-----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, UrdQQ2QKooNRARcwgkn21aaJOOm+2OgYafp1g/drnjos4bvYC9B1RNE8aD+lsuZZ up3LRopumRxY97JRok00qg== 0000950134-99-009907.txt : 19991115 0000950134-99-009907.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950134-99-009907 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 720593134 STATE OF INCORPORATION: R1 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08430 FILM NUMBER: 99749404 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045875400 MAIL ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70161 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to______________ Commission File No. 1-8430 McDERMOTT INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1450 Poydras Street, New Orleans, Louisiana 70112-6050 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (504) 587-5400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The number of shares outstanding of the Company's Common Stock at October 29, 1999 was 59,542,673. 2 M c D E R M O T T I N T E R N A T I O N A L, I N C. I N D E X - F O R M 1 0 - Q
PAGE ---- PART I - FINANCIAL INFORMATION - ------------------------------ Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet September 30, 1999 and March 31, 1999 4 Condensed Consolidated Statement of Income Three and Six Months Ended September 30, 1999 and 1998 6 Condensed Consolidated Statement of Comprehensive Income Three and Six Months Ended September 30, 1999 and 1998 7 Condensed Consolidated Statement of Cash Flows Six Months Ended September 30, 1999 and 1998 8 Notes to Condensed Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 23 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings 37 Item 4 - Submission of Matters to a Vote of Security Holders 41 Item 5 - Shareholders Proposals for 2000 41 Item 6 - Exhibits and Reports on Form 8-K 42 SIGNATURES 43 - ---------- 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 SHEET ASSETS
9/30/99 3/31/99 ------- ------- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 108,552 $ 181,503 Investments 116,077 55,646 Accounts receivable - trade, net 367,094 281,667 Accounts receivable - unconsolidated affiliates 33,511 165,154 Accounts receivable - other 205,172 125,631 Environmental and products liabilities recoverable - current 241,009 228,738 Contracts in progress 163,613 179,310 Inventories 55,199 52,656 Deferred income taxes 83,879 73,364 Other current assets 31,678 31,697 ----------------- ------------------ Total Current Assets 1,405,784 1,375,366 ----------------- ------------------ Property, Plant and Equipment 1,448,464 1,460,639 Less accumulated depreciation 1,012,593 1,026,678 ----------------- ------------------ Net Property, Plant and Equipment 435,871 433,961 ----------------- ------------------ Investments: Government obligations 177,379 473,072 Other investments 110,151 378,181 ----------------- ------------------ Total Investments 287,530 851,253 ----------------- ------------------ Products Liabilities Recoverable 972,274 1,167,113 ----------------- ------------------ Excess of Cost over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $112,962,000 at September 30, 1999 and $104,444,000 at March 31, 1999 448,447 125,436 ----------------- ------------------ Prepaid Pension Costs 145,331 130,437 ----------------- ------------------ Other Assets 199,771 221,954 ----------------- ------------------ TOTAL $ 3,895,008 $ 4,305,520 ================= ==================
See accompanying notes to condensed consolidated financial statements. 4 5 LIABILITIES AND STOCKHOLDERS' EQUITY
9/30/99 3/31/99 ------- ------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 133,847 $ 31,126 Accounts payable 163,413 198,500 Environmental and products liabilities - current 292,833 259,836 Accrued employee benefits 90,658 132,105 Accrued contract costs 40,111 51,619 Advance billings on contracts 197,253 240,380 Other current liabilities 332,925 352,845 ----------------- ------------------ Total Current Liabilities 1,251,040 1,266,411 ----------------- ------------------ Long-Term Debt 323,162 323,774 ----------------- ------------------ Accumulated Postretirement Benefit Obligation 121,959 128,188 ----------------- ------------------ Environmental and Products Liabilities 1,109,189 1,334,096 ----------------- ------------------ Other Liabilities 268,544 263,950 ----------------- ------------------ Commitments and Contingencies. Minority Interest 1,104 195,367 ----------------- ------------------ Stockholders' Equity: Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 61,443,287 at September 30, 1999 and 61,147,775 at March 31, 1999 61,443 61,148 Capital in excess of par value 1,045,975 1,028,393 Accumulated deficit (182,703) (200,432) Treasury stock at cost, 2,000,614 shares at September 30, 1999 and March 31, 1999 (62,731) (62,731) Accumulated other comprehensive loss (41,974) (32,644) ----------------- ------------------ Total Stockholders' Equity 820,010 793,734 ----------------- ------------------ TOTAL $ 3,895,008 $ 4,305,520 ================= ==================
5 6 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/99 9/30/98 9/30/99 9/30/98 ------- ------- ------- ------- (Unaudited) (In thousands) Revenues $ 595,870 $ 779,983 $ 1,243,754 $ 1,599,792 ----------- ----------- ----------- ----------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 499,495 630,176 1,037,137 1,309,853 Depreciation and amortization 22,713 21,738 44,152 48,297 Selling, general and administrative expenses 50,292 57,534 102,290 112,044 ----------- ----------- ----------- ----------- 572,500 709,448 1,183,579 1,470,194 ----------- ----------- ----------- ----------- Gain (Loss) on Asset Disposals and Impairments - Net 907 (1,726) (1,290) 40,721 ----------- ----------- ----------- ----------- Operating Income before Income (Loss) from Investees 24,277 68,809 58,885 170,319 Income (Loss) from Investees (6,759) (3,157) (7,113) 13,746 ----------- ----------- ----------- ----------- Operating Income 17,518 65,652 51,772 184,065 ----------- ----------- ----------- ----------- Other Income (Expense): Interest income 9,611 25,711 24,653 58,436 Interest expense (13,034) (15,619) (25,173) (32,236) Minority interest (56) (12,361) (4,285) (50,052) Other-net 941 (5,671) 620 35,886 ----------- ----------- ----------- ----------- (2,538) (7,940) (4,185) 12,034 ----------- ----------- ----------- ----------- Income before Provision for Income Taxes 14,980 57,712 47,587 196,099 Provision for Income Taxes 11,362 6,097 23,926 22,923 ----------- ----------- ----------- ----------- Net Income $ 3,618 $ 51,615 $ 23,661 $ 173,176 =========== =========== =========== =========== Earnings per Common Share: Basic $ 0.06 $ 0.88 $ 0.40 $ 2.92 Diluted $ 0.06 $ 0.85 $ 0.40 $ 2.76 =========== =========== =========== =========== 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 STATEMENT OF COMPREHENSIVE INCOME
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/99 9/30/98 9/30/99 9/30/98 ------- ------- ------- ------- (Unaudited) (In thousands) Net Income $ 3,618 $ 51,615 $ 23,661 $ 173,176 --------- --------- --------- --------- Other Comprehensive Income: Currency translation adjustments: Foreign currency translations adjustments 12,120 1,028 4,338 2,436 Sales of investments in foreign entities -- -- -- 15,596 Purchase of J. Ray McDermott, S.A. minority interest (5,695) -- (5,695) -- Minimum pension liability adjustment -- -- (9) -- Unrealized losses (gains) on investments: Unrealized losses (gains) arising during the period, net of taxes of $68,000 for the three months ended September 30, 1999 and $313,000 and $35,000, respectively, for the nine months ended September 30, 1999 and 1998 (1,443) 7,267 (8,103) 7,666 Reclassification adjustment for losses (gains) included in net income, net of taxes of $3,000 for the nine months ended September 30, 1999 (3) (870) 139 (975) --------- --------- --------- --------- Other Comprehensive Income (Loss) 4,979 7,425 (9,330) 24,723 --------- --------- --------- --------- Comprehensive Income $ 8,597 $ 59,040 $ 14,331 $ 197,899 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 7 8 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED 9/30/99 9/30/98 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 23,661 $ 173,176 --------- --------- Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 44,152 48,297 Income (loss) from investees, less dividends 14,015 (9,169) Loss (gain) on asset disposals and impairments - net 1,290 (40,721) Provision for (benefit from) deferred taxes 6,196 (5,829) Other 3,253 2,281 Changes in assets and liabilities, net of effects of divestitures: Accounts receivable (30,144) 69,297 Net contracts in progress and advance billings (27,247) 16,755 Accounts payable (36,000) (46,487) Accrued and other current liabilities (39,792) 45,893 Other, net 2,697 13,285 Proceeds from insurance for products liabilities claims 116,655 106,099 Payments of products liabilities claims (186,324) (130,466) --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (107,588) 242,411 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (34,904) (30,100) Acquisition of minority interest in J. Ray McDermott, S. A (526,604) -- Purchases of available-for-sale securities (93,702) (425,262) Sales of available-for-sale securities 380,223 209,734 Maturities of available-for-sale securities 209,007 272,966 Proceeds from asset disposals 2,627 127,805 Other (4,086) (2,042) --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (67,439) 153,101 --------- ---------
