UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) F O R M 1 0 - K10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended MarchDecember 31, 19992002
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 Number 1-8430
McDERMOTT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization) Identification No.)
1450 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70112-6050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- ----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_][ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_][X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [ ]
The aggregate market value of the Company's Common Stockregistrant's common stock held by
non-affiliatesnonaffiliates of the registrant was $1,725,490,308$258,410,985 as of April 29, 1999.January 31, 2003.
The number of shares outstanding of the Company's Common Stockregistrant's common stock outstanding at April 29, 1999January 31,
2003 was 59,248,598.64,831,612.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 in connection with the Company's 1999registrant's 2003 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART 1
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Marine Construction Services
General 3
Foreign Operations 4
Raw Materials 5
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Power Generation Systems
General 6
Foreign Operations 6
Raw Materials 7
Customers and Competition 7
Backlog 7
Factors Affecting Demand 8
D. Government Operations
General 8
Raw Materials 9
Customers and Competition 9
Backlog 9
Factors Affecting Demand 9
E. Industrial Operations
General 10
Foreign Operations 10
Raw Materials 10
Customers and Competition 10
Backlog 11
Factors Affecting Demand 11
F. Patents and Licenses 11
G. Research and Development Activities 11
H. Insurance 12
I. Employees 13
J. Environmental Regulations and Matters 13I
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Marine Construction Services
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Government Operations
General 6
Raw Materials 6
Customers and Competition 6
Backlog 7
Factors Affecting Demand 7
D. Patents and Licenses 7
E. Research and Development Activities 7
F. Insurance 7
G. Employees 9
H. Governmental Regulations and Environmental Matters 9
I. Risk Factors 11
J. Cautionary Statement Concerning Forward-Looking Statements 19
K. Available Information 21
Item 3. LEGAL PROCEEDINGS 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 28
Item 6. SELECTED FINANCIAL DATA 29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
General 30
Critical Accounting Policies and Estimates 32
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 35
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 37
Effects of Inflation and Changing Prices 39
Liquidity and Capital Resources 39
New Accounting Standards 44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
i
INDEX - FORM 10-K
PAGE
Item 3. LEGAL PROCEEDINGS 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 18
Item 6. SELECTED FINANCIAL DATA 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 21
Fiscal Year 1999 vs Fiscal Year 1998 22
Fiscal Year 1998 vs Fiscal Year 1997 24
Effects of Inflation and Changing Prices 26
Liquidity and Capital Resources 27
Impact
PAGE
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants 48
Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 49
Consolidated Statements of Loss for the Years Ended December 31, 2002, 2001 and 2000 51
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2002, 2001 and 2000 52
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 53
2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 54
Notes to Consolidated Financial Statements 55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 102
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 102
Item 11. EXECUTIVE COMPENSATION 102
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS 103
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 103
Item 14. CONTROLS AND PROCEDURES 103
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 103
Signatures 106
Certifications 107
ii
Statements we make in this Annual Report on Form 10-K which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward-looking statements within the meaning of the Year 2000 30
New Accounting Standards 32
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 33
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Company Report on Consolidated Financial
Statements 35
ReportPrivate Securities
Litigation Reform Act of PricewaterhouseCoopers LLP 36
Report1995. These forward-looking statements are subject to
various risks, uncertainties and assumptions, including those to which we refer
under the headings "Risk Factors" and "Cautionary Statement Concerning
Forward-Looking Statements" in Items 1 and 2 of Ernst & Young LLP 37
Consolidated Balance Sheet - March 31, 1999
and 1998 38
Consolidated StatementPart I of Income (Loss) for the
Three Fiscal Years ended March 31, 1999 40
Consolidated Statement of Comprehensive Income
(Loss) for the Three Fiscal Years ended
March 31, 1999 41
Consolidated Statement of Stockholders'
Equity for the Three Fiscal Years ended
March 31, 1999 42
Consolidated Statement of Cash Flows for the
Three Fiscal Years ended March 31, 1999 44
Notes to Consolidated Financial Statements 46
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 84
ii
INDEX - FORM 10-K
PAGE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 85
Item 11. EXECUTIVE COMPENSATION 85
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 85
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 85
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 86
Signatures 88
Exhibit 4.1 - AMENDED AND RESTATED RIGHTS AGREEMENT
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
Exhibit 23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP
Exhibit 23.2 - CONSENT OF ERNST & YOUNG LLP
Exhibit 27 - FINANCIAL DATA SCHEDULE
iii
this report.
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("MII") was incorporated under the laws of the
Republic of Panama in 1959 and is the parent company of the McDermott group of
companies, which includesincludes:
- J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated. MII's Common Stock and JRM's Common Stock and 9.375% Senior
Subordinated Notes due July 2006 are publicly traded. On May 7, 1999, MII and
JRM jointly announced that they executed a definitive merger agreement pursuant
to which MII will acquire all shares of JRM not already owned by MII for $35.62
per share in cash. Pursuant to the merger agreement, on May 13, 1999, MII
initiated a tender offer for all shares of JRM common stock for $35.62 per share
in cash. The tender offer will expire on June 10, 1999 unless extended. Any
shares not purchased in the tender offer will be acquired for the same price in
cash in a second-step merger . The tender offer is subject to the condition
that the majority of the publicly held shares are validly tendered pursuant to
the tender offer, as well as other customary conditions. JRM currently has
approximately 39,060,000 shares of common stock outstanding, of which 24,668,297
shares, or 63%, are owned by MII, and approximately 14,400,000 are publicly
held.
Hereinafter, unless the context requires otherwise, the following terms shall
mean:
. MII for McDermott International, Inc., a Panama corporation,
. JRM for J. Ray McDermott, S. A., a majority owned Panamanian subsidiary of MII
("JRM"), and its consolidated subsidiaries,
. MI forsubsidiaries;
- McDermott Incorporated, a Delaware subsidiary of MII ("MI"),
and its consolidated subsidiaries,
. BWICO forsubsidiaries;
- Babcock & Wilcox Investment Company, a Delaware subsidiary of
MI . B&W for the Babcock & Wilcox Company, a Delaware subsidiary of BWICO, and
its consolidated subsidiaries,
. BWXT for("BWICO");
- BWX Technologies, Inc., a Delaware subsidiary of BWICO
("BWXT"), and its consolidated subsidiaries; and
- The Babcock & Wilcox Company, an unconsolidated Delaware
subsidiary of BWICO ("B&W").
In this Annual Report on Form 10-K, unless the context otherwise indicates,
"we," "us" and "our" mean MII and its consolidated subsidiaries.
On February 22, 2000, B&W and certain of its subsidiaries and
. McDermottfiled a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve all their asbestos liability. As of
February 22, 2000, B&W's operations have been subject to the jurisdiction of the
Bankruptcy Court and, as a result, our access to cash flows of B&W and its
subsidiaries is restricted. The B&W Chapter 11 proceedings require a significant
amount of management's attention, and they represent an uncertainty in the
financial marketplace. See Section I, Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and Note 20 to our
consolidated enterprise.
McDermott operatesfinancial statements for further information concerning the effects
of the Chapter 11 filing.
Due to the bankruptcy filing, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
consolidated financial statements and we have been presenting our investment in
B&W on the cost method. The Chapter 11 filing, along with subsequent filings and
negotiations, led to increased uncertainty with respect to the amounts, means
and timing of the ultimate settlement of asbestos claims and the recovery of our
investment in B&W. Due to this increased uncertainty, we wrote off our net
investment in B&W in the quarter ended June 30, 2002. On December 19, 2002,
drafts of a joint plan of reorganization and settlement agreement, together with
a draft of a related disclosure statement, were filed in the Chapter 11
proceedings, and we determined that a liability related to the proposed
settlement is probable and that the value is reasonably estimable. Accordingly,
as of December 31, 2002, we established an estimate for the cost of the
settlement of the B&W bankruptcy proceedings of $110.0 million, including
related tax expense of $23.6 million. See Management's Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 and Note 20 to our
consolidated financial statements for further information on B&W and information
regarding developments in negotiations relating to the B&W Chapter 11
proceedings.
Historically, we have operated in four business segments:
.- Marine Construction Services includes the results of
the operations of JRM and its subsidiaries, which suppliessupply worldwide
services forto customers in the offshore oil and gas exploration
and production and hydrocarbon processing industries and to
other marine construction companies. PrincipalThis segment's principal
activities include the design,front-end and detailed engineering,
fabrication
1
and installation of offshore drilling and production platforms
and other specialized structures, modular facilities, marine
pipelines and subsea production systemssystems. This segment also
provides comprehensive project management and procurement
activities.
services. This segment operates throughout the world in most
major offshore oil and gas producing regions, including the
Gulf of Mexico, West Africa, South America, the Middle East,
India, the Caspian Sea and Southeast Asia.
- Government Operations includes the results of operations of
BWXT. This segment supplies nuclear components to the U.S.
Navy and provides various services to the U.S. Government,
including uranium processing, environmental site restoration
services and management and operating services for various
U.S. Government-owned facilities, primarily within the nuclear
weapons complex of the U.S. Department of Energy ("DOE").
Government Operations also includes the results of McDermott
Technology, Inc. ("MTI"). Historically, MTI performed research
activities for our other segments and marketed, negotiated and
administered research and development contracts. However, we
have determined to decentralize our research and development
activities and we are in the process of incorporating most of
MTI's other operations into BWXT.
- Industrial Operations included the results of operations of
McDermott Engineers & Constructors (Canada) Ltd. ("MECL"), a
subsidiary that we sold to a unit of Jacobs Engineering Group
Inc. on October 29, 2001.
- Power Generation Systems includes the results of the operations of
theour Power Generation Group, which is conducted primarily
through B&W and its subsidiaries. This segment provides a
variety of services, and equipment and systems to generate steam
and electric power at energy facilities worldwide. . Government Operations includes theDue to
B&W's Chapter 11 filing, effective February 22, 2000, we no
longer consolidate B&W's and its subsidiaries' results of
operations in our consolidated financial statements. Through
February 21, 2000, B&W's and its subsidiaries' results are
reported as Power Generation Systems B&W in the operations of BWXT, which
supplies nuclear reactor components and nuclear fuel assembliessegment
information that follows. See Note 20 to our consolidated
financial statements for information on the U.S.
Navy and various other equipment and services to the U.S. Government and
manages various U.S. Government-owned facilities.
. Industrial Operations includes thecondensed
consolidated results of theB&W and its subsidiaries.
Currently, excluding B&W and its subsidiaries, our operations consist of McDermott
Engineers & Constructors (Canada) Ltd., Hudson Products Corporation,
McDermott Technologies, Inc. ("MTI")Marine
Construction Services and other smaller businesses.
McDermott has a continuing program of reviewing joint venture, acquisition and
disposition opportunities.Government Operations.
The following tables showsummarize our revenues and operating income (loss) of McDermott for the three fiscal years
ended MarchDecember 31, 1999.2002, 2001 and 2000. See Note 17 to theour consolidated
financial statements for additional information with
respect to McDermott'sabout our business segments and
operations in different geographic areas.
1
FOR FISCAL YEARS ENDED MARCHYear Ended
December 31,
(Dollars in Millions)
1999 1998 19972002 2001 2000
---- ---- ----
(In Millions)
REVENUES
Marine Construction Services $1,279.6 40.6% $1,855.5 50.5% $1,408.5 44.7%$ 1,148.0 $ 848.5 $ 757.5
Government Operations 553.8 494.0 444.0
Industrial Operations - 507.2 426.3
Power Generation Systems 1,066.2 33.8% 1,142.7 31.1% 985.4 31.3%
Government Operations 382.7 12.1% 370.5 10.1% 373.1 11.8%
Industrial Operations 427.5 13.5% 337.8 9.2% 458.1 14.5%
Adjustments and- B&W - - 155.8
Power Generation Systems 46.9 47.8 33.8
Eliminations (6.0) - (31.9) (0.9%) (74.2) (2.3%)
- ---------------------------------------------------------------------------------------------------------
Total Revenues $3,150.0 100.0% $3,674.6 100.0% $3,150.9 100.0%
- ---------------------------------------------------------------------------------------------------------(0.6) (3.7)
---------------------------------------------------------------------------
$ 1,748.7 $ 1,896.9 $ 1,813.7
===========================================================================
2
Year Ended
December 31,
2002 2001 2000
---- ---- ----
(In Millions)
OPERATING INCOME (LOSS):INCOME:
Segment Operating Income (Loss):
Marine Construction Services $ 126.5 46.3%(162.6) $ 107.1 46.6%14.5 $ 10.8(33.6)
Government Operations 34.6 29.3 33.2
Industrial Operations - 9.9 9.8
Power Generation Systems 90.3 33.1% 82.5 35.8% (34.6) - Government Operations 39.4 14.4% 35.8 15.6% 32.5 -
Industrial Operations 16.9 6.2% 4.7 2.0% (30.6)B&W - - ---------------------------------------------------------------------------------------------------------
Total $273.1 100.0% $230.1 100.0% $(21.9) 100.0%7.2
Power Generation Systems (2.8) (3.6) (7.8)
-----------------------------------------------------------------------------
$ (130.8) $ 50.1 $ 8.8
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals
and Impairments - Net:
Marine Construction Services $ 18.6 80.8% $(40.1) -(320.9) $ 29.0 -
Power Generation Systems 4.4 19.4% (6.1) - (19.2) -(3.6) $ (1.0)
Government Operations 0.2 0.8% 0.5 - 0.4 -(0.1) (1.1)
Industrial Operations (0.2) (1.0%) 128.2 - (11.9) - - ---------------------------------------------------------------------------------------------------------
Total(0.1)
-----------------------------------------------------------------------------
$ 23.0 100.0%(320.9) $ 82.5 100.0%(3.7) $ (1.7) 100.0%
- ---------------------------------------------------------------------------------------------------------(2.2)
-----------------------------------------------------------------------------
Equity in Income (Loss) from Investees:
Marine Construction Services $ 10.75.3 $ 10.4 $ 2.9
Government Operations 24.6 23.0 11.1
Industrial Operations - $ 70.2 82.2% $ (7.8) -0.1 0.1
Power Generation Systems (4.7) - 7.5 8.8% (0.3) -
Government Operations 4.1 - 4.3 5.0% 3.6 -
Industrial Operations (1.7) - 3.4 4.0% 0.7B&W - - ---------------------------------------------------------------------------------------------------------
Total $ 8.4 100.0% $ 85.4 100.0% $ (3.8) 100.0%
- ---------------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS):
Marine Construction Services $155.8 51.2% $137.2 34.5% $ 32.0 -0.8
Power Generation Systems 90.0 29.6% 83.9 21.1% (54.1) -
Government Operations 43.7 14.3% 40.6 10.2% 36.5 -
Industrial Operations 15.0 4.9% 136.3 34.2% (41.8)(2.2) 0.6 (24.6)
-----------------------------------------------------------------------------
$ 27.7 $ 34.1 $ (9.7)
-----------------------------------------------------------------------------
Write-off of investment in B&W (224.7) - -
---------------------------------------------------------------------------------------------------------
Total Segment Income (Loss): 304.5 100.0% 398.0 100.0% (27.4) 100.0%Other unallocated (1.5) - ---------------------------------------------------------------------------------------------------------
Other Unallocated Items (51.0) (5.3) (72.4)
General-
Corporate Expenses-Net (36.1) (37.2) (47.4)
- ---------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $217.4 $355.5 $(147.2)
- ---------------------------------------------------------------------------------------------------------(23.6) (5.1) 8.0
-----------------------------------------------------------------------------
$ (673.8) $ 75.4 $ 4.9
=============================================================================
2
See Note 17 to our consolidated financial statements for further
information on Corporate.
B. MARINE CONSTRUCTION SERVICES
GENERAL
OnGeneral
In January 31, 1995, McDermottwe organized JRM and contributed substantially all of itsour
marine construction services business to it. JRM a new company incorporated under the laws
of the Republic of Panama in 1994. Also, on January 31, 1995, JRMthen acquired Offshore
Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger with OPI,
JRM was a wholly owned subsidiary of MII; asMII. As a result of the merger, JRM became
a majority ownedmajority-owned subsidiary of MII. On May 7,In June 1999, MII and JRM
entered into a merger agreement pursuant to which MII initiated a tender offer
for thoseacquired all of the
publicly held shares of JRM that it did not already own for $35.62 per share in
cash. Any such shares not purchased in the offer will be acquired for the same
price in cash in a second-step merger. JRM conducts the business activities of
this segment.common stock.
The Marine Construction Services segment consists ofsegment's business involves the basicfront-end and
detailed
design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. As a strategic operating
decision, JRM has transitioned away from installation, particularly heavy-lift
technology, into deep water subsea technology. This segment also provides
comprehensive project management services, feasibility studies,and procurement activities, and removal, salvage and refurbishment services for offshore fixed
platforms.services. This segment operates
throughout the world in allmost major offshore oil and gas producing regions,
including the Gulf of Mexico, the North Sea, West Africa, South America, the Middle East,
India, the Caspian Sea and the Far East.
This segment also participates in joint ventures. The joint ventures are
accounted for using either the equity or the cost method. JRM's joint ventures
are largely financed through their own resources, including, in some cases,
stand-alone borrowing arrangements. JRM's two most significant joint venture
investments were in the HeereMac joint venture and the McDermott-ETPM joint
venture. JRM has terminated its interests in both of these joint ventures.
The HeereMac joint venture was formed in January 1989 and utilized the
specialized, heavy-lift marine construction vessels which were previously owned
by the two parties. Each party had a 50% interest in the joint venture, and
Heerema had responsibility for its day-to-day operations. OnSoutheast Asia.
At December 19, 1997,
JRM and Heerema Offshore Construction Group, Inc. ("Heerema") terminated the
HeereMac joint venture. Heerema acquired and assumed JRM's 50% interest in the
joint venture in exchange for cash of $318,500,000 and title to several pieces
of equipment. The equipment transferred to JRM includes two launch barges and
the derrick barge 101, a 3,500-ton lift capacity, semi-submersible derrick
barge. The HeereMac joint venture was accounted for using the equity method
until March 31, 1997 and the cost method thereafter.
JRM formed its initial joint venture with ETPM S.A., McDermott-ETPM, in April
1989 to provide general marine construction services to the petroleum industry
in West Africa, South America, the Middle East and India and to provide offshore
pipelaying services in the North Sea. In March 1995, JRM and ETPM S.A. expanded
their joint venture's operations to include the Far East and began jointly
pursuing subsea contracting work on a worldwide basis. Most of the operating
companies in the McDermott-ETPM joint venture were majority-owned and controlled
by JRM and were consolidated for financial reporting purposes. However, the
operations of McDermott-ETPM West, Inc., which conducts operations in the North
Sea, South America and West Africa, were managed and controlled by ETPM S.A.
McDermott-ETPM West, Inc. was accounted for using the equity method. On April
3, 1998, JRM and ETPM S.A. terminated the McDermott-ETPM joint venture. Pursuant
to the termination, JRM received net cash of approximately $105,000,000 and the
derrick/lay barge 1601 and assumed 100% ownership of McDermott-ETPM East, Inc.
and McDermott-ETPM Far East, Inc. ETPM S.A. received the lay barge 200 and took
ownership of McDermott Subsea Constructors Limited ("MSCL") and McDermott-ETPM
West, Inc.
JRM participates in other joint ventures involving operations in foreign
countries that require majority-ownership by local interests. Through a
subsidiary, JRM also participates in an equally owned joint venture with the
Brown & Root Energy Services unit of Halliburton Company ("Brown & Root"), which
was formed in
3
February 1995 to combine the operations of JRM's Inverness and Brown & Root's
Nigg fabrication facilities in Scotland.
In May 1998, JRM sold its Aberdeen based engineering business of McDermott
Engineering (Europe) Limited and announced its intention to withdraw from
traditional European engineering markets. See Note 17 to the consolidated
financial statements regarding these events. JRM retains a presence in the
European markets via Mentor Subsea Technology Services, Ltd. to focus on subsea
opportunities. During fiscal year 1999, McDermott announced its intention to
withdraw from substantially all third-party engineering activities.
At March 31, 1999,2002, JRM owned or operated 5six fabrication facilities
throughout the world. JRM'sIts principal domestic fabrication yard and offshore base
is located on 1,114 leased acres of land under lease, near Morgan City, Louisiana. JRMIt also
wholly owns or operates fabrication facilities in the following locations: near
Corpus Christi, Texas; near Inverness, Scotland; in Indonesia on Batam Island; and in Jebel Ali, U.A.E.
JRM also owns and operates, through a 95% interest in a consolidated subsidiary,
a ship repair yard in Veracruz, Mexico.Mexico, which is also used as a fabrication
facility. JRM also operates a portion of the Shelfprojectstroy fabrication
facility in Baku, Azerbaijan. This facility is owned by the State Oil Company of
the Azerbaijan Republic.
3
JRM's fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM can fabricate a full range of offshore structures, from
conventional jacket-type fixed platforms to deepwater platform configurations
employing spar, compliant-tower and tension leg technologies, as well as
floating production, platformstorage and sparofftake ("FPSO") technology. JRM also
fabricates platform deck structures and modular components, including complete
production processing systems, hydrocarbon separation and treatment systems,
pressure and flow control systems and personnel quarters.
At March 31, 1999, expirationExpiration dates, including renewal options, of leases covering land for JRM's
fabrication yards at December 31, 2002, were as follows:
Morgan City, Louisiana Years 2000-2033
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
Morgan City, Louisiana Years 2004-2048
Jebel Ali, U.A.E. Year 2015
Batam Island, Indonesia Year 2028
Veracruz, Mexico Year 2024
JRM owns or, through its ownership interests in joint ventures, has interests in
one of the largest fleetsa large fleet of marine equipment used in major offshore construction.
The nucleus of a "construction spread" is a large derrick barge, pipelaying
barge or combination derrick-pipelaying barge capable of offshore operations for
an extended period of time in remote locations. At MarchDecember 31, 1999,2002, JRM owned
or, through ownership interests in joint ventures, had interests in 5five derrick
vessels, 2one pipelaying vesselsvessel and 8eight combination derrick-pipelaying vessels.
The lifting capacities of the derrick and combination derrick-
pipelayingderrick-pipelaying vessels
range from 800600 to 5,000 tons. These vessels range in length from 400350 to 698 feet
and are fully equipped with stiff leg or revolving cranes, auxiliary cranes,
welding equipment, pile-driving hammers, anchor winches and a variety of
additional gear. TheJRM's largest vessel is the semi-submersiblesemisubmersible derrick barge 101.
To101,
which we plan to sell in 2003. Six of the vessels are self-propelled, with two
also having dynamic positioning systems. JRM also has a substantial inventory of
specialized support the operations of these major marineequipment for deepwater construction vessels,and pipelay. In
addition, JRM and
its joint ventures also ownowns or leaseleases a substantial number of other vessels, such as
tugboats, utility boats, launch barges and cargo barges.
FOREIGN OPERATIONSbarges, to support the
operations of its major marine construction vessels.
JRM participates in joint ventures involving operations in foreign countries
that require majority ownership by local interests. Through a subsidiary, JRM
also participated in an equally owned joint venture with the Brown & Root Energy
Services unit of Halliburton Company ("Brown & Root"), which was formed in
February 1995 to combine the operations of JRM's Inverness and Brown & Root's
Nigg fabrication facilities in Scotland. This joint venture was terminated
effective June 30, 2001. In addition, JRM owns a 49% interest in Construcciones
Maritimas Mexicanas, S.A. de C.V., a Mexican joint venture, which provides
marine installation services in the Gulf of Mexico.
Foreign Operations
JRM's revenues, net of intersegment revenues, and segment income derived from
operations located outside of the United States, and the approximate percentages
to McDermott'sour total consolidated revenues and total consolidated segment income (loss),
respectively, follow:
4
REVENUES SEGMENT INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENTRevenues Segment Income (Loss)
Amount Percent Amount Percent
(Dollars in thousands)
1999Year ended December 31, 2002 $ 731,022 23% $129,440 43%
1998 1,112,685528,792 30% 317,482 80%
1997 839,583$ (5,128)(1) 1%
Year ended December 31, 2001 $ 327,604 17% $ 8,801 11%
Year ended December 31, 2000 $ 494,689 27% 14,525$ 5,865 -
RAW MATERIALS
This(1)Excludes $313.0 million goodwill impairment charge.
Raw Materials
Our Marine Construction Services segment uses raw materials, such as carbon and
alloy steelsteels in various forms, welding gases, concrete, fuel oil and gasoline,
thatwhich are available from many sources. JRM is not dependent upon any single
supplier or source.source for any
4
of these materials. Although shortages of certainsome of these raw materials and fuels have
existed from time to time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
ThisCustomers and Competition
Our Marine Construction Services segment's principal customers are oil and gas
companies, including several foreign government-owned companies. Customers generallyThese customers
contract with JRM for the
design,project management, engineering, procurement, fabrication
and installation of offshore drilling and production platforms and other
specialized structures, modular facilities, marine pipelines and subsea
production systems. Contracts are usually awarded on a competitive bidcompetitive-bid basis. A
number of companies compete effectively with JRM and its joint ventures in each
of the separate marine construction phases in various parts of the world. Examples are Aker Gulf Marine,These
competitors include Global Industries, Ltd., Gulf Island Fabrication, Inc., Hyundai Heavy Industries, Global Industries Ltd., Saipem
S.p.A.,
Heerema Offshore Construction Group, Inc., Hyundai Heavy Industries, Nippon
Steel Corporation, Saipem S.p.A., Stolt Offshore S.A., Technip Offshore and
other companies.
BACKLOG
At March 31, 1999 and 1998,Horizon Offshore, Inc.
Our Marine Construction Services' backlog amounted to
$406,183,000 and $1,266,310,000, respectively. This represents approximately
16% and 37%, respectively,Services segment performs a substantial number of
McDermott's total backlog. JRM's backlog declined
in all operating areas because of lower oil prices. In addition, backlog
declined because of JRM's withdrawal from traditional engineering markets.
Finally, backlog decreased because of sluggish economic conditions in the Middle
and Far East and the political instability in the Far East. Of the March 31,
1999 backlog, management expects that approximately $386,454,000 will be
recognized in revenues in fiscal year 2000 and $19,729,000 in fiscal year 2001.
JRM has been awarded a contract valued at $20,500,000 from Larsen & Toubro
Limited for the ONGC Pipelines and Platform Modification Project. Under this
contract, JRM is responsible for transportation of coated pipelines and offshore
installation of 12 pipelines, 17 risers, 3 subsea tie-ins, and 19 crossings.
JRM is also responsible for freespan rectification and de-watering and
commissioning of one pipeline with platform gas.
Subsequent to March 31, 1999, JRM was awarded a contract for $335,000,000 from
Conoco Indonesia Inc. and other West Natuna Sea operators to construct a subsea
natural gas pipeline from Indonesia's West Natuna Sea gas fields to Singapore.
This award was not included in backlog at March 31, 1999.
Work has historically been performedprojects on a fixed-price cost-plus or day-rate
basis or a combination thereof. More recently, certain "partnering-type"
contracts have introduced a risk and reward element wherein a portion of total
compensation is tied to the overall performance of the alliance partners.basis. This segment attempts to cover increased costs
of anticipated changes in labor, material and service costs of our long-term
contracts, either through an estimateestimation of such changes, which is reflected in
the original price, or through price escalation clauses. However, for
first-of-a-kind projects we have undertaken in recent periods, we have been
unable to forecast accurately total cost to complete until we have performed all
major phases of the project. As demonstrated by our experience on these
contracts, revenue, cost and gross profit realized on fixed-price contracts will
often vary from the estimated amounts because of changes in job conditions and
variations in labor and equipment productivity over the term of the contract.
Our Marine Construction Services segment may experience reduced profitability or
losses on projects as a result of these variations and the risks inherent in the
marine construction industry.
Backlog
At December 31, 2002 and 2001, our Marine Construction Services segment's
backlog amounted to $2.1 billion and $1.8 billion, respectively. This represents
approximately 56% and 62% of our total consolidated backlog at December 31, 2002
and 2001, respectively. Of the December 31, 2002 backlog, we expect to recognize
approximately $1.5 billion in revenues in 2003, $0.4 billion in 2004 and $0.2
billion thereafter.
JRM has historically performed work on a fixed-price, cost-plus or day-rate
basis or a combination thereof. More recently, certain contracts have introduced
a risk-and-reward element wherein a portion of total compensation is tied to the
overall performance of the partners in an alliance. Most of JRM's long-term
contracts have provisions for progress payments.
During the year ended December 31, 2002, our Marine Construction Services
segment was awarded the following contracts, among others:
- a contract for approximately $340 million for Azerbaijan
International Operating Company in Baku for the fabrication of
two integrated topside facilities;
- a fixed-price contract for approximately $250 million for
Murphy Exploration & Production Company to engineer, procure,
fabricate and install a spar offshore production facility for
the "Front Runner" development project in the deepwater Gulf
of Mexico;
- a fixed-price contract for approximately $80 million for Oil &
Natural Gas Corporation Ltd., through Engineers India Limited,
the prime contractor, to fabricate and install two platforms,
pipelines and platform modifications in the Mumbai North
Field, offshore India;
- a contract for approximately $65 million for BP Trinidad and
Tobago LLC to fabricate, construct and load out two offshore
platforms; and
5
FACTORS AFFECTING DEMAND
The- a fixed-price contract for approximately $55 million for Al
Khafi Joint Operations to procure, fabricate and install a
utility platform and install submarine cable onshore to
offshore Saudi Arabia in the Persian Gulf.
Factors Affecting Demand
Our Marine Construction Services segment's activity of this segment depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction.
Severalconstruction of development projects. Numerous factors influence these
expenditures:
.expenditures, including:
- oil and gas prices, along with expectations about future
prices;
- the cost of productionexploring for, producing and delivery,
.delivering oil and
gas;
- the terms and conditions of offshore leases,
.leases;
- the discovery rates of new oil and gas reserves in offshore
.areas;
- the ability of businesses in the oil and gas industry to raise
capital,capital; and
.- local and international political and economic conditions.
In some Far East countries, internal consumption of oil and gas products has
decreased due to the current economic crises.
Oil and gas company capital exploration and production budgetsSee Section I for calendar year
1999 have been significantly reduced because of falling oil and gas prices.
These budgets are now set and, therefore, unaffected by the partial recovery in
prices resulting from the recent OPEC production agreements. Economic and
political conditions in Asia have had an adverse effectfurther information on exploration and
production spending.factors affecting demand.
C. POWER GENERATION SYSTEMS
GENERAL
The Power Generation Systems segment:
. supplies engineered-to-order services, products and systems for energy
conversion worldwide and related industrial equipment, such as burners,
pulverizer mills, soot blowers and ash handlers,
. manufactures heavy pressure equipment for energy conversion such as boilers
fueled by coal, oil, bitumen, natural gas, solid municipal waste, biomass,
and other fuels,
. fabricates steam generators for nuclear power plants,
. designs and supplies environmental control systems, including both wet and
dry scrubbers for flue gas desulfurization, modules for selective catalytic
reduction of nitrogen oxides, and electrostatic precipitators and similar
devices,
. supports operating plants with a wide variety of services, including the
installation of new systems and replacement parts, engineering upgrades,
construction, maintenance, and field technical services such as condition
assessment,
. provides inventory services to help customers respond quickly to plant
interruptions and to construction crews to maintain and repair operating
equipment, and
. provides power through cogeneration, refuse-fueled power plants, and other
independent power producing facilities, and participates in this market as
a contractor for engineer-procure-construct services, as an equipment
supplier, as an operations and maintenance contractor and through ownership
interests.
The principal manufacturing plants of this segment, which B&W owns, are located
in West Point, Mississippi; Lancaster, Ohio; and Cambridge, Ontario, Canada. B&W
closed its Paris, Texas plant in fiscal year 1999. This segment's unconsolidated
affiliates' (equity investees) foreign plants are located in Beijing, China;
Batam Island, Indonesia; Pune, India; and Cairo, Egypt. This segment also
operates independent power facilities located in Ebensburg, Pennsylvania and
Sunnyside, Utah. All of these plants are well maintained, have suitable
equipment and are of adequate size.
FOREIGN OPERATIONS
Power Generation Systems' revenues, net of intersegment revenues, and segment
income (loss) derived from operations located outside of the United States, and
the approximate percentages to McDermott's total revenues and total segment
income (loss), respectively, follow:
6
REVENUES SEGMENT INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1999 $189,148 6% $ 8,283 3%
1998 196,831 5% 25,694 6%
1997 296,544 9% (33,701) 123%
Products for McDermott installation are engineered and built in B&W's United
States and Canadian facilities, as well as in the facilities of the segment's
equity investees in China, Indonesia, India and Egypt.
RAW MATERIALS
The Power Generations Systems segment uses raw materials such as carbon and
alloy steels in various forms, such as plates, forgings, structurals, bars,
sheets, strips, heavy wall pipes and tubes to construct power generation systems
and equipment. Significant amounts of components and accessories are also
purchased for assembly into the supplied systems and equipment. These raw
materials and components generally are purchased as needed for individual
contracts. Although shortages of certain of these raw materials have existed
from time to time, no serious shortage exists at the present time. This segment
is not sole source dependent for any significant raw materials.
CUSTOMERS AND COMPETITION
This segment's principal customers are the electric power generation industry
(including government-owned utilities and independent power producers); the pulp
and paper industry; process industries such as petrochemical plants, oil
refineries and steel mills; and other steam-using industries and institutions.
The electric power generation industry accounted for approximately 26%, 24% and
22% of McDermott's total revenues for fiscal years 1999, 1998 and 1997,
respectively.
Customers normally purchase services, equipment or systems from the Power
Generation Systems segment after an extensive evaluation process based on
competitive bids. Proposals are submitted based on the estimated cost of each
job.
Within the United States, the Power Generation Systems segment competes with a
number of domestic and foreign-based companies specializing in steam generating
systems, equipment and services. Examples include ABB Asea Brown Boveri Ltd.,
Ahlstrom Corporation, DB Riley, Inc., Foster Wheeler Corporation, Kvaerner ASA,
and other companies. In international markets, this segment competes against
these companies, plus additional foreign-based companies. A number of
additional companies compete in environmental control equipment, related
specialized industrial equipment and the independent power producing business.
Other suppliers of steam systems, as well as many other businesses, compete for
replacement parts, repair and alteration, and other services required to backfit
and maintain existing systems.
BACKLOG
At March 31, 1999 and 1998, this segment's backlog amounted to $905,283,000 and
$1,070,351,000, or approximately 35% and 31%, respectively, of McDermott's
backlog. Backlog decreased primarily as a result of delays and cancellations of
power projects in Southeast Asia due to that region's current economic crisis
and management's focus on higher margin projects. Backlog includes $65,000,000
of delayed contracts as a result of the Asian economic crisis. Of the March 31,
1999 backlog, it is expected that approximately $552,534,000 will be recognized
in revenues in fiscal year 2000, $173,501,000 in fiscal year 2001 and
$179,248,000 thereafter, of which approximately 77% will be recognized in fiscal
years 2002 through 2004.
During fiscal year 1999, this segment was awarded a contract valued at
approximately $100,000,000 to supply four nuclear steam generators to Baltimore
Gas and Electric's Calvert Cliffs nuclear power plant on Chesapeake Bay in
Calvert County, Maryland. This segment also received a $46,000,000 contract for
a Sidi Krir, Egypt
7
build, own, operate and transfer ("BOOT") project for two utility boilers from
Bechtel International Inc. for Intergen; and a contract valued at $40,000,000
for boiler maintenance and precipitator installation at Dominion Energy's
Kincaid Station in Kincaid, Illinois.
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
the Power Generation Systems segment is usually entitled to a financial
settlement related to the individual circumstances of the contract. Operations
and maintenance contracts, which are performed over an extended period, are
included in backlog based upon an estimate of the revenues from these contracts.
The Power Generation Systems segment attempts to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts
either through an estimate of such changes, which is reflected in the original
price, or through price escalation clauses. Most long-term contracts have
provisions for progress payments.
FACTORS AFFECTING DEMAND
Electric utilities in parts of Asia and the Middle East are current purchasers
of new baseload generating units and environmental control systems. This was
due to the growth of their economies and to the small existing stock of
electrical generating capacity in most developing countries. However, a
currency crisis, which began in Southeast Asia in the summer of 1997, has slowed
the number of inquiries and orders. With the international markets in an
unsettled condition, several projects in emerging markets have been delayed,
suspended or cancelled. Management expects this segment to be adversely
affected if the adverse economic and political conditions in Southeast Asia
continue.
Electrical consumption has grown moderately in the United States in recent years
and competition within the electric power industry in the United States has
intensified. The Energy Policy Act of 1992 deregulated the electric power
generation industry by allowing independent power producers access to the
electric utilities' transmission and distribution systems. Several states have
changed their laws to encourage competition among generators of electricity.
The modest growth in demand and the changes associated with this transition from
a regulated to a competitive industry have caused electric power companies to
defer ordering new coal-fired power plants in the United States. When electric
utilities are in need of peaking capacity, many are purchasing combustion
turbines with short lead-times or are purchasing electricity from other
utilities and non-regulated sources, such as cogenerators and independent power
producers.
Substantially all the customers of the Power Generation Systems segment are
affected by environmental regulations of the countries in which their facilities
are located. In the United States, the Clean Air Act requires many customer
industries to implement systems to limit or remove emissions. These mandated
expenditures have caused some customers to defer refurbishments of existing
plants. The same requirements have caused other customers to purchase
environmental control equipment from this segment. Future changes in
environmental regulations will continue to affect demand for this segment's
products and services.
This segment's systems, products and services are capital intensive. As such,
customer demand is heavily affected by the variations in their business cycles
and by the overall economies of their countries. Availability of funds for
project financing, investment and maintenance at this segment's customers varies
with the conditions of their domestic businesses.
D. GOVERNMENT OPERATIONS
GENERAL
TheGeneral
Our Government Operations segment provides nuclear fuel assembliescomponents and nuclear
reactor components to the U.S. Navy for the Naval Reactors Program. This
activity has made contributions to operating income of McDermott in all three
fiscal years and is expected to do so in the foreseeable future. This segment,
in addition to its Naval Reactors Program business, supplies other equipment andvarious
services to the U.S. Government. It is
8
also proceeding with new Government projects and exploring new programs which
require the technological capabilities it developed as a Government contractor.
EnvironmentalExamples of this segment's activities include
environmental restoration services and the management of government-owned
facilities, primarily within the Department of Energy's ("DOE") nuclear weapons complex are examples of these markets.
Thethe DOE.
This segment's principal plants of this segment are located in Lynchburg, VirginiaVirginia; Barberton,
Ohio; and Barberton, Ohio.
RAW MATERIALS
ThisMount Vernon, Indiana. BWXT conducts all the operations of our
Government Operations segment.
Raw Materials
Our Government Operations segment is notrelies on certain sole source dependentsuppliers for
any significant raw materials except for uranium, which is furnishedused in its products. We believe these suppliers are viable, and owned bywe
and the U.S. Government expend significant effort to maintain the supplier base.
Customers and used
in theCompetition
Our Government Operations' segment supplies nuclear fuel assemblies supplied to the U.S. Navy for the Naval Reactors
Program.
CUSTOMERS AND COMPETITION
This segment is the sole supplier to the U.S. Navy of all major nuclear steam
system equipment and all nuclear fuel assemblies and reactor components for the Naval Reactors Program.U.S.
Navy. There are a smalllimited number of suppliers of smallspecialty nuclear components,
with BWXT being the largest based on revenues. ThisThrough the operations of this
segment, iswe are also involved along with other companies in the operation ofof:
- the Idaho National Engineering and Environmental Laboratory
near Idaho Falls, Idaho;
- the Rocky Flats Environmental Technology Site near Boulder,
Colorado;
- the Savannah River Site in Aiken, South Carolina;
- the Strategic Petroleum Reserve in and around New Orleans,
Louisiana;
- the HanfordPantex Site in Richland, Washington.
During fiscal year 1998,Amarillo, Texas;
- the Government Operations segment received a contract
fromOak Ridge National Lab Site (the "Y-12" facility) in Oak
Ridge, Tennessee; and
- the U.S. DOE as the prime contractor to manage the environmental
remediation and site transition project at the DOE's Mound SiteMiamisburg Closure Project in Miamisburg, Ohio.
A BWXT subsidiary, Babcock & WilcoxAll of Ohio, Inc., began performance
under the several hundred million dollar multi-year contract in October 1997.
The contract isthese contracts are subject to annual funding. Forfunding determinations by the fiscal years 1999, 1998 and
1997, theU.S.
Government.
The U.S. Government accounted for approximately 12%29%, 10%24% and 11%23% of our total
consolidated revenues for the years ended December 31, 2002, 2001 and 2000,
respectively, including 22%, respectively, of McDermott's total revenues, including 8%, 7%18% and 10%17%, respectively, related to nuclear
fuel assembliescomponents.
6
Backlog
At December 31, 2002 and reactor components for the
U.S. Navy.
BACKLOG
At March 31, 1999 and 1998,2001, our Government Operations segmentsegment's backlog
amounted to $860,981,000$1.7 billion and $810,230,000,$1.0 billion, or approximately 33%44% and 24%36%,
respectively, of McDermott'sour total consolidated backlog. Of the MarchDecember 31, 19992002
backlog management expects thatin this segment, we expect to recognize revenues of approximately $330,532,000 will be recognized$0.5
billion in revenues2003, $0.4 billion in fiscal year 2000,
$194,694,000 in fiscal year 20012004 and $335,755,000$0.8 billion thereafter, of which we
expect to recognize approximately 89% will be recognized90% in fiscal years2005 through 2007. At December 31,
2002, through 2004. At
March 31, 1999, this segment's backlog with the U.S. Government was $760,202,000$1.6 billion (of which
$12,023,000$266.5 million had not yet been funded), or approximately 30%43% of McDermott'sour total
consolidated backlog. The MarchDuring the year ended December 31, 19992002, the U.S.
Government backlog includes
only the current year funding for the DOE Mound Site in Miamisburg, Ohio.
During fiscal year 1999,awarded this segment was awarded approximately $270,000,000 in
new orders for aircraft carrier components, prototypical steam generation
equipment for the newest submarine design and the downloading of enriched
uranium for the commercial markets.
FACTORS AFFECTING DEMANDapproximately $1.1 billion.
Factors Affecting Demand
This segment's systemsoperations are generally capital intensive.capital-intensive on the manufacturing
side. This segment may be impacted by U.S. Government budget restraints.
Even with the maturing of the U.S. Navy's shipbuilding programrestraints and
U.S.
Government defense budget reductions, thedelays.
The demand for nuclear fuel assemblies and
reactor components for the U.S. Navy has continued to comprisecomprises a substantial
portion of this segment's backlog. OrdersWe expect that orders for U.S. Navy nuclear fuel assemblies
and nuclear reactor components
are expected towill continue to be a significantan increasing part of backlog since this segment is the sole source provider of these nuclear fuel
assemblies and nuclear reactor components.
9
E. INDUSTRIAL OPERATIONS
GENERAL
Industrial Operations includes the results of Engineering and Construction
operations, Hudson Products Corporation ("HPC") and MTI, and other businesses.
Engineering and Construction operations are conducted primarily through
McDermott Engineers & Constructors (Canada), Ltd. ("MECL").
MECL provides services, including project management, conceptual and process
design, front-end engineering and design, detailed engineering, procurement,
construction management and contract maintenance. HPC products include air-
cooled heat exchangers, combination water and air-cooled systems, air-cooled
vacuum steam condensers, fiberglass reinforced axial flow fans for air-cooled
heat exchangers and wet cooling towers and fan control systems. MTI performs
research activities for internal operating segments of McDermott and markets,
negotiates and administers contracts that leverage company research and
development technology needs with external funds.
The principal plant of HPC is located in Beasley, Texas. One of Industrial
Operations' unconsolidated affiliates has a plant in Monterrey, Mexico, which
manufactures axial flow fans and structural components for air-cooled heat
exchangers. Both of these plants are well maintained, have suitable equipment
and are of adequate size. MTI's research and development facilities are located
in Alliance, Ohio and Lynchburg, Virginia. MECL is located in Calgary, Alberta,
Canada.
FOREIGN OPERATIONS
Industrial Operations' revenues, net of intersegment revenues, and segment
income (loss) derived from operations located outside of the United States, and
the approximate percentages to McDermott's total revenues and total segment
income (loss), respectively, follow:
REVENUES SEGMENT INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1999 $319,937 10% $ 4,592 2%
1998 195,886 5% 90,516 23%
1997 242,973 8% (29,614) 108%
RAW MATERIALS
Industrial Operations uses raw materials such as carbon and alloy steels in
various forms, such as plates, bars, sheets, and pipes, and aluminum pipes,
aluminum strips, fiberglass cloth and epoxy resins. The majority of raw
materials and components are purchased as needed for individual contracts.
Additional quantities of raw materials are carried as base stock for jobs
requiring quick turnaround. Although extended lead time of certain raw
materials have existed from time to time, no serious shortage exists at the
present time, nor is any shortage expected in the foreseeable future.
Industrial Operations is not sole source dependentSee Section I for any significant raw
materials.
CUSTOMERS AND COMPETITION
Industrial Operations' principal customers include oil and natural gas
producers, the electric power generation industry, petrochemical and chemical
processing industries, state and federal government agencies and non-profit
utility groups.
Equipment orders for items such as air-cooled heat exchangers are customarily
awarded after competitive bids have been submitted as proposals to customers
basedfurther information on the estimated cost of each job. In both the U.S. and international
markets, this segment competes with a number of domestic and foreign-based
companies
10
specializing in air-cooled heat exchanger equipment. The majority of
the engineering and construction operations contracts are awarded in a
competitive market in which both price and quality are considerations.
BACKLOG
At March 31, 1999 and 1998, Industrial Operations' backlog amounted to
$400,649,000 and $262,339,000, or approximately 16% and 8%, respectively, of
McDermott's total backlog. Of the March 31, 1999 backlog, management expects
that approximately $352,900,000 will be recognized in revenues in fiscal year
2000, $43,509,000 in fiscal year 2001 and $4,240,000 thereafter.
This segment received a contract award valued at $80,000,000 for the
engineering, procurement and construction management contract for the Impress
Phase 5 Natural Gas Liquids Extraction Plant for Canada Petroleum Company and
its partner TransCanada Pipelines Ltd.
Also, they were awarded a contract for the engineering, procurement and
construction management contract for $60,000,000 cogeneration plant in Fort
Saskatchewan, Alberta by TransAlta Energy Corporation and Air Liquide Canada
Inc.
In addition, they were awarded a $200,000,000 contract to supply engineering and
procurement services for world scale gas liquids extraction facilities and
fractionation facilities to be built near Joliet, Illinois by Aux Sable Liquid
Products LP.
The remaining value of all contracts with the above three customers reflected in
the March 31, 1999 backlog is $262,545,000.
FACTORS AFFECTING DEMAND
The equipment and services provided by Industrial Operations are somewhat
capital intensive, and the demand for its equipment and services is affected by
variations in the business cycles of their customers' industries and in the
overall economies in their regions. Variations in business cycles are affected
by the price of oil. Industrial Operations is also affected by legislative
issues such as environmental regulations and fluctuations in U.S. Government
funding patterns. Seasonal plant outages, business cycles and economic
conditions cause variations in availability of funds for investment and
maintenance at customers' facilities.
F.factors affecting demand.
D. PATENTS AND LICENSES
McDermott has been issued manyWe currently hold a large number of U.S. and foreign patents and it has manyhave numerous
pending patent applications. PatentsWe have acquired patents and licenses have been acquired and granted
licenses have
been granted to others when we have considered it advantageous for us to McDermott. While McDermott regards
itsdo so.
Although in the aggregate our patents and licenses are important to be of value, nous, we do
not regard any single patent or license or group of related patents or licenses
is believedas critical or essential to be material in relation to itsour business as a whole. G.In general, we depend on
our technological capabilities and the application of know-how rather than
patents and licenses in the conduct of our various businesses.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
McDermott conducts itsWe have decentralized our research and development activities and now conduct
our principal research and development activities through individual business
units at MTI's
research centers in Alliance, Ohio and Lynchburg, Virginia. McDermott also
conducts development activities at itsour various manufacturing plants and engineering and design offices.
McDermott spent approximately $28,064,000,
$37,928,000 and $50,749,000, onOur research and development activities duringcost approximately $61.6 million, $58.3
million and $50.2 million in the
fiscal years ended MarchDecember 31, 1999, 19982002, 2001 and 1997,2000,
respectively. Contractual arrangements for customer-sponsored research and
development can vary on a case
by casecase-by-case basis and includesinclude contracts, cooperative
agreements and grants. Customers of McDermott paid for approximately $15,752,000, $22,803,000 and
$34,170,000, of theOf our total spent on research and development expenses, during
fiscal years 1999, 1998our
customers paid for approximately $47.8 million, $46.6 million and 1997, respectively. Research and development
activities were related to development and improvement of new and existing
products and equipment and conceptual and engineering evaluation for translation
into practical applications. MTI's multi-million dollar clean environment
development facility in Alliance, Ohio was constructed in response to present
and future emission pollution standards$34.8 million
in the 11
U.S.years ended December 31, 2002, 2001 and worldwide. Approximately 125 employees were engaged full time in
research and development activities at March 31, 1999.
H.2000, respectively.
F. INSURANCE
McDermott maintainsWe maintain liability and property insurance against such risk and in such amounts as it considers adequate. However, certainwe consider adequate for
those risks we consider necessary. Some risks are either not insurable or insurance to
cover them is available only at rates which McDermott considersthat we consider uneconomical. These risks
include war and confiscation of property in certainsome areas of the world, pollution
liability in excess of relatively low limits and in recent years, asbestos liability. Depending
on competitive conditions and other factors, McDermott endeavorswe endeavor to obtain contractual
protection against uninsured risks from itsour customers. However, there is no assurance that
insuranceInsurance or contractual
indemnity protection, when obtained, willmay not be sufficient or effective under
all circumstances or against all hazards to which McDermottwe may be subject.
McDermott'sOur insurance policies do not insure against liability and property damage
losses resulting from nuclear accidents at reactor facilities of itsour utility
customers. To protect against liability for damage to a customer's property, McDermott obtainswe
endeavor to obtain waivers of subrogation from the customer and its insurer and
is generallyare usually named as an additional insured under the utility customer's nuclear
property policy.
7
To protect against liability from claims brought by third parties, McDermott iswe are
insured under the utility customer's nuclear liability policies and hashave the
benefit of the indemnity and limitation of any applicable liability provision of
the Price-Anderson Act, as amended (the
"Act").Act. The Price-Anderson Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of a certain amount. This amount is determined by the sum of commercially
available liability insurance plus certain retrospective premium assessments
payable by operators of commercial nuclear reactors. For those sites where McDermott provideswe
provide environmental remediation services, it seekswe seek the same protection from itsour
customers as it doeswe do for itsour other nuclear activities. The Price-Anderson Act, as
amended, includes a sunset provision and requires renewal each time that it
expires. Contracts that were entered into during a period of time that
Price-Anderson was in full force and effect continue to receive the benefit of
the Price-Anderson Act nuclear indemnity. The Price-Anderson Act last expired on
August 1, 2002, and was subsequently extended through December 31, 2004. BWXT
currently has no contracts involving nuclear materials covered by the
Price-Anderson Act that are not covered by and subject to the nuclear indemnity
of the Price-Anderson Act.
Although McDermott doeswe do not own or operate any nuclear reactors, it haswe have coverage under
commercially available nuclear liability and property insurance for three of itsour
four facilitieslocations that are licensed to possess special nuclear materials. The
fourth facilitylocation operates primarily as a conventional research center. This
facility is licensed to possess special nuclear material and has a small and
limited amount of special nuclear material on the premises. Two of the four
owned facilities are located at MTI'sour Lynchburg, Virginia site. These facilities are
insured under a nuclear liability policy that also insures the facility of
Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company, that waswhich we sold
during the fiscal year ended March 31, 1993. All three licensed facilities share
the same nuclear liability insurance limit, as the commercial insurer would not
allow FCFC to obtain a separate nuclear liability insurance policy. Due to the
type or quantity of nuclear material present under contract with the U.S.
Government, the two facilities in Lynchburg have statutory indemnity and
limitation of liability as provided under the Price-Anderson Act. In addition, our contracts
to manufacture and supply nuclear fuel or nuclear components to the U.S. Government contain
statutory indemnity clauses wherebyunder which the U.S. Government has assumed the
risks of public liability claims related to nuclear incidents.
JRM's offshore construction business is subject to the usual risks of operations
at sea. JRM has additional exposure because it uses expensive construction
equipment, sometimes under extreme weather conditions, often in remote areas of
the world. In many cases, JRM also operates on or in proximity to existing
offshore facilities. These facilities are subject to damage whichthat could result in
the escape of oil and gas into the sea. McDermott's insurance coverage forCertain contractual protections
historically provided by JRM's customers have eroded and are not available in
all cases.
As a result of the asbestos contained in commercial boilers and other products
liabilityB&W and employers' liability
claimscertain of its subsidiaries sold, installed or serviced in prior
decades, B&W is subject to varying insurance limits that are dependent upona substantial volume of nonemployee liability claims
asserting asbestos-related injuries. The vast majority of these claims relate to
exposure to asbestos occurring prior to 1977, the year involved.in which the U.S.
Occupational Safety and Health Administration adopted new regulations that
impose liability on employers for, among other things, job-site exposure to
asbestos.
B&W received its first asbestos claims in 1983. Initially, B&W's primary
insurance carrier, a unit of Travelers Group, handled the claims. B&W exhausted
the limits of its primary products liability insurance coverage in 1989. Prior
to its Chapter 11 filing, B&W had been handling the claims under a
claims-handling program funded primarily by reimbursements from its
excess-coverage insurance carriers. B&W's excess coverage available for
asbestos-related products liability claims runs from 1949 through March 1986.
This coverage has been provided by a total of 136 insurance companies. B&W
obtained varying amounts of excess-coverage insurance for each year within that
period, and within each year there are typically several increments of coverage.
For each of those increments, a syndicate of insurance companies has provided
the coverage.
8
B&W had agreements with the majority of its principalexcess-coverage insurers concerning
the method of allocation ofallocating products liability asbestos claim payments to the years
of coverage. Pursuantcoverage under the applicable policies. See Note 20 to those agreements, B&W negotiates
and settles these claims and bills these amounts to the appropriate insurers.
McDermott has recognized a provision to the extent that recovery of these
amounts from the insurers is not probable. McDermott's estimates of future
asbestos products liability and probable insurance recoveries are based on prior
history and management's best estimate of cost based on all available
information. However, future costs to settle claims, as well as the number of
claims, could be adversely
12
affected by changes in judicial rulings and influences beyond McDermott's
control. Accordingly, changes in the estimates of future asbestos products
liability and insurance recoverables and 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 theour consolidated
financial statements.
MII has two wholly-ownedstatements for information regarding B&W's Chapter 11 filing and
liability for nonemployee asbestos claims.
We have several wholly owned insurance subsidiaries that provide general and
automotive liability builders'insurance and, from time-to-time, builder's risk within
certain limits, marine hull and workers' compensation insurance to the McDermott group ofour
companies. These insurance subsidiaries have not provided significant amounts of
insurance to unrelated parties. I.These captive insurers provide certain coverages
for our subsidiary entities and related coverages. Claims as a result of our
operations, or arising in the B&W Chapter 11 proceedings, could adversely impact
the ability of these captive insurers to respond to all claims presented,
although we believe such a result is unlikely.
BWXT, through two of its dedicated limited liability companies, has long-term
management and operating agreements with the U.S. Government for the Pantex and
Y-12 facilities. Most insurable liabilities arising from these sites are not
protected in our corporate insurance program but rely on government contractual
agreements and certain specialized self-insurance programs funded by the U.S.
Government. The U.S. Government has historically fulfilled its contractual
agreement to reimburse for insurable claims, and we expect it to continue this
process during our administration of these two facilities. However, it should be
noted that, in most situations, the U. S. Government is contractually obligated
to pay, subject to the availability of authorized government funds.
As a result of the impact of the September 11, 2001 terrorist attacks, we have
experienced higher costs, higher deductibles and more restrictive terms and
conditions as we have renewed our insurance coverage. Specifically, several of
our insurance programs, including property, onshore builder's risk and others,
now contain exclusions that were not previously applicable, including war and
acts of terrorism. This issue has been impacted by the Terrorism Risk Insurance
Act, although at this point insurers are quite divergent in the prices and
coverage they are offering. We expect to continue to maintain coverage that we
consider adequate at rates that we consider economical. However, some previously
insured risks may no longer be insurable or insurance to cover them will be
available only at rates that we consider uneconomical.
G. EMPLOYEES
At MarchDecember 31, 1999, McDermott2002, we employed under its direct supervision,
approximately 20,35018,200 persons compared with
24,70013,300 at MarchDecember 31, 1998.2001. Approximately 7,0007,100 of our employees were members
of labor unions at MarchDecember 31, 1999 as2002, compared with approximately 6,4004,700 at
MarchDecember 31, 1998. After nine months2001. Many of negotiations between BWXT and one of its unions, BWXT temporarily discontinuedour operations for their union workforce on April 23, 1999 dueare subject to the union's
refusal to vote on a new labor contract. Negotiations continued and the union
ratified BWXT's final offer on May 9, 1999 and the union workers returned to
work. The majority of B&W's and BWXT's manufacturing facilities operate under union contracts, which
we customarily are renewed every two to three years. One
union contract covering 200 hourly workers at one of B&W's Ohio facilities
expired on April 24, 1999. The negotiating groups are operating under a day-to-
day agreement and management expects to renew the contract without incident.
