UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K
(Mark One)
F O R M 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
20022003
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o 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
1-8430001-08430McDERMOTT INTERNATIONAL, INC.
- -------------------------------------------------------------------------------- (Exact(Exact name of registrant as specified in its charter)REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1450 POYDRAS STREET NEW ORLEANS, LOUISIANA 70112-6050 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's
REPUBLIC OF PANAMA 72-0593134 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 1450 POYDRAS STREET
NEW ORLEANS, LOUISIANA70112-6050 (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
Title of each class Name of each Exchange
on which registeredCommon Stock, $1.00 par value New York Stock Exchange Rights to Purchase Preferred Stock
(Currently Traded with Common Stock)New York Stock Exchange 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]þ NO[ ]oIndicate 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'sregistrant’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]þIndicate 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].YES þ NO[ ]oThe aggregate market value of the
registrant'sregistrant’s common stock held by nonaffiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter (based on the closing sales price on the New York Stock Exchange on June 30, 2003), was approximately $408,664,534.The aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant was
$258,410,985$693,977,249 as of January31, 2003.30, 2004.The number of shares of the
registrant'sregistrant’s common stock outstanding at January31, 200330, 2004 was64,831,612.66,177,449.DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
registrant'sregistrant’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 theregistrant's 2003registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.McDERMOTT INTERNATIONAL, INC.
INDEX
-— FORM 10-KPART I
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INDEX — FORM 10-K
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PAGE48 50 51 53 54 55 56 57 109 109 109 109 109 109 109 110 113 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 Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the headings
"Risk Factors"“Risk Factors” and"Cautionary“Cautionary Statement Concerning Forward-LookingStatements"Statements” in Items 1 and 2 of Part I of this report.P A R TPART I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc.
("MII"(“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 includes:-J. Ray McDermott, S.A., a Panamanian subsidiary of MII("JRM"(“JRM”), and its consolidated subsidiaries;-McDermott Incorporated, a Delaware subsidiary of MII("MI"(“MI”), and its consolidated subsidiaries;-Babcock & Wilcox Investment Company, a Delaware subsidiary of MI("BWICO"(“BWICO”);-BWX Technologies, Inc., a Delaware subsidiary of BWICO("BWXT"(“BWXT”), and its consolidated subsidiaries; and-The Babcock & Wilcox Company, an unconsolidated Delaware subsidiary of BWICO("(“B&W"&W”)., and its consolidated subsidiaries.In this Annual Report on Form 10-K, unless the context otherwise indicates,
"we," "us"“we,” “us” and"our"“our” mean MII and its consolidated subsidiaries.On February 22, 2000, B&W and certain of its subsidiaries (collectively, the “Debtors”) filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the
"Bankruptcy Court"“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&W’s operations have been subject to the jurisdiction of the Bankruptcy Court since February 22, 2000 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 ofmanagement'smanagement’s attention, and they represent an uncertainty in the financial marketplace. See Section I,Management'sManagement’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 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, ledDuring the quarter ended June 30, 2002, due 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,&W, we wrote off our net investment in B&W. The total impairment charge of $224.7 million included our investment in B&Win the quarter ended June 30, 2002.of $187.0 million and other related assets totaling $37.7 million, primarily consisting of accounts receivable from B&W. 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 settlementiswas probable and that the valueiswas 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. As of December 31, 2003, we have updated our estimated cost of the proposed settlement to reflect current conditions, and for the year ended December 31, 2003 we recorded an aggregate increase in the provision of $18.0 million, including associated tax expense of $3.4 million. The increase in the provision is primarily due to an increase in our stock price.At a special meeting of our shareholders on December 17, 2003, our shareholders voted on and approved a resolution relating to a proposed settlement agreement that would resolve the B&W Chapter 11 proceedings. The shareholders’ approval of the resolution is conditioned on the subsequent approval of the proposed settlement by MII’s Board of Directors (the “Board”). We would become bound to the settlement agreement only when the plan of reorganization becomes effective, and the plan of reorganization cannot become effective without the approval of the Board within 30 days prior to the effective time of the plan. The Board’s decision will be made after consideration of any developments that might occur prior to the effective date, including any changes in the status of
1
the Fairness in Asbestos Injury Resolution legislation pending in the United States Senate. According to documents filed with the Bankruptcy Court, the asbestos personal injury claimants have voted in favor of the proposed B&W plan of reorganization sufficient to meet legal requirements. See
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note 20 to our consolidated financial statements included in this report forfurther information on B&W andinformation regarding developments in negotiations relating to the B&W Chapter 11proceedings.proceedings and a summary of the components of the settlement.Historically, we have operated in four business segments:
-Marine Construction Services includes the results of operations of JRM and its subsidiaries, which supplyworldwideservices tocustomers in theoffshore oil and gasexploration and production and hydrocarbon processing industries and to other marine construction companies.field developments worldwide. Thissegment'ssegment’s principal activities include the front-end and detailed engineering, fabrication1and installation of offshore drilling and production platformsfacilities andother specialized structures, modular facilities,installation of marine pipelines and subsea production systems. This segmentalso provides comprehensive project management and procurement services. This segmentoperatesthroughout the worldin most major offshore oil and gas producing regions throughout the world, including the U.S. Gulf of Mexico,West Africa,Mexico, South America, the Middle East, India, the Caspian Sea andSoutheast Asia. -Asia Pacific. See Section I, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for information on significant losses incurred by JRM in recent years and significant liquidity issues currently facing JRM.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"(“DOE”). Government Operations also includes the results of McDermott Technology, Inc.("MTI"(“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"(“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 operations of our Power Generation Group, which is conducted primarily through B&W and its subsidiaries. This segment provides a variety of services, equipment and systems to generate steam and electric power at energy facilities worldwide. Due to B&W's&W’s Chapter 11 filing, effective February 22, 2000, we no longer consolidate B&W's&W’s and itssubsidiaries'subsidiaries’ results of operations in our consolidated financial statements.Through February 21, 2000, B&W'sAmounts reported for this segment for the years ended December 31, 2002 andits subsidiaries'2001 reflect the resultsare reported as Power Generation Systemsof operations of subsidiaries not owned by B&Winat thesegment information that follows.time of the Chapter 11 filing. See Note 20 to our consolidated financial statements for information on the condensed consolidated results of B&W and its subsidiaries.Currently, excluding B&W and its subsidiaries, our operations consist of Marine Construction Services and Government Operations.
The following tables summarize our revenues and operating income by business segment for the years ended December 31, 2003, 2002 and 2001. We have restated our segment information for the years ended December 31, 2002 and 2001
and 2000. Seefor changes in our segments due to discontinued operations as described in Note 17 to our consolidated financial statements included in this report. See Note 17 for additional information about our business segments and operations in different geographic areas.
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In Millions)REVENUES Marine Construction Services $ 1,148.0 $ 848.5 $ 757.5 Government Operations 553.8 494.0 444.0 Industrial Operations - 507.2 426.3 Power Generation Systems - B&W - - 155.8 Power Generation Systems 46.9 47.8 33.8 Eliminations - (0.6) (3.7) --------------------------------------------------------------------------- $ 1,748.7 $ 1,896.9 $ 1,813.7 ===========================================================================
Year Ended December 31, 2003 2002 2001 (In Millions) REVENUES Marine Construction Services $ 1,803.9 $ 1,133.1 $ 839.7 Government Operations 531.5 553.8 494.0 Industrial Operations — — 507.2 Power Generation Systems — 46.9 47.8 Eliminations — — (0.6 )
$ 2,335.4 $ 1,733.8 $ 1,888.1
2
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In Millions)OPERATING INCOME: Segment Operating Income (Loss): Marine Construction Services $ (162.6) $ 14.5 $ (33.6) Government Operations 34.6 29.3 33.2 Industrial Operations - 9.9 9.8 Power Generation Systems - B&W - - 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 $ (320.9) $ (3.6) $ (1.0) Government Operations - (0.1) (1.1) Industrial Operations - - (0.1) ----------------------------------------------------------------------------- $ (320.9) $ (3.7) $ (2.2) ----------------------------------------------------------------------------- Equity in Income (Loss) from Investees: Marine Construction Services $ 5.3 $ 10.4 $ 2.9 Government Operations 24.6 23.0 11.1 Industrial Operations - 0.1 0.1 Power Generation Systems - B&W - - 0.8 Power Generation Systems (2.2) 0.6 (24.6) ----------------------------------------------------------------------------- $ 27.7 $ 34.1 $ (9.7) ----------------------------------------------------------------------------- Write-off of investment in B&W (224.7) - - Other unallocated (1.5) - - Corporate (23.6) (5.1) 8.0 ----------------------------------------------------------------------------- $ (673.8) $ 75.4 $ 4.9 =============================================================================
Year Ended December 31, 2003 2002 2001 (In Millions) OPERATING INCOME (LOSS): Segment Operating Income (Loss): Marine Construction Services $ (51.1 ) $ (165.3 ) $ 12.4 Government Operations 58.2 34.6 29.3 Industrial Operations — — 9.9 Power Generation Systems (0.8 ) (2.8 ) (3.6 )
$ 6.3 $ (133.5 ) $ 48.0
Gain (Loss) on Asset Disposals and Impairments — Net: Marine Construction Services $ 5.8 $ (320.9 ) $ (3.6 ) Government Operations 0.4 — (0.1 )
$ 6.2 $ (320.9 ) $ (3.7 )
Equity in Income (Loss) from Investees: Marine Construction Services $ (0.5 ) $ 5.3 $ 10.4 Government Operations 28.0 24.6 23.0 Industrial Operations — — 0.1 Power Generation Systems 0.9 (2.2 ) 0.6
$ 28.4 $ 27.7 $ 34.1
Write-off of investment in B&W — (224.7 ) — Other unallocated — (1.5 ) — Unallocated corporate (93.6 ) (23.6 ) (5.1 )
$ (52.7 ) $ (676.5 ) $ 73.3
See Note 17 to our consolidated financial statements for further information on Corporate.
B. MARINE CONSTRUCTION SERVICES
General
In January 1995, we organized JRM and contributed substantially all of our marine construction services business to it. JRM then acquired Offshore Pipelines, Inc.
("OPI")in a merger transaction.Prior to the merger with OPI, JRM was a wholly owned subsidiary of MII.As a result of the merger, JRMbecameceased to be amajority-ownedwholly owned subsidiary of MII. In June 1999, MII acquired all of the publicly held shares of JRM commonstock.stock, and JRM again became a wholly owned subsidiary of MII.The Marine Construction Services
segment'ssegment’s business involves the front-end and detailed engineering, fabrication and installation of offshore drilling and productionplatformsfacilities andother specialized structures, modular facilities,installation of marine pipelines and subsea production systems. This segment also provides comprehensive project management and procurement services. This segment operatesthroughout the worldin most major offshore oil and gas producing regions throughout the world, including the U.S. Gulf of Mexico,West Africa,Mexico, South America, the Middle East, India, the Caspian Sea andSoutheast Asia. At December 31, 2002,Asia Pacific.See Section I, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for information on significant losses incurred by JRM
owned or operated six fabrication facilities throughout the world. Its principal domestic fabrication yardin recent years andoffshore base is located on 1,114 leased acres of land near Morgan City, Louisiana. It also wholly owns or operates fabrication facilities in the following locations: near Corpus Christi, Texas; in Indonesia on Batam Island;significant liquidity issues currently facing JRM.Marine Construction Vessels 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, 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. 3JRM'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, storage and offtake ("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. Expiration dates, including renewal options, of leases covering land for JRM's fabrication yards at December 31, 2002, were as follows:
Morgan City, Louisiana Years 2004-2048 Jebel Ali, U.A.E. Year 2015 Batam Island, Indonesia Year 2028 Veracruz, Mexico Year 2024JRM ownsPropertiesWe operate a large fleet of marine
equipmentvessels used in major offshore construction. The nucleus of a"construction spread"“marine 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 December 31, 2002, JRM ownedWe currently own or, through our ownership interests in joint ventures,had interests in fiveoperate two derrick vessels, one pipelaying vessel,and eightten combination derrick-pipelayingvessels.vessels and one shearleg crane barge. The lifting capacities oftheour derrick and combination derrick-pipelaying3
vessels range from 600 to 5,000 tons. These vessels range in length from 350 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. JRM's largest vessel is the semisubmersible derrick barge 101, which we plan to sell in 2003.equipment. Six of the vessels are self-propelled, with two also having dynamic positioning systems.JRMWe alsohashave a substantial inventory of specialized support equipment for intermediate water and deepwater construction and pipelay. In addition,JRM ownswe own orleaseslease a substantial number of other vessels, such as tugboats, utility boats, launch barges and cargo barges, to support the operations ofitsour major marine construction vessels.JRM participatesThe following table sets forth certain information with respect to the major marine construction vessels utilized to conduct our Marine Construction Services business, including their location at December 31, 2003 (except where otherwise noted, each of the vessels is owned and operated by us):
Year Entered Maximum Derrick Maximum Pipe Location and Vessel Name Flag Vessel Type Service/ Upgraded Lift (tons) Diameter (inches) UNITED STATES DB 50 (a) Panama Pipelay/Derrick 1988 4,400 20 DB 16 (a) U.S.A. Pipelay/Derrick 1967/2000 860 30 Oceanic 93 U.S.A. Shearleg Crane 1976 5,000 — Intermac 600 Panama Launch/Cargo Barge (b) 1973 — — DB 60 Panama Pipelay/Derrick 1974/2003 1,800 72 MEXICO DB 101 Panama Semi-Submersible Derrick 1978 3,500 — DB 17 (c) Panama Pipelay/Derrick 1969 860 60 Mexica (d) Mexico Derrick 1966 600 — Mixteco (d) Mexico Pipelay/Derrick 1972 800 48 Huasteco (d) Mexico Pipelay/Derrick 1976 2,000 48 Olmeca II (d) Mexico Pipelay 1969 — 42 MIDDLE EAST DB 27 Panama Pipelay/Derrick 1974 2,400 60 CASPIAN SEA Israfil Husseinov (e) Azerbaijan Pipelay 1997/2003 — 60 ASIA PACIFIC DB 30 Panama Pipelay/Derrick 1975/1999 3,080 60 DB 26 (f) Panama Pipelay/Derrick 1975 900 60 DLB KP1 Panama Pipelay/Derrick 1974 660 60 Intermac 650 U.S.A. Launch/Cargo Barge (g) 1980 — —
(a) Vessel with dynamic positioning capability. (b) The dimensions of this vessel are 500’ x 120’ x 33’. (c) Owned by us and operated for our benefit by our Mexican joint venture, Construcciones Maritimas Mexicanas, S.A. de C.V., pursuant to a bareboat charter. (d) Owned and operated by our Mexican joint venture, Construcciones Maritimas Mexicanas, S.A. de C.V., and accounted for as a cost-method investment. (e) Operated by us for a subdivision of the State Oil Company of Azerbaijan. (f) Owned and operated by our Malaysian joint venture. (g) The dimensions of this vessel are 650’ x 170’ x 40’. Governmental regulations, our insurance policies and some of our financing arrangements require us to maintain our vessels in
joint ventures involving operationsaccordance with standards of seaworthiness and safety set by governmental authorities or classification societies. We maintain our fleet to the standards for seaworthiness, safety and health set by the American Bureau of Shipping, Den Norske Veritas and other world-recognized classification societies.Our principal fabrication yards are located near Morgan City, Louisiana, near Rockport, Texas, in
foreign countries that require majority ownershipIndonesia on Batam Island and in Dubai, U.A.E. In addition, we operate, through a 95% interest in a consolidated subsidiary, a ship repair yard in Veracruz, Mexico, which we use as a fabrication facility from time to time. We also operate a portion of the Shelfprojectstroy fabrication facility in Baku, Azerbaijan. This facility is owned bylocal interests. Through a subsidiary, JRM also participated in an equally owned joint venture withtheBrown & Root Energy Services unitState Oil4
Company of
Halliburton Company ("Brown & Root"), which was formed in February 1995 to combinetheoperations of JRM's Inverness and Brown & Root's NiggAzerbaijan Republic. Our fabrication facilitiesin Scotland. This joint venture was terminated effective June 30, 2001. In addition, JRM ownsare equipped with a49% interest in Construcciones Maritimas Mexicanas, S.A. de C.V.,wide variety of heavy-duty construction and fabrication equipment, including cranes, welding equipment, machine tools and robotic and other automated equipment. We fabricate aMexican joint venture, which provides marine installation services infull range of offshore structures, from conventional jacket-type fixed platforms to intermediate water and deepwater platform configurations employing Spar, compliant-tower and tension leg technologies, as well as floating, production, storage and offtake (“FPSO”) technology.Expiration dates, including renewal options, of leases covering land for JRM’s fabrication yards at December 31, 2003 were as follows:
Morgan City, Louisiana Years 2004-2048 Jebel Ali, U.A.E. Year 2015 Batam Island, Indonesia Year 2028 Veracruz, Mexico Year 2024 As a result of renewal options on the
Gulf of Mexico.various tracts comprising the Morgan City fabrication yard, we have the ability, within our sole discretion, to continue leasing almost all the land we are currently using for that yard until 2048.Foreign Operations
JRM'sJRM’s revenues, net of intersegment revenues, and its segment income (loss) derived from operations located outside of the United States,
andas well as the approximate percentages to our total consolidated revenues and total consolidated segment income (loss), respectively,follow:for each of the last three years were as follows:
Revenues Segment Income (Loss) Amount Percent Amount Percent (Dollars in thousands) Year ended December 31, 2003 $ 1,070,894 46 % $ (3,827 ) — Year ended December 31, 2002 $ 513,932 30 % $ (7,806 )(1) 2 % Year ended December 31, 2001 $ 318,733 17 % $ 6,685 9 %
Revenues Segment Income (Loss) Amount Percent Amount Percent (Dollars in thousands)Year ended December 31, 2002 $ 528,792 30% $ (5,128)(1) 1% Year ended December 31, 2001 $ 327,604 17% $ 8,801 11% Year ended December 31, 2000 $ 494,689 27% $ 5,865 -Excludes $313.0 million goodwill impairment charge.(1)Excludes $313.0 million goodwill impairment charge.We participate in joint ventures involving operations in foreign countries that sometimes require majority ownership by local interests. One of our most important joint ventures, Construcciones Maritimas Mexicanas, S.A. de C.V., is a Mexican joint venture which provides marine installation services in the Gulf of Mexico, in which we own a 49% interest.
Raw Materials
Our Marine Construction Services segment uses raw materials, such as carbon and alloy steels in various forms, welding gases,
concrete, fuel oilpaint, fuels andgasoline,lubricants, which are available from many sources. JRMisdoes notdependent upondepend on any single supplier or source for any4of these materials. Although shortages of some of these materials and fuels have existed from time to time, no seriousmaterial shortageexists atcurrently exists. However, steel prices are rising and deliveries are less than orderly, indicating that shortages may occur in thepresent time. Customers andnear future.Competition
Our Marine Construction Services segment's principal customersWe believe we are among the few marine construction contractors capable of providing the full range of services in major offshore oil and gas producing regions of the world. We believe that the substantial capital costs involved in becoming a full-service marine construction contractor create a significant barrier to entry into the market as a global, fully integrated competitor. We do, however, face substantial competition from regional competitors and less integrated providers of marine construction services, such as engineering firms, fabrication yards, pipelaying companies
including several foreign government-owned companies. These customers contract with JRM for project management, engineering, procurement, fabricationandinstallation 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-bid basis.shipbuilders.A number of companies compete
effectivelywithJRM and its joint venturesus in each of the separate marine construction phases in various parts of the world. These competitors include Allseas Marine Contractors S.A., Daewoo Engineering & Construction Co., Ltd., Global Industries Ltd.,Gulf Island Fabrication, Inc.,HeeremaOffshore ConstructionGroup,Inc.,Hyundai HeavyIndustries,Industrial Co., Ltd., Kiewit Offshore Services, Ltd., Nippon Steel Corporation, Saipem S.p.A., Stolt Offshore S.A. and Technip S.A. Contracts are usually awarded on a competitive bid basis. Although we believe customers consider, among other things, the availability and technical5
capabilities of equipment and personnel, efficiency, condition of equipment, safety record and reputation, price competition is normally the primary factor in determining which qualified contractor with available equipment is awarded a contract. Major marine construction vessels have few alternative uses and, because of their nature and the environment in which they work, have relatively high maintenance costs whether or not they are operating.
Customers
JRM’s customers are primarily oil and gas companies, including several foreign government-owned companies. JRM’s five largest customers during 2003, BP plc, Azerbaijan International Operating Company, Ras Laffan Liquified Natural Gas Company Limited, Murphy Oil Corporation, and Dominion Resources, Inc.,
Technip Offshoreaccounted for 13.0%, 11.2%, 7.7%, 7.0% andHorizon Offshore,6.7% of our total consolidated revenues, respectively. JRM’s five largest customers during 2002, Murphy Oil Corporation, BP plc, Azerbaijan International Operating Company, Dominion Resources, Inc.Our Marine Construction Services segment performs, and Phillips Petroleum Pty. Ltd., accounted for 10.1%, 7.2%, 7.0%, 5.9% and 5.0% of our total consolidated revenues, respectively.In 2001, we entered into a
substantial numbercontract with a unit ofprojectsBP for the exclusive use of our Morgan City, Louisiana fabrication yard for a period of approximately three years to perform fabrication of topsides facilities for four new major deepwater hubs for the Gulf of Mexico:Holstein, Thunder Horse, Mad DogandAtlantis. This arrangement has been cost-plus, but we expect it to be reduced to an hourly rate as the work begins to wind down in April 2004.The level of engineering and construction services required by any one customer depends upon the amount of that customer’s capital expenditure budget for any single year. Consequently, customers that account for a significant portion of revenues in one year may represent an immaterial portion of revenues in subsequent years.
Contracts
We have historically performed work on a fixed-price, cost-plus or day-rate basis or a combination of these methods. Most of our long-term contracts have provisions for progress payments.
During the year ended December 31, 2003, we were awarded the following contracts, with an estimated aggregate contract amount of $633 million, among others:
Customer Project Description Location ExxonMobil Fabricating platforms and installing platforms and pipelines Offshore Qatar BP Fabricating topsides Gulf of Mexico Shah Deniz Exploration Ltd. (BP is the operator) Installing a gas export pipeline Caspian Sea Shell Oil Company Installing pipelines Gulf of Mexico Larsen & Toubro Ltd. Fabricating and installing platforms for Qatar Petroleum Offshore Qatar Dolphin Energy Ltd. Fabricating and installing two integrated drilling and production platform complexes Qatar’s North Field We recognize our contract revenues and related costs on a percentage-of-completion basis.