8 9 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED 9/30/99 9/30/98 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (30,722) $ (43,716) Increase (decrease) in short-term borrowing 133,455 (10,139) Issuance of common stock 1,447 3,380 Issuance of subsidiary's stock 3,253 1,281 Dividends paid (5,916) (7,920) Purchases of McDermott International, Inc. stock -- (59,156) Acquisition of subsidiary's common stock -- (55,560) Acquisition of subsidiary's preferred stock -- (154,631) Other (255) (651) ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 101,262 (327,112) ------------ ------------ EFFECTS OF EXCHANGE RATE CHANGES ON CASH 814 (342) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (72,951) 68,058 ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 181,503 277,876 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 108,552 $ 345,934 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 25,882 $ 33,385 Income taxes - net $ 31,121 $ 12,115 ============ ============
See accompanying notes to condensed consolidated financial statements. 9 10 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes: o J. Ray McDermott, S.A. ("JRM"), a subsidiary of MII, o McDermott Incorporated ("MI"), a subsidiary of MII, o Babcock & Wilcox Investment Company ("BWICO"), a subsidiary of MI, o The Babcock & Wilcox Company ("B&W"), a subsidiary of BWICO, and o BWX Technologies, Inc. ("BWXT"), a subsidiary of BWICO. Unless the context otherwise requires, hereinafter, the terms "McDermott" , "we" and "our" will be used to mean the consolidated enterprise. On August 3, 1999, MII's Board of Directors approved the change of MII's fiscal year from a year ending on March 31, which was the fiscal year end used in its most recent report on Form 10-K filed with the Securities and Exchange Commission, to the new fiscal year end of December 31. MII's report on Form 10-K for the nine-month period ending December 31, 1999 will cover the transition period. The accompanying unaudited condensed consolidated financial statements are presented in U. S. Dollars, and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments are of a normal, recurring nature except for the following: In the three and six months ended September 30, 1998: o an $8,000,000 settlement of punitive damage claims in a civil suit associated with a Pennsylvania facility formerly operated by B&W. In the six months ended September 30, 1998: o a gain on the dissolution of a joint venture of $37,390,000, o a gain on the settlement and curtailment of postretirement benefit plans of $27,642,000, o interest income of $18,630,000 on settlement of outstanding Internal Revenue Service exposure items, and o a gain of $12,000,000 from the sale of assets of a joint venture. Operating results for the six months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the nine months ending December 31, 1999. For further information, refer to the 10 11 consolidated financial statements and related footnotes included in MII's annual report on Form 10-K for the fiscal year ended March 31, 1999. NOTE 2 - PRODUCTS LIABILITY As a result of asbestos-containing commercial boilers and other products sold or installed in prior decades by B&W and certain of its subsidiaries, B&W is subject to a substantial volume of non-employee products liability claims. 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 plueral changes). McDermott has insurance coverage for these asbestos products liability claims against B&W, which coverage is subject to varying insurance limits that are dependent upon the year involved. Pursuant to agreements with the majority of our principal insurers concerning the method of allocation of claim payments to the years of coverage, we negotiate and settle these claims and bill the appropriate amounts to the insurers. Since these claims began in the early 1980s, we have engaged in a strategy of grouping claims that meet certain basic criteria and settling them at the lowest average cost per claim possible. While we have rejected claims that we deemed invalid, as a general practice we do not litigate asbestos liability claims. We believe that this settlement strategy has allowed us to use our available insurance to discharge B&W's asbestos liability claims efficiently by minimizing associated legal and administrative costs. McDermott has recognized provisions in its financial statements to the extent that settled claim payments are not recoverable from insurers. At September 30 and March 31, 1999, McDermott had recorded the following with respect to asbestos products liability claims and related insurance recoveries:
September 30, March 31, 1999 1999 ---- ---- (Unaudited) (In thousands) Asbestos products liability: Current $ 278,500 $ 240,000 Non-current 1,097,539 1,322,363 ------------ ------------ Total $ 1,376,039 $ 1,562,363 ============ ============ Asbestos products liability insurance recoverable: Current $ 240,400 $ 199,750 Non-current 972,274 1,167,113 ------------ ------------ Total $ 1,212,674 $ 1,366,863 ============ ============
11 12 Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from B&W's prior claims history and constitute management's best estimate of such future cost, including recoverability from insurers. Estimates of insurance recoveries are based upon management's analysis of insurance coverage and insurer solvency. Inherent in the estimate of these liabilities are expected trend claim severity and frequency and other factors, which may vary significantly as claims are filed and settled. Such estimates are based upon management's expectation that new claims will conclude within the next 12 1/2 years, that there will be a significant decline in new claims received after 3 1/2 years, and that the average cost per claim will continue to increase only moderately. Future costs to settle claims, as well as the number of claims, could be adversely affected by changes in judicial rulings and other influences beyond our control. Any changes in the estimates of future asbestos products liability and insurance recoverables or differences between the proportion of any additional asbestos products liabilities covered by insurance and that experienced in the past could result in material changes to the results of operations for any fiscal quarter or year. Consequently, B&W's ultimate loss for non-employee asbestos liability claims may differ materially from amounts provided in the consolidated financial statements and may have a material adverse effect on McDermott's and B&W's results of operations and financial position. Recently, B&W has experienced an increase in the amounts demanded by certain plaintiff's attorneys to settle mesothelioma, lung cancer and asbestosis claims. The demanded amounts significantly exceed the average amount of B&W's historical settlement payments for these types of claims. We are evaluating this development to determine if it is representative of the amounts required to settle these types of claims in the future and its overall impact on the estimates and forecasts of B&W's ultimate exposure for non-employee asbestos claims. If we are unsuccessful in negotiating the demanded amounts down to historical levels, which typically have included moderate annual increases, B&W may be forced to accept higher settlement amounts, begin litigating such claims or take other available courses of action. Any of these actions could have a material adverse impact on B&W's ultimate exposure for asbestos liability claims and McDermott's (including B&W's) consolidated financial position, results of operations and business prospects. 12 13 NOTE 3 - INVENTORIES Inventories at September 30 and March 31, 1999 are summarized below:
September 30, March 31, 1999 1999 ---- ---- (Unaudited) (In thousands) Raw Materials and Supplies $ 40,285 $ 37,481 Work in Progress 6,128 7,606 Finished Goods 8,786 7,569 ------------------ ------------------ $ 55,199 $ 52,656 ================== ==================
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss included in stockholders' equity at September 30 and March 31, 1999 are as follows:
September 30, March 31, 1999 1999 ---- ---- (Unaudited) (In thousands) Currency Translation Adjustments $ (29,119) $ (27,762) Net Unrealized Gain (Loss) on Investments (7,058) 906 Minimum Pension Liability (5,797) (5,788) ------------------ ------------------ $ (41,974) $ (32,644) ================== ==================
NOTE 5 - ACQUISITIONS In the six months ended September 30, 1999, MII acquired all of the publicly held shares of JRM common stock in a two-step acquisition. On June 10, 1999, MII purchased 14,353,490 shares in a tender offer for the publicly held shares of JRM for $35.62 per share. Together with the 24,668,297 shares held by MII, the tendered shares represented approximately 99.5% of the shares of JRM common stock outstanding at the expiration of the tender offer. On July 30, 1999, the remaining 227,348 shares of JRM common stock were acquired for the same price in cash in a second-step merger. For financial statement purposes, the acquisition was accounted for using the purchase method of accounting. The aggregate purchase price was approximately $534,339,000, including direct acquisition costs of approximately $8,833,000. The excess of the purchase price over net assets acquired approximated $331,530,000 at September 30, 1999. This goodwill is being amortized over twenty years. The financial 13 14 statements reflect the preliminary allocation of purchase price, as the purchase price allocation has not yet been finalized. This acquisition has eliminated the minority interest in JRM. During the three months ended June 30, 1999, MII recorded minority interest expense of $4,005,000 related to JRM. In the three and six months ended September 30, 1998, MII's minority interest expense related to JRM was $15,174,000 and $49,110,000, respectively. NOTE 6 - 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. After receiving the allegations, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture, 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, North Sea and Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. In July 1999, a former JRM officer was indicted by the Department of Justice for participating in an international bid-rigging conspiracy for the sale of marine construction services and pled guilty. We have cooperated and are continuing to cooperate with the Department of Justice in its investigation. The Department of Justice also has requested additional information from us relating to possible anti-competitive 14 15 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 certain 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, North Sea and Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. In August 1999, Statoil filed its notice of appeal of the dismissal. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining claims in the lawsuit. That motion is pending. In June 1998, Shell Offshore, Inc. and certain 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"). Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc. and The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C. and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A. intervened (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) as plaintiffs in the Shell Litigation. Also, in December 1998, Total Oil Marine p.l.c. and Norsk 15 16 Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. We are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether MII and JRM may have violated U.S. securities laws in connection with, but not limited to, the matters described above. MII and JRM are subject to a 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 (the "Consent Decree"). The Consent 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 the Consent 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, MII formed and continues to maintain a special committee of its 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. However, these matters could result in civil and criminal liability and have a material adverse effect on McDermott's consolidated financial position and results of operations. B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania involving approximately 200 separate cases relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"), alleging, among other things, that they suffered personal injury and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and Atlantic Richfield Company liable to the plaintiffs in the first eight cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the court set aside the judgement and ordered a new trial on all issues. Recently, the court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters. We do not expect any further trials on the other cases until a decision is rendered on the appeal. We believe that adequate insurance is available to meet any possible liability in this matter. However, there is a controversy between B&W and its insurers as to the amount of insurance coverage under the insurance policies covering these facilities. B&W has filed an action seeking a judicial determination of this matter, which is currently pending in a Pennsylvania court. We believe 16 17 that any award and all other claims will be resolved within the limits and coverage of such insurance policies; however, no assurance on insurance coverage or financial impact if limits of coverage are exceeded can be given. In connection with the foregoing, B&W settled all pending and future punitive damage claims represented by the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks reimbursement of this amount from other parties. Two purported class actions were filed in March and April 1999 in the Civil District Court for the Parish of Orleans, State of Louisiana, by alleged public shareholders of JRM, challenging MII's initial proposal to acquire the publicly traded shares of JRM common stock in a stock for stock merger. This initial proposal was subsequently abandoned and MII later acquired all of JRM's publicly traded common stock for $35.62 per share pursuant to a cash tender offer followed by a second-step cash merger. In September 1999, these actions were dismissed by the court without prejudice. Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation related to our business activities. It is management's opinion that none of this litigation will have a material adverse effect on McDermott's consolidated financial position or results of operations. NOTE 7 - 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. 17 18 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 the manufacturing of auxiliary equipment such as air-cooled heat exchangers and replacement parts. Industrial Operations also includes contract research activities. Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, non-employee products liability asbestos claims provisions, contract and insurance claims provisions, legal expenses and gains on sales of corporate assets. Other reconciling items to income before provision for income taxes are interest income, interest expense, minority interest and other-net. Assets excluded from segment assets are primarily insurance recoverables for products liability claims, excess cost over fair value of net assets purchased, investments and prepaid pension costs. Amortization of the excess of cost over fair value of net assets purchased was allocated to the reportable segments for all periods presented. 18 19 Segment Information for the Three and Six Months ended September 30, 1999 and 1998.
