On February 21, 2000, we entered into financing arrangements providing for up to $200,000,000 of financing to MII, BWXT and Hudson Products Corporation (the "MII Credit Facility"), and up to $300,000,000 to JRM and its subsidiaries (the "JRM Credit Facility"). This financing, for which Citibank, N.A. is the administrative agent, provides revolving credit facilities and advances for letters of credit. On April 24, 2000, these financing 26 27 arrangements were amended and restated and the JRM Credit Facility was reduced to $200,000,000. Borrowings on the MII Credit Facility bear interest at LIBOR plus 42.5 basis points, or the prime rate, depending upon the duration of the borrowing, and this facility has an annual fee of $400,000. Borrowings on the JRM Credit Facility bear interest at LIBOR plus 137.5 basis points, or the prime rate plus 25 basis points, depending upon the duration of the borrowings, and this facility has an annual fee of $750,000. NOTE 10 - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require us to recognize all derivatives on our consolidated balance sheet at their fair values. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," which adds to the guidance related to accounting for derivative instruments and hedging activities. We have not yet determined the effect SFAS No. 133, as amended by SFAS No. 138, will have on our consolidated financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for certain issues including (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. Generally, the provisions of this Interpretation are effective July 1, 2000 and shall be applied prospectively. However, certain requirements apply to events that occur after December 15, 1998 or January 12, 2000 but prior to July 1, 2000. The effects of such events also shall be recognized on a prospective basis beginning July 1, 2000. We have determined that the adoption of Interpretation No. 44 will have no material effect on our consolidated financial position or results of operations. 27 28 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities law affords. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement. In addition, various statements this Form 10-Q contains, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report, we disclaim any obligation to update these statements, and we caution you not to unduly rely on them. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following: o general economic and business conditions and industry trends; o the continued strength of the industries in which we are involved; o decisions about offshore developments to be made by oil and gas companies; o the deregulation of the U.S. electric power market; o the highly competitive nature of our businesses; o our future financial performance, including availability, terms and deployment of capital; o the continued availability of qualified personnel; o changes in, or our failure or inability to comply with, government regulations and adverse outcomes from legal and regulatory proceedings, including the results of ongoing governmental investigations 28 29 and related civil lawsuits involving alleged anticompetitive practices in our marine construction business; o estimates for pending and future nonemployee asbestos claims against B&W and potential adverse developments that may occur in the Chapter 11 reorganization proceeding involving B&W and certain of its subsidiaries; o changes in existing environmental regulatory matters; o rapid technological changes; o difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions; and o social, political and economic situations in foreign countries where we do business. We believe the items we have outlined above are important factors that could cause our actual results to differ materially from those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises. We advise our security holders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements. GENERAL The amount of revenues we generate from our Marine Construction Services segment largely depends on the level of oil and gas development activity in the world's major hydrocarbon producing regions. Our revenues from this segment reflect the variability associated with the timing of significant development projects. Although oil and gas prices have somewhat stabilized in recent months and oil company merger activity has reduced, these have yet to have an impact on our Marine Construction Services' customers' exploration and production spending for the remainder of 2000. Economic and political instability in Asia has also had an adverse effect on the timing of exploration and production spending. Consequently, we do not expect our Marine Construction Services segment's revenues to increase significantly in 2000. The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a result of reductions in the defense budget over the past several years, we do not expect this segment to experience any significant growth in the next three years. We expect this segment's backlog to 29 30 remain relatively constant since it is the sole supplier to the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components for the Naval Reactors Program. We currently expect the 2000 operating activity of this segment will be about the same as in 1999. The revenues of our Industrial Operations segment are affected by variations in the business cycles in its customers' industries and the overall economy. Legislative and regulatory issues such as environmental regulations and fluctuations in U.S. Government funding patterns also affect this segment. We currently expect the 2000 operating activity of this segment will be about the same as in 1999. Effective February 22, 2000 and until B&W and its filing subsidiaries emerge from the Chapter 11 reorganization proceeding and the subsequent accounting is determined, we no longer consolidate B&W's and its subsidiaries' results of operations in our consolidated financial statements and our investment in B&W is presented on the cost method. Through February 21, 2000, B&W's and its subsidiaries' results are included in our segment results under Power Generation Systems - B&W (see Note 6 to the consolidated financial statements.) B&W and its consolidated subsidiaries pre-bankruptcy filing revenues of $155,774,000 and operating income of $7,951,000 are included in our consolidated financial results for the six-month period ended June 30, 2000. In general, each of our business segments is composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues. We evaluate the realizability of our long-lived assets, including property, plant and equipment and goodwill, whenever events or changes in circumstances indicate that we may not be able to recover the carrying amounts of those assets. We carry our property, plant and equipment at cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. We derive a significant portion of our revenues from foreign operations. As a result, international factors, including variations in local economies and changes in foreign currency exchange rates affect our revenues and operating results. We attempt to limit our exposure to changes in foreign currency exchange rates by attempting to match anticipated foreign currency contract receipts with like foreign currency disbursements. To the extent that we are unable to match the foreign currency receipts and disbursements related to our contracts, we enter into forward exchange contracts to reduce the impact of foreign exchange rate movements on our operating results. Because we generally do not hedge beyond our contract exposure, we believe this practice minimizes the impact of foreign exchange rate movements on our operating results. 