This segment attemptsAccordingly, we review contract price and cost estimates periodically as the work progresses and reflect adjustments in income proportionate to the percentage of completion in the period when we revise those estimates. To the extent that 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.6
We attempt to cover
increasedanticipated increases in costs ofanticipated changes inlabor, material and service costs of our long-term contracts, either through anestimationestimate of suchchanges,charges, which is reflected in the original price, or through price escalation clauses. However, for first-of-a-kind projects we haveundertaken in recent periods, we havebeen unable to accurately forecastaccuratelytotal cost to complete until we have performed all major phases of the project.As demonstrated by ourOur experience on these long-term contracts has shown that revenue, cost and gross profit realized on fixed-price contracts will often vary from the original and subsequently 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 segmentWe may experience reduced profitability or losses on projects as a result of these variations and the risks inherent in the marine construction industry.Our arrangements with customers frequently require us to provide letters of credit or bid and performance bonds to secure bids or performance under contracts for marine construction services. While these letters of credit and bonds may involve significant dollar amounts, historically there have been no material payments to our customers under these arrangements. These arrangements are typical in the industry for projects outside the U.S. Gulf of Mexico.
Backlog
AtAs of December 31,
20022003 and2001,2002, our Marine Construction Servicessegment'ssegment’s backlog amounted to$2.1approximately $1.4 billion and$1.8$2.1 billion, respectively. This represents approximately56%44% and62%56% of our total consolidated backlog at December 31,20022003 and2001,2002, respectively. Of the December 31,20022003 backlog, we expect to recognize approximately$1.5$0.9 billion in revenues in2003,2004, $0.4 billion in20042005 and$0.2$0.1 billion thereafter.JRM has historically performed work onWhile fabrication projects are typically awarded substantially in advance of performance as 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 performanceresult of thepartnersrequired lead time for procurement, the marine construction industry is highly seasonal inan alliance. Mostsome geographic regions. Because ofJRM's long-term contracts have provisions for progress payments. Duringthe more conducive weather conditions, most installation operations are conducted in the warmer months of the yearended December 31, 2002,in those areas, and many of these contracts are awarded with only a short period of time before the desired time of project performance. Projects in ourMarine 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 fabricationbacklog may be cancelled by customers. Significant or numerous cancellations could adversely affect our business, financial condition and results oftwo 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- 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.operations.Factors Affecting Demand
Our Marine Construction Services
segment'ssegment’s activity depends mainly on the capital expenditures of oil and gas companies and foreign governments for construction of development projects. Numerous factors influence these expenditures, including:-oil and gas prices, along with expectations about future prices;-the cost of exploring for, producing and delivering oil and gas;-the terms and conditions of offshore 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; and-local and international political and economic conditions.See Section I for further information on factors affecting demand.
C. GOVERNMENT OPERATIONS
General
Our Government Operations segment provides nuclear components and various services to the U.S. Government. Examples of this
segment'ssegment’s activities include environmental restoration services and the management of government-owned facilities, primarily within the nuclear weapons complex of the DOE.This
segment'ssegment’s principal plants are located in Lynchburg, Virginia; Barberton, Ohio; and Mount Vernon, Indiana. BWXT conducts all the operations of our Government Operations segment.7
Raw Materials
Our Government Operations segment relies on certain
sole sourcesole-source suppliers for materials used in its products. We believe these suppliers are viable, and we and the U.S. Government expend significant effort to maintain the supplier base.Customers and Competition
Our Government
Operations'Operations segment supplies nuclear components for the U.S. Navy. There are a limited number of suppliers of specialty nuclear components, with BWXT being the largest based on revenues. Through the operations of this segment, we are also involved along with other companies in the operation of:-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 Louisiana andaround New Orleans, Louisiana; -Texas;the Pantex Site in Amarillo, Texas;-the Oak Ridge National Lab Site (the"Y-12"“Y-12” facility) in Oak Ridge, Tennessee; and-the Miamisburg Closure Project in Miamisburg, Ohio.All of these contracts are subject to annual funding determinations by the U.S. Government.
The U.S. Government accounted for approximately
29%21%,24%29% and23%24% of our total consolidated revenues for the years ended December 31, 2003, 20022001and2000,2001, respectively, including22%20%,18%22% and17%18%, respectively, related to nuclear components.6Backlog
At December 31,
20022003 and2001,2002, our Government Operationssegment'ssegment’s backlog amounted to$1.7$1.8 billion and$1.0$1.7 billion, or approximately44%56% and36%44%, respectively, of our total consolidated backlog. Of the December 31,20022003 backlog in this segment, we expect to recognize revenues of approximately $0.5 billion in2003, $0.42004, $0.5 billion in20042005 and $0.8 billion thereafter, of which we expect to recognize approximately90%95% in20052006 through2007.2008. At December 31,2002,2003, thissegment'ssegment’s backlog with the U.S. Government was$1.6$1.8 billion (of which$266.5$17.6 million had not yet been funded), or approximately43%55% of our total consolidated backlog. During the year ended December 31,2002,2003, the U.S. Government awarded this segment new orders of approximately$1.1 billion.$631.5 million.Factors Affecting Demand
This segment'sOur Government Operations segment’s operations are generally capital-intensive on the manufacturing side. This segment may be impacted by U.S. Government budget restraints and delays.
The demand for nuclear components for the U.S. Navy comprises a substantial portion of this
segment'ssegment’s backlog. We expect that orders for nuclear components will continue to be an increasing part of backlog for the foreseeable future.See Section I for further information on factors affecting demand.
D. PATENTS AND LICENSES
We currently hold a large number of U.S. and foreign patents and have numerous pending patent applications. We have acquired patents and licenses and granted licenses to others when we have considered it advantageous for us to do so. Although in the aggregate our patents and licenses are important to us, we do not regard any single patent or license or group of related patents or licenses as critical or essential to our business as a whole. 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.
8
E. RESEARCH AND DEVELOPMENT ACTIVITIES
We
have decentralized our research and development activities and nowconduct our principal research and development activities through individual business units at our various manufacturing plants and engineering and design offices. Our research and development activities cost approximately $39.8 million, $61.6 million$58.3 millionand$50.2$58.3 million in the years ended December 31, 2003, 20022001and2000,2001, respectively. Contractual arrangements for customer-sponsored research and development can vary on a case-by-case basis and include contracts, cooperative agreements and grants. Of our total research and development expenses, our customers paid for approximately $34.9 million, $47.8 million$46.6 millionand$34.8$46.6 million in the years ended December 31, 2003, 2002 and 2001,and 2000,respectively.F. INSURANCE
We maintain liability and property insurance in amounts we consider adequate for those risks we consider necessary. Some risks are not insurable or insurance to cover them is available only at rates that we consider uneconomical. These risks include war and confiscation of property in some areas of the world, pollution liability in excess of relatively low limits and asbestos liability. Depending on competitive conditions and other factors, we endeavor to obtain contractual protection against uninsured risks from our customers. Insurance or contractual indemnity protection, when obtained, may not be sufficient or effective under all circumstances or against all hazards to which we may be subject.
Our insurance policies do not insure against liability and property damage losses resulting from nuclear accidents at reactor facilities of our utility customers. To protect against liability for damage to a
customer'scustomer’s property, we endeavor to obtain waivers of subrogation from the customer and its insurer and are usually named as an additional insured under the utilitycustomer'scustomer’s nuclear property policy.7To protect against liability from claims brought by third parties, we are insured under the utility customer'scustomer’s nuclear liability policies and have the benefit of the indemnity and limitation of any applicable liability provision of the Price-Anderson 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 we provide environmental remediation services, we seek the same protection from our customers as we do for our 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 we do not own or operate any nuclear reactors, we have coverage under commercially available nuclear liability and property insurance for three of our four locations that are licensed to possess special nuclear materials. The fourth location 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 facilities are located at our Lynchburg, Virginia site. These facilities are insured under a nuclear liability policy that also insures the facility of Framatome Cogema Fuel Company
("FCFC"(“FCFC”), formerly B&W Fuel Company, which 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 under the Price-Anderson Act. In addition, our contracts to manufacture and supply nuclear components to the U.S. Government contain statutory indemnity clauses under which the U.S. Government has assumed the risks of public liability claims related to nuclear incidents.JRM'sJRM’s offshore construction business is subject to the usual risks of operations at
sea.sea, including accidents resulting in the loss of life or property, pollution or other environmental mishaps, adverse weather conditions, mechanical failures, collisions, property losses to our vessels, business interruption due to political action in foreign countries, and labor stoppages. 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 that could result in the escape of oil and gas into the sea.CertainLitigation arising from any such event may result in our being named as a9
defendant in lawsuits asserting large claims. Depending on competitive conditions and other factors, we have endeavored to obtain contractual
protections historically providedprotection against uninsured risks from our customers. When obtained, such contractual indemnification protection may not in all cases be supported byJRM's customers have eroded andadequate insurance maintained by the customer. These contractual protections are not available in all cases.As a result of the asbestos contained in 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. The vast majority of these claims relate to exposure to asbestos occurring prior to 1977, the year 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&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&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.8B&W had agreements with the majority of its excess-coverage insurers concerning the method of allocating products liability asbestos claim payments to the years of coverage under the applicable policies. See Note 20 to our consolidated financial statements for information regarding B
&W's&W’s Chapter 11 filing and liability for nonemployee asbestos claims.We have several wholly owned insurance subsidiaries that provide general and automotive liability insurance and, from time-to-time,
builder'sbuilder’s risk within certain limits, marine hull andworkers'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.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'sbuilder’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 December 31,
2002,2003, we employed approximately18,20016,000 persons compared with13,30018,200 at December 31,2001.2002. Approximately7,1005,000 of our employees were members of labor unions at December 31,2002,2003, compared with approximately4,7007,100 at December 31,2001.2002. Many of our operations are subject to union contracts, which we customarily renew periodically. Currently, we consider our relationship with our employees to be satisfactory.10
We do not consider the possibility of a shortage of qualified personnel currently to be a major factor in our business. If demand for marine construction services were to increase rapidly, retention of qualified people might become more difficult without significant increases in compensation.
H. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A wide rangeGeneral
Many aspects of
federal, state, localour operations and properties are affected by political developments and are subject to both domestic and foreignlaws, ordinances andgovernmental regulations,apply to our operations,including those relating to:-construction and equipping of offshore production platforms and other marine facilities;constructing and equipping electric power and other industrial facilities;-possessing and processing special nuclear materials;-marine vessel safety;workplace health and safety;currency conversions and-repatriation;taxation of foreign earnings and earnings of expatriate personnel; andprotecting the environment.In addition, we depend on the demand for our marine construction services from the oil and gas industry and, therefore, are 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 offshore exploration and development drilling for oil and gas for economic and other policy reasons would adversely affect our operations by limiting demand for our 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.
We are required by various other governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. The kinds of permits, licenses and certificates required in our operations depend upon a number of factors.
The exploration and development of oil and gas properties on the continental shelf of the United States is regulated primarily under the U.S. Outer Continental Shelf Lands Act and regulations promulgated thereunder. These laws require the construction, operation and removal of offshore production facilities located on the outer continental shelf of the United States to meet stringent engineering and construction specifications. Similar regulations govern the plugging and abandoning of wells located on the outer continental shelf of the United States and the removal of all production facilities. Violations of regulations issued pursuant to the U.S. Outer Continental Shelf Lands Act and related laws can result in substantial civil and criminal penalties as well as injunctions curtailing operations.
We cannot determine the extent to which new legislation, new regulations or changes in existing laws or regulations may affect our future operations.
Environmental
Our operations and properties are subject to a wide variety of increasingly complex and stringent foreign, federal, state and local environmental laws and regulations, including those governing discharges into the
existingair andevolving legalwater, the handling andregulatory standards relatingdisposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by hazardous substances and the health and safety of employees. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Some environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Such laws and regulations may also expose us to liability for theenvironment.conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were performed.These
standardslaws and regulations include the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended("CERCLA"(“CERCLA”), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery11
Act and similar laws that provide for responses to, and liability for,
9releases of hazardous substances into the environment. These standardslaws and regulations also include similar foreign, state or local counterparts to these federal laws, which regulate air emissions, water discharges, hazardous substances and waste, and require public disclosure related to the use of various hazardous substances. Our operations are also governed by laws and regulations relating to workplace safety and worker health, primarily, in the United States, the Occupational Safety and Health Act and regulations promulgated thereunder.We
believeare currently in the process of investigating and remediating some of our former operating sites. Although we have recorded reserves in connection with certain of these matters, due to the uncertainties associated with environmental remediation, we cannot assure you thatour facilities are in substantial compliance with current regulatory standards.the actual costs resulting from these remediation matters will not exceed the recorded reserves.Our compliance with U.S. federal, state and local environmental control and protection regulations resulted in pretax charges of approximately $10.3 million in the year ended December 31, 2003. In addition, compliance with existing environmental regulations necessitated capital expenditures of $0.3 million in the year ended December 31,
2002.2003. We expect to spend another$1.4$2.4 million on such capital expenditures over the next five years.Complying 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 anticipate that environmental control and protection standards will become increasingly stringent and costly. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial position as a result of future compliance with existing environmental laws and regulations. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures by us, which may be material. Accordingly, there can be no assurance that we will not incur significant environmental compliance costs in the future.In addition, offshore construction and drilling in some areas have been opposed by environmental groups and, in some areas, have been restricted. To the extent laws are enacted or other governmental actions are taken that prohibit or restrict offshore construction and drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general and the offshore construction industry in particular, our business and prospects could be adversely affected.
We have been identified as a potentially responsible party at various cleanup sites under 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 be undertaken at certain of our current and former plant sites. During the fiscal year ended March 31, 1995, we decided to close B
&W's&W’s nuclear manufacturing facilities in Parks Township, Armstrong County, Pennsylvania (the"Parks Facilities"“Parks Facilities”), and B&W proceeded to decommission the facilities in accordance with its existing license from the Nuclear Regulatory Commission(the"NRC"(the “NRC”). B&W subsequently transferred the facilities to BWXT in the fiscal year ended March 31, 1998. During the fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC on a plan that provides for the completion of facilities dismantlement and soil restoration by 2001 and license termination in 2003. Substantially all work has been completed and BWXT expects torequest approval fromfile the application for license termination in the first quarter of 2004. BWXT expects that the NRCto releasewill grant thesite for unrestricted use at that time.request and terminate the license in the normal course. At December 31,2002,2003, the remaining provision for the decontamination, decommissioning and closing of these facilities was$0.4$0.3 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"(“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 nonradiation12
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'sNRC’s decommissioning regulations require BWXT and 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 assurance10aggregating $29.9$27.1 million during the year ending December 31,20032004 by issuing letters of credit for the ultimate decommissioning of all their licensed facilities, except one. This facility, which represents the largest portion ofBWXT'sBWXT’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'sMTI’s NRC licenses forbyproductby-product 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 December 31,
20022003 and2001,2002, we had total environmental reserves (including provisions for the facilities discussed above) of$20.6$17.0 million and$21.2$20.6 million, respectively. Of our total environmental reserves at December 31, 2003 and 2002,and 2001, $8.3$9.0 million and$6.1$8.3 million, respectively, were included in current liabilities. Our estimated recoveries of these costs totaling $0.2 millionand $3.2 million, respectively,are included in accounts receivable-— other in our consolidated balance sheet at December 31,20022003 and2001.2002. 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 haveJRM currently faces significant near-term liquidity issues,
currently facing our company,including significant losses onour EPIC sparcertain projectsin the current year which require funding in 2003, as well as the need to refinance our newand a lack of letter of creditfacility, which is scheduled to expire in April 2004.capacity.Due primarily to the losses incurred on
theJRM’s threeEPIC sparSpar projects, theCarina Ariesproject and theBelanakFPSO project, which we describe in this report, we expect JRM to experience negative cash flowsduring 2003. Completionfor three of theEPIC spar projects hasfour quarters in 2004 andwill continueexpect JRM toput a strain on JRM's liquidity. JRM intendsrequire additional third party sources of liquidity in the second quarter of 2004. We intend to funditsJRM’s cash needsthroughwith the other potential borrowingson ouror credit facilities permitted under the indenture governing JRM’s recent debt offering, including a planned new letter of credit facility,intercompany loans from MIIand sales of nonstrategic assets, including certain marine vessels.In addition, underHowever, with regard to asset sales, covenants contained in thetermsindenture governing JRM’s recent debt offering generally restrict JRM from using the proceeds ofourasset sales involving more than $10 million to fund working capital needs.JRM’s letters of credit are currently secured by collateral accounts funded with cash equal to 105% of the amount outstanding. Therefore, we are currently seeking a new
credit facility, JRM'sletter of creditcapacity was reduced from $200 millionfacility that would not require cash collateral, which is critical to$100 million. This reduction does not negatively impact our abilityJRM’s liquidity. If we are unable toexecute the contracts in our current backlog. However, it will likely limit JRM'sobtain this new facility, JRM’s ability to pursue projects fromcertaincustomers who require letters of credit as a condition ofaward. We are exploring other opportunitiesaward will be limited and JRM’s liquidity will continue toimprove our liquidity position, including better management of working capital through process improvements, negotiations with customersbe restricted. Our ability torelieve tight schedule requirements and to accelerate certain portions of cash collections, and alternative financing sources for lettersobtain a new letter of credit facility forJRM.JRM will depend on numerous factors, including JRM’s operating performance and overall market conditions, including conditions impacting potential third party lenders.If we are unable to obtain additional third party financing for a new letter of credit facility for JRM,
experiences additional significant contract costs on the EPIC spar projects as a result of unforeseen events,or obtain other borrowings or sell JRM assets, wemayexpect JRM will be unable tofund all our budgetedmeet its working capitalexpendituresneeds. These factors cause substantial doubt about JRM’s ability to continue as a going concern. If JRM is unable to access third party financing for a new letter of credit facility, JRM would have to consider various alternatives including a potential restructuring or filing for receivership. Should JRM file for receivership or enter Chapter 11 proceedings, we may13
have to stop consolidating the results of operations of JRM and
meet allits subsidiaries (which consist of ourfunding requirements for contractual commitments. In this instance, weMarine Construction Services segment) effective as of the date of the Chapter 11 filing. A Chapter 11 filing would berequired to defer certain capital expenditures, which in turn could result in curtailmentan event ofcertain 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 rightsdefault under theintercompany agreement we describe in Management's Discussion and Analysisindenture governing JRM’s recently issued notes. See liquidity for discussion concerning potential impact ofFinancial 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 undera Chapter 11 filing on ournew 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 11refinance 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.pension plans.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"“ACC”) and the Future Claimants Representative (the"FCR"“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&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 consensualthird amended joint plan of reorganization and accompanying form of settlement agreement that is on file with the Bankruptcy Court.AtAs of December 31,2002,2003, weestablishedhave recorded 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 31,2002.2003.The asbestos claims and the B&W Chapter 11 proceedings require a significant amount of
management'smanagement’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 approved 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 andas totheir participation in theparticipationfunding ofthose insurers in a plan to fundthe settlementtrusts; 12-trust;the BankruptcyCourt'sCourt’s decisions relating to numerous substantive and procedural aspects of the Chapter 11proceedings, includingproceedings;theCourt's periodic determinations as to whether to extendoutcome of objections and potential appeals involving approval of theexisting preliminary injunction that prohibits asbestos liability lawsuitsdisclosure statement andother actions for which there is shared insurance from being brought against nonfiling affiliatesconfirmation of the plan of reorganization;conversion of B&W, including MI, JRM and MII; -&W’s debtor-in-possession financing to exit financing;the pension plan spin-off contemplated by the proposed settlement;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,andthe 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.other insurance-related issues.14
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,future.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&W’s debtor-in-possession revolving credit facility (the"DIP“DIP CreditFacility"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 31,2002,2003, approximately$51.4$42.0 million in letters of credithavehas 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 31,2002,2003, 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$84.3 million, of which$107.7$80.1 million related to the business operations of B&W and its subsidiaries.13As 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 andanticompetitive 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 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'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 andattorneys'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 litigationor any actions that others may take in connection with the allegations we describe abovecould 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-the cost of exploring for, producing and delivering oil and gas;-the sale and expiration dates of available offshore leases;-15
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 marine construction 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 marine construction 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 theThe 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 theworld'sworld’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 andgas in recent months.gas. Thewarcontinuing instability and unrest 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 andgas than those experienced in recent months.gas. In addition, thewar withcontinued unrest in 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 armedArmed conflicts, terrorism and their effects on us or our marketswill notmay 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 andprofitability willdecline.decline and we may suffer losses.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 realizeactual revenues or costs being different from those we originally estimated and may result in reduced profitability or losses on projects.Specifically, duringIn particular, if steel prices rise beyond what we have estimated, we may suffer reduced profitability or further losses on our fixed-price projects, including those contracts in our backlog. During 2002 and 2003, our Marine Construction Services segmenthasexperienced material losses onitsthreeEngineer, Procure, Install and Construct ("EPIC") spar projects:of our Spar projects,Medusa, Devils Tower andFrontRunner.Runner;theCarina Ariesproject; and theBelanakFPSO project. These contractsarewere first-of-a-kind for JRM, as well as long-term in nature. We have experienced schedule delays and cost overruns on these contracts that have adversely impacted our financialresults. Theseresults and liquidity. Three of these projects, theFront Runner, theCarina Ariesand theBelanakFPSO projects, continue to facesignificantthese risks. For more information, see discussion of these projects in the Marine Construction Services Segment — Recent Operating Results and Outlook section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.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
15proportionate 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. AtAs of December 31,2002,2003, we have provided for our estimated losses onthe three EPIC spar projects and othercontracts whicharewere inalossposition. Although we continually strive to improve our ability to estimatepositions. Our current estimates of our contract costs and the profitabilityassociated withof our long-term projectsit is reasonably possible that current estimatescould change, and adjustments to overall contract costs may continue to be significant in future periods.16
Deficiencies in JRM’s internal controls and procedures, including procedures to estimate project costs, could have an adverse effect on us.
As described in Item 9A, we have identified certain matters involving internal controls and operations of our Marine Construction Services segment which, among other things, impact our ability to forecast accurately total costs to complete fixed-price contracts, primarily first-of-a-kind projects, until we have performed all major phases of the work. In addition, our auditors have advised us that these matters are considered a “material weakness” in JRM’s ability to accurately estimate costs to complete first-of-a-kind projects. A material weakness is a significant deficiency in a significant control or an aggregation of such deficiencies that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
Our ability to run our businesses profitably requires us to estimate accurately the cost of executing projects we bid for and, once we are awarded a contract, to control those costs during execution. This is particularly true in connection with the long-term, fixed-price, single-provider contracts for complex projects that represent an increasingly large part of our Marine Construction Services business. Moreover, because we recognize revenue, income and loss on JRM’s long-term contracts on a percentage-of-completion basis, the accuracy of our financial results depends on our ability to maintain accurate forecasts of project costs throughout the project’s life. JRM’s management is implementing measures to correct and improve the effectiveness of its internal controls and is evaluating the effectiveness of these measures. However, we cannot be certain that the measures we take will be effective or that other deficiencies in our internal controls and procedures that could occur in the future will not result in material losses or otherwise have a material adverse effect on us.