During the next twelve months, three union contracts covering approximately 100
B&W hourly workers will expire. Management expects to renew the contracts
without incident. McDermott considers itsperiodically.
Currently, we consider our relationship with itsour employees to be satisfactory.
J. ENVIRONMENTALH. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
McDermott isA wide range of federal, state, local and foreign laws, ordinances and
regulations apply to our operations, including those relating to:
- constructing and equipping electric power and other industrial
facilities;
- possessing and processing special nuclear materials;
- workplace health and safety; and
- protecting the environment.
We cannot determine the extent to which new legislation, new regulations or
changes in existing laws or regulations may affect our future operations.
Our operations are subject to the existing and evolving legal and regulatory
standards relating to the environment. These standards include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"). They also include any similar laws that provide for responses to and liability
for
9
releases of hazardous substances into the environment, and
other federal laws, each as amended.environment. These standards also
include similar foreign, state or local counterparts to these federal laws,
which regulate air emissions, water discharges, hazardous substances and wastes,waste,
and require public disclosure related to the use of various hazardous
substances. McDermott'sOur operations are also governed by laws and regulations relating to
workplace safety and worker health, primarily the Occupational Safety and Health
Act and regulations promulgated thereunder. McDermott believesWe believe that itsour facilities are
in substantial compliance with current regulatory standards.
McDermott'sOur compliance with U.S. federal, state and local environmental control and
protection regulations necessitated capital expenditures of $413,000$0.3 million in fiscalthe
year 1999. Management expectsended December 31, 2002. We expect to spend another $3,046,000$1.4 million on such
capital expenditures over the next five years. ManagementComplying with existing
environmental regulations resulted in pretax charges of approximately $11.0
million in the year ended December 31, 2002. We cannot predict all of the
environmental requirements or circumstances that will exist in the future but
anticipatesanticipate that environmental control and protection standards will become
increasingly stringent and costly.
Complying with existing environmental
regulations resulted in pretax charges of approximately $13,299,000 in fiscal
year 1999.
McDermott hasWe have been identified as a potentially responsible party at various cleanup
sites under CERCLA. McDermott hasCERCLA and other environmental laws can impose liability for
the entire cost of cleanup on any of the potentially responsible parties,
regardless of fault or the lawfulness of the original conduct. Generally,
however, where there are multiple responsible parties, a final allocation of
costs is made based on the amount and type of wastes disposed of by each party
and the number of financially viable parties, although this may not be the case
with respect to any particular site. We have not been determined to be a major
contributor of wastes to any of these sites. However, each potentially responsible
party or contributor may face assertionsOn the basis of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on itsour relative
contribution of waste to each site, McDermott'swe expect our share of the ultimate
liability for the various sites iswill not expected to have a material adverse effect on McDermott'sour
consolidated financial position, results of operations or liquidity in any given
year.
13
RemediationEnvironmental remediation projects have been or mayand continue to be undertaken at
certain of McDermott'sour current and former plant sites. During the fiscal year ended
March 31, 1995, B&W completed, subject
to Nuclear Regulatory Commission ("NRC") certification, the decommissioning and
decontamination of its former nuclear fuel processing plant at Apollo,
Pennsylvania. All fabrication and support buildings have been removed, and all
contaminated soil has been shipped to authorized disposal facilities. In fiscal
year 1997, B&W was notified by the NRC that the Apollo plant site had been
released for unrestricted use. The Apollo plant site is the first major nuclear
facility in the U.S. to achieve "green-field" status after remediation, and will
now be removed from the NRC's Site Decommissioning Management Plan. The nuclear
license for the plant was terminated.
During fiscal year 1995, managementwe decided to close B&W's nuclear manufacturing facilities in
Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"), and B&W
proceeded to decommission the facilities in accordance with its existing license
from the Nuclear Regulatory Commission (the"NRC"). Decontamination is proceeding as permitted byB&W subsequently transferred
the existing NRC
license. A decommissioning plan was submitted to the NRC for review and
approval during January 1996. The facilities were transferred to BWXT in the fiscal year ended March 31, 1998. BWXT's managementDuring the
fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC in fiscal year
1999 on a
plan that provides for the completion of facilities dismantlement and soil
restoration by 2001 and license termination in 2002. BWXT's management2003. BWXT expects to request
approval from the NRC to release the site for unrestricted use at that time. At
MarchDecember 31, 1999,2002, the remaining provision for the decontamination,
decommissioning and the closing of these facilities was $15,811,000.$0.4 million. By December
31, 2002, only a portion of the operation and maintenance aspect of the
decommissioning and decontamination work at the Parks facility remained to be
completed in order to receive NRC approval to terminate the NRC license. For a
discussion of certain civil litigation we are involved in concerning the Parks
Facilities, see Item 3.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP"), by letter dated March 19, 1994, advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination of
theresulting from previous
operations ofat the facilities. These facilities areBWXT now a part of
BWXT.owns these facilities. PADEP has advised
BWXT that it does not intend to assess any monetary sanctions, provided that
BWXT continues its remediation program offor the Parks Facilities. At March 31, 1999 and 1998, McDermott had total environmental reserves
(including provisions forWhether
additional nonradiation contamination remediation will be required at the facilities discussed above), of $31,568,000 and
$46,164,000,respectively. Of the total environmental reserves at March 31, 1999
and 1998, $19,835,000 and $9,934,000, respectively, were included in current
liabilities. Estimated recoveries of these costs are included in environmental
and products liability recoverable at March 31, 1999. Inherent in the estimates
ofParks
facility remains unclear. Results from recent sampling completed by PADEP have
indicated that such reserves and recoveries are expected levels of contamination,
decommissioning costs and recoverability from other parties, whichremediation may vary
significantly as decommissioning activities progress. Accordingly, changes in
estimates could result in a material adjustment to operating results, and the
ultimate loss may differ materially from amounts provided in the consolidated
financial statements.
McDermott performsnot be necessary.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operatesoperate certain facilities that are licensed to
possess and process special nuclear materials. McDermott is thusAs a result of these activities,
we are subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
DecommissioningThe NRC's decommissioning regulations promulgated by the NRC require BWXT and MTI to provide financial
assurance that itthey will be able to pay the expected cost of decommissioning
itstheir facilities at the end of their service lives. BWXT and MTI will continue
to provide financial assurance
of $25,103,00010
aggregating $29.9 million during fiscalthe year 2000ending December 31, 2003 by issuing
letters of credit for the ultimate decommissioning of all itstheir licensed
facilities, except one. This facility, which represents the largest portion of
BWXT's eventual decommissioning costs, has provisions in its government
contracts pursuant to which all of its decommissioning costs and financial
assurance obligations are covered by the U.S. Government (DOE).DOE.
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI/MTI's NRC licenses for byproduct and source nuclear material is
anticipated to occurwas
finalized in JulyDecember 1999. In conjunction with the transfer of this regulatory
authority and upon notification by the NRC, of the effective date of
agreement, MTI will reissueissued decommissioning financial
assurance instruments naming the State of Ohio as the beneficiary.
NoAt December 31, 2002 and 2001, we had total environmental reserves (including
provisions for the facilities discussed above) of $20.6 million and $21.2
million, respectively. Of our total environmental reserves at December 31, 2002
and 2001, $8.3 million and $6.1 million, respectively, were included in current
liabilities. Our estimated recoveries of these costs totaling $0.2 million and
$3.2 million, respectively, are included in accounts receivable - other provisionsin our
consolidated balance sheet at December 31, 2002 and 2001. Inherent in the
estimates of those reserves and recoveries are our expectations regarding the
levels of contamination, decommissioning costs and recoverability from other
parties, which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in material adjustments to our
operating results, and the ultimate loss may differ materially from the amounts
we have provided for in our consolidated financial statements.
I. RISK FACTORS
We have significant liquidity issues currently facing our company, including
significant losses on our EPIC spar projects in the current year which require
funding in 2003, as well as the need to refinance our new credit facility, which
is scheduled to expire in April 2004.
Due primarily to the losses incurred on the three EPIC spar projects, we expect
JRM to experience negative cash flows during 2003. Completion of the EPIC spar
projects has and will continue to put a strain on JRM's liquidity. JRM intends
to fund its cash needs through borrowings on our new credit facility,
intercompany loans from MII and sales of nonstrategic assets, including certain
marine vessels. In addition, under the terms of our new credit facility, JRM's
letter of credit capacity was reduced from $200 million to $100 million. This
reduction does not negatively impact our ability to execute the contracts in our
current backlog. However, it will likely limit JRM's ability to pursue projects
from certain customers who require letters of credit as a condition of award. We
are exploring other opportunities to improve our liquidity position, including
better management of working capital through process improvements, negotiations
with customers to relieve tight schedule requirements and to accelerate certain
portions of cash collections, and alternative financing sources for letters of
credit for JRM. If JRM experiences additional significant contract costs on the
EPIC spar projects as a result of unforeseen events, we may be unable to fund
all our budgeted capital expenditures and meet all of our funding requirements
for contractual commitments. In this instance, we would be required to defer
certain capital expenditures, which in turn could result in curtailment of
certain of our operating activities or, alternatively, require us to obtain
additional sources of financing which may not be available to us or may be cost
prohibitive.
MI experienced negative cash flows in 2002, primarily due to payments of taxes
resulting from the exercise of MI's rights under the intercompany agreement we
describe in Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources in Item 7 of this
report. MI expects to meet its cash needs in 2003 through intercompany
borrowings from BWXT, which BWXT may fund through borrowings under our new
credit facility. MI is restricted, as a result of covenants in its debt
instruments, in its ability to transfer funds to MII and MII's other
subsidiaries through cash dividends or through unsecured loans or investments.
On a consolidated basis, we expect to incur negative cash flows in the first
three quarters of 2003. In addition, in March 2003, Moody's Investor Service
lowered MI's credit rating from B2 to B3. These factors may further impact our
access to capital and our ability to
11
refinance our new credit facility, which is scheduled to expire in April 2004.
Given our current credit rating and operating results, there can be no assurance
that we can obtain additional access to third party funds, if required.
If we are unable to finalize a settlement in the B&W Chapter 11 proceedings,
including obtaining the requisite approvals and Bankruptcy Court confirmation,
with substantially the same terms as contained in the agreement in principle,
our financial condition and results of operations may be materially and
adversely affected.
During the year ended December 31, 2002, we reached an agreement in principle
with the Asbestos Claimants Committee (the "ACC") and the Future Claimants
Representative (the "FCR") in the B&W Chapter 11 proceedings, which includes the
following key terms, among others:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
otherwise make available their rights to all applicable
insurance proceeds to the trust.
- MII would issue 4.75 million shares of restricted common stock
and cause those shares to be transferred to the trust, and MII
would effectively guarantee that those shares would have a
value of $19.00 per share on the third anniversary of the date
of their issuance.
- MI would issue promissory notes to the trust in an aggregate
principal amount of $92.0 million, with principal payments of
$8.4 million per year payable over 11 years, with interest
payable on the outstanding balance at the rate of 7.5% per
year. The payment obligations under those notes would be
guaranteed by MII.
- In exchange for those contributions, MII and its subsidiaries
(other than B&W and its subsidiaries) would be released and
indemnified from and against claims arising from B&W's use of
asbestos and would receive other protections from claims
arising from B&W activities.
The terms of the agreement in principle are reflected in a proposed consensual
plan of reorganization that is on file with the Bankruptcy Court. At December
31, 2002, we established an estimate for the cost of the proposed settlement.
However, there are continuing risks and uncertainties that will remain with us
until the requisite approvals are obtained and the final settlement is reflected
in a plan of reorganization that is confirmed by the Bankruptcy Court pursuant
to a final, nonappealable order of confirmation. An agreed or litigated
settlement, or the final decision by the Bankruptcy Court, could result in the
ultimate liability exceeding amounts recorded as of December 31, 2002.
The asbestos claims and the B&W Chapter 11 proceedings require a significant
amount of management's attention, and they represent an uncertainty in the
financial marketplace. Until the uncertainty is resolved, we may be unable to
deliver to our shareholders the maximum value potentially available to them
through our operations and businesses, taken as a whole. There is no assurance
that the proposed joint plan of reorganization, or any amendment thereto, will
be modifiedapproved by the Bankruptcy Court.
There are a number of issues and matters to be resolved before the ultimate
outcome of the B&W Chapter 11 proceedings can be determined, including, among
others, the following:
- the ultimate asbestos liability of B&W and its subsidiaries;
- the outcome of negotiations with the ACC, the FCR and other
participants in the Chapter 11 proceedings, concerning, among
other things, the size and structure of the settlement trusts
to satisfy the asbestos liability and the means for funding
those trusts;
- the outcome of negotiations with our insurers as to additional
amounts of coverage available to B&W and its subsidiaries and
as to the participation of those insurers in a plan to fund
the settlement trusts;
12
- the Bankruptcy Court's decisions relating to numerous
substantive and procedural aspects of the Chapter 11
proceedings, including the Court's periodic determinations as
to whether to extend the existing preliminary injunction that
prohibits asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII;
- the continued ability of our insurers to reimburse B&W and its
subsidiaries for payments made to asbestos claimants and the
resolution of claims filed by insurers for recovery of
insurance amounts previously paid for asbestos personal injury
claims;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999, and the related ruling
issued on April 17, 2002. See Item 3 and Note 10 to our
consolidated financial statements for further information;
- the outcome of objections and potential appeals involving
approval of the disclosure statement and confirmation of the
plan of reorganization;
- final agreement regarding the proposed spin-off of the MI/B&W
pension plan; and
- final agreement on a tax sharing and tax separation
arrangement between MI and B&W.
We have significant guarantee obligations, other contingent claim exposures and
collateral agreements with creditors and customers of our subsidiaries,
including B&W, that may impact our flexibility in addressing the liquidity
issues currently facing our company or other needs for capital that may arise in
the future, including the need to refinance our new credit facility which
expires in April 2004.
In recent periods, MII has entered into credit arrangements to support its
operating subsidiaries and, in some cases, guaranteed or otherwise become
contingently liable for the credit arrangements and customer contractual
obligations of its subsidiaries. These exposures include the following:
- Parent guarantor exposure under our new credit facility. MII
is the parent guarantor under a new $180 million credit
facility for JRM and BWXT (the "New Credit Facility").
Accordingly, to the extent either JRM or BWXT borrows under
that facility or obtains letters of credit under that
facility, MII is liable for the obligations owing to the
lenders under the facility. In addition, MII has
collateralized its guaranty obligations under the New Credit
Facility with 100% of the capital stock of MI and JRM. As of
March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under the New
Credit Facility.
- B&W letter of credit exposure. At the time of the B&W
bankruptcy filing, MII was a maker or a guarantor of
outstanding letters of credit aggregating approximately $146.5
million ($9.4 million at December 31, 2002) that were issued
in connection with the business operations of B&W and its
subsidiaries. At that time, MI and BWICO were similarly
obligated with respect to additional letters of credit
aggregating approximately $24.9 million that were issued in
connection with the business operations of B&W and its
subsidiaries. Although a permitted use of B&W's $300 million
debtor-in-possession revolving credit facility (the "DIP
Credit Facility") is the issuance of new letters of credit to
backstop or replace these preexisting letters of credit, each
of MII, MI and BWICO has agreed to indemnify and reimburse B&W
and its filing subsidiaries for any customer draw on any
letter of credit issued under the DIP Credit Facility to
backstop or replace any such preexisting letter of credit for
which it has exposure and for the associated letter of credit
fees paid under the facility. As of December 31, 2002,
approximately $51.4 million in letters of credit have been
issued under the DIP Credit Facility to replace or backstop
these preexisting letters of credit.
- Indemnification obligations under surety arrangements. MII has
agreed to indemnify our two surety companies for obligations
of various subsidiaries of MII, including B&W and several of
its subsidiaries, under surety bonds issued to meet bid bond
and performance bond requirements imposed by their customers.
As of December 31, 2002, the aggregate outstanding amount of
surety bonds that were guaranteed by MII and issued in
connection with the business operations of its subsidiaries
was approximately $121.0 million, of which $107.7 million
related to the business operations of B&W and its
subsidiaries.
13
As to the guarantee and indemnity obligations related to B&W, the proposed B&W
Chapter 11 settlement contemplates indemnification and other protections for
MII, MI and BWICO.
The existence of these arrangements may adversely impact our flexibility in
accessing new capital resources to address liquidity issues or other needs for
capital that may arise in the future.
We are subject to loss and other contingencies relating to allegations of
wrongdoing and anticompetitive acts made against MI, JRM, MII and others
involving worldwide heavy-lift activities in the marine construction services
industry.
In March 1997, we began an investigation into allegations of wrongdoing by a
limited number of our former employees and former employees of JRM and others.
The allegations concerned the heavy-lift business of one of JRM's joint
ventures, which owned and operated a fleet of large derrick vessels with lifting
capacities ranging from 3,500 to 13,200 tons, and JRM. On becoming aware of
these allegations, we notified authorities, including the Antitrust Division of
the U.S. Department of Justice ("DOJ"), the Securities and Exchange Commission
("SEC") and the European Commission. As a result of that prompt notification,
the DOJ has granted immunity to MII, JRM and certain affiliates, and our
officers, directors and employees at the time of disclosure, from criminal
prosecution for any anticompetitive acts involving worldwide heavy-lift
activities. We cooperated with the DOJ in its investigation into this time.and
related matters. In February 2001, we were advised that the SEC had terminated
its investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, a number of major and independent oil and gas exploration and
development companies filed lawsuits in the United States District Court for the
Southern District of Texas against, among others, MI, JRM and MII. These
lawsuits allege, among other things, that the defendants engaged in
anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects. In addition to seeking injunctions to enjoin us and the other
defendants from engaging in future anticompetitive acts, actual damages and
attorneys' fees, the plaintiffs are requesting treble damages. In December 2000,
a number of Norwegian oil companies, including Norwegian affiliates of several
of the plaintiffs in the cases pending in the Southern District of Texas, filed
lawsuits against us and others for alleged violations of the Norwegian Pricing
Act of 1953, in connection with projects completed offshore Norway. The
plaintiffs in these lawsuits are seeking recovery of alleged actual damages in
unspecified amounts. Under applicable Norwegian law, any recovery by these
plaintiffs would be limited to their actual damages, and those damages would be
recoverable only to the extent the plaintiffs have not received cost
reimbursements or other related recoveries from their customers or other third
parties. We understand that the conduct alleged by the Norwegian plaintiffs is
generally the same as the conduct alleged by the plaintiffs in the cases pending
in the Southern District of Texas.
Although we have executed agreements to settle the heavy-lift antitrust claims
filed by several of the plaintiffs in the Southern District of Texas, the
litigation continues with the other plaintiffs. The ultimate outcome of this
litigation or any actions that others may take in connection with the
allegations we describe above could have a material adverse effect on our
consolidated financial position, results of operations and cash flows. See Item
3 for additional information.
Our Marine Construction Services segment derives substantially all its revenues
from companies in the oil and gas exploration and production industry, a
historically cyclical industry with levels of activity that are significantly
affected by the levels and volatility of oil and gas prices.
The demand for marine construction services has traditionally been cyclical,
depending primarily on the capital expenditures of oil and gas companies for
construction of development projects. These capital expenditures are influenced
by such factors as:
- prevailing oil and gas prices;
- expectations about future prices;
14
ITEM- the cost of exploring for, producing and delivering oil and
gas;
- the sale and expiration dates of available offshore leases;
- the discovery rate of new oil and gas reserves in offshore
areas;
- domestic and international political, military, regulatory and
economic conditions;
- technological advances; and
- the ability of oil and gas companies to generate funds for
capital expenditures.
Prices for oil and gas historically have been extremely volatile and have
reacted to changes in the supply of and demand for oil and natural gas
(including changes resulting from the ability of the Organization of Petroleum
Exporting Countries to establish and maintain production quotas), domestic and
worldwide economic conditions and political instability in oil producing
countries. We anticipate prices for oil and natural gas will continue to be
volatile and affect the demand for and pricing of our services. A material
decline in oil or natural gas prices or activities over a sustained period of
time could materially adversely affect the demand for our services and,
therefore, our results of operations and financial condition.
War, other armed conflicts or terrorist attacks could have a material adverse
effect on our business.
Events leading to the war in Iraq, increasing military tension involving North
Korea, as well as the terrorist attacks of September 11, 2001 and subsequent
terrorist attacks and unrest, have caused instability in the world's financial
and commercial markets, have significantly increased political and economic
instability in some of the geographic areas in which we operate and have
contributed to high levels of volatility in prices for oil and gas in recent
months. The war in Iraq, as well as threats of war or other armed conflict
elsewhere, may cause further disruption to financial and commercial markets and
contribute to even higher levels of volatility in prices for oil and gas than
those experienced in recent months. In addition, the war with Iraq could lead to
acts of terrorism in the United States or elsewhere, and acts of terrorism could
be directed against companies such as ours. In addition, acts of terrorism and
threats of armed conflicts in or around various areas in which we operate, such
as the Middle East and Indonesia, could limit or disrupt our markets and
operations, including disruptions from evacuation of personnel, cancellation of
contracts or the loss of personnel or assets. Although we have not experienced
any material adverse effects on our results of operations as a result of armed
conflicts and terrorist acts to date, we can provide no assurance that armed
conflicts, terrorism and their effects on us or our markets will not
significantly affect our business and results of operations in the future.
We are subject to risks associated with contractual pricing in the offshore
marine construction industry, including the risk that, if our actual costs
exceed the costs we estimate on our fixed-price contracts, our gross margins and
profitability will decline.
Because of the highly competitive nature of the offshore marine construction
industry, our Marine Construction Services segment performs a substantial number
of its projects on a fixed-price basis. We attempt to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts,
either through estimates of cost increases, which are reflected in the original
contract price, or through price escalation clauses. Despite these attempts,
however, the revenue, cost and gross profit we realize on a fixed-price contract
will often vary from the estimated amounts because of changes in job conditions
and variations in labor and equipment productivity over the term of the
contract. These variations and the risks generally inherent in the marine
construction industry may result in the gross profits we realize being different
from those we originally estimated and may result in reduced profitability or
losses on projects. Specifically, during 2002, our Marine Construction Services
segment has experienced material losses on its three Engineer, Procure, Install
and Construct ("EPIC") spar projects: Medusa, Devils Tower and Front Runner.
These contracts are first-of-a-kind as well as long-term in nature. We have
experienced schedule delays and cost overruns on these contracts that have
adversely impacted our financial results. These projects continue to face
significant risks.
In addition, we recognize revenues under our long-term contracts in the Marine
Construction Services segment on a percentage-of-completion basis. Accordingly,
we review contract price and cost estimates periodically as the work progresses
and reflect adjustments
15
proportionate to the percentage of completion in income in the period when we
revise those estimates. To the extent these adjustments result in a reduction or
an elimination of previously reported profits with respect to a project, we
would recognize a charge against current earnings, which could be material. At
December 31, 2002, we have provided for our estimated losses on the three EPIC
spar projects and other contracts which are in a loss position. Although we
continually strive to improve our ability to estimate our contract costs and
profitability associated with our long-term projects, it is reasonably possible
that current estimates could change and adjustments to overall contract costs
may continue to be significant in future periods.
We face risks associated with recent legislative proposals that could change
laws applicable to corporations that have completed inversion transactions.
As a result of our reorganization in 1982, which we completed through a
transaction commonly referred to as an "inversion," our company is a corporation
organized under the laws of the Republic of Panama. Recently, the U.S. House and
Senate have considered legislation that would change the tax law applicable to
corporations that have completed inversion transactions. Some of the legislative
proposals have contemplated retroactive application and, in certain cases,
treatment of such corporations as United States corporations for United States
federal income tax purposes. Some of the legislative proposals have also
contemplated additional limitations on the deductibility for United States
federal income tax purposes of certain intercompany transactions, including
intercompany interest expense. It is possible the legislation enacted in this
area could substantially increase our corporate income taxes and, consequently,
decrease our future net income and increase our future cash outlays for taxes.
Other legislative proposals, if enacted, could limit or even prohibit our
eligibility to be awarded contracts with the U.S. Government in the future. We
are unable to predict with any level of certainty the likelihood or final form
in which any proposed legislation might become law or the nature of regulations
that may be promulgated under any such future legislative enactments. As a
result of these uncertainties, we are unable to assess the impact on us of any
proposed legislation in this area.
We face risks associated with investing in foreign subsidiaries and joint
ventures, including the risk that we may be restricted in our ability to access
the cash flows or assets of these entities.
We conduct some operations through foreign subsidiaries and joint ventures. We
do not manage all of these entities. Even in those joint ventures that we
manage, we are often required to consider the interests of our joint venture
partners in connection with decisions concerning the operations of the joint
ventures. Arrangements involving these subsidiaries and joint ventures may
restrict us from gaining access to the cash flows or assets of these entities.
In addition, these foreign subsidiaries and joint ventures sometimes face
governmentally imposed restrictions on their abilities to transfer funds to us.
Our international operations are subject to political, economic and other
uncertainties not encountered in our domestic operations.
We derive a significant portion of our revenues from international operations,
including customers in the Middle East. Our international operations are subject
to political, economic and other uncertainties not encountered in domestic
operations. These include:
- risks of war, particularly the risks associated with the war
involving the United States and Iraq, and civil unrest;
- expropriation, confiscation or nationalization of our assets;
- renegotiation or nullification of our existing contracts;
- changing political conditions and changing laws and policies
affecting trade and investment;
- the overlap of different tax structures; and
- the risks associated with the assertion of foreign sovereignty
over areas in which our operations are conducted.
Our Marine Construction Services segment may be particularly susceptible to
regional conditions that may adversely affect its operations. Its major marine
vessels typically require relatively long periods of time to mobilize over long
distances, which could affect our ability to withdraw them from areas of
conflict. Additionally, various foreign jurisdictions have laws limiting the
right and ability of foreign subsidiaries and joint ventures to pay dividends
and remit earnings to affiliated companies.
16
Our international operations sometimes face the additional risks of fluctuating
currency values, hard currency shortages and controls of foreign currency
exchange. We attempt to minimize our exposure to foreign currency fluctuations
by attempting to match anticipated foreign currency contract receipts with
anticipated like foreign currency disbursements. To the extent we are unable to
match the anticipated foreign currency receipts and disbursements related to our
contracts, we attempt to enter into forward contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with our committed
exposures.
Our operations are subject to operating risks and limits on insurance coverage,
which could expose us to potentially significant liability costs.
We are subject to a number of risks inherent in our operations, including:
- accidents resulting in the loss of life or property;
- pollution or other environmental mishaps;
- adverse weather conditions;
- mechanical failures;
- collisions;
- property losses;
- business interruption due to political action in foreign
countries; and
- labor stoppages.
We have been, and in the future we may be, named as defendants in lawsuits
asserting large claims as a result of litigation arising from events such as
these. Some of the risks inherent in our operations are either not insurable or
insurance is available only at rates that we consider uneconomical. This has
particularly been the case following the September 11, 2001 terrorist attacks in
New York City and Washington, D.C., which led to significant changes in various
insurance markets, including decreased coverage limits, more limited coverage,
additional exclusions in coverage, increased premium costs, and increased
deductibles and self insured retentions. These changes were in addition to
similar changes we had seen in certain markets prior to September 11, 2001.
Risks which are difficult to insure include, among others, the risk of war and
confiscation of property in certain areas of the world, losses or liability
resulting from acts of terrorism, certain risks relating to construction, and
pollution liability. Depending on competitive conditions and other factors, we
endeavor to obtain contractual protection against uninsured risks from our
customers. When obtained, such contractual indemnification protection may not in
all cases be supported by adequate insurance maintained by the customer. Such
insurance or contractual indemnity protection may not be sufficient or effective
under all circumstances or against all hazards to which we may be subject. A
successful claim for which we are not fully insured could have a material
adverse effect on us.
BWXT, through two of its dedicated limited liability companies, has long-term
management and operating agreements with the U.S. Government for the Y-12 and
the Pantex facilities. Most insurable liabilities arising from these sites are
not protected in our corporate insurance program but rely on government
contractual agreements and certain specialized self-insurance programs funded by
the U.S. Government. The U.S. Government has historically fulfilled its
contractual agreement to reimburse for insurable claims and we expect it to
continue this process during our administration of these two facilities.
However, it should be noted that, in most situations, the U. S. Government is
contractually obligated to pay, subject to the availability of authorized
government funds.
We have captive insurers which provide certain coverages for our subsidiary
entities and related coverages. Claims as a result of our operations, or arising
in the B&W Chapter 11 proceedings, could adversely impact the ability of these
captive insurers to respond to all claims presented, although we believe such a
result is unlikely.
17
We depend on significant customers.
Some of our industry segments derive a significant amount of their revenues and
profits from a small number of customers. The inability of these segments to
continue to perform services for a number of their large existing customers, if
not offset by contracts with new or other existing customers, could have a
material adverse effect on our business and operations.
Our significant customers include state and federal government agencies and
utilities. In particular, our Government Operations segment derives
substantially all its revenue from the U.S. Government. Some of our large
multiyear contracts with the U.S. Government are subject to annual funding
determinations. State and U.S. Government budget restraints and other factors
affecting these governments may adversely affect our business.
We may not be able to compete successfully against current and future
competitors.
Most industry segments in which we operate are highly competitive. Some of our
competitors or potential competitors have greater financial or other resources
than we have. Our operations may be adversely affected if our current
competitors or new market entrants introduce new products or services with
better features, performance, prices or other characteristics than those of our
products and services. This is significant to our offshore business in JRM,
where capital investment is becoming critical to our ability to compete.
The loss of the services of one or more of our key personnel, or our failure to
attract, assimilate and retain trained personnel in the future, could disrupt
our operations and result in loss of revenues.
Our success depends on the continued active participation of our executive
officers and key operating personnel. The loss of the services of any one of
these persons could adversely affect our operations.
Our operations require the services of employees having the technical training
and experience necessary to obtain the proper operational results. As a result,
our operations depend, to a considerable extent, on the continuing availability
of such personnel. If we should suffer any material loss of personnel to
competitors or be unable to employ additional or replacement personnel with the
requisite level of training and experience to adequately operate our equipment,
our operations could be adversely affected. While we believe our wage rates are
competitive and our relationships with our employees are satisfactory, a
significant increase in the wages paid by other employers could result in a
reduction in our workforce, increases in wage rates, or both. If either of these
events occurred for a significant period of time, our financial condition and
results of operations could be adversely impacted.
A substantial number of our employees are members of labor unions. Although we
expect to renew our union contracts without incident, if we are unable to
negotiate acceptable new contracts with our unions in the future, we could
experience strikes or other work stoppages by the affected employees, and new
contracts could result in increased operating costs attributable to both union
and non-union employees. If any such strikes or other work stoppages were to
occur, or if our other employees were to become represented by unions, we could
experience a significant disruption of our operations and higher ongoing labor
costs.
We are subject to government regulations that may adversely affect our future
operations.
Many aspects of our operations and properties are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to:
- construction and equipping of production platforms and other
marine facilities;
- marine vessel safety;
- currency conversions and repatriation;
- oil exploration and development;
- taxation of foreign earnings and earnings of expatriate
personnel; and
- use of local employees and suppliers by foreign contractors.
18
In addition, our Marine Construction Services segment depends on the demand for
its services from the oil and gas industry and, therefore, is affected by
changing taxes, price controls and other laws and regulations relating to the
oil and gas industry generally. The adoption of laws and regulations curtailing
exploration and development drilling for oil and gas for economic and other
policy reasons would adversely affect the operations of our Marine Construction
Services segment by limiting the demand for its services. We cannot determine
the extent to which our future operations and earnings may be affected by new
legislation, new regulations or changes in existing regulations.
Environmental laws and regulations and civil liability for contamination of the
environment or related personal injuries may result in increases in our
operating costs and capital expenditures and decreases in our earnings and cash
flow.
Governmental requirements relating to the protection of the environment,
including solid waste management, air quality, water quality, the
decontamination and decommissioning of former nuclear manufacturing and
processing facilities and cleanup of contaminated sites, have had a substantial
impact on our operations. These requirements are complex and subject to frequent
change. In some cases, they can impose liability for the entire cost of cleanup
on any responsible party without regard to negligence or fault and impose
liability on us for the conduct of others or conditions others have caused, or
for our acts that complied with all applicable requirements when we performed
them. Our compliance with amended, new or more stringent requirements, stricter
interpretations of existing requirements or the future discovery of
contamination may require us to make material expenditures or subject us to
liabilities that we currently do not anticipate. See Section H for further
information. In addition, some of our operations and the operations of
predecessor owners of some of our properties have exposed us to civil claims by
third parties for liability resulting from contamination of the environment or
personal injuries caused by releases of hazardous substances into the
environment. For a discussion of civil proceedings of this nature in which we
are currently involved, see Item 3.
We are subject to other risks that we discuss in other sections of this annual
report.
For discussions of various factors that affect the demand for our products and
services in our segments, see the discussions under the heading "Factors
Affecting Demand" in each of Sections B and C. For a discussion of our insurance
coverages and uninsured exposures, see Section F. For discussions of various
legal proceedings in which we are involved, in addition to those we refer to
above, see Item 3. In addition to the risks we describe or refer to above, we
are subject to other risks, contingencies and uncertainties, including those we
have referred to under the heading "Cautionary Statement Concerning
Forward-Looking Statements" in Section J.
J. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are generally
accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "plan," "goal" or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we will
specifically describe a statement as being a forward-looking statement and refer
to this cautionary statement.
In addition, various statements this Annual Report on Form 10-K contains,
including those that express a belief, expectation or intention, as well as
those that are not statements of historical fact, are forward-looking
statements. Those forward-looking statements appear in Items 1 and 2-"Business
and Properties" and Item 3-"Legal Proceedings" in Part I of this report and in
19
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the notes to our consolidated financial statements
in Item 8 of Part II of this report and elsewhere in this report. These
forward-looking statements speak only as of the date of this report; we disclaim
any obligation to update these statements unless required by securities law, and
we caution you not to rely on them unduly. We have based these forward-looking
statements on our current expectations and assumptions about future events.
While our management considers these expectations and assumptions to be
reasonable, they are inherently subject to significant business, economic,
competitive, regulatory and other risks, contingencies and uncertainties, most
of which are difficult to predict and many of which are beyond our control.
These risks, contingencies and uncertainties relate to, among other matters, the
following:
- general economic and business conditions and industry trends;
- the continued strength of the industries in which we are
involved;
- decisions about offshore developments to be made by oil and
gas companies;
- the deregulation of the U.S. electric power market;
- the highly competitive nature of our businesses;
- our future financial performance, including compliance with
covenants in our credit facilities, availability, terms and
deployment of capital;
- the continued availability of qualified personnel;
- operating risks normally incident to offshore exploration,
development and production operations;
- our ability to replace or extend our current credit facility
on or before April 30, 2004, given our results of operations
in 2002 and our current credit rating;
- the ability of JRM to maintain its forecasted financial
performance, including its ability to manage costs associated
with its EPIC spar projects;
- changes in, or our failure or inability to comply with,
government regulations and adverse outcomes from legal and
regulatory proceedings, including the results of ongoing civil
lawsuits involving alleged anticompetitive practices in our
marine construction business;
- estimates for pending and future nonemployee asbestos claims
against B&W and potential adverse developments that may occur
in the Chapter 11 reorganization proceedings and related
settlement discussions involving B&W and certain of its
subsidiaries and MII;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999 and the related ruling
issued on April 17, 2002;
- the potential impact on available insurance due to the recent
increases in bankruptcy filings by asbestos-troubled
companies;
- the potential impact on our insurance subsidiaries of B&W
asbestos-related claims under policies issued by those
subsidiaries;
- legislation recently proposed by members of the U.S. Congress
that, if enacted, could reduce or eliminate the tax advantages
we derive from being organized under the laws of the Republic
of Panama;
- recently proposed legislation that, if enacted, could limit or
prohibit us from entering into contracts with the U.S.
Government;
- changes in existing environmental regulatory matters;
- rapid technological changes;
- realization of deferred tax assets;
20
- consequences of significant changes in interest rates and
currency exchange rates;
- difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
- social, political and economic situations in foreign countries
where we do business, including, among others, countries in
the Middle East and Southeast Asia;
- the possibilities of war, other armed conflicts or terrorist
attacks;
- effects of asserted and unasserted claims;
- our ability to obtain surety bonds and letters of credit;
- the continued ability of our insurers to reimburse us for
payments made to asbestos claimants; and
- our ability to maintain builder's risk, liability and property
insurance in amounts we consider adequate at rates that we
consider economical, particularly after the impact on the
insurance industry of the September 11, 2001 terrorist
attacks.
We believe the items we have outlined above are important factors that could
cause estimates in our financial statements to differ materially from actual
results and those expressed in a forward-looking statement made in this report
or elsewhere by us or on our behalf. We have discussed many of these factors in
more detail elsewhere in this report. These factors are not necessarily all the
important factors that could affect us. Unpredictable or unknown factors we have
not discussed in this report could also have material adverse effects on actual
results of matters that are the subject of our forward-looking statements. We do
not intend to update our description of important factors each time a potential
important factor arises, except as required by applicable securities laws and
regulations. We advise our security holders that they should (1) be aware that
important factors not referred to above could affect the accuracy of our
forward-looking statements and (2) use caution and common sense when considering
our forward-looking statements.
K. AVAILABLE INFORMATION
Our website address is www.mcdermott.com. We make available through this website
under "SEC Filing," free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after we electronically file those
materials with, or furnish those materials to, the SEC.
Item 3. LEGAL PROCEEDINGS
In March 1997, MII and JRM,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"). and the heavy-lift business of JRM. Upon becoming aware of these
allegations, MII and JRMwe notified authorities, including the Antitrust Division of the
U.S.
Department of JusticeDOJ, the SEC and the European Commission. As a result of MII's and
JRM'sour prompt disclosure
of the allegations, both companiesJRM, certain other affiliates and their officers, directors
and employees at the time of the disclosure were granted immunity from criminal
prosecution by the Department of JusticeDOJ for any anti-competitiveanticompetitive acts involving worldwide
heavy-lift activities. After receivingIn June 1999, the allegations, JRM initiated actionDOJ agreed to terminate its interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer inour request to expand 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 partscope of the plea, both HeereMacimmunity to include a broader range of our marine construction
activities 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.
MII and JRM have cooperated and are continuing to cooperate with the Department
of Justice in its investigation.affiliates. The Department of JusticeDOJ had also has requested additional information
from the companiesus relating to possible anti-competitiveanticompetitive 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 withOn becoming aware of the terminationallegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. We also terminated the McDermott-ETPM joint venture, and on April 3,
1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has beenwas renamed
J. Ray McDermott Middle East, Inc.
21
On December 22, 1997, HeereMac and one of its employees pled guilty to criminal
charges by the DOJ that they and others had participated in a conspiracy to rig
bids in connection with the heavy-lift business of HeereMac in the Gulf of
Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were
fined $49.0 million and $0.1 million, respectively. As part of the plea, both
HeereMac and certain employees of HeereMac agreed to cooperate fully with the
DOJ investigation. Neither MII, JRM nor any of their officers, directors or
employees were a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in an international bid-rigging conspiracy for the sale of
marine construction services. In May 2000, another former JRM officer was
indicted by the DOJ for participating in a bid-rigging conspiracy for the sale
of marine construction services in the Gulf of Mexico. His trial was held in
February 2001 and, at the conclusion of the Government's case, the presiding
judge directed a judgment of acquittal.
We cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC had terminated its
investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certainseveral related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United StatesU.S 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-competitiveanticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and
Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in
fraudulent activity and tortiously interfered with the plaintiffs' businesses in
connection with certain offshore transportation and installation projects in the
Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In
December 1998, Den norske stats oljeselskap a.s., individually and on behalf of
certain of its ventures and its participants (collectively, "Statoil"), filed a
similar lawsuit in the same court.court (the "Statoil Litigation"). In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Phillips Litigation haveand Statoil Litigation requested punitive as well as
treble damages. In January 1999, the court dismissed without prejudice, due to
the court's lack of subject matter jurisdiction, the claims of the Phillips
Plaintiffs relating to alleged injuries sustained on any foreign projects. In
July 1999, the court also dismissed the Statoil Litigation for lack of subject
matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of
Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed
the district court decision in February 2000 and Statoil filed a motion for
rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of
their request to dismiss their remaining domestic claims in the lawsuit in order
to seek an appeal of the dismissal of their claims on foreign projects, which
request was subsequently denied. On March 12, 2001, the plaintiffs' motion for
rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The
plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On
February 20, 2002, the U.S. Supreme Court denied the petition for certiorari.
The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April
15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the
year ended December 31, 2002, Heerema and MII executed agreements to settle the
heavy-lift antitrust claims against Heerema and MII with British Gas and
Phillips, and the Court has entered an order of dismissal.
In June 1998, Shell Offshore, Inc. and certainseveral related entities also filed a
lawsuit in the United StatesU.S. 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-competitiveanticompetitive acts in
violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequent thereto,Subsequently, the following parties (acting for themselves and, in certain
cases, on behalf of their respective co-venturers and for whom they operate)
intervened as plaintiffs in the Shell Litigation: Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources
Offshore, Inc. and; The Louisiana Land & Exploration Company; Marathon Oil Company
and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.,; Green
Canyon Pipeline Company, L.L.C.
and; Delos Gathering Company, L.L.C.;
22
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
15
they operate) as plaintiffs in the Shell Litigation.S.A.. Also,
in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell LawsuitLitigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign project claims of the
plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non heavy-lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims. During the year ended December 31, 2002, Heerema and
MII executed agreements to settle heavy-lift antitrust claims against Heerema
and JRM are also cooperatingMII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf
Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington
Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass
Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering
Company L.L.C., and the Court has entered an order of dismissal. In addition,
Woodside Energy, Ltd. filed a Securitiesmotion of dismissal with prejudice, which was
granted. Recently, we entered into a settlement agreement with Conoco, Inc. and
Exchange Commission
("SEC") investigation into whether the Court entered an order of dismissal.
On December 15, 2000, a number of Norwegian oil companies may have violated U.S.
securities lawsfiled lawsuits against
MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing
Act of 1953 in connection with but not limitedprojects in Norway. Plaintiffs include Norwegian
affiliates of various of the plaintiffs in the Shell Litigation pending in
Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates,
with some by Heerema/HeereMac and none by JRM. We understand that the conduct
alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S.
civil cases. The cases were heard by the Conciliation Boards in Norway during
the first week of October 2001. The Conciliation Boards referred the cases to
the matters described
above. MII and JRM are subjectcourt of first instance for further proceedings. The plaintiffs have one
year from the date of referral to a judicial order entered in 1976,proceed with the consent of MI (which at that time was the parentcases. Several of the
McDermott groupplaintiffs who filed cases before the Conciliation Boards have filed writs with
the courts of companies), pursuantfirst instance in order to an SEC complaint (the "Consent Decree"). The Consent
Decree prohibitscommence 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.court proceedings.
Settlement discussions are underway with these plaintiffs.
As a result of the initial allegations of wrongdoing in March 1997, both MII and
JRMwe formed and continue to maintaina
special committeescommittee of theirour Board of Directors to monitor and oversee the companies'our
investigation into all of these matters. It is not possible to predictOur Board of Directors concluded that
the ultimate outcomespecial committee was no longer necessary, and it was dissolved in 2002.
Because we have reached settlement agreements with the vast majority of the Departmentoil
company claimants, we have adjusted our reserve to more appropriately reflect
the risks and exposures of Justice
investigation, the SEC investigation, the companies' 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.remaining claims.
B&W and Atlantic Richfield Company ("ARCO")are defendants in lawsuitsa lawsuit filed on
June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the United StatesU. S. District
Court for the Western District of Pennsylvania involving over 120Pennsylvania. The suit involves approximately
500 separate casesclaims for compensatory and punitive damages relating to the
operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"), alleging,. The plaintiffs in the Hall Litigation
allege, among other things, that they suffered personal injury, property damage
and other damages as a result of radioactive emissions from these facilities. In
September 1998, a jury found B&W and ARCO liable to theeight plaintiffs in the
first eight cases brought to trial, awarding $36,700,000$36.7 million in compensatory damages. In
June 1999, the district court set aside the $36.7 million judgment and ordered a
new trial on all issues. In November 1999, the district court allowed an
interlocutory appeal by the plaintiffs of certain issues, including the granting
of the new trial and the court's rulings on certain evidentiary matters, which,
following B&W believes that adequate insurance is available&W's bankruptcy filing, the Third Circuit Court of Appeals declined
to meet any possible liability in this matter. However, the jury verdict is not
final, and a number of post trial lawsuits are pending contesting this
contingency. There is a controversy between B&W and its insurer as to the
amount of insurance coverage under the insurance policies covering these
facilities availableaccept for this award, and all other claims. B&W has filed an
action seeking a judicial determination of this matter, which is currently
pending in a Pennsylvania court. Management believes that the 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.review.
In connection with the foregoing,1998, B&W settled all pending and future punitive damage claims represented by the
plaintiffs' lawyers in the Hall
Litigation for $8,000,000 and$8.0 million for which B&W seeks reimbursement of this amount from other
parties. Two purported class actionsThere is a controversy between B&W and its insurers as to the amount of
coverage available under
23
the liability insurance policies covering the facilities. B&W filed a
declaratory judgment action in a Pennsylvania State Court seeking a judicial
determination as to the amount of coverage available under the policies. On
April 28, 2001, in response to cross-motions for partial summary judgment, the
Pennsylvania State Court issued its ruling regarding: (1) the applicable trigger
of coverage under the Nuclear Energy Liability Policies issued by B&W's
insurers; and (2) the scope of the insurers' defense obligations to B&W under
these policies. With respect to the trigger of coverage, the Pennsylvania State
Court held that "manifestation" is an applicable trigger with respect to the
underlying claims at issue. Although the Court did not make any determination of
coverage with respect to any of the underlying claims, we believe the effect of
its ruling is to increase the amount of coverage potentially available to B&W
under the policies at issue to $320.0 million. With respect to the insurers'
duty to defend B&W, the Court held that B&W is entitled to separate and
independent counsel funded by the insurers. On May 21, 2001, the Court granted
the insurers' motion for reconsideration of the April 25, 2001 order. On October
1, 2001, the Court entered its order reaffirming its original substantive
insurance coverage rulings and further certified the order for immediate appeal
by any party. B&W's insurers filed an appeal in November 2001. On November 25,
2002, the Pennsylvania Superior Court affirmed the rulings in favor of B&W on
the trigger of coverage and duty to defend issues. On December 24, 2002, B&W's
insurers filed a petition for the allowance of an appeal in the Pennsylvania
Supreme Court. The Pennsylvania Supreme Court has not yet made any determination
regarding whether to accept discretionary review of the insurers' appeal.
The plaintiffs' remaining claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W filed a
complaint for declaratory and injunctive relief with the Bankruptcy Court
seeking to stay the pursuit of the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied
in October 2000. B&W appealed the CivilBankruptcy Court's Order and on May 18, 2001,
the U.S. District Court for the Parish of Orleans, StateEastern District of Louisiana, by alleged public shareholderswhich has
jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the
Bankruptcy Court's Order. We believe that all claims under the Hall Litigation
will be resolved within the limits of coverage of our insurance policies;
moreover, the proposed settlement agreement and plan of reorganization in the
B&W Chapter 11 proceedings include an overall settlement of this dispute.
However, should the B&W Chapter 11 settlement fail, or should the settlement
particular to the Hall Litigation and the Apollo-Parks issue not be consummated,
there may be an issue as to whether our insurance coverage is adequate and we
may be materially adversely impacted if our liabilities exceed our coverage. B&W
transferred the two facilities subject to the Hall Litigation to BWXT in June
1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1998, a subsidiary of JRM challenging MII's initial proposal(the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of the module. In December 1999,
Texaco filed a lawsuit seeking consequential damages for delays resulting from
the incident, as well as costs incurred to acquirecomplete the publicly traded sharesproject with another
contractor and uninsured losses. This lawsuit was filed in the U. S. District
Court for the Eastern District of Louisiana against a number of parties, some of
which brought third-party claims against the Operator Subsidiary and another
subsidiary of JRM, Common Stockthe owner of the vessel that attempted the lift of the deck
module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator
Subsidiary were subsequently tendered as direct defendants to Texaco. In
addition to Texaco's claims in the federal court action, damages for the loss of
the south deck module have been sought by Texaco's builder's risk insurers in
claims against the Owner Subsidiary and the other defendants, excluding the
Operator Subsidiary, which was an additional insured under the policy. Total
damages sought by Texaco and its builder's risk insurers in the federal court
proceeding approximate $280 million. Texaco's federal court claims against the
Operator Subsidiary were stayed in favor of a pending binding arbitration
proceeding between them required by contract, which the Operator Subsidiary
initiated to collect $23 million due for work performed under the contract, and
in which Texaco also sought the same consequential damages and uninsured losses
as it seeks in the federal court action, and also seeks approximately $2 million
in other damages not sought in the federal court action. The federal court
trial, on the issue of liability only, commenced in October 2001. On March 27,
2002, the Court orally found that the Owner Subsidiary was liable to Texaco,
specifically finding that Texaco had failed to sustain its burden of proof
against all named defendants except the Owner Subsidiary relative to liability
issues, and, alternatively, that the Operator Subsidiary's highly extraordinary
negligence served as a superceding cause of the loss. The finding was
subsequently set forth in a stock for stock merger.written order dated April 5, 2002, which found
24
against the Owner Subsidiary on the claims of Texaco's builder's risk insurers
in addition to the claims of Texaco. On May 7, 1999,6, 2002, the Owner Subsidiary filed
a notice of appeal of the April 5, 2002 order, which appeal it subsequently
withdrew without prejudice for technical reasons. On January 13, 2003, the
district court granted the Owner Subsidiary's motions for summary judgment with
respect to Texaco's claims against the Owner Subsidiary, and vacated its
previous findings to the contrary. The Court has not yet ruled on the Owner
Subsidiary's similar motion against Texaco's builder's risk insurers. The case
had been transferred to a new district court judge, but was subsequently
transferred back to the original district court judge. The scheduled trial date
of February 10, 2003 on damages and certain insurance issues has been continued
without date. The trial in the binding arbitration proceeding commenced on
January 13, 2003 and has proceeded on various dates through March 14, and will
recommence on May 26, 2003 for one week and at various times thereafter.
Although the Owner Subsidiary is not a party to the arbitration, we believe that
the claims against the Owner Subsidiary, like those against the Operator
Subsidiary, are governed by the contractual provisions which waive the recovery
of consequential damages against the Operator Subsidiary and its affiliates. We
plan to vigorously pursue the arbitration proceeding and any appeals process, if
necessary, in the federal court action, and we do not believe that a material
loss with respect to these matters is likely. In addition, we believe our
insurance will provide coverage for the builder's risk and consequential damage
claims in the event of liability. However, the ultimate outcome of the
proceedings and any challenge by our insurers to coverage is uncertain, and an
adverse ruling in either the arbitration or court proceeding or any potential
proceeding with respect to insurance coverage for any losses, or any bonding
requirements applicable to any appeal from an adverse ruling, could have a
material adverse impact on our consolidated financial position, results of
operations and cash flow.
In early April 2001, a group of insurers that includes certain underwriters at
Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the B&W
Chapter 11 proceedings in the U.S. District Court for the Eastern District of
Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy
Court, which actions have been consolidated before the U.S. District Court for
the Eastern District of Louisiana, which has jurisdiction over portions of the
B&W Chapter 11 proceeding. The insurance policies at issue in this litigation
provide a significant portion of B&W's excess liability coverage available for
the resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions
of an agreement they entered into with these Plaintiff Insurers relating to
insurance payments by the Plaintiff Insurers as a result of asbestos claims.
They also allege that MII and B&W have wrongfully attempted to expand the
underwriters' obligations under that settlement agreement and the applicable
policies through the filing of a plan of reorganization in the B&W bankruptcy
proceeding that contemplates the transfer of rights under that agreement and
those policies to a trust that will manage the pending and future
asbestos-related claims against B&W and certain of its affiliates. The
complaints seek declarations that, among other things, the defendants are in
material breach of the settlement agreement with the Plaintiff Insurers and that
the Plaintiff Insurers owe no further obligations to MII and B&W under that
agreement. With respect to the insurance policies, if the Plaintiff Insurers
should succeed in terminating the settlement agreement, they seek to litigate
issues under the policies in order to reduce their coverage obligations. The
complaint against MII also seeks a recovery of unspecified compensatory damages.
B&W filed a counterclaim against the Plaintiff Insurers, which asserts a claim
for breach of contract for amounts owed and unpaid under the settlement
agreement, as well as a claim for anticipatory breach for amounts that will be
owed in the future under the settlement agreement. B&W seeks a declaratory
judgment as to B&W's rights and the obligations of the Plaintiff Insurers and
other insurers under the settlement agreement and under their respective
insurance policies with respect to asbestos claims. On October 2, 2001, MII and
B&W filed dispositive motions with the District Court seeking dismissal of the
Plaintiff Insurers' claim that MII and B&W had materially breached the
settlement agreement at issue. In a ruling issued January 4, 2002, the District
Court granted MII's and B&W's motion for summary judgment and dismissed the
declaratory judgment action filed by the Plaintiff Insurers. The ruling
concluded that the Plaintiff Insurers' claims lacked a factual or legal basis.
Our agreement with the
25
underwriters went into effect in April 1990 and has served as the allocation
and payment mechanism to resolve many of the asbestos claims against B&W. We
believe this ruling reflects the extent of the underwriter's contractual
obligations and underscores that this coverage is available to settle B&W's
asbestos claims. As a result of the January 4, 2002 ruling, the only claims that
remained in the litigation were B&W's counterclaims against the Plaintiff
Insurers and against other insurers. The parties agreed to dismiss without
prejudice those of B&W's counterclaims seeking a declaratory judgment regarding
the parties' respective rights and obligations under the settlement agreement.
B&W's counterclaim seeking a money judgment for approximately $6.5 million due
and owing by insurers under the settlement agreement remains pending. A trial of
this counterclaim is scheduled for April 24, 2003. The parties have reached a
preliminary agreement in principle to settle B&W's counterclaim for in excess of
the claimed amounts, and approximately $4.3 million has been received to date
from the insurers, subject to reimbursement in the event a final settlement
agreement is not reached. Following the resolution of this remaining
counterclaim, the Plaintiff Insurers will have an opportunity to appeal the
January 4, 2002 ruling. At this point, the Plaintiff Insurers have not indicated
whether they intend to pursue an appeal.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers
Casualty and Surety Company (collectively, "Travelers") filed an adversary
proceeding against B&W and related entities in the U.S. Bankruptcy Court for the
Eastern District of Louisiana seeking a declaratory judgment that Travelers is
not obligated to provide any coverage to B&W with respect to so-called
"non-products" asbestos bodily injury liabilities on account of previous
agreements entered into by the parties. On or about the same date, Travelers
filed a similar declaratory judgment against MI and MII in the U.S. District
Court for the Eastern District of Louisiana. The cases filed against MI and MII
have been consolidated before the District Court and the ACC and the FCR have
intervened in the action. On February 4, 2002, B&W and MII filed answers to
Travelers' complaints, denying that previous agreements operate to release
Travelers from coverage responsibility for asbestos "non-products" liabilities
and asserting counterclaims requesting a declaratory judgment specifying
Travelers' duties and obligations with respect to coverage for B&W's asbestos
liabilities. The Court has bifurcated the case into two phases, with Phase I
addressing the issue of whether previous agreements between the parties serve to
release Travelers from any coverage responsibility for asbestos "non-products"
claims. On August 14, 2002, the Court granted B&W's and MII's motion for leave
to file an amended answer and counterclaims, adding additional counterclaims
against Travelers. Discovery was completed in September 2002 and the parties
filed cross-motions for summary judgment, which were heard on February 26, 2003.
We are awaiting the Court's ruling on these motions. No trial date has been
scheduled.
On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana
against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology,
Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at
the time of, or rendered insolvent as a result of, a corporate reorganization
that we completed in the fiscal year ended March 31, 1999, which included, among
other things, B&W's cancellation of a $313 million note receivable and B&W's
transfer of all the capital stock of Hudson Products Corporation, Tracy Power,
BWXT and McDermott Technology, Inc. to BWICO, and (2) the transfers are not
voidable. As an alternative, and only in the event that the Bankruptcy Court
finds B&W was insolvent at a pertinent time and the transactions are voidable
under applicable law, the action preserved B&W's claims against the defendants.
The Bankruptcy Court permitted the ACC and the FCR in the Chapter 11 proceeding
to intervene and proceed as plaintiff-intervenors and realigned B&W as a
defendant in this action. The ACC and the FCR are asserting in this action,
among other things, that B&W was insolvent at the time of the transfers and that
the transfers should be voided. The Bankruptcy Court ruled that Louisiana law
applied to the solvency issue in this action. Trial commenced on October 22,
2001 to determine B&W's solvency at the time of the corporate reorganization and
concluded on November 2, 2001. In a ruling filed on February 8, 2002, the
Bankruptcy Court found B&W solvent at the time of the corporate reorganization.