30 31 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Marine Construction Services Revenues increased $87,337,000 to $246,142,000 due to higher volume in offshore activities in the Far East relating to the West Natuna project and in North American fabrication activities. These increases were partially offset by lower volume in North American offshore and Eastern Hemisphere fabrication activities. Segment operating income decreased $19,309,000 from income of $17,308,000 to a loss of $2,001,000, primarily due to lower volume and margins in North American offshore and Eastern Hemisphere fabrication activities.. There were also lower margins in our Mexican ship repair business and in our engineering activities. In addition, there was the amortization of the goodwill associated with our purchase of the minority interest in JRM. These decreases were partially offset by higher volume in Eastern Hemisphere offshore activities. Loss on asset disposals and impairments-net decreased from $1,850,000 to $144,000. The loss in the prior period was due to impairment losses on oil and gas investments and a write-off of goodwill associated with a Mexican shipyard. Income (loss) from investees increased $5,628,000 from a loss of $1,089,000 to income of $4,539,000, primarily due to a revision of withholding taxes associated with a Mexican joint venture and improvement in our European joint venture over the prior period. In addition, there were lower operating results from our Gulf of Mexico joint ventures in the prior period. Government Operations Revenues increased $19,153,000 to $112,043,000, primarily due to higher volumes from nuclear fuel assemblies and reactor components for the U.S. Government. Segment operating income decreased $1,404,000 to $8,506,000, primarily due to lower margins from management and operation contracts for U.S. Government-owned facilities and commercial nuclear environmental services. These decreases were partially offset by higher volume from nuclear fuel assemblies and reactor components for the U. S. Government and lower sales and marketing expenses. Income from investees increased $1,288,000 to $1,927,000, primarily due to higher operating results from a joint venture in Idaho. 31 32 Industrial Operations Revenues decreased $2,655,000 to $129,471,000, primarily due to lower volumes from engineering activities in Canadian operations and air-cooled heat exchangers. These decreases were partially offset by higher volumes from plant maintenance activities in Canadian operations. Segment operating income decreased $1,845,000 to $2,527,000, primarily due to lower sales volumes and margins from engineering activities in Canadian operations and air-cooled heat exchangers. These decreases were partially offset by higher volumes from plant maintenance activities in Canadian activities and lower general and administrative expenses. Power Generation Systems Loss from investees increased $19,330,000 to $20,564,000, primarily due to charges of $21,600,000, including approximately $12,000,000 related to financial guarantees, to exit certain foreign joint ventures. Other Unallocated Items Other unallocated items improved $9,433,000 from expense of $1,995,000 to income of $7,438,000, primarily due to lower employee benefit, general and administrative and research and development expenses. General Corporate Expenses - Net General corporate expenses decreased $1,964,000 primarily due to the deconsolidation of B&W. Other Income Statement Items Interest income decreased $8,149,000 to $6,893,000, primarily due to a decrease in investments. Interest expense decreased $1,161,000 to $10,978,000, primarily due to changes in debt obligations and prevailing interest rates. We no longer have minority interest, primarily due to the acquisition of the minority interest in JRM in the prior year. Other-net improved $6,513,000 from expense of $321,000 to income of $6,192,000. This improvement was primarily due to income attributable to over funded pension plans from discontinued operations and foreign currency transaction gains in the current period compared to foreign currency transaction losses in the prior period. 32 33 The provision for income taxes decreased $6,625,000 to $5,939,000, while income before provision for income taxes and extraordinary item decreased $36,715,000 from income of $32,607,000 to a loss of $4,108,000. The change in the relationship of pretax income to the provision for income taxes was primarily the result of a decrease in income during the current period. The provision for the three months ended June 30, 2000, reflects non-deductible amortization of goodwill of $4,502,000 created by the premium we paid on the acquisition of minority interest in JRM. The loss before provision for income taxes for the three months ended June 30, 2000 includes charges of $21,600,000 to exit certain foreign joint ventures which have no associated tax benefits. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Marine Construction Services Revenues increased $47,401,000 to $452,777,000 due to higher volume in offshore activities in the Far East relating to the West Natuna project. This increase was partially offset by lower volumes in essentially all geographic areas. Segment operating income decreased $37,379,000 from income of $29,591,000 to a loss of $7,788,000, primarily due to lower volume and margins in North American activities including our Mexican ship repair business and lower margins in the Eastern Hemisphere. There was also the amortization of the goodwill associated with our purchase of the minority interest in JRM. These decreases were partially offset by higher margins in engineering activities and potential litigation settlements recorded in the prior period. Gain (loss) on asset disposals and impairments-net increased $23,020,000 from a loss of $22,079,000 to income of $941,000. The loss in the prior period was due to impairment losses on fabrication facilities and fabrication and marine equipment. There was also a write-off of goodwill associated with worldwide engineering and a Mexican shipyard. Income (loss) from investees decreased $5,253,000 from income of $2,246,000 to a loss of $3,007,000, primarily due to lower operating results from our Mexican joint venture (partially offset by a benefit recognized on revisions of withholding taxes) and higher operating results from our Far East joint venture in the prior period. These lower operating results were partially offset by lower operating results from a Gulf of Mexico joint venture in the prior period. 