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,"“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 wouldchangehave changed the tax law applicable to corporations that have completed inversion transactions. Some of the legislative proposalshavecontemplated 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 proposalshavealso 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 generally encountered in
domesticour U.S. operations. These include:-risks of war,particularly the risks associated with the war involving the United States and Iraq,terrorism and civil unrest;-17
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 construction 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.
16Our 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.
SomeInsurance against some of the risks inherent in our operationsareis eithernot insurableunavailable orinsurance isavailable 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 andself insuredself-insured retentions. These changes were in addition to similar changes we had seen in certain markets prior to September 11, 2001. Riskswhichthat are difficult to insure include, among others, the risk of war and confiscation of property incertainsome 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.
17In addition, if the proposed settlement in the bankruptcy proceedings involving B&W is finalized, MII and its subsidiaries will assign to a trust formed in connection with the settlement their rights to insurance coverages that have substantial available limits of coverage for, among other things, asbestos-related personal injury claims. As a result,
18
these insurance rights would no longer be available to MII and its subsidiaries to address any future claims against them, including any future asbestos-related personal injury claims against them.
We depend on significant
customers. Some of our industrycustomers, including the U.S. Government.Our Marine Construction Services and Government Operations 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
offshoreMarine Construction Services 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.1819
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 offshore 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. Such expenditures and liabilities may adversely affect our business, results of operations or financial condition. See Section H above 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
3.3 in Part I of this report.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“Factors AffectingDemand"Demand” in each of Sections B andC.C above. For a discussion of our insurance coverages and uninsured exposures, see SectionF.F above. For discussions of various legal proceedings in which we are involved, in addition to those we refer to above, see Item3.3 in Part I of this report. 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“Cautionary Statement Concerning Forward-LookingStatements"Statements” in SectionJ.J below.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"“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"“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-"Business2 - “Business andProperties"Properties” and Item3-"Legal Proceedings"3 — “Legal Proceedings” in Part I of this report and in19Item 7 - "Management's— “Management’s Discussion and Analysis of Financial Condition and Results ofOperations"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 them20
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.
• general economic and business conditions and industry trends; • general developments in the industries in which we are involved; • decisions about offshore developments to be made by oil and gas companies; • the highly competitive nature of our businesses; • our future financial performance, including compliance with covenants in our credit agreements and other debt instruments, and availability, terms and deployment of capital; • the continued availability of qualified personnel; • the operating risks normally incident to offshore marine construction operations; • the ability of JRM to maintain its forecasted financial performance, including its ability to manage costs associated with its fixed-price long-term projects; • the ability of JRM to obtain a letter of credit facility; • changes in, or our failure or inability to comply with, government regulations and adverse outcomes from legal and regulatory proceedings; • 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, and liabilities relating to, existing or future environmental regulatory matters; • rapid technological changes; • realization of deferred tax assets; • 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 Asia Pacific; • 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. 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
21
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.www.mcdermott.com. We make available through this website under"SEC“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, theSEC.Securities and Exchange Commission (the “SEC”). We have adopted, and posted on our website: our Corporate Governance Guidelines; a Code of Ethics for our Chief Executive Officer, and other Senior Financial Officers; and charters for the Audit, Governance and Compensation Committees of our Board.Item 3. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the DOJ, the SEC and the European Commission. As a result of our prompt disclosure of the allegations, JRM, certain other affiliates and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the DOJ for any anticompetitive acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities and affiliates. The DOJ had also requested additional information from us relating to possible anticompetitive 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. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. We also terminated the McDermott-ETPM joint venture, and on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed J. Ray McDermott Middle East, Inc. 21On 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 several related entities
(the "Phillips Plaintiffs"(collectively, the “Phillips Plaintiffs”) filed a lawsuit in the U.S District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, Heerema Offshore Construction Group, Inc. (“Heerema”), JRM’s former HeereMac joint venture with Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anticompetitive 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 theplaintiffs'plaintiffs’ businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea andthe Far EastAsia Pacific (the"Phillips Litigation"“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"“Statoil”), filed a similar lawsuit in the same court (the"Statoil Litigation"“Statoil Litigation”). In addition to seeking injunctive relief, actual damages andattorneys'attorneys’ fees, the plaintiffs in the Phillips Litigation and Statoil Litigation requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to thecourt'scourt’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"“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, theplaintiffs'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 endedAs of December 31,2002,2003, Heerema, MII andMIISaipem had executed agreements to settle the heavy-lift antitrust claimsagainst Heerema and MIIwithBritish Gas and Phillips, and the Court has entered an order of dismissal.all claimants in these proceedings. The cases have now all been concluded.In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the U.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 anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act (the
"Shell Litigation"“Shell Litigation”). 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 itsaffiliates;affiliates (collectively, “Chevron Texaco”); Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of itsaffiliates;affiliates (collectively, “Marathon”); VK-Main Pass Gathering Company, L.L.C.; Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.;22Chevron 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..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 andattorneys'attorneys’ fees, the plaintiffs in the Shell Litigation 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 districtcourt'scourt’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 thecourt'scourt’s decision on our motion to dismiss the foreign claims.During the year endedAs of December 31,2002,2003, Heerema and MII had22
executed agreements to settle or dismiss the heavy-lift antitrust claims against Heerema and MII with
Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf Exploration UK PLCall plaintiffs except Chevron Texaco andElf 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 anMarathon. An order ofdismissal.dismissal related to the cases settled or dismissed has been entered by the court. We do not believe that a material loss, above amounts already provided for, with respect to these matters is likely. Inaddition, Woodside Energy, Ltd.December 2003, Chevron Texaco fileda motionsuit in the High Court ofdismissal with prejudice, which was granted. Recently, we entered into a settlement agreement with Conoco, Inc.London alleging antitrust injury regarding seven named projects occurring in the period from 1993 to 1997. We are presently reviewing the claims presented andthe Court entered an order of dismissal.have engaged U.K. counsel to advise us on this matter.On December 15, 2000, a number of Norwegian oil companies filed lawsuits against MII,
Heeremac,HeereMac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing Act of 1953 in connection with projects in Norway. Plaintiffsincludeincluded Norwegian affiliates of various of the plaintiffs in the ShellLitigation pending in Houston.Litigation. 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 casesAs of December 31, 2003, these Norwegian lawsuits wereheardsettled and an order of dismissal of all pending litigation was entered by theConciliation Boards in Norway during the first week of October 2001. The Conciliation Boards referred the cases to the court of first instance for further proceedings. The plaintiffs have one year from the date of referral to proceed with the cases. Several of the plaintiffs who filed cases before the Conciliation Boards have filed writs with the courts of first instance in order to commence the court proceedings. Settlement discussions are underway with these plaintiffs. As a result of the initial allegations of wrongdoing in March 1997, we formed a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. Our Board of Directors concluded that the special committee was no longer necessary, and it was dissolved in 2002. Because we have reached settlement agreements with the vast majority of the oil company claimants, we have adjusted our reserve to more appropriately reflect the risks and exposures of the remaining claims.Norwegian court.B&W and Atlantic Richfield Company
("ARCO"(“ARCO”) are defendants in a lawsuit filed on June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District Court for the Western District of Pennsylvania. The suit involves approximately 500 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the"Hall Litigation"“Hall Litigation”). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36.7 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 thecourt'scourt’s rulings on certain evidentiary matters, which, following B&W's&W’s bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review.In 1998, B&W settled 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 a controversy between B&W and its insurers as to the amount of coverage available under
23the 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&W’s insurers; and (2) the scope of theinsurers'insurers’ defense obligations to B&W under these policies. With respect to the trigger of coverage, the Pennsylvania State Court held that"manifestation"“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 theinsurers'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 theinsurers'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&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&W’s insurers filed a petition for the allowance of an appeal in the Pennsylvania Supreme Court. The Pennsylvania Supreme Courthas not yet made any determination regarding whether to accept discretionary reviewdenied the insurer’s petition for the allowance ofthe insurers' appeal.an appeal by order dated December 2, 2003.The
plaintiffs'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&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 BankruptcyCourt'sCourt’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 BankruptcyCourt'sCourt’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 materially23
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'sBWXT’s formation and an overall corporate restructuring.In December 1998, a subsidiary of JRM (the
"Operator Subsidiary"“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"(“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 complete the project 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, the owner of the vessel that attempted the lift of the deck module (the"Owner Subsidiary"“Owner Subsidiary”). Both the Owner Subsidiary and the Operator Subsidiary were subsequently tendered as direct defendants to Texaco. In addition toTexaco'sTexaco’s claims in the federal court action, damages for the loss of the south deck module have been sought byTexaco's builder'sTexaco’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 itsbuilder'sbuilder’s risk insurers in the federal court proceedingapproximateapproximated $280 million.Texaco'sTexaco’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 OperatorSubsidiary'sSubsidiary’s highly extraordinary negligence served as a superceding cause of the loss. The finding was subsequently set forth in a written order dated April 5, 2002, which found24against the Owner Subsidiary on the claims of Texaco's builder'sTexaco’s builder’s risk insurers in addition to the claims of Texaco. On May 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 OwnerSubsidiary'sSubsidiary’s motions for summary judgment with respect toTexaco'sTexaco’s claims against the Owner Subsidiary, and vacated its previous findings to the contrary.The Court has not yet ruled onOn March 31, 2003, the district court granted the OwnerSubsidiary's similarSubsidiary’s motion for dismissal againstTexaco's builder'sTexaco’s builder’s risk underwriters. A final judgment was entered by the district court on October 30, 2003 from which an appeal has been taken by Texaco’s builder’s risk insurers.The case had been transferredIn the fourth quarter of 2003, Texaco, JRM and JRM’s underwriters settled the claims of Texaco for consequential damages. We have an agreement with our insurers under which based on this settlement we are obligated to pay $1.25 million per year through 2008 as an adjustment to premiums of prior years. This agreement resulted in anew district court judge, but was subsequently transferred back tocharge of approximately $5.4 million for theoriginal district court judge. The scheduled trial date of February 10, 2003 on damages and certain insurance issues has been continued without date.year ended December 31, 2003. The trial in the binding arbitration proceeding commenced on January 13, 2003,and hasproceeded on various intermittent datesthrough March 14,thereafter andwill recommence on May 26,concluded in December 2003,for one week and at various times thereafter. Although the Owner Subsidiary is not a partywith final briefs relating tothe arbitration, we believe that theJRM’s claims against Texaco filed in March 2004. An arbitration decision with regard to JRM’s claims is expected in theOwner Subsidiary, like those against the Operator Subsidiary, are governed by the contractual provisions which waive the recoverysecond quarter ofconsequential damages against the Operator Subsidiary and its affiliates.2004. We plan to vigorously pursue the arbitration proceeding and defend any appeals processif necessary,in the federal court action, and we do not believe that a material loss, above amounts already provided for, with respect to these matters is likely. In addition, we believe our insurance will provide coverage for thebuilder's risk and consequential damagefederal court claims in the event of liability. However, the ultimate outcome of the proceedingsand any challenge by our insurers to coverageis uncertain, andan 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 froman 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'sLloyd’s and Turegum Insurance Company (the"Plaintiff Insurers"“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&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.TheyOur 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. The Plaintiff Insurers also allege that MII and B&W have wrongfully attempted to expand theunderwriters'underwriters’ obligations24
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
terminatingvacating 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&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 PlaintiffInsurers'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 grantedMII'sMII’s and B&W's&W’s motion for summary judgment and dismissed the declaratory judgment action filed by the Plaintiff Insurers. The ruling concluded that the PlaintiffInsurers'Insurers’ claims lacked a factual or legal basis.Our agreement with the 25underwriters 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 theunderwriter'sunderwriter’s contractual obligations and underscores that this coverage is available to settle B&W's&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&W’s counterclaims against the Plaintiff Insurers and against other insurers. The parties agreed to dismiss without prejudice those of B&W's&W’s counterclaims seeking a declaratory judgment regarding theparties'parties’ respective rights and obligations under the settlement agreement. B&W's&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&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. A trial of this counterclaim is presently scheduled for April 19, 2004, but the parties are working to finalize a settlement of the counterclaim prior to commencement of the trial. 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 August 5, 2003, certain underwriters at Lloyd’s, London and certain London Market companies (the “London Insurers”) commenced a new adversary proceeding against B&W in the Bankruptcy Court for the Eastern District of Louisiana, which makes allegations similar to those made in the prior adversary action. The complaint of the London Insurers alleges that B&W anticipatorily repudiated the 1990 settlement agreement between B&W and the London Insurers. The alleged anticipatory repudiation is based primarily on B&W’s submission of the Joint Plan to the Bankruptcy Court. The complaint alleges that the London Insurers’ claims from the first adversary action that were ruled to be premature are now ripe for adjudication, given that B&W has reached agreement on a consensual plan of reorganization with the representatives of asbestos claimants. In addition to seeking unspecified damages for this alleged anticipatory repudiation, the complaint also seeks declaratory relief as to the London Insurers’ obligations to indemnify B&W for its asbestos-related claims and seeks to prevent the assignment of rights to asbestos bodily injury coverage to the Asbestos PI Trust. On or about August 6, 2003, a similar lawsuit was filed in the District Court by the London Insurers against MII. The London Insurers also filed a motion to withdraw the reference with respect to the action pending in the Bankruptcy Court, seeking to transfer it from the Bankruptcy Court to the District Court. B&W and MII have each filed motions to dismiss or, in the alternative, to stay the actions filed against each of them by the London Insurers. The Court has not ruled on the London Insurers’ motion to withdraw the reference or on B&W’s or MII’s motion to dismiss or stay. No discovery has been taken in either case. However, we do not believe that a material loss with respect to these matters is likely.
On or about August 22, 2003, Continental Insurance Co. (“Continental”) commenced an action in the Eastern District of Louisiana against MII and MI and a similar adversary action against B&W in the Bankruptcy Court. These actions make allegations similar to those made in the prior adversary actions of the London Market Insurers. The complaints of Continental allege, among other things, that MII anticipatorily repudiated the settlement agreement MII and B&W had entered into in 2000 with Continental relating to insurance payments by Continental as a result of asbestos-related products liability claims. The parties have reached a settlement of these actions, and the Bankruptcy Court has approved the settlement.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers Casualty and Surety Company (collectively,
"Travelers"“Travelers”) filed an adversary proceeding against B&W and related entities in the U.S. Bankruptcy25
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"“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 toTravelers'Travelers’ complaints, denying that previous agreements operate to release Travelers from coverage responsibility for asbestos"non-products"“non-products” liabilities and asserting counterclaims requesting a declaratory judgment specifyingTravelers'Travelers’ duties and obligations with respect to coverage for B&W's&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 partiesserveserved to release Travelers from any coverage responsibility for asbestos"non-products" claims. On August 14, 2002,“non-products” claims and Phase II addressing whether, in theCourt grantedabsence of such a release, Travelers would be obligated to cover any additional asbestos-related bodily injury claims asserted against B&W's and MII's motion for leave to file an amended answer and counterclaims, adding additional counterclaims against Travelers. Discovery&W. After discovery was completed,in September 2002 andthe parties filed cross-motions for summary judgment on Phase I issues. On August 22, 2003, the Court granted summary judgment to B&W, the ACC, the FCR, MI and MII, and against Travelers, finding that the agreements did not release Travelers from all asbestos liability and further finding that MII and MI were not liable to indemnify Travelers for asbestos-related non-products claims under those agreements. One of our captive insurers reinsured certain coverages provided by Travelers to B&W, and therefore, our captive insurer may have certain exposures, subject to the terms, conditions and limits of liability of the reinsurance coverages, in the event Travelers is ultimately found liable for any amounts to B&W, on account of asbestos-related non-products personal injury claims. The issue of whether Travelers will have any additional coverage liability to B&W will be considered in Phase II of the litigation, whichwere heard on February 26, 2003. We are awaiting the Court's ruling on these motions. No trial datehasbeen scheduled.not yet commenced.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&W’s cancellation of a $313 million note receivable and B&W's&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&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&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 the 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 counts26presented by the ACC and the FCR that we believe are resolved by the February 8, 2002 ruling. On March 20,By Order and Judgment dated April 17, 2002,at a hearing inthe Bankruptcy Courtthe judgegranted 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 OrderandJudgment dated April 17, 2002 thatdismissed the proceeding with prejudice. On April 26, 2002, the ACC and the 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 the FCR have not yet filed their reply brief pending discussions regarding settlement and a consensual joint plan of reorganization. If a consensual joint plan of reorganization is confirmed, the ACC and the FCR have agreed to dismiss this appeal with prejudice. 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 April14, 2003.12, 2004. See Note 20 to our consolidated financial statements for information regarding B&W's&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 February 2002, one of our subsidiaries, J. Ray McDermott West Africa, Inc. ("JRMWA"), and Global Energy Company Limited ("GEC") entered into a joint 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 CommissionSEC 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 27recently become aware ofAs we reported in our annual report on Form 10-K for the year ended December 31, 2002, the SEC26
has issued a formal order of investigation
issued by the SECin connection with its inquiry, pursuant to which theStaffstaff of the SEC has requested additional information from us and several of our current and former officers and directors. We continue to cooperate fully with both inquiries and have provided all information that has been requested. Several of our current and former officers and directors have voluntarily given interviews and have respondedor are in the process of responding,to SEC subpoenas requesting additionalinformation.documents and testimony.We have been advised by the New York Stock Exchange that it is reviewing transactions in MII securities prior to our May 6, 2003 earnings announcement. We have provided all information requested by the New York Stock Exchange and intend to cooperate fully with its review.
On July 12, 2002, AE Energietechnic GmbH (“Austrian Energy”) filed 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, the former SK Energi, now Energi E2 A/S (“E2”), for construction of a biomass boiler facility in Denmark. As a result of performance delays attributable to Austrian Energy and other factors, E2 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 E2’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. In June 2003, Volund reached a settlement with E2 in this matter and recorded a $1.1 million charge to earnings. This amount has been re-evaluated and reduced to $0.4 million in December 2003. In February 2004, Volund and Austrian Energy reached agreement on a claim amount of approximately $4.0 million to be entered into the Austrian Bankruptcy Court for approval. While a dividend of the claim is expected, the amount of that dividend is not currently known. Depending on the final resolution of the E2 claims and Volund’s claims against Austrian Energy, an adjustment of the purchase price from the sale of Volund to B&W may be required. Such adjustment would be recorded as a change to the estimated cost of the B&W Chapter 11 settlement. See Note 2 to our consolidated financial statements for information concerning the sale of Volund to B&W.
On July 8, 2003, Bay Ltd. (“Bay”), a subcontractor for two of JRM’s Spar projects, theMedusaandDevils Towerprojects, filed a demand for arbitration in Houston, Texas seeking approximately $32.2 million in damages and asserting various liens against theMedusaandDevils Towerfacilities. On July 17, 2003, JRM filed a Complaint and Motion to Compel Arbitration in the U.S. District Court for the Southern District of Texas against Bay. The federal court ruled that arbitration should proceed in accordance with the applicable provisions of the Spar agreement. JRM filed its own demand for arbitration in Houston, Texas, seeking damages against Bay arising from Bay’s performance of work on theDevils Towerproject. Bay filed a counterclaim in that action, seeking approximately $7.6 million. No dates for the arbitration have been scheduled. On December 30, 2003, Bay dismissed its arbitration demand filed in Houston, Texas.
In addition, JRM filed a Complaint for Preliminary and Permanent Injunctive Relief and for Damages in the U.S. District Court for the Eastern District of Louisiana with regard to claims against Bay arising from Bay’s performance of work on theMedusaproject. In that complaint, JRM seeks in excess of $10 million as a result of Bay’s various breaches of contract. Bay filed a counterclaim in the proceedings seeking damages of approximately $24 million and enforcement of its alleged lien rights. The matter is set for trial in March 2005.
We plan to vigorously prosecute our claims in the Bay arbitration and defend the counterclaim. We have provided for our estimated losses in these matters as part of related contract costs, and we do not believe any additional material loss with respect to these matters is likely. However, the ultimate outcome of these proceedings is uncertain and an adverse ruling, either in the arbitration or the court proceedings, could have a material adverse impact on our consolidated financial position, results of operations and cash flow.
On December 9, 2002, a class action proceeding entitledDoug Benoit, et al. v. J. Ray McDermott, Inc. et al.was initiated against one of JRM’s subsidiaries and numerous third-party defendants in the 58th Judicial District Court of Jefferson County, Texas. This proceeding involves approximately 140 plaintiffs who have alleged injuries as a result of exposures to asbestos and welding fumes while working onboard JRM’s marine construction vessels or in JRM’s fabrication facilities. Trial of some of these claims is set for July 5, 2004. We believe that most or all of
27
these claims are subject to applicable workers’ compensation laws or comparable provisions of the Jones Act. We cannot now determine the result of these claims, and we anticipate that other similar claims may be filed in the future. Nevertheless, we do not expect that the outcome of these actions will have a material adverse impact on our financial position, results of operations or cash flows.
On or about November 5, 2003 a class action proceeding entitledJose Fragoso, et al. v. J. Ray McDermott, Inc. et al.was commenced in the 404th Judicial District Court of Cameron County, Texas. This proceeding involves 163 nonemployee plaintiffs who have alleged negligence for exposure to silica while working at an unspecified location. Thereafter, nine similar lawsuits were filed in the same district by the same law firm. In total, there are approximately 500 plaintiffs. In addition to JRM and MII, the suits name seven other premises defendants and allege additional claims against more than 70 product defendants. These ten proceedings are in the initial stages, and no trial has been set at this time in any of these proceedings.
Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or arbitration proceedings or subject to disputes or claims related to our business activities, including
performance-performance or warranty-related matters under our customer and supplier contracts and other businessarrangements.arrangements, as well as workers’ compensation and similar claims under the Jones Act. In ourmanagement'smanagement’s opinion, none ofthis litigationthese proceedings, disputes ordisputes andclaims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.See Note 20 to our consolidated financial statements included in this report for information regarding B
&W's&W’s potential liability for nonemployee asbestos 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
We
did not submitheld a special meeting of stockholders of MII on December 17, 2003 for the following purpose:To consider and vote on the adoption of a resolution to:
approve the proposed settlement agreement relating to the Chapter 11 bankruptcy proceedings involving B&W;authorize and approve the settlement contemplated by the proposed settlement agreement, including the disposition of assets of MII in the settlement, as provided in the proposed settlement agreement; andauthorize MII’s execution and delivery of, and performance under, the proposed settlement agreement, in substantially the form the stockholders approve, with such modifications or changes as the MII Board of Directors may approve;in each case subject to the subsequent approval of the proposed settlement and settlement agreement by the Board of Directors of MII, after consideration of any
matterdevelopments that may occur prior toathe effective date of the related joint plan of reorganization that has been proposed in connection with the Chapter 11 bankruptcy proceedings referred to above, including developments involving currently pending federal legislation relating to an overall resolution of asbestos-related personal injury claims in the United States.The affirmative vote of
security holders, througha majority of thesolicitationshares ofproxiesour common stock present in person orotherwise duringrepresented by proxy at thequarter ended December 31, 2002.Special Meeting was required to approve the proposed resolution, provided that, in order for the vote to be effective, the number of shares of our common stock for which votes were cast in favor of the proposed resolution was required to represent at least 50% of the voting power of all of the shares of our common stock outstanding and entitled to vote on the proposed resolution. The voting, resulting in approval of the resolution, was as follows:
Votes For Votes Against Abstentions Broker Non-Votes 46,648,582 1,126,732 411,080 — 28
PART II
Item 5. MARKET FOR THE
REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSOur common stock is traded on the New York Stock Exchange. High and low stock prices in the years ended December 31,
20012002 and20022003 were as follows:YEAR ENDED DECEMBER 31, 2001
SALES PRICE ----------- QUARTER ENDED HIGH LOW ---- ---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 $ 7.310YEAR 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
SALES PRICE QUARTER ENDED HIGH LOW March 31, 2002 $ 16.42 $ 10.95 June 30, 2002 $ 17.29 $ 5.60 September 30, 2002 $ 8.10 $ 2.95 December 31, 2002 $ 6.64 $ 2.34 YEAR ENDED DECEMBER 31, 2003
SALES PRICE QUARTER ENDED HIGH LOW March 31, 2003 $ 4.76 $ 2.64 June 30, 2003 $ 6.79 $ 2.17 September 30, 2003 $ 7.74 $ 3.75 December 31, 2003 $ 12.20 $ 5.73 In the third quarter of 2000,
MII'sMII’s Board of Directors determined to suspend the payment of regular dividends onMII'sMII’s common stock for an indefinite period.28As of December 31,
2002,2003, there were approximately3,7923,699 record holders of our common stock.The following table provides information on our equity compensation plans as of December 31,
2002:2003:
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 Equity compensation plans approved by security holders 5,771,553 $ 12.32 1,722,926 2,348,434 $ 12.11 572,245
Total 8,119,987 $ 12.26 2,295,171
Number of Weighted- Number of securities to be average securities issued upon exercise exercise price remaining of outstanding of outstanding available for(1) Reflects information on our 1992 Senior Management Stock Plan, Category options and rights options and rights future issuance - ---------------------------------------------------------------------------------------------Equitywhich is our only equity compensationplansplan that has not been approved bysecurity holders 5,483,538 $15.16 2,101,567 Equity compensation plansour stockholders and that (1) has any outstanding awards that have notapproved by security holders(1) 2,321,126 $14.08 694,849 - --------------------------------------------------------------------------------------------- Total 7,804,664 $14.84 2,796,416 =============================================================================================been exercised or (2) can be used for future grants of equity-based awards. See Note 9 to our consolidated financial statements for more information regarding this plan.(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 equity-based awards. See Note 9 to our consolidated financial statements for more information regarding this plan.29
Item 6. SELECTED FINANCIAL DATA
For the Years Ended
December 31,For the
Nine-Month
Period Ended
December 31,2003 2002 2001 2000(1) 1999 (In thousands, except for per share amounts) Revenues $ 2,335,364 $ 1,733,821 $ 1,888,078 $ 1,803,179 $ 1,839,543 $ (102,158 ) $ (787,966 ) $ (25,282 ) $ (26,473 ) $ (1,039 ) Income (Loss) before Cumulative Effect of Accounting Change $ (98,939 ) $ (776,394 ) $ (20,022 ) $ (22,082 ) $ 440 Net Income (Loss) $ (95,229 ) $ (776,394 ) $ (20,022 ) $ (22,082 ) $ 440 Basic Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Change $ (1.59 ) $ (12.74 ) $ (0.42 ) $ (0.44 ) $ (0.02 ) Income (Loss) before Cumulative Effect of Accounting Change $ (1.54 ) $ (12.55 ) $ (0.33 ) $ (0.37 ) $ 0.01 Net Income (Loss) $ (1.49 ) $ (12.55 ) $ (0.33 ) $ (0.37 ) $ 0.01 Diluted Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Change $ (1.59 ) $ (12.74 ) $ (0.42 ) $ (0.44 ) $ (0.03 ) Income (Loss) before Cumulative Effect of Accounting Change $ (1.54 ) $ (12.55 ) $ (0.33 ) $ (0.37 ) $ 0.01 Net Income (Loss) $ (1.49 ) $ (12.55 ) $ (0.33 ) $ (0.37 ) $ 0.01 Total Assets $ 1,248,874 $ 1,278,171 $ 2,103,840 $ 2,055,627 $ 3,874,891 Current Maturities of Long-Term Debt $ 37,217 $ 55,577 $ 209,480 $ 258 $ 87 Long-Term Debt $ 279,682 $ 86,104 $ 100,393 $ 323,157 $ 323,014 Cash Dividends per Common Share $ — $ — $ — $ 0.10 $ 0.15
For 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 1999 ---- ---- ------- ------------- ---- (In thousands, except for per share amounts)Revenues $ 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 $ (776,735) $ (20,857) $ (22,082) $ 440 $ 192,081 Net Income (Loss) $ (776,394) $ (20,022) $ (22,082) $ 440 $ 153,362 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 $ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.25 Net Income (Loss) $ (12.55) $ (0.33) $ (0.37) $ 0.01 $ 2.60 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 $ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.16 Net Income (Loss) $ (12.55) $ (0.33) $ (0.37) $ 0.01 $ 2.53 Total Assets $ 1,278,171 $ 2,103,840 $ 2,055,627 $ 3,874,891 $ 4,305,520 Current Maturities of Long-Term Debt $ 55,577 $ 209,480 $ 258 $ 87 $ 31,126 Long-Term Debt $ 86,104 $ 100,393 $ 323,157 $ 323,014 $ 323,774 Cash Dividends per Common Share $ - $ - $ 0.10 $ 0.15 $ 0.20(1)(1) Effective February 22, 2000, our consolidated financial results exclude the results of B&W and its consolidated subsidiaries. (2) Cumulative effect of accounting change is due to the adoption of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” See Note 18 to our consolidated financial statements for significant items included in the years ended December 31,
20022003 and2001.2002.Results for the year ended December 31, 2001 include a pretax gain on our sale of MECL totaling $28 million and tax of approximately $85.4 million associated with the intended exercise of an intercompany stock purchase and sale agreement.
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 include: - a gain on the dissolution of a joint venture of $37.4 million; 29- a gain on the settlement and curtailment of postretirement benefit plans of $27.6 million; - interest income of $18.6 million on domestic tax refunds; - a gain of $12.0 million from the sale of assets 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 goodwill; - various provisions of $20.3 million related to potential settlements of litigation and contract disputes; and - the write-off of $12.6 million of receivables from a joint venture.30
Item 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSStatements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-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"“Risk Factors” and"Cautionary“Cautionary Statement Concerning Forward-LookingStatements"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. Each of our business segments has been capitalized and is financed on a stand-alone basis. Debt covenants preclude using the financial resources or the movement of excess cash from one segment for the benefit of the other. Our Marine Construction Services segment has incurred substantial operating losses over the last two years, which has strained its liquidity. Liquidity available to our other segment, Government Operations, is not available to satisfy the needs of our Marine Construction Services segment. Cash available at MII is not anticipated to be sufficient to fund forecast negative cash flow at JRM, if MII chose to do so. See further discussion in the Liquidity section of this Item.
Marine Construction Services Segment — Recent Operating Results and Outlook
Our recent operating results have been adversely affected by material losses on several large marine construction contracts, including the contracts related to: three Spar projects,Medusa, Devils TowerandFront Runner;theCarina Ariesproject off the coast of Argentina; and theBelanakFPSO project on Batam Island. Each of these projects was a first-of-a-kind project for JRM entered into on a fixed-price basis during 2001 and early 2002. We believe the losses from these projects resulted to a significant degree from deficiencies in the process through which we previously bid for, priced and planned first-of-a-kind projects. Our new management team has implemented procedures designed to bring discipline and a more balanced risk/reward structure to the pricing and terms and conditions of our contracts. However, given the risks inherent in fixed-price contracts, we continue to have difficulty estimating costs to complete these contracts and, therefore, adjustments to overall contract costs due to unforeseen events may continue to be significant in future periods since our backlog will continue to contain fixed-price contracts. At December 31, 2003, JRM’s backlog was comprised of the two remaining Spar projects, theCarina Ariesproject and theBelanakFPSO project (12%); cost plus projects (16%); combination fixed price/cost reimbursable projects (32%); and other fixed-price projects (40%).
We recorded estimated losses of $149.3 million during 2002 and $27.9 million during 2003 on the three Spar projects. During 2003, we also recorded estimated losses of $66.5 million on theCarina Ariesproject and $25.2 million on theBelanakFPSO project. Although we have already reflected these losses in our income statement, the negative cash flows associated with the cost overruns on these projects continue to be incurred. We expect that these negative cash flows will continue through three of the four quarters in 2004. At December 31, 2003, our estimates of the approximate percentage of completion for each of these projects was as follows:
100 % 99 % 70 % 67 % 76 % The primary issue remaining related toMedusais resolution of a dispute with a subcontractor, Bay Ltd. (See Note 10 to our consolidated financial statements included in this report.) The one-year warranty period onMedusa expires on August 22, 2004. We have accrued warranty reserves which we believe are adequate to cover all known and likely warranty claims at this time. However, our experience with respect to Spar warranty is limited and it is possible that actual warranty claims will exceed amounts provided for at December 31, 2003.
31
In early 2003, our assessment was that the major challenge in completingDevils Towerwithin its revised budget was to remain on track with the revised schedule for topsides fabrication due to significant liquidated damages that are associated with the contract. At that time, it appeared that a substantial portion of the costs and delay impacts onDevils Towerwas attributable to remedial activities undertaken with regard to the paint application, and, on March 21, 2003, we filed an action against the paint supplier and certain of its related parties for recovery of the remediation costs, delays and other damages. During the third week of April 2003, we encountered difficulties in installing the piles necessary to moor theDevils Towerhull in place and suspended offshore work on this activity. In June 2003, we reached a settlement with the customer relating to schedule and developed a plan for paint and pile installation issues. Since then, eight of the nine piles onDevils Towerhave been successfully installed and accepted by the United States Minerals Management Service (the “USMMS”), the U.S. Government regulatory agency for offshore structures. The remaining pile was installed to a depth 9 feet short of the design penetration of 114 feet. The American Bureau of Shipping has provided a recommendation to the USMMS suggesting approval of the as-installed pile. Based on this recommendation, we believe it is probable that the pile will be accepted. However, should the USMMS reject the pile, JRM would be required to fabricate and install a replacement pile. JRM estimates that additional cost of $7.4 million would be incurred to fabricate and install a replacement pile, and it believes that a majority of this cost would be recoverable in a future period through an insurance claim. We received a certificate of substantial completion from our customer on this project in February 2004. Additional remaining issues include a dispute with a subcontractor, Bay Ltd., and the one-year warranty period, which will begin on the receipt of the certificate of final completion. (See Note 10 to our consolidated financial statements included in this report.)
TheFront Runnerhull has been completed and is currently moored at a shipyard on the Gulf of Mexico awaiting installation, which is currently scheduled in late May 2004. The topsides are being fabricated by a subcontractor and are scheduled for installation in late June 2004. The key remaining issues for theFront Runnercontract are the completion of fabrication and installation of the topsides. During the quarter ended December 31, 2003, we incurred substantial cost overruns on the reimbursable scopes of work performed by our topsides subcontractor. Our forecasted fabrication completion date has also been extended. Due to these items, our estimated loss on this project was increased by approximately $10 million in the quarter ended December 31, 2003.
With regard to theCarina Ariesproject, we have provided for our best estimate of the total cost to achieve project completion and recorded losses totaling $66.5 million for the year ended December 31, 2003. During the March 2003 quarter, we recorded losses of approximately $2.0 million for offshore pipelay and platform installation productivity below forecast. During the June 2003 quarter, we recorded approximately $40 million of losses attributable to cost incurred as a result of a June 2003 storm that damaged our pipelay equipment and required us to pay subcontractors for standby or contract termination as we made repairs to recommence work. On October 30, 2003, we signed a change order and addendum to the master agreement with the customer. This agreement, among other things, reduced our liquidated damages and risk of loss exposures, transferred weather risk to the customer and changed the contract from a lump-sum contract to a partial lump-sum and unit rate contract. During the December 2003 quarter, we recorded additional losses of approximately $6.0 million for fabrication cost overruns and $18.5 million for offshore pipelay and platform installation productivity below forecast, especially unforeseen mechanical downtime which is not rembursable under the amended contract. We also have a pending insurance claim from which we expect to recover a portion of the June 2003 storm loss, which has not been reflected in the total cost to complete. After completing the pipeline portion of this contract, we need to install the topsides. We believe the topsides installation scope of work presents potentially less risk than the pipeline installation.
With regard to theBelanakFPSO project, which involves a subcontract to JRM for the fabrication of wellhead platforms and topsides for an FPSO in Indonesia, we have provided for our best estimate of the total cost to achieve project completion and recorded losses totaling $29.2 million for the quarter ended December 31, 2003. The increase in cost is attributable to overruns of the material and subcontractor cost estimates, as well as labor costs to complete. We have a pending contract amendment awaiting approval by an Indonesian governmental agency, which would reduce the now expected total cost to complete this project. Under our current subcontract, we are subject to liquidated damages of approximately $148,000 per day for late completion of our scope of work, with a cap of approximately $16 million. Late performance by JRM would not give rise to liquidated damages if first oil flows into the FPSO by December 15, 2004, as that date may be adjusted under the contract. A finally approved contract amendment would, among other things, extend our liquidated damages date. Further, even without that contract amendment or without first oil date satisfaction, we believe we are entitled to an extension of the schedule for liquidated damages due to the actions of the prime contractor. Therefore, we believe JRM is not likely to incur
32
liquidated damages. In addition to the liquidated damages exposure, remaining issues relate to our ability to meet our forecast of required manhours to complete this project, which we have been unable to accurately estimate in the past.
As of December 31, 2003, we have provided for our estimated losses on these contracts and our estimated costs to complete all our other contracts. However, it is 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. As with the projects specifically discussed above, such adjustments could have a material adverse impact on our results of operations, financial condition and cash flow. Alternatively, positive adjustments to overall contract costs at completion could materially improve our results of operations, financial condition and cash flow. Also, in addition to theCarina Ariesinsurance claim and theBelanakFPSO contract amendment previously discussed, we are pursuing other claims and contract amendments. JRM currently believes it has an opportunity to recover up to $25 million of the losses incurred in 2003 through customer change orders, negotiated settlements or legal proceedings in future periods. The timing of any such recovery is uncertain. Although we can provide no assurance that JRM will recover any of these items, any such recovery would positively impact JRM’s operating income in the period in which it is received.
The amount of revenues
we generate fromour Marine Construction Services segment generates largely depends on the level of oil and gas development activity in theworld'sworld’s major hydrocarbon-producing regions.OurNumerous factors influence this activity, including:oil and gas prices, along with expectations about future prices;the cost of exploring for, producing and delivering oil and gas;the terms and conditions of offshore leases;the discovery rates of new oil and gas reserves in offshore areas;reserve depletion and replacement rates;technological barriers or advances;socio-political drivers in developing countries;the ability of businesses in the oil and gas industry to raise capital; andlocal and international political and economic conditions.JRM’s revenues
from this segmentreflect the variability associated with the timing of significant oil and gas development projects.We expect our Marine Construction Services segment'sDuring 2003, JRM’s revenues increased compared toincrease during 2003,the prior year, primarilyforfrom deepwater floating production projects and projects in the Azerbaijan sector of the Caspian Sea. Webelieve 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 abilitycurrently expect a 45% tocompete successfully50% reduction in manhours worked at our fabrication yards in 2004 compared to 2003. We also currently expect a 40% to 50% reduction in thedeepwater market.number of barge days worked by our barges in 2004 compared to 2003. While we expectour Marine Construction Services segmentJRM’s revenues toincrease indecrease during 2004 compared to 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 actionswe expect operating income to improveour ability to compete in this marketas we complete work ona rational basis. These actions may include downsizing our operational support base, selling or disposing of some of our marine equipmentthe unprofitable fixed-price Spar contracts, theCarina Ariesproject andother cost cutting measures. These factors may have a significant impact on our anticipated Marine Construction Services segment income in future periods.theBelanakFPSO project.Due to the deterioration in
this segment'sJRM’s financial performance during the year ended December 31, 2002, we revised our expectations concerningthis segment'sJRM’s future earnings and cash flow and tested the goodwill oftheour 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 ofthis segment'sJRM’s goodwill.Government Operations Segment — Recent Operating Results and Outlook
The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a supplier of major nuclear components for
thecertain U.S.Navy,Government programs, BWXT is a significant participant in the defense industry. We recognizedan increaseincreases in bookings during theyear ended December 31,years 2002 and 2003 thathashave allowed us to reach a record backlog at December 31, 2003 in our Government Operations. Additionally, withBWXT'sBWXT’s unique capability of full life-cycle management of special nuclear materials, facilities and technologies, BWXT30is poised to continue to participate in the continuing cleanup and management of the Department of Energy'sEnergy’s nuclear sites and weapons complexes.We currently expect the operating results of this segmentBWXT is expected to continue producing strong financial results. Its backlog of approximately $1.8 billion is expected to
improveproduce revenues for 2004 of approximately $515 million, not including any new contracts that may be awarded during the year. BWXT’s commitment to cost containment, in2003.addition to the potential for new service contract awards, leads management to believe operating margins should remain consistent with 2003 levels, on a comparable basis.33
Other
The results of operations of our Industrial Operations segment include only the results of MECL, which we sold in October 2001. The results of Menck GmbH (“Menck”), previously a component of our Marine Construction Services segment, and the results of Hudson Products Corporation
("HPC"(“HPC”), are reported in discontinued operations. We sold Menck in August 2003 and 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 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.
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 representatives of the present and future asbestos 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 settlementiswas probable and that the valueiswas reasonably estimable. Accordingly,atas 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. As of December 31, 2003, we have updated our estimated cost of the proposed settlement to reflect current conditions, and for the year ended December 31, 2003 we recorded an aggregate increase in the provision of $18.0 million, including associated tax expense of $3.4 million. The increase in the provision is primarily due to an increase in our stock price.At a special meeting of our shareholders on December 17, 2003, our shareholders voted on and approved a resolution relating to a proposed settlement agreement that would resolve the B&W Chapter 11 proceedings. The shareholders’ approval of the resolution is conditioned on the subsequent approval of the proposed settlement by MII’s Board of Directors (the “Board”). We would become bound to the settlement agreement only when the plan of reorganization becomes effective, and the plan of reorganization cannot become effective without the approval of the Board within 30 days prior to the effective time of the plan. The Board’s decision will be made after consideration of any developments that might occur prior to the effective date, including any changes in the status of the Fairness in Asbestos Injury Resolution legislation pending in the United States Senate. According to documents filed with the Bankruptcy Court, the asbestos personal injury claimants have voted in favor of the proposed B&W plan of reorganization. See Note 20 to our consolidated financial statements included in this report 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 year ended December 31, 2000.At December 31, 2002, in accordance with Statement of Financial Accounting Standards
("SFAS"(“SFAS”) No. 87,Employers'“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 relatingAt December 31, 2003, we decreased our minimum pension liability by approximately $135 million primarily due to theB&W Chapter 11 proceedings have progressed, it has,improvement inour judgment, become probable thatfinancial markets in 2003. In 2004, we expect to recognize approximately $63.1 million of expense related to the MI qualified pension plan.If the proposed plan of reorganization is confirmed and the parties receive all requisite approvals for the proposed settlement, we will spin off the portion of
MI'sMI’s qualified pension plan related to the active and retired34
employees of B&W as
partofa final settlement.the effective date of the plan of reorganization. If weeffectcomplete such a spin-off, wewillwould be required to recognize any curtailment and settlement gains or losses associated withthe spin-off at the time we effectthe 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 31,2002,2003, we would have recorded curtailment and settlement losses through a pre-tax charge to earnings totaling$117 million, with no associated tax benefits.approximately $122.8 million. In addition,based on data provided by our actuary at December 31, 2002,we would also havealsorecorded a reduction in our charge toOther Comprehensive Incomeother comprehensive income for31recognition of our minimum pension liability totaling approximately $226$127.2 million.If weAs a result, if the spin-off hadrecorded these itemsoccurred at December 31,2002,2003, ourStockholders' Equity (Deficit)stockholders’ deficit would have improved by approximately$109$4.4 million.However, under generally accepted accounting principles, we cannot record the effect of the spin-off until the event actually occurs.We anticipatethat the spin-off will occur in 2003. We will recordrecording 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 effectthat would have been recorded if the spin-off had been completed as of December 31, 2002.described in this paragraph.As a result of our reorganization in 1982, which we completed through a transaction commonly referred to as an
"inversion,"“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. Wehaveengaged an independent consultant to undertake an analysis of the potential re-domestication of MII from Panama to the U.S. Additionally, werecentlyentered into an agreement with two shareholders pursuant to which management will sponsor and recommend 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 bytheour Board of Directors not to be in the best interests of our shareholders, pursuant to our agreement describedabove,in this paragraph, 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 theanalysis by the independent consultant and the completion of theB&W reorganization proceedings.Effective January 1, 2002, based on a review performed by us and
ourindependent consultants we engaged, 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 and net 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
forward contractsforeign currency derivative instruments 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 the preparation of our financial statements. These policies require our most difficult, subjective and complex judgements, often as a result of the need 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, we generally recognize estimated contract
incomerevenue and resultingrevenue are generally recognizedincome 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 aproject'sproject’s completion and therefore the timing ofincomerevenue andrevenueincome recognition. We routinely review estimates related to our contracts, and revisions to profitability are reflected in earnings immediately.IfFor contracts that we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For first-of-a-kind in nature contracts, we will recognize revenue and cost equally and will only recognize gross margin when probable and reasonably estimable, which is generally when
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the contract is 70% complete. We define first-of-a-kind in nature contracts as those long-term construction contracts for projects that have never been attempted before or that contain such a level of risk and uncertainty that estimation of the final outcome is impractical except to assure that no loss will be incurred. For details concerning the effect of this policy on the Marine Construction Services segment’s backlog, see page 38.
For all contracts including first-of-a-kind, 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, weWe have had
32significant adjustments to earnings as a result of revisions to contract estimates. Such revisions have been primarily due to the factestimates on several projects thatmany of our contracts have been "first-of-a-kind" orwere first-of-a-kind for JRM and have been inherently difficult toestimate 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.estimate. As demonstrated by our experienceonwith these contracts,in 2002, revenue,we were unable to forecast accurately the total cost to complete these projects until we performed almost all of their major phases. Therefore, we have instituted more stringent bidding andgross profit realized on fixed-price contracts will often vary from estimated amounts.estimating processes. Although wearecontinuallystrivingstrive 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 isprobable. Anyprobable and can be reasonably estimated. We recognize income from contract change orders or claims when formally agreed with the customer. We reflect any amounts not collectedare reflectedas an adjustment to earnings. We regularly assesscustomer credit risk inherent inthe collectibility of contractcosts. We recognize contract claim income when formally agreed with the customer.revenues from customers.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 thatAny 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
8eight to 40 years for buildings and2two 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. Effective January 1, 2002, based on a review performed by us and independent consultants we engaged, we changed our estimate of the useful lives of new major marine vessels from 12 years to 25 years. 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
3three to5five years. We accrue drydock costs in advance of the anticipated future drydocking, commonly known as the"accrue“accrue inadvance"advance” method.ActualWe charge actual drydock costsare chargedagainst the liability when incurred, and we recognize any differences between actual costs and accrued costsare recognizedover 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 repairswhich are not necessarily visibleuntil 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
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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.