On February 19, 2002, the ACC and FCR filed a motion with the District Court
seeking leave to appeal the February 8, 2002 ruling. On February 20, 2002, MI,
BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed a
motion for summary judgment asking that judgment be entered on a variety of
additional pending counts
26
presented by the ACC and FCR that we believe are resolved by the February 8,
2002 ruling. On March 20, 2002, at a hearing in the Bankruptcy Court, the judge
granted this motion and dismissed all claims asserted in complaints filed by the
ACC and the FCR regarding the 1998 transfer of certain assets from B&W to its
parent, which ruling was memorialized in an Order and Judgment dated April 17,
2002 that dismissed the proceeding with prejudice. On April 26, 2002, the ACC
and FCR filed a notice of appeal of the April 17, 2002 Order and Judgment and on
June 20, 2002 filed their appeal brief. On July 22, 2002, MI, BWICO, BWXT,
Hudson Products Corporation and McDermott Technology, Inc. filed their brief in
opposition. The ACC and FCR have not yet filed their reply brief pending
discussions regarding settlement and a consensual joint plan of reorganization.
In addition, an injunction preventing asbestos suits from being brought against
nonfiling affiliates of B&W, including MI, JRM announcedand MII, and B&W subsidiaries not
involved in the Chapter 11 extends through April 14, 2003. See Note 20 to our
consolidated financial statements for information regarding B&W's potential
liability for nonemployee asbestos claims and additional information concerning
the B&W Chapter 11 proceedings.
On July 12, 2002, AE Energietechnic GmbH ("Austrian Energy") applied for the
appointment of a receiver in the Bankruptcy Court of Graz, Austria. Austrian
Energy is a subsidiary of Babcock-Borsig AG, which filed for bankruptcy on July
4, 2002 in Germany. Babcock and Wilcox Volund ApS ("Volund"), which we sold to
B&W in October 2002, is jointly and severally liable with Austrian Energy
pursuant to both their consortium agreement as well as their contract with the
ultimate customer, SK Energi, for construction of a biomass boiler facility in
Denmark. As a result of performance delays attributable to Austrian Energy and
other factors, SK Energi has asserted claims for damages associated with the
failure to complete the construction and commissioning of the facility on
schedule. On August 30, 2002, Volund filed a claim against Austrian Energy in
the Austrian Bankruptcy Court to establish Austrian Energy's liability for SK
Energi's claims, which was subsequently rejected in its entirety by Austrian
Energy. On October 8, 2002, Austrian Energy notified Volund that theyit had
terminated its consortium agreement with Volund in accordance with Austrian
bankruptcy laws. Volund is pursuing its claims in the Austrian Bankruptcy Court
as well as other potential remedies available under applicable law. Assuming no
recovery from Austrian Energy, the cost to Volund is currently estimated at $2.5
million, which we accrued during the three months ended September 30, 2002. See
Note 2 to our consolidated financial statements for information concerning the
sale of Volund to B&W.
In February 2002, one of our subsidiaries, J. Ray McDermott West Africa, Inc.
("JRMWA"), and Global Energy Company Limited ("GEC") entered into a mergerjoint
venture agreement related to a construction project. The parties entered into an
associated escrow agreement, with Citibank as the escrow agent, pursuant to
which JRMWA deposited $10.2 million into an escrow account at Citibank. The
joint venture agreement provided that, under certain circumstances of
termination, GEC would be entitled to certain amounts from the escrow account
and such transfer would constitute a full and final release of JRMWA from all
obligations, and JRMWA would retain the remainder of the escrowed funds. On July
15, 2002, GEC filed two instruments with the High Court of Lagos State, Nigeria
against JRMWA, and Citibank: (1) an application for injunction to restrain
Citibank from remitting the sum of $10.2 million to JRMWA; and (2) a lawsuit
seeking a declaration that GEC is entitled to specific performance and that the
$10.2 million held by Citibank can only be exchanged for shares representing a
12.75 % interest in Nigerdock Nigeria PLC. Also on July 15, 2002, JRMWA filed an
application for injunction to restrain Citibank from remitting $1.3 million to
GEC, which application for injunctive relief JRMWA subsequently dismissed as
duplicative. On August 19, 2002, JRMWA filed a motion to stay proceedings in
Nigeria in lieu of arbitration in London, as provided for in the joint venture
agreement. GEC had attempted through a series of motions to dismiss JRMWA's
motion to stay proceedings in lieu of arbitration. The hearing on JRMWA's motion
to stay was set for October 30, 2002 and on that date the parties agreed to a
settlement. Pursuant to the settlement, GEC received $1.8 million and JRMWA
received $8.4 million of the escrowed funds, JRMWA waived invoiced amounts of
approximately $1.0 million and each party was granted a full and final release
and discharge of all claims. This settlement was entered as an order of the
Nigerian High Court on October 31, 2002.
In September 2002, we were advised that the Securities and Exchange Commission
and the New York Stock Exchange were conducting inquiries into the trading of
MII will acquire allsecurities occurring prior to our public announcement of such publicly traded sharesAugust 7, 2002 with
respect to our second quarter 2002 results, our revised 2002 guidance and
developments in negotiations relating to the B&W Chapter 11 proceedings. We have
27
recently become aware of JRM Common Stock for $35.62
per sharea formal order of investigation issued by the SEC in
connection with its inquiry, pursuant to a cash tender offer followed by a second step merger. Onwhich the same day, the Court entered an order consolidating the two actions under the
caption In re J. Ray McDermott Shareholder Litigation. There have been no
further proceedings in eitherStaff of the actionsSEC has
requested additional information from us and several of our current and former
officers and directors. We continue to date. JRMcooperate fully with both inquiries and
MII believehave provided all information that has been requested. Several of our current
and former officers and directors have voluntarily given interviews and have
responded, or are in the actions are without merit and intendprocess of responding, to contest these suits vigorously.SEC subpoenas requesting
additional information.
Additionally, due to the nature of itsour business, McDermott is,we are, from time to time,
involved in routine litigation or subject to disputes or claims related to itsour
business activities. It isactivities, including performance- or warranty-related matters under
our customer and supplier contracts and other business arrangements. In our
management's opinion, that none of this routine litigation or disputes and claims will have a
material adverse effect on McDermott'sour consolidated financial position, or results of
operations.operations or cash flows.
See Item 1H and Note 1120 to theour consolidated financial statements for information regarding
McDermott'sB&W's potential liability for non-employee products liabilitynonemployee asbestos claims.
16
claims and the settlement
negotiations and other activities related to the B&W Chapter 11 reorganization
proceedings commenced by B&W and certain of its subsidiaries on February 22,
2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NoWe did not submit any matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the
solicitation of proxies or otherwise.
17
P A R T I
ITEMotherwise during the quarter ended December 31, 2002.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCKEQUITY AND RELATED STOCKHOLDER
MATTERS
MII's Common StockOur common stock is traded on the New York Stock Exchange. High and low stock
prices and dividends declared forin the fiscal years ended MarchDecember 31, 19982001 and 19992002 were as follows:
FISCAL YEAR 1998ENDED DECEMBER 31, 2001
SALES PRICE
CASH
----------------------- DIVIDENDS-----------
QUARTER ENDED HIGH LOW
DECLARED---- ---
March 30, 2001 $ 16.850 $ 10.125
June 29, 2001 $ 14.440 $ 9.890
September 28, 2001 $ 12.020 $ 7.500
December 31, 2001 $ 12.570 $ 7.310
YEAR ENDED DECEMBER 31, 2002
SALES PRICE
-----------
QUARTER ENDED HIGH LOW
---- ---
March 31, 2002 $ 16.420 $ 10.950
June 30, 2002 $ 17.290 $ 5.600
September 30, 2002 $ 8.100 $ 2.950
December 31, 2002 $ 6.640 $ 2.340
In the third quarter of 2000, MII's Board of Directors determined to suspend the
payment of regular dividends on MII's common stock for an indefinite period.
28
As of December 31, 2002, there were approximately 3,792 record holders of our
common stock.
The following table provides information on our equity compensation plans as of
December 31, 2002:
Number of Weighted- Number of
securities to be average securities
issued upon exercise exercise price remaining
of outstanding of outstanding available for
Plan Category options and rights options and rights future issuance
- ------------------ ----------- --------- ------------------------------------------------------------------------------------------------------
June 30, 1997 $ 29Equity compensation plans
approved by security holders 5,483,538 $15.16 2,101,567
Equity compensation plans not
approved by security holders(1) 2,321,126 $14.08 694,849
- 5/8 $18 $0.05
September 30, 1997 36 - 1/2 28 - 1/2 0.05
December 31, 1997 40 - 1/8 28 - 7/8 0.05
March 31, 1998 41 - 15/16 29 - 1/4 0.05---------------------------------------------------------------------------------------------
Total 7,804,664 $14.84 2,796,416
=============================================================================================
FISCAL YEAR 1999
SALES PRICE CASH
----------------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------------ ----------- --------- ---------
June 30, 1998 $43 - 15/16 $ 34 - 3/8 $0.05
September 30, 1998 35 19 - 1/4 0.05
December 31, 1998 32 - 5/16 21 - 31/32 0.05
March 31, 1999 27 19 - 1/4 0.05
As(1) Reflects information on our 1992 Senior Management Stock Plan, which is our
only equity compensation plan that has not been approved by our
stockholders and that (1) has any outstanding awards that have not been
exercised or (2) can be used for future grants of March 31, 1999, the approximate number of record holders of Common Stock
was 4,609.
18
ITEMequity-based awards. See
Note 9 to our consolidated financial statements for more information
regarding this plan.
Item 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED MARCHFor the For the
Nine-Month Fiscal
For the Years Ended Period Ended Year Ended
December 31, December 31, March 31,
2002 2001 2000(1) 1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ----------1999
---- ---- ------- ------------- ----
(In thousands, except for per share amounts)
Revenues $3,149,985 $3,674,635 $3,150,850 $3,244,318 $3,043,680$ 1,748,681 $ 1,896,948 $ 1,813,670 $ 1,844,298 $ 3,056,920
Income (Loss) from Continuing Operations $ (786,204) $ (24,422) $ (24,864) $ (1,435) $ 185,183
Income (Loss) before Extraordinary Item and Cumulative Effect of
Accounting Change$ (776,735) $ (20,857) $ (22,082) $ 440 $ 192,081 $ 215,690 $ (206,105) $ 20,625 $ 10,876
Net Income (Loss) $ 153,362(776,394) $ 215,690(20,022) $ (206,105)(22,082) $ 20,625440 $ 9,111153,362
Basic Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations $ (12.71) $ (0.40) $ (0.42) $ (0.02) $ 3.14
Income (Loss) before Extraordinary Item and Cumulative Effect of
Accounting Change$ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.25 $ 3.74 $ (3.95) $ 0.23 $ 0.05
Net Income (Loss) $ 2.60(12.55) $ 3.74(0.33) $ (3.95)(0.37) $ 0.230.01 $ 0.022.60
Diluted Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations $ (12.71) $ (0.40) $ (0.42) $ (0.02) $ 3.05
Income (Loss) before Extraordinary Item and Cumulative Effect of
Accounting Change$ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.16 $ 3.48 $ (3.95) $ 0.23 $ 0.05
Net Income (Loss) $ 2.53(12.55) $ 3.48(0.33) $ (3.95)(0.37) $ 0.230.01 $ 0.022.53
Total Assets $4,305,520 $4,501,130 $4,599,482 $4,387,251 $4,751,670$ 1,278,171 $ 2,103,840 $ 2,055,627 $ 3,874,891 $ 4,305,520
Current Maturities of Long-Term Debt $ 323,77455,577 $ 598,182209,480 $ 667,174258 $ 576,25687 $ 579,101
Subsidiary's Redeemable
Preferred Stocks - 155,358 170,983 173,301 179,251
---------------------------------------------------------------
Total31,126
Long-Term Debt $ 323,77486,104 $ 753,540100,393 $ 838,157323,157 $ 749,557323,014 $ 758,352323,774
Cash Dividends per Common Share $ 0.20- $ 0.20- $ 0.600.10 $ 1.000.15 $ 1.000.20
(1) Effective February 22, 2000, our consolidated financial results exclude the
results of B&W and its consolidated subsidiaries.
See Note 18 to theour consolidated financial statements for significant items
included in the years ended December 31, 2002 and 2001.
Pretax results for the year ended December 31, 2000 include losses totaling
$23.4 million to exit certain foreign joint ventures.
Pretax results for the nine-month period ended December 31, 1999 include a loss
on the curtailment of a foreign pension plan of $37.8 million.
Our results for the fiscal year ended March 31, 1999 and 1998 results.
Fiscal year 1997 results include:
. asset impairment losses of $54,642,000,
. gains on asset disposals of $72,121,000, including the realization of
$12,271,000 of the deferred- a gain on the saledissolution of major marine vessels to
HeereMac,
. favorable workers' compensation costa joint venture of $37.4 million;
29
- a gain on the settlement and other insurance adjustmentscurtailment of $21,441,000,
.postretirement
benefit plans of $27.6 million;
- interest income of $18.6 million on domestic tax refunds;
- a provision of $72,400,000 for estimated future non-employee products
asbestos claims,
. write-downs of equity investments totaling $25,875,000,
. the write-down of certain claims of $12,506,000 for which recovery was not
probable, and
. a $10,285,000 provision related to employee severance costs.
Fiscal year 1996 results include:
. an equity income gain of $30,612,000 resulting$12.0 million from the sale of two power
purchase contracts,
. favorable workers' compensation costassets of a joint
venture;
- an $8.0 million settlement of punitive damage claims in a
civil suit associated with a Pennsylvania facility we formerly
operated;
- an extraordinary loss on the retirement of debt of $38.7
million;
- a loss of $85.2 million for estimated costs relating to
estimated future nonemployee asbestos claims;
- losses of $21.9 million related to impairment of assets and
other insurance adjustmentsgoodwill;
- various provisions of $24,640,000,
. a gain$20.3 million related to potential
settlements of $34,788,000 resulting from the sale of McDermott's interest in
Caspian Sea oil fields,litigation and .contract disputes; and
- the write-off of an insurance claim$12.6 million of $12,600,000 due to an unfavorable
arbitration ruling related to the recovery of cost incurred for corrective
action in certain utility and industrial installations.
19
Fiscal year 1995 results include:
.receivables from a $46,489,000 charge for the decontamination, decommissioning and closing of
certain nuclear manufacturing facilities and the closing of a manufacturing
facility,
. a $14,478,000 charge for the reduction of estimated products liability
asbestos claims recoveries from insurers, and
. a $26,300,000 benefit for a reduction in accrued interest expense due to the
settlement of outstanding tax issues.
See Note 3 to the consolidated financial statements regarding the change to the
cost method of accounting for McDermott's investment in the HeereMac joint
venture in fiscal year 1997. Equity in income of HeereMac was $1,083,000 and
$6,244,000 in fiscal years 1996 and 1995, respectively. See Note 3 regarding
the April 3, 1998 termination of the McDermott-ETPM joint
venture.
Fiscal year
1995 includes the cumulative effect of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 112. See Note 11 regarding the uncertainty
as to the ultimate loss relating to products liability asbestos claims and the
results of the ongoing investigations into possible anti-competitive practices
by MII and JRM, and related civil lawsuits.
20
ITEMItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Revenues of the Marine Construction Services segment are largely a function of
the level of oil and gas development activityStatements we make 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, and
backlog has declined over $850,000,000 since the beginning of the fiscal year.
At the current backlog level, management expects revenues in fiscal year 2000 to
be as much as forty percent lower than in the current 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 issue inquiries relating to the refurbishment or replacement of
existing recovery boilers. Management expects the fiscal year 2000 operating
activity of this segment to be about the same as in the current fiscal year.
Revenues of the Government Operations segment are largely a function of capital
spending by the U.S. Government. Management does not expect this segment to
experience any significant growth because of reductions in the defense budget
over the past several years; however, management expects the segment to remain
relatively constant since it is the sole-source provider of nuclear fuel
assemblies and nuclear reactor components to the U.S. Government. Management
expects the fiscal year 2000 operating activity of this segment to be about the
same as in the current fiscal year.
Revenues of Industrial Operations are affected by variations in the business
cycles in the 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. Management expects the fiscal year
2000 operating activity of this segment to be about the same as in the current
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. McDermott attempts to minimize its exposure to changes
in foreign currency exchange rates by matching foreign currency contract
receipts with like foreign currency disbursements. To the extent that it is
unable to match the foreign currency receipts and disbursements related to its
contracts, McDermott enters into forward exchange contracts to reduce the impact
of foreign exchange rate movements on operating results.
21
Statements made hereinfollowing discussion which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward looking. They involveforward-looking statements that are subject to risks, uncertainties and
assumptions. Our actual results, performance or achievements, or industry
results, could differ materially from those we express in the following
discussion as a result of a variety of factors, including the risks and
uncertainties we have referred to under the headings "Risk Factors" and
"Cautionary Statement Concerning Forward-Looking Statements" in Items 1 and 2 of
Part I of this report.
GENERAL
In general, our business segments are composed of capital-intensive businesses
that rely on large contracts for a substantial amount of their revenues.
The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon-producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant oil and gas development
projects. We expect our Marine Construction Services segment's revenues to
increase during 2003, primarily for deepwater projects and projects in the
Azerbaijan sector of the Caspian Sea. We believe the oil and gas exploration and
production industry is focused on deepwater projects and that the deepwater
floater market will be robust over the next several years. JRM's future success
is heavily dependent on its ability to compete successfully in the deepwater
market. While we expect our Marine Construction Services segment revenues to
increase in 2003, our Gulf of Mexico marine operations will face challenges in
2003, due to an extremely competitive environment. We are in the process of
performing a strategic analysis of our Gulf of Mexico marine business and plan
to take a number of risksactions to improve our ability to compete in this market on
a rational basis. These actions may include downsizing our operational support
base, selling or disposing of some of our marine equipment and uncertainties thatother cost
cutting measures. These factors may cause actual resultshave a significant impact on our anticipated
Marine Construction Services segment income in future periods.
Due to differ
materially from such forward-looking statements. These risksthe deterioration in this segment's financial performance during the year
ended December 31, 2002, we revised our expectations concerning this segment's
future earnings and uncertainties
include:
. decisions about offshore developments to be made by oilcash flow and gas companies,
.tested the deregulationgoodwill of the Marine Construction
Services segment for impairment. During the year ended December 31, 2002, we
recorded an impairment charge of $313.0 million, which was the total amount of
this segment's goodwill.
The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. energy market,
. governmental regulationGovernment. As a supplier of nuclear components for
the U.S. Navy, BWXT is a significant participant in the defense industry. We
recognized an increase in bookings during the year ended December 31, 2002 that
has allowed us to reach a record backlog in our Government Operations.
Additionally, with BWXT's unique capability of full life-cycle management of
special nuclear materials, facilities and technologies, BWXT
30
is poised to continue to participate in the continuing cleanup and management of
the Department of Energy's nuclear sites and weapons complexes. We currently
expect the operating results of this segment to continue to improve in 2003.
The results of operations of our Industrial Operations segment include only the
results of MECL, which we sold in October 2001. The results of Hudson Products
Corporation ("HPC") are reported in discontinued operations. We sold HPC in July
2002. See Note 2 to our consolidated financial statements for further
information on discontinued operations. In addition, we now include the results
of MTI in Government Operations. MTI was previously included in our Industrial
Operations segment.
The results of operations of our Power Generation Systems segment include
primarily the results of Volund, which we sold to B&W on October 11, 2002. See
Note 2 to our consolidated financial statements for information concerning that
sale.
As a result of the Chapter 11 reorganization proceedings involving B&W and
several of its subsidiaries, we stopped consolidating the results of operations
of B&W and its subsidiaries in our consolidated financial statements and we have
been presenting our investment in B&W on the cost method. The Chapter 11 filing,
along with subsequent filings and negotiations, led to increased uncertainty
with respect to the amounts, means and timing of the ultimate settlement of
asbestos claims and the continued fundingrecovery of McDermott's contractsour investment in B&W. Due to this increased
uncertainty, we wrote off our net investment in B&W in the quarter ended June
30, 2002. The total impairment charge of $224.7 million included our investment
in B&W of $187.0 million and other related assets totaling $37.7 million,
primarily consisting of accounts receivable from B&W, for which we provided an
allowance of $18.2 million. This charge was precipitated by a combination of
factors, including a change in our expectations regarding our ability to retain
our equity in B&W. During the quarter ended September 30, 2002, we reached an
agreement in principle with U.S. government agencies,
. estimates for pendingrepresentatives of the present and future non-employee asbestos
claims,
personal injury claimants in the B&W Chapter 11 proceedings on several key
terms, which served as a basis for continuing negotiations. On December 19,
2002, drafts of a joint plan of reorganization and settlement agreement,
together with a draft of a related disclosure statement, were filed in the
Chapter 11 proceedings, and we determined that a liability related to the
proposed settlement is probable and that the value is reasonably estimable.
Accordingly, at December 31, 2002, we established an estimate for the cost of
the settlement of the B&W bankruptcy proceedings of $110.0 million, including
related tax expense of $23.6 million. See Note 20 to our consolidated financial
statements for details regarding this estimate and for further information
regarding developments in negotiations relating to the B&W Chapter 11
proceedings. Through February 21, 2000, B&W's and its subsidiaries' results are
included in our segment results under Power Generation Systems - B&W (see Note
17 to our consolidated financial statements). Accordingly, B&W and its
consolidated subsidiaries' pre-bankruptcy filing revenues of $155.8 million and
operating income of $8.0 million are included in our consolidated financial
results for the highly competitive natureyear ended December 31, 2000.
At December 31, 2002, in accordance with Statement of McDermott's businesses,
. operating risksFinancial Accounting
Standards ("SFAS") No. 87, Employers' Accounting for Pensions," we recognized a
minimum pension liability of approximately $452 million. This recognition
resulted in a decrease in our prepaid pension asset of $122 million, an increase
in our pension liability of $345 million and an increase in other intangible
assets of $15 million. The increase in our minimum pension liability primarily
resulted from the combination of the downturn in financial markets in 2002 and
the low interest rates in effect at December 31, 2002.
As negotiations relating to the B&W Chapter 11 proceedings have progressed, it
has, in our judgment, become probable that we will spin off the portion of MI's
qualified pension plan related to the active and retired employees of B&W as
part of a final settlement. If we effect such a spin-off, we will be required to
recognize any curtailment and settlement gains or losses associated with the
marine construction services business,
. economicspin-off at the time we effect the spin-off. Curtailment and political conditions in Asia,
. the resultssettlement gains or
losses are determined based on actuarial calculations as of the ongoing investigationdate of the
spin-off. Based on data provided by our actuary, if this anticipated spin-off
had occurred on December 31, 2002, we would have recorded curtailment and
settlement losses totaling $117 million, with no associated tax benefits. In
addition, based on data provided by our actuary at December 31, 2002, we would
have also recorded a reduction in our charge to Other Comprehensive Income for
31
recognition of our minimum pension liability totaling approximately $226
million. If we had recorded these items at December 31, 2002, our Stockholders'
Equity (Deficit) would have improved by approximately $109 million. However,
under generally accepted accounting principles, we cannot record the effect of
the spin-off until the event actually occurs. We anticipate that the spin-off
will occur in 2003. We will record the effect of the spin-off based on actuarial
calculations as of the date of the spin-off, which could be materially different
from the effect that would have been recorded if the spin-off had been completed
as of December 31, 2002.
As a result of our reorganization in 1982, which we completed through a
transaction commonly referred to as an "inversion," our company is a corporation
organized under the laws of the Republic of Panama. Recently, the U.S. House and
Senate have considered legislation that would change the tax law applicable to
corporations that have completed inversion transactions. We have engaged an
independent consultant to undertake an analysis of the potential
re-domestication of MII from Panama to the U.S. Additionally, we recently
entered into an agreement with two shareholders pursuant to which management
will sponsor and JRMrecommend a proposal for re-domestication on the proxy
statement for the annual meeting in the event the tax, costs and other
considerations impacted by re-domestication are determined by our Board of
Directors to be in the best interests of our shareholders. In the event that
re-domestication is determined by the our Board of Directors not to be in the
best interests of our shareholders, pursuant to our agreement described above,
management will present the re-domestication proposal on the proxy but may
recommend against it. The timing of any such management proposal is contingent
upon the completion of the analysis by the independent consultant and the
U.S.
Department of Justice into possible anti-competitive practices by MII and
JRM, and related civil lawsuits, and
. the resultscompletion of the ongoing SEC investigationB&W reorganization proceedings.
Effective January 1, 2002, based on a review performed by us and our independent
consultants, we changed our estimate of the useful lives of new major marine
vessels from 12 years to 25 years to better reflect the service lives of our
assets and industry norms. Consistent with this change, we also extended the
lives of major upgrades to existing vessels. We continue to depreciate our major
marine vessels using the units-of-production method, based on the utilization of
each vessel. The change in estimated useful lives reduced our operating loss by
approximately $3.2 million for the year ended December 31, 2002.
We derive a significant portion of our revenues from foreign operations. As a
result, international factors, including variations in local economies and
changes in foreign currency exchange rates, affect our revenues and operating
results. We attempt to limit our exposure to changes in foreign currency
exchange rates by attempting to match anticipated foreign currency contract
receipts with like foreign currency disbursements. To the extent that we are
unable to match the foreign currency receipts and disbursements related to our
contracts, we enter into whether McDermott may have
violated U.S. securities lawsforward contracts to reduce the impact of foreign
exchange rate movements on our operating results. Because we generally do not
hedge beyond our exposure, we believe this practice minimizes the impact of
foreign exchange rate movements on our operating results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe the following are our most critical accounting policies that we apply
in connection with such anti-competitive
practicesthe preparation of our financial statements. These policies require our most
difficult, subjective and other matters.
FISCAL YEAR 1999 VS FISCAL YEAR 1998
Marine Construction Services
- ----------------------------
Revenues decreased $575,916,000 to $1,279,570,000, primarily due to lower volume
in Europecomplex judgements, often as a result of the withdrawalneed to
make estimates of matters that are inherently uncertain.
Contracts and Revenue Recognition. We generally recognize contract revenues and
related costs on a percentage-of-completion method for individual contracts or
combinations of contracts. Under this method, estimated contract income and
resulting revenue are generally recognized based on costs incurred to date as a
percentage of total estimated costs. Total estimated costs, and resulting
contract income, are affected by changes in the expected cost of materials and
labor, productivity, scheduling and other factors. Additionally, external
factors such as weather, customer requirements and other factors outside of our
control, may also affect the progress and estimated cost of a project's
completion and therefore the timing of income and revenue recognition. We
routinely review estimates related to our contracts and revisions to
profitability are reflected in earnings immediately. If a current estimate of
total contract cost indicates a loss on a contract, the projected loss is
recognized in full when determined. In prior years, we have had
32
significant adjustments to earnings as a result of revisions to contract
estimates. Such revisions have been primarily due to the fact that many of our
contracts have been "first-of-a-kind" or have been inherently difficult to
estimate due to the long-term nature of the project, changing customer
requirements and other factors outside of our control. In addition, for
first-of-a-kind projects undertaken by our Marine Construction Services segment
in recent periods, we have been unable to forecast accurately total cost to
complete until we have performed all major phases of the project. As
demonstrated by our experience on these contracts in 2002, revenue, cost and
gross profit realized on fixed-price contracts will often vary from estimated
amounts. Although we are continually striving to improve our ability to estimate
our contract costs and profitability, adjustments to overall contract costs due
to unforeseen events may continue to be significant in future periods.
We recognize claims for extra work or for changes in scope of work in contract
revenues, to the extent of costs incurred, when we believe collection is
probable. Any amounts not collected are reflected as an adjustment to earnings.
We regularly assess customer credit risk inherent in contract costs. We
recognize contract claim income when formally agreed with the customer.
Property, Plant and Equipment. We carry our property, plant and equipment at
depreciated cost, reduced by provisions to recognize economic impairment when we
determine impairment has occurred. Factors that impact our determination of
impairment include forecasted utilization of equipment and estimates of cash
flow from projects to be performed in future periods. Our estimates of cash flow
may differ from actual cash flow due to, among other things, technological
changes, economic conditions or changes in operating performance. It is
reasonably possible that changes in such factors may negatively affect our
business segments and result in future asset impairments.
Except for major marine vessels, we depreciate our property, plant and equipment
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. We depreciate
major marine vessels using the units-of-production method based on the
utilization of each vessel. Our depreciation expense calculated under the
units-of-production method may be less than, equal to or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation and 50% of
cumulative straight-line depreciation.
We expense the costs of maintenance, repairs and renewals, which do not
materially prolong the useful life of an asset, as we incur them except for
drydocking costs. We accrue estimated drydock costs for our marine fleet over
the period of time between drydockings, generally 3 to 5 years. We accrue
drydock costs in advance of the anticipated future drydocking, commonly known as
the "accrue in advance" method. Actual drydock costs are charged against the
liability when incurred and any differences between actual costs and accrued
costs are recognized over the remaining months of the drydock cycle. Our actual
drydock costs often differ from our estimates due to the long period between
drydockings and the inherent difficulties in estimating cost of vessel repairs,
which are not necessarily visible until the drydock occurs.
Pension Plans and Postretirement Benefits. We estimate income or expense related
to our pension and postretirement benefit plans based on actuarial assumptions,
including assumptions regarding discount rates and expected returns on plan
assets. We determine our discount rate based on a review of published financial
data and discussions with our actuary regarding rates of return on high-quality
fixed-income investments currently available and expected to be available during
the period to maturity of our pension obligations. Based on historical data and
discussions with our actuary, we determine our expected return on plan assets
based on the expected long-term rate of return on our plan assets and the
market-related value of our plan assets. Changes in these assumptions can result
in significant changes in our estimated pension income or expense. We revise our
assumptions on an annual basis based upon changes in current interest rates,
return on plan assets and the underlying demographics of our workforce. These
assumptions are reasonably likely to change in future periods and may have a
material impact on future earnings.
33
Loss Contingencies. We estimate liabilities for loss contingencies when it is
probable that a liability has been incurred and the amount of loss is reasonably
estimable. Disclosure is required when there is a reasonable possibility that
the ultimate loss will exceed the recorded provision. We are currently involved
in certain investigations and litigation as discussed in Note 10 to our
consolidated financial statements. We have accrued our estimates of the probable
losses associated with these matters. However, our losses are typically resolved
over long periods of time and are often difficult to estimate due to the
possibility of multiple actions by third parties. Therefore, it is possible
future earnings could be affected by changes in our estimates related to these
matters. Our most significant loss contingencies include our estimate of the
cost of the potential settlement of the B&W Chapter 11 proceedings which is now
dependent on the finalization of the proposed settlement based on the agreement
in principle discussed in this report (see Notes 10 and 20 to our consolidated
financial statements).
Goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that we
no longer amortize goodwill, but instead perform periodic testing for
impairment. It requires a two-step impairment test to identify potential
goodwill impairment and measure the amount of a goodwill impairment loss. The
first step of the test compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of the impairment loss, if any. Both steps of
goodwill impairment testing involve significant estimates. As a result of the
write-off of the goodwill associated with our Marine Construction Services
segment, our total goodwill has been substantially reduced.
Environmental Clean-Up Costs. We accrue for future decommissioning of our
nuclear facilities that will permit the release of these facilities to
unrestricted use at the end of each facility's life, which is a requirement of
our licenses from the traditional European
engineering marketsNuclear Regulatory Commission. We reflect the accruals,
based on the estimated cost of those activities and net of any cost-sharing
arrangements, over the economic useful life of each facility, which we typically
estimate at 40 years. We adjust the estimated costs as further information
develops or circumstances change. We do not discount costs of future
expenditures for environmental cleanup to their present values. An exception to
this accounting treatment relates to the work we perform for one facility, for
which the U.S. Government is obligated to pay all the decommissioning costs. We
recognize recoveries of environmental clean-up costs from lower volumeother parties as
assets when we determine their receipt is probable. Effective January 1, 2003,
we will adopt SFAS No. 143, requiring us to record the fair value of a liability
for an asset retirement obligation in essentially all activitiesthe period in North
America,which it is incurred. When
we initially record such a liability, we will capitalize a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability
will be accreted to its present value each period, and the capitalized cost will
be depreciated over the useful life of the related asset. Upon settlement of a
liability, we will settle the obligation for its recorded amount or incur a gain
or loss.
Deferred Taxes. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income, carrybacks, future reversals and ongoing
prudent and feasible tax planning strategies in prior years in assessing the
need for a valuation allowance, given our operating results for 2002, we have
not assumed that future taxable income or tax planning strategies will be
available to us as of December 31, 2002 in determining our valuation allowance.
If we were to subsequently determine that we would be able to realize deferred
tax assets in the future in excess of our net recorded amount, an adjustment to
deferred tax assets would increase income in the period such determination was
made. We will continue to assess the adequacy of the valuation allowance on a
quarterly basis. Any changes to our estimated valuation allowance could be
material to our consolidated financial condition and results of operations.
Warranty. With respect to our Marine Construction Services segment, we include
warranty costs as a component of our total contract cost estimate to satisfy
contractual requirements. In addition, we make specific provisions where we
expect the costs of warranty to significantly exceed the accrued estimates.
Factors that impact our estimate of warranty costs include prior history of
warranty claims and our estimates of future costs of materials and labor. At our
Marine Construction Services segment, warranty periods are generally
34
limited and we have had minimal warranty cost in prior years. It is reasonably
possible that our future warranty provisions may vary from what we have
experienced in the past. In our Government Operations segment, we accrue
estimated expenses to satisfy contractual warranty requirements when we
recognize the associated revenue on the related contracts.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Marine Construction Services
Revenues increased 35% to $1,148.0 million. The increase is a result of
increased activity for our EPIC spar projects, a topside fabrication and a
pipeline installation project in the Azerbaijan sector of the Caspian Sea, two
fabrication and installation projects in Southeast Asia, one deck fabricated in
the Middle East for the West African market and in worldwide engineering.a topsides fabrication contract
at our Morgan City fabrication facility. These decreases wereincreases are partially offset by
higher volumereduced activity on other Gulf of Mexico projects and a decline in charters to
our Mexican joint venture. Pemex, the national oil company of Mexico, is the
primary customer of this joint venture.
Although revenues increased, segment operating income, which is before equity in
income from investees, declined to a loss of $162.6 million compared with income
of $14.5 million for the year ended December 31, 2001. The loss is due primarily
to charges totaling $149.3 million relating to additional cost overruns,
schedule delays and higher-than-expected forecasted costs to complete our three
EPIC spar projects, each of which is now in a loss position. At December 31,
2002, the financial percent complete on each of these projects was estimated as
follows: Medusa, 74%; Devils Tower, 48%; and Front Runner, 30%. In addition, we
incurred losses on Gulf of Mexico pipeline work and a project for the South
American market. We also experienced reduced activity on other Gulf of Mexico
projects, lower charter activity to our Mexican joint venture and increased
costs to complete a fabrication project for the West African market due to poor
productivity. This project is also in a loss position. We also experienced lower
utilization of our marine fleet in the Far East.
SegmentGulf of Mexico. Higher volumes from two
fabrication and installation projects in Southeast Asia, a topside fabrication
and a pipeline installation project in the Azerbaijan sector of the Caspian Sea
and a topsides fabrication contract at our Morgan City fabrication facility
partially offset these losses. In addition, we experienced lower general and
administrative expenses and a favorable adjustment to potential settlements of
litigation. For the year ended December 31, 2001, segment operating income
included goodwill amortization expense of $18.0 million.
The net loss on asset disposal and impairments for the year ended December 31,
2002 is due primarily to the goodwill impairment charge of $313.0 million. See
Note 1 to our consolidated financial statements for information concerning this
impairment charge. During the year ended December 31, 2002, we also recorded
charges totaling approximately $15.0 million relating to a reorganization of our
Western Hemisphere organization. These charges include an impairment charge of
$6.8 million related to land at one of our facilities and $1.9 million to reduce
to net realizable value four material barges and certain marine equipment that
we expect to sell in 2003.
Equity in income from investees decreased $5.1 million to $5.3 million,
primarily due to a $2.4 million charge related to the impairment of an
investment in an international joint venture and its favorable operating results
recorded in the prior year. Favorable contract closeout adjustments associated
with our U.K. joint venture partially offset these decreases.
Backlog was $2.1 billion and $1.8 billion, respectively, at December 31, 2002
and 2001. At December 31, 2002, the Marine Construction Services backlog
included $345.0 million related to uncompleted work on our three EPIC spar
projects and $265.0 million related to other contracts in loss positions.
Government Operations
Revenues increased $19,360,000$59.8 million to $126,482,000,$553.8 million, primarily due to higher
volumevolumes from the manufacture of nuclear components for certain U.S. Government
programs, the management and margins in all activities in the Far Eastoperating contracts for U.S. Government-owned
facilities, commercial work and a favorable
settlement of contract claims in that area. There were also higher margins in
Middle East fabrication operations and lower general and administrative
expenses. In addition, prior period results include amortization of OPI
goodwill of $16,318,000. These increases wereother government operations. Lower volumes from
commercial nuclear environmental services partially offset by lower volume
in essentially all activities in North America and the Middle East and in
worldwide engineering. There were also higher net operating expenses and a
charge to restructure foreign joint ventures.
Gain (loss) on asset disposals and impairments--net was a gain of $18,620,000
compared to a loss of $40,119,000 in the prior period. This was primarily due
to gains recognized from the termination of the McDermott-ETPM joint venture and
the sale of three Gulf of Mexico vessels, partially offset by impairment losses
on fabrication facilities and goodwill associated with worldwide engineering and
a Mexican shipyard. The loss in the prior period was primarily due to the
write-off of $262,901,000 of goodwill associated with the acquisition of OPI,
partially offset by the $224,472,000 gain recognized from the termination of the
HeereMac joint venture.
Income from investees decreased $59,566,000 to $10,670,000, primarily due to a
$61,637,000 distribution of earnings related to the termination of the HeereMac
joint venture in the prior period. There were also lower operating results from
Brown & Root McDermott Fabricators Limited and a joint venture in Mexico. These
decreases were partially offset by a gain on the sale of assets in a Malaysian
joint venture. In addition, losses were recorded by McDermott-ETPM West, Inc.
in the prior period.
Backlog for the Marine Construction Services segment at March 31, 1999 and 1998
was $406,183,000 and $1,266,310,000, respectively. Backlog decreased primarily
as a result of lower oil prices. In addition, backlog declined as a result of
JRM's withdrawal from traditional engineering markets. Finally, backlog
decreased as a result of sluggish economic conditions in the Middle and Far East
and the political instability in Asia.
Power Generation Systems
- ------------------------
Revenues decreased $76,504,000 to $1,266,310,000, primarily due to lower
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, replacement nuclear steam generators and
22these increases.
35
industrial boilers. These decreases were partially offset by higher revenues
from repair and alteration of existing fossil fuel steam systems and plant
enhancement projects.
Segment operating income, which is before equity in income from investees,
increased $7,887,000$5.3 million to $90,318,000,$34.6 million, primarily due to higher volumevolumes from
the manufacture of nuclear components for certain U.S. Government programs and
margins from repair and alteration of existing fossil fuel
steam systems and operation and maintenance contracts. There were alsocommercial work, higher margins from industrial boilers, higher volume from plant enhancement projects
and lower net operating expenses. These increases were partially offset by
lower volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems, lower volume from replacement nuclear steam
generators and higher general and administrative expenses.
Gain (loss) on asset disposals and impairments--net increased $10,551,000 to a
gain of $4,465,000 compared to a loss of $6,086,000 in the prior period. The
gain was primarily due to gains recognized from the sale of a domestic
manufacturing facility. The loss in the prior period was primarily due to asset
impairments in this facility.
Income (loss) from investees decreased $12,274,000 from income of $7,541,000 to
a loss of $4,733,000, primarily due to lower operating results from a foreign
joint venture located in Egypt and the write-off of notes and accounts
receivable from a foreign joint venture located in Turkey.
Backlog for the Power Generation Systems segment at March 31, 1999 and 1998 was
$905,283,000 and $1,070,351,000, respectively. Backlog has been adversely
impacted by suspensions of power generation 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 future.
Government Operations
- ---------------------
Revenues increased $12,187,000 to $382,706,000, primarily due to higher revenues
from management and operationoperating contracts for U.S.
Government-owned facilities and from nuclear fuel assemblies and reactor components for the U.S. Government.
These increases were partially offset by lower revenues from other government operations, commercial operations and commercial nuclear environmental services.
Segment operating income increased $3,537,000 to $39,353,000, primarily due to aoperations. In addition, we
received an insurance settlement relating to environmental restoration costs.
In addition, there wasHowever, we experienced lower margins from nuclear component manufacturing for
certain U.S. Government programs along with higher volumefacility management oversight
costs and lower volumes from managementcommercial nuclear environmental services. We also
incurred costs associated with the decentralization of our research and
operation contracts for U.S. Government-owned
facilitiesdevelopment division and lowerincreased spending on fuel cell research and
development.
Equity in income from investees increased $1.6 million to $24.6 million,
primarily due to improved operating results from one of our joint ventures
operating in Texas, partially offset by higher general and administrative
expenses.
These increases were
partially offset by lower margins from commercial nuclear environmental
servicesBacklog was $1.7 billion and lower volume from commercial operations$1.0 billion, respectively, at December 31, 2002
and other government
operations. In addition, there was an $8,000,000 settlement of punitive damage
claims relating to a civil suit associated with a Pennsylvania facility formerly
operated by B&W.
Backlog for the Government Operations segment at March2001. At December 31, 1999 and 1998 was
$860,981,000 and $810,230,000, respectively. At March 31, 1999,2002, this segment's backlog with the U.S. Government
was $760,202,000,$1.6 billion, of which $12,023,000$266.5 million had not yet been funded.
Industrial Operations
- ---------------------Power Generation Systems
Revenues increased $89,733,000decreased $0.9 million to $427,520,000,$46.9 million as a result of lower volumes
from after-market services and the sale of Volund to B&W in October 2002.
Segment operating loss, which is before equity in income from investees,
decreased $0.8 million to $2.8 million, primarily due to higher revenues
from engineering activities in Canadian operations. This increase was partially
offset by lower revenues from domestic engineering and construction activities
and from the disposition of a non-core business.
Segment operating income increased $12,227,000 to $16,906,000, primarily due to
higher volume from engineering activities in Canadian operations and higher
margins from air-cooled heat exchangers. There were also losses in a non-core
business disposed of in the prior period. These increases were partially offset
by higher general and
administrative expenses.
23
Gain (loss) on asset disposalsexpenses and impairments-netthe sale of Volund to B&W. The loss provision we
recorded related to the claims involving Volund and Austrian Energy described in
Note 10 partially offset these decreases.
Equity in income from investees decreased $128,473,000 from
income of $128,239,000$2.9 million to a loss of $234,000. The prior period gains were$2.3
million, primarily due to a $3.3 million charge related to the impairment of an
investment in a foreign joint venture operating in India.
Corporate
Corporate expenses increased $18.5 million to $23.6 million, primarily due to
the salerecognition of McDermott's interestexpense from our pension plans in Sakhalin Energy Investment
Company Ltd.the current period compared
to income from those plans and Universal Fabricators Incorporated.
Income (loss) from investees decreased by $5,022,000 from income of $3,376,000a nonrecurring favorable insurance recovery in
the year ended December 31, 2001. Lower legal and professional services expenses
related to a loss of $1,646,000, primarily due tothe B&W Chapter 11 proceedings, lower operating results from a
domestic joint venture in Coloradoinsurance expenses and the
shutdownimproved performance of two foreign joint
venturesour captive insurance subsidiaries for the year ended
December 31, 2002 partially offset these increases.
During the year ended December 31, 2002, we recognized expense from certain of
our qualified pension plans of approximately $11.1 million. During the year
ended December 31, 2001, we recognized income from these plans of approximately
$29.0 million. We expect to recognize approximately $72.1 million of expense in
the former Soviet Union.
Backlog for Industrial Operations at March 31, 19992003 related to these plans. The significant increase expected in 2003 from 2002
levels is due principally to changes in our discount rate and 1998 was $400,649,000
and $262,339,000, respectively. Backlog increased because of significant new
bookings in Engineering and Construction.plan asset
performance.
Other Unallocated Items
- -----------------------
Other unallocated items increased $45,719,000 to $51,005,000, primarily due to
provisionsDuring the year ended December 31, 2002, we recorded a provision of $1.5 million
for estimated future non-employee products liability asbestos claims,
higher legal expenses and higher general and administrative expenses. These
decreases were partially offset by lower employee benefit expenses.environmental costs associated with MECL, which we sold in 2001.
Other Income Statement Items
- ----------------------------
Interest income increased $35,430,000decreased $11.0 million to $97,965,000,$8.6 million, primarily due to increases
in investments in government obligations and other debt securities and interest
income on domestic tax refunds. These increases were partially offset by a
decrease in investments and prevailing interest income due to the collection of the promissory note
received from the sale of the derrick barges 101 and 102.rates.
Interest expense decreased $18,192,000$24.5 million to $63,262,000,$15.1 million, primarily due to
changes in debt obligations and prevailing interest rates prevailing thereon.rates.
36
Other-net decreased $22,052,000 from income of $3,253,000declined $11.1 million to expense of $18,799,000, primarily due to$4.4 million. For the year ended
December 31, 2002, we recorded $2.5 million of minority interest expense
associated with a loss of $45,535,000 for insolvent insurers
providing coverage for estimated future non-employee products liability asbestos
claims, partially offset byMarine Construction Services segment joint venture. In
addition, we had a net gain$2.0 million decrease in gains on the settlement and curtailmentsale of postretirement benefit plans. (See Note 6investment
securities as well as an increase in miscellaneous other expenses.
We recorded the following charges in the year ended December 31, 2002, with
little or no associated tax benefit:
- the impairment of the remaining $313.0 million of goodwill
attributable to the consolidated financial
statements.)premium we paid on the acquisition of the
minority interest in JRM in June 1999;
- the write-off of the investment in B&W and other related
assets totaling $224.7 million; and
- the net pre-tax provision of $86.4 million for the estimated
cost of settlement of the B&W Chapter 11 proceedings.
The net pre-tax provision for (benefit from) income taxes decreased $80,920,000 from a
provisionthe estimated cost of $76,117,000the B&W Chapter 11
settlement includes approximately $154.0 million of expenses with no associated
tax benefits. The remaining items, consisting primarily of estimated benefits we
expect to a benefit of $4,803,000, while income before
provision for (benefit from) income taxes and extraordinary item decreased
$104,529,000 to $187,278,000. The decrease in the provision for income taxes
was primarily the result of a benefit of $25,456,000 recordedreceive as a result of the decreasesettlement, constitute income in taxable
jurisdictions. See Note 20 to our consolidated financial statements for
additional details regarding the settlement provision.
In addition, our valuation allowance for the realization of deferred tax assets
increased by $202.0 million from $12.8 million at December 31, 2001 to $214.8
million at December 31, 2002. The provision for income taxes for the year ended
December 31, 2001 reflects nondeductible amortization of goodwill of $19.5
million, of which $18.0 million was attributable to JRM. Income taxes for the
year ended December 31, 2001 also include a tax benefit related to favorable tax
settlements in foreign jurisdictions totaling $30,429,000 of prior years' disputed items in various
jurisdictionsapproximately $5.2 million and a
decreaseprovision for proposed U.S. federal income tax deficiencies. The provision for
income taxes for the year ended December 31, 2001 also includes a charge of
$85.4 million associated with the exercise of the intercompany stock purchase
and sale agreement discussed in income. McDermott operatesNote 5 to our consolidated financial statements.
We operate in many different tax jurisdictions. Within these jurisdictions, tax
provisions vary because of nominal rates, allowability of deductions, credits
and other benefits and tax bases (for example, revenuesrevenue versus income). These
variances, along with variances in theour mix of income withinfrom these jurisdictions,
are responsible for shifts in theour effective tax rate.
FISCAL YEAR 1998 VS FISCALENDED DECEMBER 31, 2001 COMPARED TO YEAR 1997ENDED DECEMBER 31, 2000
Marine Construction Services
- ----------------------------
Revenues increased $447,017,000$91.0 million to $1,855,486,000,$848.5 million, primarily due to higher
volumevolumes in virtually allNorth American activities, including the deepwater markets of the
Gulf of Mexico, and in all operating areas, exceptthe Eastern Hemisphere fabrication operations. Lower
volume in offshore activities in Southeast Asia relating to the Far East, engineering activities in the Middle East and
engineering and procurement activities in Europe and West Africa.Natuna
project partially offset this increase.
Segment operating income increased $96,303,000$48.0 million from a loss of $33.5 million to
$107,122,000. Virtually allincome of $14.5 million, primarily due to higher volumes and margins in North
American activities and in all operating areas, except the Far EastEastern Hemisphere fabrication operations. Lower
volumes on the West Natuna project, increased cost estimates relating to several
Gulf of Mexico projects, especially two large first-of-a-kind EPIC contracts,
and Engineering,
reflected this increase.
Gain (loss)higher general and administrative expenses partially offset these increases.
Loss on asset disposals and impairments - net decreased $69,140,000 from
a gain of $29,021,000increased $2.6 million to a loss of $40,119,000,$3.6
million primarily due to the impairment
lossdecision in the fourth quarter of $262,901,000 relating2001 to goodwill associated with the
24
acquisition of OPI. Also contributing to the decrease were: prior year gains
from the sale of the derrick barges 15 and 21; participation in a gain from the
sale ofscrap the
derrick barge 100 by the HeereMac joint venture; and the realization
of a portion of the deferred gain resulting from the sale of the derrick barges
101 and 102. These decreases were partially offset by the $224,472,000 gain
recognized from the termination of the HeereMac joint venture.
Income (loss)Ocean Builder.
Equity in income from investees increased $78,069,000 from a loss of $7,833,000$7.6 million to income of $70,236,000,$10.4 million,
primarily due to a $61,637,000 distribution of earnings
related to the termination of the HeereMacfavorable contract closeout adjustments from our U.K. joint
venture.venture that was terminated in June 2001. In addition, the loss
from the McDermott ETPM-West, Inc. joint venture decreased $9,248,000 to
$7,584,000 in fiscal year 1998.
See Note 3 to the consolidated financial statements regarding the April 3, 1998
termination of the McDermott-ETPMended December
31, 2000 included higher losses associated with our U.K. joint venture.
See Note 17 to the
consolidated financial statements regarding the sale and intention to exit
certain European operations.
Power Generation Systems
- ------------------------37
Government Operations
Revenues increased $157,291,000$50.0 million to $1,142,721,000,$494.0 million, primarily due to higher
revenuesvolumes from fabricationnuclear components for the U.S. Government and erection of fossil fuel steamcommercial work.
Lower volumes from management and environmental
control systems, plant enhancement projects, boiler cleaning equipment,operating contracts for U.S. Government-owned
facilities and engineering, procurement and construction of cogeneration plants. These
increases wereother government operations partially offset by lower revenues from replacement nuclear steam
generators.these increases.
Segment operating income (loss) increased $117,015,000 from a loss of
$34,584,000decreased $3.9 million to income of $82,431,000,$29.3 million, primarily due
to higherlower volume and margins from fabricationmanagement and erection of fossil fuel steamoperating contracts for U.S.
Government-owned facilities and environmental control
systems, plant enhancement projects, boiler cleaning equipmentother government operations and engineering,
procurementhigher general
and construction of cogeneration plants. In addition, there wereadministrative expenses. Higher volume and margins from commercial work,
higher volumes from nuclear components for the U.S. Government and higher
margins from replacementcommercial nuclear steam generators and replacement parts
and lower selling and general and administrative expenses.environmental services partially offset these
decreases.
Loss on asset disposals and impairments - net decreased $13,119,000 to
$6,086,000,$0.9 million, primarily
due to the write-downasset impairments at one of an equity investment in a
domestic cogeneration joint venture and an asset impairment loss on a domestic
manufacturing facilityour research facilities in the prior year.
Income (loss)year ended
December 31, 2000.
Equity in income from investees increased $7,888,000 from a loss of $347,000$11.9 million to income of $7,541,000. This represents the results of approximately twelve joint
ventures. The increase is primarily due to the favorable operating results from
three foreign joint ventures and a provision for a loss on a Canadian joint
venture in the prior year. This increase was partially offset by a favorable
termination agreement of a domestic joint venture in the prior year.
Government Operations
- ---------------------
Revenues decreased $2,532,000 to $370,519,000, primarily due to lower revenues
from nuclear fuel assemblies and reactor components for the U.S. Government,
commercial nuclear environmental services and other government-related
operations. These decreases were partially offset by higher revenues from
management and operation contracts for U.S. Government owned facilities.
Segment operating income increased $3,358,000 to $35,816,000, primarily due to
higher volume from management and operation contracts for U.S. Government-owned
facilities and higher margins from nuclear fuel assemblies and reactor
components for the U.S. Government and other government-related operations.
These increases were partially offset by lower volume and margins from
commercial nuclear environmental services and higher operating expenses.
Industrial Operations
- ---------------------
Revenues decreased $120,329,000 to $337,787,000, primarily due to lower revenues
from engineering and construction activities in Canadian operations and the
disposition of non-core businesses (domestic shipyard
25
and ordnance operations). These decreases were partially offset by higher
revenues from air-cooled heat exchangers and plant maintenance activities in
Canadian operations.
Segment operating income (loss) increased $35,320,000 from a loss of $30,641,000
to income of $4,679,000. This was primarily due to cost overruns on an
engineering and construction contract in the prior period, higher volume on air-
cooled heat exchangers, lower selling and general and administrative expenses
and prior year losses in non-core businesses (domestic shipyard and ordnance
operations).
Gain (loss) on asset disposals and impairments-net increased $140,097,000 from a
loss of $11,858,000 to a gain of $128,239,000, primarily due to the sale of
McDermott's interest in Sakhalin Energy Investment Company Ltd. and Universal
Fabricators Incorporated in the current year and an asset impairment in the
prior year.
Income from investees increased $2,639,000 to $3,376,000,$23.0 million,
primarily due to higher operating results from twoa joint venture in Idaho and the
start-up of the Pantex and Y-12 joint ventures. Lower operating results from a
joint venture in Colorado partially offset these increases.
Industrial Operations
Revenues increased $81.0 million to $507.3 million, primarily due to higher
volumes from engineering and construction activities performed by MECL. Lower
volumes from plant maintenance activities partially offset these increases.
Power Generation Systems
Revenues increased $14.0 million to $47.8 million, primarily due to increased
volume from Volund, an international power generation operation which we
acquired in June 2000.
Segment operating loss decreased $4.1 million to $3.7 million, primarily due to
contract loss provisions recorded in the year ended December 31, 2000.
Equity in income (loss) from investees increased $25.2 million from a loss of
$24.6 million to income of $0.6 million, primarily due to charges to exit and
impair certain foreign joint ventures.
Other Unallocated Items
- -----------------------
Other Unallocated Items decreased $67,096,000ventures in the year ended December 31, 2000.
Corporate
Corporate expense, net increased $13.1 million from income of $8.0 million to
expense of $5,286,000,$5.1 million. While we achieved a 30% reduction in our corporate
departmental expenses attributable to cost cutting programs, income recognized
on our overfunded pension plans was down substantially in 2001 from 2000. During
the years ended December 31, 2001 and 2000, we recognized income from certain of
our qualified pension plans of approximately $29.0 million and $48.0 million,
respectively. We also experienced significantly higher legal and professional
service expenses in 2001 related to the B&W Chapter 11 proceedings.
Other Income Statement Items
Interest income decreased $7.5 million to $19.6 million, primarily due to provisions for estimated future non-employee products liability
asbestos claimsa
decrease in investments and contract claims in the prior year.
General Corporate Expenses - Net
- --------------------------------
General Corporate Expenses - Netprevailing interest rates.
Interest expense decreased $10,205,000$3.9 million to $37,251,000,$39.7 million, primarily due to
staff reductions, other economy measures,changes in short-term debt obligations and certain one-time costs
incurredprevailing interest rates.
38
Other-net income increased $3.9 million to $6.6 million, primarily due to the
reversal of prior years' rent accruals on a fabrication yard in the prior period, which was partially offset byMiddle East
and gains on the sale of certain corporate aircraftinvestment securities in the prior period.
Other Income Statement Items
- ----------------------------
Interest income increased $15,793,000 to $62,535,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $13,646,000 to $81,454,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense increased $42,422,000 to $47,984,000, primarily due to
minority shareholder participation in the improved operating results of JRM and
MSCL.
Other-net increased $22,785,000 from expense of $19,532,000 to income of
$3,253,000. This increase was primarily due to bank fees and discounts on the
sale of certain accounts receivable and a loss of $19,446,000 for insolvent
insurers providing coverage for estimated future non-employee asbestos claims,
both in the prior year. These increases were partially offset by income in the
prior year for certain reimbursed financing costs.ended December 31,
2001.
The provision for (benefit from) income taxes increased $90,709,000 from a
benefit of $14,592,000 to a provision of $76,117,000, while income before provision for income taxes increased $512,504,000 from a lossfor the years ended December 31, 2001 and 2000
reflected nondeductible amortization of $220,697,000goodwill totaling approximately $19.5
million and $20.1 million, respectively, of which $18.0 million is attributable
to incomethe premium we paid on the acquisition of $291,807,000.the minority interest in JRM in
June 1999. The increase inprovision for income taxes isin the year ended December 31, 2001
also included a charge of approximately $85.4 million associated with the
intended exercise of an intercompany stock purchase and sale agreement. The
provision for income taxes for the year ended December 31, 2000 included a
provision of $3.8 million for B&W for the prefiling period and a tax benefit of
$1.4 million from the use of certain tax attributes in a foreign joint venture.
Also included are tax benefits primarily duerelated to an
increasefavorable tax settlements in
income.foreign jurisdictions totaling approximately $5.2 million and $5.5 million for
the years ended December 31, 2001 and 2000, respectively, and a provision for
proposed IRS tax deficiencies in the year ended December 31, 2001. In addition,
McDermott operatesincome before the provision for income taxes for the year ended December 31,
2000 included losses and charges of $25.6 million to exit certain foreign joint
ventures which had no associated tax benefits. We operate in many different tax
jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits and tax
basisbases (for example, revenuesrevenue versus income). These variances, along with
variances in theour mix of income withinfrom these jurisdictions, are responsible for
shifts in theour effective tax rate.