33 34 Government Operations Revenues increased $41,656,000 to $226,763,000, primarily due to higher volumes from nuclear fuel assemblies and reactor components for the U.S. Government and from management and operation contracts for U. S. Government-owned facilities. Segment operating income decreased $6,913,000 to $23,479,000, primarily due to a settlement relating to environmental restoration costs recorded in the prior period. There were also lower margins from management and operation contracts for U.S. Government-owned facilities. These decreases were partially offset by higher volume from nuclear fuel assemblies and reactor components for the U. S. Government. Industrial Operations Revenues decreased $9,335,000 to $244,713,000, primarily due to lower volumes from engineering activities in Canadian operations and air-cooled heat exchangers. These decreases were partially offset by higher volumes from plant maintenance activities in Canadian operations. Segment operating income decreased $2,898,000 to $4,207,000, primarily due to lower sales volumes and margins from engineering activities in Canadian operations and air-cooled heat exchangers. These decreases were partially offset by higher volumes and margins from plant maintenance activities in Canadian operations and lower general and administrative expenses. Power Generation Systems Loss from investees increased $9,026,000 to $21,429,000, primarily due to charges of $21,600,000, including approximately $12,000,000 related to financial guarantees, to exit certain foreign joint ventures. The loss in the prior period was primarily due to the write-off of notes and accounts receivable from a foreign joint venture in Turkey. Other Unallocated Items Other unallocated items improved $53,587,000 from expense of $51,771,000 to income of $1,816,000, primarily due to provisions for estimated future non-employee products liability asbestos claims and reserves for potential litigation settlements recorded in the prior period and lower general and administrative expenses. These improvements were partially offset by the initial reorganization expenses incurred by MII associated with the B&W Chapter 11 filing. 34 35 Other Income Statement Items Interest income decreased $20,302,000 to $14,038,000, primarily due to a decrease in investments. Interest expense decreased $6,463,000 to $19,801,000, primarily due to changes in debt obligations and prevailing interest rates. We no longer have minority interest, primarily due to the acquisition of the minority interest in JRM in the prior year. Other-net improved $62,636,000 from expense of $52,572,000 to income of $10,064,000. This improvement was primarily due to a loss of $45,535,000 for insolvent insurers providing coverage for estimated future non-employee products liability asbestos claims and a net loss on the settlement and curtailment of postretirement benefit plans recorded in the prior period. In addition, there were foreign currency transaction gains in the current period compared to foreign currency transaction losses in the prior period and income attributable to over funded pension plans from discontinued operations. The provision for income taxes increased $18,018,000 from a benefit of $8,762,000 to a provision of $9,256,000, while income before provision for income taxes and extraordinary item increased $19,179,000 from a loss of $12,103,000 to income of $7,076,000. The change in the relationship of pretax income to the provision for income taxes was primarily the result of (1) an increase in income, (2) a decrease in our tax expense of $7,851,000 in the prior period due to the change in our valuation allowance for deferred tax assets and (3) $9,062,000 we recorded in the prior period as a result of favorable tax settlements of disputed items in foreign jurisdictions. The provision for the six months ended June 30, 2000 reflects non-deductible amortization of goodwill of $9,004,000 created by the premium we paid on the acquisition of the minority interest in JRM and a benefit of $5,500,000 from a favorable tax settlement in a foreign jurisdiction. Income taxes in the six months ended June 30, 2000 also include a provision of $3,800,000 for B&W for the pre-filing period. The loss before provision for income taxes for the six months ended June 30, 2000 includes charges of $21,600,000 to exit certain joint ventures which have no associated tax benefit. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate. 35 36 Backlog
6/30/00 12/31/99 ---------- ---------- (Unaudited) (In thousands) Marine Construction Services $ 311,527 $ 514,822 Government Operations 981,054 1,151,960 Industrial Operations 357,289 415,820 Power Generation Systems -- 1,202,695 ---------- ---------- TOTAL BACKLOG $1,649,870 $3,285,297 ========== ==========
Due to the deconsolidation of B&W (see Note 8 to the condensed consolidated financial statements), backlog from Power Generation Systems totaling $1,105,549,000 is no longer included in our consolidated total at June 30, 2000. In general, all of McDermott's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues. Backlog for the Marine Construction Services segment decreased primarily because of delays in awards of new offshore construction programs. At June 30, 2000, Government Operations' backlog with the U. S. Government was $867,816,000 (of which $16,465,000 had not been funded). This segment's backlog is not expected to experience significant growth as a result of reductions in defense budgets. However, management expects this segment's backlog to remain relatively constant since it is the sole source provider of nuclear fuel assemblies and nuclear reactor components for the U. S. Government. Liquidity and Capital Resources During the six months ended June 30, 2000, our cash and cash equivalents decreased $76,892,000 to $85,842,000 and total debt increased $20,119,000 to $429,632,000, primarily due to an increase in short-term borrowings of $24,858,000. During this period, we received cash of $15,181,000 from sales and maturities of investments and $1,495,000 from the sale of assets. We used cash of $58,184,000 in operating activities, $35,013,000 for additions to property, plant and equipment, $16,415,000 for the purchase of investments, $5,970,000 for dividends on MII's common stock and $4,146,000 for B&W Volund's acquisition of certain business units of the Ansaldo Volund Group. Expenditures for property, plant and equipment decreased $18,233,000 to $35,013,000. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. 36 37 At June 30, 2000 and December 31, 1999, we had available various uncommitted short-term lines of credit from banks totaling $26,424,000 and $72,766,000, respectively. At June 30, 2000 and December 31, 1999, borrowings against these lines of credit were $836,000 and $4,148,000, respectively. On February 21, 2000, B&W and certain of its subsidiaries entered into their $300,000,000 debtor-in-possession revolving credit and letter of credit facility to satisfy their working capital and letter of credit needs during the pendency of their bankruptcy case. See Note 8 to the condensed consolidated financial statements. On February 21, 2000, we also entered into other financing arrangements providing financing to the balance of our operations. This financing, as amended on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000 credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each facility is with a group of lenders, for which Citibank, N.A. is acting as the administrative agent to the amounts outstanding under each facility. The MII Credit Facility consists of two tranches, each of which has a three-year term. One is a revolving credit facility that provides for up to $100,000,000 to the borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 to reimburse issuers for drawings under certain outstanding letters of credit totaling $48,975,000 issued for the benefit of B&W and its subsidiaries and to issue new letters of credit for the account of MII to renew or extend any of those outstanding letters of credit on their scheduled expiration dates. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the MII Credit Facility may not exceed $200,000,000. This facility is secured by a collateral account funded with various U.S. government securities with a marked-to-market value equal to 105% of the aggregate amount available for drawing under letters of credit and revolving credit borrowings then outstanding. Borrowings against this facility at June 30, 2000 were $30,000,000. As of August 10, 2000, we have borrowed an additional $20,000,000 against this facility. The JRM Credit Facility also consists of two tranches. One is a revolving credit facility that provides for up to $100,000,000 for advances to borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 to reimburse issuers for drawings under JRM's outstanding letters of credit and to issue new letters of credit to renew or extend any of those outstanding letters of credit on their scheduled expiration dates. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the JRM Credit Facility may not exceed $200,000,000. The facility is subject to certain financial and non-financial covenants. Borrowings against this facility at June 30, 2000 were $20,000,000. 37 38 At June 30, 2000, we had total cash, cash equivalents and investments of $463,869,000. Our investment portfolio consists primarily of government obligations and other investments in debt securities. The fair value of our investments at June 30, 2000 was $378,027,000. As of June 30, 2000, we had pledged approximately $43,456,000 fair value of these obligations to secure a letter of credit in connection with certain reinsurance agreements and $54,679,000 fair value of these obligations to secure borrowings of $55,434,000 that are incurred under repurchase agreements. In addition, approximately $201,749,000 fair value of these obligations secured the MII Credit Facility. In connection with B&W's bankruptcy filing, MII entered into a support agreement pursuant to which it agreed to provide MI with standby financial support on its interest payments on its (i) $225,000,000 in aggregate principal amount of 9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in principal amount under a Pollution Control Note due 2009. MI is required to pay MII $5,000 per month under the support agreement which expires on March 15, 2002. MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. At June 30, 2000, substantially all the net assets of MI were subject to those restrictions. At June 30, 2000, JRM and its subsidiaries could make unsecured loans to or investments in MII and its other subsidiaries of approximately $72,000,000. As a result of MI's reclassification of its investment in MII to a reduction of stockholder's equity on March 31, 1999, MI and its subsidiaries are unable to incur any additional long-term debt obligations under one of MI's public debt indentures. Moreover, as a result of B&W's bankruptcy filing, B&W and its subsidiaries are precluded from paying dividends, making payments on pre-bankruptcy accounts or notes payable or loans to, or investments in, MI, MII or MII's other subsidiaries. We do not believe MI's and its subsidiaries inability to incur long-term debt or B&W's bankruptcy filing will materially impact our working capital and liquidity requirements for the foreseeable future. We expect to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, cash and cash equivalents, and short-term borrowings. At June 30, 2000, we had a valuation allowance for deferred tax assets of $18,326,000, which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that our remaining deferred tax assets are realizable through carrybacks and future reversals of existing taxable temporary differences, future taxable income and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. Uncertainties that affect the ultimate realization of our deferred tax assets include the risk 38 39 of incurring losses in the future and the possibility of declines in value of appreciated assets involved in the tax planning strategies we have identified. We have considered these factors in determining our valuation allowance. We will continue to assess the adequacy of our valuation allowance on a quarterly basis. Our quarterly dividend on our common stock was $0.05 per share. At the recommendation of management, on August 1, 2000, MII's Board of Directors voted to eliminate the quarterly common stock dividend with the intention of conserving cash for future corporate and operational uses. We have evaluated and expect to continue evaluating possible strategic acquisitions, some of which may be material. At any given time we may be engaged in discussions or negotiations or enter into agreements relating to potential acquisition transactions. Working capital decreased $217,376,000 from $166,402,000 at December 31, 1999 to a deficit of $50,974,000 at June 30, 2000. During the remainder of 2000, we expect to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, cash and cash equivalents, and short-term borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact our liquidity or capital resources. The Babcock & Wilcox Company B&W and its subsidiaries conduct substantially all of the operations of our Power Generation Systems segment. The amount of revenues we generate from our Power Generation Systems segment primarily depends on capital spending by customers in the electric power generation industry. In that industry, persistent economic growth in the United States has brought the supply of electricity into approximate balance with energy demand, except during periods of peak demand. Electric power producers have generally been meeting these peaks with new combustion turbines rather than new base-load capacity. New U.S. emissions requirements have also prompted some customers to place orders for environmental equipment. Domestic demand for electrical power generation industry services and replacement nuclear steam generators continues at strong levels. In the process industries, demand for services remains strong, and the pulp and paper industry have recently increased their inquiries relating to the refurbishment or replacement of their existing recovery boilers. The international markets remain unsettled. Economic and political instability in Asia has caused projects there to be delayed, suspended or cancelled. We currently expect the 2000 operating activity of this segment will be about the same as in 1999. B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity 39 40 whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $180,866,000 as of June 30, 2000 is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization. See Note 8 to the condensed consolidated financial statements for B&W's financial information at June 30, 2000. In the three months ending June 30, 2000: B&W's revenues increased $32,206,000 to $298,246,000, primarily due to higher volumes from the fabrication and erection of fossil fuel steam and environmental control systems. This increase was partially offset by lower volumes from fabrication, repair and retrofit of existing facilities, private power systems, replacement nuclear steam generators and industrial boilers; B&W's operating income (loss) decreased $19,439,000 from income of $13,234,000 to a loss of $6,205,000, primarily due to write-downs and adjustments to substantially completed original equipment contracts still under warranty or in dispute resolution with various customers - primarily international and lower volumes and margins from the fabrication, repair and retrofit of existing facilities, industrial boilers and replacement nuclear steam