33Effective March 31, 2003, participation and benefits for the JRM pension plan were frozen. As a result, we recorded a curtailment gain totaling approximately $2.5 million in other-net for the year ended December 31, 2003. 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
certainsome 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 settlementbased on the agreement in principlediscussed in this report (see Notes 10 and 20 to our consolidated financialstatements)statements included in this report).Goodwill.SFAS No. 142,
"Goodwill“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. We wrote off $313 million, which represented all of JRM’s goodwill, in 2002. As a result,of the write-off of the goodwill associated with our Marine Construction Services segment,our total goodwill has been substantially reduced.Asset Retirement Obligations and Environmental
Clean-UpClean-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 eachfacility'sfacility’s life, which is a requirement of our licenses from the Nuclear 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 other parties as assets when we determine their receipt is probable.Effective January 1, 2003, wewill adoptadopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” requiring us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When we initially record such a liability, wewillcapitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liabilitywill beis accreted to its present value each period, and the capitalized costwill beis 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. SFAS No. 143 applies to environmental liabilities associated with assets that we currently operate and are obligated to remove from service. For environmental liabilities associated with assets that we no longer operate, we have accrued amounts based on the estimated costs of clean-up activities, net of any cost-sharing arrangements. We adjust the estimated costs as further information develops or circumstances change. 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.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 feasibleWe believe that the deferred taxplanning 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 usasset recorded as of December 31,2002 in determining our valuation allowance.2003 is realizable through carrybacks, future reversals of existing taxable temporary differences and future taxable income. 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 increaseincomeearnings for the period inthe periodwhich 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
thewarranty costsof warrantyto significantly exceed the accrued estimates. In our Marine Construction Services segment, warranty periods are generally limited, and we have had minimal warranty cost in prior years. 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 34limited andHowever, we havehad minimalsubstantially completed two of our three Spar projects with no warrantycost in prior years. It is reasonably possible that our future warranty provisions may vary from what we have experienced in the past.history. In our Government Operations segment, we accrue estimated expenses to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. Our future warranty provisions may vary from what we have experienced in the past.37
For a discussion of recently adopted accounting standards, see Note 1 to our consolidated financial statements included in this report.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Marine Construction Services
Revenues increased 59% to $1.8 billion for the year ended December 31, 2003. The improvement in revenues resulted from increased fabrication and marine installation on the major projects listed below:
a topside fabrication project for BP in our Morgan City facility;AIOC projects for fabrication of topsides and marine installation of topsides and pipelines in the Azerbaijan sector of the Caspian Sea;wellhead deck and jacket fabrication and marine installation project offshore Qatar for an ExxonMobil affiliate;fabrication of platforms and installation of subsea cables for a Middle Eastern operator;fabrication and installation of decks for an operator offshore Vietnam;
• theDevils TowerandFront RunnerSpar projects;
• theCarina Ariesproject; and
• theBelanakFPSO project. Partially offsetting these increases was a decline in Gulf of Mexico and Asia Pacific projects other than those listed above.
Segment operating loss, which is before equity in income from investees, for the year ended December 31, 2003 was a loss of $51.1 million, compared to a loss of $165.3 million for the year ended December 31, 2002. Each of the projects listed above contributed operating income to partially offset the segment operating loss for the year ended December 31, 2003, with the following exceptions:
• theCarina Ariesproject, where we recorded losses of $66.5 million in 2003 as discussed on page 32 as compared to a $9.6 million loss in 2002;
• theFront RunnerSpar project, where we recorded additional losses of $39.7 million in 2003, as compared to a $9.3 million loss in 2002; and
• theBelanakFPSO project, where we recorded a loss of $29.2 million in the December 2003 quarter, which offset $3.9 million and $8.0 million of profit previously recorded in 2003 and 2002, respectively, under the percentage-of-completion method. This put theBelanakFPSO project in a loss position of $17.3 million at December 31, 2003. The year ended December 31, 2003 included losses of $27.9 million (with improvements onMedusaandDevils Toweroffsetting the additional $39.7 million loss onFront Runner) on the three Spar projects as compared to losses of $149.3 million for the year ended December 31, 2002.
Gain (loss) on asset disposals and impairments-net for the year ended December 31, 2003 included a $2.9 million gain on the sale of assets associated with operations in Europe that are no longer active and a $1.4 million gain on the sale of an investment in an oil and gas property. During the year ended December 31, 2002, we wrote-off goodwill of $313.0 million.
Equity in income (loss) of investees declined to a loss of $0.5 million during the year ended December 31, 2003 compared to income of $5.3 million during the year ended December 31, 2002. The year ended December 31, 2002 included income from a European joint venture that is no longer active and income from our Spars International joint venture, offset by losses associated with our Mexican joint venture, which is now being accounted for on the cost method.
Backlog was $1.4 billion and $2.1 billion, respectively, at December 31, 2003 and 2002. At December 31, 2003, the Marine Construction Services backlog included $80.7 million related to uncompleted work on our three Spar projects and $95.3 million related to other contracts in loss positions. In addition, of the $197.6 million in backlog for
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our project for Dolphin Energy Ltd., $70.3 million of revenues expected to be recorded in 2004 will generate no gross profit as we will account for this project under our first-of-a-kind policy.
Government Operations
Revenues decreased $22.3 million to $531.5 million, primarily due to lower volumes from our management and operating contract at the U. S. Government-owned facility in Miamisburg, Ohio. We are no longer the prime contractor but are now a subcontractor for this site, and, as a result, we now record only our fee in revenues rather than the full revenues from the contract. In addition, our research and development division reported lower revenues due to reassigning contracts out to their responsible divisions (including B&W and its subsidiaries) as part of the decentralization of our research and development activities. We also experienced lower revenues from our commercial work and other government operations, primarily due to an early lease buyout and the completion of a very profitable contract in 2002. The decreases in revenues were partially offset by revenues attributable to higher volumes from the manufacture of nuclear components for certain U.S. Government programs and our commercial nuclear environmental services. In addition, we resolved two contract disputes favorably.
Segment operating income, which is before equity income from investees, increased $23.6 million to $58.2 million, primarily due to higher volume and margins from the manufacture of nuclear components for certain U.S. Government programs. In addition, we decreased spending on fuel cell research and development and, as mentioned above, we resolved two contract disputes favorably. These increases in operating income were partially offset by lower volume and margins from our commercial work and from our other government operations. In addition, we experienced higher general and administrative expenses due to increased facility management oversight costs and increased regulatory compliance costs. We also experienced lower costs in the prior year due to the receipt of an insurance settlement relating to environmental restoration costs.
Equity in income from investees increased $3.4 million to $28.0 million, primarily due to increased operating results from several of our joint ventures operating in Idaho, Louisiana, Tennessee and Texas.
Backlog was $1.8 billion and $1.7 billion, respectively, at December 31, 2003 and 2002. At December 31, 2003, this segment’s backlog with the U.S. Government was $1.8 billion, of which $17.6 million had not yet been funded.
Corporate
Unallocated corporate expenses increased $70.0 million to $93.6 million, primarily due to higher qualified pension plan expenses as a result of changes in our discount rate and plan asset performance. Also, the results of our captive insurers were lower in the year ended December 31, 2003 compared with the year ended December 31, 2002.
During the year ended December 31, 2003, we recognized expense from certain of our qualified pension plans of approximately $75.7 million. During the year ended December 31, 2002, we recognized expense from these plans of approximately $11.1 million.
Other Income Statement Items
Interest income decreased $5.3 million to $3.2 million, primarily due to a decrease in average cash equivalents and investments and prevailing interest rates.
Interest expense increased $3.9 million to $19.0 million, primarily due to higher interest costs associated with our omnibus revolving credit facility and JRM’s 11% senior secured notes. These increases were partially offset by lower interest expense resulting from the repayment of MI’s remaining 9.375% Notes due March 15, 2002.
Other-net improved $6.3 million to income of $2.1 million, primarily due to income resulting from the curtailment of JRM’s qualified pension plan and minority interest income associated with a JRM subsidiary. These improvements were partially offset by an increase in foreign currency transaction losses.
39
Provision for Income Taxes
The net pre-tax provision for the estimated cost of the B&W Chapter 11 settlement recorded in the year ended December 31, 2003 includes approximately $24.4 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 proposed B&W Chapter 11 settlement, constitute income in jurisdictions where we are subject to income taxation. In addition, for the year ended December 31, 2003, we decreased our valuation allowance for the realization of deferred tax assets by $15.5 million to $199.3 million.
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 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; andthe net pre-tax provision of $86.4 million for the estimated cost of settlement of the B&W Chapter 11 proceedings.We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.
Cumulative Effect of Accounting Change
Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires us 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, we capitalize 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, we will either settle the obligation for its recorded amount or incur a gain or loss upon settlement. As a result of the adoption of SFAS No. 143, we recorded income of approximately $3.7 million as the cumulative effect of an accounting change.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Marine Construction Services
Revenues increased 35% to
$1,148.0 million.$1,133.2 million for the year ended December 31, 2002. The increaseiswas a result of increased activity for ourEPIC sparSpar projects, a topside fabrication and a pipeline installation project in the Azerbaijan sector of the Caspian Sea, two fabrication and installation projects inSoutheastAsia Pacific, one deck fabricated in the Middle East for the West African market and atopsidesfabrication contract for topsides at our Morgan City fabrication facility. These increasesarewere partially offset by reduced 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 (loss), which is before equity in income from investees, declined to a loss of
$162.6$165.3 million compared with income of$14.5$12.4 million for the year ended December 31, 2001. The lossiswas due primarily to charges totaling $149.3 million relating to additional cost overruns, schedule delays and higher-than-expected forecasted costs to complete our threeEPIC 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%.Spar projects. 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 alsoIn addition, we experienced lower utilization of our marine fleet in the Gulf of Mexico. Higher volumes from two fabrication and installation projects inSoutheastAsia Pacific, a topside fabrication and a pipeline installation project in the Azerbaijan sector of the Caspian Sea and atopsidesfabrication contract for topsides at our Morgan City fabrication facility partially offset these losses.In addition, weWe also experienced lower general and administrative expenses and a favorable adjustment to potential settlements of litigation.For theThe year ended December 31, 2001segment operating incomeincluded goodwill amortization expense of $18.0 million.40
The net loss on asset disposal and impairments for the year ended December 31, 2002
iswas 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 andcertainsome marine equipment that weexpect to selllisted for sale 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 internationalour Mexican 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 $59.8 million to $553.8 million, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. Government programs, the management and operating contracts for U.S. Government-owned facilities, commercial work and other government operations. Lower volumes from commercial nuclear environmental services partially offset these increases.
35Segment operating income, which is before equity in income from investees, increased $5.3 million to $34.6 million, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. Government programs and commercial work, higher margins from management and operating contracts for U.S. Government-owned facilities and other government operations. In addition, we received an insurance settlement relating to environmental restoration costs. However, we experienced lower margins from nuclear component manufacturing for certain U.S. Government programs along with higher facility management oversight costs and lower volumes from commercial nuclear environmental services. We also incurred costs associated with the decentralization of our research and development division and increased 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.
Backlog was $1.7 billion and $1.0 billion, respectively, at December 31, 2002 and 2001. At December 31, 2002, this segment's backlog with the U.S. Government was $1.6 billion, of which $266.5 million had not yet been funded.Power Generation Systems
Revenues decreased $0.9 million to $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 lower general and administrative expenses and the 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 $2.9 million to a loss of $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 recognition of expense from our pension plans in the current period compared to income from those plans and a nonrecurring favorable insurance recovery in the year ended December 31, 2001. Lower legal and professional services expenses related to the B&W Chapter 11 proceedings, lower insurance expenses and the improved performance of our 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 2003 related to these plans. The significant increase expected in 2003 from 2002 levels is due principally to changes in our discount rate and plan asset performance.41
Other Unallocated Items
During the year ended December 31, 2002, we recorded a provision of $1.5 million for environmental costs associated with MECL, which we sold in 2001.
Other Income Statement Items
Interest income decreased $11.0 million to $8.6 million, primarily due to a decrease in investments and prevailing interest rates.
Interest expense decreased $24.5 million to $15.1 million, primarily due to changes in debt obligations and prevailing interest rates.
36Other-netOther — net declined
$11.1$8.4 million to expense of$4.4$4.2 million. For the year ended December 31, 2002, we recorded $2.5 million of minority interest expense associated with a Marine Construction Services segment joint venture. In addition, we had a $2.0 million decrease in gains on the sale of investment securities as well as an increase in miscellaneous other expenses.Provision for Income Taxes
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 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 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 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 approximately $5.2 million and a provision 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 Note 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, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Marine Construction Services Revenues increased $91.0 million to $848.5 million, primarily due to higher volumes in North American activities, including the deepwater markets of the Gulf of Mexico, and in the Eastern Hemisphere fabrication operations. Lower volume in offshore activities in Southeast Asia relating to the West Natuna project partially offset this increase. Segment operating income increased $48.0 million from a loss of $33.5 million to income of $14.5 million, primarily due to higher volumes and margins in North American activities and in the Eastern 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 higher general and administrative expenses partially offset these increases. Loss on asset disposals and impairments - net increased $2.6 million to $3.6 million primarily due to the decision in the fourth quarter of 2001 to scrap the derrick barge Ocean Builder. Equity in income from investees increased $7.6 million to $10.4 million, primarily due to favorable contract closeout adjustments from our U.K. joint venture that was terminated in June 2001. In addition, the year ended December 31, 2000 included higher losses associated with our U.K. joint venture. 37Government Operations Revenues increased $50.0 million to $494.0 million, primarily due to higher volumes from nuclear components for the U.S. Government and commercial work. Lower volumes from management and operating contracts for U.S. Government-owned facilities and other government operations partially offset these increases. Segment operating income decreased $3.9 million to $29.3 million, primarily due to lower volume and margins from management and operating contracts for U.S. Government-owned facilities and other government operations and higher general and administrative expenses. Higher volume and margins from commercial work, higher volumes from nuclear components for the U.S. Government and higher margins from commercial nuclear environmental services partially offset these decreases. Loss on asset disposals and impairments - net decreased $0.9 million, primarily due to asset impairments at one of our research facilities in the year ended December 31, 2000. Equity in income from investees increased $11.9 million to $23.0 million, primarily due to higher operating results from a 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 in the year ended December 31, 2000. Corporate Corporate expense, net increased $13.1 million from income of $8.0 million to expense of $5.1 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 a decrease in investments and prevailing interest rates. Interest expense decreased $3.9 million to $39.7 million, primarily due to changes in short-term debt obligations and prevailing interest rates. 38Other-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 Middle East and gains on the sale of investment securities in the year ended December 31, 2001. The provision for income taxes for the years ended December 31, 2001 and 2000 reflected nondeductible amortization of goodwill totaling approximately $19.5 million and $20.1 million, respectively, of which $18.0 million is attributable to the premium we paid on the acquisition of the minority interest in JRM in June 1999. The provision for income taxes in 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 related to favorable tax settlements in 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, income 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 bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.EFFECTS OF INFLATION AND CHANGING PRICES
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, using historical U.S. dollar accounting
("(“historicalcost"cost”). Statements based on historical cost, however, do not 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 our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts.
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LIQUIDITY AND CAPITAL RESOURCES
On
February 11,December 9, 2003, weentered into definitive agreements with a group of lenders for acompleted newcredit 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 facilityfinancing arrangements for JRM andits subsidiariesBWXT on a stand-alone basis. These financing arrangements include the issuance of $200 million aggregate principal amount of 11% senior secured notes due 2013 by JRM (the"JRM“JRM Secured Notes”) and the entering into of a $125 million three-year revolving credit facility by BWXT (the “BWXT CreditFacility"Facility”)that were. The BWXT Credit Facility was increased to $135 million in January 2004 and may be increased up to $150 million. Concurrent with the new financing arrangements, we cancelled our $166.5 million omnibus revolving credit facility, which was scheduled to expire onFebruary 21, 2003. The NewApril 4, 2004. Neither the JRM Secured Notes nor the BWXT Credit Facilityinitially providesis guaranteed by MII.The JRM Secured Notes were issued in an original aggregate principal amount of $200 million, mature on December 15, 2013 and bear interest at 11% per annum, payable semiannually on each June 15 and December 15, commencing June 15, 2004. These notes were issued at a discount, yielding proceeds to JRM of $194.1 million before payment of approximately $8.0 million in debt issuance costs. The JRM Secured Notes are senior secured obligations of JRM and are guaranteed by certain subsidiaries of JRM.
On or after December 15, 2008, JRM may redeem some or all of the JRM Secured Notes at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest to the redemption date.
12-month period commencing December 15 in Year Percentage 2008 105.500 % 2009 103.667 % 2010 101.833 % 2011 and thereafter 100.000 % Before December 15, 2006, JRM may redeem the JRM Secured Notes with the cash proceeds from public equity offerings by JRM at a redemption price equal to 111% of the principal amount plus accrued and unpaid interest to the redemption date, in an aggregate principal amount for all such redemptions not to exceed 35% of the original aggregate principal amount of the notes, subject to specified conditions.
JRM’s obligations under the indenture relating to the JRM Secured Notes are unconditionally guaranteed, jointly and severally, by (1) all subsidiaries that own a marine vessel that is or is required to become a mortgaged vessel under the terms of the indenture and related collateral agreements and (2) all significant subsidiaries of JRM as defined in the indenture. The JRM Secured Notes are secured by first-priority liens, subject to certain exceptions and permitted liens, on (1) capital stock of some of the subsidiary guarantors and (2) specified major marine construction vessels owned by JRM and certain subsidiary guarantors. The indenture governing the JRM Secured Notes requires JRM to comply with various covenants that, among other things, restrict JRM’s ability to:
incur additional debt or issue subsidiary preferred stock or stock with a mandatory redemption feature before the maturity of the notes;pay dividends on its capital stock;redeem or repurchase its capital stock;make some types of investments and sell assets;use proceeds from asset sales to fund working capital needs;create liens or engage in sale and leaseback transactions;engage in transactions with affiliates, except on an arm’s-length basis; andconsolidate or merge with, or sell its assets substantially as an entirety to, another person.The indenture also imposes various reporting obligations on JRM.
JRM is required to use commercially reasonable efforts to cause a registration statement with respect to an offer to exchange the JRM Secured Notes for notes registered under the Securities Act to be declared effective no later than June 6, 2004. If JRM fails to satisfy its registration and exchange offer obligations, it will be required to pay additional interest at 0.50% per annum until it satisfies those obligations.
43
The BWXT Credit Facility is a revolving credit agreement providing for borrowings and issuances of letters of credit in an aggregate amount of up to
$180$135 millionwith certain sublimits on the amounts available to JRM and BWXT. On May 13, 2003, the maximum amount availablefor a three-year term. Borrowings under theNew Credit Facility will be reducedagreement may not exceed $100 million. BWXT may, at its option and subject to$166.5certain conditions, increase the aggregate commitments under the facility to $150 million. Theobligations 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 NewBWXT Credit Facility requiresusBWXT to comply with various financial and nonfinancial covenants and reporting requirements. The financial covenants requireusBWXT to maintain a minimumamount of cumulative earnings before taxes, depreciation and amortization;leverage ratio; 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 aminimum variance on expected costsmaximum debt tocomplete 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.capitalization ratio. BWXT was in compliance with these covenants at December 31, 2003. TheNew Credit Facility is scheduled to expire on April 30, 2004. 39Proceeds 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,interest rate at December 31, 2003we 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.was 5.00%. Commitment fees are charged atthea per annum rate of0.75 of 1% per annum on the unused working capital commitment,0.50%, payable quarterly.The MIIProceeds from the BWXT Credit Facilitywas canceled resulting in the release of $107.8 million in cash collateral that hashave been usedtogether withto repay anadditional $10 million of cash,intercompany loan from MII, toprovide JRMrepay amounts owed by BWXT under the omnibus revolving credit facility andBWXT with intercompany loans in the amount of $90 million and $25 million, respectively. JRM and BWXT are using the proceeds of those intercompany loansforworking capital needs andgeneral corporatepurposes. During 2002, JRM experienced material losses onpurposes of BWXT, itsthree EPIC spar projects: Medusa, Devils Towersubsidiaries andFront 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 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.joint ventures. At December 31,2002,2003, BWXT had borrowings of $36.8 million outstanding under the BWXT Credit Facility.As a result of continued losses in our Marine Construction Services segment, we have
providedexperienced negative cash flows forour 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 change2003 andadjustments to overall contract costs may continue to be significant in future periods. Due primarily to the losses incurred on the three EPIC spar projects, weexpect JRM to experience negative cash flowsduring 2003. Completionfor three of theEPIC spar projects has and will continue to put a strain on JRM's liquidity. JRM intendsfour quarters in 2004. We intend to funditsJRM’s negative cashneeds throughflows with the proceeds from the sale of the JRM Secured Notes, other potential borrowingsonor credit facilities permitted under theNew Credit Facility, intercompany loans from MIIindenture governing the JRM Secured Notes, including a planned new letter of credit facility for JRM, and sales of nonstrategic assets, including certain marine vessels.In addition, underHowever, with regard to asset sales, covenants in thetermsindenture governing the JRM Secured Notes contain various restrictions on asset sales in excess of $10 million and generally prohibit JRM’s use of such proceeds to fund working capital needs.JRM’s letters of credit are currently secured by collateral accounts funded with cash equal to 105% of the
New Credit Facility, JRM'samount outstanding. Therefore, we are currently seeking a new letter of creditcapacity was reduced from $200 millionfacility that would not require cash collateral, which is critical to$100 million. This reduction does not negatively impact our abilityJRM’s liquidity. If we are unable toexecute the contracts in our current backlog. However, it will likely limit JRM'sobtain this new facility, JRM’s ability to pursue projects fromcertaincustomers who require letters of credit as a condition ofaward. We are exploring other opportunitiesaward will be limited and JRM’s liquidity will continue toimprove 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.be restricted. Our ability to obtainsuchareplacementnew letter of credit facility for JRM will depend on numerous factors, includingJRM'sJRM’s operating performance and overall marketconditions.conditions, including conditions impacting potential third party lenders.If we are unable to obtain additional third party financing for a new letter of credit facility for JRM,
experiences additional significant contract costs on the EPIC spar projects as a result of unforeseen events,obtain other borrowings or sell JRM assets, wemayexpect JRM will be unable to meet its working capital needs in the near-term. These factors cause substantial doubt about JRM’s ability to continue as a going concern. JRM would have to consider various alternatives including a potential restructuring or filing for receivership. Should JRM file to reorganize under Chapter 11, we believe MII and its other subsidiaries, including MI, BWICO, BWXT and B&W, would not be a party to these proceedings. In addition, MII, MI, BWICO, BWXT and B&W have assessed their ability to continue as viable businesses and have concluded that they can fund their operating activities and capital requirements. MII has not committed to support JRM should it be unable to acquire additional third party financing. However, as discussed below, MII has guaranteed JRM’s performance under certain construction contracts and a Chapter 11 proceeding could pose significant risks to MII and its other subsidiaries if JRM is unable to perform its obligations.As of December 31, 2003, MII had outstanding performance guarantees for six JRM projects. We are not aware that MII has ever had to satisfy a performance guaranty for JRM or any of its other subsidiaries. Five of these guarantees (with a total cap of $136 million) relate to projects which have been completed and are in the warranty periods, the latest of which would expire in January 2006. JRM has incurred minimal warranty costs in prior years and any substantial warranty costs in the future could possibly be covered in whole or in part by insurance. However, if JRM incurs substantial warranty liabilities and is unable to respond, and such liabilities are not covered by insurance, MII would ultimately have to satisfy those claims. The remaining MII performance guaranty for JRM (with a cap of $24 million) is for a pipeline project which is currently in progress and expected to be completed prior to April 15, 2004. This performance guaranty also runs through the one-year warranty period, which we expect to expire prior to April 15, 2005.