EFFECTEFFECTS OF INFLATION AND CHANGING PRICES
McDermott'sOur financial statements are prepared in accordance with generally accepted
accounting principles in the United States, using historical U.S. dollar
accounting (historical
cost)("historical cost"). Statements based on historical cost, however, do
not
26
adequately reflect the cumulative effect of increasing costs and changes in
the purchasing power of the dollar, especially during times of significant and
continued inflation.
In order to minimize the negative impact of inflation on itsour operations, McDermott attemptswe
attempt to cover the increased cost of anticipated changes in labor, material
and service costs, either through an estimate of suchthose changes, which is
reflectedwe reflect
in the original price, or through price escalation clauses in itsour contracts.
LIQUIDITY AND CAPITAL RESOURCES
On February 11, 2003, we entered into definitive agreements with a group of
lenders for a new credit facility ("New Credit Facility") to replace our
previous facilities, which consisted of a $100 million credit facility for MII
and BWXT (the "MII Credit Facility") and a $200 million credit facility for JRM
and its subsidiaries (the "JRM Credit Facility") that were scheduled to expire
on February 21, 2003. The New Credit Facility initially provides for borrowings
and issuances of letters of credit in an aggregate amount of up to $180 million,
with certain sublimits on the amounts available to JRM and BWXT. On May 13,
2003, the maximum amount available under the New Credit Facility will be reduced
to $166.5 million. The obligations under the New Credit Facility are (1)
guaranteed by MII and various subsidiaries of JRM and (2) collateralized by all
our capital stock in MI, JRM and certain subsidiaries of JRM and substantially
all the JRM assets and various intercompany promissory notes. The New Credit
Facility requires us to comply with various financial and nonfinancial covenants
and reporting requirements. The financial covenants require us to maintain a
minimum amount of cumulative earnings before taxes, depreciation and
amortization; a minimum fixed charge coverage ratio; a minimum level of tangible
net worth (for MII as a whole, as well as for JRM and BWXT separately); and a
minimum variance on expected costs to complete the Front Runner EPIC spar
project. In addition, we must provide as additional collateral fifty percent of
any net after-tax proceeds from significant asset sales. The New Credit Facility
is scheduled to expire on April 30, 2004.
39
Proceeds from the New Credit Facility may be used by JRM and BWXT, with
sublimits for JRM of $100 million for letters of credit and $10 million for cash
advances and for BWXT of $60 million for letters of credit and $50 million for
cash advances. At March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under this facility. Pricing for
cash advances under the Credit Facility is prime plus 4% or Libor plus 5% for
JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at
the rate of 0.75 of 1% per annum on the unused working capital commitment,
payable quarterly.
The MII Credit Facility was canceled resulting in the release of $107.8 million
in cash collateral that has been used, together with an additional $10 million
of cash, to provide JRM and BWXT with intercompany loans in the amount of $90
million and $25 million, respectively. JRM and BWXT are using the proceeds of
those intercompany loans for working capital needs and general corporate
purposes.
During fiscal year 1999, McDermott's cash2002, JRM experienced material losses on its three EPIC spar projects:
Medusa, Devils Tower and cash equivalents decreased
$96,373,000Front Runner. These contracts are first-of-a-kind as
well as long term in nature. We have experienced schedule delays and cost
overruns on these contracts that have adversely impacted our financial results.
These projects continue to $181,503,000face significant issues. The remaining challenges to
completing Medusa within its revised schedule and total debt decreased $399,582,000budget are finishing the
topsides fabrication and the marine installation portion of the project. Our
revised schedule requires installation activities during the second quarter of
2003. We believe the major challenge in completing Devils Tower within its
revised budget is to $354,900,000, primarilyremain on track with the revised schedule for topsides
fabrication due to a reduction in short-term borrowings of
$30,954,000 and repayment of $326,921,000 in long-term debt. During this
period, McDermott provided cash of $300,285,000 from operating activities, and
received cash proceeds of $176,290,000 fromsignificant liquidated damages that are associated with the
net sales and maturities of
investments, and $145,161,000 from asset disposals, including $95,546,000 from
the terminationcontract. A substantial portion of the McDermott-ETPM joint venture. McDermott used cashcosts and delay impacts on Devils Tower
are attributable to remedial activities undertaken with regard to the paint
application. On March 21, 2003, we filed an action against the paint vendors for
recovery of $272,061,000the remediation costs, delays and other damages. The key issues for
the acquisitionFront Runner contract relate to subcontractors and liquidated damages due to
schedule slippage either by JRM or one or more of preferredthe subcontractors. At
December 31, 2002, we have provided for our estimated losses on these contracts.
Although we continually strive to improve our ability to estimate our contract
costs associated with these projects, it is reasonably possible that current
estimates could change and common stock , $78,787,000 for
additionsadjustments to property, plant and equipment and $13,810,000 for dividends on
MII's common and preferred stock.
Pursuantoverall contract costs may continue to
agreements with the majority of its principal insurers, McDermott
negotiates and settles products liability asbestos claims from non-employees and
bills these amountsbe significant in future periods.
Due primarily to the appropriate insurers. Reimbursementlosses incurred on the three EPIC spar projects, we expect
JRM to experience negative cash flows during 2003. Completion of the EPIC spar
projects has and will continue to put a strain on JRM's liquidity. JRM intends
to fund its cash needs through borrowings on the New Credit Facility,
intercompany loans from MII and sales of nonstrategic assets, including certain
marine vessels. In addition, under the terms of the New Credit Facility, JRM's
letter of credit capacity was reduced from $200 million to $100 million. This
reduction does not negatively impact our ability to execute the contracts in our
current backlog. However, it will likely limit JRM's ability to pursue projects
from certain customers who require letters of credit as a condition of award. We
are exploring other opportunities to improve our liquidity position, including
better management of working capital through process improvements, negotiations
with customers to relieve tight schedule requirements and to accelerate certain
portions of cash collections, and alternative financing sources for letters of
credit for JRM. In addition, we plan to refinance BWXT on a stand-alone basis,
thereby freeing up additional letter of credit capacity for JRM and are
currently in the process of evaluating terms and conditions with certain
financial institutions. We also intend to seek a replacement credit facility for
JRM prior to the scheduled expiration of the New Credit Facility, in order to
provide for increased letter of credit capacity. Our ability to obtain such claims
is subject to varying insurance limits based upona
replacement facility will depend on numerous factors, including JRM's operating
performance and overall market conditions. If JRM experiences additional
significant contract costs on the year involved. Moreover,EPIC spar projects as a result of collection delays inherentunforeseen
events, we may be unable to fund all our budgeted capital expenditures and meet
all of our funding requirements for our contractual commitments. In this
instance, we would be required to defer certain capital expenditures, which 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 $7,200 per claim over the last three years)
has continued to rise. Claims paid during the fiscal year ended March 31, 1999
were $227,176,000, of which $175,457,000 has been recovered or is due from
insurers. At March 31, 1999, receivables of $85,409,000 were due from insurers
for reimbursement of settled claims. Of the $85,409,000 due from insurers,
$37,287,000 had been included in the pool of qualified receivables sold pursuant
to a receivables purchase and sale agreement (see below). 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.
At March 31, 1999, the estimated liability for pending and future non-employee
products liability asbestos claims was $1,562,363,000 and estimated insurance
recoveries were $1,366,863,000. Management's expectation is that new claims will
conclude within the next thirteen years, that there will be a significant
decline in new claims received after four years, and that the average cost per
claim will continue to increase only moderately. McDermott's estimates of future
asbestos products liability and probable insurance recoveries are based on prior
history and management's best estimate of cost based on all available
information. However, future costs to settle claims, as well as the number of
claims, could be adversely affected by changes in judicial rulings and
influences beyond McDermott's control. Accordingly, changes in the estimates of
future asbestos products liability and insurance recoverables and differences
between the proportion of any additional asbestos products liabilities covered
by insurance, and that experienced in the pastturn could result in material
adjustmentscurtailment of certain of our operating activities or,
alternatively, require us to obtain additional sources of financing which may
not be available to us or may be cost prohibitive.
MI experienced negative cash flows in 2002, primarily due to payments of taxes
resulting from the resultsexercise of operations for any fiscal quarterMI's rights under the intercompany agreement we
discuss below. MI expects to meet its cash needs in 2003 through intercompany
borrowings from BWXT, which BWXT may fund through operating cash flows or
year,borrowings under the New Credit Facility.
40
MI is restricted, as a result of covenants in its debt instruments, in its
ability to transfer funds to MII and the
ultimate loss may differ materially from amounts providedMII's other subsidiaries through cash
dividends or through unsecured loans or investments.
On a consolidated basis, we expect to incur negative cash flows in the consolidated
financial statements.
Expenditures for property, plantfirst
three quarters of 2003. In addition, in March 2003, Moody's Investor Service
lowered MI's credit rating from B2 to B3. These factors may further impact our
access to capital and equipment increased $33,697,000 to
$78,787,000 in fiscal year 1999. The majority of fiscal year 1999 expenditures
were to maintain, replace and upgrade existing facilities and equipment.
McDermott has budgeted capital expenditures of approximately $38,236,000 during
fiscal 2000.
At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase and sale agreement between B&W and certain of its
affiliates and subsidiaries and a U.S. Bank. Through July 31, 1998, $25,854,000
was repaid under the agreement. Effective July 31, 1998, the receivables
purchase and sale agreement was amended and restated to provide for, among other
things, the inclusion of certain insurance recoverables in the pool of qualified
accounts receivable. It also provided for sales treatment as opposed to secured
financing treatment for this arrangement under Financial Accounting Standards
Board ("FASB")
27
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." As a result, $56,929,000 was removed from notes payable and
current maturities of long-term debt on the balance sheet. This amended and
restated agreement was terminated on April 30, 1999.
On May 7, 1999, MII and JRM entered into a merger agreement pursuant to which
MII initiated a tender offer for those shares of JRM that it did not already own
for $35.62 per share in cash. Under the merger agreement, any shares not
purchased in the tender offer will be acquired for the same price in cash in a
second-step merger. MII estimates that it will require approximately
$560,000,000 to consummate the tender offer and second-step merger and to pay
related fees and expenses. MII expects to obtain the funds from cash on hand
and from a new $525,000,000 senior secured term loan facility with Citibank,
N.A. The facility will terminate and all borrowings thereunder will mature upon
the earlier of five business days after the consummation of the second merger or
September 30, 1999. When the facility terminates, JRM will declare and pay a
dividend and/or loan to MII such amounts that, together with MII's available
cash, will be used to repay all outstanding loans under the facility. Citibank,
N.A. may act either as sole lender under the facility or syndicate all or a
portion of the facility to a group of financial institutions. The facility
contains customary representations, warranties, covenants and events of default.
The facility also includes financial covenants that:
. require MII to maintain a minimum consolidated tangible net worth of not
less than $250,000,000,
. limit MII'sour ability to pay dividends,refinance the New Credit Facility, which is
scheduled to expire in April 2004. Our current credit rating and . require MII, JRMoperating
performance in 2002 could limit our alternatives and certain other subsidiariesability to maintain cash, cash
equivalentsrefinance the
New Credit Facility.
At December 31, 2002 and investments in debt securitiesDecember 31, 2001, we had available various uncommitted
short-term lines of credit from banks totaling $10.2 million and $8.9 million,
respectively. We had no borrowings against these lines at least $575,000,000 at
all times.
The facility is secured by a first priority pledge of all JRM capital stock and
securities convertible into JRM capital stock held byDecember 31, 2002 or
acquired by MII or any
of its subsidiaries.December 31, 2001.
At MarchDecember 31, 1999, McDermott2002, we had total cash, cash equivalents and investments of
$1,088,402,000. McDermott's$348.4 million. Our investment portfolio consists primarily of investments in
government obligations and other investments inhighly liquid debt securities. The fair value
of short and long-termour investments at MarchDecember 31, 19992002 was $921,070,000. At March$173.2 million. As of December 31,
1999,2002, we had pledged approximately $48,760,000$46.3 million fair value of these obligations were pledgedinvestments
to secure a letter of credit in connection with certain reinsurance agreements.
Management anticipates that approximately $560,000,000In addition, as of thisDecember 31, 2002, we had pledged investment portfolio will be usedassets
having a fair market value of approximately $107.8 million as cash collateral to
fundsecure our obligations under the tender offer, second-step merger andMII Credit Facility. In February 2003, the MII
Credit Facility was terminated, resulting in the release of the cash collateral.
Our cash requirements as of December 31, 2002 under current contractual
obligations are as follows:
Less than 1-3 3-5 After
Total 1 Year Years Years 5 Years
(In thousands)
Long-term debt $ 91,946 $ 9,500 $ 11,500 $ 9,721 $ 61,225
Capital leases $ 4,135 $ 477 $ 1,133 $ 1,265 $ 1,260
Operating leases $ 62,801 $ 6,932 $ 9,712 $ 6,509 $ 39,648
Take-or-pay contract $ 12,600 $ 1,800 $ 3,600 $ 3,600 $ 3,600
Note: Less than 1 Year includes MI's Series "A" Medium Term Notes
totaling $9.5 million, the repayment of which we funded on February 11,
2003.
Our contingent commitments, excluding amounts guaranteed related fees and expenses referred to above.B&W, under
letters of credit currently outstanding expire as follows:
Less than 1-3 3-5
Total 1 Year Years Years
(In thousands)
$ 183,160 $164,655 $3,190 $15,315
At March 31, 1999 and 1998, McDermott24, 2003, our liquidity position was as follows (in millions):
JRM MI Other Consolidated
Cash, cash equivalents and investments $ 124 $ - $ 91 $ 215
Less: Pledged securities - - (46) (46)
Captive insurer requirements (21) - (30) (51)
Restricted foreign cash (8) - (1) (9)
- -------------------------------------------------------------------------------------------
Total free cash available 95 - 14 109
Amount available under New Credit Facility(1) 10 40 - 50
- -------------------------------------------------------------------------------------------
Total available liquidity $ 105 $ 40 $ 14 $ 159
===========================================================================================
(1) Reflects amount available for cash advances. We had available various uncommitted short-
term linesan additional $9 million
in letter of credit capacity.
41
During the year ended December 31, 2002, MI repurchased or repaid the remaining
$208.8 million in aggregate principal amount of its 9.375% Notes due March 15,
2002 for aggregate payments of $208.3 million, resulting in an extraordinary net
after-tax gain of $0.3 million. In order to repay the remaining notes, MI
exercised its right pursuant to a stock purchase and sale agreement with MII
(the "Intercompany Agreement"). Under this agreement, MI had the right to sell
to MII and MII had the right to buy from banksMI, 100,000 units, each of which
consisted of one share of MII common stock and one share of MII Series A
Participating Preferred Stock. MI held this financial asset since prior to the
1982 reorganization transaction under which MII became the parent of MI. MI
received approximately $243 million from the exercise of the Intercompany
Agreement. MII funded that payment by (1) receiving dividends of $80 million
from JRM and $20 million from one of our captive insurance companies and (2)
reducing its short-term investments and cash and cash equivalents. The proceeds
paid to MI were subject to U.S. federal, state and other applicable taxes, and
we recorded a tax provision totaling $87,578,000approximately $85.4 million at December 31,
2001. Through December 31, 2002, we have made estimated tax payments for the
associated tax liability.
On February 21, 2000, B&W and $127,061,000,
respectively. Borrowings against these linescertain of its subsidiaries entered into the DIP
Credit Facility to satisfy their working capital and letter of credit at March 31, 1998 were
$5,100,000. There were no borrowings against these lines at March 31, 1999. At
March 31, 1998, B&W was a party to a revolving credit facility under which there
were no borrowings. In July 1998, B&W terminated its existing credit facility
and, jointly and severally with BWICO and BWXT, entered into a new $200,000,000
three-year, unsecured credit agreement (the "BWICO Credit Agreement") with a
groupneeds
during the pendency 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. In connection
with satisfyingtheir bankruptcy case. As a condition to borrowing or
issuingobtaining letters of credit under the BWICODIP Credit Agreement, MI made a $15,000,000 capital contribution to BWICO in
August 1998. At March 31, 1999, there wereFacility, B&W must comply with
certain financial covenants. B&W had no borrowings outstanding under this
facility at December 31, 2002 or December 31, 2001. Letters of credit
outstanding under the DIP Credit Facility at December 31, 2002 totaled
approximately $140.9 million. This facility, which was scheduled to expire on
February 22, 2003, has been amended and extended to February 22, 2004, with an
additional one-year extension at the option of B&W. The amendment also provides
for a reduction of the facility from $300 million to $227.75 million. See Note
20 to our consolidated financial statements for further information on the DIP
Credit Facility.
At December 31, 2002, MII was a maker or guarantor on $9.4 million of letters of
credit issued in connection with B&W's operations prior to B&W's Chapter 11
filing. In addition, MII, MI and BWICO Credit
Agreement.
At Marchhave agreed to indemnify B&W for any
customer draw on $51.4 million in letters of credit that have been issued under
the DIP Facility to replace or backstop letters of credit on which MII, MI and
BWICO were makers or guarantors as of the time of B&W's Chapter 11 filing. We
are not aware that B&W has ever had a letter of credit drawn on by a customer.
However, MII, MI and BWICO do not currently have sufficient cash or other liquid
resources available, either individually or combined, to satisfy their primary,
guaranty or indemnity obligations relating to letters of credit issued in
connection with B&W's operations should customer draws occur on a significant
amount of these letters of credit. In addition, as of December 31, 1998, JRM2002, MII
guaranteed surety bonds of approximately $121.0 million, of which $107.7 million
related to the business operations of B&W and certainits subsidiaries. We are not aware
that either MII or any of its subsidiaries, were partiesincluding B&W, have ever had a
surety bond called. However, MII does not currently have sufficient cash or
other liquid resources available if contract defaults require it to fund a
revolving credit facility under which there were no borrowings. In June 1998,
JRMsignificant amount of its surety bond guarantee obligations. As to the guarantee
and suchindemnity obligations involving B&W, the proposed B&W Chapter 11 settlement
contemplates indemnification and other protections for MII, MI and BWICO.
As a result of its bankruptcy filing, B&W and its filing subsidiaries entered into a new $200,000,000 three-year, unsecured
credit agreement (the "JRM Credit Agreement") with aare
precluded from paying dividends to shareholders and making payments on any
pre-bankruptcy filing accounts or notes payable that are due and owing to any
other entity within the McDermott group of banks. Borrowings
againstcompanies (the "Pre-Petition
Intercompany Payables") and other creditors during the JRM Credit Agreement cannot exceed $50,000,000. The remaining
$150,000,000 is reserved forpendency of the
issuancebankruptcy case, without the Bankruptcy Court's approval.
As a result of lettersthe B&W bankruptcy filing, our access to the cash flows of credit. At March 31,
1999, there were no borrowings under the JRM Credit Agreement. Management does
not anticipate JRM will need to borrow funds under the JRM Credit Agreement
during fiscal year 2000. Subsequent to year-end, JRM elected to reduce the
commitments on the JRM Credit Agreement from $200,000,000 to $100,000,000.
28
B&W
and its subsidiaries has been restricted. In addition, MI and JRM and their
respective subsidiaries are restricted,limited, as a result of covenants in debt
instruments, in their ability to transfer funds to MII and certain of its other
subsidiaries through cash dividends or through unsecured loans or investments.
At March 31, 1999,
substantially allCompletion of the net assetsEPIC spar projects has and will continue to put a strain on
JRM's liquidity. As a result, we have assessed our ability to continue as a
viable business and have concluded that we can continue to fund our operating
activities and capital requirements. However, our ability to obtain a successful
and timely resolution to the B&W Chapter 11 proceedings has impacted our
42
ability to obtain additional financing. Our current credit rating has also
impacted our access to, and sources of, MI werecapital and has resulted in additional
collateral requirements for our debt obligations, as reflected under the New
Credit Facility.
As discussed in Note 20 to our consolidated financial statements, we are
continuing our discussions with the ACC and FCR concerning a potential
settlement. As a result of those discussions, we reached an agreement in
principle in August 2002 with representatives of the ACC and FCR on several key
terms, which served as a basis for continuing negotiations; however, a number of
significant issues and numerous details remain to be negotiated and resolved.
Should the remaining issues and details not be negotiated and resolved to the
mutual satisfaction of the parties, the parties may be unable to resolve the B&W
Chapter 11 proceedings through settlement. Additionally, the potential
settlement will be subject to such restrictions. At
March 31, 1999, JRM couldvarious conditions, including the requisite
approval of the asbestos claimants, the Bankruptcy Court confirmation of a plan
of reorganization reflecting the settlement and the approval by MII's Board of
Directors and stockholders. The parties are currently working to address the
remaining unresolved issues and details in a joint plan of reorganization and
related settlement agreement. On December 19, 2002, B&W and its filing
subsidiaries, the ACC, the FCR, and MI filed drafts of a joint plan of
reorganization and settlement agreement, together with a draft of a related
disclosure statement, which include the following key terms:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
otherwise make unsecured loansavailable their rights to or investments in MII of
approximately $75,000,000 and pay dividends to MII of approximately
$146,300,000. In connection with the tender offer and merger described above,
an amendmentall applicable
insurance proceeds to the JRM Credit Agreement was enteredtrust.
- MII would issue 4.75 million shares of restricted common stock
and cause those shares to be transferred to the trust. The
resale of the shares would be subject to certain limitations,
in order to provide for an orderly means of selling the shares
to the public. Certain sales by the trust would also be
subject to an MII right of first refusal. If any of the shares
issued to the trust are still held by the trust after three
years, and to the extent those shares could not have been sold
in the market at a price greater than or equal to $19.00 per
share (based on quoted market prices), taking into account the
restrictions on sale and any waivers of those restrictions
that permits JRM to
loan to MII such amounts as may be required forgranted by MII from time to repaytime, MII would
effectively guarantee that those shares would have a value of
$19.00 per share on the amounts
outstanding underthird anniversary of the $525,000,000 senior secured term loan facility with
Citibank N.A.
On March 5, 1999, JRM consummated an offerdate of their
issuance. MII would be able to purchase allsatisfy this guaranty
obligation by making a cash payment or through the issuance of
additional shares of its outstanding
9.375% Senior Subordinated Notes at a purchase price of 113.046% of their
principal amount ($1,130.46 per $1,000 principal amount), plus accrued and
unpaid interest. On that date, JRM purchased $248,575,000common stock. If MII elects to issue
shares to satisfy this guaranty obligation, it would not be
required to issue more than 12.5 million shares.
- MI would issue promissory notes to the trust in an aggregate
principal amount of $92 million. The notes would be unsecured
obligations and would provide for payments of principal of
$8.4 million per year to be payable over 11 years, with
interest payable on the outstanding balance at the rate of
7.5% per year. The payment obligations under those notes for a total purchase pricewould
be guaranteed by MII.
- MII and all its past and present directors, officers and
affiliates, including its captive insurers, would receive the
full benefit of $284,564,000, including interest of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchaseSection 524(g) of the notes, JRM received consentsBankruptcy Code with
respect to certain
amendments that amendedpersonal injury claims attributable to B&W's use of
asbestos and would be released and protected from all pending
and future asbestos-related claims stemming from B&W's
operations, as well as other claims (whether contract claims,
tort claims or eliminated certain restrictive covenants and other provisions contained in the indentureclaims) of any kind relating to B&W,
including but not limited to claims relating to the notes. Specifically,1998
corporate reorganization that has been the covenants containedsubject of
litigation in the indentureChapter 11 proceedings.
- The settlement would be conditioned on the approval by MII's
Board of Directors and stockholders of the terms of the
settlement outlined above.
As the settlement discussions proceed, we expect that restricted JRM's ability to pay
dividends, repurchasesome of the court
proceedings in or redeem its capital stock, or to transfer funds through
unsecured loans to or investments in MII were eliminated.
Working capital decreased $26,475,000 from $135,430,000 at March 31, 1998 to
$108,955,000 at March 31, 1999. During the next fiscal year, McDermott's
management expects 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.
JRM's joint ventures are largely financed through their own resources,
including, in some cases, stand-alone borrowing arrangements. In some
instances, McDermott provides guarantees on behalf of its joint ventures. (See
Note 11relating to the consolidated financial statements.)
AtB&W Chapter 11 case will continue and that the
parties will continue to maintain their previously asserted positions. The
Bankruptcy Court has directed the
43
parties to file an amended disclosure statement by March 31, 1999,28, 2003 that, among
other things, updates the ratio of long-term debt to total stockholders' equity was
0.41 as compared with 0.88 at March 31, 1998.
On April 6, 1998, MII called allstatus of the outstanding sharesnegotiations, and has set a disclosure
statement hearing for April 9, 2003. Following that filing and hearing, the
Bankruptcy Court will schedule further proceedings concerning this matter. The
process of its Series C
Cumulative Convertible Preferred Stockfinalizing and implementing the settlement could take up to a year,
depending on, among other things, the nature and extent of any objections or
appeals in the bankruptcy case.
Based on recent developments in the settlement negotiations, we determined that
a liability related to the proposed settlement is probable and that the value is
reasonably estimable. Accordingly, at December 31, 2002, we established an
estimate for redemption on April 21, 1998. At the
close of business on the redemption date, all 2,875,000 preferred shares then
outstanding were converted into 4,077,890 common shares.
On July 17, 1998, MI redeemed all of its 2,152,766 outstanding shares of Series
B $2.60 Cumulative Preferred Stock for $31.25, plus $0.1156 in accrued but
unpaid dividends, per share. MII made a $68,000,000 capital contribution to MI
to cover the cost of the redemption.
On September 11, 1998, MI redeemed 2,795,428 of its outstanding shares of Series
A $2.20 Cumulative Convertible Preferred Stock ("Series A Preferred Stock") for
$31.25, plus $0.43 in accrued but unpaid dividends, per share. The remaining
23,251 outstanding shares of its Series A Preferred Stock were converted into
MII common stock at a conversion ratio of one share of MII common stock, plus
$0.10, for each preferred share. MII made a $90,000,000 capital contribution to
MI to cover the costsettlement of the redemptionB&W bankruptcy proceedings of
$110.0 million, including tax expense of $23.6 million. This charge is in
addition to the $220.9 million after-tax charge we recorded in the quarter ended
June 30, 2002 to write off our investment in B&W and conversion.
MII's quarterly dividendsother related assets. For
details regarding this estimate, see Note 20 to our consolidated financial
statements.
Despite our recent progress in our settlement discussions, there are $0.05 per share on its Common Stock. Priorcontinuing
risks and uncertainties that will remain with us until the requisite approvals
are obtained and the final settlement is reflected in a plan of reorganization
that is confirmed by the Bankruptcy Court pursuant to redemption, MI's quarterly dividends were $0.55 per share on the Series A $2.20
Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60
Cumulative Preferred Stock.
During fiscal year 1998, MII's Boarda final, nonappealable
order of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purposeconfirmation. One of the repurchases wasremaining issues to offset dilution
created bybe resolved as
negotiations relating to the 29
issuance of shares pursuantB&W Chapter 11 proceedings continue relates to MII's stock compensation and thrift plans. MII
completed its two million share repurchase program in August 1998. During the
fiscal year ended March 31, 1999, MII repurchased 1,900,000 shares of its common
stock at an average share price of $31.10.
During fiscal year 1998, JRM's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purposeproposed spin-off of the repurchases wasMI/B&W pension plan. In our judgment, it has become
probable that we will spin off the portion of MI's qualified pension plan
related to offset dilution
created by the issuanceactive and retired employees of shares pursuant to JRM's stock compensation and
thrift plans. JRM repurchased 362,500 shares at an average share price of
$37.31 during fiscal year 1998. During fiscal year 1999, JRM's Board of
Directors authorized the repurchase of up to an additional one million shares of
its common stock . JRM repurchased another 1,837,700 shares of its common stock
at an average share price of $31.67 through October 8, 1998, at which time JRM
ceased all further share repurchases. At such time, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
At March 31, 1999, MII has provided a valuation allowance for deferred tax
assets of $39,961,000 which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. Management believes 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. Management 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. 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 Year 2000 Project began
company-wide with a planning phase during the latterB&W as 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 employingfinal
settlement. If we effect such 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:
. Business Applications and IT Infrastructure ("IT Systems")
. Facilities (office buildings)
. Embedded Systems (in plants and construction equipment)
. Customer Products (embedded systems in customer products)
. 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, and
(5) test and validate solutions.
30
At March 31, 1999, the inventory, prioritization and assessment of the critical
IT Systems' components were complete. The remediation and replacement tasks are
in progress with approximately 90% of the work completed. The Facilities and
Embedded Systems phases of the project were 90% complete and on schedule with
testing and replacement of components showing significant progress during the
quarter. The analysis of Critical Suppliers includes the determination of the
compliance status of the suppliers' businesses as well as the products they
produce. The majority of the company sites have completed this analysis and the
balance are near completion. The Customer Products phase of the project is
essentially complete with minor work outstanding at a few of the company's
smaller business units.
All Year 2000 solutions for the critical IT Systems, Facilities and Embedded
Systems that support McDermott's engineering, manufacturing and construction
operations and the corporate functions are scheduled to be substantially
completed by June 30, 1999. The analysis and the compliance tasks for Customer
Products and Critical Suppliers are on schedule and are forecast to be completed
by June 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 providerspin-off, we will be completed by October 31, 1999.
McDermott does not expect that the costrequired to recognize any
curtailment and settlement gains or losses associated with the modificationsspin-off at the
time we effect the spin-off. Curtailment and settlement gains or losses are
determined based on actuarial calculations as of the date of the spin-off. Based
on data provided by our actuary, if this anticipated spin-off had occurred on
December 31, 2002, we would have recorded curtailment and settlement losses
totaling $117 million, with no associated tax benefits. In addition, based on
data provided by our actuary at December 31, 2002, we would have also recorded a
reduction in our charge to critical systemsOther Comprehensive Income for recognition of our
minimum pension liability totaling approximately $226 million. If we had
recorded these items at December 31, 2002, our Stockholders' Equity (Deficit)
would have improved by approximately $109 million. However, under generally
accepted accounting principles, we cannot record the effect of the spin-off
until the event actually occurs. We anticipate that the spin-off will occur in
2003. We will record the effect of the spin-off based on actuarial calculations
as of the date of the spin-off, which could be materially different from the
effect that would have been recorded if the spin-off had been completed as of
December 31, 2002.
NEW ACCOUNTING STANDARDS
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that we no longer amortize goodwill,
but instead perform periodic testing for impairment. We completed our
transitional goodwill impairment test and did not incur an impairment charge as
of January 1, 2002. However, due to the deterioration in JRM's financial
performance during the three months ended September 30, 2002 and our revised
expectations concerning JRM's future earnings and cash flow, we tested the
goodwill of the Marine Construction Services segment for impairment and
determined that an impairment charge was warranted. See Note 1 to our
consolidated financial statements for disclosure concerning the goodwill
impairment charge and our reconciliation of reported net income to adjusted net
income, which excludes goodwill amortization expense for all periods presented.
Effective January 1, 2002, we also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Pronouncements Bulletin No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. See Note 2 to our consolidated
financial statements for information on our discontinued operations.
44
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss.
We must adopt SFAS No. 143 effective January 1, 2003 and expect to record as the
cumulative effect of an accounting change income of approximately $3.0 million
upon adoption.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting
for Intangible Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for
Leases." In addition, it amends other complianceexisting authoritative pronouncements to
make various technical corrections, clarify meanings or describe their
applicability under changed conditions. We must adopt the provisions of SFAS No.
145 related to the rescission of SFAS No. 4 as of January 1, 2003, and we expect
to reclassify the extraordinary gain on extinguishment of debt we recorded in
2001 and 2002, because (as a result of the change in accounting principles) it
will no longer meet the criteria for classification as an extraordinary item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, willincluding restructuring activities. It is effective for
exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. We do not expect the adoption of the
recognition and measurement provisions of this Interpretation to have a material
impacteffect 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, $9,000,000 is
attributable to the purchase of hardware and software, which will be
capitalized, and the remaining $29,000,000 will be expensed as incurred.
Expenditures to date include $7,000,000 of capital and $21,000,000 of expense.
The differences between the cost incurred to date and the project completion
percentage is due to certain project milestones with subcontractors for work
being performed for the corporate office. Excluding the corporate office,
approximately 90% of the total anticipated Year 2000 project cost has been
incurred through March 31, 1999.
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.
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 focus
on the mission critical processes and third party dependencies that could be at
risk with the century date change. Contingency plans are in the early stages of
development and are being prioritized consistent with the requirements of each
operating location. All contingency planning activities are scheduled to be
completed by September 30, 1999.
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:
31
. the availability and cost of personnel trained in these areas,
. the ability to locate and correct all relevant computer code,
. timely responses to and corrections by third parties and suppliers,
. the ability to implement interfaces between the new systems and the systems
not being replaced, and,
. 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 April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on accounting for the costs of start-up
activities and requires that entities expense start-up costs and organization
costs as they are incurred. McDermott's adoption of SOP 98-5 will not have a
material impact on itsour consolidated financial position or results of operations. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Therefore, our financial
statements for the year ended December 31, 2002 contain the disclosures required
by Interpretation No. 45.
In June 1998,December 2002, the FASB issued SFAS No. 133,148, "Accounting for Derivative
InstrumentsStock-Based
Compensation--Transition and Hedging Activities,Disclosure," which amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002 and for interim periods beginning
after JuneDecember 15, 1999.2002. Our financial statements for the year ended December
31, 2002 contain the disclosures required by 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. McDermott has not yet determined what effect the
adoption of SFAS No. 133 will have on its consolidated financial position or
results of operations.
32148.
45
ITEMItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
McDermott'sOur exposure to market risk from changes in interest rates relates primarily to
itsour investment portfolio, which is primarily comprised of investments in U.S.
governmentGovernment obligations and other highly liquid debt securities. McDermott issecurities denominated in
U.S. dollars. We are averse to principal loss and ensuresensure the safety and
preservation of itsour invested funds by limiting default risk, market risk and
reinvestment risk. All of McDermott'sour investments in debt securities are classified as
available-for-sale.
McDermott hasWe have no material future earnings or cash flow exposures from changes in
interest rates on itsour long-term debt obligations, as substantially all of these
obligations have fixed interest rates. McDermott hasWe have exposure to changes in interest
rates on itsour short-term uncommitted lines of credit and its unsecuredthe New Credit Facility
(see Item 7 - Management's Discussion and committed revolving credit facilities (seeAnalysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources). At MarchDecember 31, 1999, McDermott2002
we had $45.6 million of outstanding borrowings under our credit facilities. At
December 31, 2001, we had no outstanding borrowings against these short-termunder our credit facilities.
McDermott hasWe have operations in many foreign locations, and, as a result, itsour financial
results could be significantly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in those foreign markets. In
order to manage the risks associated with foreign currency exchange
fluctuations, McDermottwe regularly hedges suchhedge those risks with foreign currency forward
exchange contracts (principally to hedge its Canadian dollar exposure).
McDermott doescontracts. We do not enter into speculative forward exchange contracts.
Interest Rate Sensitivity
The table below providesfollowing tables provide information about McDermott's market sensitiveour financial instruments that
are sensitive to changes in interest rates. The tables present principal cash
flows and constitutes a forward-looking statement.related weighted-average interest rates by expected maturity dates.
Principal Amount by Expected Maturity
(In thousands)
At December 31, 2002:
FiscalFair Value
at
Years Ending MarchDecember 31, December 31,
2003 2004 2005 2006 2007 Thereafter Total 2002
Investments(1) $ 143,857 $ 27,830 $ - $ - $ - $ - $ 171,687 $ 173,227
Average Interest Rate 0.54% 3.16% - - - -
Long-term Debt-
Fixed Rate $ 9,500 $ - $ 11,500 $ 5,484 $ 4,250 $ 61,225 $ 91,959 $ 56,596
Average Interest Rate 9.00% - 7.81% 7.38% 6.80% 8.44%
At December 31, 2001:
Fair Value
2000 2001at
Years Ending December 31, December 31,
2002 2003 2004 2005 2006 Thereafter Total at 3/31/99
-------- -------- -------- ------- ------- ---------- -------- ----------2001
Investments $366,304 $294,400 $118,960 $67,000 $75,540$ 81,411 $ 227,270 $ 2,700 $ - $922,204 $921,070$ - $ - $ 311,381 $ 331,003
Average Interest Rate 4.91% 5.48% 6.10% 5.47% 5.13% -4.54% 3.20% 5.25%
Long-term Debt-
Fixed Rate $ 30,640 - $225,000 -209,018 $ 9,500 $84,175 $349,315 $360,99711,501 $ 209 $11,715 $ 5,706 $ 67,239 $ 305,388 $ 292,849
Average Interest Rate 8.22% - 9.375% - 9.00% 8.20%
Long-term Debt-
Variable Rate $ 25 $ 25 $ 25 $ 25 $ 25 $ 4,652 $ 4,777 $ 4,777
Average Interest Rate 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%9.37% 8.14% 5.79% 7.77% 7.32% 8.27%
33(1)In February 2003, we liquidated approximately $108 million of our investment
portfolio for working capital and general corporate purposes.
Exchange Rate Sensitivity
The following tables provide information about our foreign currency forward
contracts and present such information in U.S. dollar equivalents. The tables
present notional amounts and related weighted-average exchange rates by expected
(contractual) maturity dates and constitute a forward-looking statement. These
notional amounts generally are used to calculate the contractual payments to be
exchanged under the contract.
46
Contract Amount by Expected Maturity
(In thousands)At December 31, 2002 (all forward contracts are expected to mature in 2003):
Fiscal YearsYear Ending March 31, Fair Value 2000 2001Average Contractual
Foreign Currency December 31, 2003 at December 31, 2002 Total at 3/31/99
------- ------ ------- ------- ----------Exchange Rate
Forward Contracts to Purchase
Foreign Currencies for U.S. Dollars:
Canadian Dollar $49,955 $9,292 $31,041 $90,288 $86,426
Average Contractual Exchange Rate 1.442 1.421 1.415
Japanese YenIndonesian Rupiah $ 3,260 - -3,679 $ 3,260157 9703.900
Euro $ 3,193
Average Contractual Exchange Rate 116.7
Danish Kroner11,260 $ 153 - -245 1.025
Pound Sterling $ 153525 $ 145
Average Contractual Exchange Rate 6.5573 1.596
Forward Contracts to Sell Foreign
Currencies for U.S. Dollars:
Canadian Dollar $14,880 - - $14,880 $13,920Swedish Krona $ 675 $ (18) 10.668
Pound Sterling $ 263 $ (1) 1.598
At December 31, 2001 (all forward contracts matured in 2002):
Year Ending Fair Value Average Contractual
Foreign Currency December 31, 2002 at December 31, 2001 Exchange Rate
1.402
French Franc
Forward Contracts to Purchase
Foreign Currencies for U.S. Dollars:
Indonesian Rupiah $ 72014,249 $ 604(722) 10667.600
Australian Dollar $ 2,42311,161 $ 3,747(844) 0.549
Euro $ 3,691
Average Contractual Exchange Rate 5.884 5.794 5.74510,017 $ (250) 0.912
Singapore Dollar $ 7,390 $ (127) 1.810
Forward Contracts to Sell
Foreign Currencies for U.S. Dollars:
Euro $ 385 $ (1) 0.900
Pound Sterling $ 340 $ (11) 1.460
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
McDermott has prepared the consolidated financial statements and related
financial information included in this report. McDermott has the primary
responsibility for the financial statements and other financial information and
for ascertaining that the data fairly reflect the financial position and results
of operations of McDermott. The financial statements were prepared in
accordance with generally accepted accounting principles, and necessarily
reflect informed estimates and judgments by appropriate officers of McDermott
with appropriate consideration given to materiality.
McDermott believes that it maintains an internal control structure designed to
provide reasonable assurance that assets are safeguarded against loss or
unauthorized use and that the financial records are adequate and can be relied
upon to produce financial statements in accordance with generally accepted
accounting principles. The concept of reasonable assurance is based on the
recognition that the cost of an internal control structure must not exceed the
related benefits. Although internal control procedures are designed to achieve
these objectives, it must be recognized that fraud, errors or illegal acts may
nevertheless occur. McDermott seeks to assure the objectivity and integrity of
its accounts by its selection of qualified personnel, by organizational
arrangements that provide an appropriate division of responsibility and by the
establishment and communication of sound business policies and procedures
throughout the organization. McDermott believes that its internal control
structure provides reasonable assurance that fraud, errors or illegal acts that
could be material to the financial statements are prevented or would be
detected.
McDermott's accompanying consolidated financial statements have been audited by
its independent accountants, who provide McDermott with advice on the
application of U.S. generally accepted accounting principles to McDermott's
business and also provide an objective assessment of the degree to which
McDermott meets its responsibility for the fairness of financial reporting.
They regularly evaluate the internal control structure and perform such tests
and other procedures as they deem necessary to reach and express an opinion on
the fairness of the financial statements. The reports of the independent
accountants appear elsewhere herein.
The Board of Directors pursues its responsibility for McDermott's consolidated
financial statements through its Audit Committee, which is composed solely of
directors who are not officers or employees of McDermott. The Audit Committee
meets periodically with the independent accountants and management to review
matters relating to the quality of financial reporting and internal control
structure and the nature, extent and results of the audit effort. In addition,
the Audit Committee is responsible for recommending the engagement of
independent accountants for McDermott to the Board of Directors, who in turn
submit the engagement to the stockholders for their approval. The independent
accountants have free access to the Audit Committee.
May 14, 1999
3547
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S
To the Board of Directors and Stockholders of
McDermott International, Inc.
In our opinion, the accompanying consolidated balance sheetsheets and the related
consolidated statements of income (loss),loss, comprehensive income (loss),loss, stockholders' equity
(deficit), and cash flows present fairly, in all material respects, the
financial position of McDermott International, Inc. and subsidiaries (the
"Company") at MarchDecember 31, 1999,2002 and 2001, and the results of their operations
and their cash flows for each of the year thenthree years in the period ended December
31, 2002 in conformity with accounting principles generally accepted accounting principles.in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit.audits. We conducted our auditaudits of these
statements in accordance with auditing standards generally accepted auditing standardsin the
United States of America, which require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
May 14, 1999
36
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Stockholders
McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott
International, Inc. as of March 31, 1998, and the related consolidated
statements of income (loss), comprehensive income (loss) stockholders' equity
and cash flows for each of the two years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referredAs discussed in Note 1 to above present fairly, in
all material respects, the consolidated financial positionstatements, the Company
changed its method of McDermott
International, Inc. at March 31, 1998,accounting for goodwill and other intangible assets and
the accounting for the impairment or disposal of long lived assets on January 1,
2002.
As discussed in Notes 1, 12, 20 and 21 to the consolidated financial statements,
on February 22, 2000, The Babcock & Wilcox Company ("B&W"), a wholly owned
subsidiary of the Company, filed a voluntary petition with the U.S. Bankruptcy
Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Subsequent to
this Filing, certain parties asserted that assets transferred by B&W to its
parent as part of a corporate reorganization during fiscal year 1999 should be
returned to B&W. On February 8, 2002, a ruling in favor of the Company was
issued by the U.S. Bankruptcy Court on the assets transferred by B&W. This
ruling is currently under appeal. The Company has recently entered into a
preliminary settlement agreement with certain claimants to resolve the Chapter
11 filing and the transferred asset claims, as well as other matters, and has
filed a proposed consensual plan of reorganization with the U.S. Bankruptcy
Court. The final resolution and timing of these matters remain uncertain. In
addition, during 2002, the Company's wholly owned subsidiary, J. Ray McDermott,
S.A., recorded significant losses on certain construction projects. These
matters, among others, have negatively impacted the Company's results of
its
operations for the year ended December 31, 2002 and its cash flows for each of the two years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNGliquidity.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
May 19, 1998
37March 24, 2003
48
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 and 1998SHEETS
ASSETS
1999 1998
---------- ----------December 31,
2002 2001
---- ----
(In thousands)
Current Assets:
Cash and cash equivalents $ 181,503175,177 $ 277,876196,912
Investments 55,646 135108,269 158,000
Accounts receivable - trade, net 281,667 550,552194,603 139,598
Accounts receivable from The Babcock & Wilcox Company 12,273 3,681
Accounts and notes receivable - unconsolidated affiliates 165,154 52,35117,695 69,368
Accounts receivable - other 125,631 139,864
Environmental and products liabilities recoverable - current 228,738 143,58864,718 34,833
Contracts in progress 179,310 239,548149,162 97,326
Inventories 52,656 63,342686 1,825
Deferred income taxes 73,364 84,0363,350 59,370
Other current assets 31,697 45,26436,972 52,490
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,375,366 1,596,556762,905 813,403
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\
Property, Plant and Equipment:
Land 22,670 29,03412,520 19,897
Buildings 197,902 205,284132,538 138,443
Machinery and equipment 1,198,381 1,457,6301,032,244 1,022,932
Property under construction 41,686 23,40462,625 37,378
- ------------------------------------------------------------------------------------------
1,460,639 1,715,352------------------------------------------------------------------------------------------------------
1,239,927 1,218,650
Less accumulated depreciation 1,026,678 1,181,658885,827 864,751
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 433,961 533,694354,100 353,899
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Investments:
Government obligations 473,072 519,44348,681 171,702
Other investments 378,181 553,91316,277 1,301
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Investments 851,253 1,073,35664,958 173,003
- ------------------------------------------------------------------------------------------
Environmental and Products Liabilities Recoverable 1,167,113 604,870------------------------------------------------------------------------------------------------------
Investment in The Babcock & Wilcox Company - ------------------------------------------------------------------------------------------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $104,444,000 at March 31,1999
and $107,814,000 at March 31, 1998 125,436 127,077186,966
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Accounts Receivable from The Babcock & Wilcox Company - 17,489
- ------------------------------------------------------------------------------------------------------
Goodwill 12,926 330,705
- ------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 130,437 328,58319,311 152,510
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Assets 221,954 236,99463,971 75,865
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL $4,305,520 $4,501,130
- ------------------------------------------------------------------------------------------$ 1,278,171 $ 2,103,840
======================================================================================================
See accompanying notes to consolidated financial statements.
3849
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 1998
----------- -----------December 31,
2002 2001
---- ----
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 31,12655,577 $ 156,300209,506
Accounts payable 198,500 301,988
Environmental and products liabilities - current 259,836 181,234166,251 118,811
Accounts payable to The Babcock & Wilcox Company 32,379 34,098
Accrued employee benefits 132,105 146,83962,109 91,596
Accrued liabilities - other 318,631 285,834185,320 203,695
Accrued contract cost 51,619 89,32153,335 26,367
Advance billings on contracts 240,380 268,764329,557 170,329
U.S. and foreign income taxes payable 34,214 30,84632,521 123,985
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,266,411 1,461,126917,049 978,387
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 323,774 598,18286,104 100,393
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 128,188 393,61626,898 23,536
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 1,334,096 751,62012,258 15,083
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Self-Insurance 71,918 67,878
- -----------------------------------------------------------------------------------------------------------------
Pension Liability 392,072 42,063
- -----------------------------------------------------------------------------------------------------------------
Accrued Cost of The Babcock & Wilcox Company Bankruptcy Settlement 86,377 -
- -----------------------------------------------------------------------------------------------------------------
Other Liabilities 263,950 271,489102,252 106,390
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies. Minority Interest:
Subsidiary's redeemable preferred stocks(Note 10)
- 155,358
Other minority interest 195,367 189,966
- -----------------------------------------------------------------------------------------------
Total Minority Interest 195,367 345,324
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares; outstanding
2,875,000 Series C $2.875 cumulative convertible,
par value $1.00 per share - 2,875Equity (Deficit):
Common stock, par value $1.00 per
share, authorized 150,000,000 shares; issued
61,147,77566,351,478 and 63,733,257 shares at
MarchDecember 31, 19992002 and 56,607,861
at March 31, 1998 61,148 56,6082001, respectively 66,351 63,733
Capital in excess of par value 1,028,393 1,012,3381,093,428 1,077,148
Accumulated deficit (200,432) (341,916)(1,027,318) (250,924)
Treasury stock at cost, 2,000,6142,061,407 and 2,005,792 shares at
MarchDecember 31, 19992002 and 100,614 shares at March 31, 1998 (62,731) (3,575)2001, respectively (62,792) (62,736)
Accumulated other comprehensive loss (32,644) (46,557)(486,426) (57,111)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 793,734 679,773(Deficit) (416,757) 770,110
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL $4,305,520 $4,501,130
- -----------------------------------------------------------------------------------------------$ 1,278,171 $ 2,103,840
=================================================================================================================
3950
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999LOSS
1999 1998 1997
----------- ---------- -----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share data)amounts)
Revenues $3,149,985 $3,674,635 $3,150,850$ 1,748,681 $1,896,948 $ 1,813,670
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding depreciation1,744,138 1,657,889 1,613,742
Loss on write-off of investment in The
Babcock & Wilcox Company 224,664 - -
Impairment of J. Ray McDermott, S.A. goodwill 313,008 - -
Losses (gains) on asset disposals and amortization) 2,635,229 3,117,279 2,878,972
Depreciation and amortization 101,390 142,301 151,581impairments - net 7,849 3,739 2,803
Selling, general and administrative expenses 222,239 224,045 262,918160,474 194,041 182,457
- --------------------------------------------------------------------------------------------------------
2,958,858 3,483,625 3,293,471------------------------------------------------------------------------------------------------------
2,450,133 1,855,669 1,799,002
- --------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and Impairments - Net 17,910 79,065 (526)
- --------------------------------------------------------------------------------------------------------
Operating Income (Loss) before------------------------------------------------------------------------------------------------------
Equity in Income (Loss) from Investees 209,037 270,075 (143,147)27,692 34,093 (9,795)
- --------------------------------------------------------------------------------------------------------
Income (Loss) from Investees 8,379 85,382 (4,098)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 217,416 355,457 (147,245)(673,760) 75,372 4,873
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 97,965 62,535 46,7428,560 19,561 27,108
Interest expense (63,262) (81,454) (95,100)
Minority interest (46,042) (47,984) (5,562)(15,124) (39,663) (43,605)
Estimated loss on The Babcock & Wilcox Company
bankruptcy settlement (86,377) - -
Gain on sale of McDermott Engineers &
Constructors (Canada) Ltd. - 27,996 -
Curtailments and settlements of
employee benefit plans - (4,000) (5,297)
Other-net (18,799) 3,253 (19,532)(4,440) 6,641 2,692
- --------------------------------------------------------------------------------------------------------
(30,138) (63,650) (73,452)------------------------------------------------------------------------------------------------------
(97,381) 10,535 (19,102)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Provision for (Benefit from) Income Taxes
and Extraordinary Item 187,278 291,807 (220,697)(771,141) 85,907 (14,229)
Provision for (Benefit from) Income Taxes (4,803) 76,117 (14,592)15,063 110,329 10,635
- --------------------------------------------------------------------------------------------------------
Income (Loss)------------------------------------------------------------------------------------------------------
Loss from Continuing Operations
before Extraordinary Item 192,081 215,690 (206,105)(786,204) (24,422) (24,864)
Income from Discontinued Operations 9,469 3,565 2,782
- ------------------------------------------------------------------------------------------------------
Loss before Extraordinary Item (38,719)(776,735) (20,857) (22,082)
Extraordinary Gain on Debt Extinguishment 341 835 -
- - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $153,362 $215,690 $(206,105)
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Stockholders
(after Preferred Stock Dividends) $153,362 $207,424 $(214,371)
- --------------------------------------------------------------------------------------------------------
Earnings (Loss)Loss $ (776,394) $ (20,022) $ (22,082)
======================================================================================================
Loss per Common Share:
Basic:
Income (Loss)Loss from Continuing Operations
before Extraordinary Item $ 3.25(12.71) $ 3.74(0.40) $ (3.95)(0.42)
Net Income (Loss)Loss $ 2.60(12.55) $ 3.74(0.33) $ (3.95)(0.37)
Diluted:
Income (Loss)Loss from Continuing Operations
before Extraordinary Item $ 3.16(12.71) $ 3.48(0.40) $ (3.95)(0.42)
Net Income (Loss)Loss $ 2.53(12.55) $ 3.48(0.33) $ (3.95)
- --------------------------------------------------------------------------------------------------------(0.37)
===================================================================================================
Cash Dividends:
Per Common Share $ 0.20 $ 0.20 $ 0.60
Per Preferred Share- $ - $ 2.88 $ 2.88
- --------------------------------------------------------------------------------------------------------0.10
===================================================================================================
See accompanying notes to consolidated financial statements.
4051
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999LOSS
1999 1998 1997Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Net Income (Loss)Loss $ 153,362 $215,690(776,394) $ (206,105)(20,022) $ (22,082)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (856)
Foreign currency translation adjustments, net267 (4,826) (11,615)
Reclassification adjustment for impairments
of reclassification adjustments (3,689) (11,271)
Reclassification adjustments for salesinvestments 18,435 - -
Sales of investments in foreign entities in fiscal year 1999 15,596
Minimum pension liability adjustment,
net of taxes of $791,000, $1,547,000 and $480,000
in fiscal years 1999, 1998 and 1997, respectively (1,058) (2,582) (720)1,041 1,513 (6,077)
Unrealized gains (losses) on investments:derivative financial instruments:
Unrealized gains (losses) arising during the period,
net of taxes of $3,000 in fiscal year 1999 1,887
Unrealized gains (losses), net of reclassification adjustments
arising during the period, net of taxes of $360,000 and
$85,000 in fiscal years 1998 and 1997, respectively 4,807 (2,257)on derivative financial instruments 3,858 (2,506) -
Reclassification adjustment for (gains) losses included in net income (534) 266 -
Minimum pension liability adjustment:
Net of tax benefits of $0, $1,554,000 and $1,250,000 in the years
ended December 31, 2002, 2001 and 2000, respectively (451,756) (2,849) 2,372
Deconsolidation of The Babcock & Wilcox Company - - 2,562
Unrealized gains on investments:
Unrealized gains arising during the period,
net of taxes of $11,000$0, $30,000 and $210,000 in fiscal year 1999 (1,656)the years
ended December 31, 2002, 2001 and 2000, respectively 371 9,286 4,887
Reclassification adjustment for net gains included in
net loss, net of tax benefits of $0 and $162,000 in the
years ended December 31, 2002 and 2001, respectively (997) (3,143) -
-------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 13,913 (1,464) (14,248)Loss (429,315) (2,259) (7,871)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss)Loss $(1,205,709) $ 167,275 $214,226(22,281) $ (220,353)
- -------------------------------------------------------------------------------------------------------------------------(29,953)
===========================================================================================================================
See accompanying notes to consolidated financial statements.
4152
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999(DEFICIT)
Accumulated Total
Common Stock Capital Other Stockholders'
------------ in Excess Accumulated Comprehensive Treasury Equity
Shares Par Value of Par Value Deficit Loss Stock (Deficit)
------ --------- ------------ ------- ---- ----- --------
(In thousands, except for share amounts)
Preferred Stock
Series C Common Stock
----------------------------- --------------------------
Shares Par Value Shares Par Value
------ --------- ------ ---------
Balance MarchDecember 31, 1996 2,875,000 $ 2,875 54,435,823 $ 54,4361999 61,625,434 61,625 1,048,848 (208,904) (46,980) (62,731) 791,858
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net lossLoss - - - (22,082) - - (22,082)
Minimum pension liability - - - - Loss4,933 - 4,933
Unrealized gain on investments - - - - 4,887 - 4,887
Translation adjustments - - - - (11,615) - (11,615)
Common stock dividends - - - (5,993) - Preferred- (5,993)
Exercise of stock dividendsoptions 3,851 4 14 - - - 18
Vesting of deferred stock units 947 1 - - - - JRM equity transactions1
Restricted stock purchases - net 40,000 40 (42) - - - (2)
Directors stock plan 1,863 2 - - - - 2
Contributions to thrift plan 910,287 910 7,602 - - - 8,512
Sale of investments
in foreign entities - - - 6,077 (6,077) - -
Purchase of treasury shares - - - - - (5) (5)
Stock based compensation charges - - 6,089 - - - 6,089
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 62,582,382 62,582 1,062,511 (230,902) (54,852) (62,736) 776,603
Net loss - - - (20,022) - - (20,022)
Minimum pension liability - - - - (2,849) - (2,849)
Unrealized gain on investments - - - - 6,143 - 6,143
Translation adjustments - - - - (3,313) - (3,313)
Unrealized loss on derivatives - - - - (2,240) - (2,240)
Exercise of stock options 11,674 12 98 - - 22,779 23
Tax benefit on- 110
Vesting of deferred stock optionsunits 100,701 101 (101) - - - -
Restricted stock purchases - net 324,007 324 (347) - - 171,290 171
Awards of common- (23)
Directors stock - - 975 1
Redemption of preferred sharesplan 2,550 2 - - - - 2
Contributions to thrift plan - - 306,089 306
Deferred career executive stock plan expense711,943 712 7,272 - - - 7,984
Stock based compensation charges - - ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 2,875,000 2,875 54,936,956 54,937
Net income7,715 - - - 7,715
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 63,733,257 $ 63,733 $ 1,077,148 $ (250,924) $ (57,111) $(62,736) $ 770,110
Net loss - - - (776,394) - - (776,394)
Minimum pension liability - - - - Gain(451,756) - (451,756)
Unrealized loss on investments - - - - (626) - (626)
Translation adjustments - - - - Common stock dividends19,743 - 19,743
Unrealized gain on derivatives - - - - Preferred stock dividends3,324 - - - -
JRM equity transactions - - - -3,324
Exercise of stock options 113,800 113 1,281 - - 1,450,593 1,451
Tax benefit on- 1,394
Vesting of deferred stock optionsunits 6,123 6 (6) - - - -
Restricted stock purchasesissuances - net 403,700 404 (816) - - 90 -
Redemption of preferred shares(56) (468)
Performance based stock issuances 699,711 700 4,238 - - 100 - 4,938
Contributions to thrift plan - - 191,058 191
Purchase of treasury shares1,394,887 1,395 8,481 - - - 9,876
Stock based compensation charges - Deferred career executive stock plan expense- 3,102 - - - 3,102
- Termination of directors' retirement plan - - 32,040 32
Cancellation of shares - - (2,976) (3)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance MarchDecember 31, 1998 2,875,000 2,875 56,607,861 56,608
Net income - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 188,768 189
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 2,025 2
Directors' stock plan - - 18,735 19
Redemption of preferred shares - - 23,251 23
Conversion of Series C Preferred stock (2,875,000) (2,875) 4,077,890 4,078
Contributions to thrift plan - - 229,245 229
Purchase of treasury shares - - - -
Deferred career executive stock plan expense - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1999 -2002 66,351,478 $ - 61,147,77566,351 $ 61,148
- ----------------------------------------------------------------------------------------------------------------1,093,428 $(1,027,318) $(486,426) $(62,792) $(416,757)
====================================================================================================================================
See accompanying notes to the consolidated financial statements.