generators. In addition, there were lower margins from private power systems. Selling, general and administrative expenses were lower due to revisions in the amount billed from MI. Interest income increased $108,000 to $1,829,000, primarily due to an increase in investments; Other-net decreased $1,365,000 from income of $131,000 to expense of $1,234,000, primarily due to employee benefit expenses. In the six months ending June 30, 2000: B&W's revenues increased $14,955,000 to $570,813,000, primarily due to higher volumes from the fabrication and erection of fossil fuel steam and environmental control systems. This increase was partially offset by lower volumes from fabrication, repair and retrofit of existing facilities, industrial boilers, replacement nuclear steam generators, boiler cleaning equipment and private power systems; 40 41 B&W's operating income decreased $1,959,000 to $8,001,000, primarily due to lower volumes and margins from the fabrication, repair and retrofit of existing facilities, industrial boilers, replacement nuclear steam generators, private power systems and boiler cleaning equipment. In addition, there were write-downs and adjustments to substantially completed original equipment contracts still under warranty or in dispute resolution with various customers - primarily international, higher employee benefit expenses and reorganization expenses associated with the Chapter 11 filing. These decreases were partially offset by provisions for estimated future non-employee products liability asbestos claims in the prior period. In addition, there were lower general and administrative expenses; Interest income decreased $7,966,000 to $2,792,000, primarily due to interest income on domestic tax refunds in the prior period; Other-net improved $50,875,000 from expense of $50,839,000 to income of $36,000, primarily due to a loss of $45,535,000 for insolvent insurers providing coverage for estimated future non-employee products liability asbestos claims in the prior period. B&W's backlog at June 30, 2000 and December 31, 1999 was $1,105,549,000 and $1,202,949,000, respectively. In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into a $300,000,000 debtor-in-possession revolving credit and letter of credit facility with Citibank, N.A. and Salomon Smith Barney Inc. with a three-year term. We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries' operating activities and meet its debt and capital requirements for the foreseeable future. However, the ability of B&W to continue as a going concern is dependent upon its ability to settle its ultimate asbestos products liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment. See Note 8 to the condensed consolidated financial statements for more information about B&W's Chapter 11 bankruptcy proceeding. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require us to recognize all derivatives on our consolidated balance sheet at their fair values. Derivatives that 41 42 are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," which adds to the guidance related to accounting for derivative instruments and hedging activities. We have not yet determined the effect SFAS No. 133, as amended by SFAS No. 138, will have on our consolidated financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for certain issues including (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. Generally, the provisions of this Interpretation are effective July 1, 2000 and shall be applied prospectively. However, certain requirements apply to events that occur after December 15, 1998 or January 12, 2000 but prior to July 1, 2000. The effects of such events also shall be recognized on a prospective basis beginning July 1, 2000. We have determined that the adoption of Interpretation No. 44 will have no material effect on our consolidated financial position or results of operations. PART II McDERMOTT INTERNATIONAL, INC. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of our prompt 42 43 disclosure of the allegations, both MII and JRM and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the Department of Justice agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees pled guilty to criminal charges by the Department of Justice that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. In July 1999, a former JRM officer pled guilty to charges brought by the Department of Justice that he participated in an international bid-rigging conspiracy for the sale of marine construction services. In May 2000, another former JRM officer was indicted by the Department of Justice for participating in a bid rigging conspiracy for the sale of marine construction services in the Gulf of Mexico. We have cooperated with the Department of Justice in its investigation. The Department of Justice also has requested additional information from us relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually 43 44 and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. In August 1999, Statoil appealed this dismissal to the Fifth Circuit Court of Appeal. The Fifth Circuit has set August 2000 for oral arguments on the Statoil appeal. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining domestic claims in the lawsuit in order to seek an appeal of the dismissal of their claims on foreign projects, which request was subsequently denied. In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. In October 1999, the Shell Litigation plaintiffs filed a motion to amend their complaint to include non-heavy lift marine construction activity claims against the defendants, which motion was granted in April 2000. We are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether MII and JRM may have violated U.S. securities laws in connection with, but not limited to, the matters described above. MII and JRM are subject to a consent decree under a judicial order entered in 1976, with the consent of 44 45 MI (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint. This decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of this decree could result in substantial civil and/or criminal penalties to the companies. As a result of the initial allegations of wrongdoing in March 1997, we formed and have continued to maintain a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC investigation, our internal investigation, the above-referenced lawsuits or any actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. These matters could result in civil and criminal liability and have a material adverse effect on our consolidated financial position and results of operations. B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania. The suit involves approximately 300 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the district court set aside the $36,700,000 judgement and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. The plaintiffs' claims against B&W in the Hall Litigation have been automatically stayed as a result of the B&W bankruptcy filing. B&W has filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion. In 1998, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8,000,000 for which it seeks reimbursement from other parties. There is a controversy between B&W and its insurers as to the amount of coverage available under the liability insurance policies covering the facilities. B&W filed a declaratory judgement action in a Pennsylvania State Court seeking a judicial determination as to the amount of coverage available under the policies. We believe that all claims under the Hall Litigation will be resolved within the limits and coverage of our insurance policies; but our insurance coverage may not be adequate and 45 46 we may be materially adversely impacted if our liabilities exceed our coverage. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring. In December 1999 and early 2000, several persons who allegedly purchased shares of our common stock during the period from May 21, 1999 through November 11, 1999 filed four purported class action complaints against MII and two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United States District Court for the Eastern District of Louisiana. Each of the complaints alleges that the defendants violated federal securities laws by disseminating materially false and misleading information and/or concealing material adverse information relating to our estimated liability for asbestos-related claims. Each complaint seeks relief, including unspecified compensatory damages and an award for costs and expenses. The four cases have been consolidated. On June 14, 2000 the plaintiffs filed an amended complaint, and on July 14, 2000, we filed a motion to dismiss all claims asserted in the original and amended complaints. We believe the substantive allegations contained in the complaints are without merit and intend to defend against these and any substantively similar claims vigorously. In December 1998, JRM was in the process of installing a deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due under the installation contract, and, in January 2000, JRM instituted an arbitration proceeding against Texaco seeking the amount owed. Texaco has countered with a lawsuit, claiming consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor. The court has dismissed Texaco's counterclaims for consequential damages but the dismissal is on appeal. Texaco has also filed a lawsuit against a number of other parties, claiming that they are responsible for the incident. It is our position that the installation contract between the parties prohibits Texaco's claims against JRM and JRM is entitled to the amount withheld. Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance or warranty related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position or results of operations. See Note 8 regarding B&W's potential liability for non-employee asbestos claims and the Chapter 11 reorganization proceedings recently commenced by B&W and certain of its subsidiaries. 46 47 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Shareholders held on May 2, 2000, we submitted the following matters to our shareholders with voting as follows: (a) The election of three directors: Class III - For a three-year term
Nominee Votes For Votes Withheld ------- ---------- -------------- Robert L. Howard 53,102,578 689,099 Roger E. Tetrault 53,090,487 701,190 John N. Turner 53,094,103 697,574
Joe B. Foster, Philip J. Burguieres, Bruce DeMars, John W. Johnstone, Jr., Kathryn D. Sullivan and Richard E. Woolbert also continued as directors immediately after the meeting. (b) A proposal to retain PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 31, 2000: Votes For Votes Against ---------- ------------- 53,341,181 126,595 On August 1, 2000, Roger E. Tetrault retired as MII's Chairman of the Board and Chief Executive Officer and Bruce W. Wilkinson was elected by MII's Board of Directors to replace him. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended June 30, 2000. 47 48 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McDERMOTT INTERNATIONAL, INC. /s/ Daniel R. Gaubert ------------------------------ By: Daniel R. Gaubert Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) August 11, 2000 48 49 EXHIBIT INDEX
Exhibit Description - ------- ----------- 3.2 Amended and Restated By-laws of McDermott International, Inc. 27 Financial Data Schedule
49 EX-3.2 2 ex3-2.txt AMENDED/RESTATED BYLAWS OF MCDERMOTT INTERNATIONAL 1 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF McDERMOTT INTERNATIONAL, INC. (as amended to March 1, 2000 ) ARTICLE I Meetings of Stockholders Section 1. The annual and any special meetings of the stockholders shall be held on the date and at the time and place designated in the notice of such meetings or in a duly executed waiver of notice thereof. Section 2. A special meeting of the stockholders may be held at any time upon the call of the Chief Executive Officer or by order of the Board of Directors. Section 3. Whether or not a quorum is present at any stockholders' meeting, the meeting may be adjourned from time to time by the vote of the holders of a majority of the voting power of the shares of the outstanding capital stock of the Company present in person or represented by proxy at the meeting, as they shall determine. Section 4. Holders of a majority of the voting power of the shares of the outstanding capital stock of the Company entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of all business at any meeting of the stockholders. 2 Section 5. In all matters arising at stockholders' meetings, a majority of the voting power of the shares of the outstanding capital stock of the Company present in person or represented by proxy at the meeting shall be necessary and sufficient for the transaction of any business, except where some larger percentage is affirmatively required by law or by the certificate of incorporation. Section 6. At any meeting of stockholders, the chairman of the meeting may appoint two inspectors who shall subscribe an oath or affirmation to execute faithfully the duties of inspectors with strict impartiality and according to the best of their ability, to canvass the votes on any matter and make and sign a certificate of the result thereof. No candidate for the office of director shall be appointed as such inspector with respect to the election of directors. Such inspectors shall be appointed upon the request of the holders of ten percent (10%) or more of the voting power of the shares of the outstanding capital stock of the Company present and entitled to vote on such matter. Section 7. All elections of directors shall be by ballot. The chairman of the meeting may cause a vote by ballot to be taken upon any other matter, and such vote by ballot shall be taken upon the request of the holders of ten percent (10%) or more of the voting power of the shares of the outstanding capital stock of the Company present and entitled to vote on such matter. -2- 3 Section 8. The meetings of the stockholders shall be presided over by the Chief Executive Officer, or if he is absent or unable to preside, by the Chairman and if neither the Chief Executive Officer nor the Chairman is present or able to preside, then by a Vice Chairman; if more than one Vice Chairman is present and able to preside the Vice Chairman who shall have held such office for the longest period of time shall preside; if neither the Chief Executive Officer nor the Chairman nor a Vice Chairman is present and able to preside, then the President shall preside; if none of the above is present and able to preside, then a person shall be elected at the meeting to preside over same. The Secretary of the Company, if present, shall act as secretary of such meetings or, if he is not present, an Assistant Secretary shall so act; if neither the Secretary nor an Assistant Secretary is present, then a secretary shall be appointed by the person presiding over the meeting. The order of business shall be as follows: (a) Calling of meeting to