A Chapter 11 filing by JRM would require us to give notice to the U.S. Pension Benefit Guaranty Corporation (the “PBGC”). This would cause the PBGC to consider, among other things, whether it would be prudent for them to involuntarily terminate the JRM pension plan. JRM is current on all required pension funding obligations to date. However, if the JRM qualified pension plan were terminated by the PBGC, we believe its termination liability would not exceed $55 million. If JRM were unable to meet this obligation, under law, MII and its other subsidiaries would be jointly and severally liable to make up any shortfall. Based on our
budgeted capital expendituresexperience in the B&W Chapter 11 proceedings, we believe that it is unlikely that the PBGC would exercise its right to terminate the JRM pension plan. However, if the JRM pension plan were terminated andmeet allJRM were unable to fully fund its termination liability, we believe that one or44
more of
our funding requirements for our contractual commitments. In this instance, weMII’s U.S. subsidiaries would be required todefer certain capital expenditures, which in turnmake up any shortfall. Although we do not believe that this is likely, based on the current liquidity forecast for our other U.S. subsidiaries, a $55 million shortfall could be met. Although we believe an action by the PBGC is remote, it could result incurtailmenta potential event ofcertain 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 rightsdefault under theintercompany agreement we discuss below.BWXT Credit Facility which could have a material adverse impact on MII’s liquidity.In March 2003, Moody’s Investor Service lowered MI’s credit rating from B2 to B3. In April 2003, Standard and Poor’s also lowered our corporate credit rating from B to CCC+ and our senior debt rating from B to CCC-. At December 31, 2003, JRM’s credit rating was B3/B-.
MI expects to meet its cash needs in
20032004 through intercompany borrowings from BWXT, which BWXT may fund through operating cash flows or borrowings underthe New Credit Facility. 40its credit facility. MI is restricted, as a result of covenants in its debt instruments, in its ability to transfer funds to MII and MII'sMII’s other subsidiaries, including JRM, through cash dividends or through unsecured loans or investments.On a consolidated basis, we expectMI and its subsidiaries are unable to incurnegativeany additional long-term debt obligations under MI’s public debt indenture, other than in connection with certain extension, renewal or refunding transactions.Our net cash used in operations was approximately $97.5 million for the year ended December 31, 2003 compared to $9.8 million for the year ended December 31, 2002. We experienced significant decreases in our cash position in 2003 compared to 2002. This decrease was primarily attributable to the three Spar contracts in our Marine Construction Services segment. Normally, billings and cash receipts on long-term construction contracts exceed costs incurred early in the lives of the contracts and the contracts require net cash outflows later in their lives. In addition, we have experienced significant cost overruns on these projects, which has negatively impacted our cash flows from operating activities in 2003. Another item affecting our net cash used in operations for the
first three quartersyear ended December 31, 2003 was a reduction in our payments of income taxes totaling approximately $84.2 million compared to the year ended December 31, 2002, when MI paid taxes of approximately $85.4 million resulting from the exercise of an intercompany stock purchase and sale agreement between MI and MII.Our net cash provided by investing activities decreased approximately $143.2 million from $126.4 million for the year ended December 31, 2002 to net cash used in investing activities of $16.8 million for the year ended December 31, 2003.
In addition,This decrease was primarily due to an increase in restricted cash and cash equivalents of $135.7 million, $98.2 million of which serves as collateral for letters of credit. We decreased our capital expenditures in 2003 by approximately $28.8 million, primarily in our Marine Construction Services segment. Proceeds from asset disposals decreased in 2003 from 2002 by approximately $17.0 million. The proceeds from asset disposals in 2002 were primarily related to the sale of Hudson Products Corporation, while proceeds from asset disposals in 2003 were primarily related to the sale of JRM’s Menck GmbH subsidiary.For the year ended December 31, 2003, we had net cash provided by financing activities of $159.6 million compared to net cash used in financing activities of $147.3 million for the year ended December 31, 2002. The year ended December 31, 2003 included proceeds from the JRM Secured Notes of $194.1 million, payment of $9.5 million of MI’s series A medium term notes, and a decrease in short term borrowings totaling $8.9 million. The year ended December 31, 2002 included $208.3 million to repay the remaining amount of MI’s 9.375% Notes due March 15, 2002 and an increase in short-term borrowings of approximately $60 million.
At December 31, 2003,
Moody's Investor Service lowered MI's credit rating from B2 to B3. These factors may further impact our access to capitalwe had total cash and cash equivalents of $355.3 million. However, our ability torefinanceuse $180.5 million of these funds is restricted due to theNew Credit Facility, whichfollowing: $98.2 million serves as collateral for letters of credit; $5.4 million serves as collateral for foreign exchange trading and other financial obligations; $48.1 million isscheduledrequired toexpiremeet reserve requirements of our captive insurance companies; $22.0 is temporarily reserved to pay the next two succeeding payments of interest on the JRM Secured Notes as required by the indenture; and $6.8 million is held inApril 2004. Our current credit ratingrestricted foreign accounts. The $22.0 million temporary interest reserve is required until the later to occur of (1) the acceptance by the customer under the existing construction contract for theDevils Towerproduction platform andoperating performance in 2002 could limit our alternatives and ability to refinance(2) theNew Credit Facility. Atacceptance by the customer under the existing construction contract for theFront Runnerproduction platform. In addition, at December 31, 2003 and 2002, our balance in cash andDecember 31, 2001, we had available various uncommitted short-term lines of credit from banks totaling $10.2cash equivalents on our consolidated balance sheets includes approximately $19.9 million and$8.9$17.9 million,respectively. We had no borrowings againstrespectively, in adjustments for bank overdrafts, with a corresponding increase in accounts payable for theselinesoverdrafts.Our working capital, excluding restricted cash and cash equivalents, improved by approximately $7.8 million from a negative $212.6 million at December 31, 2002
orto a negative $204.8 million at December 31,2001.2003. Since December 31, 2003, $28.7 million of restricted cash held by BWXT has been released. In addition, in 2004, we expect to release45
$22.0 million of restricted cash upon completion of ourDevils TowerandFront Runnerprojects as described in the preceding paragraph. We also expect to release approximately $75 million of restricted cash by obtaining a new letter of credit facility for JRM in 2004.
At December 31,
2002,2003, we hadtotal cash, cash equivalents andinvestments with a fair value of$348.4$42.8 million. Our investment portfolio consists primarily of investments in government obligations and other highly liquiddebt securities. The fair value of our investments at December 31, 2002 was $173.2 million.money market instruments. As of December 31,2002,2003, we had pledged approximately$46.3$41.2 million fair value of these investments to secure a letter of credit in connection with certain reinsurance agreements.In addition,At March 9, 2004, our liquidity position was as
of December 31, 2002, we had pledged investment portfolio assets having a fair market value of approximately $107.8 million as cash collateral to secure our obligations under the MII Credit Facility. In February 2003, the MII Credit Facility was terminated, resulting in the release of the cash collateral.follows (in millions):
JRM MI Other Consolidated Cash, cash equivalents and investments $ 188 $ 1 $ 116 $ 305 Less restricted amounts: Letter of credit collateral (84 ) — (4 ) (88 ) Captive insurer requirements (16 ) — (33 ) (49 ) Pledged securities — — (41 ) (41 ) Temporary interest reserve (22 ) — — (22 ) Restricted foreign accounts (3 ) — (1 ) (4 ) Foreign exchange trading (5 ) — — (5 )
Total free cash available 58 1 37 96 Amount available under BWXT Credit Facility — 74 — 74
Total available liquidity $ 58 $ 75 $ 37 $ 170
Our cash requirements as of December 31,
20022003 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 $ 3,600Note: Less than 1 Year includes MI's Series "A" Medium Term Notes totaling $9.5
Less than 1-3 3-5 After Total 1 Year Years Years 5 Years (In thousands) Long-term debt $ 276,596 $ — $ 16,974 $ 8,500 $ 251,122 Capital leases $ 3,553 $ 467 $ 1,162 $ 1,924 $ — Operating leases $ 61,168 $ 8,108 $ 9,493 $ 6,736 $ 36,831 Take-or-pay contract $ 10,800 $ 1,800 $ 3,600 $ 3,600 $ 1,800 Insurance premium adjustment $ 6,250 $ 1,250 $ 3,750 $ 1,250 $ — In addition, we expect to contribute approximately $12.2 million
the repayment of which we funded on February 11, 2003.to our domestic pension plans and $13.2 million to our domestic other postretirement benefit plans in 2004.Our contingent commitments, excluding amounts guaranteed related to B&W, under letters of credit currently outstanding expire as follows:
Less than 1-3 3-5 Total 1 Year Years Years (In thousands)$ 183,160 $164,655 $3,190 $15,315At March 24, 2003, our liquidity position was as follows (in millions):
JRM MI Other ConsolidatedCash, 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 an additional $9 million in letter
Less than 1-3 Total 1 Year Years Thereafter (In thousands) $144,953 $ 128,581 $ 15,315 $ 1,057 As of
credit capacity. 41During the year endedDecember 31,2002, MI repurchased or repaid2003, MII had outstanding performance guarantees for five Volund contracts. Volund is currently owned by B&W. These guarantees, theremaining $208.8 millionlast of which will expire on December 31, 2005, were all executed inaggregate principal amount2001 and have a cap of $46 million. These projects have all been completed and MII has never had to satisfy a performance guaranty for Volund. Under the terms of an agreement between MII and B&W, B&W must reimburse MII for any costs MII may incur under any of these performance guarantees. As of December 31, 2003, B&W has sufficient liquidity to cover its9.375% Notes due March 15, 2002 for aggregate paymentsobligations under this agreement. However, if Volund incurs and is unable to satisfy substantial warranty liabilities on these projects prior to expiration of$208.3 million, resulting in an extraordinary net after-tax gain of $0.3 million. In orderthe guaranty periods and B&W is not able torepay the remaining notes, MI exercisedsatisfy itsright pursuant to a stock purchase and sale agreement with MII (the "Intercompany Agreement"). Under this agreement, MI had the right to sellcontractual obligation to MII and such liabilities are not covered by insurance, MIIhad 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. 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 approximately $85.4 million at December 31, 2001. Through December 31, 2002, we have made estimated tax payments for the associated tax liability.would be liable.On February 21, 2000, B&W and certain of its subsidiaries entered into the DIP Credit Facility to satisfy their working capital and letter of credit needs during the pendency of their bankruptcy case. B&W had no borrowings outstanding under this facility at December 31, 2003 or December 31, 2002. Letters of credit outstanding under the DIP Credit Facility at December 31, 2003 totaled approximately $169.2 million. This facility, which was scheduled to
46
expire on February 22, 2003, was amended and extended to February 22, 2004, with a reduction of the facility from $300 million to $227.75 million. Recently, B&W exercised its option to extend the maturity by one year to February 22, 2005. As a condition to borrowing or obtaining letters of credit under the DIP Credit Facility, B&W must comply with certain financial covenants.
B&W had no borrowings outstanding under this facility atAt December 31,2002 or December 31, 2001. Letters2003, B&W was in violation ofcredit outstandingone of the covenants due to a certain subsidiary entering into foreign currency forward exchange contracts without first inquiring whether the lenders were willing to provide such contracts. On March 5, 2004, B&W received a waiver from the lenders under the DIP Credit Facilityat December 31, 2002 totaled approximately $140.9 million. This facility, which was scheduledtoexpire 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.remedy this violation. See Note 20 to our consolidated financial statements for further information on the DIP Credit Facility.AtAs of 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,2003, MII, MI and BWICO have agreed to indemnify B&W foranycustomerdrawdraws on$51.4$42.0 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&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, should customer draws occur on a significant amount of these letters of credit requiring 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 lettersthe liquidity ofcredit issued in connection with B&W's operations should customer draws occur on a significant amount of these letters of credit.MII, MI and BWICO would be strained. In addition, as of December 31,2002,2003, MII guaranteed surety bonds of approximately$121.0$84.3 million, of which$107.7$80.1 million related to the business operations of B&W and its subsidiaries. We are not aware that either MII or any of its subsidiaries, including 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 significant amount of its surety bond guarantee obligations. As to the guarantee and indemnity 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 are precluded from paying dividends to
shareholders and making payments on any pre-bankruptcy filing accounts or notes payable that are due and owing to any other entity within the McDermott group of companies (the "Pre-Petition Intercompany Payables") and other creditors during the pendency of the bankruptcy case, without the Bankruptcy Court's approval. As a result of the B&W bankruptcy filing, our access to the cash flows of B&W and its subsidiaries has been restricted. In addition, MI and JRM and their respective subsidiaries are limited, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. Completion of the EPIC 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 42ability to obtain additional financing. Our current credit rating has also impacted our access to, and sources of, capital and has resulted in additional collateral requirements for our debt obligations, as reflected under the New Credit Facility.us.As discussed in Note 20 to our consolidated financial statements included in this report, we
are continuing our discussions with the ACC and FCR concerning a potential settlement. As a result of those discussions, wehave reached an agreement in principlein August 2002withrepresentatives ofthe ACC and the FCRon several key terms, which served asconcerning abasispotential settlement forcontinuing 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 resolvethe B&W Chapter 11proceedings 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 and stockholders. The parties are currently working to address the remaining unresolved issues and detailsproceedings. That agreement ina 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 includeprinciple includes 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 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. 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 a 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 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 would be guaranteed by MII.-MII and all of itspast and present directors, officers and affiliates,subsidiaries, including its captive insurers, and all of their respective directors and officers, would receive the full benefit of the protections afforded by Section 524(g) of the Bankruptcy Code with respect to personal injury claims attributable to B&W's&W’s use of asbestos and would be released and protected from all pending and future asbestos-related claims stemming from B&W's&W’s operations, as well as other claims (whether contract claims, tort claims or other claims) of any kind 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 proposed settlementwould beis conditioned on the approval byMII'sMII’s Board of Directorsand stockholdersof the terms of the settlement outlined above.As the47
This proposed settlement
discussions proceed, we expect that somehas been reflected in a third amended joint plan ofthe court proceedings in or relating to the B&W Chapter 11 case will continuereorganization andthataccompanying form of settlement agreement filed by the partieswill continue to maintain their previously asserted positions.with the Bankruptcy Court on June 25, 2003, and as amended through December 30, 2003, together with a third amended joint disclosure statement filed on June 25, 2003. The Bankruptcy Court commenced hearings on the confirmation of the proposed plan of reorganization on September 22, 2003. These hearings were completed at the Bankruptcy Court level on January 9, 2004, and the record before the Bankruptcy Court hasdirectedclosed. The plan proponents and the43partiesobjectors tofile an amended disclosure statementthe plan filed proposed findings of fact and conclusions of law on February 17, 2004. Responses are due by March28, 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,15, 2004. It is uncertain how the Bankruptcy Court willschedule further proceedings concerning this matter. The processproceed at that point or how long it will take for the Bankruptcy Court to issue its opinion and order respecting confirmation offinalizingthe plan, andimplementingit is also uncertain when and how thesettlement couldDistrict Court will takeup to a year, depending on, among other things,action after thenatureBankruptcy Court has issued its opinion andextent of any objections or appeals in the bankruptcy case. Based on recent developments in the settlement negotiations, we determined that a liability related toorder.As noted above, the proposed settlement is
probablesubject to approval by MII’s Board of Directors. We expect that approval will be impacted by the progress of pending federal legislation entitled “The Fairness in Asbestos Injury Resolution Act of 2003” (Senate Bill 1125, the “FAIR Bill”), which the Judiciary Committee of the United States Senate approved on July 10, 2003. The FAIR Bill would create a privately funded, federally administered trust fund to resolve pending and future asbestos-related personal injury claims. The bill has not been approved by the Senate and has not been introduced in the House of Representatives.Under the terms of the FAIR Bill as approved by the Senate Judiciary Committee, companies that have been defendants in asbestos personal injury litigation, as well as insurance companies, would contribute amounts to a national trust on a periodic basis to fund payment of claims filed by asbestos personal injury claimants who qualify for payment under the FAIR Bill based on an allocation methodology the FAIR Bill specifies. The FAIR Bill also contemplates, among other things, that the national fund would terminate if the administrator could not certify that 95% of the previous year’s eligible claimants had been paid, in which case the claimants and defendants would return to the tort system. There are many other provisions in the FAIR Bill that would affect its impact on B&W and the other Debtors, the Chapter 11 proceedings and our company.
It is not possible to determine whether the FAIR Bill will ever be presented for a vote or adopted by the full Senate or the House of Representatives, or whether the FAIR Bill will be signed into law. Nor is it possible at this time to predict the final terms of any bill that might become law or its impact on B&W and the other Debtors or the Chapter 11 proceedings. We anticipate that, during the legislative process, the terms of the FAIR Bill, as approved by the Senate Judiciary Committee, will change 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 tax expense of $23.6 million. This charge is in additionany such changes may be material to the$220.9 million after-tax charge we recorded in the quarter ended June 30, 2002 to write off our investment inFAIR Bill’s impact on B&W and the otherrelated assets. For details regarding this estimate, see Note 20Debtors. Many organized labor organizations, including the AFL-CIO, have indicated their opposition toour consolidated financial statements. Despite our recent progress in our settlement discussions, there are continuing risks and uncertainties that will remain with us untiltherequisite approvals are obtainedFAIR Bill, and thefinal settlement is reflectedAmerican Insurance Association, a national organization of insurance companies, has also expressed opposition to the FAIR Bill ina plan of reorganization that is confirmedthe form approved by theBankruptcy Court pursuant to a final, nonappealable orderSenate Judiciary Committee. In light ofconfirmation. One ofthat opposition, as well as other factors, we cannot currently predict whether theremaining issues toFAIR Bill will beresolved as negotiations relating toenacted or, if enacted, how it would impact the B&W Chapter 11 proceedings,continue relates totheproposed spin-off of the MI/B&W pension plan. InDebtors or ourjudgment, it has 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 spin-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 Other 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. 44In 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 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 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, including 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 effect on our 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and 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 December 15, 2002. Our financial statements for the year ended December 31, 2002 contain the disclosures required by SFAS No. 148. 45company. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents and our investment portfolio, which is primarily comprised of investments in U.S. Government obligations and
otherhighly liquiddebt securitiesmoney market instruments denominated in U.S. dollars. We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. All our investments in debt securities are classified as available-for-sale.We have no material future earnings or cash flow exposures from changes in interest rates on our long-term debt obligations, as substantially all of these obligations have fixed interest rates. We have exposure to changes in interest rates on
our short-term uncommitted lines of credit andtheNewBWXT Credit Facility (see Item 7- Management's— Management’s Discussion and Analysis of Financial Condition and Results of Operations-— Liquidity and Capital Resources). At December 31,20022003 we had$45.6$36.8 million of outstanding borrowings underour credit facilities. At December 31, 2001, we had no outstanding borrowings under our credit facilities.this facility.We have operations in many foreign locations, and, as a result, our 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, we
regularlyattempt to hedge those risks with foreign currency derivative instruments. Historically, we have hedged those risks with foreign currency forward48
contracts. However, due to limitations in our credit facilities, we have recently hedged those risks with foreign currency option contracts. We do not enter into speculative
forward contracts.derivative instruments.Interest Rate Sensitivity
The following tables provide information about our financial instruments that are sensitive to changes in interest rates. The tables present principal cash flows and related weighted-average interest rates by expected maturity dates.