42
Accumulated
Capital Other Total
in Excess Accumulated Comprehensive Treasury Stockholders'
of Par Value Deficit Income Stock Equity
------------- ----------- --------------- ----------- -------------
$949,022 $ (290,968) $(30,845) $ - $ 684,520
- -------------------------------------------------------------------------------------
- (206,105) - - (206,105)
- - (720) - (720)
- - (2,257) - (2,257)
- - (11,271) - (11,271)
- (32,824) - - (32,824)
- (8,266) - - (8,266)
1,339 - - - 1,339
371 - - - 394
41 - - - 41
(5) - - - 166
20 - - - 21
68 - - - 68
5,724 - - - 6,030
5,865 - - - 5,865
- -------------------------------------------------------------------------------------
962,445 (538,163) (45,093) - 437,001
- 215,690 - - 215,690
- - (2,582) - (2,582)
- - 4,807 - 4,807
- - (3,689) - (3,689)
- (11,177) - - (11,177)
- (8,266) - - (8,266)
3,431 - - - 3,431
30,005 - - - 31,456
4,916 - - - 4,916
(24) - - - (24)
221 - - - 221
5,795 - - - 5,986
- - - (3,662) (3,662)
4,576 - - - 4,576
1,057 - - - 1,089
(84) - - 87 -
- -------------------------------------------------------------------------------------
1,012,338 (341,916) (46,557) (3,575) 679,773
- 153,362 - - 153,362
- - (1,058) - (1,058)
- - 231 - 231
- - 14,740 - 14,740
- (11,878) - - (11,878)
2,495 - - - 2,495
3,543 - - - 3,732
1,013 - - - 1,013
- - - - 2
421 - - - 440
701 - - - 724
(1,203) - - - -
5,813 - - - 6,042
- - - (59,156) (59,156)
3,272 - - - 3,272
- -------------------------------------------------------------------------------------
$1,028,393 $ (200,432) $(32,644) $ (62,731) $ 793,734
- -------------------------------------------------------------------------------------
4353
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998 1997
---------- ---------- ----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)Loss $ 153,362(776,394) $ 215,690 $(206,105)
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:(20,022) $ (22,082)
Depreciation and amortization 101,390 142,301 151,58140,811 62,371 63,890
Income or loss of investees, less dividends 20,271 (13,913) 17,422
(Gain) loss7,156 2,616 23,850
Loss on asset disposals and impairments - net (17,910) (79,065) 5267,850 3,733 2,800
Provision for (benefit from) deferred taxes (29,725) 9,521 (211)
Extraordinary loss 38,719(33,678) 9,269 20,918
Gain on sale of businesses (15,044) (27,996) -
Impairment of J. Ray McDermott, S.A. goodwill 313,008 - -
Loss on write-off of investment in The Babcock & Wilcox Company 224,664 - -
Extraordinary gain on debt extinguishment (341) (835) -
Estimated loss on The Babcock & Wilcox bankruptcy settlement 86,377 - -
Deconsolidation of The Babcock & Wilcox Company - - (19,424)
Other 3,805 15,372 6,52512,093 1,112 12,880
Changes in assets and liabilities, net
of effects from acquisitions and divestitures:
Accounts receivable 79,553 28,596 7,978(51,733) (31,066) 29,554
Accounts payable (100,835) 31,712 3,44353,332 28,337 12,148
Inventories 10,305 1,974 123176 4,293 (4,134)
Net contracts in progress and advance billings 31,470 152,097 139,188105,498 82,088 (18,231)
Income taxes 627 (47,356) (6,026)(18,635) 95,113 (15,845)
Accrued liabilities 41,238 30,746 (26,936)16,844 (32,107) (40,680)
Products and environmental liabilities 49,133 11,524 86,8123,091 3,085 (10,332)
Other, net (45,670) 116,973 (32,609)15,852 (4,176) (87,023)
Proceeds from insurance for products liability claims 191,728 157,656 153,141- - 26,427
Payments of products liability claims (227,176) (196,091) (188,205)- - (23,782)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 300,285 577,737 106,647(9,073) 175,815 (49,066)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (6,627) -(644) (2,707)
Purchases of property, plant and equipment (78,787) (45,090) (91,371)(64,852) (45,008) (49,300)
Purchases of available-for-sale securities (827,371) (788,503) (617,464)(1,361,752) (1,352,266) (114,449)
Maturities of available-for-sale securities 664,183 112,369 219,301744,538 161,901 108,437
Sales of available-for-sale securities 339,478 95,430 156,827775,441 1,226,107 26,382
Proceeds from asset disposals 145,161 457,337 106,30441,095 53,056 4,778
Investments in equity investees 88 (4,391) (31,030)
Returns from investees - 2,124 24,500(800) (1,132)
Other 49 (162) - - (1,821)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 242,752 (177,351) (234,754)134,519 42,184 (27,991)
- ------------------------------------------------------------------------------------------------------------
44
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998 1997
---------- ---------- ----------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $(326,921) $(152,116) $(31,687)
Issuance of long-term debt - - 244,375
Decrease(208,416) (15,110) (2)
Increase (decrease) in short-term borrowing (30,954) (208,759) (12,371)60,056 (96,062) 9,676
Issuance of common stock 4,173 31,431 565
Issuance of subsidiary's stock 2,127 5,599 4,569
Acquisition of subsidiary's common stock (58,272) (13,537) -
Acquisition of subsidiary's preferred stock (154,633) (15,406) (2,250)1,394 1,000 47
Dividends paid (13,810) (19,367) (51,947)- - (8,972)
Purchase of McDermott International, Inc. stock (59,156) (3,662) - - (5)
Other (3,686) (5,102) (4,843)(334) 4,500 (999)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)USED IN FINANCING ACTIVITIES (641,132) (380,919) 146,411(147,300) (105,672) (255)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 1,722 626 816119 (35) (802)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (96,373) 20,093 19,120(21,735) 112,292 (78,114)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 277,876 257,783 238,663PERIOD 196,912 84,620 162,734
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $181,503 $277,876 $257,783
- -----------------------------------------------------------------------------------------PERIOD $ 175,177 $ 196,912 $ 84,620
============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 68,31720,792 $ 87,51438,166 $ 85,50244,872
Income taxes (net of refunds) $ 44,044119,962 $ 15,571(2,057) $ 14,758
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES
Transfer of accounts receivables sold under a
purchase and sale agreement from secured
borrowings to sales treatment $ 56,929 $ - $ -
- -----------------------------------------------------------------------------------------12,402
============================================================================================================
See accompanying notes to consolidated financial statements.
4554
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCHDECEMBER 31, 19992002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
TheWe have presented our consolidated financial statements are presented in U.S. Dollars in
accordance with accounting principles generally accepted in the United States("States
("GAAP"). TheThese consolidated financial statements include the accounts of
McDermott International, Inc. and its subsidiaries and controlled joint
ventures. InvestmentsWe use the equity method to account for investments in joint ventures
and other entities which McDermott
International, Inc. doeswe do not control, but hasover which we have significant
influence over, are
accounted for using the equity method. Allinfluence. We have eliminated all significant intercompany transactions and
accountsaccounts. We have been eliminated. Certainreclassified certain amounts previously reported have
been reclassified to conform
with the presentation at MarchDecember 31, 1999.
Hereinafter,2002. We present the notes to our
consolidated financial statements on the basis of continuing operations, unless
the context requires otherwise the following terms shall
mean:
. MII forstated.
McDermott International, Inc., a PanamaPanamanian corporation . JRM for("MII"), is the parent
company of the McDermott group of companies, which includes:
- J. Ray McDermott, S. A.S.A., a majority-owned Panamanian subsidiary of MII
("JRM"), and its consolidated subsidiaries,
. MI forsubsidiaries;
- McDermott Incorporated, a Delaware subsidiary of MII ("MI"),
and its consolidated subsidiaries,
. BWICO forsubsidiaries;
- Babcock & Wilcox Investment Company, a Delaware subsidiary of
MI . B&W for the Babcock & Wilcox Company, a Delaware subsidiary of BWICO, and
its consolidated subsidiaries,
. BWXT for("BWICO");
- BWX Technologies, Inc., a Delaware subsidiary of BWICO
("BWXT"), and its consolidated subsidiaries; and
- The Babcock & Wilcox Company, an unconsolidated Delaware
subsidiary of BWICO ("B&W").
On February 22, 2000, B&W and certain of its subsidiaries and
. McDermottfiled a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve their asbestos liability. As of February
22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy
Court and, as a result, our access to cash flows of B&W and its subsidiaries is
restricted.
Due to the bankruptcy filing, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
consolidated enterprise.financial statements, and we have been presenting our investment in
B&W on the cost method. The Chapter 11 filing, along with subsequent filings and
negotiations, led to increased uncertainty with respect to the amounts, means
and timing of the ultimate settlement of asbestos claims and the recovery of our
investment in B&W. Due to this increased uncertainty, we wrote off our net
investment in B&W in the quarter ended June 30, 2002. The total impairment
charge of $224.7 million included our investment in B&W of $187.0 million and
other related assets totaling $37.7 million, primarily consisting of accounts
receivable from B&W, for which we provided an allowance of $18.2 million. On
December 19, 2002, drafts of a joint plan of reorganization and settlement
agreement, together with a draft of a related disclosure statement, were filed
in the Chapter 11 proceedings, and we determined that a liability related to the
proposed settlement is probable and that the value is reasonably estimable.
Accordingly, as of December 31, 2002, we established an estimate for the cost of
the settlement of the B&W bankruptcy proceedings of $110.0 million, including
tax expense of $23.6 million. See Note 20 for details regarding this estimate
and for further information regarding developments in negotiations relating to
the B&W Chapter 11 proceedings.
Use of Estimates
- ----------------
The preparation ofWe use estimates and assumptions to prepare our financial statements in
conformity with generally accepted
accounting principles requires management to makeGAAP. These estimates and assumptions that
affect the amounts reportedwe
report in theour financial statements and accompanying notes. ActualOur actual results
could differ from those estimates. Variances could result in a material effect
on our results of operations and financial position in future periods.
55
Earnings Per Share
- ------------------
Earnings (loss)We have computed earnings per common share has been computed on the basis of the weighted average
number of common shares, and, where dilutive, common share equivalents,
outstanding during the indicated periods.
Investments
- -----------
McDermott'sOur investments, primarily government obligations and other highly liquid debt
securities, are classified as available-for-sale and are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive loss. InvestmentsWe classify investments available for
current operations are classified in the balance sheet as current assets, while we classify
investments held for long-term purposes are classified as non-currentnoncurrent assets. TheWe adjust the
amortized cost of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. SuchThat amortization is included in interest income. RealizedWe
include realized gains and losses are includedon our investments in other income.income (expense).
The cost of securities sold is based on the specific identification method. InterestWe
include interest on securities is included in interest income.
Foreign Currency Translation
- ----------------------------
AssetsWe translate assets and liabilities of our foreign operations, other than
operations in highly inflationary economies, are translated into U.S. Dollars at current
exchange rates, and we translate income statement items are translated at average exchange
rates for the year. Adjustmentsperiods presented. We record adjustments resulting from the
translation of foreign currency financial statements are recorded as a component of
accumulated other comprehensive loss. ForeignWe report foreign currency transaction
adjustments are reported
46
gains and losses in income. IncludedWe have included in other income (expense)
are transaction gains (losses) of $3,384,000, $5,200,000,($2.8) million, ($1.7) million and $3,628,000$3.5 million
for fiscalthe years 1999, 1998ended December 31, 2002, 2001 and 1997,2000, respectively. In fiscal years 1999 and 1998, a loss of $15,596,000 and a gain of
$1,005,000, respectively, were transferred from currency translation adjustments
and included in gain (loss) on asset disposals and impairments - net due to the
sale of foreign investments.
Contracts and Revenue Recognition
- ---------------------------------
ContractWe generally recognize contract revenues and related costs are principally recognized on a
percentage
of completionpercentage-of-completion method for individual contracts or combinations thereofof
contracts based uponon work performed, man hours, or a cost to costcost-to-cost method, as
applicable to the product or activity involved. Certain partnering contracts
contain a risk and rewardrisk-and-reward element, whereby a portion of total compensation is
tied to the overall performance of the alliance partners. RevenuesWe include revenues
and related costs so recorded, plus accumulated contract costs that exceed
amounts invoiced to customers under the terms of the contracts, are included in contracts in
progress. BillingsWe include in advance billings on contracts billings that exceed
accumulated contract costs and revenues and costs recognized under percentage of completion are included in advance billings on contracts.the
percentage-of-completion method. Most long-term contracts havecontain provisions for
progress payments. AllWe expect to invoice customers for all unbilled revenues will be billed. Contractrevenues. We
review contract price and cost estimates are reviewed periodically as the work progresses and
reflect adjustments proportionate to the percentage of completion are reflectedpercentage-of-completion in income in
the period when suchthose estimates are revised. Provisions are made currentlyWe make provisions for all known or
anticipated losses. Variations from estimated contract performance could result
in a material adjustmentadjustments to operating results for any fiscal quarter or year. ClaimsWe
include claims for extra work or changes in scope of work are includedto the extent of costs
incurred in contract revenues when we believe collection is probable. IncludedAt
December 31, 2002 and 2001, we have included in accounts receivable
and
contracts in progress are approximately $15,535,000 and $5,790,000$19.5 million relating to commercial and U.S. Government contracts claims whose final
settlement is subject to future determination through negotiations or other
procedures whichthat had not been completed at March 31, 1999 and 1998, respectively.completed.
1999 1998
--------- ---------December 31,
2002 2001
---- ----
(In thousands)
Included in Contracts in Progress are:Progress:
Costs incurred less costs of revenue recognized $ 46,94246,217 $ 88,51945,032
Revenues recognized less billings to customers 132,368 151,029
--------------------------------------------------------------------------102,945 52,294
- -------------------------------------------------------------------------------------------------
Contracts in Progress $179,310 $239,548
--------------------------------------------------------------------------$ 149,162 $ 97,326
=================================================================================================
56
December 31,
2002 2001
---- ----
(In thousands)
Included in Advance Billings on Contracts are:Contracts:
Billings to customers less revenues recognized $320,523 $311,302$ 477,599 $ 221,209
Costs incurred less costs of revenue recognized (80,143) (42,538)
--------------------------------------------------------------------------(148,042) (50,880)
- -------------------------------------------------------------------------------------------------
Advance Billings on Contracts $240,380 $268,764
--------------------------------------------------------------------------$ 329,557 $ 170,329
=================================================================================================
McDermott is usually entitled to financial settlements relative to the
individual circumstances of deferrals or cancellations of Power Generation
Systems' contracts. McDermott does not recognize such settlements or claims for
additional compensation until final settlement is reached.
IncludedWe have included in accounts receivable - trade arethe following amounts
representing retainages on contracts as follows:contracts:
1999 1998December 31,
2002 2001
---- ----
(In thousands)
Retainages $108,605 $70,414
------------------------------------------------------------$ 34,137 $ 32,156
=================================================================================================
Retainages expected to be collected after one year $ 29,246 $33,567
------------------------------------------------------------14,325 $ 13,082
=================================================================================================
Of itsthe long-term retainages at MarchDecember 31, 1999, McDermott anticipates collection
of $10,946,0002002, we anticipate collecting $11.9
million in fiscal year 2001, $17,167,0002004 and $2.4 million in fiscal year 2002 and
$1,133,000 in fiscal year 2003.
47
2005.
Inventories
- -----------
Inventories are carriedWe carry our inventories at the lower of cost or market. Cost is determinedWe determine cost on an
average cost basis except for certain materials inventories, for which the
last-in first-out (LIFO) method is used. The cost of approximately 16% and 17%
of total inventories was determined using the LIFO method at March 31, 1999 and
1998, respectively.basis. Inventories at March 31, 1999 and 1998 are summarized below:
1999 1998
------- -------December 31,
2002 2001
---- ----
(In thousands)
Raw Materials and Supplies $37,481 $47,411$ 393 $ 1,733
Work in Progress 7,606 6,720
Finished Goods 7,569 9,211
-------------------------------------------------293 92
- -------------------------------------------------------------
Total Inventories $52,656 $63,342
-------------------------------------------------$ 686 $ 1,825
=============================================================
Comprehensive Income (Loss)
- ---------------------------
Effective April 1, 1998, McDermott adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," to report and
display comprehensive income and its components. Under this new principle, the
accumulated other comprehensive income or loss is displayed in the consolidated
balance sheet as a component of stockholders' equity. Comprehensive income is
displayed as a separate financial statement.Loss
The components of accumulated other comprehensive loss included in stockholders'
equity at March 31, 1999 and 1998(deficit) are as follows:
1999 1998
--------- ---------December 31,
2002 2001
---- ----
(In thousands)
Currency Translation Adjustments $(27,762) $(42,502)$ (30,659) $ (50,402)
Net Unrealized Gain on Investments 906 675 1,301
Net Unrealized Gain (Loss) on Derivative Financial Instruments 1,084 (2,240)
Minimum Pension Liability (5,788) (4,730)
----------------------------------------------------------------(457,526) (5,770)
- -----------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss $(32,644) $(46,557)
----------------------------------------------------------------$ (486,426) $ (57,111)
===============================================================================================
Warranty Expense
- ----------------
Estimated warrantyWe accrue estimated expense which may be required to satisfy contractual warranty requirements,
primarily of our Government Operations segment, when we recognize the Power Generation Systems segment, is accrued
relative toassociated
revenue recognition on the respectiverelated contracts. JRM includesWe include warranty costs associated with our
Marine Construction Services segment as a component of theirour total contract cost
estimate to satisfy contractual requirements. In addition, we make specific
provisions are made where we expect the actual costs of a warranty are expected to significantly
exceed such accruals.the accrued estimates. Such provisions could have a material effect on
our consolidated financial position, results of operations and cash flows.
Environmental Clean-up Costs
- ----------------------------
McDermott accruesWe accrue for future decommissioning of itsour nuclear facilities that will permit
the release of these facilities to unrestricted use at the end of each
facility's life, which is a conditionrequirement of itsour licenses from the Nuclear
Regulatory Commission. SuchWe reflect the accruals, based on the estimated cost of
those activities areand net of any cost-sharing arrangements, over the economic
useful life of each facility, which is
estimatedwe typically estimate at 40 years. EstimatedThe total
estimated cost of future decommissioning of our nuclear facilities is estimated
to be $30.0
57
million, of which we have recorded $1.5 million in accrued liabilities - other
and $9.9 million in other liabilities. We adjust the estimated costs are adjusted as further
information develops or circumstances change and, if applicable, are net of cost-sharing
agreements. Costschange. We do not discount costs of future
expenditures for environmental clean-up are not
discountedcleanup to their present value. However, there is anAn exception atto
this accounting treatment relates to the work we perform for one facility, that has provisions in its government contracts pursuant tofor
which all
of its decommissioning costs are covered by the U.S. Government. RecoveriesGovernment is obligated to pay all the decommissioning costs. We
recognize recoveries of environmental clean-up costs from other parties are recognized as
assets when we determine their receipt is deemed probable.
48
Research and Development
- ------------------------
Research and development activities are related to development and improvement
of new and existing products and equipment and conceptual and engineering
evaluation for translation into practical applications. The costWe charge to operations
the costs of research and development whichthat is not performed on specific
contracts is charged to
operations as incurred. Such expense waswe incur them. These expenses totaled approximately $12,312,000, $15,125,000$13.8 million,
$11.7 million and $16,579,000$15.4 million in fiscalthe years 1999, 1998ended December 31, 2002, 2001 and
1997,2000, respectively. In addition, our customers paid for expenditures we made on
research and development activities of approximately $15,752,000, $22,803,000$47.8 million, $46.6
million and $34,170,000 in fiscal years 1999, 1998 and 1997,
respectively, were paid for by customers of McDermott.
Minority Interest
- -----------------
Minority interest expense includes dividends on MI preferred stock (see Note 8)
and the recognition of minority shareholder participation$34.8 million in the results of
operations of less than wholly-owned subsidiaries.
Long-Lived Assets
- -----------------
McDermott evaluates the realizability of its long-lived assets, includingyears ended December 31, 2002, 2001 and 2000,
respectively.
Property, Plant and Equipment
We carry our property, plant and equipment and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are carried at cost, reduced by provisions to
recognize economic impairment when management determines suchwe determine impairment has occurred.
Except for major marine vessels, we depreciate our property, plant and equipment is depreciated
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. MajorWe depreciate
major marine vessels are depreciated using the units-of-production method based on the
utilization of each vessel. DepreciationOur depreciation expense calculated under the
units-of-
productionunits-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation or 50% of
cumulative straight-line depreciation. DepreciationOur depreciation expense was $84,404,000, $106,305,000$35.7
million, $38.2 million and $102,486,000$38.0 million for fiscalthe years 1999, 1998ended December 31, 2002,
2001 and 1997,2000, respectively.
Maintenance,Effective January 1, 2002, based on a review performed by us and our independent
consultants, we changed our estimate of the useful lives of new major marine
vessels from 12 years to 25 years to better reflect the service lives of our
assets and industry norms. Consistent with this change, we also extended the
lives of major upgrades to existing vessels. We continue to depreciate our major
marine vessels using the units-of-production method, based on the utilization of
each vessel. The change in estimated useful lives reduced our operating loss by
approximately $3.2 million for the year ended December 31, 2002.
We expense the costs of maintenance, repairs and renewals whichthat do not materially
prolong the useful life of an asset are expensed as incurredwe incur them except for drydocking
costs. We accrue estimated drydock costs, including labor, raw materials,
equipment and regulatory fees, for theour marine fleet which are estimated and accrued over the period of time
between drydockings, which is generally 3 to 5 years. Such accrualsWe accrue drydock costs in
advance of the anticipated future drydocking, commonly known as the "accrue in
advance" method. Actual drydock costs are charged against the liability when
incurred and any differences between actual costs and accrued costs are
recognized over the remaining months of the drydock cycle. Such differences
could have a material effect on our consolidated financial position, results of
operations and cash flows.
Goodwill
On January 1, 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, we
no longer amortize goodwill to operations
currently.earnings, but instead we periodically test for
impairment. Due to the deterioration in our Marine Construction Services
segment's financial performance during the three months ended September 30, 2002
and our revised expectations concerning this segment's future earnings and cash
flow, we tested the goodwill of the Marine
58
Construction Services segment for impairment as of September 30, 2002. With the
assistance of an independent consultant, we completed the first step of the
goodwill impairment test and determined that the carrying amount including
goodwill of the reporting unit, JRM, exceeded its fair value at September 30,
2002. Accordingly, we concluded that it was probable that a goodwill impairment
loss had occurred and recorded an estimated impairment charge of $313 million,
which was the total amount of JRM's goodwill. The fair value of JRM was
estimated using a discounted cash flow approach. We completed the second step of
the goodwill impairment test, the measurement of the potential loss, during the
quarter ended December 31, 2002 and concluded that no adjustment to the
estimated loss was required.
Following is our reconciliation of reported net loss to adjusted net loss, which
excludes goodwill amortization expense (including related tax effects), for the
periods presented:
Year Ended
December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share amounts)
Loss before extraordinary item $(776,735) $ (20,857) $(22,082)
Add back: goodwill amortization - 19,480 20,130
-------------------------------------------
Adjusted loss before extraordinary item $(776,735) $ (1,377) $ (1,952)
===========================================
Net loss $(776,394) $ (20,022) $(22,082)
Add back: goodwill amortization - 19,480 20,130
-------------------------------------------
Adjusted net loss $(776,394) $ (542) $ (1,952)
===========================================
Basic and diluted loss per share before
extraordinary item:
Loss before extraordinary item $ (12.56) $ (0.34) $ (0.37)
Add back: goodwill amortization - 0.32 0.34
-------------------------------------------
Adjusted basic and diluted loss per share before
extraordinary item $ (12.56) $ (0.02) $ (0.03)
===========================================
Basic and diluted loss per share:
Net loss $ (12.55) $ (0.33) $ (0.37)
Add back: goodwill amortization - 0.32 0.34
-------------------------------------------
Adjusted basic and diluted loss per share $ (12.55) $ (0.01) $ (0.03)
===========================================
59
Changes in the carrying amount of goodwill by segment are as follows:
Power Power
Marine Generation Generation
Construction Government Industrial Systems Systems
Services Operations Operations - B&W - Other Total
(In thousands)
Balance as of January 1, 2000 $ 349,023 $ 14,517 $ 1,149 $ 79,531 $ - $ 444,220
Deconsolidation of B&W - - (78,897) - (78,897)
Acquisition of various business units
of the Ansaldo Volund Group - - - - 5,745 5,745
Amortization expense (18,007) (796) (357) (635) (335) (20,130)
Other including currency
translation adjustments (1) 1 - 1 - 1
-------------------------------------------------------------------------------
Balance as of December 31, 2000 331,015 13,722 792 - 5,410 350,939
Acquisition of various business units
of the Ansaldo Volund Group - - - - (1,109) (1,109)
Amortization expense (18,007) (796) (268) - (409) (19,480)
Other including currency
translation adjustments - - (524) - 879 355
-------------------------------------------------------------------------------
Balance as of December 31, 2001 313,008 12,926 - - 4,771 330,705
Impairment loss (313,008) - - - - (313,008)
Sale of Volund - - - - (5,231) (5,231)
Other including currency
translation adjustments - - - - 460 460
-------------------------------------------------------------------------------
Balance as of December 31, 2002 $ - $ 12,926 $ - $ - $ - $ 12,926
===============================================================================
Other Intangible Assets
- -----------------
The majorityPursuant to our adoption of goodwill pertains to the acquisition of B&W. McDermott
amortizes goodwill associated with the acquisition of B&W on a straight-line
basis over 40 years and amortizesSFAS No. 142, we evaluated our other goodwill over 10 to 20 years. During
fiscal year 1999, McDermott recorded $27,231,000 of additional goodwill arising
from JRM's purchase of treasury shares (see Note 2) and a reduction of goodwill
of $9,267,000 relating to the sale of McDermott Subsea Constructors Limited (see
Note 3). Impairments of goodwill of $10,461,000 and $272,610,000, respectively,
were recorded in fiscal years 1999 and 1998 (see Note 7).
Goodwill amortization expense was $8,290,000, $25,026,000 and $31,641,000 for
fiscal years 1999, 1998 and 1997, respectively.
Other intangible
assets and determined that all our other intangible assets as of $22,638,000 and $30,293,000 areJanuary 1, 2002
have definite useful lives. We continue to amortize these intangible assets. We
have included our other intangible assets, consisting primarily of rights to use
technology, in other assets, at Marchas follows:
December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Gross cost $ 959 $ 9,459 $ 9,477
Accumulated amortization (556) (8,386) (7,826)
- -------------------------------------------------------------------------------------
Net $ 403 $ 1,073 $ 1,651
=====================================================================================
The following summarizes the changes in the carrying amount of other intangible
assets:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Balance at beginning of period $ 1,073 $ 1,651 $ 8,083
Additions (reductions) 108 (18) 977
Deconsolidation of B&W - - (4,980)
Amortization expense - non-competition
agreements - - (267)
Amortization expense - technology rights (778) (560) (2,162)
- -----------------------------------------------------------------------------------------------
Balance at end of period $ 403 $ 1,073 $ 1,651
===============================================================================================
During the year ended December 31, 19992000, we acquired certain technology rights
with a cost of $902,000, an estimated useful life of 5 years and 1998, respectively. These intangible assets
consist primarily of trademarks, rights to use technology,no residual
value.
Estimated amortization expense for the next five fiscal years is: 2003 -
$195,000; 2004 - $195,000; 2005 - $12,000; 2006 - $0; 2007 - $0.
60
Other Non-Current Assets
We have included deferred debt issuance costs and investments in oil and gas
properties in other assets. We amortize deferred debt issuance cost as interest
expense over the life of the related debt. We report depletion expense of
investments in oil and non-competition agreements. Amortization expense forgas properties as amortization expense. Following are the
changes in the carrying amount of these intangible assets was $6,909,000, $8,229,000 and $10,187,000,
respectively, for fiscal years 1999, 1998 and 1997.
49
assets:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Balance at beginning of period $ 6,878 $ 8,802 $ 6,264
Additions - 1,611 7,467
Deconsolidation of B&W - - (76)
Depletion expense - oil and gas investment (691) (797) (543)
Interest expense - debt issuance costs (2,580) (2,738) (4,310)
- -----------------------------------------------------------------------------------------------
Balance at end of period $ 3,607 $ 6,878 $ 8,802
===============================================================================================
Capitalization of Interest Cost
- -------------------------------
Interest is capitalizedWe capitalize interest in accordance with SFAS No. 34, "Capitalization of
Interest Cost." In fiscal years 1999, 1998 and 1997,We incurred total interest cost
incurred was $63,839,000, $82,347,000of $17.9 million, $41.0 million and
$95,924,000,$46.1 million in the years ended December 31, 2002, 2001 and 2000, respectively,
of which $578,000, $893,000we capitalized $2.8 million, $1.4 million and $824,000, respectively, was capitalized.$2.4 million in the years
ended December 31, 2002, 2001 and 2000, respectively.
Cash Equivalents
- ----------------
CashOur cash equivalents are highly liquid investments, with maturities of three
months or less when purchased,we purchase them, which arewe do not heldhold as part of theour
investment portfolio.
Derivative Financial Instruments
- --------------------------------
McDermott attemptsOur worldwide operations give rise to minimize its exposure to market risks from changes in
foreign currency
exchange rates by matching foreign currency contract receipts with like foreign
currency disbursements. To the extent that it is unable to match the foreign
currency receipts and disbursements related to its contracts, McDermott enters
into derivatives,rates. We use derivative financial instruments, primarily
forward exchange contracts, to reduce the impact of changes in foreign exchange rate movementsrates on
our operating results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts that are
denominated in currencies other than our operating entities' functional
currencies. We record these contracts at fair value on our consolidated balance
sheet. Depending on the hedge designation at the inception of the contract, the
related gains and losses on these contracts are either deferred in stockholders'
equity (as a component of accumulated other comprehensive loss) until the hedged
item is recognized in earnings or offset against the change in fair value of the
hedged firm commitment through earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings. The
gain or loss on a derivative financial instrument not designated as a hedging
instrument is also immediately recognized in earnings. Gains and losses on
forward exchange contracts that qualifyrequire immediate recognition are included as hedgesa component
of firm purchase and sale
commitments are deferred and recognizedother-net in income or as adjustmentsour consolidated statement of carrying
amounts when the hedged transactions occur. Gains and losses on forward
exchange contracts which hedge foreign currency assets or liabilities are
recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged.loss.
Stock-Based Compensation
- ------------------------
McDermott followsAt December 31, 2002, we have several stock-based employee compensation plans,
which are described more fully in Note 9. We account for those plans using the
intrinsic value method under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting
for its employee stock plans.interpretations. Under APB 25, if the exercise price of the Company's employee stock
optionsoption equals or exceeds the fair value of the underlying stock on the
measurement date, no compensation expense is recognized. If the measurement date
is later than the date of grant, compensation expense is recorded to the
measurement date based on the quoted market price of the underlying stock at the
end of each reporting period. Stock options granted to employees of B&W during
the Chapter 11 filing are accounted for using the fair value method of SFAS No.
123 "Accounting for Stock-Based Compensation," as B&W employees are not
considered employees of MII for purposes of APB 25.
61
The following table illustrates the effect on net loss and loss per share if we
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share data)
Net loss, as reported $ (776,394) $ (20,022) $ (22,082)
Add back: stock-based compensation
cost included in net loss, net of
related tax effects 5,161 3,651 5,920
Deduct: total stock-based compensation
cost determined under fair-value-
based method, net of related tax effects (11,720) (6,968) (8,595)
----------------------------------------------
Pro forma net loss $ (782,953) $ (23,339) $ (24,757)
==============================================
Loss per share:
Basic and diluted, as reported $ (12.55) $ (0.33) $ (0.37)
Basic and diluted, pro forma $ (12.66) $ (0.38) $ (0.41)
For the years ended December 31, 2002, 2001 and 2000, charges to income include
amounts related to approximately 1,053,000 stock options that require variable
accounting as a consequence of the DSU program described in Note 9.
New Accounting Standards
- ------------------------Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that we no longer amortize goodwill,
but instead perform periodic testing for impairment. We have completed our
transitional goodwill impairment test and did not incur an impairment charge as
of January 1, 2002. However, due to the deterioration in JRM's financial
performance during the three months ended September 30, 2002 and our revised
expectations concerning JRM's future earnings and cash flow, we tested the
goodwill of the Marine Construction Services segment for impairment. See the
Goodwill section of this note for disclosure concerning the goodwill impairment
charge and our reconciliation of reported net income to adjusted net income,
which excludes goodwill amortization expense for all periods presented.
Effective January 1, 2002, we also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Pronouncements Bulletin No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. See Note 2 for information on our
discontinued operations.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss.
We must adopt SFAS No. 143 effective January 1, 2003 and expect to record as the
cumulative effect of an accounting change income of approximately $3.0 million
upon adoption.
In April 1998,2002, the American InstituteFASB issued SFAS No. 145, "Rescission of Certified Public AccountantsFASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting
for Intangible
62
Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for Leases." In
addition, it amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. We must adopt the provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 as of January 1, 2003, and we expect to reclassify the
extraordinary gain on extinguishment of debt we recorded in 2001 and 2002,
because (as a result of the change in accounting principles) it will no longer
meet the criteria for classification as an extraordinary item.
In June 2002, the FASB issued StatementSFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," whichcosts associated with exit and
disposal activities, including restructuring activities. It is effective for
fiscal years beginningexit or disposal activities that are initiated after December 15,
1998. SOP 98-5 provides guidance31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on accountingthe
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the costsfair value of start-up
activitiesthe obligation undertaken in
issuing the guarantee. The initial recognition and requires that entities expense start-up costs and organization
costs as theymeasurement provisions of
this Interpretation are incurred. McDermott'sapplicable on a prospective basis to guarantees issued
or modified after December 31, 2002. We do not expect the adoption of SOP 98-5 will notthe
recognition and measurement provisions of this Interpretation to have a material
impacteffect on itsour consolidated financial position or results of operations. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Therefore, our financial
statements for the year ended December 31, 2002 contain the disclosures required
by Interpretation No. 45.
In June 1998,December 2002, the Financial Accounting Standards BoardFASB issued SFAS No. 133,148, "Accounting for Derivative InstrumentsStock-Based
Compensation--Transition and Hedging Activities,Disclosure," which amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002 and for interim periods beginning
after JuneDecember 15, 1999.2002. Our financial statements for the year ended December
31, 2002 contain the disclosures required by 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. McDermott has
not yet determined what effect the adoption of SFAS No. 133 will have on its
consolidated financial position or results of operations.148.
NOTE 2 - ACQUISITIONS, During fiscal year 1997, an additional interest in Talleres Navales del Golfo, a
Mexican shipyard, was acquired. During fiscal year 1998, McDermottDISPOSITIONS AND DISCONTINUED OPERATIONS
Acquisitions
In June 2000, we acquired, the
minority ownership in Diamond Power Specialty U.K. In fiscal years 1999 and
1998, McDermott acquired a portionthrough our Babcock & Wilcox Volund ApS ("Volund")
subsidiary, various business units of the outstanding minority interestAnsaldo Volund Group, a group of
JRM,companies owned by Finmeccanica S.p.A. of Italy. We acquired waste-to-energy,
biomass, gasification and stoker-fired boiler businesses and projects, as a
50
result of JRM's purchase of treasury shares. These acquisitions were accounted
for usingwell
as an engineering and manufacturing facility in Esbjerg, Denmark from the
Ansaldo Volund Group. We used the purchase method and operating results have been includedof accounting for this
acquisition. The acquisition cost was $2.7 million plus assumed liabilities,
which resulted in goodwill of $5.7 million. We reduced goodwill by $1.1 million
in 2001 due to the Consolidated Statementadjustment of Income (Loss)certain assumed liabilities.
Volund acquired the BS Incineration business from FLS Miljo A/S, in October
2001. This acquisition was a natural complement to Volund's service business.
The cost of the acquisition dates. Pro formawas $1.3 million. Volund paid cash of $0.6 million
in October 2001 and paid the remaining acquisition cost in June 2002. Volund
recorded goodwill of $1.1 million on this acquisition. This acquisition is not
considered significant.
63
Dispositions
On October 11, 2002, we sold Volund to B&W. The consideration received by MII
from B&W included a $3 million note and funding for the repayment of
approximately $14.5 million of principal and interest on a loan owed by Volund
to MII. The purchase price is subject to a possible downward adjustment,
depending on the final resolution of the customer claims relating to the
construction of a biomass facility in Denmark and Volund's related claims
against Austrian Energy. See Note 10 for a discussion of those claims. Terms of
the sale also included replacement by the debtor-in-possession revolving credit
and letter of credit facility of approximately $11.0 million of letters of
credit previously issued under MII's credit facility. We have deferred
recognition of a gain on the sale of Volund until final resolution of the B&W
bankruptcy proceedings.
In October 2001, we sold McDermott Engineers & Constructors (Canada) Ltd.
("MECL") to Jacobs Canada Inc. ("Jacobs"), a wholly owned Canadian subsidiary of
Jacobs Engineering Group, Inc. Under the terms of the sale, we received cash of
$47.5 million and retained certain liabilities, including environmental
liabilities, executive termination and pension liabilities and professional
fees, of MECL and its subsidiaries. The retained liabilities relate to prior
operations of MECL and certain of its subsidiaries and are not debt obligations.
We do not consider these liabilities significant. We sold our stock in MECL with
a net book value of $11.9 million, including goodwill of $0.5 million. The
estimated costs of the sale were $7.6 million. The sale resulted in a gain of
$28.0 million and tax expense of $2.4 million. Our consolidated income statement
includes the following for MECL up to the date of sale:
Year Ended December 31,
2001 2000
---- ----
(In thousands)
Revenues $ 507,223 $ 425,974
Operating income $ 9,984 $ 9,185
Net income $ 6,639 $ 8,059
Discontinued Operations
On July 10, 2002, we completed the sale of one of our subsidiaries, Hudson
Products Corporation ("HPC"), formerly a component of our Industrial Operations
segment. The sale price of $39.5 million consisted of $37.5 million in cash and
a $2 million subordinated promissory note. In the year ended December 31, 2002,
we recorded a gain on the sale of HPC of $9.4 million, net of a provision for
income taxes of $5.7 million. We have reported the gain on sale and results of
operations for HPC in discontinued operations, and HPC is classified at December
31, 2001 as an asset held for sale in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which we adopted on
January 1, 2002. We have not been presented becausereclassified our consolidated statements of loss for
the effectsyears ended December 31, 2001 and 2000 for consistency to reflect the
current year treatment of these
acquisitions were not significant.
Subsequent Event--On May 13, 1999, MII commencedHPC as a tender offer to acquire all
outstanding shares of JRM not already owned by MIIdiscontinued operation. At December 31, 2001,
we have reported HPC's assets totaling $31.4 million in other current assets and
HPC's liabilities totaling $8.9 million in other current liabilities in our
consolidated balance sheet. Condensed financial information for $35.62 per share. JRM
currently has approximately 39,060,000 shares outstanding, of which MII owns
approximately 63%.our operations
reported in discontinued operations follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues $ 31,534 $ 72,858 $ 64,083
Income before provision
for income taxes $ 164 $ 5,371 $ 4,252
64
NOTE 3 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
IncludedEQUITY METHOD INVESTMENTS
We have included in other assets are investments in our worldwide joint ventures and
other entities which are accountedthat we account for using the equity method of $61,393,000$11.5 million and
$72,389,000$21.0 million at MarchDecember 31, 19992002 and 1998,2001, respectively. UndistributedThe undistributed
earnings of our equity method investees were $38,088,000$2.6 million and $40,484,000$11.1 million at
MarchDecember 31, 19992002 and 1998,2001, respectively.
Summarized below is combined balance sheet and income statement information,
based on the most recent financial information, for investments in entities we
accounted for using the equity method are presented below:(unaudited):
1999 1998
------- ---------December 31,
2002 2001
---- ----
(In thousands)
Current Assets $448,558 $ 629,773
Non-Current64,607 $ 403,148
Noncurrent Assets 205,562 259,694
----------------------------------------------------------------11,734 54,032
- ------------------------------------------------------------------------------------
Total Assets $654,120(1) $ 889,467
----------------------------------------------------------------76,341 $ 457,180
====================================================================================
Current Liabilities $361,058 $ 610,694
Non-Current23,069 $ 305,249
Noncurrent Liabilities 124,521 123,3901,231 40,124
Owners' Equity 168,541 155,383
----------------------------------------------------------------52,041 111,807
- ------------------------------------------------------------------------------------
Total Liabilities and Owners' Equity $654,120(1) $ 889,467
----------------------------------------------------------------
1999 1998 1997
---------- ---------- ----------76,341 $ 457,180
====================================================================================
(1) The reduction in 2002 is attributable to our joint ventures in Mexico and
Beijing being placed on the cost method of accounting.
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues $1,100,224 $1,535,987 $1,239,071$ 1,800,727 $ 2,376,931 $ 1,424,127
Gross Profit $ 64,64578,272 $ 172,349139,300 $ 120,60083,198
Income before Provision for Income Taxes $ 37,03173,618 $ 90,56489,530 $ 22,05047,725
Provision for Income Taxes 4,398 27,460 10,767
---------------------------------------------------------------------------------------5,789 14,783 1,449
- ---------------------------------------------------------------------------------------------------
Net Income $ 32,63367,829 $ 63,10474,747 $ 11,283
---------------------------------------------------------------------------------------46,276
===================================================================================================
McDermott'sRevenues of equity method investees include $1,653.8 million, $1,614.1 million
and $766.4 million of reimbursable costs recorded by limited liability companies
in our Government Operations segment at December 31, 2002, 2001 and 2000,
respectively. Our investment in equity method investees was less that McDermott'sthan our
underlying equity in net assets of those investees based on stated ownership
percentages by $18,824,000$11.0 million at MarchDecember 31, 1999 and greater than McDermott's
underlying equity in net assets by $4,355,000 at March 31, 1998.2002. These differences are
primarily related to the partial liquidation of an investee,
cumulative losses, the timing of distribution of dividends and various
GAAP
adjustments.
51adjustments under generally accepted accounting principles.
The provision for income taxes is based on the tax laws and rates in the
countries in which our investees operate. There is no expected relationship
between the provision for income taxes and income before taxes. The taxation
regimes vary not only with respect to nominal rate, but also with respect to the
allowability of deductions, credits and other benefits. For certain of our U.S.
investees, U.S. income taxes are the responsibility of the owner.
65
Reconciliation of net income per combined income statement information to equity
in income (loss) from investees per our consolidated statement of income (loss)loss is as
of
March 31:follows:
1999 1998 1997
-------- -------- --------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Equity income based on stated ownership percentages $12,768 $25,192 $ 594
Distribution30,119 $ 33,427 $ 17,460
Impairment of earnings from
HeereMacinvestments in foreign joint venture received
as part of termination(7,174) - 61,637 -
Impairment of advances(5,996)
Costs to investee (4,823)exit certain foreign joint ventures - - Recognition(17,453)
Sale of shares in foreign joint venture project losses3,971 2,353 - - (6,508)
All other adjustments due to amortization of basis differences,
timing of GAAP adjustments, dividend distributions and
other adjustments 434 (1,447) 1,816
--------------------------------------------------------------
Income776 (1,687) (3,806)
- -----------------------------------------------------------------------------------------------------------------------
Equity in income (loss) from investees $ 8,379 $85,382 $(4,098)
--------------------------------------------------------------27,692 $ 34,093 $ (9,795)
=======================================================================================================================
During fiscal year 1998,On June 30, 2001, JRM, andthrough one of its subsidiaries, entered into an
agreement to sell its share in a foreign joint venture, partner, Heerema Offshore
Construction Group, Inc. ("Heerema"), terminated the HeereMac joint venture.
Each party had a 50% interest in the joint venture. Heerema had responsibility
for its day-to-day operations. During fiscal year 1997, JRM changed from the
equity to the cost method of accounting for its investment in the HeereMac joint
venture because it was no longer able to exercise significant influence over
HeereMac's operating and financial policies.
Pursuant to the termination of the joint venture, Heerema acquired and assumed
JRM's 50% interest in the joint venture.Brown & Root McDermott
Fabricators Limited. JRM received $318,500,000initial consideration in cash and
title to several pieces of equipment. The cash received included a $61,637,000
distribution of earnings and approximately $100,000,000 of principal and
interest owed to JRM under the 7.75% promissory note described in the next
paragraph. The equipment received included two launch barges and the derrick
barge 101, a semi-submersible derrick barge with a 3,500-ton lift capacity. As
a result of the termination, JRM recorded a gain on asset disposal of
$224,472,000 and income from investees of $61,637,000. The $224,472,000 gain on
asset disposal includes recognition of the remaining deferred gain which had
resulted from the 1996 sale of vessels to the HeereMac joint venture described
in the next paragraph.
During fiscal year 1996, JRM sold to the HeereMac joint venture the major marine
vessels that it had been leasing to the joint venture. JRM received cash of
$135,969,000 (including a $30,000,000 advance deposit on the sale of certain
marine equipment which was completed during fiscal year 1997) and a 7.75% note
receivable of $105,000,000. JRM recorded a deferred gain on the sale of
$103,239,000. The note receivable, net of the deferred gain, was included in
investment in unconsolidated affiliates. Prior to the change to the cost method
of accounting for its investment in HeereMac, JRM was amortizing the deferred
gain over the depreciable lives of the vessels that were assigned by HeereMac.
After the change to the cost method, JRM recognized pro rata portions of the
deferred gain as payments were received on the 7.75% note. In fiscal year 1997,
JRM received a $12,500,000 principal payment on the note and recognized
$12,271,000 of the deferred gain . At March 31, 1997, the note receivable and
deferred gain balances were $92,500,000 and $90,803,000, respectively. Also, in
fiscal year 1997, JRM realized a gain of $16,682,000 on the sale of a marine
vessel by HeereMac on behalf of JRM.
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture, and JRM recognized a gain on the termination of $37,353,000.
Pursuant to the termination, JRM received cash of approximately
$105,000,000,
ETPM S.A.'s derrick/lay barge 1601 and ETPM S.A.'s interest in McDermott-ETPM
East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received JRM's lay barge
200 and JRM's interest in McDermott Subsea Constructors Limited ("MSCL") and
McDermott-ETPM West, Inc. The consolidated statement of income (loss) includes
revenues of $74,096,000 and $44,033,000 and operating income (loss) of
$18,751,000 and ($22,956,000) for fiscal years 1998 and 1997 , respectively,
attributable to operations transferred to ETPM S.A.
52
During fiscal year 1999, JRM's Malaysian joint venture sold two combination
pipelay and derrick barges. The joint venture, in which JRM holds a 49%
interest, received approximately $47,000,000 in cash$7.4 million for the barges.
McDermott has investmentssale in numerous joint venturesthe year ended December 31, 2001 and other entities on a
worldwide basis. No individual investee was significant foran additional
$2.3 million in the periods
presented.
Transactionsyear ended December 31, 2002. Final purchase price
adjustments and related cost issues are still being negotiated. We expect these
negotiations to be finalized in 2003.
Our transactions with unconsolidated affiliates included the following:
1999 1998 1997
-------- -------- --------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Sales to $136,737 $164,501 $140,605$ 81,833 $ 240,935 $ 73,961
Leasing activities (included in Sales to) $ 42,15441,881 $ 10,49181,194 $ 9,60936,863
Purchases from $ 12,223- $ 33,54411,885 $ 32,1033,751
Dividends received $ 28,65034,848 $ 9,83236,920 $ 13,32414,109
Other assets include $2,819,000 and $4,250,000 at March 31, 1999 and 1998,
respectively, of non-currentOur accounts receivable from unconsolidated affiliates.
Accounts payable includes $28,314,000 and $25,803,000 at March 31, 1999 and
1998, respectively, of payables to unconsolidated affiliates. Property,affiliates of $3.2
million at December 31, 2001. Our property, plant and equipment includes cost of
$63,594,000$75.2 million and $131.0 million and accumulated depreciation of $29,497,000$49.0 million
and $57.3 million, respectively, at MarchDecember 31, 1999 of marine equipment that was leased, on an as
needed basis, to an unconsolidated affiliate. Property, plant2002 and equipment
includes cost of $137,513,000 and accumulated depreciation of $113,528,000 at
March 31, 19982001 of marine
equipment that was leased to the McDermott-ETPM joint
venture. Thisan unconsolidated affiliate. At December 31, 2002,
our other current assets include $14.4 million of marine equipment that was
transferredleased to ETPM S.A. as partan unconsolidated affiliate. During the year ended December 31, 2000,
we recorded charges of the
termination of the McDermott-ETPM$23.4 million to exit certain foreign joint venture on April 3, 1998.ventures.
NOTE 4 - INCOME TAXES
IncomeWe have provided for income taxes have been provided based uponon the tax laws and rates in the
countries in which operations are conducted. Allwe conduct our operations. We have earned all of our income has been earned
outside of Panama, and McDermott iswe are not subject to income tax in Panama on income
earned outside of Panama. Therefore, there is no expected relationship between
the provision for, or benefit from, income taxes and income, or loss, before
income taxes. The major reason for the variations in such relationshipsthese amounts is that
income is earned within and subject to the taxation laws of various countries,
each of which has a regime of taxation whichthat varies from that of any other country.the others. The taxation
regimes of taxation vary not only with respect to nominal rate, but also with respect to the
allowability of deductions, credits and other benefits. The
variations areVariations also exist
because the proportional extent to which income is earned in, and subject to tax
by, any particular country or countries varies from year to year. MII and
certain of its subsidiaries keep books and file tax returns on the completed
contract method of accounting.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of MarchDecember 31, 19992002 and
19982001 were as follows:
5366
1999 1998
---------- --------December 31,
2002 2001
---- ----
(In thousands)
Deferred tax assets:
Pension liability $ 122,564 $ -
Prior year minimum tax credit carryforward 5,600 -
Accrued warranty expense $ 15,848 $ 15,58266 149
Accrued vacation pay 8,234 10,2596,191 5,788
Accrued liabilities for self-insurance
(including postretirement health care benefits) 69,025 169,76815,679 11,944
Accrued liabilities for executive and employee incentive compensation 30,972 28,51725,287 25,823
Investments in joint ventures and affiliated companies 6,419 9,498941 3,755
Operating loss carryforwards 13,458 25,39417,916 8,587
Environmental and products liabilities 620,992 363,5986,004 6,087
Long-term contracts 36,627 17,392
Drydock reserves 7,460 9,429
Accrued interest 6,395 6,395
Deferred foreign tax credits 5,298 7,235
Other 29,489 34,71015,779 18,422
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 794,437 657,326
- ------------------------------------------------------------------------------------------------------------------271,807 121,006
Valuation allowance for deferred tax assets (39,961) (69,057)(214,827) (12,840)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets 754,476 588,26956,980 108,166
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 21,644 37,18430,914 19,494
Estimated provision for B&W Chapter 11 settlement 17,342 -
Prepaid pension costs 11,493 110,801- 39,501
Investments in joint ventures and affiliated companies 15,243 13,9212,578 2,710
Insurance and other recoverables 544,382 291,89969 1,230
Other 5,526 11,6943,166 3,270
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 598,288 465,49954,069 66,205
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $156,188 $122,770
- ------------------------------------------------------------------------------------------------------------------$ 2,911 $ 41,961
===============================================================================================================
Income (loss) from continuing operations before provision for (benefit from)
income taxes and extraordinary item was as follows:
1999 1998 1997
-------- --------- ---------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
U.S. $ 63,361 $(125,441) $(164,771)(384,475) $ 39,220 $ 11,447
Other than U.S. 123,917 417,248 (55,926)
-------------------------------------------------------------------------------------------------------------------------------(386,666) 46,687 (25,676)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before provision
for (benefit from) income taxes and extraordinary item $187,278 $ 291,807 $(220,697)
-------------------------------------------------------------------------------------------------------------------------------(771,141) $ 85,907 $ (14,229)
====================================================================================================================
The provision for (benefit from) income taxes consistsconsisted of:
Current:
U.S. - Federal $ 18,582 $54,340 $(13,411)(40,567) $ 88,273 $ (14,611)
U.S. - State and local 7,983 8,541 (2,667)252 4,729 2,034
Other than U.S. (1,643) 3,715 1,69717,337 8,058 2,294
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total current 24,922 66,596 (14,381)(22,978) 101,060 (10,283)
- ------------------------------------------------------------------------------------
Deferred--------------------------------------------------------------------------------------------------------------------
Deferred:
U.S. - Federal (37,152) (147) 7,09036,284 12,410 21,860
U.S. - State and local 2,823 69 (1,862)1,757 (368) (1,098)
Other than U.S. 4,604 9,599 (5,439)
- ------------------------------------------------------------------------------------(2,773) 156
- --------------------------------------------------------------------------------------------------------------------
Total deferred (29,725) 9,521 (211)38,041 9,269 20,918
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision for (benefit from) income taxes $ (4,803) $76,117 $(14,592)
- ------------------------------------------------------------------------------------15,063 $ 110,329 $ 10,635
====================================================================================================================
54We recorded the following charges in the year ended December 31, 2002, with
little or no associated tax benefit:
- the impairment of the remaining $313.0 million of goodwill
attributable to the premium we paid on the acquisition of the
minority interest of JRM in June 1999;
- the write-off of the investment in B&W and other related
assets totaling $224.7 million; and
- the net pre-tax provision of $86.4 million for the estimated
cost of settlement of the B&W Chapter 11 proceedings.
67
There is noThe net pre-tax provision for (benefit from)the estimated cost of the B&W Chapter 11
settlement includes approximately $154.0 million of expenses with no associated
tax benefits. The remaining items, consisting primarily of estimated benefits we
expect to receive as a result of the settlement, constitute income in taxable
jurisdictions. See Note 20 for additional details regarding the settlement
provision.
For the year ended December 31, 2001, our current provision for U.S. income
taxes includes a charge of approximately $85.4 million associated with the
extraordinary itemintended exercise of $38,719,000 recorded by JRM.
Thethe intercompany stock purchase and sale agreement referred
to in Notes 5 and 8. Our current provision for other than U.S. income taxes in
1999, 1998the years ended December 31, 2001 and 19972000 includes a reduction of $525,000, $10,427,000$4.1 million
and $2,021,000,$0.6 million, respectively, for the benefit of net operating loss
carryforwards. Fiscal 1999 also includes a
benefit totaling approximately $25,456,000 for a reduction in the valuation
allowance for deferred taxes. This reduction is the result of tax planning
strategies, use of operating loss carrybacks and forecasted taxable income.
Included in the reduction of the valuation allowance was an amountLosses from foreign joint ventures that generated no
corresponding tax benefit which resulted fromtotaled $25.6 million in the saleyear ended December 31,
2000 and amortization of a foreign subsidiary.goodwill associated with the acquisition of the
minority interest in JRM was $18.0 million in the years ended December 31, 2001
and 2000. In addition, fiscal 1999 also includesthe years ended December 31, 2001 and 2000 include a tax
benefit of $5.2 million and $5.5 million from favorable tax settlements in
U.S. and
foreign jurisdictions, totaling approximately $30,429,000. Initial recognitionand a provision for proposed Internal Revenue Service
("IRS") tax deficiencies was recorded in the year ended December 31, 2001. The
provision for income taxes for the year ended December 31, 2000 also includes a
provision of OPI pre-acquisition$3.8 million for B&W for the pre-filing period and a benefit of
$1.4 million from the use of certain tax benefits in fiscal year 1997 resultedattributes in a reduction
in excess cost over fair value of assets acquired of $3,115,000.foreign joint venture.