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/99 9/30/98 9/30/99 9/30/98 ------- ------- ------- ------- (Unaudited) (In thousands) REVENUES: Marine Construction Services $ 175,179 $ 349,099 $ 333,984 $ 719,651 Power Generation Systems 203,688 223,755 471,142 482,884 Government Operations 109,357 100,740 202,247 201,156 Industrial Operations 107,039 108,897 239,165 199,078 Adjustments and Eliminations (1) 607 (2,508) (2,784) (2,977) ----------- ----------- ------------ ------------ Total Revenues $ 595,870 $ 779,983 $ 1,243,754 $ 1,599,792 =========== =========== ============ ============ (1) Segment revenues are net of the following intersegment transfers and other adjustments: Marine Construction Services Transfers $ 528 $ 755 $ 952 $ 2,077 Power Generation Systems Transfers 60 (13) 1,201 424 Government Operations Transfers 308 73 621 131 Industrial Operations Transfers 129 92 168 103 Adjustments and Eliminations (1,632) 1,601 (158) 242 ----------- ----------- ------------ ------------ Total $ (607) $ 2,508 $ 2,784 $ 2,977 =========== =========== ============ ============
19 20
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/99 9/30/98 9/30/99 9/30/98 ------- ------- ------- ------- (Unaudited) (In thousands) OPERATING INCOME: Segment Operating Income: Marine Construction Services $ 4,013 $ 55,028 $ 21,321 $ 92,267 Power Generation Systems 15,665 15,161 32,036 34,648 Government Operations 7,194 6,322 17,104 11,777 Industrial Operations 4,364 5,500 8,736 9,362 --------- --------- --------- --------- Total Segment Operating Income $ 31,236 $ 82,011 $ 79,197 $ 148,054 --------- --------- --------- --------- Gain (Loss) on Asset Disposals and Impairments - Net: Marine Construction Services $ 638 $ (1,969) $ (1,212) $ 43,078 Power Generation Systems 273 81 1,276 205 Government Operations (4) 132 (4) 138 Industrial Operations -- 10 1 75 --------- --------- --------- --------- Total Gain (Loss) on Asset Disposals and Impairments - Net $ 907 $ (1,746) $ 61 $ 43,496 --------- --------- --------- --------- Income (Loss) from Investees: Marine Construction Services $ (5,724) $ (3,782) $ (6,813) $ 9,733 Power Generation Systems (1,506) 732 (1,018) 3,709 Government Operations 700 561 1,339 1,207 Industrial Operations (229) (668) (621) (903) --------- --------- --------- --------- Total Income (Loss) from Investees $ (6,759) $ (3,157) $ (7,113) $ 13,746 --------- --------- --------- --------- SEGMENT INCOME (LOSS): Marine Construction Services $ (1,073) $ 49,277 $ 13,296 $ 145,078 Power Generation Systems 14,432 15,974 32,294 38,562 Government Operations 7,890 7,015 18,439 13,122 Industrial Operations 4,135 4,842 8,116 8,534 --------- --------- --------- --------- Total Segment Income 25,384 77,108 72,145 205,296 --------- --------- --------- --------- Other Unallocated Items 1,799 (3,148) (196) (1,884) General Corporate Expenses - Net (9,665) (8,308) (20,177) (19,347) --------- --------- --------- --------- Total Operating Income $ 17,518 $ 65,652 $ 51,772 $ 184,065 ========= ========= ========= =========
20 21 NOTE 8 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/99 9/30/98 9/30/99 9/30/98 ------- ------- ------- ------- (Unaudited) (In thousands, except shares and per share amounts) Basic: Net income $ 3,618 $ 51,615 $ 23,661 $ 173,176 ----------- ----------- ----------- ----------- Weighted average common shares 59,035,083 58,835,380 58,988,577 59,362,161 ----------- ----------- ----------- ----------- Basic earnings per common share $ 0.06 $ 0.88 $ 0.40 $ 2.92 ----------- ----------- ----------- ----------- Diluted: Net income $ 3,618 $ 51,615 $ 23,661 $ 173,176 Dividends on Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock -- 1,202 -- 2,752 ----------- ----------- ----------- ----------- Net income for diluted computation $ 3,618 $ 52,817 $ 23,661 $ 175,928 ----------- ----------- ----------- ----------- Weighted average common shares (basic) 59,035,083 58,835,380 58,988,577 59,362,161 Effect of dilutive securities: Stock options and restricted stock 810,719 932,500 901,769 1,497,887 Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock -- 2,205,923 -- 2,512,301 Series C $2.875 Cumulative Convertible Preferred Stock -- -- -- 380,914 ----------- ----------- ----------- ----------- Adjusted weighted average common shares and assumed conversions 59,845,802 61,973,803 59,890,346 63,753,263 ----------- ----------- ----------- ----------- Diluted earnings per common share $ 0.06 $ 0.85 $ 0.40 $ 2.76 ----------- ----------- ----------- -----------
NOTE 9 - NEW ACCOUNTING STANDARDS During the six months ended September 30, 1999, McDermott adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," for accounting for the costs of start-up activities. SOP 98-5 requires that entities expense start-up costs and 21 22 organization costs as they are incurred. The effect of the adoption of SOP 98-5 on McDermott's consolidated financial position and results of operations was not material. 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 McDermott to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, " Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. We have not yet determined what the effect of SFAS No. 133 will have on McDermott's consolidated financial position or results of operations. 22 23 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes: o J. Ray McDermott, S.A. ("JRM"), a subsidiary of MII, o McDermott Incorporated ("MI"), a subsidiary of MII, o Babcock & Wilcox Investment Company ("BWICO"), a subsidiary of MI, o The Babcock & Wilcox Company ("B&W"), a subsidiary of BWICO, and o BWX Technologies, Inc. ("BWXT"), a subsidiary of BWICO. Unless the context otherwise requires, hereinafter, the terms "McDermott" , "we" and "our" will be used to mean the consolidated enterprise. Revenues of the Marine Construction Services segment are largely a function of the level of oil and gas development activity in the world's major hydrocarbon producing regions. Consequently, revenues reflect the variability associated with the timing of significant development projects. As a result of continuing lower oil prices, Marine Construction Services' customers have significantly reduced capital expenditures for exploration and production spending. At the current backlog level, we expect revenues to be as much as fifty percent lower than in the previous fiscal year, and profitability to be lower because of the volume decline. Economic and political instability in Asia have also had an adverse effect on the timing of exploration and production spending. Revenues of the Power Generation Systems segment are largely a function of capital spending by the electric power generation industry. In the electric power generation industry, persistent economic growth in the United States has brought the supply of electricity into approximate balance with energy demand, except at periods of peak demand. However, electric power producers have generally chosen to meet these peaks with new combustion turbines rather than with base-load capacity. New emissions requirements have also prompted some customers to place orders for environmental equipment. Demand for electrical power generation industry services and replacement nuclear steam generators continues at strong levels. International markets remain unsettled, and economic and political instability in Asia have caused projects in these emerging markets to be delayed, suspended or cancelled. In the process industry, demand for services remains strong, and the pulp and paper industry has begun to make inquiries relating to the refurbishment or replacement of existing recovery boilers. We expect operating activity of this segment to be about the same as in the previous fiscal year. Revenues of the Government Operations segment are largely a function of capital spending by the U.S. Government. We do not expect this segment to experience any significant growth as a result of reductions in 23 24 the defense budgets. However, this segment's backlog should remain relatively constant since this segment is the sole-source provider of nuclear fuel assemblies and nuclear reactor components to the U.S. Navy. We expect operating activity of this segment to be about the same as in the previous fiscal year. Revenues of Industrial Operations are affected by variations in the business cycles in its customers' industries and the overall economy. Legislative issues such as environmental regulations and fluctuations in U.S. Government funding patterns also affect Industrial Operations. Backlog for Industrial Operations has improved significantly from a year ago, primarily because of significant new contracts in engineering and construction. We expect operating activity of this segment to be about the same as in the previous fiscal year. In general, all of McDermott's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues. A significant portion of McDermott's revenues and operating results are derived from its foreign operations. As a result, McDermott's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. We attempt to minimize McDermott's exposure to changes in foreign currency exchange rates by matching foreign currency contract receipts with like foreign currency disbursements. To the extent that we are unable to match the foreign currency receipts and disbursements related to our contracts, we enter into forward exchange contracts to reduce the impact of foreign exchange rate movements on operating results. Statements made herein which express a belief, expectation or intention, as well as those that are not historical fact, are forward looking. They involve a number of risks and uncertainties that may cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include: o decisions about offshore developments to be made by oil and gas companies, o the deregulation of the U.S. energy market, o governmental regulation and the continued funding of McDermott's contracts with U.S. government agencies, o estimates for pending and future non-employee asbestos claims, o the highly competitive nature of McDermott's businesses, o operating risks associated with the marine construction services business, o economic and political conditions in Asia, o the results of our and the U.S. Department of Justice's ongoing investigation into possible anti-competitive practices by MII and JRM, and related civil lawsuits, and o the results of the ongoing SEC investigation into whether McDermott may have violated U.S. securities laws in connection with such anti-competitive practices and other matters. 