Principal Amount by Expected Maturity
(In
(In thousands)At December 31, 2003:
Fair Value Years Ending December 31, at December 31, 2004 2005 2006 2007 2008 Thereafter Total 2003 Investments $ 42,884 $ — $ — $ — $ — $ — $ 42,884 $ 42,800 Average Interest Rate 0.26 % — — — — — Long-term Debt — Fixed Rate $ — $ 11,500 $ 5,484 $ 4,250 $ 6,750 $ 254,475 $ 282,459 $ 260,158 Average Interest Rate — 7.81 % 7.38 % 6.80 % 7.16 % 10.49 % At December 31, 2002:
Fair Value at Years Ending December 31, December 31, 2003 2004 2005 2006 2007 Thereafter Total 2002Investments(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%
Fair Value Years Ending December 31, at December 31, 2003 2004 2005 2006 2007 Thereafter Total 2002 Investments $ 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 % Exchange Rate Sensitivity
At December 31,
2001:
Fair Value at Years Ending December 31, December 31, 2002 2003 2004 2005 2006 Thereafter Total 2001Investments $ 81,411 $ 227,270 $ 2,700 $ - $ - $ - $ 311,381 $ 331,003 Average Interest Rate 4.54% 3.20% 5.25% Long-term Debt- Fixed Rate $ 209,018 $ 11,501 $ 209 $11,715 $ 5,706 $ 67,239 $ 305,388 $ 292,849 Average Interest Rate 9.37% 8.14% 5.79% 7.77% 7.32% 8.27%(1)In February2003, weliquidatedhad foreign currency option contracts outstanding to purchase 9.1 million Euros at a weighted-average strike price of 1.245 with varying expiration dates through November 30, 2004. These contracts had a total fair value of approximately$108$0.4 millionof our investment portfolio for working capital and general corporate purposes. Exchange Rate Sensitivityat December 31, 2003. We had no foreign currency forward contracts outstanding at December 31, 2003.The following
tables providetable provides information about our foreign currency forward contracts outstanding at December 31, 2002 andpresentpresents such information in U.S. dollar equivalents. Thetables presenttable presents notional amounts and related weighted-average exchange rates by expected (contractual) maturity dates andconstituteconstitutes a forward-looking statement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.46At December 31,
2002 (all forward contracts are expected to mature in 2003):
Year Ending Fair Value Average Contractual Foreign Currency December 31, 2003 at December 31, 2002 Exchange RateForward Contracts to Purchase Foreign Currencies for U.S. Dollars: Indonesian Rupiah $ 3,679 $ 157 9703.900 Euro $ 11,260 $ 245 1.025 Pound Sterling $ 525 $ 3 1.596 Forward Contracts to Sell Foreign Currencies for U.S. Dollars: Swedish Krona $ 675 $ (18) 10.668 Pound Sterling $ 263 $ (1) 1.598At December 31, 2001 (all forward contracts matured in 2002):2002:
Year Ending Fair Value Average Contractual Foreign Currency December 31, 2002 at December 31, 2001 Exchange RateForward Contracts to Purchase Foreign Currencies for U.S. Dollars: Indonesian Rupiah $ 14,249 $ (722) 10667.600 Australian Dollar $ 11,161 $ (844) 0.549 Euro $ 10,017 $ (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
Year Ending Fair Value Average Contractual Foreign Currency December 31, 2003 at December 31, 2002 Exchange Rate Indonesian Rupiah $ 3,679 $ 157 9703.900 Euro $ 11,260 $ 245 1.025 Pound Sterling $ 525 $ 3 1.596 Swedish Krona $ 675 $ (18 ) 10.668 Pound Sterling $ 263 $ (1 ) 1.598 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
47R 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 S49
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
McDermott International, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of loss, comprehensive loss,
stockholders'stockholders’ equity (deficit), and cash flows present fairly, in all material respects, the financial position of McDermott International, Inc. and subsidiaries (the"Company"“Company”) at December 31,20022003 and2001,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31,20022003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of theCompany'sCompany’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in 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 audits provide a reasonable basis for our opinion.As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for asset retirement obligations as of January 1, 2003. In addition and as discussed in Note 1 to the consolidated financial statements, the Company changed its method of 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,In 2002,a ruling in favor ofthe Companywas issued by the U.S. Bankruptcy Court on the assets transferred by B&W. This ruling is currently under appeal. The Company has recentlyentered into a preliminary settlement agreement with certain claimants to resolve the Chapter 11 filing, andthe transferred asset claims, as well asother matters, andhasin 2003 filedaan amended proposed consensual plan of reorganization with the U.S. Bankruptcy Court. The final resolution and timing of these mattersremainremains uncertain. In addition and as discussed in Notes 12 and 21 to the consolidated financial statements, during 2002 and 2003 theCompany'sCompany’s wholly owned subsidiary, J. Ray McDermott, S.A. (“JRM”),recordedhas incurred significant operating losses on certain construction projects. Thesematters, among others,losses have negatively impacted theCompany'sCompany’s results of operationsfor the year ended December 31, 2002andits liquidity.liquidity, and raise substantial doubt about JRM’s ability to continue as a going concern.PricewaterhouseCoopers LLP
New Orleans, Louisiana
March24, 2003 4815, 2004 50
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETSASSETS
December 31, 2002 2001 ---- ---- (In thousands)Current Assets: Cash and cash equivalents $ 175,177 $ 196,912 Investments 108,269 158,000 Accounts receivable - trade, net 194,603 139,598 Accounts receivable from The Babcock & Wilcox Company 12,273 3,681 Accounts and notes receivable - unconsolidated affiliates 17,695 69,368 Accounts receivable - other 64,718 34,833 Contracts in progress 149,162 97,326 Inventories 686 1,825 Deferred income taxes 3,350 59,370 Other current assets 36,972 52,490 - ------------------------------------------------------------------------------------------------------ Total Current Assets 762,905 813,403 - ------------------------------------------------------------------------------------------------------ \ Property, Plant and Equipment: Land 12,520 19,897 Buildings 132,538 138,443 Machinery and equipment 1,032,244 1,022,932 Property under construction 62,625 37,378 - ------------------------------------------------------------------------------------------------------ 1,239,927 1,218,650 Less accumulated depreciation 885,827 864,751 - ------------------------------------------------------------------------------------------------------ Net Property, Plant and Equipment 354,100 353,899 - ------------------------------------------------------------------------------------------------------ Investments: Government obligations 48,681 171,702 Other investments 16,277 1,301 - ------------------------------------------------------------------------------------------------------ Total Investments 64,958 173,003 - ------------------------------------------------------------------------------------------------------ Investment in The Babcock & Wilcox Company - 186,966 - ------------------------------------------------------------------------------------------------------ Accounts Receivable from The Babcock & Wilcox Company - 17,489 - ------------------------------------------------------------------------------------------------------ Goodwill 12,926 330,705 - ------------------------------------------------------------------------------------------------------ Prepaid Pension Costs 19,311 152,510 - ------------------------------------------------------------------------------------------------------ Other Assets 63,971 75,865 - ------------------------------------------------------------------------------------------------------ TOTAL $ 1,278,171 $ 2,103,840 ======================================================================================================
December 31, 2003 2002 (In thousands) Current Assets: Cash and cash equivalents $ 174,790 $ 129,517 Restricted cash and cash equivalents (See Note 21) 180,480 44,824 Investments — 108,269 Accounts receivable — trade, net 195,073 177,347 Accounts receivable from The Babcock & Wilcox Company 6,192 12,273 Accounts and notes receivable — unconsolidated affiliates 14,024 17,695 Accounts receivable — other 38,296 63,270 Contracts in progress 69,485 147,336 Deferred income taxes 4,168 3,350 Other current assets 16,019 45,403
Total Current Assets 698,527 749,284
Property, Plant and Equipment: Land 12,609 12,520 Buildings 137,823 132,538 Machinery and equipment 1,067,665 1,030,764 Property under construction 26,125 62,625
1,244,222 1,238,447 Less accumulated depreciation 880,460 885,051
Net Property, Plant and Equipment 363,762 353,396
Investments: Government obligations 17,824 48,681 Other investments 24,976 16,277
Total Investments 42,800 64,958
Goodwill 12,926 12,926
Prepaid Pension Costs 18,722 19,311
Other Assets 112,137 78,296
TOTAL $ 1,248,874 $ 1,278,171
See accompanying notes to consolidated financial statements.
4951
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 2002 2001 ---- ---- (In thousands)Current Liabilities: Notes payable and current maturities of long-term debt $ 55,577 $ 209,506 Accounts payable 166,251 118,811 Accounts payable to The Babcock & Wilcox Company 32,379 34,098 Accrued employee benefits 62,109 91,596 Accrued liabilities - other 185,320 203,695 Accrued contract cost 53,335 26,367 Advance billings on contracts 329,557 170,329 U.S. and foreign income taxes payable 32,521 123,985 - ----------------------------------------------------------------------------------------------------------------- Total Current Liabilities 917,049 978,387 - ----------------------------------------------------------------------------------------------------------------- Long-Term Debt 86,104 100,393 - ----------------------------------------------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 26,898 23,536 - ----------------------------------------------------------------------------------------------------------------- Environmental and Products Liabilities 12,258 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 102,252 106,390 - ----------------------------------------------------------------------------------------------------------------- Commitments and Contingencies. (Note 10) - ----------------------------------------------------------------------------------------------------------------- Stockholders' Equity (Deficit): Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 66,351,478 and 63,733,257 shares at December 31, 2002 and 2001, respectively 66,351 63,733 Capital in excess of par value 1,093,428 1,077,148 Accumulated deficit (1,027,318) (250,924) Treasury stock at cost, 2,061,407 and 2,005,792 shares at December 31, 2002 and 2001, respectively (62,792) (62,736) Accumulated other comprehensive loss (486,426) (57,111) - ----------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity (Deficit) (416,757) 770,110 - ----------------------------------------------------------------------------------------------------------------- TOTAL $ 1,278,171 $ 2,103,840 =================================================================================================================50STOCKHOLDERS’ DEFICIT
December 31, 2003 2002 (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 37,217 $ 55,577 Accounts payable 146,665 163,811 Accounts payable to The Babcock & Wilcox Company 42,137 32,379 Accrued employee benefits 69,923 60,897 Accrued liabilities — other 166,129 190,843 Accrued contract cost 69,928 53,335 Advance billings on contracts 176,105 329,031 U.S. and foreign income taxes payable 14,727 31,176
Total Current Liabilities 722,831 917,049
Long-Term Debt 279,682 86,104
Accumulated Postretirement Benefit Obligation 26,861 26,898
Self-Insurance 60,737 71,918
Pension Liability 311,393 392,072
Accrued Cost of The Babcock & Wilcox Company Bankruptcy Settlement 100,916 86,377
Other Liabilities 109,631 114,510
Commitments and Contingencies. (Note 10) Stockholders’ Deficit: Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 68,129,390 and 66,351,478 shares at December 31, 2003 and 2002, respectively 68,129 66,351 Capital in excess of par value 1,105,828 1,093,428 Accumulated deficit (1,122,547 ) (1,027,318 ) Treasury stock at cost, 2,061,407 shares at December 31, 2003 and 2002 (62,792 ) (62,792 ) Accumulated other comprehensive loss (351,795 ) (486,426 )
Total Stockholders’ Deficit (363,177 ) (416,757 )
TOTAL $ 1,248,874 $ 1,278,171
52
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands, except per share amounts)Revenues $ 1,748,681 $1,896,948 $ 1,813,670 - ------------------------------------------------------------------------------------------------------ Costs and Expenses: Cost of operations 1,744,138 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 impairments - net 7,849 3,739 2,803 Selling, general and administrative expenses 160,474 194,041 182,457 - ------------------------------------------------------------------------------------------------------ 2,450,133 1,855,669 1,799,002 - ------------------------------------------------------------------------------------------------------ Equity in Income (Loss) from Investees 27,692 34,093 (9,795) - ------------------------------------------------------------------------------------------------------ Operating Income (Loss) (673,760) 75,372 4,873 - ------------------------------------------------------------------------------------------------------ Other Income (Expense): Interest income 8,560 19,561 27,108 Interest expense (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 (4,440) 6,641 2,692 - ------------------------------------------------------------------------------------------------------ (97,381) 10,535 (19,102) - ------------------------------------------------------------------------------------------------------ Income (Loss) from Continuing Operations before Provision for Income Taxes and Extraordinary Item (771,141) 85,907 (14,229) Provision for Income Taxes 15,063 110,329 10,635 - ------------------------------------------------------------------------------------------------------ Loss from Continuing Operations before Extraordinary Item (786,204) (24,422) (24,864) Income from Discontinued Operations 9,469 3,565 2,782 - ------------------------------------------------------------------------------------------------------ Loss before Extraordinary Item (776,735) (20,857) (22,082) Extraordinary Gain on Debt Extinguishment 341 835 - - ------------------------------------------------------------------------------------------------------ Net Loss $ (776,394) $ (20,022) $ (22,082) ====================================================================================================== Loss per Common Share: Basic: Loss from Continuing Operations before Extraordinary Item $ (12.71) $ (0.40) $ (0.42) Net Loss $ (12.55) $ (0.33) $ (0.37) Diluted: Loss from Continuing Operations before Extraordinary Item $ (12.71) $ (0.40) $ (0.42) Net Loss $ (12.55) $ (0.33) $ (0.37) =================================================================================================== Cash Dividends: Per Common Share $ - $ - $ 0.10 ===================================================================================================
Year Ended December 31, 2003 2002 2001 (In thousands, except per share amounts) Revenues $ 2,335,364 $ 1,733,821 $ 1,888,078
Costs and Expenses: Cost of operations 2,252,842 1,734,580 1,653,042 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 impairments — net (6,171 ) 7,855 3,739 Selling, general and administrative expenses 169,764 157,845 192,134
2,416,435 2,437,952 1,848,915
Equity in Income from Investees 28,382 27,692 34,093
Operating Income (Loss) (52,689 ) (676,439 ) 73,256
Other Income (Expense): Interest income 3,230 8,553 19,553 Interest expense (18,993 ) (15,123 ) (39,656 ) Estimated loss on The Babcock & Wilcox Company bankruptcy settlement (14,539 ) (86,377 ) — Gain on sale of McDermott Engineers & Constructors (Canada) Ltd. — — 27,996 Other — net 2,123 (4,174 ) 4,220
(28,179 ) (97,121 ) 12,113
Income (Loss) from Continuing Operations before Provision for Income Taxes and Cumulative Effect of Accounting Change (80,868 ) (773,560 ) 85,369 Provision for Income Taxes 21,290 14,406 110,651
Loss from Continuing Operations before Cumulative Effect of Accounting Change (102,158 ) (787,966 ) (25,282 ) Income from Discontinued Operations 3,219 11,572 5,260
Loss before Cumulative Effect of Accounting Change (98,939 ) (776,394 ) (20,022 ) Cumulative Effect of Accounting Change 3,710 — —
Net Loss $ (95,229 ) $ (776,394 ) $ (20,022 )
Loss per Common Share: Basic and Diluted: Loss from Continuing Operations before Cumulative Effect of Accounting Change $ (1.59 ) $ (12.74 ) $ (0.42 ) Income from Discontinued Operations 0.05 0.19 0.09 Cumulative Effect of Accounting Change 0.05 — — Net Loss $ (1.49 ) $ (12.55 ) $ (0.33 )
See accompanying notes to consolidated financial statements.
5153
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVELOSSINCOME (LOSS)
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)Net Loss $ (776,394) $ (20,022) $ (22,082) - --------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss): Currency translation adjustments: Foreign currency translation adjustments 267 (4,826) (11,615) Reclassification adjustment for impairments of investments 18,435 - - Sales of investments in foreign entities 1,041 1,513 (6,077) Unrealized gains (losses) on derivative financial instruments: Unrealized gains (losses) 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 $0, $30,000 and $210,000 in 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 Loss (429,315) (2,259) (7,871) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Loss $(1,205,709) $ (22,281) $ (29,953) ===========================================================================================================================
Year Ended December 31, 2003 2002 2001 (In thousands) Net Loss $ (95,229 ) $ (776,394 ) $ (20,022 ) Other Comprehensive Income (Loss): Currency translation adjustments: Foreign currency translation adjustments 1,150 267 (4,826 ) Reclassification adjustment for impairments of investments — 18,435 — Sales of investments in foreign entities — 1,041 1,513 Unrealized gains (losses) on derivative financial instruments: Unrealized gains (losses) on derivative financial instruments 673 3,858 (2,506 ) Reclassification adjustment for (gains) losses included in net loss (994 ) (534 ) 266 Minimum pension liability adjustment: Net of tax benefits of $1,554,000 in the year ended December 31, 2001 134,499 (451,756 ) (2,849 ) Unrealized gains (losses) on investments: Unrealized gains (losses) arising during the period, net of taxes of $0, $0 and $30,000 in the years ended December 31, 2003, 2002 and 2001, respectively (292 ) 371 9,286 Reclassification adjustment for net gains included in net loss, net of tax benefits of $0, $0 and $162,000 in the years ended December 31, 2003, 2002 and 2001, respectively (405 ) (997 ) (3,143 )
Other Comprehensive Income (Loss) 134,631 (429,315 ) (2,259 )
Comprehensive Income (Loss) $ 39,402 $ (1,205,709 ) $ (22,281 )
See accompanying notes to consolidated financial statements.
5254
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS'STOCKHOLDERS’ EQUITY (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)Balance December 31, 1999 61,625,434 61,625 1,048,848 (208,904) (46,980) (62,731) 791,858 - ------------------------------------------------------------------------------------------------------------------------------------ Net Loss - - - (22,082) - - (22,082) Minimum pension liability - - - - 4,933 - 4,933 Unrealized gain on investments - - - - 4,887 - 4,887 Translation adjustments - - - - (11,615) - (11,615) Common stock dividends - - - (5,993) - - (5,993) Exercise of stock options 3,851 4 14 - - - 18 Vesting of deferred stock units 947 1 - - - - 1 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 - - - 110 Vesting of deferred stock units 100,701 101 (101) - - - - Restricted stock purchases - net 324,007 324 (347) - - - (23) Directors stock plan 2,550 2 - - - - 2 Contributions to thrift plan 711,943 712 7,272 - - - 7,984 Stock based compensation charges - - 7,715 - - - 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 - - - - (451,756) - (451,756) Unrealized loss on investments - - - - (626) - (626) Translation adjustments - - - - 19,743 - 19,743 Unrealized gain on derivatives - - - - 3,324 - 3,324 Exercise of stock options 113,800 113 1,281 - - - 1,394 Vesting of deferred stock units 6,123 6 (6) - - - - Restricted stock issuances - net 403,700 404 (816) - - (56) (468) Performance based stock issuances 699,711 700 4,238 - - - 4,938 Contributions to thrift plan 1,394,887 1,395 8,481 - - - 9,876 Stock based compensation charges - - 3,102 - - - 3,102 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 2002 66,351,478 $ 66,351 $ 1,093,428 $(1,027,318) $(486,426) $(62,792) $(416,757) ====================================================================================================================================
Common Stock Capital
in ExcessAccumulated Accumulated
Other
ComprehensiveTreasury Total
Stockholders'Shares Par Value of Par Value Deficit Loss Stock Equity (Deficit) (In thousands, except for share amounts) 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 — — — 110 Vesting of deferred stock units 100,701 101 (101 ) — — — — Restricted stock purchases — net 324,007 324 (347 ) — — — (23 ) Directors stock plan 2,550 2 — — — — 2 Contributions to thrift plan 711,943 712 7,272 — — — 7,984 Stock-based compensation charges — — 7,715 — — — 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 — — — — (451,756 ) — (451,756 ) Unrealized loss on investments — — — — (626 ) — (626 ) Translation adjustments — — — — 19,743 — 19,743 Unrealized gain on derivatives — — — — 3,324 — 3,324 Exercise of stock options 113,800 113 1,281 — — — 1,394 Vesting of deferred stock units 6,123 6 (6 ) — — — — Restricted stock issuances — net 403,700 404 (816 ) — — (56 ) (468 ) Performance based stock issuances 699,711 700 4,238 — — — 4,938 Contributions to thrift plan 1,394,887 1,395 8,481 — — — 9,876 Stock-based compensation charges — — 3,102 — — — 3,102
Balance December 31, 2002 66,351,478 66,351 1,093,428 (1,027,318 ) (486,426 ) (62,792 ) (416,757 ) Net loss — — — (95,229 ) — — (95,229 ) Minimum pension liability — — — — 134,499 — 134,499 Unrealized loss on investments — — — — (697 ) — (697 ) Translation adjustments — — — — 1,150 — 1,150 Unrealized loss on derivatives — — — — (321 ) — (321 ) Vesting of deferred stock units 33,759 34 (34 ) — — — — Restricted stock issuances — net 445,593 446 716 — — — 1,162 Contributions to thrift plan 1,298,560 1,298 4,791 — — — 6,089 Stock-based compensation charges — — 6,927 — — — 6,927
Balance December 31, 2003 68,129,390 $ 68,129 $ 1,105,828 $ (1,122,547 ) $ (351,795 ) $ (62,792 ) $ (363,177 )
See accompanying notes to consolidated financial statements.
5355
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (776,394) $ (20,022) $ (22,082) Depreciation and amortization 40,811 62,371 63,890 Income or loss of investees, less dividends 7,156 2,616 23,850 Loss on asset disposals and impairments - net 7,850 3,733 2,800 Provision for (benefit from) deferred taxes (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 12,093 1,112 12,880 Changes in assets and liabilities, net of effects from acquisitions and divestitures: Accounts receivable (51,733) (31,066) 29,554 Accounts payable 53,332 28,337 12,148 Inventories 176 4,293 (4,134) Net contracts in progress and advance billings 105,498 82,088 (18,231) Income taxes (18,635) 95,113 (15,845) Accrued liabilities 16,844 (32,107) (40,680) Products and environmental liabilities 3,091 3,085 (10,332) Other, net 15,852 (4,176) (87,023) Proceeds from insurance for products liability claims - - 26,427 Payments of products liability claims - - (23,782) - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (9,073) 175,815 (49,066) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions - (644) (2,707) Purchases of property, plant and equipment (64,852) (45,008) (49,300) Purchases of available-for-sale securities (1,361,752) (1,352,266) (114,449) Maturities of available-for-sale securities 744,538 161,901 108,437 Sales of available-for-sale securities 775,441 1,226,107 26,382 Proceeds from asset disposals 41,095 53,056 4,778 Investments in equity investees - (800) (1,132) Other 49 (162) - - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 134,519 42,184 (27,991) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (208,416) (15,110) (2) Increase (decrease) in short-term borrowing 60,056 (96,062) 9,676 Issuance of common stock 1,394 1,000 47 Dividends paid - - (8,972) Purchase of McDermott International, Inc. stock - - (5) Other (334) 4,500 (999) - ------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (147,300) (105,672) (255) - ------------------------------------------------------------------------------------------------------------ EFFECTS OF EXCHANGE RATE CHANGES ON CASH 119 (35) (802) - ------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,735) 112,292 (78,114) - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 196,912 84,620 162,734 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 175,177 $ 196,912 $ 84,620 ============================================================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 20,792 $ 38,166 $ 44,872 Income taxes (net of refunds) $ 119,962 $ (2,057) $ 12,402 ============================================================================================================
Year Ended December 31, 2003 2002 2001 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (95,229 ) $ (776,394 ) $ (20,022 ) Depreciation and amortization 44,504 40,620 62,264 Income or loss of investees, less dividends 5,477 7,156 2,616 Loss (gain) on asset disposals and impairments — net (6,171 ) 7,856 3,733 Provision for (benefit from) deferred taxes (13,221 ) 38,041 9,269 Gain on sale of businesses (1,029 ) (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 — Estimated loss on The Babcock & Wilcox bankruptcy settlement 14,539 86,377 — Cumulative effect of accounting change (3,710 ) — — Other 4,638 11,568 277 Changes in assets and liabilities, net of effects from acquisitions and divestitures: Accounts receivable 18,770 (62,860 ) (29,231 ) Accounts payable (14,682 ) 51,654 28,911 Net contracts in progress and advance billings (74,926 ) 106,176 81,851 Income taxes (16,488 ) (91,387 ) 94,985 Accrued liabilities (2,632 ) 20,445 (32,615 ) Pension liability 53,819 20,490 (11,388 ) Other, net (11,205 ) 7,824 13,957
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (97,546 ) (9,806 ) 176,611
CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash and cash equivalents (135,656 ) (8,090 ) (30,491 ) Acquisitions — — (644 ) Purchases of property, plant and equipment (36,057 ) (64,852 ) (45,008 ) Purchases of available-for-sale securities (285,896 ) (1,361,752 ) (1,360,280 ) Maturities of available-for-sale securities 281,684 744,538 161,901 Sales of available-for-sale securities 135,472 775,441 1,229,087 Proceeds from asset disposals 24,097 41,095 53,056 Investments in equity investees — — (800 ) Other (405 ) 49 4,872
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (16,761 ) 126,429 11,693
CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt 194,129 — — Payment of long-term debt (9,500 ) (208,416 ) (15,110 ) Payment of debt issuance costs (18,577 ) — — Increase (decrease) in short-term borrowing (8,850 ) 60,056 (96,062 ) Issuance of common stock — 1,394 1,000 Other 2,376 (334 ) 4,500
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 159,578 (147,300 ) (105,672 )
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 2 119 (35 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,273 (30,558 ) 82,597
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 129,517 160,075 77,478
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 174,790 $ 129,517 $ 160,075
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 17,693 $ 20,518 $ 38,166 Income taxes (net of refunds) $ 35,797 $ 119,962 $ (2,057 )
See accompanying notes to consolidated financial statements.