MII and JRM would be subject to withholding taxes on distributions of earnings
from their U.S. subsidiaries and certain foreign subsidiaries. NoFor the year
ended December 31, 2002, the undistributed earnings of U.S. subsidiaries of MII
and JRM were approximately $564.0 million. U.S. withholding taxes have been provided asof
approximately $169.0 million would be payable upon distribution of these
earnings. For the same period, the undistributed earnings are considered indefinitely
reinvested. It is not practicableof the foreign
subsidiaries of such U.S. companies amounted to estimate theapproximately $79.4 million. The
unrecognized deferred U.S. income tax liability on thosethese earnings is
approximately $31.0 million. Withholding taxes of approximately $4.0 million
would be payable to the applicable foreign jurisdictions upon remittance of
these earnings. SettlementsWe have not provided for any taxes, as we treat these earnings
as indefinitely reinvested. The undistributed taxable earnings of foreign
subsidiaries of MII and JRM were $27.9 million and applicable withholding taxes
of $3.9 million would be due upon remittance of these earnings. We have provided
withholding tax of $2.4 million on the intended distribution of approximately
$20.5 million. The remaining $7.4 million in undistributed earnings is
considered indefinitely reinvested, and we have made no provision for taxes on
these earnings.
We reached settlements with the Internal Revenue Service ("IRS")IRS concerning MI's U.S. income tax liability
through the fiscal year ended March 31, 1990,1992, disposing of all U.S. federal
income tax issues. The IRS has issued notices for MI for the fiscal years ended
March 31, 1991 and1993 through March 31, 19921998 and for JRM for the fiscal years ended
March 31, 1995 through March 31, 1998 asserting deficiencies in the amount of
taxes reported. The deficiencies are based on issues
substantially similar to those of earlier years. MI believesWe believe that any income taxes ultimately assessed against MI
and JRM will not exceed amounts for which we have already provided.
McDermott has providedAt December 31, 2002, we had a valuation allowance ($39,961,000 at March 31, 1999)of $214.8 million for
deferred tax assets, which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. Management believesWe believe that our
remaining deferred tax assets at March 31, 1999 are realizable through carrybacks and future
reversals of existing taxable temporary differences,
future taxable income and, if necessary, the implementation of tax planning
strategies involving the sales of appreciated assets. Uncertainties that affect
the ultimate realization of 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. Managementdifferences. We will continue to assess
the adequacy of theour valuation allowance on a quarterly basis. McDermott hasAny changes to our
estimated valuation allowance could be material to the financial statements.
We have foreign net operating loss carryforwards of approximately $15,000,000$33.1 million
available to offset future taxable income in foreign jurisdictions.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"),
MI has the right to sell to MII and MII has the right to buy from MI, 100,000
units, each unit consisting of one share of MII Common Stock and one share of
MII Series A Participating Preferred Stock. The price is based primarily upon
the stockholders' equity of MII at the closeApproximately $6.6 million of the fiscal year preceding the
date at which the rightforeign net operating loss carryforwards is
scheduled to sell or buy, as the case may be, is exercised, and,expire in 2003 to a limited extent, upon the price-to-book value2009. We have domestic net operating loss
carryforwards of the Dow Jones Industrial
Average. At April 1, 1999, the current unit value was $2,903 and the aggregate
current unit value for MI's 100,000 units was $290,336,000.approximately $19.2 million available to offset future taxable
income in domestic jurisdictions. The domestic net proceedsoperating loss carryforwards
are scheduled to MI from the exercise of any rights under the Intercompany Agreement would be
subjectexpire in years 2009 to U.S. federal, state and other applicable taxes. No tax provisions
have been established, since there is no present intention by either party to
exercise such rights.
552022.
68
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
1999 1998
-------- --------December 31,
2002 2001
---- ----
(In thousands)
Long-term debt consists of:
Unsecured Debt:
Series A Medium Term Notes (maturities ranging from 1 to 5
years;(maturing in 2003; interest at
various rates ranging from 8.20%8.99% to 9.00%)(1) $ 40,0009,500 $ 40,0009,500
Series B Medium Term Notes (maturities ranging from 14 to 2523
years; interest at various rates ranging from 6.50%7.57% to 8.75%) 64,000 91,00064,000
9.375% Notes due March 15, 2002 ($225,000,000208,808,000 principal amount) 224,739 224,665- 208,789
9.375% Senior Subordinated Notes due 2006
($250,000,0001,234,000 principal amount) 1,397 244,9861,221 1,218
Other notes payable through 20092030 (interest at
various rates ranging to 10%) 23,667 35,48417,225 21,845
Secured Debt:
10.375% Note payable due 1998 - 12,200
Other notes payable through 2012 and capitalizedCapitalized lease obligations 1,097 18,2644,135 4,521
- ---------------------------------------------------------------------------------------------
354,900 666,599---------------------------------------------------------------------------------------------------------
96,081 309,873
Less: Amounts due within one year 31,126 68,4179,977 209,480
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $323,774 $598,182
- ---------------------------------------------------------------------------------------------$ 86,104 $ 100,393
=========================================================================================================
(1) We funded the repayment of these notes on February 11, 2003.
December 31,
2002 2001
---- ----
(In thousands)
Notes payable and current maturities of long-term debt consist of:
Short-term lines of credit - unsecured $ 3,725 $ -
$ 5,100
Secured borrowingsShort-term lines of credit - 82,783secured 41,875 -
Other notes payable - 26
Current maturities of long-term debt 31,126 68,4179,977 209,480
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $31,126 $156,300
- ---------------------------------------------------------------------------------------------$ 55,577 $ 209,506
=========================================================================================================
Weighted average interest rate on short-term borrowings 8.20% 5.87%
- ---------------------------------------------------------------------------------------------5.17% 9.37%
=========================================================================================================
The Indentures forDuring the year ended December 31, 2002, MI repurchased or repaid the remaining
$208.8 million in aggregate principal amount of its 9.375% Notes due March 15,
2002 for aggregate payments of $208.3 million, resulting in an extraordinary net
after-tax gain of $0.3 million. In order to repay the remaining notes, MI
exercised its right pursuant to a stock purchase and sale agreement with MII
(the "Intercompany Agreement"). Under this agreement, MI had the right to sell
to MII and MII had the right to buy from MI, 100,000 units, each of which
consisted of one share of MII common stock and one share of MII Series A
Participating Preferred Stock. MI held this financial asset since prior to the
1982 reorganization transaction under which MII became the parent of MI. The
price was based on (1) MII's stockholders' equity at the close of the fiscal
year preceding the date on which the right to sell or buy, as the case may be,
was exercised and B Medium Term
Notes contain certain restrictive covenants, including limitations on
indebtedness, liens securing indebtedness and dividends and loans.
On March 5, 1999, JRM consummated an offer(2) the price-to-book value of the Dow Jones Industrial
Average. At January 1, 2002, the aggregate unit value of MI's right to purchasesell all
of its outstanding
9.375% Senior Subordinated Notes at a purchase price of 113.046% of their
principal100,000 units to MII was approximately $243 million. MI received this
amount ($1,130.46 per $1,000 principal amount), plus accrued and
unpaid interest. On that date, JRM purchased $248,575,000 in principal amountfrom the exercise of the notes for a total purchase priceIntercompany Agreement. MII funded that payment
by (1) receiving dividends of $284,564,000, including interest$80 million from JRM and $20 million from one of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchase of the notes, JRM received consents to certain
amendments that amended or eliminated certain restrictive covenantsour captive insurance companies and other
provisions contained in the indenture relating to the notes. Specifically, the
covenants contained in the indenture that restricted JRM's ability to pay
dividends, repurchase or redeem(2) reducing its capital stock, or to transfer funds through
unsecured loans to orshort-term investments in MII were eliminated.and
cash and cash equivalents.
Maturities of long-term debt during the five fiscal years subsequent to MarchDecember 31,
19992002 are as follows: 20002003 - $31,126,000; 2001 - $452,000; 2002 -
$224,949,000; 2003 -$25,000;$10.0 million; 2004 - $9,525,000.
56
$0.6 million; 2005 -$12.0
million; 2006 - $6.1 million; 2007 - $4.9 million.
At MarchDecember 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase2002 and sale agreement between B&W and certain of its
affiliates and subsidiaries and a U.S. Bank. Through July 31, 1998, $25,854,000
was repaid under the agreement. Effective July 31, 1998, the receivables
purchase and sale agreement was amended and restated to provide for, among other
things, the inclusion of certain insurance recoverables in the pool of qualified
accounts receivable. It also provided for sales treatment as opposed to secured
financing treatment for this arrangement under SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
As a result, $56,929,000 was removed from notes payable and current maturities
of long-term debt on the balance sheet. This amended agreement was terminated
on April 30, 1999.
At March 31, 1999 and 1998, McDermott2001, we had available various uncommitted short-
termshort-term
lines of credit from banks totaling $87,578,000$10.2 million and $127,061,000,$8.9 million,
respectively. Borrowings againstWe had no borrowings outstanding under these lines of credit as of
December 31, 2002 or 2001.
On February 11, 2003, we entered into definitive agreements with a group of
lenders for a new credit facility ("New Credit Facility") to replace our
previous facilities, which consisted of a $100 million credit facility for MII
and BWXT (the "MII Credit Facility") and a $200 million credit facility for JRM
and its subsidiaries (the "JRM Credit Facility") that were scheduled to expire
on February 21, 2003. The
69
New Credit Facility initially provides for borrowings and issuances of letters
of credit in an aggregate amount of up to $180 million, with certain sublimits
on the amounts available to JRM and BWXT. On May 13, 2003, the maximum amount
available under the Credit Facility will be reduced to $166.5 million. The
obligations under the New Credit Facility are (1) guaranteed by MII and various
subsidiaries of JRM and (2) collateralized by all our capital stock in MI, JRM
and certain subsidiaries of JRM and substantially all the JRM assets and various
intercompany promissory notes. The New Credit Facility requires us to comply
with various financial and nonfinancial covenants and reporting requirements.
The financial covenants require us to maintain a minimum amount of cumulative
earnings before taxes, depreciation and amortization; a minimum fixed charge
coverage ratio; a minimum level of tangible net worth (for MII as a whole, as
well as for JRM and BWXT separately); and a minimum variance on expected costs
to complete the Front Runner EPIC spar project. In addition, we must provide as
additional collateral fifty percent of any net after-tax proceeds from
significant asset sales. The New Credit Facility is scheduled to expire on April
30, 2004.
Proceeds from the New Credit Facility may be used by JRM and BWXT, with
sublimits for JRM of $100 million for letters of credit and $10 million for cash
advances and for BWXT of $60 million for letters of credit and $50 million for
cash advances. At March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under this facility. Pricing for
cash advances under the Credit Facility is prime plus 4% or Libor plus 5% for
JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at
Marchthe rate of 0.75 of 1% per annum on the unused working capital commitment,
payable quarterly.
The MII Credit Facility served as a revolving credit and letter of credit
facility. Borrowings under this facility could be used for working capital and
general corporate purposes. The aggregate amount of loans and amounts available
for drawing under letters of credit outstanding under the MII Credit Facility
could not exceed $100 million. This facility was secured by a collateral account
funded with various U.S. Government securities with a minimum marked-to-market
value equal to 105% of the aggregate amount available for drawing under letters
of credit and revolving credit borrowings outstanding. We had borrowings of
$41.9 million outstanding under the MII Credit Facility at December 31, 1998 were
$5,100,000. There were2002 and
no borrowings against these linesthis facility at MarchDecember 31, 1999. At
March2001. Letters of credit
outstanding at December 31, 1998, B&W2002 were approximately $53.0 million. The interest
rate was a partyLibor plus 0.425%, or prime depending upon notification to borrow. The
interest rate at December 31, 2002 was 4.25%. Commitment fees under this
facility totaled approximately $0.3 million for the year ended December 31,
2002.
The JRM Credit Facility consisted of two tranches. One was a revolving credit
facility under which there
were no borrowings. In July 1998, B&W terminated its existing credit facilitythat provided for up to $100 million for advances that could be used
for working capital and jointly and severally with BWICO and BWXT, entered into a new $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.general corporate purposes. The remaining
$150,000,000 is reservedsecond tranche provided
for the issuanceup to $200 million of letters of credit. In connection
with satisfying a condition to borrowing or issuingThe aggregate amount of loans and
amounts available for drawing under letters of credit under the
BWICO Credit Agreement, MI made a $15,000,000 capital contribution to BWICO in
August 1998. At March 31, 1999, there were no borrowings under the BWICO Credit
Agreement. Under the BWICO Credit Agreement, there are certain restrictive
covenants, including limitations on indebtedness, sales and leaseback
transactions, investments, loans and advances and the maintenance of certain
financial ratios. Commitment fees are on .40% of the unused portion of BWICO
Credit Agreement's $200,000,000 commitment. Commitment fees totaled
approximately $733,000, $412,000 and $160,000 for fiscal years 1999, 1998 and
1997, respectively.
At March 31, 1998, JRM and certain of its subsidiaries were parties to a
revolving credit facility under which there were no borrowings. In June 1998,
JRM and such subsidiaries entered into a new $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 is reserved for the issuance of letters of credit. At March 31,
1999, there were no borrowingsoutstanding under the JRM
Credit Agreement. Management doesFacility could not anticipate JRM will need to borrow fundsexceed $200 million. We had borrowings of $3.7 million
outstanding under the JRM Credit Agreement
during fiscal year 2000. Subsequent to year-end, JRM elected to reduce the
commitments onFacility at December 31, 2002 and no borrowings
against this facility at December 31, 2001. Letters of credit outstanding under
the JRM Credit Agreement from $200,000,000Facility at December 31, 2002 totaled approximately $73.2
million. The interest rate was Libor plus 2%, or prime plus 1% depending upon
notification to $100,000,000.
Under the JRM Credit Agreement, there are certain restrictive covenants,
including limitations on additional indebtedness, liens securing indebtedness,
sales and leaseback transactions, investments, loans and advances and the
maintenance of certain financial ratios.borrow. The interest rate at December 31, 2002 was 5.25%.
Commitment fees were on .35% of the
unused portion of JRM Credit Agreement's $200,000,000 commitment. Commitment
feesunder this facility totaled approximately $610,000, $380,000$1.1 million for the
year ended December 31, 2002.
MI and $380,000 for fiscal years
1999, 1998JRM and 1997, respectively.
Subsequent Event - On May 7, 1999,their respective subsidiaries are restricted, as a result of
covenants in debt instruments, in their ability to transfer funds to MII and JRM entered into a merger agreement
pursuant to which MII initiated a tender offer for those shares of JRM that it
did not already own for $35.62 per share in cash. Under the merger agreement,
any shares not purchased in the tender offer will be acquired for the same price
in cash in a second-step merger. MII estimates that it will require
approximately $560,000,000 to consummate the tender offer and second-step merger
and to pay related fees and expenses. MII expects to obtain the funds from cash
on hand and from a new $525,000,000 senior secured term loan facility with
Citibank, N.A. The facility will terminate and all borrowings thereunder will
mature upon the earlier of five business days after the consummation of the
second merger or September 30, 1999. When the facility terminates, JRM will
declare and pay a dividend and/or loan to MII such amounts that, together with
MII's available cash, will be used to repay all outstanding loans under the
facility. Citibank, N.A. may act either as sole lender under the facility or
syndicate all or a portion of the facility to a group of financial institutions.
The facility contains customary representations, warranties, covenants and
events of default. The facility also includes financial covenants that:
57
. require MII to maintain a minimum consolidated tangible net worth of not
less than $250,000,000,
. limit MII's ability to pay dividends, and,
. require MII, JRM and certainits
other subsidiaries through cash dividends or through unsecured loans or
investments.
MI and its subsidiaries are unable to maintain cash, cash
equivalents and investmentsincur any additional long-term debt
obligations under one of MI's public debt indentures, other than in debt securities of at least $575,000,000 at
all times.
The facility is secured by a first priority pledge of all JRM capital stock and
securities convertible into capital stock held byconnection
with certain extension, renewal or acquired by MII or any of
its subsidiaries. Commitment fees will be approximately $3,300,000 in the next
fiscal year.refunding transactions.
70
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
McDermott providesWe provide retirement benefits, primarily through non-contributorynoncontributory pension plans,
for substantially all of itsour regular full-time employees. McDermott doesWe do not provide
retirement benefits to certain non-residentnonresident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada or the United Kingdom. SalariedWe base our
salaried plan benefits are based on final average compensation and years of service, while
we base our hourly plan benefits are based on a flat benefit rate and years of service.
McDermott'sOur funding policy is to fund applicable pension plans to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974
(ERISA)("ERISA") and, generally, to fund other pension plans as recommended by the
respective plan actuaryactuaries and in accordance with applicable law.
PostretirementWe make available postretirement health care and life insurance benefits are supplied to
certain retired union employees based on their union contracts. Effective April 1, 1998, McDermott
terminated all other postretirement benefits. OnIn the same date,year
ended December 31, 2000, we curtailed retirement benefits on one of our union
contracts and amended the pension plansplan to increase benefits for the employees
affected by the terminationcurtailment, resulting in a curtailment loss of $1.4 million.
At December 31, 2002, in accordance with SFAS No. 87, "Employers' Accounting for
Pensions," we were amendedrequired to recognize a minimum pension liability of
approximately $452 million. This recognition resulted in a decrease in our
prepaid pension asset of $122 million, an increase in our pension liability of
$345 million and an increase in other intangible assets of $15 million. The
increase in the minimum pension liability is a direct result of the combination
of the downturn in financial markets in 2002 and the low interest rates in
effect at December 31, 2002.
Effective March 31, 2003, benefit accruals under JRM's qualified pension plan
will cease. Any pension benefits earned to that date will remain payable
pursuant to the plan upon retirement, but no future benefits will accrue. All
employees participating in the JRM qualified pension plan on March 31, 2003 will
fully vest at that time.
In the nine-month period ended December 31, 1999, we curtailed a pension plan in
the United Kingdom and increased the benefits payable to offset the costemployees affected
by the curtailment. We recognized additional curtailment losses on this plan of
postretirement health care$10.2 million and life
insurance to the participants. The decrease$3.9 million in the postretirement benefit
obligation was measured against the increaseyears ended December 31, 2001 and 2000 due
to revisions in the projected benefit obligationour expected share of the pension plans, andsurplus. We are continuing to
negotiate a resulting curtailment gain of $21,940,000 was
recognized in fiscal year 1999.
In February 1998, McDermott terminated its Retirement Plan for Non-Management
Directors and issued 32,040 shares of McDermott Common Stock to the directors at
that time, in full satisfaction of their accrued benefits under the terminated
plan.
Effective April 1, 1998, McDermott adopted SFAS No. 132 "Employers' Disclosure
about Pensions and Other Postretirement Benefits." SFAS No. 132 establishes new
disclosure requirements for pension and postretirement benefits. Fiscal year
1998 balances have been restated to comply with the new requirements.
58settlement.
71
Pension Benefits Other Benefits
1999 1998 1999 1998
----------- ----------- ---------- ----------Year Ended Year Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of fiscal year $1,411,512 $1,244,134period $ 349,2881,833,428 $ 370,8661,734,527 35,395 $ 35,151
Service cost 33,341 29,002 203 3,48728,137 25,579 - -
Interest cost 112,822 94,182 9,478 26,480
Plan participants' contributions 136 127119,360 115,195 2,406 2,499
Curtailments - 10,219 - -
Curtailments 1,452 3,011 (215,751)Amendments 148 5,414 - Amendments 245,306 291-
Transfers - 1,321 - -
Change in assumptions 101,387 111,592 3,012 -139,280 37,019 1,237 1,392
Actuarial (gain) loss 9,210 (3,386) 29,049 (10,880)28,224 14,823 499 280
Foreign currency exchange rate changes (7,014) 772- (4,132) - -
Benefits paid (108,709) (68,213) (21,332) (40,665)(105,569) (106,537) (3,709) (3,927)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,799,443 1,411,512 153,947 349,288period 2,043,008 1,833,428 35,828 35,395
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 1,822,166 1,561,368period 1,821,530 1,943,562 - -
Actual return on plan assets 190,586 320,797(159,730) (23,520) - -
Company contributions 14,602 8,033 21,332 40,665
Plan participants' contributions 136 127 - -24,073 12,899 3,709 3,927
Foreign currency exchange rate changes (12,898) 54- (4,908) - -
Benefits paid (101,346) (68,213) (21,332) (40,665)
---------------------------------------------------------------------------------------------------------(105,569) (106,503) (3,709) (3,927)
- -----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at the end of year 1,913,246 1,822,166period 1,580,304 1,821,530 - -
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Funded status 113,803 410,654 (153,947) (349,288)(462,704) (11,898) (35,828) (35,395)
Unrecognized net obligation (25,456) (36,006) 2,712541,275 (242) - -
Unrecognized prior service cost 14,689 16,03515,599 14,550 - -
Unrecognized actuarial (gain) loss (42,866) (107,657) 1,879 (77,159)
---------------------------------------------------------------------------------------------------------(153) 93,920 8,929 7,930
- -----------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 60,17094,017 $ 283,026 $(149,356) $(426,447)
---------------------------------------------------------------------------------------------------------96,330 $ (26,899) $ (27,465)
=============================================================================================================================
Amounts recognized in the statement of financial
position consist of:balance sheet:
Prepaid benefit cost $ 130,43719,311 $ 328,583152,510 $ - $ -
Accrued benefit liability (81,727) (55,694) (149,356) (426,447)(401,167) (65,848) (26,899) (27,465)
Intangible asset 2,435 2,96915,026 578 - -
Accumulated other comprehensive income 9,025 7,168460,847 9,090 - -
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 60,17094,017 $ 283,026 $(149,356) $(426,447)
- ---------------------------------------------------------------------------------------------------------96,330 $ (26,899) $ (27,465)
=============================================================================================================================
Weighted average assumptions as of March 31:assumptions:
Discount rate 7.01% 7.52% 6.60% 7.00%6.50% 7.25% 6.50% 7.42%
Expected return on plan assets 8.13% 8.47%8.28% 8.33% - -
Rate of compensation increase 4.50% 4.97%4.00% 4.44% - -
For measurement purposes, a 5 percent10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal year 2000.2002. The rate was assumed to
decrease gradually to 4 percent5.0% in 20052009 and remain at that level thereafter.
59
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
----------- ---------- ---------- -------- -------- -------Year Ended December 31, Year Ended December 31,
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
(In thousands)
Components of net periodic
benefit income (cost)cost (income):
Service cost $ 33,34128,137 $ 29,00225,579 $ 30,58925,277 $ 203- $ 3,487- $ 4,737-
Interest cost 112,822 94,182 86,111 9,478 26,480 30,551119,360 115,195 111,947 2,406 2,499 2,514
Expected return on plan assets (146,990) (130,317) (175,041)(136,227) (145,738) (145,066) - - -
Amortization of prior service cost 2,522 2,430 2,1703,207 2,600 2,589 - - -
Recognized net actuarial loss (gain) loss (11,792) (7,493) 49,079 (1,109) (4,416) 75111,912 (15,800) (34,449) 834 718 542
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit income (cost) $(10,097) $(12,196) $(7,092)cost (income) $ 8,572 $25,551 $36,039
- -----------------------------------------------------------------------------------------------------------------------26,389 $ (18,164) $ (39,702) $ 3,240 $ 3,217 $ 3,056
======================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $253,434,000, $207,549,000$1,883.0 million, $1,805.8 million and $152,700,000,$1,402.4
million, respectively for fiscal year ended Marchat December 31, 19992002 and $122,277,000, $92,724,000$187.2 million, $140.2 million
and $64,231,000,$103.2 million, respectively, for fiscal year ended Marchat December 31, 1998.2001.
72
Assumed health carehealth-care cost trend rates have a significant effect on the amounts reportedwe
report for the health careour health-care plan. A one-percentage-point change in our assumed
health carehealth-care cost trend rates would have the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
-------------- --------------
(In thousands)
Effect on total of service and interest
cost components $ 300150 $ (288)(145)
Effect on postretirement benefit obligation $4,286 $(4,238)$ 2,088 $ (2,019)
Multiemployer Plans
- One of MII'sB&W's subsidiaries contributes to various multiemployer plans. The plans
generally provide defined benefits to substantially all unionized workers in
this subsidiary. AmountsThe amount charged to pension cost and contributed to the plans
were $11,295,000, $5,151,000 and
$4,552,000was $2.4 million in fiscal years 1999, 1998 and 1997, respectively.the year ended December 31, 2000.
NOTE 7 - IMPAIRMENT OF LONG-LIVED ASSETS
AND GOODWILL
Impairment losses to write-downwrite down property, plant and equipment to estimated fair
values and to write-off goodwill are summarized by segment as follows:
1999 1998 1997
------- -------- -------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Property, plant and equipment:equipment and other assets:
Assets to be held and used:
Marine Construction Services $16,458 $ 2,891 $19,228
Power Generation Systems6,800 $ - 8,704 11,098$ -
Assets to be disposed of:
Marine Construction Services 877 7,000 12,162
Industrial Operations 261 - 7,295
Goodwill:
Marine Construction Services 10,461 262,901 -
Power Generation Systems - 1,611 4,859
Industrial1,943 6,318 3,346
Government Operations - 8,098 - 833
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $28,057 $291,205 $54,642
- ---------------------------------------------------------------------$ 8,743 $ 6,318 $ 4,179
==============================================================================================================
60
Property, plant and equipment and other assets - assets to be held and used
- ---------------------------------------------------------
During fiscal years 1999, 1998 and 1997, management identified certain long-
lived assetsthe year ended December 31, 2002, our Marine Construction Services
segment recorded an impairment loss of $6.8 million on land at one of our
facilities that wereis no longer expected to recover their entireits carrying value through
future cash flows. Fair values were generallyWe determined fair value based on sales pricesan appraisal of comparable assets. The assets include non-core, surplus and
obsolete property and equipment and fabrication facilities in the Marine
Construction Services segment, and manufacturing facilities and related
equipment inland.
Prior to impairment, the Power Generation Systems segment.land had a book value of approximately $13.5 million.
Property, plant and equipment assetsand other assets-assets to be disposed of
- -------------------------------------------------------
In fiscalDuring the year 1999, theended December 31, 2002, our Marine Construction Services
segment recorded a loss of
$877,000impairment losses totaling $1.9 million to reduce a building located near Londonfour material
barges and certain other marine equipment to its fair value less cost to
sell.net realizable value. Prior to recognition of the
impairment charges, this marine equipment had a total net book value of
approximately $2.1 million. We expect to sell this equipment in 2003.
During the year ended December 31, 2001, our Marine Construction Services
segment recorded an impairment loss totaling $6.3 million to reduce an idled
derrick barge to scrap value. Prior to impairment, the buildingvessel had a net book
value of approximately $7,549,000. Management decided to sell$6.9 million. During the building as a
resultyear ended December 31, 2002, we
sold the vessel for net proceeds of its withdrawal from traditional European engineering operations. The
building is expected to be sold during$0.6 million and recorded an additional
impairment loss of $43,000.
During the next year.
In fiscal year 1998, theended December 31, 2000, our Marine Construction Services
segment recorded impairment losses totaling $3.3 million. These provisions
included $2.0 million for salvaged structures that were written down to net
realizable value, a loss$0.3 million adjustment to a building for sale near London
that we sold in 2001, and $1.1 million writedown of $7,000,000 to reduce a Floating Production, Storage and Offloading System
("FPSO") to its estimated fair value less cost to sell. Prior to recognition offixed assets in our
Inverness facility.
73
During the impairment loss, the FPSO had a net book value of approximately $21,500,000.
The estimated fair value was determined based upon management's best estimate,
as these types of vessels are somewhat unique in nature. Management decided to
sell the FPSO as a result of a strategic decision to exit this market.
Excluding the impairment loss, net income for fiscal year 1998 for the FPSO was
$2,774,000. The FPSO was sold during fiscal year 1999 resulting in a loss on
asset disposal of approximately $2,382,000.
In fiscal year 1997, the Marine Construction Services segment recorded losses of
$12,162,000 to reduce certain property and equipment to estimated fair values
less cost to sell. Prior to recognition of the impairment loss, the carrying
value of these assets was approximately $18,950,000. Also in fiscal year 1997,
the Industrialended December 31, 2000, our Government Operations segment
recorded a loss of $7,295,000, which was
adjusted in fiscal year 1998, to reduce a building and land to its estimated
fair value less cost to sell. Prior to recognition of thean impairment loss the
property had a book value of approximately $15,795,000. The estimated fair
value was based upon prices of similar real estate. Management had begun
marketing the propertytotaling $0.8 million at our research facility in
Alliance, Ohio for fixed assets that had been used as office space. Excluding the
impairment losses, results of operations for fiscal year 1997, were not
material. Substantially all of these assets were disposed of in fiscal year
1998, with no significant gain or loss recognized.
Goodwill
- ---------
In fiscal year 1999, the Marine Construction Services segment wrote off
$4,834,000 associated with the acquisition of a Mexican shipyard acquired in a
prior year. Management determined that the goodwill related to the Mexican
shipyard had no value as the facility's intended use was as a new-build
facility, and the facility had been engaged primarily in ship repair. Also in
fiscal year 1999, the Marine Construction Services segment wrote off $5,627,000
related to an engineering business acquired in a prior year. Management
determined that the business had no value as management has decided to withdraw
from the third-party engineering business. Annual amortization of this goodwill
totaled $1,524,000.
In fiscal year 1998, the Marine Construction Services segment wrote off
$262,901,000 associated with the acquisition of OPI. In December 1997,
management decided to exit the traditional shallow water business, and abandoned
OPI-type work. The decision was based upon the industry outlook, the departure
of key OPI executives, the disposal of significant OPI joint ventures and the
disposal of major OPI vessels. Annual amortization of the OPI goodwill was
approximately $21,800,000. In addition, in fiscal year 1998, the Industrial
Operations segment wrote off $8,098,000 associated with the acquisition of
McDermott Engineers and Constructors (Canada) Limited in a prior year.
Management concluded that the goodwillwill no longer had value due to reduced future
asset utilization and deteriorating market conditions
61
Also in fiscal years 1998 and 1997, $1,611,000 and $4,859,000, respectively, of
goodwill related to Power Generation Systems segment manufacturing facilities
and related equipment classified as assets to be held and used referred to above
was written off.used.
NOTE 8 - SUBSIDIARIES' STOCKS
At March 31, 1998, 13,000,000 shares of MI Preferred Stock, with a par value of
$1 per share, were authorized. Of the authorized shares, 2,818,679 shares of
Series A Cumulative Convertible Preferred Stock ("Series A"), and 2,152,766
shares of Series B Cumulative Preferred Stock ("Series B"), respectively, were
outstanding (in each case, exclusive of treasury shares owned by MI) at March
31, 1998. During fiscal year 1999, the Series A and Series B stocks were
redeemed. Preferred dividends of $4,400,000, $12,722,000 and $13,243,000 were
included as a component of minority interest in other income (expense) in fiscal
years 1999, 1998 and 1997, respectively.
During fiscal year 1998, JRM's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to JRM's stock compensation and
thrift plans. JRM repurchased 362,500 shares at an average share price of
$37.31 during fiscal year 1998. During fiscal year 1999, JRM's Board of
Directors authorized the repurchase of up to an additional one million shares of
its common stock . JRM repurchased another 1,837,700 shares of its common stock
at an average share price of $31.67 through October 8, 1998, at which time JRM
ceased all further share repurchases. At such time, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
At March 31, 1999 and 1998, JRM had outstanding 3,200,000 shares of Series A
$2.25 Cumulative Convertible Preferred Stock ("JRM Series A Preferred Stock" -
with an aggregate liquidation preference of $160,000,000), all of which were
owned by MII. Each share of JRM Series A Preferred Stock is convertible into
1.794 shares of JRM Common Stock at any time after either (i) a call by JRM for
redemption of any or all of the outstanding JRM Series A Preferred Stock or (ii)
January 31, 2000. At March 31, 1999, 14,538,270 shares of JRM Common Stock were
reserved for issuance in connection with the conversion of JRM Series A
Preferred Stock, the exercise of stock options and awards of restricted stock
under JRM's stock incentive plans and contributions to the Thrift Plan described
in Note 10. At March 31, 1999, 839,471 options were outstanding at a weighted
average exercise price of $26.80 per share (407,107 options exercisable at a
weighted average exercise price of $23.75 per share).
Subsequent Event On May 13, 1999, MII commenced a tender offer to acquire all
outstanding shares of JRM not already owned by MII for $35.62 per share. JRM
currently has approximately 39,060,000 shares outstanding, of which MII owns
approximately 63%.
NOTE 9 - CAPITAL STOCK
The Panamanian regulations that relate to acquisitions of securities of
companies registered with the National Securities Commission, such as MII, have
certain requirements. They require, among other matters, that detailed
disclosure concerning thean offeror be finalized prior to thebefore that person acquires
beneficial acquisitionownership of more than 5five percent of the outstanding shares of any
class of our stock pursuant to a tender offer. The detailed disclosure is
subject to review by either the Panamanian National Securities Commission or theour
Board of Directors of the subject company.Directors. Transfers of securitiesshares of common stock in violation of these
regulations are invalid and cannot be registered for transfer.
CommonWe issue shares of our common stock is issued in connection with the conversionour 2001 Directors and
redemption of MI's
Series A Preferred Stock (for fiscal year 1998 only), the conversion of MII's
Series C Preferred Stock (for fiscal year 1998 only), theOfficers Long-Term Incentive Plan, our 1996 Officer Stock
ProgramLong-Term Incentive Plan
(and its predecessor programs), the 1992 Director Stock Plan, theour 1992 Senior Management Stock ProgramPlan and
contributions to theour Thrift Plan. At MarchDecember 31, 19992002 and 1998, 10,465,6882001, 15,180,999 and
18,091,4149,026,795 shares of MII Common Stock,common stock, respectively, were reserved for issuance in
connection with the above.
62
During fiscal year 1998, MII's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to MII's stock compensation and
thriftthose plans. MII completed its two million share repurchase program in August
1998. During the fiscal year ended March 31, 1999, MII repurchased 1,900,000
shares of its common stock at an average share price of $31.10.
MII Preferred Stock
- On April 6, 1998, MII called for redemption its non-voting
Series C Cumulative Convertible Preferred Stock. On April 21, 1998, all
2,875,000 shares of Series C Preferred Stock were converted into shares of MII
Common Stock at a rate of 1.4184 shares of MII Common Stock for each share of
Series C Preferred Stock, resulting in 4,077,890 shares of MII Common Stock
being issued.
At MarchDecember 31, 1999 and 1998,2001, 100,000 shares of non-votingour nonvoting Series A Participating
Preferred Stock (the "Participating Preferred Stock") and 30,000 and 40,000
shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred
Stock"), respectively, were issued and owned by
MI. The Non-Voting Preferred
Stock is currently callable by MII at $275 per share, and 10,000 shares are
being redeemed eachDuring the year by MII at $250 per share. The annual per share
dividend rates forended December 31, 2002, we purchased the Participating Preferred Stock and the Non-Voting
Preferred Stock are $10 and $20, respectively, payable quarterly, and dividends
on such shares are cumulative to the extent not paid. The annual per share
dividend rate for the Participating Preferred Stock is limited to no more than
ten times the amount of the per share dividend on MII Common Stock. In
addition,100,000 shares of
Participating Preferred Stock are entitledpursuant to receive
additional dividends whenever dividends in excessthe exercise of $3.00the Intercompany
Agreement and cancelled them. Under the Intercompany Agreement, MI had the right
to sell to MII and MII had the right to buy from MI, 100,000 units, each of
which consisted of one share of MII common stock and one share of MII Series A
Participating Preferred Stock. MI held this financial asset since prior to the
1982 reorganization under which MII became the parent of MI. During the quarter
ended March 31, 2002, MI exercised its right pursuant to this agreement and
received approximately $243 million. During the year ended December 31, 2001, we
redeemed the last 10,000 shares of the Series B nonvoting Preferred Stock, which
were owned by MI, at $250 per share on MII
Common Stock are declared (or deemed to have been declared) in any fiscal year.
For McDermott financial reporting purposesunder the Participating Preferred Stock and
the Non-Voting Preferred Stock are considered constructively retired.
On December 5, 1995, MIIapplicable mandatory redemption
provisions.
We designated 702,652 sharesa series of itsour authorized but unissued Preferred Stockpreferred stock as Series
D Participating Preferred Stock in connection with its adoption of a new Stockholdersour Stockholder Rights Plan on December 30, 1995.Plan.
As of MarchDecember 31, 1999, there were2002, no shares of Series D Participating Preferred Stock
were outstanding.
TheOur issuance of additional MII Preferred Stockshares of preferred stock in the future and the
specific terms thereof, such as the dividend rights, conversion rights, voting
rights, redemption prices and similar matters, may be authorized by theour Board of
Directors of MII without stockholder approval.
The issuance is limited to the
extent such approval may be required by applicable rules of the New York Stock
Exchange or applicable law. If additional Preferred Stock is issued, such
additional shares will rank senior to MII Common Stock as to dividends and upon
liquidation.
MII Rights
MII hasOn October 17, 2001, our Board of Directors adopted a Stockholder Rights Plan
pursuantand declared a dividend of one right to which each holder of
Common Stock has one Rightpurchase preferred stock for each
outstanding share of Common Stock held. The
Rights currently trade withour common stock to stockholders of record at the Common Stock and each Rightclose of
business on November 1, 2001. Each right initially entitles the registered
holder
thereof to purchase from us a fractional share consisting of one one-hundredthone-thousandth
of a share of MIIour Series D Participating Preferred Stock, for $50par value $1.00 per
share, at a purchase price of $35.00 per fractional share, subject to
anti-dilution adjustments.adjustment. The Rightsrights generally will not become exercisable and detach from the Common Stock withinuntil ten days
after a specified
period of time afterpublic announcement that a person or a group either becomes the beneficial owner of
15 percenthas acquired 15% or more of
our common stock (thereby becoming an "Acquiring Person") or the outstanding Common Stock, or commences or announces an
intention to commencetenth business
day after the commencement of a tender or exchange offer for 15 percentthat would result in a
person or more of the
outstanding Common Stock (an "Acquiring Person"). Once exercisable, each Right
entitles the holder thereof (other thangroup becoming an Acquiring Person)Person (we refer to the earlier of those
dates as the "Distribution Date"). The rights are attached to all certificates
representing our currently outstanding common stock and will attach to all
common stock certificates we issue prior to the Distribution Date. Until the
Distribution Date, the rights will be evidenced by the certificates representing
our common stock and will be transferable only with our common stock. Generally,
if any person or group becomes an Acquiring Person, each right, other than
rights beneficially owned by the Acquiring Person (which will thereupon become
void), will thereafter entitle its holder to purchase, at the $50rights' then
current exercise price, that number of shares of Common Stockour
74
common stock having a market value equal to twiceof two times the exercise price.price of the right.
If, MII merges withafter there is an Acquiring Person, and we or transfers 50 percent
or morea majority of our assets is
acquired in certain transactions, each right not owned by an Acquiring Person
will entitle its assets or earningsholder to any person after the Rights become
exercisable, holders of Rights may purchase, that number ofat a discount, shares of common stock of
the acquiring entity having a market value equal to twice(or its parent) in the exercise
price. The Rights are redeemable by MII at a price of $0.01 per Right for a
specified period oftransaction. At any time until ten
days after a personpublic announcement that the rights have been triggered, we will
generally be entitled to redeem the rights for $.01 per right and to amend the
rights in any manner other than to reduce the redemption price. Certain
subsequent amendments are also permitted. Until a right is exercised, the holder
thereof, as such, will have no rights to vote or group becomes an Acquiring Person.receive dividends or any other
rights of a stockholder. The Stockholder Rights Plan, whichplan was amendedapproved at our 2002 annual meeting of
stockholders and restated on April 15, 1999,
willis scheduled to expire on January 2, 2001.
63
the fifth anniversary of the date of
its adoption.
NOTE 109 - STOCK PLANS
1996 Officer2001 Directors and Officers Long-Term Incentive Plan
- A totalIn May 2002, our shareholders approved the 2001 Directors and Officers Long-Term
Incentive Plan. Members of 1,508,164 sharesthe Board of Common
Stock (including shares that were not awarded under predecessor plans) are
available for stock option grants and restricted stock awards toDirectors, executive officers, and key
employees under this plan at March 31, 1999.and consultants are eligible to participate in the plan. The
Compensation Committee of the Board of Directors selects the participants for
the plan. The plan permits the grantprovides for a number of forms of stock-based compensation,
including nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, deferred stock units, performance shares
and performance units, subject to satisfaction of specific performance goals. Up
to 3,000,000 shares of our common stock were authorized for issuance through the
plan, of which a maximum of 30 percent may be awarded pursuant to grants in the
form of restricted stock.stock, deferred stock units and performance shares. Options
to purchase shares are granted at not less than 100% of the fair market value on
the date of grant, become exercisable at such time or times as determined when
granted, and expire not more than ten years after the date of the grant.
1996 Officer Long-Term Incentive Plan
Our 1996 Officer Long-Term Incentive Plan permits grants of nonqualified stock
options, incentive stock options and restricted stock to officers and key
employees. Under thethis plan, eligible employees may bewe granted rights to purchase
shares of Common Stock at par value ($1.00 per share), which shares are subject
to restrictions on transfer that lapse at such times and circumstances as
specified when granted. As of March 31, 1999, 801,705 shares of Common Stock
available for award may be granted as restricted stock. During fiscal years
1999 and 1998, performance-based restricted stock awards were granted
to certain officers and key employees under the plan.employees. Under the provisions of the
performance-based awards, no shares arewere issued at the time of the initial
award, and the number of shares which will ultimately be issued shall bewas determined based on the
change in the market value of the Common Stockour common stock over a specified performance
period.
The performance-based awards in fiscal years 1999 and 1998
were represented by initial notional grants totaling 129,510 and 86,400 rights
to purchase restricted shares of Common Stock, respectively. These rights had
weighted average fair values of $28.52 and $33.00 on their respective dates of
grant during fiscal years 1999 and 1998. Through March 31, 1999, a total of
1,121,940 shares of restricted stock (including 171,930 shares issued in fiscal
year 1997 with a weighted average fair value of $19.92 per share) have been
issued under the Plan (and a predecessor plan). No restricted shares were
issued in fiscal years 1999 or 1998.
1997 Director Stock Program
- A total of 91,200 shares of CommonUnder our 1997 Director Stock (including approved shares that were not awarded under a predecessor plan) are
available for grants ofProgram, we grant options and rights to purchase restricted shares, to
non-employee directors under this program at March 31, 1999. Options to purchase 900 300shares
in the first year of a director's term and 300 shares will be granted on the first, second, and thirdin subsequent years respectively, ofat a
Director's term atpurchase price that is not less than 100% of the fair market value on the date
of grant. OptionsThese options become exercisable, in full, six months after the date
of the grant and expire ten years and one day after the date of grant. RightsUnder this
program, we also grant rights to purchase 450 150,shares in the first year of a
director's term and 150 shares are granted on the
first, second, and thirdin subsequent years respectively, of a Director's term, at par value ($1.00 per
share), which. Those shares are subject to restrictions on transfer that lapse at the
end of such term.
Through MarchAt December 31, 1999,2002, we had a total of 19,7502,101,567 shares of restrictedour common stock
have been issuedavailable for award under the 2001 Directors and Officers Plan, the 1996 Officer
Long-Term Incentive Plan and the 1997 Director Stock Plan
(and its predecessor plan).Program.
75
The following table summarizes activity for the restricted stock and
performance-based restricted stock awards under these plans (share data in
thousands):
Year Ended December 31,
2002 2001 2000
- -----------------------------------------------------------------------------
Outstanding, beginning of period 961 837 571
Restricted shares granted 404 299 42
Notional shares granted pursuant to
performance-based awards - - 516
Restricted shares issued pursuant to
performance-based awards 700 27 -
Notional shares lapsed (516) (22) (215)
Restricted shares released (162) (180) (55)
Cancelled/forfeited (33) - (22)
- -----------------------------------------------------------------------------
Outstanding, end of period 1,354 961 837
=============================================================================
The weighted average fair values of the restricted shares granted during the
years ended December 31, 2002, 2001 and 2000 were $11.62, $14.54 and $7.66 per
share, respectively. The weighted average fair values of the restricted shares
issued pursuant to performance-based awards during the years ended December 31,
2002 and 2001 were $16.05 and $9.66, respectively. The weighted average fair
value of the performance-based awards granted in the year ended December 31,
2000 was $8.30.
1992 Senior Management Stock Option Plan
- Under this plan, senior management
employees may be grantedour 1992 Senior Management Stock Plan, options to purchase shares of Common Stock. The total
number of shares available for grant is determined by the Board of Directors
from time to time. Options to purchase shares are
granted at a purchase price that is not less than 100% of the fair market value
on the date of grant, become exercisable at such time or times as determined
when granted and expire not more than ten years after the date of grant. Our
Board of Directors determines the total number of shares available for grant
from time to time. At December 31, 2002, we had a total of 694,849 shares of
common stock available for stock option grants under this plan.
In the event of a change in control of McDermott,our company, all threethese programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of outstanding options.
As of March 20, 2000, individuals were provided the opportunity to elect to
cancel, on a grant-by-grant basis, outstanding stock options outstanding.
64
granted prior to
February 22, 2000, and in exchange, receive Deferred Stock Units ("DSUs"). A DSU
is a contractual right to receive a share of MII common stock at a point in the
future, provided applicable vesting requirements have been satisfied. DSUs
granted as a result of this election will vest 50% upon judicial confirmation of
a plan of reorganization in connection with the Chapter 11 proceedings related
to B&W and 50% one year later, or 100% on the fifth anniversary of the date of
grant, whichever is earlier. Under this program, 2,208,319 stock options were
cancelled and 347,488 DSUs were granted with a weighted average fair value of
$9.41 at the date of grant.
The following table summarizes activity for MII'sour stock option plansoptions (share data in
thousands):
1999 1998 1997
--------- -------------------- --------------------Year Ended December 31,
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Outstanding, April 1 3,904 $23.66 5,260 $22.55 4,449 $22.72beginning of period 6,557 $ 15.58 4,865 $ 16.12 4,812 $ 24.38
Granted 651 $29.40 363 $33.99 909 $21.641,597 14.03 1,921 14.53 2,479 9.19
Exercised (187) $19.76 (1,451) $21.68 (23) $17.27(113) 9.12 (12) 9.37 (4) 4.67
Cancelled/forfeited (123) $21.83 (268) $26.67 (75) $23.06(508) 15.13 (217) 18.78 (2,422) 25.45
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Outstanding, March 31 4,245 $24.76 3,904 $23.66 5,260 $22.55
- -------------------------------------------------------------------------------------------------end of period 7,533 $ 15.38 6,557 $ 15.58 4,865 $ 16.12
=====================================================================================================================
Exercisable, March 31 3,101 $23.82 2,358 $22.95 3,430 $22.88
- -------------------------------------------------------------------------------------------------end of period 4,246 $ 16.92 3,304 $ 18.84 2,435 $ 23.04
=====================================================================================================================
76
Included in the table above are 365,000 options granted to B&W employees during
2001. These options are accounted for using the fair value method of SFAS No.
123, as B&W employees are not considered employees of MII for purposes of APB
25.
The following tables summarize the range of exercise prices and the
weighted
averageweighted-average remaining contractual life of the options outstanding and the
range of exercise prices for the options exercisable at MarchDecember 31, 19992002 (share
data in thousands):
Options Outstanding - ----------------------------------------------------------------------------------
WeightedOptions Exercisable
--------------------------------------------- ------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Weighted-Average Average
Range of Number Contractual AverageExercise Number Exercise
Exercise Prices Outstanding Life in Years ExercisePrice Exercisable Price
- ---------------------------------------------------------------------------------------------------- --------------------------------------------- ------------------------------
$ 19.313.83 - 7.65 32 9.7 $ 6.82 - $ 24.00 1,857 6.0 $21.26
$ 24.13 -
$ 29.06 1,383 4.4 $24.90
$ 29.387.66 - $ 38.25 1,005 4.4 $31.0511.48 2,172 7.2 9.21 1,589 9.23
11.48 - 15.30 3,409 8.4 14.36 737 14.30
15.30 - 19.13 25 3.4 17.29 25 17.29
19.13 - 22.95 483 3.7 20.15 483 20.15
22.95 - 26.78 1,133 1.3 24.65 1,133 24.65
26.78 - 30.60 188 0.8 29.13 188 29.13
30.60 - 34.00 91 0.3 33.86 91 33.86
----- -----
$ 19.313.83 - 34.00 7,533 6.4 $ 38.25 4,245 5.1 $24.7615.38 4,246 $ 16.92
=====
Options Exercisable
- ----------------------------------------------------------------------------------
Weighted-
Range of Average
Exercise Prices Exercisable Exercise Price
- ----------------------------------------------------------------------------------
$ 19.31 - $ 24.00 1,492 $21.37
$ 24.13 - $ 29.06 1,383 $24.90
$ 29.38 - $ 34.00 226 $33.31
-----
$ 19.31 - $ 34.00 3,101 $23.82 =====
As discussed in Note 1, McDermott applies APB 25 and related interpretations in
accounting for its stock-based compensation plans. Charges to income related to
stock plan awards totaled approximately $4,276,000, $6,288,000 and $7,273,000
for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. If
McDermott had accounted for its stock plan awards using the alternative fair
value method of accounting under SFAS 123, "Accounting for Stock-Based
Compensation," its net income (loss) and earnings (loss) per share would have
been the pro forma amounts indicated as follows:
65
1999 1998 1997
---------- ---------- ------------
(In thousands, except per share data)
Net income (loss)
As reported $153,362 $215,690 $(206,105)
Pro forma $148,629 $214,991 $(207,206)
Basic earnings (loss) per share:
As reported $ 2.60 $ 3.74 $ (3.95)
Pro forma $ 2.52 $ 3.73 $ (3.97)
Diluted earnings (loss) per share:
As reported $ 2.54 $ 3.48 $ (3.95)
Pro forma $ 2.46 $ 3.48 $ (3.97)
The above pro forma information is not indicative of future pro forma amounts.
SFAS 123 does not apply to awards prior to fiscal year 1996 and additional
awards in future years are anticipated.
The fair value of each option grant was estimated at the date of grant using a
Black-Scholes option pricingoption-pricing model, with the following weighted-average
assumptions:
1999 1998 1997
----- ----- -----Year Ended December 31,
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.67% 5.48% 6.27%4.69% 4.80% 6.41%
Volatility factor of the expected market
price of MII's common stock .46 .36 .360.51 0.51 0.48
Expected life of the option in years 3.5 3.6 5.06.10 5.00 5.00
Expected dividend yield of MII's common stock 0.8% 0.6% 1.0%0.0% 0.0% 0.0%
The weighted average fair valuevalues of the stock options granted in fiscalthe years 1999, 1998ended
December 31, 2002, 2001 and 1997 was $10.80, $10.852000 were $8.23, $7.26 and $8.23,$4.61, respectively.
Thrift Plan
- On both November 12, 1991 and June 5, 1995, respectively, a maximum of 5,000,000 of the authorized and
unissued shares of each of the MII and JRM
Common Stockcommon stock were reserved for issuance. The stock was reservedissuance for the employer
match for employee contributions to the Thrift Plan for Employees of McDermott Incorporated and
Participating Subsidiary and Affiliated Companies (the "Thrift Plan"). SuchOn
October 11, 2002, an additional 5,000,000 of the authorized and unissued shares
of MII common stock were reserved for issuance for the employer match to the
Thrift Plan. Those matching employer contributions equal 50% of the first 6% of
compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are non-forfeitable after fivethree years of service or upon
retirement, death, lay-off or approved disability. The Thrift Plan allows
employees to sell their interest in MII's common stock fund at any time, except
as limited by applicable securities laws and regulations. During fiscalthe years 1999,
1998ended
December 31, 2002, 2001 and 1997, 229,245, 191,0582000, we issued 1,394,887, 711,943 and 306,089910,287
shares, respectively, of MII's Common Stock were issued as employer contributions pursuant to the Thrift Plan.
During fiscal years 1999, 1998 and 1997, 68,104, 65,727 and 77,112 shares,
respectively, of JRM's Common Stock were issuedcommon stock as employer contributions pursuant
to the Thrift Plan. At MarchDecember 31, 1999, 2,896,5422002, 4,579,919 shares of MII's Common Stock and 4,708,701 shares of JRM Common Stockcommon stock
remained available for issuance.issuance under the Thrift Plan.
NOTE 1110 - CONTINGENCIES AND COMMITMENTS
Investigations and Litigation
- In March 1997, MII and JRM,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"). and the heavy-lift business of JRM. Upon becoming aware of these
allegations, MII and JRMwe notified authorities, including the Antitrust Division of the
U.S. Department of JusticeDOJ, the SEC and the European Commission. As a result of
MII's and JRM's77
our prompt disclosure of the allegations, both companiesJRM, certain other affiliates and
their officers, directors and employees at the time of the disclosure were
granted immunity from criminal prosecution by the Department of JusticeDOJ for any anti-competitiveanticompetitive
acts involving worldwide heavy-lift activities. After receivingIn June 1999, the allegations, JRM initiated actionDOJ agreed to
terminate its interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer inour request to expand the joint venture,
Heerema, acquired JRM's interest in exchange for cash and title to
66
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 partscope of the plea, both HeereMacimmunity to include a broader range of
our marine construction activities 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.
MII and JRM have cooperated and are continuing to cooperate with the Department
of Justice in its investigation.affiliates. The Department of JusticeDOJ had also has requested
additional information from the companiesus relating to possible anti-competitiveanticompetitive 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 withOn becoming aware of the terminationallegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. We also terminated the McDermott-ETPM joint venture, and on April 3,
1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has beenwas renamed
J. Ray McDermott Middle East, Inc.
On December 22, 1997, HeereMac and one of its employees pled guilty to criminal
charges by the DOJ that they and others had participated in a conspiracy to rig
bids in connection with the heavy-lift business of HeereMac in the Gulf of
Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were
fined $49.0 million and $0.1 million, respectively. As part of the plea, both
HeereMac and certain employees of HeereMac agreed to cooperate fully with the
DOJ investigation. Neither MII, JRM nor any of their officers, directors or
employees were a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in an international bid-rigging conspiracy for the sale of
marine construction services. In May 2000, another former JRM officer was
indicted by the DOJ for participating in a bid-rigging conspiracy for the sale
of marine construction services in the Gulf of Mexico. His trial was held in
February 2001 and, at the conclusion of the Government's case, the presiding
judge directed a judgment of acquittal.
We cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC had terminated its
investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certainseveral related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United StatesU.S 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-competitiveanticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and
Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in
fraudulent activity and tortiously interfered with the plaintiffs' businesses in
connection with certain offshore transportation and installation projects in the
Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In
December 1998, Den norske stats oljeselskap a.s., individually and on behalf of
certain of its ventures and its participants (collectively, "Statoil"), filed a
similar lawsuit in the same court.court (the "Statoil Litigation"). In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Phillips Litigation haveand Statoil Litigation requested punitive as well as
treble damages. In January 1999, the court dismissed without prejudice, due to
the court's lack of subject matter jurisdiction, the claims of the Phillips
Plaintiffs relating to alleged injuries sustained on any foreign projects. In
July 1999, the court also dismissed the Statoil Litigation for lack of subject
matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of
Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed
the district court decision in February 2000 and Statoil filed a motion for
rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of
their request to dismiss their remaining domestic claims in the lawsuit in order
to seek an appeal of the dismissal of their claims on foreign projects, which
request was subsequently denied. On March 12, 2001, the plaintiffs' motion for
rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The
plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On
February 20, 2002, the U.S. Supreme Court denied the petition for certiorari.
The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April
15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the
year ended December 31, 2002,
78
Heerema and MII executed agreements to settle the heavy-lift antitrust claims
against Heerema and MII with British Gas and Phillips, and the Court has entered
an order of dismissal.
In June 1998, Shell Offshore, Inc. and certainseveral related entities also filed a
lawsuit in the United StatesU.S. 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-competitiveanticompetitive acts in
violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequent thereto,Subsequently, the following parties (acting for themselves and, in certain
cases, on behalf of their respective co-venturers and for whom they operate)
intervened as plaintiffs in the Shell Litigation: Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources
Offshore, Inc. and; The Louisiana Land & Exploration Company; Marathon Oil Company
and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.,; Green
Canyon Pipeline Company, L.L.C.
and; Delos Gathering Company, L.L.C.; Chevron U.S.A.
Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its
affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A. 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.S.A.. Also, in December
1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and
on behalf of their respective co-venturers, filed similar lawsuits in the same
court, which lawsuits were consolidated with the Shell Litigation. In addition
to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs
in the Shell LawsuitLitigation request treble damages. In February 1999, we filed a
motion to dismiss the foreign project claims of the plaintiffs in the Shell
Litigation due to the Texas district court's lack of subject matter
jurisdiction, which motion is pending before the court. Subsequently, the Shell
Litigation plaintiffs were allowed to amend their complaint to include non
heavy-lift marine construction activity claims against the defendants.
Currently, we are awaiting the court's decision on our motion to dismiss the
foreign claims. During the year ended December 31, 2002, Heerema and MII
executed agreements to settle heavy-lift antitrust claims against Heerema and
JRM are also cooperatingMII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf
Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington
Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass
Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering
Company L.L.C., and the Court has entered an order of dismissal. In addition,
Woodside Energy, Ltd. filed a Securitiesmotion of dismissal with prejudice, which was
granted. Recently, we entered into a settlement agreement with Conoco, Inc. and
Exchange Commission
("SEC") investigation into whether the Court entered an order of dismissal.