24 25 RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998 Marine Construction Services Revenues decreased $173,920,000 to $175,179,000 due to lower volume in essentially all activities in all geographic areas. Segment operating income decreased $51,015,000 to $4,013,000, primarily due to lower volume and goodwill amortization associated with the purchase of JRM's minority interest. These decreases were partially offset by lower general and administrative expenses. Gain (loss) on asset disposals and impairments-net increased $2,607,000 from a loss of $1,969,000 to a gain of $638,000. The loss in the prior period was primarily due to the sale of a marine vessel. Loss from investees increased $1,942,000 to $5,724,000, primarily due to lower results from a Mexican joint venture partially offset by improved results from a Far East joint venture. Power Generations Systems Revenues decreased $20,067,000 to $203,688,000, primarily due to lower volume from the fabrication and erection of fossil fuel steam and environmental control systems, fabrication, repair and retrofit of existing facilities, private power systems projects and boiler cleaning equipment. These decreases were partially offset by higher volume from nuclear services and replacement nuclear steam generators. Segment operating income increased $504,000 to $15,665,000, primarily due to higher margins from fabrication, repair and retrofit of existing facilities and higher volume and margins from nuclear services and replacement nuclear steam generators. In addition, there were lower selling and general and administrative expenses. These increases were partially offset by lower volume and margins from fabrication and erection of fossil fuel steam and environmental control systems and boiler cleaning equipment. Income (loss) from investees decreased $2,238,000 from income of $732,000 to a loss of $1,506,000, primarily due to provisions to exit a joint venture located in Turkey. Government Operations Revenues increased $8,617,000 to $109,357,000, primarily due to higher volume from management and operation contracts for U. S. Government-owned facilities and from nuclear fuel assemblies and reactor components for the U.S. Government. 25 26 Segment operating income increased $872,000 to $7,194,000, primarily due to an $8,000,000 settlement in the prior period for punitive damages in a civil suit associated with a Pennsylvania facility formerly operated by B&W. This increase was partially offset by lower margins from commercial nuclear environmental services, nuclear fuel assemblies and reactor components for the U.S. Government and management and operation contracts for U. S. Government-owned facilities. Industrial Operations Revenues decreased $1,858,000 to $107,039,000, primarily due to lower volume from air-cooled heat exchangers, plant maintenance activities in Canadian operations and the parts business. These decreases were partially offset by higher volume from engineering activities in Canadian operations. Segment operating income decreased $1,136,000 to $4,364,000, primarily due to lower volume from air-cooled heat exchangers and lower volume and margins from the parts business. These decreases were partially offset by higher volume from engineering activities in Canadian operations. Other Unallocated Items Other unallocated items increased $4,947,000 from expense of $3,148,000 to income of $1,799,000, primarily due to lower employee benefit and general and administrative expenses. These changes were partially offset by higher research and development expenses. Other Income Statement Items Interest income decreased $16,100,000 to $9,611,000, primarily due to interest income on settlement of Internal Revenue Service exposure items in the prior year and decreases in investments. Interest expense decreased $2,585,000 to $13,034,000, primarily due to changes in debt obligations and prevailing interest rates. Minority interest expense decreased $12,305,000 to $56,000, primarily due to the acquisition of the minority interest in JRM. Other-net increased $6,612,000 from expense of $5,671,000 to income of $941,000. This increase was primarily due to a net loss on the settlement and curtailment of postretirement benefit plans recorded in the prior period. This increase was partially offset by foreign currency transaction losses in the current period compared to gains in the prior period. 26 27 The provision for income taxes increased $5,265,000 to $11,362,000, while income before provision for income taxes decreased $42,732,000 to $14,980,000. 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 along with a decrease in tax expense for the prior period due to a favorable tax settlement of disputed items. Also contributing to the change in the relationship of pretax income to the provision for income taxes were losses incurred from two foreign joint ventures with no corresponding tax benefits. McDermott operates in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits, and tax basis (for example, revenues versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate. RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1999 VS. SIX MONTHS ENDED SEPTEMBER 30, 1998 Marine Construction Services Revenues decreased $385,667,000 to $333,984,000 due to lower volume in essentially all activities in all geographic areas. Segment operating income decreased $70,946,000 to $21,321,000, primarily due to lower volume and the goodwill amortization associated with the purchase of JRM's minority interest. These decreases were partially offset by higher margins in procurement activities in the Middle East, higher margins in offshore activities in North America and lower general and administrative expenses. Gain (loss) on asset disposals and impairments-net decreased $44,290,000 from a gain of $43,078,000 to a loss of $1,212,000. The gain in the prior period was primarily due to the termination of the McDermott-ETPM joint venture and the sale of three Gulf of Mexico vessels. Income (loss) from investees decreased $16,546,000 from income of $9,733,000 to a loss of $6,813,000, primarily due to a gain on the sale of assets in a Malaysian joint venture in the prior period. In addition, there were lower operating results from Brown & Root McDermott Fabricators Limited, a Mexican joint venture and a North American joint venture. Power Generations Systems Revenues decreased $11,742,000 to $471,142,000, primarily due to lower volume from fabrication and erection of fossil fuel steam and environmental control systems, private power systems projects, boiler cleaning equipment and industrial boilers. These decreases were partially offset by higher volume from the fabrication, repair and retrofit of existing facilities and replacement parts. 27 28 Segment operating income decreased $2,612,000 to $32,036,000, primarily due to lower volume and margins from fabrication and erection of fossil fuel steam and environmental control systems, private power systems projects and boiler cleaning equipment and lower volume from industrial boilers. In addition, there were higher selling and general and administrative expenses. These decreases were partially offset by higher volume and margins from fabrication, repair and retrofit of existing facilities, nuclear services and replacement parts. Gain on asset disposals and impairments-net increased $1,071,000 to $1,276,000. This increase was primarily due to a gain on the sale of this segment's interest in a domestic cogeneration facility. Income from investees decreased $4,727,000 from income of $3,709,000 to a loss of $1,018,000, primarily due to lower operating results in two foreign joint ventures and a provision to exit a joint venture located in Turkey. These decreases were partially offset by higher operating results from a domestic joint venture located in Pennsylvania. Government Operations Revenues increased $1,091,000 to $202,247,000, primarily due to higher volume from management and operation contracts for U. S. Government-owned facilities and other government operations. These increases were partially offset by lower volume from nuclear fuel assemblies and reactor components for the U.S. Government. Segment operating income increased $5,327,000 to $17,104,000, primarily due to an $8,000,000 settlement in the prior period for punitive damages in a civil suit associated with a Pennsylvania facility formerly operated by B&W. There were also higher margins