order (b) Election of chairman and the appointment of a secretary, if necessary (c) Presentation of proof of the due calling of the meeting (d) Presentation and examination of proxies (e) Settlement of the minutes of the previous meeting (f) Reports of officers and committees (g) The election of directors, if an annual meeting, or a meeting called for that purpose -3- 4 (h) Unfinished business (i) New business (j) Adjournment. Section 9. At every meeting of the stockholders, all proxies shall be received and taken in charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions touching the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless inspectors shall have been appointed, in which event such inspectors shall perform such duties and decide such questions with respect to the matter for which they have been appointed. Section 10. At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors, or (b) by any stockholder of the Company of record at the time of giving of the notice provided for in this Section, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before a stockholder meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice must be addressed to the attention of the Secretary and delivered to or mailed and received at the principal executive offices of the Company not less than 90 days nor more than 120 -4- 5 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. The stockholder's notice shall set forth (i) the name and address of the stockholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal or nomination is made; (ii) a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the Company which are owned by the stockholder and the number of shares which are beneficially owned by the beneficial owner, if any; (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons or to propose the business specified in the notice; and (iv) as to each person the stockholder proposes to nominate for election or re-election as a director, the name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the rules of the Securities and Exchange Commission had such nominee been nominated by the Board -5- 6 of Directors, and a description of any arrangements or understandings between the stockholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made, and the written consent of each such nominee to being named in the proxy statement as a nominee and to serve as a director if elected; or, as to each matter the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest of the stockholder in such business. The chairman of the meeting may refuse to permit any business to be brought before an annual meeting by a stockholder not in compliance with the provisions of this Section. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, and with all other applicable laws, rules and regulations, with respect to the matters set forth in this Section. ARTICLE II Directors Section 1. The business and affairs of the Company shall be managed by its Board of Directors in accordance with the provisions of the Articles of Incorporation. The number of Directors shall be as provided in the Articles of Incorporation. -6- 7 Section 2. Meetings of the Board of Directors may be called by the Chairman or by the Chief Executive Officer or by a majority of the directors by giving notice to each director. Section 3. Meetings of the Board of Directors shall be presided over by the Chairman, or if the Chairman so requests or is absent or unable to preside, by the Chief Executive Officer; if neither the Chairman nor the Chief Executive Officer is present and able to preside, then by a Vice Chairman; if more than one Vice Chairman is present and able to preside, the Vice Chairman who shall have held such office for the longest period of time shall preside; if neither the Chairman nor the Chief Executive Officer nor a Vice Chairman is present and able to preside, then the President shall preside; if none of the above is present and able to preside, then one of the Directors shall be elected at the meeting to preside over same. Section 4. Whether or not a quorum is present at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting from time to time as they may determine. Notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. Any business may be transacted at the adjourned meeting which might have been transacted at the original meeting. Section 5. Any committee of the Board of Directors shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Company to the -7- 8 extent provided in the resolution by which such committee is designated, except that no such committee shall have authority to alter or amend the By-Laws, or to fill vacancies in either the Board of Directors or its own membership. In the absence or disqualification of any member of such a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Each such committee shall meet at stated times or on notice to all by any of its own number. It shall fix its own rules of procedure. A majority shall constitute a quorum and the affirmative vote of a majority of those present at a meeting at which a quorum is present shall be the act of such committee. Each such committee shall keep minutes of its proceedings. Section 6. Directors shall receive as compensation for their services an amount in addition to actual expenses incident to the attending of meetings to be fixed by resolution of the Board of Directors. Nothing in this section shall be construed to preclude a Director from serving the Company in any other capacity and receiving compensation therefor. Section 7. A Director shall not serve past his attaining the age of 70, and any such Director who attains age 70 during a term to which he was elected shall immediately resign and retire from the Board of Directors; provided, however, that any Director -8- 9 of the Company as of November 13, 1998 who is, or will attain during his current term, the age of 70 may continue to serve as a Director for the remainder of such Director's current term, and that up to 10% of the Directors, but in no event less than one Director, may serve beyond age 70, and up to age 72, with the approval of The Directors' Nominating and Governance Committee. No person shall be nominated for election or serve as a Director who has served as a Director of the Company, together with its parent and subsidiary companies, for a cumulative period of twenty (20) years and any such person whose service as a Director totals twenty (20) years during a term to which he is elected shall resign and retire from the Board of Directors as of the next annual meeting of the stockholders. Section 8. A Director of this Corporation who is, under Section 411(a) of the Employee Retirement Income Security Act of 1974 of the United States of America, under a disability to serve as a fiduciary of an employee benefit plan, as that term is defined in Section 3(3) of said Act shall not serve as a fiduciary of any such employee benefit plan with respect to which the Company or any of its subsidiaries is an employer as defined in Section 3(5) of said Act; and, during the period of such disability, such Director shall be precluded from acting in any manner with respect to any such plan. Any Director who is disabled from serving as a fiduciary of an employee benefit plan under Section 411(a) of said Act shall be requested to consent, in writing, to the applicability of this By-Law to him. -9- 10 ARTICLE III Officers Section 1. The officers of this Company shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders or from time to time and shall hold office until their successors are elected and qualify, or until their earlier death, resignation or removal. Such officers shall consist of a Chairman of the Board of Directors, a Chief Executive Officer, one or more Vice Chairmen of the Board of Directors, a President, one or more Vice Presidents, a Secretary, a Treasurer and one or more Controllers. In these By-Laws, the Chairman of the Board of Directors is sometimes referred to as "Chairman", and the Vice Chairman or Vice Chairmen of the Board of Directors are sometimes referred to as "Vice Chairman" or "Vice Chairmen", respectively. The Board of Directors may in addition elect at such meeting or from time to time one or more Assistant Secretaries and one or more Assistant Treasurers and one or more Assistant Controllers. Any number of offices may be held by the same person. Section 2. The officers shall have such powers and duties as may be provided in these By-Laws and as may be conferred upon or assigned to them by the Board of Directors from time to time. Section 3. The Chairman shall preside over meetings of the Board of Directors, as stated elsewhere in these By-Laws. -10- 11 Section 4. The Chief Executive Officer shall preside over meetings of the shareholders, as stated elsewhere in these By-Laws; subject to the direction of the Board of Directors, he shall have and exercise direct charge of and general supervision over all business and affairs of the Company and shall perform all duties incident to the office of the Chief Executive Officer of a corporation, and such other duties as may be assigned to him by the Board of Directors. Section 5. Each Vice Chairman of the Board of Directors shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 6. The President shall be the Chief Operating Officer of the Company and shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 7. Each Vice President shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 8. Each Controller shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. -11- 12 Section 9. The Secretary shall give proper notice of meetings of stockholders and directors, shall be custodian of the book in which the minutes of such meetings are kept, and shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chief Executive Officer. Section 10. The Treasurer shall keep or cause to be kept accounts of all monies of the company received or disbursed, shall deposit or cause to be deposited all monies and other valuables in the name of and to the credit of the Company in such banks and depositories as the Board of Directors shall designate, and shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chief Executive Officer. All checks or other instruments for the payment of money shall be signed in such a manner as the Board of Directors may from time to time determine. Section 11. Any officers of the Company may be removed, with or without cause, by resolution adopted by the Board of Directors at a meeting called for that purpose. ARTICLE IV Seals The corporate seal of this Company shall be a circular seal with the name of the Company around the border and the word "SEAL" in the center. -12- 13 ARTICLE V Any of these By-Laws may be amended, altered or repealed and additional By-Laws may be adopted by the Board of Directors by the affirmative vote of a majority of the whole Board cast at a meeting duly held, except that the vote of two-thirds of the outstanding shares of the Company entitled to vote shall be required to amend, alter or repeal Section 1 or Section 9 of Article II or this Article V (as it applies to said Section 1 and 9 of Article II) of these By-Laws. ARTICLE VI Indemnification Section 1. Each person (and the heirs, executors and administrators of such person) who is or was a director or officer of the Company shall in accordance with Section 2 of this Article VI be indemnified by the Company against any and all liability and reasonable expense that may be paid or incurred by him in connection with or resulting from any actual or threatened claim, action, suit or proceeding (whether brought by or in the right of the Company or otherwise), civil, criminal, administrative or investigative, or in connection with an appeal relating thereto, in which he may become involved, as a party or otherwise, by reason of his being or having been a director or officer of the Company or, if he shall be serving or shall have served in such capacity at the request of the Company, a director, officer, employee or agent of another corporation or -13- 14 any partnership, joint venture, trust or other entity whether or not he continues to be such at the time such liability or expense shall have been paid or incurred, provided such person acted, in good faith, in a manner he reasonably believed to be in or not opposed to the best interest of the Company and in addition, in criminal actions or proceedings, had no reasonable cause to believe that his conduct was unlawful. As used in this ARTICLE VI, the terms, "liability" and "expense" shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against, and amounts paid in settlement by, such director or officer. The termination of any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, or investigative, by judgment, settlement (whether with or without court approval), conviction or upon a plea of guilty or nolo contendere, or its equivalent, shall not create a presumption that such director or officer did not meet the standards of conduct set forth in this Section 1. Section 2. Every such director and officer shall be entitled to indemnification under Section 1 of this ARTICLE VI with respect to any claim, action, suit or proceeding of the character described in such Section 1 in which he may become in any way involved as set forth in such Section 1, if (i) he has been wholly successful on the merits or otherwise in respect thereof, or (ii) the Board of Directors acting by a majority vote of a quorum consisting of directors who are not parties to (or who have been wholly successful with respect to) such claim, -14- 15 action, suit or proceeding, finds that such director or officer has met the standards of conduct set forth in such Section 1 with respect thereto, or (iii) a court determines that he has met such standards with respect thereto, or (iv) independent legal counsel (who may be the regular counsel of the Company) deliver to the Company their written advice that, in their opinion, he has met such standards with respect thereto. Section 3. Expenses incurred with respect to any claim, action, suit or proceeding of the character described in Section 1 of this ARTICLE VI may be advanced by the Company prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount unless it is ultimately determined that he is entitled to indemnification under this ARTICLE VI. Section 4. The rights of indemnification under this ARTICLE VI shall be in addition to any rights to which any such director or officer or any other person may otherwise be entitled by contract or as a matter of law. -15- EX-27 3 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S JUNE 30, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 6-MOS DEC-31-2000 JUN-30-2000 85,842 54,679 239,646 48,607 115,784 562,277 1,262,522 894,376 1,996,026 613,251 318,314 0 0 62,080 725,050 1,996,026 1,078,999 1,078,999 1,057,067 1,057,067 0 0 19,801 7,076 9,256 (2,180) 0 0 0 (2,180) (0.04) (0.04)
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