On December 15, 2000, a number of Norwegian oil companies may have violated U.S.
securities lawsfiled lawsuits against
MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing
Act of 1953 in connection with but not limitedprojects in Norway. Plaintiffs include Norwegian
affiliates of various of the plaintiffs in the Shell Litigation pending in
Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates,
with some by Heerema/HeereMac and none by JRM. We understand that the conduct
alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S.
civil cases. The cases were heard by the Conciliation Boards in Norway during
the first week of October 2001. The Conciliation Boards referred the cases to
the matters described
above. MII and JRM are subjectcourt of first instance for further proceedings. The plaintiffs have one
year from the date of referral to a judicial order entered in 1976,proceed with the consent of MI (which at that time was the parentcases. Several of the
McDermott groupplaintiffs who filed cases before the Conciliation Boards have filed writs with
the courts of companies), pursuantfirst instance in order to an SEC complaint (the "Consent Decree"). The Consent
Decree prohibitscommence 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.
67
court proceedings.
Settlement discussions are underway with these plaintiffs.
As a result of the initial allegations of wrongdoing in March 1997, both MII and
JRMwe formed and continue to maintaina
special committeescommittee of theirour Board of Directors to monitor and oversee the companies'our
investigation into all of these matters. It is not possible to predictOur Board of Directors concluded that
the ultimate outcomespecial committee was no longer necessary, and it was dissolved in 2002.
Because we have reached settlement agreements with the vast majority of the Departmentoil
company claimants, we have adjusted our reserve to more appropriately reflect
the risks and exposures of Justice
investigation, the SEC investigation, the companies' 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.remaining claims.
79
B&W and Atlantic Richfield Company ("ARCO") are defendants in lawsuitsa lawsuit filed on
June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the United StatesU. S. District
Court for the Western District of Pennsylvania involving over 120Pennsylvania. The suit involves approximately
500 separate casesclaims for compensatory and punitive damages relating to the
operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"), alleging,. The plaintiffs in the Hall Litigation
allege, among other things, that they suffered personal injury, property damage
and other damages as a result of radioactive emissions from these facilities. In
September 1998, a jury found B&W and Atlantic
Richfield CompanyARCO liable to theeight plaintiffs in the
first eight cases brought to trial, awarding $36,700,000$36.7 million in compensatory damages. In
June 1999, the district court set aside the $36.7 million judgment and ordered a
new trial on all issues. In November 1999, the district court allowed an
interlocutory appeal by the plaintiffs of certain issues, including the granting
of the new trial and the court's rulings on certain evidentiary matters, which,
following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined
to accept for review.
In 1998, B&W believes that adequate
insurancesettled all pending and future punitive damage claims in the Hall
Litigation for $8.0 million for which B&W seeks reimbursement from other
parties. There is available to meet possible liability in this matter. However, the
jury verdict is not final, and a number of post trial motions are pending
contesting this contigency. Bothcontroversy between B&W and its insurers haveas to the amount of
coverage available under the liability insurance policies covering the
facilities. B&W filed actionsa declaratory judgment action in a Pennsylvania State
Court seeking a judicial determination as to the amount of insurancecoverage available
under the policies. On April 28, 2001, in response to cross-motions for partial
summary judgment, the Pennsylvania State Court issued its ruling regarding: (1)
the applicable trigger of coverage under the insurance policies covering these facilities, available for this awardNuclear Energy Liability Policies
issued by B&W's insurers; and all other claims.(2) the scope of the insurers' defense obligations
to B&W hasunder these policies. With respect to the trigger of coverage, the
Pennsylvania State Court held that "manifestation" is an applicable trigger with
respect to the underlying claims at issue. Although the Court did not make any
determination of coverage with respect to any of the underlying claims, we
believe the effect of its ruling is to increase the amount of coverage
potentially available to B&W under the policies at issue to $320.0 million. With
respect to the insurers' duty to defend B&W, the Court held that B&W is entitled
to separate and independent counsel funded by the insurers. On May 21, 2001, the
Court granted the insurers' motion for reconsideration of the April 25, 2001
order. On October 1, 2001, the Court entered its order reaffirming its original
substantive insurance coverage rulings and further certified the order for
immediate appeal by any party. B&W's insurers filed an actionappeal in November 2001.
On November 25, 2002, the Pennsylvania Superior Court affirmed the rulings in
favor of B&W on the trigger of coverage and duty to defend issues. On December
24, 2002, B&W's insurers filed a petition for the allowance of an appeal in the
Pennsylvania Supreme Court. The Pennsylvania Supreme Court has not yet made any
determination regarding whether to accept discretionary review of the insurers'
appeal.
The plaintiffs' remaining claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W filed a
complaint for declaratory and injunctive relief with the Bankruptcy Court
seeking a judicial determinationto stay the pursuit of this matter,the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which is currently pendingstay the Bankruptcy Court denied
in a Pennsylvania court. Management
believesOctober 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001,
the U.S. District Court for the Eastern District of Louisiana, which has
jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the
Bankruptcy Court's Order. We believe that all claims under the award and all other claimsHall Litigation
will be resolved within the limits andof coverage of suchour insurance policies;
however, no assurance on insurance
coveragemoreover, the proposed settlement agreement and plan of reorganization in the
B&W Chapter 11 proceedings include an overall settlement of this dispute.
However, should the B&W Chapter 11 settlement fail, or financial impact if limits of coverage are exceeded can be given.
In connection withshould the foregoing, B&W settled all pending and future punitive
damage claims represented by the plaintiffs' lawyers insettlement
particular to the Hall Litigation and the Apollo-Parks issue not be consummated,
there may be an issue as to whether our insurance coverage is adequate and we
may be materially adversely impacted if our liabilities exceed our coverage. B&W
transferred the two facilities subject to the Hall Litigation to BWXT in June
1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for $8,000,000Texaco Exploration and seeks reimbursementProduction, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of this amountthe module. In December 1999,
Texaco filed a lawsuit seeking consequential damages for delays resulting from
other parties.
Two purported class actions have beenthe incident, as well as costs incurred to complete the project with another
contractor and uninsured losses. This lawsuit was filed in the CivilU. S. District
Court for the Parish of Orleans, StateEastern District of Louisiana by alleged public shareholdersagainst a number of parties, some of
which brought third-party claims against the Operator Subsidiary and another
subsidiary of JRM, challenging MII's initial proposalthe owner of the vessel that attempted the lift of the deck
module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator
Subsidiary were subsequently tendered as direct defendants to acquireTexaco. In
80
addition to Texaco's claims in the publicly traded sharesfederal court action, damages for the loss of
JRM
Common Stockthe south deck module have been sought by Texaco's builder's risk insurers in
claims against the Owner Subsidiary and the other defendants, excluding the
Operator Subsidiary, which was an additional insured under the policy. Total
damages sought by Texaco and its builder's risk insurers in the federal court
proceeding approximate $280 million. Texaco's federal court claims against the
Operator Subsidiary were stayed in favor of a pending binding arbitration
proceeding between them required by contract, which the Operator Subsidiary
initiated to collect $23 million due for work performed under the contract, and
in which Texaco also sought the same consequential damages and uninsured losses
as it seeks in the federal court action, and also seeks approximately $2 million
in other damages not sought in the federal court action. The federal court
trial, on the issue of liability only, commenced in October 2001. On March 27,
2002, the Court orally found that the Owner Subsidiary was liable to Texaco,
specifically finding that Texaco had failed to sustain its burden of proof
against all named defendants except the Owner Subsidiary relative to liability
issues, and, alternatively, that the Operator Subsidiary's highly extraordinary
negligence served as a superceding cause of the loss. The finding was
subsequently set forth in a stock for stock merger.written order dated April 5, 2002, which found
against the Owner Subsidiary on the claims of Texaco's builder risk insurers in
addition to the claims of Texaco. On May 7, 1999,6, 2002, the Owner Subsidiary filed a
notice of appeal of the April 5, 2002 order, which appeal it subsequently
withdrew without prejudice for technical reasons. On January 13, 2003, the
district court granted the Owner Subsidiary's motions for summary judgment with
respect to Texaco's claims against the Owner Subsidiary, and vacated its
previous findings to the contrary. The Court has not yet ruled on the Owner
Subsidiary's similar motion against Texaco's builder's risk insurers. The case
had been transferred to a new district court judge, but was subsequently
transferred back to the original district court judge. The scheduled trial date
of February 10, 2003 on damages and certain insurance issues has been continued
without date. The trial in the binding arbitration proceeding commenced on
January 13, 2003 and has proceeded on various dates through March 14, and will
recommence on May 26, 2003 for one week and at various times thereafter.
Although the Owner Subsidiary is not a party to the arbitration, we believe that
the claims against the Owner Subsidiary, like those against the Operator
Subsidiary, are governed by the contractual provisions which waive the recovery
of consequential damages against the Operator Subsidiary and its affiliates. We
plan to vigorously pursue the arbitration proceeding and any appeals process, if
necessary, in the federal court action, and we do not believe that a material
loss with respect to these matters is likely. In addition, we believe our
insurance will provide coverage for the builder's risk and consequential damage
claims in the event of liability. However, the ultimate outcome of the
proceedings and any challenge by our insurers to coverage is uncertain, and an
adverse ruling in either the arbitration or court proceeding or any potential
proceeding with respect to insurance coverage for any losses, or any bonding
requirements applicable to any appeal from an adverse ruling, could have a
material adverse impact on our consolidated financial position, results of
operations and cash flow.
In early April 2001, a group of insurers that includes certain underwriters at
Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the B&W
Chapter 11 proceedings in the U.S. District Court for the Eastern District of
Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy
Court, which actions have been consolidated before the U.S. District Court for
the Eastern District of Louisiana, which has jurisdiction over portions of the
B&W Chapter 11 proceeding. The insurance policies at issue in this litigation
provide a significant portion of B&W's excess liability coverage available for
the resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and JRM announced
thatB&W breached the confidentiality provisions
of an agreement they had entered into with these Plaintiff Insurers relating to
insurance payments by the Plaintiff Insurers as a mergerresult of asbestos claims.
They also allege that MII and B&W have wrongfully attempted to expand the
underwriters' obligations under that settlement agreement and the applicable
policies through the filing of a plan of reorganization in the B&W bankruptcy
proceeding that contemplates the transfer of rights under that agreement and
those policies to a trust that will manage the pending and future
asbestos-related claims against B&W and certain of its affiliates. The
complaints seek declarations that, among other things, the defendants are in
material breach of the
81
settlement agreement with the Plaintiff Insurers and that the Plaintiff
Insurers owe no further obligations to MII and B&W under that agreement. With
respect to the insurance policies, if the Plaintiff Insurers should succeed in
terminating the settlement agreement, they seek to litigate issues under the
policies in order to reduce their coverage obligations. The complaint against
MII also seeks a recovery of unspecified compensatory damages. B&W filed a
counterclaim against the Plaintiff Insurers, which asserts a claim for breach of
contract for amounts owed and unpaid under the settlement agreement, as well as
a claim for anticipatory breach for amounts that will be owed in the future
under the settlement agreement. B&W seeks a declaratory judgment as to B&W's
rights and the obligations of the Plaintiff Insurers and other insurers under
the settlement agreement and under their respective insurance policies with
respect to asbestos claims. On October 2, 2001, MII and B&W filed dispositive
motions with the District Court seeking dismissal of the Plaintiff Insurers'
claim that MII and B&W had materially breached the settlement agreement at
issue. In a ruling issued January 4, 2002, the District Court granted MII's and
B&W's motion for summary judgment and dismissed the declaratory judgment action
filed by the Plaintiff Insurers. The ruling concluded that the Plaintiff
Insurers' claims lacked a factual or legal basis. Our agreement with the
underwriters went into effect in April 1990 and has served as the allocation and
payment mechanism to resolve many of the asbestos claims against B&W. We believe
this ruling reflects the extent of the underwriter's contractual obligations and
underscores that this coverage is available to settle B&W's asbestos claims. As
a result of the January 4, 2002 ruling, the only claims that remained in the
litigation were B&W's counterclaims against the Plaintiff Insurers and against
other insurers. The parties agreed to dismiss without prejudice those of B&W's
counterclaims seeking a declaratory judgment regarding the parties' respective
rights and obligations under the settlement agreement. B&W's counterclaim
seeking a money judgment for approximately $6.5 million due and owing by
insurers under the settlement agreement remains pending. A trial of this
counterclaim is scheduled for April 24, 2003. The parties have reached a
preliminary agreement in principle to settle B&W's counterclaim for in excess of
the claimed amounts, and approximately $4.3 million has been received to date
from the insurers, subject to reimbursement in the event a final settlement
agreement is not reached. Following the resolution of this remaining
counterclaim, the Plaintiff Insurers will have an opportunity to appeal the
January 4, 2002 ruling. At this point, the Plaintiff Insurers have not indicated
whether they intend to pursue an appeal.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers
Casualty and Surety Company (collectively, "Travelers") filed an adversary
proceeding against B&W and related entities in the U.S. Bankruptcy Court for the
Eastern District of Louisiana seeking a declaratory judgment that Travelers is
not obligated to provide any coverage to B&W with respect to so-called
"non-products" asbestos bodily injury liabilities on account of previous
agreements entered into by the parties. On or about the same date, Travelers
filed a similar declaratory judgment against MI and MII in the U.S. District
Court for the Eastern District of Louisiana. The cases filed against MI and MII
have been consolidated before the District Court and the ACC and the FCR have
intervened in the action. On February 4, 2002, B&W and MII filed answers to
Travelers' complaints, denying that previous agreements operate to release
Travelers from coverage responsibility for asbestos "non-products" liabilities
and asserting counterclaims requesting a declaratory judgment specifying
Travelers' duties and obligations with respect to coverage for B&W's asbestos
liabilities. The Court has bifurcated the case into two phases, with Phase I
addressing the issue of whether previous agreements between the parties serve to
release Travelers from any coverage responsibility for asbestos "non-products"
claims. On August 14, 2002, the Court granted B&W's and MII's motion for leave
to file an amended answer and counterclaims, adding additional counterclaims
against Travelers. Discovery was completed in September 2002 and the parties
filed cross-motions for summary judgment, which were heard on February 26, 2003.
We are awaiting the Court's ruling on these motions. No trial date has been
scheduled.
On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana
against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology,
Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at
the time of, or rendered insolvent as a result of, a corporate reorganization
that we completed in the fiscal year ended March 31, 1999, which included, among
other things, B&W's cancellation of a $313 million note
82
receivable and B&W's transfer of all the capital stock of Hudson Products
Corporation, Tracy Power, BWXT and McDermott Technology, Inc. to BWICO, and (2)
the transfers are not voidable. As an alternative, and only in the event that
the Bankruptcy Court finds B&W was insolvent at a pertinent time and the
transactions are voidable under applicable law, the action preserved B&W's
claims against the defendants. The Bankruptcy Court permitted the ACC and the
FCR in the Chapter 11 proceeding to intervene and proceed as
plaintiff-intervenors and realigned B&W as a defendant in this action. The ACC
and the FCR are asserting in this action, among other things, that B&W was
insolvent at the time of the transfers and that the transfers should be voided.
The Bankruptcy Court ruled that Louisiana law applied to the solvency issue in
this action. Trial commenced on October 22, 2001 to determine B&W's solvency at
the time of the corporate reorganization and concluded on November 2, 2001. In a
ruling filed on February 8, 2002, the Bankruptcy Court found B&W solvent at the
time of the corporate reorganization. On February 19, 2002, the ACC and FCR
filed a motion with the District Court seeking leave to appeal the February 8,
2002 ruling. On February 20, 2002, MI, BWICO, BWXT, Hudson Products Corporation
and McDermott Technology, Inc. filed a motion for summary judgment asking that
judgment be entered on a variety of additional pending counts presented by the
ACC and FCR that we believe are resolved by the February 8, 2002 ruling. On
March 20, 2002, at a hearing in the Bankruptcy Court, the judge granted this
motion and dismissed all claims asserted in complaints filed by the ACC and the
FCR regarding the 1998 transfer of certain assets from B&W to its parent, which
ruling was memorialized in an Order and Judgment dated April 17, 2002 that
dismissed the proceeding with prejudice. On April 26, 2002, the ACC and FCR
filed a notice of appeal of the April 17, 2002 Order and Judgment and on June
20, 2002 filed their appeal brief. On July 22, 2002, MI, BWICO, BWXT, Hudson
Products Corporation and McDermott Technology, Inc. filed their brief in
opposition. The ACC and FCR have not yet filed their reply brief pending
discussions regarding settlement and a consensual joint plan of reorganization.
In addition, an injunction preventing asbestos suits from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not
involved in the Chapter 11 extends through April 14, 2003. See Note 20 to our
consolidated financial statements for information regarding B&W's potential
liability for nonemployee asbestos claims and additional information concerning
the B&W Chapter 11 proceedings.
On July 12, 2002, AE Energietechnic GmbH ("Austrian Energy") applied for the
appointment of a receiver in the Bankruptcy Court of Graz, Austria. Austrian
Energy is a subsidiary of Babcock-Borsig AG, which filed for bankruptcy on July
4, 2002 in Germany. Babcock and Wilcox Volund ApS ("Volund"), which we sold to
B&W in October 2002, is jointly and severally liable with Austrian Energy
pursuant to both their consortium agreement as well as their contract with the
ultimate customer, SK Energi, for construction of a biomass boiler facility in
Denmark. As a result of performance delays attributable to Austrian Energy and
other factors, SK Energi has asserted claims for damages associated with the
failure to complete the construction and commissioning of the facility on
schedule. On August 30, 2002, Volund filed a claim against Austrian Energy in
the Austrian Bankruptcy Court to establish Austrian Energy's liability for SK
Energi's claims, which was subsequently rejected in its entirety by Austrian
Energy. On October 8, 2002, Austrian Energy notified Volund that it had
terminated its consortium agreement with Volund in accordance with Austrian
bankruptcy laws. Volund is pursuing its claims in the Austrian Bankruptcy Court
as well as other potential remedies available under applicable law. Assuming no
recovery from Austrian Energy, the cost to Volund is currently estimated at $2.5
million, which we accrued during the three months ended September 30, 2002. See
Note 2 to our consolidated financial statements for information concerning the
sale of Volund to B&W.
In September 2002, we were advised that the Securities and Exchange Commission
and the New York Stock Exchange were conducting inquiries into the trading of
MII securities occurring prior to our public announcement of August 7, 2002 with
respect to our second quarter 2002 results, our revised 2002 guidance and
developments in negotiations relating to the B&W Chapter 11 proceedings. We have
recently become aware of a formal order of investigation issued by the SEC in
connection with its inquiry, pursuant to which MII
will acquire all of such publicly traded shares of JRM Common Stock for $35.62
per share pursuant to a cash tender offer followed by a second step merger. On
the same day, the Court entered an order consolidating the two actions under the
caption In re J. Ray McDermott Shareholder Litigation. There have been no
further proceedings in eitherStaff of the actionsSEC has
requested additional information from us and several of our current and former
officers and directors. We continue to date. JRMcooperate fully with both inquiries and
MII believehave provided all information that has been requested. Several of our current
and former officers and directors have voluntarily given interviews and have
responded, or are in the actions are without merit and intendprocess of responding, to contest these suits vigorously.SEC subpoenas requesting
additional information.
83
Additionally, due to the nature of itsour business, McDermott is,we are, from time to time,
involved in routine litigation or subject to disputes or claims related to itsour
business activities. It isactivities, including performance- or warranty-related matters under
our customer and supplier contracts and other business arrangements. In our
management's opinion, that none of this litigation or disputes and claims will have a
material adverse effect on McDermott'sour consolidated financial position, or results of
operations.
Products Liability - McDermott has personal injuryoperations or cash flows.
See Note 20 for information regarding B&W's potential liability for nonemployee
asbestos claims and the settlement negotiations and other activities related to
previously
sold asbestos-containing products,the B&W Chapter 11 reorganization proceedings commenced by B&W and expects that itcertain of
its subsidiaries on February 22, 2000.
Environmental Matters
We have been identified as a potentially responsible party at various cleanup
sites under the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended ("CERCLA"). CERCLA and other environmental laws can
impose liability for the entire cost of cleanup on any of the potentially
responsible parties, regardless of fault or the lawfulness of the original
conduct. Generally, however, where there are multiple responsible parties, a
final allocation of costs is made based on the amount and type of wastes
disposed of by each party and the number of financially viable parties, although
this may not be the case with respect to any particular site. We have not been
determined to be a major contributor of wastes to any of these sites. On the
basis of our relative contribution of waste to each site, we expect our share of
the ultimate liability for the various sites will not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity in any given year.
Environmental remediation projects have been and continue to receive
claims inbe undertaken at
certain of our current and former plant sites. During the future. The personal injury claims are similar in nature, the
primary difference being the type of alleged injury or illness suffered by the
plaintiff.
68
Personal injury claim activity for the yearsfiscal year ended
March 31, 1999 and 1998 was
as follows:
1999 1998
-------- --------
Claims outstanding, beginning of fiscal year 43,826 45,253
New claims 24,278 30,004
Settlements (26,383) (31,431)
--------------------------------------------------------------------
Claims outstanding, end of fiscal year 41,721 43,826
--------------------------------------------------------------------
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from McDermott's claims history and constitute
management's best estimate of such future cost, including recoverability from
insurers. Inherent in the estimate of such liabilities are expected trend claim
severity and frequency and other factors which may vary significantly as claims
are filed and settled.
McDermott has insurance coverage for asbestos products liability claims which is
subject to varying insurance limits that are dependent upon the year involved.
McDermott has agreements with the majority of its principal insurers concerning
the method of allocation of claim payments to the years of coverage. Pursuant
to those agreements, McDermott negotiates and settles these claims and bills the
appropriate amounts to the insurers. McDermott has recognized a provision to
the extent that recovery of these amounts from the insurers is not probable. An
analysis of insurers providing coverage of the estimated liabilities is used to
estimate insurance recoveries.
McDermott is currently in litigation with certain excess insurance carriers
disputing specific conditions of the policies' available coverage. McDermott
believes that recovery of amounts under the policies is probable based upon
McDermott's history of negotiating settlements with other insurance carriers.
By the end of fiscal year 1999, McDermott concluded that its forecast decline in
claims in the next fiscal year was not likely. As a result, during fiscal year
1999, McDermott revised its estimate of liability for pending and future non-
employee products liability asbestos claims and recorded an additional liability
of $817,662,000, additional estimated insurance recoveries of $732,477,000 and a
loss of $85,185,000 for estimated future claims in which recovery from insurance
carriers was not determined to be probable. The revised forecast includes
management's expectation that new claims will conclude within the next thirteen
years, that there will be a significant decline in new claims received after
four years, and that the average cost per claim will continue to increase only
moderately.
In fiscal year 1997, based on an increasing number of claims and management's
evaluation of the increase, McDermott recorded an additional estimated liability
and estimated related insurance recoveries for future non-employee products
asbestos claims and recorded a loss of $72,400,000 for estimated future claims
for which recovery from insurers was not determined to be probable.
McDermott had recorded the following with respect to asbestos products liability
claims and related insurance recoveries at March 31, 1999 and 1998:
1999 1998
---------- --------
(In thousands)
Asbestos products liability:
Current $ 240,000 $171,300
Non-current 1,322,363 715,391
-------------------------------------------------------------------------
Total $1,562,363 $886,691
-------------------------------------------------------------------------
69
Asbestos products liability insurance recoverable:
Current $ 199,750 $143,588
Non-current 1,167,113 581,070
-------------------------------------------------------------------------
Total $1,366,863 $724,658
-------------------------------------------------------------------------
Future costs to settle claims, as well as the number of claims, could be
adversely affected by changes in judicial rulings and influences beyond
McDermott's control. Accordingly, changes in the estimates of future asbestos
products liability and insurance recoverables and 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.
Environmental Matters - During fiscal year 1995, managementwe decided to close B&W's nuclear manufacturing facilities in
Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"). Decontamination is proceeding as
permitted by, and B&W
proceeded to decommission the facilities in accordance with its existing NRCNuclear
Regulatory Commission ("NRC") license. A decommissioning plan was submitted toB&W subsequently transferred the
NRC for review and approval during January 1996. The facilities were
transferred to BWXT in the fiscal year ended March 31, 1998. BWXT's managementDuring the fiscal
year ended March 31, 1999, BWXT reached an agreement with the NRC in fiscal year 1999 on a plan that
provides for the completion of facilities dismantlement and soil restoration by
2001 and license termination in 2002. BWXT's management2003. BWXT expects to request approval from the
NRC to release the site for unrestricted use at that time. At MarchDecember 31, 1999,2002,
the remaining provision for the decontamination, decommissioning and the closing of
these facilities was $15,811,000.$0.4 million. By December 31, 2002, only a portion of the
operation and maintenance aspect of the decommissioning and decontamination work
at the Parks facility remained to be completed in order to receive NRC approval
to terminate the NRC license.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination resulting from previous
operations at the facilities. BWXT now owns these facilities. PADEP has advised
BWXT that it does not intend to assess any monetary sanctions, provided that
BWXT continues its remediation program for the Parks Facilities. Whether
additional nonradiation contamination remediation will be required at the Parks
facility remains unclear. Results from recent sampling completed by PADEP have
indicated that such remediation may not be necessary.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these activities,
we are subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
The NRC's decommissioning regulations require BWXT and McDermott Technology,
Inc. ("MTI") to provide financial assurance that they will be able to pay the
expected cost of decommissioning their facilities at the end of their service
lives. BWXT and MTI will continue to provide financial assurance aggregating
$29.9 million during the year ending December 31, 2003 by issuing letters of
credit for the
84
ultimate decommissioning of all their licensed facilities, except one. This
facility, which represents the largest portion of BWXT's eventual
decommissioning costs, has provisions in its government contracts pursuant to
which all of its decommissioning costs and financial assurance obligations are
covered by the DOE.
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI's NRC licenses for byproduct and source nuclear material was
finalized in December 1999. In conjunction with the transfer of this regulatory
authority and upon notification by the NRC, MTI issued decommissioning financial
assurance instruments naming the State of Ohio as the beneficiary.
At MarchDecember 31, 19992002 and 1998, McDermott2001, we had total environmental reserves (including
provisionprovisions for the facilities discussed above), of $31,568,000$20.6 million and $46,164,000, of which $19,835,000$21.2
million, respectively. Of our total environmental reserves at December 31, 2002
and $9,934,000,2001, $8.3 million and $6.1 million, respectively, were included in current
liabilities. EstimatedOur estimated recoveries of these costs totaling $0.2 million and
$3.2 million, respectively, are included in environmentalaccounts receivable - other in our
consolidated balance sheet at December 31, 2002 and products liabilities recoverable at March 31, 1999.2001. Inherent in the
estimates of suchthose reserves and recoveries are expectedour expectations regarding the
levels of contamination, decommissioning costs and recoverability from other
parties, which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in a material adjustmentadjustments to our
operating results, and the ultimate loss may differ materially from the amounts
we have provided for in theour consolidated financial statements.
McDermott has been identified as a potentially responsible party at various
cleanup sites under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. McDermott has not been determined to be a major
contributor of waste to these sites. However, each potentially responsible
party or contributor may face assertions of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on its relative contribution of
waste to each site, McDermott's share of the ultimate liability for the various
sites is not expected to have a material adverse effect on its consolidated
financial position or results of operations.
The Department of Environmental Protection of the Commonwealth of Pennsylvania,
("PADEP"), by letter dated March 19, 1994, advised The Babcock & Wilcox Company
that it would seek monetary sanctions, and remedial and monitoring relief,
related to the Parks Facilities. The relief sought related to potential
groundwater contamination of the previous operations of the facilities. PADEP
has advised BWXT that it does not intend to assess any monetary sanctions
provided that BWXT continues its remediation program of the Parks Facilities.
Operating Leases -
Future minimum payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year at MarchDecember 31, 19992002
are as follows:
70
Fiscal yearYear Ending December 31, Amount
----------- ------------- ------------------------------- ------
2000 $12,688,000
2001 $ 9,721,000
2002 $ 5,418,000
2003 $ 4,914,0006,932,000
2004 $ 2,649,0005,584,000
2005 $ 4,128,000
2006 $ 3,246,000
2007 $ 3,263,000
thereafter $36,975,000.$ 39,948,000
Total rental expense for fiscalthe years 1999, 1998ended December 31, 2002, 2001 and 19972000 was
$96,816,000,
$93,057,000$45.0 million, $43.3 million and $92,534,000,$44.1 million, respectively. These expense
amounts include contingent rentals and are net of sublease income, neither of
which areis material.
Other
- McDermott performsWe have a take-or-pay contract with the primary provider of our long distance
telecommunications service. Under the terms of this agreement, we are obligated
to pay a minimum of $1.8 million per year through 2009.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and thus issubcontracts. As a result, various aspects of our operations are
subject to continuing reviews by governmental agencies.
McDermott maintainsWe maintain liability and property insurance against such risk and in such
amounts as it considerswe consider adequate. However, certain risks are either not insurable
or insurance is available only at rates which MII considerswe consider uneconomical.
McDermottWe have several wholly owned insurance subsidiaries that provide general and
automotive liability insurance and, from time-to-time, builder's risk within
certain limits, marine hull and workers' compensation insurance to our
companies. These insurance subsidiaries have not provided significant amounts of
insurance to unrelated parties. These captive insurers provide certain coverages
for our subsidiary entities and related coverages. Claims as a result of our
operations, or arising in the B&W Chapter 11 proceedings, could adversely impact
the ability of these captive insurers to respond to all claims presented,
although we believe such a result is unlikely.
85
We are contingently liable under standby letters of credit totaling $402,771,000$183.2
million at MarchDecember 31, 1999,2002, all of which were issued in the normal course of
business. These standby lettersWe have guaranteed a $2.5 million line of credit, include $16,434,000 issued on behalf
of a former unconsolidated joint venture. McDermott has guaranteed $9,243,000
of loanswhich $5,000 was
outstanding at December 31, 2002, to and $1,168,000 of standby letters of credit issued by unconsolidated
foreign joint ventures of McDermott at March 31, 1999. In addition, McDermott
has a limited guarantee of approximately $51,000,000 of debt incurred by an unconsolidated foreign joint venture. At
MarchDecember 31, 1999, McDermott2002, we had pledged approximately $48,760,000$154.1 million fair value of government obligationsour
investment portfolio of $173.2 million: $107.8 million to secure the MII Credit
Facility and corporate
bonds$46.3 million to secure payments under and in connection with
certain reinsurance agreements. In February 2003, we entered into the New Credit
Facility described in Note 5 and the MII Credit Facility was terminated,
resulting in the release of the $107.8 million of pledged investments.
At the time of the B&W bankruptcy filing, MII was a maker or a guarantor of
outstanding letters of credit aggregating approximately $146.5 million ($9.4
million at December 31, 2002) which were issued in connection with the business
operations of B&W and its subsidiaries. At that time, MI and BWICO were
similarly obligated with respect to additional letters of credit aggregating
approximately $24.9 million which were issued in connection with the business
operations of B&W and its subsidiaries. Although a permitted use of the
debtor-in-possession revolving credit and letter of credit facility (the "DIP
Credit Facility") is the issuance of new letters of credit to backstop or
replace these preexisting letters of credit, each of MII, MI and BWICO has
agreed to indemnify and reimburse B&W and its filing subsidiaries for any
customer draw on any letter of credit issued under the DIP Credit Facility to
backstop or replace any such preexisting letter of credit for which it has
exposure and for the associated letter of credit fees paid under the facility.
As of December 31, 2002, approximately $51.4 million in letters of credit have
been issued under the DIP Credit Facility to replace or backstop these
preexisting letters of credit.
MII has agreed to indemnify our two surety companies for obligations of various
subsidiaries of MII, including B&W and several of its subsidiaries, under surety
bonds issued to meet bid bond and performance bond requirements imposed by their
customers. As of December 31, 2002, the aggregate outstanding amount of surety
bonds that were guaranteed by MII and issued in connection with the business
operations of its subsidiaries was approximately $121.0 million, of which $107.7
million related to the business operations of B&W and its subsidiaries.
NOTE 1211 - RELATED PARTY TRANSACTIONS
Under a non-competition agreement in connectionA company affiliated with the acquisitiontwo of OPI, a
director of JRM, who resigned in April 1996, received $1,500,000 in each of
fiscal years 1999, 1998our directors manages and 1997 and will receiveoperates an additional payment of
$1,500,000 in the next fiscal year.
In fiscal year 1995, JRM entered into an office sublease with an affiliate of
one of its directors (who resigned in April 1996). Such sublease expired in
March 1997. During fiscal year 1997, the affiliate paid $216,000 under the
sublease. Under another agreement, JRM paid $576,000 to the affiliate in fiscal
year 1997and reimbursed the affiliate for out-of-pocket expenses for the
management and operation of JRM's offshore
producing oil and gas property.property for JRM. The management and operation agreement
requires JRM to pay an operations management fee of approximately $11,000 per
month, a marketing service fee based on production, a minimum accounting and
property supervision fee of approximately $5,500 per month, and certain other
costs incurred in connection with the agreement. JRM paid approximately $0.9
million annually in fees and costs under the agreement during the years ended
December 31, 2002, 2001 and 2000. JRM subsidiaries also sold natural gas at
established market prices to the related party. JRM has periodically entered
into agreements with an affiliate of another director (whose term as
director ended in August 1997) pursuant to which JRM acquired interests in
certain offshore oil and gas property. During fiscal year 1996, JRM sold its
interest in the property to the affiliate in exchange for an $8,000,000
convertible production payment relating to such property. JRM also received a
right to a production payment that allows it to share in up to $8,000,000 of the
net proceeds on any production from the property based upon a percentage of its
original interest in such property. In December 1995, this property was placed
in production, and JRM earned approximately $174,000, $1,262,000 and $1,093,000
in fiscal years 1999, 1998 and 1997, respectively. In addition, during fiscal
year 1998, JRM sold its investment in common stock of this affiliate and its
interest in a limited partnership, which is also an affiliate of this director.
JRM also entered into agreements with two affiliates of the same former director to design, fabricate and install several offshore pipelines for the same
company. In addition, JRM received approximately $2.2 million, $2.1 million and
structures. The
value of these$5.0 million for work performed on those agreements was approximately $82,000,000. At Marchin the years ended December
31, 1997, all
work under these agreements had been completed2002, 2001 and invoiced.2000, respectively.
See Note 3 for transactions with unconsolidated affiliates.
71affiliates and Note 20 for
transactions with B&W.
NOTE 12 - RISKS AND UNCERTAINTIES
During 2002, our Marine Construction Services segment experienced material
losses on its three EPIC spar projects totaling $149.3 million: Medusa, Devils
Tower and Front Runner. These contracts are first-of-a-kind as well as long term
in nature. We have experienced schedule delays and cost overruns on these
contracts that have adversely impacted our financial results. These projects
continue to face significant issues. The remaining challenges to completing
Medusa within its revised schedule and budget are finishing the topsides
fabrication and the marine installation portion of the project. Our revised
schedule requires installation activities during the second quarter of 2003. We
believe the major challenge in completing Devils Tower within its revised budget
is to remain on track with the revised schedule for
86
topsides fabrication due to significant liquidated damages that are associated
with the contract. A substantial portion of the costs and delay impacts on
Devils Tower are attributable to remedial activities undertaken with regard to
the paint application. On March 21, 2003, we filed an action against the paint
vendors for recovery of the remediation costs, delays and other damages. The key
issues for the Front Runner contract relate to subcontractors and liquidated
damages due to schedule slippage either by JRM or one or more of the
subcontractors. At December 31, 2002, we have provided for our estimated losses
on these contracts. It is reasonably possible that current estimates could
change due to unforeseen events which could result in adjustments to overall
contract costs and these may continue to be significant in future periods.
NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott'sOur Marine Construction Services segment's principal customers are businesses in
the offshore oil, natural gas and hydrocarbon processing industries and other
marine construction companies. The principal customers of the Power Generation Systems
segment are principally the electric power generation industry (including
government-owned utilities and independent power producers), and the pulp and
paper and other process industries, such as oil refineries and steel mills. The
primary customer of theour Government Operations
segment is the U.S. Government (including its contractors). The principal customers of Industrial Operations
are oil and natural gas producers, electric power generation industry and
petrochemical and chemical processing industries. These concentrations
of customers may impact McDermott'sour overall exposure to credit risk, either positively
or negatively, in that theour customers may be similarly affected by changes in
economic or other conditions. In addition, McDermottwe and itsmany of our customers operatedoperate
worldwide giving rise to exposureand are therefore exposed to risks associated with the economic and
political forces of various countries and geographic areas. Approximately 54% of
our trade receivables are due from foreign customers. (See Note 17 for
additional information about McDermott'sour operations in different geographic areas.) However, McDermott's management believesWe
generally do not obtain any collateral for our receivables.
We believe that the portfolio
of receivables is well diversified and that this diversification minimizes any
potential credit risk. Receivables are generally not collateralized.
McDermott believes that itsour provision for possible losses on uncollectible accounts
receivable is adequate for itsour credit loss exposure. At MarchDecember 31, 19992002 and
1998,2001, the allowance for possible losses we deducted from Accounts receivable-
tradeaccounts
receivable-trade on the accompanying balance sheet was $5,544,000$1.6 million and $12,140,000,$1.1
million, respectively.
NOTE 14 - INVESTMENTS
The following is a summary of our available-for-sale debt securities at MarchDecember 31,
1999:2002:
Amortized Gross Gross Estimated
AmortizedCost Unrealized Gains Unrealized Losses Fair Cost Gains Losses Value
------------- ---------------- ----------------- ---------- ---------- --------
(In thousands)
Debt securities:
U.S. Treasury securities and obligations
of U.S. Government agencies $472,217 $2,326 $1,471 $473,072$ 156,365 $ 585 $ - $ 156,950
Corporate notes and bonds 228,642 679 202 229,11910,366 95 1 10,460
Other debt securities 136,259 104 63 136,300
--------------------------------------------------------------------------------------------5,821 - 4 5,817
- -----------------------------------------------------------------------------------------------------------------
Total $837,118 $3,109 $1,736 $838,491
--------------------------------------------------------------------------------------------$ 172,552 $ 680 $ 5 $ 173,227
=================================================================================================================
The amortized costIn February 2003, we liquidated approximately $108 million of our investment
portfolio for working capital and estimated fair value amounts of debt securities at March
31, 1999 include $14,171,000 in other debt securities which are reported as cash
equivalents. At March 31, 1999, McDermott's investments also included
$82,579,000 in time deposits.general corporate purposes.
The following is a summary of our available-for-sale debt securities at MarchDecember 31,
1998:2001:
Amortized Gross Gross Estimated
AmortizedCost Unrealized Gains Unrealized Losses Fair Cost Gains Losses Value
------------- ---------------- ----------------- ---------- ---------- ---------
(In thousands)
Debt securities:
U.S. Treasury securities and obligations
of U.S. Government agencies $519,114 $1,355 $1,026 $519,443$ 295,753 $ 1,015 $ 9 $ 296,759
Corporate notes and bonds 136,329 252 91 136,49018,672 256 21 18,907
Other debt securities 123,457 102 41 123,518
----------------------------------------------------------------------------------------------15,277 60 - 15,337
- -----------------------------------------------------------------------------------------------------------------
Total $778,900 $1,709 $1,158 $779,451
----------------------------------------------------------------------------------------------$ 329,702 $ 1,331 $ 30 $ 331,003
=================================================================================================================
At March 31, 1998, McDermott's investments also included $294,040,000 in time
deposits.
7287
Proceeds, gross realized gains and gross realized losses on sales of
available-
for-sale debtavailable-for-sale securities were as follows:
Gross Gross
Fiscal year Proceeds Realized Gains Realized Losses
------------- ------------------ -------------- ---------------
(In thousands)
1999 $339,478,000 $1,792,000 $125,000
1998Year Ended December 31, 2002 $ 95,430,000775,441 $ 118,000 $766,000
1997 $156,827,000997 $ 290,000-
Year Ended December 31, 2001 $1,229,087 $ 96,0007,614 $ 4,634
Year Ended December 31, 2000 $ 26,375 $ 23 $ 22
The amortized cost and estimated fair value of available-for-sale debt
securities at MarchDecember 31, 1999,2002, by contractual maturity, are as follows:
Amortized Estimated
Cost Fair Value
-------------- ------------------- ----------
(In thousands)
Due in one year or less $ 281,701 $282,008144,688 $ 144,846
Due after one through three years 480,808 482,478
Due after three years 74,609 74,005
-------------------------------------------------------------------------------------------------------------------------27,864 28,381
- -----------------------------------------------------------------------------------
Total $ 837,118 $838,491
-------------------------------------------------------------------------------------------------------------------------172,552 $ 173,227
- -----------------------------------------------------------------------------------
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
McDermott operatesOur worldwide givingoperations give rise to exposure to market risks from changes in
foreign exchange rates. DerivativeWe use derivative financial instruments, primarily
forward exchange contracts, are utilized to reduce those risks. McDermott doesthe impact of changes in foreign exchange rates on
our operating results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts that are
denominated in currencies other than our operating entities' functional
currencies. We do not hold or issue financial instruments for trading or other
speculative purposes.
Forward exchangeWe enter into forward contracts are entered into primarily as hedges of certain firm purchase and
sale commitments denominated in foreign currencies. We record these contracts at
fair value on our consolidated balance sheet. Depending on the hedge designation
at the inception of the contract, the related gains and losses on these
contracts are either deferred in stockholders' equity (as a component of
accumulated other comprehensive loss) until the hedged item is recognized in
earnings or offset against the change in fair value of the hedged firm
commitment through earnings. The ineffective portion of a derivative's change in
fair value and any portion excluded from the assessment of effectiveness are
immediately recognized in earnings. The gain or loss on a derivative instrument
not designated as a hedging instrument is also immediately recognized in
earnings. Gains and losses on forward contracts that require immediate
recognition are included as a component of other-net in our consolidated
statement of loss.
At MarchDecember 31, 1999, McDermott2002 and 2001, we had forward exchange contracts to purchase $93,700,000$15.5
million and $42.8 million, respectively, in foreign currencies (primarily
Canadian Dollars)Indonesian Rupiah and Euro) and to sell $18,626,000$0.9 million and $0.7 million,
respectively, in foreign currencies (primarily Canadian Dollars), at varying maturities through August 2003.
We have designated substantially all of these contracts as cash flow hedging
instruments. The hedged risk is the risk of changes in our
functional-currency-equivalent cash flows attributable to changes in spot
exchange rates of forecasted transactions related to our long-term contracts. We
exclude from fiscal year 2000 through 2002. At March 31, 1998, McDermott hadour assessment of effectiveness the portion of the fair value of
the forward contracts attributable to the difference between spot exchange rates
and forward exchange contracts to purchase $145,923,000 in foreign currencies (primarily
Canadian Dollars and Pound Sterling), and to sell $50,702,000 in foreign
currencies (primarily Canadian Dollars and Singapore Dollars), at varying
maturities from fiscal year 1999 through 2000.
Deferred realized and unrealized gains and losses from hedging firm purchase and
sale commitments are included on a net basis in the balance sheet as a component
of either contracts in progress or advance billings on contracts or as a
component of either other current assets or accrued liabilities. They are
recognized as part of the purchase or sale transaction when it is recognized, or
as other gains or losses when a hedged transaction is no longer expected to
occur.rates. At MarchDecember 31, 1999 and 1998, McDermott2002, we had deferred approximately
$1.1 million of net gains on these forward contracts, 82% of $137,000 and
$958,000, respectively, and deferred losses of $5,377,000 and $374,000,
respectively, relatedwhich we expect to
forward exchange contracts which will principally be
recognizedrecognize in income over the next 12 months primarily in accordance with the
percentage of completionpercentage-of-completion method of accounting. McDermott isAt December 31, 2001, we had
deferred approximately $2.2 million of net losses on forward contracts. For the
years ended December 31, 2002 and 2001, we recognized net gains on forward
contracts of approximately $1.5 million and $0.1 million, respectively.
Substantially all of these net gains represent changes in the fair value of
forward contracts excluded from hedge effectiveness.
We are exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments, but it does not anticipate
nonperformanceinstruments. We mitigate this risk by
any of these counterparties. The amount of such exposure is
generally the unrealized gains in such contracts.using major financial institutions with high credit ratings.
88
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
TheWe used the following methods and assumptions were used by McDermott in estimating itsour fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts we have reported in the
accompanying balance sheet for cash and cash equivalents approximate their fair
values.
73
Investments: TheWe estimate the fair values of investments are estimated based on quoted market
prices. For investments for which there are no quoted market prices, we derive
fair values are derived from available yield curves for investments of similar quality and
terms.
LongLong- and short-term debt: TheWe base the fair values of debt instruments are based on quoted
market prices. Where quoted prices are not available, we base the fair values
are based on
the present value of future cash flows discounted at estimated borrowing rates
for similar debt instruments or on estimated prices based on current yields for
debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks
of MI are based on quoted market prices.
Foreign currency exchangeforward contracts: TheWe estimate the fair values of foreign
currency forward exchange contracts are estimated by obtaining quotes from brokers. At MarchDecember 31,
19992002 and 1998, McDermott2001, we had net forward exchange contracts outstanding to purchase foreign
currencies with notional values of $75,074,000$14.5 million and $95,221,000$42.1 million,
respectively, and fair values of $72,153,000$0.4 million and $97,181,000,($2.0) million, respectively.
Interest rate swap agreements: The fair values of interest rate swaps are the
amounts at which they could be settled and are estimated by obtaining quotes
from brokers. At March 31, 1999, McDermott had no interest rate swaps
outstanding. At March 31, 1998, McDermott had an interest rate swap outstanding
on current notional principal of $12,200,000 with a fair value of ($25,000),
which represented the estimated amount McDermott would have had to pay to
terminate the agreement.
The estimated fair values of McDermott'sour financial instruments are as follows:
MarchDecember 31, 1999 March2002 December 31, 1998
------------------------ ---------------------------2001
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------- -------------- ---------------- ----- ------ -----
(In thousands)
Balance Sheet Instruments
- -------------------------
Cash and cash equivalents $181,503 $181,503 $ 277,876175,177 $ 277,876175,177 $ 196,912 $ 196,912
Investments 906,899 906,899 1,073,491 1,073,491$ 173,227 $ 173,227 $ 331,003 $ 331,003
Debt excluding capital leases 353,803 365,774 745,524 794,296
Subsidiary's redeemable preferred stocks - - 155,358 184,191$ 137,546 $ 102,196 $ 305,379 $ 292,875
NOTE 17 - SEGMENT REPORTING
McDermott'sOur reportable segments are Marine Construction Services, Government Operations,
Industrial Operations and Power Generation Systems, Government Operations and Industrial Operations.Systems. These segments are managed
separately and are unique in technology, services and customer class.
We have restated our segment information for the years ended December 31, 2001
and 2000 to reflect changes in our reportable segments. The results of
operations of McDermott Technology, Inc. ("MTI") are now included in our
Government Operations segment. The results of operations of HPC, which we sold
in July 2002, are reported in discontinued operations. MTI and HPC were
previously included in our Industrial Operations segment. Our Industrial
Operations segment now includes only the results of MECL, which we sold to a
unit of Jacobs Engineering Group Inc. on October 29, 2001. MECL had revenues of
approximately $507.2 million and segment income of approximately $10.0 million
through October 29, 2001, the date of the sale. We recognized a gain of
approximately $28.0 million on the sale. See Note 2 for further information.
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.
89
Government Operations supplies nuclear components to the U.S. Navy, manages and
operates government-owned facilities and supplies commercial nuclear
environmental services and other government and commercial nuclear services.
Government Operations also includes contract research activities.
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 74
provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities. Government Operations supplies nuclear reactor componentsIncluded in the year ended December 31, 2000 are charges of $23.4
million to exit certain foreign joint ventures. The Power Generation Systems
segment's operations are conducted primarily through B&W. Due to B&W's Chapter
11 filing, effective February 22, 2000, we stopped consolidating B&W's and nuclear fuel
assemblies toits
subsidiaries' results of operations in our consolidated financial statements.
Through February 21, 2000, B&W's and its subsidiaries' results are reported as
Power Generation Systems - B&W in the U.S. Government, managessegment information that follows. See Note
20 for the condensed consolidated results of B&W and operates government-owned
facilities and supplies commercial nuclear environmental services and other
government and commercial nuclear services.
Industrial Operations is comprised of the engineering and construction
activities and plant outage maintenance of certain Canadian operations and
manufacturing of auxiliary equipment such as air-cooled heat exchangers and
replacement parts. Industrial Operations also includes contract research
activities.
Intersegmentits subsidiaries.
We account for intersegment sales are accounted for at prices which arethat we generally establishedestablish by
reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses, non-employee products liability asbestos claims provisions, contract and insurance claims provisions, legal expenses and gains
(losses) on sales of corporate assets. Other reconciling items to income (loss) before
provision for income taxes are interest income, interest expense, minority
interest and other-net. Assets excludedCertain amounts previously reported as other unallocated
items are allocated to the reportable segments. In addition, income from
over-funded pension plans of discontinued businesses previously reported in
other-net is included in corporate. We have restated segment income and
corporate for prior periods to conform to the current presentation. We exclude
the following assets from segment assets are primarilyassets: investments in debt securities,
prepaid pension costs and our investment in B&W. Previously, we also excluded
insurance recoverables for products liability claims excess cost over fair value of netand certain goodwill from
segment assets. We have restated segment assets purchased,
investments in debt securities and prepaid pension costs. Amortization of the
excess of cost over fair value of net assets purchased was allocatedfor prior periods to conform to
the reportable segments for all years presented.
On May 7, 1998, JRM sold its interest in McDermott Engineering (Europe) Limited.
Management also intends to exit other European engineering operations. In
fiscal years 1999, 1998 and 1997, these operations had revenuescurrent presentation of $89,347,000,
$288,687,000 and $294,780,000, respectively, and operating income (loss) of
($7,138,000), $6,177,000, and $9,739,000, respectively. Operating income (loss)
for fiscal years 1999 and 1998 include closure costs and other disposition
losses of $2,818,000 and $4,200,000, respectively.
In fiscal years 1999, 1998 and 1997, the U.S. Government accounted for
approximately 12%, 10% and 11%, respectively, of McDermott's total revenues.
These revenues are principally included in the Government Operations segment.
In fiscal year 1999, a gain of $37,353,000 recognized from the termination of
the McDermott-ETPM joint venture increased Marine Construction Services' segment income. This increase was partially offset by a net decrease to segment income
of $17,749,000, primarily pertaining to impairment losses on fabrication
facilities and goodwill. A gain of $5,214,000 recognized from the sale of a
manufacturing facility resulted in an increase in Power Generation Systems'
segment income in fiscal 1999.
In fiscal year 1998, asset impairment losses of $280,171,000, primarily due to
the write-off of $262,901,000 of goodwill associated with the acquisition of OPI
and the write-down of marine vessels included in property, plant and equipment
in the amount of $9,891,000, decreased Marine Construction Services' segment
income. These decreases were offset by increases in segment income pertaining
to the termination of the HeereMac joint venture, a gain of $224,472,000
recognized from the termination and $61,637,000 from the distribution of
earnings. Asset impairment losses, primarily associated with manufacturing
facilities, resulted in a decrease in Power Generation Systems' segment income
of $6,395,000 in fiscal 1998. A net increase in Industrial Operations' income
of $124,816,000 was a result of gains on the sale of McDermott's interest in
Sakhalin Energy Investment Company Ltd. and Universal Fabricators Incorporated,
offset by impairment losses, primarily the write-off of goodwill associated with
the acquisition of MECL.
In fiscal year 1997, asset gains net of impairment losses resulted in a decrease
in Marine Construction Services' segment operating loss of $29,021,000. Also in
fiscal year 1997, the write-down of an equity investment and asset impairment
losses, partially offset by a gain from the sale of certain assets, resulted in
an increase in Power Generation Systems' segment loss of $20,251,000. An asset
impairment loss resulted in an increase in Industrial Operations loss of
$11,575,000 in fiscal year 1997.
75
Segment Information for the Three Fiscal Years Ended Marchassets.
SEGMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1999.2002, 2001 AND 2000.
1. Information about McDermott's Operations in our Different Industry Segments.Segments:
1999 1998 1997
----------- ----------- -----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
REVENUES /(1)/REVENUES: (1)
Marine Construction Services $1,279,570 $1,855,486 $1,408,469$ 1,148,041 $ 848,528 $ 757,508
Government Operations 553,827 494,018 444,042
Industrial Operations - 507,262 426,262
Power Generation Systems 1,066,217 1,142,721 985,430
Government Operations 382,706 370,519 373,051
Industrial Operations 427,520 337,787 458,116- B&W - - 155,774
Power Generation Systems 46,881 47,778 33,794
Adjustments and Eliminations (6,028) (31,878) (74,216)
-------------------------------------------------------------------------------------------
Total Revenues $3,149,985 $3,674,635 $3,150,850
-------------------------------------------------------------------------------------------
/(1)/(68) (638) (3,710)
- ----------------------------------------------------------------------------------------------------
$ 1,748,681 $ 1,896,948 $ 1,813,670
====================================================================================================
(1) Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 3,23368 $ 20,743282 $ 24,530896
Government Operations Transfers - 318 300
Industrial Operations Transfers - 38 283
Power Generation Systems Transfers 731 5,027 5,057
Government Operations Transfers 506 4,070 7,032
Industrial Operations Transfers 236 5,925 18,324
Adjustments and- B&W - - 59
Eliminations 1,322 (3,887) 19,273
-------------------------------------------------------------------------------------
Total $6,028 $31,878 $74,216
-------------------------------------------------------------------------------------- - 2,172
- ----------------------------------------------------------------------------------------------------
$ 68 $ 638 $ 3,710
====================================================================================================
7690
OPERATING INCOME (LOSS):
1999 1998 1997
---------- ---------- ----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Marine Construction Services $126,482 $107,122 $ 10,819(162,626) $ 14,506 $ (33,534)
Government Operations 34,600 29,320 33,224
Industrial Operations - 9,928 9,767
Power Generation Systems 90,318 82,431 (34,584)
Government Operations 39,353 35,816 32,458
Industrial Operations 16,906 4,679 (30,641)
- -----------------------------------------------------------------------------------------------------------------
Total Segment Operating Income (Loss) $273,059 $230,048B&W - - 7,172
Power Generation Systems (2,825) (3,656) (7,783)
- ----------------------------------------------------------------------------------------------------
$ (21,948)(130,851) $ 50,098 $ 8,846
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposal and
Impairments - Net:
Marine Construction Services $ 18,620 $(40,119)(320,945) $ 29,021(3,624) $ (1,012)
Government Operations 88 (128) (1,047)
Industrial Operations - 13 (141)
Power Generation Systems 4,465 (6,086) (19,205)
Government Operations 183 523 396
Industrial Operations (234) 128,239 (11,858)
Total Gain (Loss) on Asset Disposal
and Impairments - NetB&W - - (33)
- ----------------------------------------------------------------------------------------------------
$ 23,034(320,857) $ 82,557(3,739) $ (1,646)(2,233)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Equity in Income (Loss) from Investees:
/(1)/
Marine Construction Services $ 10,6705,311 $ 70,23610,442 $ (7,833)2,866
Government Operations 24,645 23,004 11,107
Industrial Operations - 43 50
Power Generation Systems (4,733) 7,541 (347)
Government Operations 4,088 4,236 3,630
Industrial Operations (1,646) 3,376 737
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from InvesteesB&W - - 812
Power Generation Systems (2,264) 604 (24,630)
- ----------------------------------------------------------------------------------------------------
$ 8,37927,692 $ 85,38934,093 $ (3,813)(9,795)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS):
/(2)/
Marine Construction Services $155,772 $137,239 $ 32,007(478,260) $ 21,324 $ (31,680)
Government Operations 59,333 52,196 43,284
Industrial Operations - 9,984 9,676
Power Generation Systems 90,050 83,886 (54,136)
Government Operations 43,624 40,575 36,484
Industrial Operations 15,026 136,294 (41,762)
- ------------------------------------------------------------------------------------------------------------------
Total Segment Income (Loss) 304,472 397,994 (27,407)B&W - ------------------------------------------------------------------------------------------------------------------
Other Unallocated Items (51,005) (5,286) (72,382)
General Corporate Expenses-Net (36,051) (37,251) (47,456)
- ------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $217,416 $355,457 $(147,245)7,951
Power Generation Systems (5,089) (3,052) (32,413)
- ------------------------------------------------------------------------------------------------------------------
/(1)/----------------------------------------------------------------------------------------------------
(424,016) 80,452 (3,182)
- ----------------------------------------------------------------------------------------------------
Write-off of investment in B&W (224,664) - -
Other unallocated items includes loss from investees of $7,000 and $285,000 for fiscal years
1998 and 1997, respectively.