from commercial nuclear environmental services. These increases were partially offset by lower margins from management and operation contracts for U. S. Government-owned facilities and other government operations and from lower volume and margins from nuclear fuel assemblies and reactor components for the U. S. Government. Industrial Operations Revenues increased $40,087,000 to $239,165,000, primarily due to higher volume from engineering and plant maintenance activities in Canadian operations. These increases were partially offset by lower volume from air-cooled heat exchangers and the parts business. Segment operating income decreased $626,000 to $8,736,000, primarily due to lower volume from air-cooled heat exchangers, lower volume and margins from the parts business and higher general and administrative 28 29 expenses. These decreases were partially offset by higher volume from engineering activities, higher volume and margins from plant maintenance activities in Canadian operations and lower sales and marketing expenses. Other Unallocated Items Other unallocated items decreased $1,688,000 to $196,000, primarily due to lower employee benefit and general and administrative expenses. These decreases were partially offset by higher research and development expenses. Other Income Statement Items Interest income decreased $33,783,000 to $24,653,000, primarily due to interest income on settlement of Internal Revenue Service exposure items in the prior year and decreases in investments. Interest expense decreased $7,063,000 to $25,173,000, primarily due to changes in debt obligations and prevailing interest rates. Minority interest expense decreased $45,767,000 to $4,285,000, primarily due to lower operating results of JRM as well as the acquisition of the minority interest in JRM. Other-net income decreased $35,266,000 to $620,000. This decrease was primarily due to a net gain on the settlement and curtailment of postretirement benefit plans recorded in the prior period and foreign currency transaction losses in the current period compared to gains in the prior period. The provision for income taxes increased $1,003,000 to $23,926,000, while income before provision for income taxes decreased $148,512,000 to $47,587,000. 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 along with a decrease in tax expense for the prior period due to a change in the valuation allowance for deferred tax assets and a favorable tax settlement of disputed items. Also contributing to the change in the relationship of pretax income to the provision for income taxes were losses incurred from two foreign joint ventures with no corresponding tax benefits. McDermott operates in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits, and tax basis (for example, revenues versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate. 29 30 Backlog
9/30/99 3/31/99 ------- ------- (Unaudited) (In thousands) Marine Construction Services $ 609,992 $ 407,223 Power Generation Systems 1,334,055 905,042 Government Operations 758,390 860,981 Industrial Operations 321,802 400,649 Adjustments and Other Eliminations (562) (799) - ------------------------------------------------------------------------------------------------------------------ TOTAL BACKLOG $ 3,023,677 $ 2,573,096 ==================================================================================================================
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 increased primarily as a result of Conoco's West Natuna Pipeline Transportation System award. Power Generation Systems' foreign markets have been adversely impacted by suspensions of power projects in Southeast Asia and Pakistan. Also, the U.S. market for industrial and utility boilers remains weak. However, the U.S. market for services and replacement nuclear steam generators is expected to remain strong and to make significant contributions to operating income into the foreseeable future. At September 30, 1999, Government Operations' backlog with the U. S. Government was $655,563,000 (of which $10,959,000 had not been funded). This segment's backlog is not expected to experience significant growth as a result of reductions in defense budgets. However, this segment's backlog should remain relatively constant since it is the sole source provider of nuclear fuel assemblies and nuclear reactor components for the U. S. Navy. Liquidity and Capital Resources During the six months ended September 30, 1999, McDermott's cash and cash equivalents decreased $72,951,000 to $108,552, 000 and total debt increased $102,109,000 to $457,009,000, primarily due to an increase in short-term borrowing of $133,455,000. During this period, McDermott received cash of $495,528,000 from net sales and maturities of investments. McDermott used cash of $526,604,000 for the acquisition of JRM's minority interest, $107,588,000 in operating activities, $34,904,000 for additions to property, plant and equipment, and $5,916,000 for dividends on MII's common stock. 30 31 Working capital increased $45,789,000 from $108,955,000 at March 31, 1999 to $154,744,000 at September 30, 1999. Expenditures for property, plant and equipment increased $4,804,000 to $34,904,000 for the six month period ended September 30, 1999 compared to the same period a year ago. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. Pursuant to agreements with the majority of our principal insurers, we negotiate and settle B&W's non-employee product liability asbestos claims and bills these amounts to the appropriate insurers. Reimbursement of such claims is subject to varying insurance limits based upon the year involved. Moreover, as a result of collection delays inherent in this process and the effect of agreed payment schedules with specific insurers, reimbursement is usually delayed for three months or more. The average amount of these claims (historical average of approximately $7,600 per claim over the last three years) has continued to rise. Claims paid during the six months ended September 30, 1999 were $186,324,000, of which $154,209,000 has been recovered or is due from insurers. At September 30, 1999, receivables of $122,944,000 were due from insurers for reimbursement of settled claims. The collection delays, and the amount of claims paid for which insurance recovery is not probable, have not had a material adverse effect upon McDermott's liquidity to date. At September 30, 1999, B&W's estimated liability for pending and future non-employee products liability asbestos claims was $1,376,039,000 and estimated insurance recoveries were $1,212,674,000. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from B&W's prior claims history and constitute management's best estimate of such future cost, including recoverability from insurers. Estimates of insurance recoveries are based upon management's analysis of insurance coverage and insurer solvency. Inherent in the estimate of these liabilities are expected trend claim severity and frequency and other factors, which may vary significantly as claims are filed and settled. Such estimates are based upon management's expectation that new claims will conclude within the next 12 1/2 years, that there will be a significant decline in new claims received after 3 1/2 years, and that the average cost per claim will continue to increase only moderately. Future costs to settle claims, as well as the number of claims, could be adversely affected by changes in judicial rulings and influences beyond our control. Accordingly, changes in the estimates of future asbestos products liability and insurance recoverables or differences between the proportion of any additional asbestos products liabilities covered by insurance and that experienced in the past could result in material adjustments to the results of operations for any fiscal quarter or year, and the ultimate loss may differ materially from amounts provided in the consolidated financial statements. Recently, B&W has experienced an increase in the amounts demanded by certain plaintiff's attorneys to settle mesothelioma, lung cancer and asbestosis claims. The demanded amounts significantly exceed the average 31 32 amount of B&W's historical settlement payments for these types of claims. We are evaluating this development to determine if it is representative of the amounts required to settle these types of claims in the future and its overall impact on the estimates and forecasts of B&W's ultimate exposure for non-employee asbestos claims. If we are unsuccessful in negotiating the demanded amounts down to historical levels, which typically have included moderate annual increases, B&W may be forced to accept higher settlement amounts, begin litigating such claims or take other available courses of action. Any of these actions could have a material adverse impact on B&W's ultimate exposure for asbestos liability claims and McDermott's (including B&W's) consolidated financial position, results of operations and business prospects. On May 7, 1999, MII and JRM entered into a merger agreement pursuant to which MII initiated a tender offer for all non-owned shares of JRM for $35.62 per share in cash. MII obtained the funds necessary to purchase such shares from cash on hand and from a $525,000,000 senior secured term loan facility with Citibank, N.A. On August 4, 1999, the borrowings against the facility were repaid and the facility was terminated. At September 30, 1999, McDermott had total cash, cash equivalents and investments of $512,159,000. McDermott's investment portfolio consists primarily of government obligations and other investments in debt securities. The fair value of short and long-term investments at September 30, 1999 was $403,607,000. At September 30, 1999, approximately $48,161,000 fair value of these obligations were pledged to secure a letter of credit in connection with certain reinsurance agreements and $140,427,000 fair value of these obligations were pledged to secure borrowings of $133,371,000 incurred under repurchase agreements. At September 30 and March 31, 1999, McDermott had available various uncommitted short-term lines of credit from banks totaling $72,304,000 and $87,578,000, respectively. At September 30, 1999, borrowings against these lines of credit were $84,000. There were no borrowings against these lines at March 31, 1999. B&W, jointly and severally with BWICO and BWXT, is party to a $200,000,000 three-year, unsecured credit agreement (the "BWICO Credit Agreement") with a group of banks. Borrowings by the three companies against the BWICO Credit Agreement cannot exceed an aggregate amount of $50,000,000. The remaining $150,000,000 is reserved for the issuance of letters of credit. There were no borrowings under the agreement at September 30 or March 31, 1999. At March 31, 1999, JRM and certain of its subsidiaries were parties to a $200,000,000 three-year, unsecured credit agreement (the "JRM Credit Agreement") with a group of banks. Borrowings against the JRM Credit Agreement cannot exceed $50,000,000. The remaining $150,000,000 was reserved for the issuance of letters of credit. During the six months ended September 30, 1999, JRM elected to reduce the letter of credit 32 33 commitments on the JRM Credit Agreement from $150,000,000 to $50,000,000. There were no borrowings under the JRM Credit Agreement at September 30 or March 31, 1999. We do not anticipate JRM will need to borrow funds under the JRM Credit Agreement in the nine months ending December 31, 1999. MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. At September 30, 1999, substantially all of the net assets of MI were subject to such restrictions. At September 30, 1999, JRM and its subsidiaries could make unsecured loans to or investments in MII and its other subsidiaries of approximately $69,000,000 and pay dividends to MII of approximately $4,400,000. 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, including B&W and BWXT, are unable to incur any additional long-term debt obligations under one of MI's public debt indentures. We do not believe that this will materially impact McDermott's immediate working capital and liquidity requirements. 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 McDermott's liquidity or capital resources. At September 30, 1999, MII had a valuation allowance for deferred tax assets of $40,736,000 which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that 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 deferred tax assets are the risk of incurring losses in the future and the possibility of declines in value of appreciated assets involved in identified tax planning strategies. These factors have been considered in determining the valuation allowance. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Impact of the Year 2000 The McDermott company-wide Year 2000 Project is proceeding on schedule and approaching completion. The project addresses information technology components (hardware and software) in internal business systems and infrastructure and the embedded systems in offices, plants and products delivered to customers. In addition, an analysis of critical suppliers is being performed to ensure the supply of materials and services that are strategic to business continuity. The final phase of Year 2000 preparation includes the development of contingency plans to further minimize the risk and mitigate the impact of the century date change. 33 34 The Year 2000 Project began company-wide with a planning phase during the latter part of 1996 followed by a company-wide assessment, which was completed in early 1997. Based upon the results of the assessment and the diverse nature of McDermott's product lines, strategies for business systems were developed that fit the requirements of each of the McDermott business units. Some entities are replacing legacy systems with commercial enterprise systems, others are employing a combination of proprietary and third-party client/server systems, while a third strategy is based primarily upon remediation of legacy applications. Embedded systems and the critical supplier analysis are being addressed with a common methodology across McDermott. A consistent work breakdown structure for the project is being employed throughout McDermott: o Business Applications and IT Infrastructure ("IT Systems") o Facilities (office buildings) o Embedded Systems (in plants and construction equipment) o Customer Products (embedded systems in customer products) o Critical Suppliers The general phases of the project common to all of the above functions are: (1) establish priorities, (2) inventory items with potential Year 2000 impact, (3) assess and create a solution strategy for those items determined to be material to McDermott, (4) implement solutions defined for those items assessed to have Year 2000 impact, (5) test and validate solutions, and (6) develop contingency plans. The status is as follows: IT Systems - Inventory prioritization and assessment of all critical systems were completed. The remediation and replacement tasks are substantially complete. Facilities and Embedded Systems - The critical components at all of McDermott's major operating locations have been made Year 2000 ready. Embedded Systems replacements are pending on a few pieces of marine equipment where construction schedules have rendered the vessels unavailable for component upgrades. The outstanding compliance work is substantially complete. Customer Products - This phase of the project has been completed at all of McDermott's locations. Critical Suppliers - This analysis includes the determination of the compliance status of the suppliers' businesses as well as the products they produce. All of McDermott's major sites except two have completed this analysis, and the remaining sites are substantially complete. 34 35 Contingency Plan - McDermott is taking steps to mitigate the risk of a material impact of Year 2000 on its operations with the development of contingency plans. These plans, prepared using a common methodology across the corporation, focus on the mission critical processes and third-party dependencies that could be at risk with the century date change. Contingency plans have been completed at all of McDermott's operations locations. The contingency plan for the corporate office will be completed by November 30, 1999. As an alternative to the remediation of the legacy payroll systems, McDermott has elected to outsource its payroll function. The transition to the payroll service provider has been completed. McDermott does not expect that the cost associated with the modifications to critical systems and other compliance activities will have a material impact on its consolidated financial condition, cash flows or results of operations. The cost of the Year 2000 Project is estimated at $38,000,000 and is being funded through operating cash flows. Of the total project cost, $8,000,000 is attributable to the purchase of hardware and software, which will be capitalized, and the remaining $30,000,000 will be expensed as incurred. Expenditures through September 30, 1999 include $8,000,000 of capital and $28,000,000 of expense. McDermott's Year 2000 compliance is also dependent upon the Year 2000 readiness of external agents and third-party suppliers on a timely basis. The failure of McDermott or its agents or suppliers to achieve Year 2000 compliance could result in, among other things, plant production interruptions, delays in the delivery of products, delays in construction completions, delays in the receipt of supplies, invoice and collection errors, and inaccurate inventories. These consequences could have a material adverse impact on McDermott's results of operations, financial condition and cash flow if it is unable to conduct its businesses in the ordinary course. Although McDermott is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its results of operations, McDermott believes that its Year 2000 Project, including contingency plans, should significantly reduce the adverse effect that any such disruptions may have. Statements made herein which express a belief, expectation or intention, as well as those which are not historical fact, are forward looking. They involve a number of risks and uncertainties which may cause actual results to differ materially from such forward-looking statements. The dates on which McDermott believes the Year 2000 Project will be completed are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to: 35 36 o the availability and cost of personnel trained in these areas, o the ability to locate and correct all relevant computer code, o timely responses to and corrections by third parties and suppliers, o the ability to implement interfaces between the new systems and the systems not being replaced, and o similar uncertainties. The general uncertainty inherent in the Year 2000 problem results in part from the uncertainty of the Year 2000 readiness of third parties and the interconnection of global businesses. Due to this general uncertainty, McDermott cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business or expose it to third-party liability. 