/(2)/ Other unallocated items include the following:
Non-Employee Products Asbestos
Claim Provisions $(39,650) $ - $ (55,692)
Contract and Insurance Claim Provisions(1,452) - -
(12,506)
Employee Benefits & InsuranceCorporate(1) (23,628) (5,080) 8,055
- ----------------------------------------------------------------------------------------------------
$ (673,760) $ 75,372 $ 4,873
====================================================================================================
(1) Corporate Departmental Expenses $ (45,104) $ (42,502) $ (60,594)
Legal/Professional Services related to
Chapter 11 Proceedings (1,612) (15,471) (2,860)
Other Corporate Expenses (2,698) (13,693) (19,534)
Income (Expense) 18,519 7,303 2,538
Legal Expenses (13,133) (4,729) (4,354)from Qualified Pension Plans (11,087) 28,553 47,983
Insurance-related Items 9,447 6,690 7,156
- -------------------------------------------------------------------------------------------------------------
Gross Corporate General and& Administrative
Expenses (9,623) (2,422)(51,054) (36,423) (27,849)
General & Administrative Expenses
Allocated to Segments 27,426 31,343 35,904
- Other (7,118) (5,438) (2,368)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $(51,005) $ (5,286)(23,628) $ (72,382)
---------------------------------------------------------------------------------------------------------(5,080) $ 8,055
=============================================================================================================
7791
1999 1998 1997
---------- ---------- ----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
SEGMENT ASSETSASSETS:
Marine Construction Services $ 586,003707,021 $ 874,143 $1,313,8021,010,300 $ 896,815
Government Operations 308,301 260,812 246,601
Industrial Operations - - 79,306
Power Generation Systems 558,951 559,162 537,937
Government Operations 211,683 178,958 187,031
Industrial Operations 114,656 124,547 228,280
------------------------------------------------------------------------------------------------8,739 38,162 39,780
- --------------------------------------------------------------------------------------------------------------------
Total Segment Assets 1,471,293 1,736,810 2,267,050
------------------------------------------------------------------------------------------------
Other Assets 1,570,374 1,280,975 1,396,9551,024,061 1,309,274 1,262,502
Corporate Assets 1,263,853 1,483,345 935,477
------------------------------------------------------------------------------------------------254,110 763,139 756,625
Discontinued Operations - 31,427 36,500
- --------------------------------------------------------------------------------------------------------------------
Total Assets $4,305,520 $4,501,130 $4,599,482
------------------------------------------------------------------------------------------------$ 1,278,171 $ 2,103,840 $ 2,055,627
====================================================================================================================
CAPITAL EXPENDITURESEXPENDITURES:
Marine Construction Services /(1)/(1) $ 84,41645,046 $ 57,70425,670 $ 66,08231,341
Government Operations 23,761 19,648 15,992
Industrial Operations - 1,466 33
Power Generation Systems 11,847 9,315 14,886
Government Operations 11,095 4,312 4,128
Industrial Operations 4,093 3,278 7,329
------------------------------------------------------------------------------------------------- B&W - - 496
Power Generation Systems (2) 356 719 6,990
- --------------------------------------------------------------------------------------------------------------------
Segment Capital Expenditures 111,451 74,609 92,425
------------------------------------------------------------------------------------------------69,163 47,503 54,852
Corporate and Other Capital Expenditures 336 1,040 767
------------------------------------------------------------------------------------------------106 1,092 101
Discontinued Operations - 963 1,291
- --------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 111,78769,269 $ 75,64949,558 $ 93,192
------------------------------------------------------------------------------------------------56,244
====================================================================================================================
DEPRECIATION AND AMORTIZATIONAMORTIZATION:
Marine Construction Services $ 56,76124,984 $ 93,84346,634 $ 99,67545,819
Government Operations 11,388 10,567 11,260
Industrial Operations - 559 673
Power Generation Systems 21,899 19,569 14,842
Government Operations 13,265 12,481 13,609
Industrial Operations 4,885 6,712 10,017
------------------------------------------------------------------------------------------------- B&W - - 2,489
Power Generation Systems 550 1,106 763
- --------------------------------------------------------------------------------------------------------------------
Segment Depreciation and Amortization 96,810 132,605 138,143
------------------------------------------------------------------------------------------------36,922 58,866 61,004
Corporate and Other Depreciation and Amortization 4,580 9,696 13,438
------------------------------------------------------------------------------------------------3,889 2,122 1,616
Discontinued Operations - 1,383 1,270
- --------------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 101,39040,811 $ 142,30162,371 $ 151,581
------------------------------------------------------------------------------------------------63,890
====================================================================================================================
INVESTMENT IN UNCONSOLIDATED AFFILIATESAFFILIATES:
Marine Construction Services $ 13,6484,863 $ 29,0696,524 $ 72,71211,086
Government Operations 4,300 5,434 2,527
Industrial Operations - - 274
Power Generation Systems 44,248 40,159 34,600
Government2,380 9,037 9,565
- --------------------------------------------------------------------------------------------------------------------
Segment Investment in Unconsolidated Affiliates 11,543 20,995 23,452
Discontinued Operations 2,282 2,090 2,017
Industrial Operations 2,308 4,965 29,778
------------------------------------------------------------------------------------------------- 3,164 1,953
- --------------------------------------------------------------------------------------------------------------------
Total Investment in Unconsolidated
Affiliates $ 62,48611,543 $ 76,28324,159 $ 139,107
------------------------------------------------------------------------------------------------25,405
====================================================================================================================
/(1)/(1) Includes new capital leases in the Eastern Hemisphere of $4,417,000 and
$4,550,000 at December 31, 2002 and 2001, respectively.
(2) Includes property, plant and equipment of $33,000,000$6,944,000 acquired in fiscalthe
acquisition of B&W Volund in the year 1999
acquired through termination of the McDermott-ETPM joint venture and of
$30,559,000 in fiscal year 1998 acquired through termination of the
HeereMac joint venture.
78ended December 31, 2000.
92
2. Information about McDermott'sour Product and Service Lines:
1999 1998 1997
---------- ---------- ----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues:REVENUES:
Marine Construction Services:
Offshore Operations $ 605,024283,308 $ 743,114331,724 $ 591,021294,399
Fabrication Operations 376,450 455,306 376,257258,545 176,908 170,883
Engineering Operations 115,594 276,422 235,672119,570 69,987 76,819
Procurement Activities 273,308 425,440 240,108
Adjustments and845,955 407,855 255,512
Eliminations (90,806) (44,796) (34,589)
------------------------------------------------------------------------------
Total 1,279,570 1,855,486 1,408,469
------------------------------------------------------------------------------
Power Generation Systems:
Original Equipment Manufacturers'
Operations 212,999 471,363 385,000
Nuclear Equipment Operations 78,023 89,816 108,498
Aftermarket Goods and Services 791,619 508,895 477,756
Operations and Maintenance 41,602 37,988 29,260
Boiler Auxiliary Equipment 85,969 86,355 54,013
Adjustments and Eliminations (143,995) (51,696) (69,097)
------------------------------------------------------------------------------
Total 1,066,217 1,142,721 985,430
------------------------------------------------------------------------------(359,337) (137,946) (40,105)
- --------------------------------------------------------------------------------------------------------------------
1,148,041 848,528 757,508
- --------------------------------------------------------------------------------------------------------------------
Government Operations:
Naval ReactorNuclear Component Program 209,079 202,126 222,697
Nuclear Environmental Services 19,932 26,177 42,709370,734 327,938 288,890
Management & Operation Contracts
of U.S. Government Facilities 99,053 64,226 13,603110,696 93,204 102,080
Other Commercial Operations 31,489 26,706 16,369
Nuclear Environmental Services 14,171 24,046 22,296
Contract Research 16,298 16,640 11,893
Other Government Operations 62,104 78,530 93,72512,297 9,036 16,132
Other CommercialIndustrial Operations 3,517 10,951 9,001
Adjustments and667 5,249 1,919
Eliminations (10,979) (11,491) (8,684)
------------------------------------------------------------------------------
Total 382,706 370,519 373,051
------------------------------------------------------------------------------(2,525) (8,801) (15,537)
- --------------------------------------------------------------------------------------------------------------------
553,827 494,018 444,042
- --------------------------------------------------------------------------------------------------------------------
Industrial Operations:
Engineering & Construction 174,894 62,448 146,025- 312,028 190,199
Plant Outage Maintenance 150,263 151,050 144,207
Shipbuilding- 200,148 237,796
Eliminations - (4,914) (1,733)
- --------------------------------------------------------------------------------------------------------------------
- 507,262 426,262
- --------------------------------------------------------------------------------------------------------------------
Power Generation Systems - B&W:
Original Equipment Manufacturers'
Operations - 10,746 80,152
Contract Research 9,172 17,180 23,592- 42,674
Nuclear Equipment Operations - - 9,051
Aftermarket Goods and Services - - 95,717
Operations and Maintenance - - 6,304
Boiler Auxiliary Equipment 93,065 97,640 68,028
All Others 362 31 9,468
Adjustments and- - 8,258
Eliminations (236) (1,308) (13,356)
------------------------------------------------------------------------------
Total 427,520 337,787 458,116
------------------------------------------------------------------------------
Adjustments and- - (6,230)
- --------------------------------------------------------------------------------------------------------------------
- - 155,774
- --------------------------------------------------------------------------------------------------------------------
Power Generation Systems:
Original Equipment Manufacturers'
Operations 30,791 27,848 16,837
Plant Enhancements 15,868 21,004 15,958
New Equipment - - 145
Other 222 (1,074) 854
- --------------------------------------------------------------------------------------------------------------------
46,881 47,778 33,794
- --------------------------------------------------------------------------------------------------------------------
Eliminations (6,028) (31,878) (74,216)
------------------------------------------------------------------------------
Total Revenues $3,149,985 $3,674,635 $3,150,850
------------------------------------------------------------------------------(68) (638) (3,710)
- --------------------------------------------------------------------------------------------------------------------
$ 1,748,681 $ 1,896,948 $ 1,813,670
====================================================================================================================
7993
3. Information about McDermott'sour Operations in Different Geographic Areas.Areas:
1999 1998 1997
---------- ---------- ----------Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues /(1)/
United States $1,573,896 $1,688,388 $1,431,868
Canada 437,363 264,846 257,285
Indonesia 220,124 230,825 95,127
United Kingdom 133,403 364,894 322,760
Qatar 132,509 264,397 99,617
Myanmar 80,130 110,692 51,014
Mexico 78,496 35,836 36,870
China 72,217 139,403 103,064
Trinidad 57,905 66,460 7,812
India 46,972 32,905 86,398
Thailand 31,674 73,223 43,498
Other Countries 285,296 402,766 615,537
-------------------------------------------------------------------------------
Total $3,149,985 $3,674,635 $3,150,850
-------------------------------------------------------------------------------
Property, Plant and Equipment, netREVENUES: (1)
United States $ 259,5491,045,245 $ 280,472892,558 $ 315,682867,337
Azerbaijan 121,603 4,851 -
Indonesia 88,520 19,645 348,656
Australia 86,594 26,194 166
Trinidad 65,304 59,934 21,016
Qatar 57,110 46,404 3,698
Mexico 48,246 23,803 24,303
Indonesia 37,309 13,091 20,85354,999 108,038 56,559
Nigeria 51,408 23,989 -
Vietnam 33,161 10,160 158
Denmark 26,599 24,686 18,750
Argentina 23,198 3,129 -
Thailand 22,572 35,702 3,212
Malaysia 20,022 55,869 3,585
India 11,215 15,135 41,188
Canada 31,456 36,275 39,008
Singapore 22,787 20,012 20,9746,512 474,372 320,583
United Kingdom 8,202 75,956 84,830
Netherlands - 45,347 33,868998 30,592 59,300
Saudi Arabia 982 26,249 23,324
Other Countries 26,412 38,738 60,227
-------------------------------------------------------------------------------
Total32,639 39,441 46,138
- --------------------------------------------------------------------------------------------------------------------
$ 433,9611,748,681 $ 533,6941,896,948 $ 599,745
-------------------------------------------------------------------------------1,813,670
====================================================================================================================
PROPERTY, PLANT AND EQUIPMENT, NET:
United States $ 226,824 $ 190,592 $ 190,517
Indonesia 61,281 61,167 64,513
United Arab Emirates 32,298 34,035 18,149
Mexico 14,497 51,678 56,712
Singapore 8,147 3,706 9,406
Denmark - 6,276 6,518
Other Countries 11,053 6,445 8,378
- --------------------------------------------------------------------------------------------------------------------
$ 354,100 $ 353,899 $ 354,193
====================================================================================================================
/(1)/ Geographic(1) We allocate geographic revenues are allocated based on the location of the customer.
804. Information about our Major Customers:
In the years ended December 31, 2002, 2001 and 2000, the U.S.
Government accounted for approximately 29%, 24% and 23%, respectively,
of our total revenues. We have included these revenues in our
Government Operations segment. In the year ended December 31, 2002,
revenues from one of our Marine Construction Services segment customers
were $174.5 million or approximately 10% of our total revenues.
94
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended MarchDecember 31, 19992002 and 1998:2001:
1999
Q U A R T E R E N D E D
------------------------------------------------
JUNEYear Ended December 31, 2002
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, SEPT.Sept. 30, DEC.Dec. 31,
MARCH 31,
1998 1998 1998 1999
------------------------------------------------2002 2002 2002 2002
----------------------------------------------------------------------
(In thousands, except for per share amounts)
Revenues $819,809 $779,983 $800,825 $749,368$ 399,192 $ 465,709 $ 435,632 $ 448,148
Operating loss (1) $ (2,022) $ (237,480) $ (365,163) $ (69,095)
Equity in income (loss) 118,413 65,652 46,310 (12,959)
Income (loss)from investees $ 7,534 $ 2,418 $ 4,469 $ 13,271
Loss from continuing operations
before extraordinary item 121,561 51,615 42,289 (23,384)$ (1,760) $ (234,972) $ (364,943) $ (184,529)
Net income (loss) 121,561 51,615 42,289 (62,103)
Earnings (loss)loss $ (593) $ (234,216) $ (357,056) $ (184,529)
Loss per common share:
Basic Income (loss)and Diluted:
From continuing operations
before extraordinary item $ 2.03(0.03) $ 0.88(3.81) $ 0.72(5.88) $ (0.40)(2.94)
Net income (loss)Loss $ 2.03(0.01) $ 0.88(3.80) $ 0.72(5.76) $ (1.06)
Diluted
Income (loss) before
extraordinary item $ 1.88 $ 0.85 $ 0.71 $ (0.40)
Net income (loss) $ 1.88 $ 0.85 $ 0.71 $ (1.06)(2.94)
Pretax results(1) Includes equity in income from investees.
Results for the quarter ended March 31, 2002 include an extraordinary gain of
$0.3 million, net of taxes of $0.2 million, related to the early retirement of
debt.
Results for the quarter ended June 30, 1998 include:
. a gain on the dissolution2002 include an impairment charge of
a joint venture$224.7 million to write off our net investment in B&W of $37,390,000,
. a gain on the settlement$187.0 million and
curtailment of postretirement benefit plans of
$38,900,000,
. interest income of $12,207,000 on domestic tax refunds, and
. a gain of $12,000,000 from the sale ofother related assets of a joint venture.
Pretax resultstotaling $37.7 million.
Results for the quarter ended September 30, 1998 include:
.2002 include an impairment charge of
$313.0 million related to JRM's goodwill and a lossgain on the settlement and curtailmentsale of postretirement benefit plansHPC of $11,258,000,
. interest income$9.4
million, net of $6,423,000 on domestic tax refunds, and
. an $8,000,000 settlementtaxes of punitive damage claims$5.7 million, which is reported in a civil suit
associated with a Pennsylvania facility formerly operated by McDermott.
Pretax resultsdiscontinued
operations.
Results for the quarter ended December 31, 1998 include:
.2002 include a $9,600,000 charge to restructure foreign joint ventures.
Pretax resultsprovision for the
quarter ended March 31, 1999 include:
. an extraordinary loss on the retirement of debt of $38,719,000,
. a loss of $85,185,000 for estimated costs relating to estimated future non-
employee asbestos claims,
. losses of $21,897,000 related to impairmentthe settlement of assets and goodwill,
. various provisionsthe B&W Chapter 11 proceedings of $20,327,000 related to potential settlements$110.0
million, including tax expense of litigation and contract disputes, and
. the write-off of $12,600,000 of receivables from a joint venture.
81
$23.6 million.
1998
Q U A R T E R E N D E D
------------------------------------------------
JUNEYear Ended December 31, 2001
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, SEPT.Sept. 30, DEC.Dec. 31,
MARCH 31,
1997 1997 1997 1998
------------------------------------------------2001 2001 2001 2001
----------------------------------------------------------------------
(In thousands, except for per share amounts)
Revenues $928,087 $920,051 $901,735 $924,762$ 410,524 $ 477,816 $ 572,631 $ 435,977
Operating income (1) $ 4,883 $ 20,133 $ 32,291 $ 18,065
Equity in income from investees $ 4,921 $ 7,871 $ 11,247 $ 10,054
Income (loss) 144,794 88,777 89,366 32,520from continuing
operations before extraordinary item $ (5,169) $ 7,257 $ 18,416 $ (44,926)
Net income (loss) 109,860 38,161 50,992 16,677$ (4,433) $ 7,958 $ 19,345 $ (42,892)
Earnings (loss) per common share:
BasicBasic:
From continuing operations
before extraordinary item $ 1.97(0.09) $ 0.650.12 $ 0.880.30 $ 0.26
Diluted(0.73)
Net income (loss) $ 1.79(0.07) $ 0.620.13 $ 0.820.32 $ 0.25(0.70)
Diluted:
From continuing operations
before extraordinary item $ (0.09) $ 0.12 $ 0.29 $ (0.73)
Net income (loss) $ (0.07) $ 0.13 $ 0.31 $ (0.70)
Pretax results for the quarter ended June 30, 1997 include:
. a gain of $96,059,000(1) Includes equity in income from the sale of McDermott's interest in Sakhalin
Energy Investment Company, Ltd.
Pretax results for the quarter ended September 30, 1997 include:
. a gain of $33,072,000 from the sale of McDermott's interest in Universal
Fabricators Incorporated.
Pretax resultsinvestees.
95
Results for the quarter ended December 31, 1997 include:
.2001 include a pre-tax gain $223,651,000 and a $61,637,000 distributionon our
sale of earnings from the
terminationMECL totaling $28.0 million, tax of the HeereMac joint venture, and
. impairment losses of $275,112,000, including a write-off of goodwillapproximately $85.4 million
associated with the acquisitionintended exercise of OPIan intercompany stock purchase and sale
agreement and an extraordinary item of $262,901,000.
Pretax results for the quarter ended March 31, 1998 include:
. losses$0.8 million, net of $10,315,000taxes of $0.5
million, related to the impairmentearly retirement of assets and related
goodwill, and
. a $5,419,000 provision for employee severance costs.
82
debt.
NOTE 19 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
For the Three Fiscal YearsYear Ended 1999 1998 1997
---------------- ---------------- ----------------December 31,
2002 2001 2000
---- ---- ----
(In thousands, except shares and per share amounts)
Basic:
Loss from continuing operations $ (786,204) $ (24,422) $ (24,864)
Income (loss) before extraordinary item $ 192,081 $ 215,690 $ (206,105)
Dividends on preferred stock, Series C - (8,266) (8,266)
----------------------------------------------------------------------------------------------------
Income (loss) for basic computation 192,081 207,424 (214,371)from discontinued operations 9,469 3,565 2,782
Extraordinary item (38,719)341 835 -
-
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)loss for basic computation $ 153,362(776,394) $ 207,424(20,022) $ (214,371)
----------------------------------------------------------------------------------------------------(22,082)
=========================================================================================================
Weighted average common shares 59,015,091 55,432,949 54,322,804
----------------------------------------------------------------------------------------------------61,860,585 60,663,565 59,769,662
=========================================================================================================
Basic earnings (loss) per common share:
Loss from continuing operations $ (12.71) $ (0.40) $ (0.42)
Income (loss) before extraordinaryfrom discontinued operations $ 0.15 $ 0.06 $ 0.05
Extraordinary item $ 3.250.01 $ 3.740.01 $ (3.95)-
Net loss $ (12.55) $ (0.33) $ (0.37)
Diluted:
Loss from continuing operations $ (786,204) $ (24,422) $ (24,864)
Income from discontinued operations 9,469 3,565 2,782
Extraordinary item (0.65)341 835 -
-
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ 2.60 $ 3.74 $ (3.95)
----------------------------------------------------------------------------------------------------
Diluted:
Income (loss) before extraordinary item $ 192,081 $ 215,690 $ (206,105)
Dividends on preferred stock, Series C - - (8,266)
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock 2,752 6,200 -
----------------------------------------------------------------------------------------------------
Income (loss) for diluted computation 194,833 221,890 (214,371)
Extraordinary item (38,719) - -
----------------------------------------------------------------------------------------------------
Net income (loss)loss for diluted computation $ 156,114(776,394) $ 221,890(20,022) $ (214,371)
----------------------------------------------------------------------------------------------------(22,082)
=========================================================================================================
Weighted average common shares (basic) 59,015,091 55,432,949 54,322,80461,860,585 60,663,565 59,769,662
Effect of dilutive securities:
Stock options and restricted stock 1,172,496 1,446,585 - Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock 1,256,151 2,818,679 - Series C $2.875 Cumulative Convertible
Preferred Stock 190,457 4,078,014 -
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares
and assumed conversions 61,634,195 63,776,227 54,322,804
----------------------------------------------------------------------------------------------------61,860,585 60,663,565 59,769,662
=========================================================================================================
Diluted earnings (loss) per common share:
Loss from continuing operations $ (12.71) $ (0.40) $ (0.42)
Income (loss) before extraordinaryfrom discontinued operations $ 0.15 $ 0.06 $ 0.05
Extraordinary item $ 3.160.01 $ 3.480.01 $ (3.95)
Extraordinary item (0.63) -
-
----------------------------------------------------------------------------------------------------
Net income (loss)loss $ 2.53(12.55) $ 3.48(0.33) $ (3.95)
----------------------------------------------------------------------------------------------------(0.37)
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ErnstAt December 31, 2002, 2001 and 2000, we excluded from the diluted share
calculation incremental shares of 1,940,511, 1,983,314 and 1,050,242,
respectively, related to stock options and restricted stock, as their effect
would have been antidilutive.
NOTE 20 - THE BABCOCK & Young LLP ("E&Y"WILCOX COMPANY
General
As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of nonemployee liability claims asserting
asbestos-related injuries. All of the personal injury claims are similar in
nature, the primary difference being the type of alleged injury or illness
suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g.,
mesothelioma, lung cancer, other types of cancer, asbestosis or pleural
changes).
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") were previouslyto reorganize under Chapter 11 of the principal auditors for McDermottU.S.
Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon,
Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International,
Inc. ("MII"(collectively, the
96
"Debtors"). On July 24, 1998,The Debtors took this action as a means to determine and
comprehensively resolve all pending and future asbestos liability claims against
them. Following the filing, the Bankruptcy Court issued a preliminary injunction
prohibiting asbestos liability lawsuits and other actions for which there is
shared insurance from being brought against nonfiling affiliates of the Debtors,
including MI, JRM and MII. The preliminary injunction is subject to periodic
hearings before the Bankruptcy Court for extension. Currently, the preliminary
injunction extends through April 14, 2003.
As discussed in Note 1, we wrote off our net investment in B&W in the quarter
ended June 30, 2002. The total impairment charge of $224.7 million included our
investment in B&W of $187.0 million and other related assets totaling $37.7
million, primarily consisting of accounts receivable from B&W, for which we
provided an allowance of $18.2 million.
Settlement Negotiations
We are continuing our discussions with the ACC and FCR concerning a potential
settlement. As a result of those discussions, we reached an agreement in
principle in August 2002 with representatives of the ACC and FCR on several key
terms, which served as a basis for continuing negotiations; however, a number of
significant issues and numerous details remain to be negotiated and resolved.
Should the remaining issues and details not be negotiated and resolved to the
mutual satisfaction of the parties, the parties may be unable to resolve the B&W
Chapter 11 proceedings through settlement. Additionally, the potential
settlement will be subject to various conditions, including the requisite
approval of the asbestos claimants, the Bankruptcy Court confirmation of a plan
of reorganization reflecting the settlement and the approval by MII's Board of
Directors selected
PricewaterhouseCoopers LLP as E&Y's replacement.
Forand stockholders. The parties are currently working to address the
two fiscal years ended March 31, 1998remaining unresolved issues and 1997, there were no
disagreementsdetails in a joint plan of reorganization and
related settlement agreement. On December 19, 2002, B&W and its filing
subsidiaries, the ACC, the FCR and MI filed drafts of those documents, together
with E&Y on any mattersa draft of accounting principlesa related disclosure statement, which include the following key
terms:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
practice,
financial statement disclosure, or auditing scope or procedure, which, if not
resolvedotherwise make available their rights to all applicable
insurance proceeds to the satisfactiontrust.
- MII would issue 4.75 million shares of E&Y,restricted common stock
and cause those shares to be transferred to the trust. The
resale of the shares would be subject to certain limitations,
in order to provide for an orderly means of selling the shares
to the public. Certain sales by the trust would also be
subject to an MII right of first refusal. If any of the shares
issued to the trust are still held by the trust after three
years, and to the extent those shares could not have been sold
in the market at a price greater than or equal to $19.00 per
share (based on quoted market prices), taking into account the
restrictions on sale and any waivers of those restrictions
that may be granted by MII from time to time, MII would
effectively guarantee that those shares would have causeda value of
$19.00 per share on the third anniversary of the date of their
issuance. MII would be able to satisfy this guaranty
obligation by making a cash payment or through the issuance of
additional shares of its common stock. If MII elects to issue
shares to satisfy this guaranty obligation, it would not be
required to make a referenceissue more than 12.5 million shares.
- MI would issue promissory notes to the subject mattertrust in an aggregate
principal amount of $92 million. The notes would be unsecured
obligations and would provide for payments of principal of
$8.4 million per year to be payable over 11 years, with
interest payable on the outstanding balance at the rate of
7.5% per year. The payment obligations under those notes would
be guaranteed by MII.
- MII and all its past and present directors, officers and
affiliates, including its captive insurers, would receive the
full benefit of Section 524(g) of the disagreement in connectionBankruptcy Code with
this report. E&Y has
not advised MIIrespect to personal injury claims attributable to B&W's use of
asbestos and would be released and protected from all pending
and future asbestos-related claims stemming from B&W's
operations, as well as other claims (whether contract claims,
tort claims or other claims) of any reportable events. E&Y's reportskind relating to B&W,
including but not limited to claims relating to the 1998
corporate reorganization that has been the subject of
litigation in the Chapter 11 proceedings.
- The settlement would be conditioned on the approval by MII's
financial
statementsBoard of Directors and stockholders of the terms of the
settlement outlined above.
97
As the settlement discussions proceed, we expect that some of the court
proceedings in or relating to the B&W Chapter 11 case will continue and that the
parties will continue to maintain their previously asserted positions. The
Bankruptcy Court has directed the parties to file an amended disclosure
statement by March 28, 2003, that, among other things, updates the status of the
negotiations, and has set a disclosure statement hearing for April 9, 2003.
Following that filing and hearing, the Bankruptcy Court will schedule further
proceedings concerning this matter. The process of finalizing and implementing
the settlement could take up to a year, depending on, among other things, the
nature and extent of any objections or appeals in the bankruptcy case.
Despite our recent progress in our settlement discussions, there are continuing
risks and uncertainties that will remain with us until the requisite approvals
are obtained and the final settlement is reflected in a plan of reorganization
that is confirmed by the Bankruptcy Court pursuant to a final, nonappealable
order of confirmation.
As of December 31, 2002, we determined that a final settlement is probable and
established an estimate for the two fiscal years ended Marchcost of the settlement of $110.0 million,
including tax expense of $23.6 million, reflecting the present value of our
contributions and contemplated payments to the trusts as outlined above. The
provision for the estimated cost of the B&W settlement is comprised of the
following (in thousands):
Promissory notes to be issued $ 83,081
MII common shares to be issued 20,805
Share price guaranty obligation 42,026
Other 3,435
Future tax reimbursements (29,000)
Forgiveness of certain intercompany balances (33,970)
-----------
Total $ 86,377
Plus: tax expense 23,593
-----------
Net provision for estimated cost of settlement $ 109,970
===========
The fair value of the promissory notes to be issued was based on the present
value of future cash flows discounted at borrowing rates currently assumed to be
available for debt with similar terms and maturities. The MII common shares to
be issued were valued at our closing stock price on December 31, 19982002 of $4.38.
The fair value of the share price guaranty obligation was based on a present
value calculation using our closing stock price on December 31, 2002, assuming
the number of shares to be issued is 12.5 million. The value of the future tax
reimbursements was based on the present value of projected future tax
reimbursements to be received from B&W. The final value of the overall
settlement and 1997 did not
contain an adverse opinioneach of its components may differ significantly from the
estimates currently recorded depending on a variety of factors, including
changes in market conditions and the market value of our common shares when
issued. Accordingly, we will revalue the estimate of the settlement on a
quarterly basis and at the time the securities are issued. Upon issuance of the
debt and equity securities, we will record such amounts as liabilities or
stockholders' equity based on the nature of the individual securities.
Remaining Issues to be Resolved
While the Chapter 11 reorganization proceedings continue to progress, there are
a disclaimernumber of opinion, nor were they qualified
or modifiedissues and matters related to the Debtors' asbestos liability to be
resolved prior to their emergence from the proceedings. Remaining issues and
matters to be resolved include, among other things, the following:
- the ultimate asbestos liability of the Debtors;
- the outcome of negotiations with the ACC, the FCR and other
participants in the Chapter 11 proceedings, concerning, among
other things, the size and structure of the settlement trusts
to satisfy the asbestos liability and the means for funding
those trusts;
- the outcome of negotiations with our insurers as to uncertainty, audit scope or accounting principles.
Foradditional
amounts of coverage of the Debtors and their participation in
a plan to fund the settlement trusts;
- the Bankruptcy Court's decisions relating to numerous
substantive and procedural aspects of the Chapter 11
proceedings, including the Bankruptcy Court's periodic
determinations as to whether to extend the existing
preliminary injunction that
98
prohibits asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII;
- the continued ability of our insurers to reimburse B&W and its
subsidiaries for payments made to asbestos claimants and the
resolution of claims filed by insurers for recovery of
insurance amounts previously paid for asbestos personal injury
claims;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999, thereand the related ruling
issued on April 17, 2002 (collectively, the "Transfer Case").
See Note 10 for further information;
- the outcome of objections and potential appeals involving
approval of the disclosure statement and confirmation of the
plan of reorganization;
- final agreement regarding the proposed spin-off of the MI/B&W
pension plan, which could significantly impact amounts
recorded at December 31, 2002; and
- final agreement on a tax sharing and tax separation
arrangement between MI and B&W.
Insurance Coverage and Pending Claims
Prior to their bankruptcy filing, the Debtors had engaged in a strategy of
negotiating and settling asbestos personal injury claims brought against them
and billing the settled amounts to insurers for reimbursement. At December 31,
2002, receivables of $23.1 million were due from insurers for reimbursement of
settled claims paid by the Debtors prior to the Chapter 11 filing. Currently,
certain insurers are refusing to reimburse the Debtors for these receivables
until the Debtors' assumption, in bankruptcy, of their pre-bankruptcy filing
contractual reimbursement arrangements with such insurers.
Pursuant to the Bankruptcy Court's order, a March 29, 2001 bar date was set for
the submission of allegedly unpaid pre-Chapter 11 settled asbestos claims and a
July 30, 2001 bar date for all other asbestos personal injury claims, asbestos
property damage claims, derivative asbestos claims and claims relating to
alleged nuclear liabilities arising from the operation of the Apollo/Parks
Township facilities against the Debtors. As of the March 29, 2001 bar date, over
49,000 allegedly settled claims had been filed. The Debtors have accepted
approximately 9,200 as pre-Chapter 11 binding settled claims at this time, with
an aggregate liability of approximately $77 million. The Bankruptcy Court has
disallowed approximately 33,000 claims as settled claims, and the Debtors are in
the process of challenging virtually all the remaining claims. If the Bankruptcy
Court determines these claims were not settled prior to the filing of the
Chapter 11 petition, these claims may be refiled as unsettled personal injury
claims. As of July 30, 2001, approximately 223,000 additional asbestos personal
injury claims, 60,000 related party claims, 168 property damage claims, 212
derivative asbestos claims and 524 claims relating to the Apollo/Parks Township
facilities had been filed. Since the July 30, 2001 bar date, approximately
13,000 additional personal injury claims were filed, including at least 2,000
claims originally filed as allegedly settled claims that were disallowed by the
Bankruptcy Court as settled claims and subsequently refiled as unsettled
personal injury claims. A bar date of January 15, 2003 was set for the filing of
certain general unsecured claims. As of January 15, 2003, in excess of 2,700
general unsecured claims were filed, and the Debtors have commenced an analysis
of these claims. Although the analysis is incomplete, the Debtors have
identified a number of claims that they intend to contest, including
approximately $183 million in claims filed by various insurance companies
seeking recovery from the Debtors under various theories. Additionally,
approximately $788 million in priority tax claims were filed, which appear to be
estimates of liability by taxing authorities for ongoing audits of MI. As to
both categories of claims, the Debtors believe that the claims are without merit
and intend to contest them. The Debtors will continue to analyze the remaining
claims. The estimated total alleged liability, as asserted by the claimants in
the Chapter 11 proceeding and in filed proofs of claim, of the asbestos-related
claims, including the alleged settled claims, exceeds the combined value of the
Debtors and certain assets transferred by B&W to its parent in a corporate
reorganization completed in fiscal year 1999 and the known available products
liability and property damage insurance coverages. The Debtors filed a proposed
Litigation Protocol with the U. S. District Court on October 18, 2001, setting
forth the intention of the Debtors to challenge all unsupported claims and
taking the position that a significant number of those claims may be disallowed
by the Bankruptcy Court. The ACC and FCR filed briefs opposing the Litigation
Protocol and requesting an estimation of pending and future claims.
99
Debtor-In-Possession Financing
In connection with the bankruptcy filing, the Debtors entered into the DIP
Credit Facility with a group of lenders providing for a three-year term. The
Bankruptcy Court approved the full amount of this facility, giving all amounts
owed under the facility a super-priority administrative expense status in
bankruptcy. The Debtors' obligations under the facility are (1) guaranteed by
substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and
(2) secured by a security interest on B&W Canada Ltd.'s assets. Additionally,
B&W and substantially all of its domestic subsidiaries granted a security
interest in their assets to the lenders under the DIP Credit Facility, effective
upon the defeasance or repayment of MI's public debt. The DIP Credit Facility
generally provides for borrowings by the Debtors for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and nonperformance letters of credit issued under
the facility cannot exceed $100 million in the aggregate. The DIP Credit
Facility also imposes certain financial and nonfinancial covenants on B&W and
its subsidiaries. There were no borrowings under this facility at December 31,
2002 or 2001. A permitted use of the DIP Credit Facility is the issuance of new
letters of credit to backstop or replace pre-existing letters of credit issued
in connection with B&W's and its subsidiaries' business operations, but for
which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000, the
aggregate amount of all such pre-existing letters of credit totaled
approximately $172 million (the "Pre-existing LCs"), $9.4 million of which
remains outstanding at December 31, 2002. MII, MI and BWICO have agreed to
indemnify and reimburse the Debtors for any customer draw on any letter of
credit issued under the DIP Credit Facility to backstop or replace any
Pre-existing LC for which they already have exposure and for the associated
letter of credit fees paid under the facility. As of December 31, 2002,
approximately $140.9 million in letters of credit has been issued under the DIP
Credit Facility of which approximately $51.4 million was to replace or backstop
Pre-existing LCs. The DIP Credit Facility, which was scheduled to expire on
February 22, 2003, has been amended and extended to February 22, 2004, with an
additional one-year extension at the option of B&W. The amendment also provides
for a reduction of the facility from $300 million to $227.75 million.
Financial Results and Reorganization Items
Summarized financial data for B&W is as follows:
INCOME STATEMENT INFORMATION
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues $ 1,497,401 $ 1,431,908 $ 1,162,458
Income (Loss) before Provision for Income Taxes $ (232,435)(1) $ 35,377 $ (3,572)
Net Income (Loss) $ (213,723) $ 17,499 $ (4,308)
(1) Includes a provision totaling $287.0 million for an increase in B&W's
asbestos liability.
BALANCE SHEET INFORMATION
December 31,
2002 2001
---- ----
(In thousands)
Assets:
Current Assets $ 709,730 $ 592,968
Noncurrent Assets 1,547,342 1,476,171
- --------------------------------------------------------------------------------------------
Total Assets $ 2,257,072 $ 2,069,139
============================================================================================
Liabilities:
Current Liabilities $ 551,228 $ 431,702
Noncurrent Liabilities(1) 1,743,737 1,457,459
Stockholder's Equity (Deficit) (37,893) 179,978
- --------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity (Deficit) $ 2,257,072 $ 2,069,139
============================================================================================
(1) Includes liabilities subject to compromise of approximately $1.7 billion,
which primarily result from asbestos-related issues.
100
In the course of the conduct of B&W's and its subsidiaries' business, MII and MI
have agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. At December 31, 2002, the total value of B&W's and its subsidiaries'
customer contracts yet to be completed covered by such indemnity arrangements
was approximately $107.7 million, of which approximately $31.9 million relates
to bonds issued after February 21, 2000.
As to the guarantee and indemnity obligations related to B&W's letters of credit
and surety bonds, the proposed B&W Chapter 11 settlement contemplates
indemnification and other protections for MII, MI and BWICO.
B&W's ability to continue as a going concern depends on its ability to settle
its ultimate asbestos liability from its net assets, future profits and cash
flow and available insurance proceeds, whether through the confirmation of a
plan of reorganization or otherwise. The B&W summarized financial information
set forth above has been prepared on a going-concern basis, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. As a result of the bankruptcy filing and
related events, we can provide no assurance that the carrying amounts of B&W's
assets will be realized or that B&W's liabilities will be liquidated or settled
for the amounts recorded. The independent accountant's report on the separate
consolidated financial statements of B&W for the years ended December 31, 2002,
2001 and 2000 includes an explanatory paragraph indicating that these issues
raise substantial doubt about B&W's ability to continue as a going concern.
Following are our condensed Pro Forma Consolidated Statements of Income (Loss)
data, assuming the deconsolidation of B&W for all periods presented.
Assumes deconsolidation as of the beginning of the period presented, all data
unaudited:
Year Ended
December 31,
2000
----
(In thousands)
Revenues $ 1,722,038
Operating Loss $ (9,699)
Loss before Provision for Income Taxes $ (19,271)
Net Loss $ (27,587)
Loss per Common Share:
Basic $ (0.46)
Diluted $ (0.46)
NOTE 21 - LIQUIDITY
As a result of the B&W bankruptcy filing in February 2000, our access to the
cash flows of B&W and its subsidiaries has been restricted. In addition and as
discussed in Note 12, JRM has incurred substantial overruns on its three EPIC
Spar projects. We also have recently received a credit downgrade. Accordingly,
our access to additional financing beyond what we currently have available may
be limited, particularly at JRM. Further, MI is restricted, as a result of
covenants in its debt instruments, in its ability to transfer funds to MII and
MII's other subsidiaries, including JRM, through cash dividends or through
unsecured loans or investments. Given these issues, we have assessed our ability
to continue as a viable business and have concluded that we can fund our
operating activities and capital requirements. Management's plans with regards
to these issues are as follows:
- B&W Chapter 11 Filing. Our ability to obtain a successful and timely
resolution to the B&W Chapter 11 proceedings has impacted our access
to, and sources of, capital. We believe the completion of the overall
settlement outlined in Note 20 will alleviate the impact of this
uncertainty.
- JRM's Negative Cash Flows Resulting from EPIC Spar Projects. Due
primarily to the losses anticipated to be incurred on the three EPIC
spar projects recorded during the year ended December 31, 2002 (see
Note 12), we expect JRM to experience negative cash flows during 2003.
Completion of the EPIC spar projects has, and will continue to, put a
strain on JRM's liquidity. JRM intends to fund its cash needs through
borrowings on the New Credit Facility (see Note 5), intercompany loans
from MII and sales of nonstrategic assets, including certain marine
101
vessels. In addition, under the terms of the New Credit Facility, JRM's
letter of credit capacity was reduced from $200 million to $100
million. This reduction does not negatively impact our ability to
execute the contracts in our current backlog. However, it will likely
limit JRM's ability to pursue projects from certain customers who
require letters of credit as a condition of award. We are exploring
other opportunities to improve our liquidity position, including
better management of working capital through process improvements,
negotiations with customers to relieve tight schedule requirements and
to accelerate certain portions of cash collections, and alternative
financing sources for letters of credit for JRM. In addition, we plan
to refinance BWXT on a stand-alone basis, thereby freeing up additional
letter of credit capacity for JRM and are currently in the process of
evaluating terms and conditions with certain financial institutions. We
also intend to seek a replacement credit facility for JRM prior to the
scheduled expiration of the New Credit Facility, in order to provide
for increased letter of credit capacity. Our ability to obtain such a
replacement facility will depend on numerous factors, including JRM's
operating performance and overall market conditions. If JRM experiences
additional significant contract costs on its EPIC Spar projects as a
result of unforeseen events, we may be unable to fund all of our
budgeted capital expenditures and meet all of our funding requirements
for our contractual commitments. In this instance, we would be required
to defer certain capital expenditures, which in turn could result in
curtailment of certain of our operating activities or, alternatively,
require us to obtain additional sources of financing which may not be
available to us or may be cost prohibitive.
- MI's Liquidity Issues. MI experienced negative cash flows in 2002,
primarily due to payments of taxes resulting from the exercise of MI's
rights under the Intercompany Agreement. MI expects to meet its cash
needs in 2003 through intercompany borrowings from BWXT, which BWXT may
fund through operating cash flows or borrowings under the New Credit
Facility.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the years ended December 31, 2002, 2001 and 2000, we had no disagreements
with PricewaterhouseCoopers LLP on any accounting andor financial disclosure.
84
P A R T I I Idisclosure
issues.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers" in theThe Proxy Statement
for MII's 1999our 2003 Annual Meeting of Stockholders.
ITEMItem 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" in theThe Proxy
Statement for MII's 1999our 2003 Annual Meeting of Stockholders.
ITEMItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference to the material
appearing under the headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in MII'sThe Proxy
Statement for the 1999our 2003 Annual Meeting of Stockholders.
ITEMItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
85The information in Note 11 to our consolidated financial statements included in
this report is incorporated by reference.
102
Item 14. CONTROLS AND PROCEDURES
Within the 90-day period immediately preceding the filing of this report, our
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures were effective as of the date of that
evaluation. However, as we have disclosed in this report, for first-of-a-kind
projects undertaken by our Marine Construction Services segment in recent
periods, we have been unable to forecast accurately total costs to complete
until we have performed all major phases of the project. This has been primarily
due to unexpected design and production inefficiencies and execution
difficulties. We have addressed these problems by improving controls throughout
the bidding, contracting and project management process, as well as making
changes in operating management personnel at JRM. Except for those changes,
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
the evaluation referred to in the first sentence of this Item 14.
P A R T I V
Item 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual
Report or incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheet MarchSheets as of December 31, 19992002
and 19982001
Consolidated StatementStatements of Income (Loss) ForLoss for the Three Fiscal Years Ended
MarchDecember 31, 19992002, 2001 and 2000
Consolidated StatementStatements of Comprehensive Income (Loss) ForLoss for the
Three Fiscal
Years Ended MarchDecember 31, 19992002, 2001 and 2000
Consolidated StatementStatements of Stockholders' Equity
For(Deficit) for the Three
Fiscal Years Ended MarchDecember 31, 19992002, 2001
and 2000
Consolidated StatementStatements of Cash Flows Forfor the Three Fiscal Years
Ended MarchDecember 31, 19992002, 2001 and 2000 Notes to
Consolidated Financial Statements Forfor the Three
Fiscal Years Ended
MarchDecember 31, 19992002, 2001 and 2000
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required financial statement schedules will be
filed by amendment to this Form 10-K on Form 10-K/A.
3. EXHIBITS
Exhibit
Number Description
2.1
Exhibit Number Description
3.1 McDermott International, Inc.'s Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1 of McDermott
International, Inc.'s Annual Report on Form 10-K for the fiscal
year ended March 31, 1996 (File No. 1-08430)).
3.2 McDermott International, Inc.'s Amended and Restated By-Laws.
3.3 Amended and Restated Certificate of Designation of Series D
Participating Preferred Stock (incorporated by reference herein
to Exhibit 3.1 to McDermott International, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001
(File No. 1-08430)).
4.1 Rights Agreement dated as of October 17, 2001 between McDermott
International, Inc. and EquiServe Trust Company, N.A., as
Rights Agent (incorporated by reference herein to Exhibit 1 to
McDermott International, Inc.'s Current Report on Form 8-K
dated October 17, 2001 (File No. 1-08430)).
4.2 Omnibus Credit Agreement dated as of February 10, 2003 among J.
Ray McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray
McDermott, Inc. and BWX Technologies, Inc., as borrowers,
McDermott International, Inc., as parent guarantor, the initial
lenders and initial
103
issuing banks named therein, Citicorp USA, Inc., as
administrative agent and collateral agent, Salomon Smith Barney
Inc., as lead arranger and book runner, The Bank of Nova
Scotia, as documentation agent, and Credit Lyonnais New York
Branch, as syndication agent.
4.3 Security Agreement dated February 10, 2003 from the grantors
referred to therein to Citicorp USA, Inc., as collateral agent.
4.4 Form of Subsidiary Guarantee related to the Omnibus Credit
Agreement.
We and Plancertain of Merger dated asour consolidated subsidiaries are parties to other debt
instruments under which the total amount of May 7, 1999
between McDermott International, Inc. and J. Ray
McDermott, S.A. (incorporated by referencesecurities authorized does not
exceed 10% of our total consolidated assets. Pursuant to Annex Aparagraph 4(iii)(A) of
Exhibit (a)(1)Item 601 (b) of Regulation S-K, we agree to the Schedule 14D-1 filed by McDermott
International, Inc. withfurnish a copy of those instruments
to the Commission on May 13, 1999).
3.1 McDermott International, Inc.'s Articles of Incorporation,
as amended (incorporated by reference to Exhibit 3.1 of
McDermott International, Inc.'s Form 10-K for the fiscal
year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated By-
Laws (incorporated by reference to Exhibit 3.2 of
McDermott International, Inc.'s Form 10-Q for the
quarter ended December 31, 1998).
4.1 Amended and Restated Rights Agreement
10.1* McDermott International, Inc.'s Supplemental Executive
Retirement Plan, as amended (incorporated by reference
to Exhibit 10 of McDermott International Inc.'s 10-K/A
for fiscal year end March 31, 1994 filed with the
Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year
ended March 31, 1983).
86request.
10.1* McDermott International, Inc.'s Supplemental Executive
Retirement Plan, as amended (incorporated by reference to
Exhibit 10 of McDermott International, Inc.'s Annual Report on
Form 10-K/A for fiscal year ended March 31, 1994 filed with the
Commission on June 27, 1994 (File No. 1-08430)).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10
to McDermott International, Inc.'s Annual Report on Form 10-K,
as amended, for the fiscal year ended March 31, 1983 (File No.
1-08430)).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated
by reference to Exhibit 10 to McDermott International, Inc.'s
Annual Report on Form 10-K, as amended, for the fiscal year
ended March 31, 1990 (File No. 1-08430)).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental
Compensation Plan (incorporated by reference to Exhibit A to
McDermott International, Inc.'s Proxy Statement for its Annual
Meeting of Stockholders held on August 9, 1994, as filed with
the Commission under a Schedule 14A (File No. 1-08430)).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance
Incentive Compensation Program (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s Annual Report on
Form 10-K, as amended, for the fiscal year ended March 31, 1988
(File No. 1-08430)).
10.6* McDermott International, Inc.'s 1992 Senior Management Stock
Option Plan (incorporated by reference to Exhibit 10 of
McDermott International, Inc.'s Annual Report on Form10-K/A for
fiscal year ended March 31, 1994 filed with the Commission on
June 27, 1994 (File No. 1-08430)).
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive
Program (incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s Annual Report on Form 10-K, as amended
for the fiscal year ended March 31, 1992 (File No. 1-08430)).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s Annual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1992 (File No. 1-08430)).
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term
Incentive Plan, as amended (incorporated by reference to
Appendix B to McDermott International, Inc.'s Proxy Statement
for its Annual Meeting of Stockholders held on September 2,
1997, as filed with the Commission under a Schedule 14A (File
No. 1-08430)).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997, as filed with the
Commission under a Schedule 14A (File No. 1-08430)).
10.12 Support Agreement between McDermott International, Inc. and
McDermott Incorporated (incorporated by reference to Exhibit
10.11 of McDermott International, Inc.'s Annual Report
104
Exhibit
Number Description
10.3* Trust for Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1990).
10.4* McDermott International, Inc.'s 1994 Variable
Supplemental Compensation Plan (incorporated by
reference to Exhibit A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the
Commission under a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term
Performance Incentive Compensation Program (incorporated
by reference to Exhibit 10 to McDermott International,
Inc.'s annual report of Form 10-K, as amended, for the
fiscal year ended March 31, 1988).
10.6* McDermott International, Inc.'s 1992 Senior Management
Stock Option Plan (incorporated by reference to Exhibit
10 of McDermott International, Inc.'s 10-K/A for fiscal
year ended March 31, 1994 filed with the Commission on
June 27, 1994).
10.7* McDermott International, Inc.'s 1992 Officer Stock
Incentive Program (incorporated by reference to Exhibit
10 to McDermott International, Inc.'s annual report on
Form 10-K, as amended for the fiscal year ended March 31,
1992).
10.8* McDermott International, Inc.'s 1992 Director Stock
Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form
10-K, as amended, for the fiscal year ended March 31,
1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer
Long-Term Incentive Plan (incorporated by reference to
Appendix A to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on
August 6, 1996 as filed with the Commission under a
Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock
Program (incorporated by reference to Appendix A to
McDermott International, Inc.'s Proxy Statement for its
Annual Meeting of Stockholders held on September 2, 1997
as filed with the Commission under a Schedule 14A).
21 Significant Subsidiaries of the Registrant
23 Consents of Independent Accountants
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to the requirements of Item 14(c)
on Form 10-K for the nine-month transition period ended
December 31, 1999 (File No. 1-08430)).
10.13 McDermott International, Inc.'s 2001 Directors & Officers
Long-Term Incentive Plan (incorporated by reference to Appendix
A to McDermott International, Inc.'s Proxy Statement for its
Annual Meeting of Stockholders held on May 1, 2002, as filed
with the Commission under a Schedule 14A (File No. 1-08430)).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Significant Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to the requirements
of Item 15(c) of Form 10-K.
(b) Reports on Form 8-K:
There were no reportsOn October 4, 2002, we filed a current report on Form 8-K
dated October 3, 2002, reporting under Item 5 - Other Events
that we had issued a press release in which we announced our
revised 2002 earnings outlook and set the date for our third
quarter earnings release.
On October 15, 2002, we filed by MII duringa current report on Form 8-K
dated October 15, 2002, reporting under Item 5 - Other Events
that one of our subsidiaries had signed fabrication contracts
with the three months
ended March 31, 1999.
87Azerbaijan International Operating Company.
On November 7, 2002, we filed a current report on Form 8-K
dated November 7, 2002, reporting under Item 5 - Other Events
that we had announced our results for the third quarter of
2002 and guidance for 2003.
On December 20, 2002, we filed a current report on Form 8-K
dated December 20, 2002, reporting under Item 5 - Other Events
that we had issued a press release in which we announced that
we, together with the ACC and the FCR, had filed a joint plan
of reorganization and a draft settlement agreement with the
Bankruptcy Court in the B&W Chapter 11 proceedings.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/Roger E. Tetrault
----------------------------------
June 9, 1999 Bruce W. Wilkinson
----------------------------
March 21, 2003 By: Roger E. TetraultBruce W. Wilkinson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
Signature Title
--------- -----
/s/ Roger E. Tetrault Chairman of the Board, Chief Executive Officer
- ------------------------------- and Director (Principal Executive Officer)
Roger E. Tetrault
/s/ Daniel R. Gaubert Senior Vice President and Chief Financial Officer
- ------------------------------- (Principal Financial and Accounting Officer)
Daniel R. Gaubert
- ------------------------------- Director
Theodore H. Black
/s/ Phillip J. Burguieres Director
- -------------------------------
Phillip J. Burguieres
/s/ Bruce Demars Director
- -------------------------------
Bruce Demars
/s/ Robert L. Howard Director
- -------------------------------
Robert L. Howard
/s/ John William Johnstone, Jr. Director
- -------------------------------
John WilliamSignature Title
/s/ Bruce W. Wilkinson Chairman of the Board, Chief Executive Officer
- ------------------------ and Director (Principal Executive Officer)
Bruce W. Wilkinson
/s/ Francis S. Kalman Executive Vice President and Chief Financial Officer
- ------------------------ (Principal Financial and Accounting Officer)
Francis S. Kalman
/s/ Philip J. Burguieres Director
- ------------------------
Philip J. Burguieres
/s/ Ronald C. Cambre Director
- ------------------------
Ronald C. Cambre
/s/ Bruce DeMars Director
- ------------------------
Bruce DeMars
/s/ Joe B. Foster Director
- ------------------------
Joe B. Foster
/s/ Robert L. Howard Director
- ------------------------
Robert L. Howard
/s/ John W. Johnstone, Jr. Director
- --------------------------
John W. Johnstone, Jr.
/s/ William McCollam, Jr. Director
- -------------------------------
William McCollam, Jr.
/s/ Kathryn D. Sullivan Director
- -------------------------------
Kathryn D. Sullivan
/s/ John N. Turner Director
- -------------------------------
John N. Turner
/s/ Richard E. Woolbert Director
- ------------------------------- Richard E. Woolbert
June 9, 1999
88Director
- --------------------------
Richard E. Woolbert
March 21, 2003
106
CERTIFICATIONS
I, Bruce W. Wilkinson, Chief Executive Officer of McDermott International, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of McDermott
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 24, 2003
/s/ Bruce W. Wilkinson
-----------------------
Bruce W. Wilkinson
Chief Executive Officer
107
I, Francis S. Kalman, Chief Financial Officer of McDermott International, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of McDermott
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 24, 2003
/s/ Francis S. Kalman
-----------------------
Francis S. Kalman
Chief Financial Officer
108
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- -----------
2.1 Agreement and Plan of Merger dated as of May 7, 1999 between McDermott
International, Inc. and J. Ray McDermott, S.A. (incorporated by
reference to Annex A of Exhibit (a)(1) to the Schedule 14D-1 filed by
McDermott International, Inc. with the Commission on May 13, 1999).
3.13.2 McDermott International, Inc.'s Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 of McDermott International,
Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31,
1996)1996 (File No. 1-08430)).
3.2 McDermott International, Inc.'s amendedAmended and restated By-LawsRestated By-Laws.
3.3 Amended and Restated Certificate of Designation of Series D
Participating Preferred Stock (incorporated by reference herein to
Exhibit 3.2 of3.1 to McDermott International, Inc.'s Quarterly Report on Form
10-Q for the quarter ended December 31, 1996)September 30, 2001 (File No. 1-08430)).
4.1 AmendedRights Agreement dated as of October 17, 2001 between McDermott
International, Inc. and RestatedEquiServe Trust Company, N.A., as Rights Agent
(incorporated by reference herein to Exhibit 1 to McDermott
International, Inc.'s Current Report on Form 8-K dated October 17, 2001
(File No. 1-08430)).
4.2 Omnibus Credit Agreement dated as of February 10, 2003 among J. Ray
McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray McDermott,
Inc. and BWX Technologies, Inc., as borrowers, McDermott International,
Inc., as parent guarantor, the initial lenders and initial issuing
banks named therein, Citicorp USA, Inc., as administrative agent and
collateral agent, Salomon Smith Barney Inc., as lead arranger and book
runner, The Bank of Nova Scotia, as documentation agent, and Credit
Lyonnais New York Branch, as syndication agent.
4.3 Security Agreement dated February 10, 2003 from the grantors referred
to therein to Citicorp USA, Inc., as collateral agent.
4.4 Form of Subsidiary Guarantee related to the Omnibus Credit Agreement.
10.1* McDermott International, Inc.'s Supplemental Executive Retirement Plan,
as amended (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s Annual Report on Form 10-K/A for fiscal year
ended March 31, 1994 filed with the Commission on June 27, 1994)1994 (File
No. 1-08430)).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual reportAnnual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1983)1983 (File No. 1-08430)).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10 to McDermott International, Inc.'s annual
reportAnnual
Report on Form 10-K, as amended, for the fiscal year ended March 31,
1990)1990 (File No. 1-08430)).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental Compensation
Plan (incorporated by reference to Exhibit A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994, as filed with the Commission under
a Schedule 14A)14A (File No. 1-08430)).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive
Compensation Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual reportAnnual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1988)1988 (File No. 1-08430)).
10.6* McDermott International, Inc.'s 1992 Senior Management Stock Option
Plan (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s 10-K/Annual Report on Form10-K/A for fiscal year ended
March 31, 1994 filed with the Commission on June 27, 1994)1994 (File No.
1-08430)).
89
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- ------
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual reportAnnual Report on Form 10-K, as amended for the fiscal year ended
March 31, 1992)1992 (File No. 1-08430)).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(Incorporated(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual reportAnnual Report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992)1992 (File No. 1-08430)).
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- -----
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term
Incentive Plan, as amended (incorporated by reference to Appendix B to
McDermott International, Inc.'s Proxy Statement for its Annual Meeting
of Stockholders held on July 28,September 2, 1997, as filed with the Commission
under a Schedule 14A)14A (File No. 1-08430)).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on
September 2, 1997, as filed with the Commission under a Schedule 14A)14A
(File No. 1-08430)).
2110.12 Support Agreement between McDermott International, Inc. and McDermott
Incorporated (incorporated by reference to Exhibit 10.11 of McDermott
International, Inc.'s Annual Report on Form 10-K for the nine-month
transition period ended December 31, 1999 (File No. 1-08430)).
10.13 McDermott International, Inc.'s 2001 Directors & Officers Long-Term
Incentive Plan (incorporated by reference to Appendix A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on May 1, 2002, as filed with the Commission under a
Schedule 14A (File No. 1-08430)).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Significant Subsidiaries of the RegistrantRegistrant.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.Independent Accountants.
90