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 McDermott to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives 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. McDermott has not yet determined what the effect of SFAS No. 133 will have on its consolidated financial position or results of operations. 36 37 PART II McDERMOTT INTERNATIONAL, INC. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of our prompt disclosure of the allegations, both MII and JRM and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the Department of Justice agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities. After receiving the allegations, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture, 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, North Sea and Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. In July 1999, a former JRM officer was indicted by the Department of Justice for participating in an international bid-rigging conspiracy for the sale of marine construction services and pled guilty. We have cooperated and are continuing to cooperate 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. 37 38 In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and certain 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, North Sea and Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. In August 1999, Statoil filed its notice of appeal of the dismissal. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining claims in the lawsuit. That motion is pending. In June 1998, Shell Offshore, Inc. and certain 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"). Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc. and The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C. and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A. intervened (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) as plaintiffs in the Shell Litigation. 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. 38 39 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 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 (the "Consent Decree"). The Consent 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 the Consent 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, MII formed and continues to maintain a special committee of its 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. However, these matters could result in civil and criminal liability and have a material adverse effect on McDermott's consolidated financial position and results of operations. B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania involving approximately 200 separate cases relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"), alleging, among other things, that they suffered personal injury and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and Atlantic Richfield Company liable to the plaintiffs in the first eight cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the court set aside the judgement and ordered a new trial on all issues. Recently, the court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters. We do not expect any further trials on the other cases until a decision is rendered on the appeal. We believe that adequate insurance is available to meet any possible liability in this matter. However, there is a controversy between B&W and its insurers as to the amount of insurance coverage under the insurance policies covering these facilities. B&W has filed an action seeking a judicial determination of this matter, which is currently pending in a Pennsylvania court. We believe that any award and all other claims will be resolved within the limits and coverage of such insurance policies; however, no assurance on insurance coverage or financial impact if limits of coverage are exceeded can be given. In connection with the foregoing, B&W settled all pending and future punitive damage claims represented by 39 40 the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks reimbursement of this amount from other parties. Two purported class actions were filed in March and April 1999 in the Civil District Court for the Parish of Orleans, State of Louisiana, by alleged public shareholders of JRM, challenging MII's initial proposal to acquire the publicly traded shares of JRM common stock in a stock for stock merger. This initial proposal was subsequently abandoned and MII later acquired all of JRM's publicly traded common stock for $35.62 per share pursuant to a cash tender offer followed by a second-step cash merger. In September 1999, these actions were dismissed by the court without prejudice. Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation related to our business activities. It is management's opinion that none of this litigation will have a material adverse effect on McDermott's consolidated financial position or results of operations. 40 41 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Shareholders held on August 3, 1999, we submitted the following matters to our shareholders with voting as follows: (a) The election of three directors: Class II - For a three year term
Nominee Votes For Votes Withheld ------- --------- -------------- Joe B. Foster 53,598,015 318,335 Kathryn D. Sullivan 53,590,760 325,590 Richard E. Woolbert 53,559,532 356,818
Messrs. Philip J. Burguieres, Bruce DeMars, Robert L. Howard, John W. Johnstone, Jr. , Roger E. Tetrault and John N. Turner also continued as directors immediately after the meeting. (b) A proposal to amend our 1996 Officer Long-Term Incentive Plan to increase the number of shares authorized for issuance under the plan from 2,500,000 to 4,000,000:
Votes For Votes Against Broker Non-Votes --------- ------------- ---------------- 50,913,695 3,002,655 Not Applicable
(c) A proposal to reapprove our 1994 Variable Supplemental Compensation Plan for tax deductibility reasons:
Votes For Votes Against Broker Non-Votes --------- ------------- ---------------- 44,813,090 950,776 8,152,484
(d) A proposal to retain PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 31, 1999:
Votes For Votes Against Broker Non-Votes --------- ------------- ---------------- 53,693,967 222,383 Not Applicable
Item 5. SHAREHOLDERS PROPOSALS FOR 2000 As a result of the change in our fiscal year to a year ending on December 31, our next annual shareholders meeting will be held on May 2, 2000. Any shareholder who wishes to have a qualified proposal considered for inclusion in our proxy materials for such meeting must send notice of the proposal to MII's Corporate Secretary at our executive offices no later than December 1, 1999. Any shareholder who intends to submit a proposal for consideration at the annual meeting, but not for inclusion in our proxy materials, or intends to submit nominees for election as directors at the meeting also must notify MII's Corporate Secretary. Under MII's By-Laws, such notice must be received at our executive offices no 41 42 earlier than January 3, 2000 or later than February 2, 2000 and must satisfy certain requirements. A copy of the pertinent By-Laws provisions can be obtained from the Corporate Secretary upon written request. 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 September 30, 1999. 42 43 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McDERMOTT INTERNATIONAL, INC. /s/ Daniel R. Gaubert ----------------------------------- By: Daniel R. Gaubert Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) November 11, 1999 43 44 EXHIBIT INDEX
Exhibit Description 3.2 Amended and Restated By-Laws of McDermott International, Inc. 27 Financial Data Schedule
EX-3.2 2 AMENDED AND RESTATED BYLAWS OF MCDERMOTT INT'L INC 1 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF MCDERMOTT INTERNATIONAL, INC. (AS AMENDED THROUGH AUGUST 3, 1999) 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. 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. 1 2 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 (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 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 2 3 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 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. 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. 3 4 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 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. In no event shall a Director 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 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. 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. 4 5 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. 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. 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. 5 6 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. 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 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 6 7 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, 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. 7 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S SEPTEMBER 30, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 6-MOS DEC-31-1999 SEP-30-1999 108,552 116,077 464,578 63,974 218,812 1,405,692 1,448,464 1,012,593 3,895,008 1,251,040 323,162 0 0 61,443 758,567 3,895,008 1,243,754 1,243,754 1,183,579 1,183,579 0 0 25,173 47,587 23,926 23,661 0 0 0 23,661 0.40 0.40
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