5456
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,20022003NOTE 1
-— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation
We have presented our consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States
("GAAP"(“GAAP”). These consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled joint ventures. We use the equity method to account for investments in joint ventures and other entities we do not control, but over which we have significant influence. We have eliminated all significant intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform with the presentation at December 31,2002.2003. We present the notes to our consolidated financial statements on the basis of continuing operations, unless otherwise stated.McDermott International, Inc., a Panamanian corporation
("MII"(“MII”), is the parent company of the McDermott group of companies, which includes:-J. Ray McDermott, S.A., a Panamanian subsidiary of MII("JRM"(“JRM”), and its consolidated subsidiaries;-McDermott Incorporated, a Delaware subsidiary of MII("MI"(“MI”), and its consolidated subsidiaries;-Babcock & Wilcox Investment Company, a Delaware subsidiary of MI("BWICO"(“BWICO”);-BWX Technologies, Inc., a Delaware subsidiary of BWICO("BWXT"(“BWXT”), and its consolidated subsidiaries; and-The Babcock & Wilcox Company, an unconsolidated Delaware subsidiary of BWICO("(“B&W"&W”)., and its consolidated subsidiaries.On February 22, 2000, B&W and certain of its subsidiaries (collectively, the “Debtors”) filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the
"Bankruptcy Court"“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&W’s operationsarehave been subject to the jurisdiction of the Bankruptcy Court since February 22, 2000 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 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 estimateAt December 31, 2003, we have updated our estimated cost of the proposed settlement to reflect current conditions, and forfurther information regarding developmentsthe year ended December 31, 2003 we recorded an aggregate increase innegotiationsthe provision of $18.0 million, including associated tax expense of $3.4 million. This increase is primarily due to an increase in our stock price.At a special meeting of our shareholders on December 17, 2003, our shareholders voted on and approved a resolution relating to a proposed settlement agreement that would resolve the B&W Chapter 11 proceedings. The shareholders’ approval of the resolution is conditioned on the subsequent approval of the proposed settlement by MII’s Board of Directors (the “Board”). We would become bound to the settlement agreement only when the plan of reorganization becomes effective, and the plan of reorganization cannot become effective without the approval of the Board within 30 days prior to the effective time of the plan. The Board’s decision will be made after consideration of any developments that might occur prior to the effective date, including any changes in the status of the Fairness in Asbestos Injury Resolution legislation pending in the United States Senate. According to documents
57
filed with the Bankruptcy Court, the asbestos personal injury claimants have voted in favor of the proposed B&W plan of reorganization. See Note 20 to our consolidated financial statements for information regarding developments in the B&W Chapter 11 proceedings and a summary of the components of the settlement.
Use of Estimates
We use estimates and assumptions to prepare our financial statements in conformity with GAAP. These estimates and assumptions affect the amounts we report in our financial statements and accompanying notes. Our 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.
55Earnings Per Share
We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods.
Investments
Our investments, primarily government obligations and other highly liquid
debt securities,money market instruments, 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. We classify investments available for current operations in the balance sheet as current assets, while we classify investments held for long-term purposes as noncurrent assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in other income (expense). The cost of securities sold is based on the specific identification method. We include interest on securities in interest income.Foreign Currency Translation
We translate assets and liabilities of our foreign operations, other than operations in highly inflationary economies, into U.S. Dollars at current exchange rates, and we translate income statement items at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive loss. We report foreign currency transaction gains and losses in income. We have included in other income (expense) transaction
gains (losses)losses of($2.8)$6.9 million,($1.7)$2.8 million and$3.5$1.7 million for the years ended December 31, 2003, 2002 and 2001,and 2000,respectively.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 based on work performed, man hours, or a cost-to-cost method, as applicable to the product or activity involved. Certain partnering contracts contain a risk-and-reward element, whereby a portion of total compensation is tied to the overall performance of the alliance partners. We include revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in contracts in progress. We include in advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. We expect to invoice customers for all unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised.
For contracts that we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For first-of-a-kind in nature contracts, we will recognize revenue and cost equally and will only recognize gross margin when probable and reasonably estimable, which is generally when the contract is 70% complete. We
make provisionsdefine first-of-a-kind in nature contracts as those long-term construction contracts for projects that have never been attempted before or that contain such a level of risk and uncertainty that estimation of the final outcome is impractical except to assure that no loss will be incurred.58
For all
known or anticipated losses.contracts including first-of-a-kind, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. We include claims for extra work or changes in scope of work to the extent of costs incurred in contract revenues when we believe collection is probable. At December 31,
20022003 and2001,2002, we have included in accounts receivable approximately $19.5 million relating to commercialcontractscontract claims whose final settlement is subject to future determination through negotiations or other procedures that had not been completed.
December 31, 2002 2001 ---- ---- (In thousands)Included in Contracts in Progress: Costs incurred less costs of revenue recognized $ 46,217 $ 45,032 Revenues recognized less billings to customers 102,945 52,294 - ------------------------------------------------------------------------------------------------- Contracts in Progress $ 149,162 $ 97,326 =================================================================================================56
December 31, 2002 2001 ---- ---- (In thousands)Included in Advance Billings on Contracts: Billings to customers less revenues recognized $ 477,599 $ 221,209 Costs incurred less costs of revenue recognized (148,042) (50,880) - ------------------------------------------------------------------------------------------------- Advance Billings on Contracts $ 329,557 $ 170,329 =================================================================================================
December 31, 2003 2002 (In thousands) Included in Contracts in Progress: Costs incurred less costs of revenue recognized $ 47,988 $ 44,391 Revenues recognized less billings to customers 21,497 102,945
Contracts in Progress $ 69,485 $ 147,336
December 31, 2003 2002 (In thousands) Included in Advance Billings on Contracts: Billings to customers less revenues recognized $ 136,279 $ 477,073 Costs incurred less costs of revenue recognized 39,826 (148,042 )
Advance Billings on Contracts $ 176,105 $ 329,031
The following amounts represent retainages on contracts:
December 31, 2003 2002 (In thousands) Retainages expected to be collected in 2004 $ 28,407 $ 19,812 Retainages expected to be collected after one year 27,624 14,325
Total Retainages $ 56,031 $ 34,137
We have included in accounts receivable
-— tradethe following amounts representingretainageson contracts:expected to be collected in 2004. Retainages expected to be collected after one year are included in other assets. Of the long-term retainages at December 31,
December 31, 2002 2001 ---- ---- (In thousands)Retainages $ 34,137 $ 32,156 ================================================================================================= Retainages expected to be collected after one year $ 14,325 $ 13,082 =================================================================================================2002,2003, we anticipate collecting$11.9$19.1 million in2004 and $2.42005, $7.9 million in2005. Inventories We carry our inventories at the lower of cost or market. We determine cost on an average cost basis. Inventories are summarized below:2006 and $0.6 million in 2007.
December 31, 2002 2001 ---- ---- (In thousands)Raw Materials and Supplies $ 393 $ 1,733 Work in Progress 293 92 - ------------------------------------------------------------- Total Inventories $ 686 $ 1,825 =============================================================Comprehensive Loss
The components of accumulated other comprehensive loss included in
stockholders' equity (deficit)stockholders’ deficit are as follows:
December 31, 2002 2001 ---- ---- (In thousands)Currency Translation Adjustments $ (30,659) $ (50,402) Net Unrealized Gain on Investments 675 1,301 Net Unrealized Gain (Loss) on Derivative Financial Instruments 1,084 (2,240) Minimum Pension Liability (457,526) (5,770) - ----------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Loss $ (486,426) $ (57,111) ===============================================================================================
December 31, 2003 2002 (In thousands) Currency Translation Adjustments $ (29,509 ) $ (30,659 ) Net Unrealized Gain (Loss) on Investments (22 ) 675 Net Unrealized Gain on Derivative Financial Instruments 763 1,084 Minimum Pension Liability (323,027 ) (457,526 )
Accumulated Other Comprehensive Loss $ (351,795 ) $ (486,426 )
59
Warranty Expense
We accrue estimated expense to satisfy contractual warranty requirements, primarily of our Government Operations segment, when we recognize the associated revenue on the related contracts. We include warranty costs associated with our Marine Construction Services segment as a component of our total contract cost estimate to satisfy contractual requirements. In addition, we make specific provisions where we expect the actual warranty costs
of a warrantyto significantly exceed the accrued estimates. Such provisions could have a material effect on our consolidated financial position, results of operations and cash flows.Asset Retirement Obligations and 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'sfacility’s life, which is a requirement of our licenses from the Nuclear Regulatory Commission.We reflectEffective January 1, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” requiring us to record theaccruals,fair value of a liability for an asset retirement obligation in the period in which it is incurred. When we initially record such a liability, we capitalize 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 a liability, we will settle the obligation for its recorded amount or incur a gain or loss. SFAS No. 143 applies to environmental liabilities associated with assets that we currently operate and are obligated to remove from service. For environmental liabilities associated with assets that we no longer operate, we have accrued amounts based on the estimatedcostcosts ofthoseclean-up activities,andnet of any cost-sharingarrangements, over the economic useful life of each facility, which we typically estimate at 40 years. The total estimated cost of future decommissioning of our nuclear facilities is estimated to be $30.0 57million, of which we have recorded $1.5 million in accrued liabilities - other and $9.9 million in other liabilities.arrangements. 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 value.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 recoveriesOn January 1, 2003, as a result of
environmental clean-up costs from other partiesadopting SFAS No. 143, we recorded income of approximately $3.7 million as the cumulative effect of an accounting change, which is net of tax expense of $2.2 million. Prior to our adoption of SFAS No. 143, we accrued the estimated cost of remediation activities over the economic life of the related assets,whenand our accrued liabilities at December 31, 2002 totaled approximately $4.6 million more than the asset retirement obligations measured at January 1, 2003 under the provisions of SFAS No. 143. In addition, as of January 1, 2003, wedetermine their receipt is probable.recorded additions to property, plant and equipment totaling $1.3 million under the provisions of SFAS No. 143.Substantially all our asset retirement obligations relate to the remediation of our nuclear analytical laboratory in our Government Operations segment. The following table reflects actual and pro forma information to reflect our asset retirement obligations as if SFAS No. 143 had been applied during 2002:
Year Ended December 31, 2003 2002 (pro forma) (In thousands) Balance at beginning of period $ 6,423 $ 5,784 Accretion expense 664 639 Reduction — sale of related asset (967 ) —
Balance at end of period $ 6,120 $ 6,423
If we had applied SFAS No. 143 for the years ended December 31, 2002 and 2001, our net loss would have improved by approximately $0.3 million and $0.2 million, respectively, with no affect on our net loss per share.
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. We charge to operations the costs of research and development that is not performed on specific contracts as we incur them. These expenses totaled approximately $4.9 million, $13.8 million
$11.7 millionand$15.4$11.7 million in the years ended December 31, 2003, 20022001and2000,2001, respectively. In addition, our customers paid for expenditures we made on research and development activities of approximately $34.9 million, $47.8 million$46.6 millionand$34.8$46.6 million in the years ended December 31, 2003, 2002 and 2001,and 2000,respectively.60
Property, Plant and Equipment
We carry our property, plant and equipment at cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred.
Except for major marine vessels, we depreciate our property, plant and equipment using the straight-line method, over estimated economic useful lives of
8eight to 40 years for buildings and2two 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 or 50% of cumulative straight-line depreciation. Our depreciation expense was$35.7$41.0 million,$38.2$35.5 million and$38.0$38.1 million for the years ended December 31, 2003, 2002 and 2001,and 2000,respectively.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 that do not materially prolong the useful life of an asset as we incur them except for drydocking costs. We accrue estimated drydock costs, including labor, raw materials, equipment and regulatory fees, for our marine fleet over the period of time between drydockings, which is generally
3three to5five years. We accrue drydock costs in advance of the anticipated future drydocking, commonly known as the"accrue“accrue inadvance"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")SFAS No. 142,"Goodwill“Goodwill and Other Intangible Assets."” Under SFAS No. 142, we no longer amortize goodwill to earnings, but instead we periodically test for impairment. Due to the deterioration in our Marine Construction Servicessegment'ssegment’s financial performance during the three months ended September 30, 2002 and our revised expectations concerning thissegment'ssegment’s future earnings and cash flow, we tested the goodwill of the Marine58Construction 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'sJRM’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.61
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
Year Ended December 31, 2003 2002 2001 (In thousands, except per share amounts) Net loss $ (95,229 ) $ (776,394 ) $ (20,022 ) Add back: goodwill amortization — — 19,480 Adjusted net loss $ (95,229 ) $ (776,394 ) $ (542 ) Basic and diluted loss per share: Net loss $ (1.49 ) $ (12.55 ) $ (0.33 ) Add back: goodwill amortization — — 0.32 Adjusted basic and diluted loss per share $ (1.49 ) $ (12.55 ) $ (0.01 ) 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 ===============================================================================
Power Marine Generation Construction Government Industrial Systems Services Operations Operations — Other Total (In thousands) 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 and December 31, 2003 $ — $ 12,926 $ — $ — $ 12,926
Other Intangible Assets
Pursuant to our adoption of SFAS No. 142, we evaluated our other intangible assets and determined that all our other intangible assets as of January 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, as 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 =====================================================================================
December 31, 2003 2002 2001 (In thousands) Gross cost $ 959 $ 959 $ 9,459 Accumulated amortization (752 ) (556 ) (8,386 )
Net $ 207 $ 403 $ 1,073
62
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, 2000, we acquired certain technology rights with a cost of $902,000, an estimated useful life of 5 years and no residual value.
Year Ended December 31, 2003 2002 2001 (In thousands) Balance at beginning of period $ 403 $ 1,073 $ 1,651 Additions (reductions) — 108 (18 ) Amortization expense — technology rights (196 ) (778 ) (560 ) Balance at end of period $ 207 $ 403 $ 1,073 Estimated amortization expense for the next five
fiscalyears is:2003 - $195,000;2004-— $195,000; 2005-— $12,000; 2006- $0; 2007 -through 2008 — $0.60Other 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 investmentsDuring the year ended December 31, 2003, we sold an investment in an oil and gaspropertiesproperty, for which depletion expense has been reported as amortization expense. Following are the changes in the carrying amount of these assets:
Year Ended December 31, 2003 2002 2001 (In thousands) Balance at beginning of period $ 3,607 $ 6,878 $ 8,802 19,577 — 1,611 Sale of oil and gas investment (2,172 ) — — Depletion expense — oil and gas investment (564 ) (691 ) (797 ) Interest expense — debt issuance costs (7,232 ) (2,580 ) (2,738 ) Balance at end of period $ 13,216 $ 3,607 $ 6,878
Year Ended(1) For the 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 -2003, additions are deferred debt issuancecosts (2,580) (2,738) (4,310) - ----------------------------------------------------------------------------------------------- Balance at end of periodcosts: JRM Secured Notes—$3,6078.0 million; omnibus revolving credit facility—$6,878 $ 8,802 ===============================================================================================6.6 million; BWXT Credit Facility— $4.9 million. See Note 5 for information on our debt and credit facilities.Capitalization of Interest Cost
We capitalize interest in accordance with SFAS No. 34,
"Capitalization“Capitalization of Interest Cost."” We incurred total interest of $20.8 million, $17.9 million$41.0 millionand$46.1$41.0 million in the years ended December 31, 2003, 20022001and2000,2001, respectively, of which we capitalized $1.6 million, $2.8 million$1.4 millionand$2.4$1.4 million in the years ended December 31, 2003, 2002 and 2001,and 2000,respectively.Cash Equivalents
Our cash equivalents are highly liquid investments, with maturities of three months or less when we purchase them, which we do not hold as part of our investment portfolio.
Derivative Financial Instruments
Our worldwide operations give rise to exposure to market risks from changes in foreign exchange rates. We use derivative financial instruments
primarily forward contracts,to reduce the 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 operatingentities'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 instockholders' equitystockholders’ deficit (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 aderivative'sderivative’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 onforward contractsderivative financial instruments that require immediate recognition are included as a component of other-net in our consolidated statement of loss.63
Stock-Based Compensation
At December 31,
2002,2003, 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“Accounting for Stock Issued toEmployees" ("Employees” (“APB25"25”), and related interpretations. Under APB 25, if the exercise price of the employee stock option 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“Accounting for Stock-Based Compensation,"” as B&W employees are not considered employees of MII for purposes of APB 25.61In addition, for the years ended December 31, 2003, 2002 and 2001, our stock-based compensation cost includes amounts related to stock options that require variable accounting. 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.
Year Ended December 31, 2003 2002 2001 (In thousands, except per share data) Net loss, as reported $ (95,229 ) $ (776,394 ) $ (20,022 ) Add back: stock-based compensation cost included in net loss, net of related tax effects 3,717 5,161 3,651 Deduct: total stock-based compensation cost determined under fair-value-based method, net of related tax effects (8,656 ) (11,720 ) (6,968 )
Pro forma net loss $ (100,168 ) $ (782,953 ) $ (23,339 )
Loss per share: Basic and diluted, as reported $ (1.49 ) $ (12.55 ) $ (0.33 ) Basic and diluted, pro forma $ (1.56 ) $ (12.66 ) $ (0.38 ) New Accounting Standards
Effective January 1,
2002,2003, 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“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 adoptAs a result of the adoption of SFAS No. 143,effective January 1, 2003 and expect to recordwe recorded income of approximately $3.7 million as the cumulative effect of an accountingchange incomechange. See the Asset Retirement Obligations and Environmental Clean-up Costs section ofapproximately $3.0 million upon adoption.this note for required disclosures.In April 2002, the
FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 145,"Rescission“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“Reporting Gains and Losses from Extinguishment of Debt,"” and SFAS No. 64,"Extinguishments“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."” It also rescinds SFAS No. 44,"Accounting“Accounting for Intangible62Assets of Motor Carriers"Carriers” and amends SFAS No. 13,"Accounting“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. Wemust adoptadopted the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 as of January 1, 2003, and weexpect to reclassifyreclassified the extraordinary gain on extinguishment of debt we recorded in 2001 and 2002, because (as a result of the change in accounting principles) itwillno longermeetmeets 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, including restructuring activities. It is effective for exit or disposal activities that are initiated after December 31, 2002.64
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's“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.TheEffective January 1, 2003, we adopted the initial recognition and measurement provisions of this Interpretationare applicableon a prospective basistofor guarantees issued or modified after December 31, 2002.We do not expect theThe adoption of the recognition and measurement provisions of this Interpretationtodid not have a material effect on our 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 forIn January 2003, the
year ended December 31, 2002 contain the disclosures required byFASB issued FASB Interpretation No.45.46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation of variable interest entities (“VIEs”) that either do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support or the equity investors lack an essential characteristic of a controlling financial interest. In December2002,2003, the FASB revised FIN 46. FIN 46 applies immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For a variable interest in a VIE acquired before February 1, 2003, we will adopt FIN 46 as of January 1, 2004, the revised effective date. We do not believe we have any entities that require consolidation as a result of adopting the provisions of FIN 46, as amended.In May 2003, the FASB issued SFAS No.
148, "Accounting150, “Accounting forStock-Based Compensation--TransitionCertain Financial Instruments with Characteristics of both Liabilities andDisclosure," which amendsEquity.” SFAS No.123150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires a financial instrument within its scope toprovide alternative methods of transition forbe classified as avoluntary 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. 148liability. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. These effective dates are not applicable to the provisions of paragraphs 9 and 10 of FAS 150 as they apply to mandatorily redeemable noncontrolling interests, as the FASB has delayed these provisions indefinitely. The adoption of SFAS No. 150 will have no material effect on our consolidated financial position or results of operations. Any future impact will depend on whether we enter into financial instruments within its scope.In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” It does not change the measurement or recognition of pension and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also requires disclosure of the components of net periodic benefit cost in interim financial statements. The revised disclosure requirements are required for financial statements
forwith fiscal years ending after December 15,20022003 and the interim-period requirements are effective for interim periods beginning after December 15,2002. Our financial statements2003. See Note 6 for theyear endedrequired disclosures about our pension plans and postretirement benefits.In January 2004, the FASB issued a staff position in response to certain accounting issues raised by the enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on December
31, 2002 contain8, 2003. The most significant issue concerns how and when to account for thedisclosures required by SFAS No. 148.federal subsidy to plan sponsors provided for in the Act. The staff position allows a company to defer recognizing the impact of the new legislation in its accounting for postretirement health benefits. If elected, the deferral is effective until authoritative guidance on the accounting for the federal subsidy is issued or until certain significant events occur, such as a plan amendment. We made this deferral election. The authoritative guidance that is eventually issued could require us to change previously reported information, although we believe the impact would be immaterial.NOTE 2
-— ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONSAcquisitions
In June 2000, we acquired, through our Babcock & Wilcox Volund ApS
("Volund"(“Volund”) subsidiary, various business units of the Ansaldo Volund Group, a group of companies owned by Finmeccanica S.p.A. of Italy. We acquired waste-to-energy, biomass, gasification and stoker-fired boiler businesses and projects, as well as an engineering and manufacturing facility in Esbjerg, Denmark from the Ansaldo Volund Group. We used the purchase method of 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 adjustment of certain assumed liabilities.65
Volund acquired the BS Incineration business from FLS Miljo A/S, in October 2001. This acquisition was a natural complement to
Volund'sVolund’s service business. The cost of the acquisition was $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.63Dispositions
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'sVolund’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 underMII'sMII’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"(“MECL”) to Jacobs Canada Inc.("Jacobs"(“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 consolidatedincomestatement of loss 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
Year Ended December 31, 2001 (In thousands) Revenues $ 507,223 Operating income $ 9,984 Net income $ 6,639 Discontinued Operations
On August 29, 2003, we completed the sale of Menck GmbH (“Menck”), a component of our Marine Construction Services segment. We received cash of $17.3 million and recorded a gain on sale of $1.0 in the year ended December 31, 2003. We have reported the gain on sale and results of operations for Menck in discontinued operations, and Menck is classified at December 31, 2002 as an asset held for sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We have reclassified our consolidated statements of loss for the years ended December 31, 2002 and 2001 for consistency to reflect the current year treatment of Menck as a discontinued operation. At December 31, 2002, we reported Menck’s assets totaling approximately $19.7 million in other current assets and Menck’s liabilities totaling approximately $6.5 million in other current liabilities in our consolidated balance sheets.
On July 10, 2002, we completed the sale of one of our subsidiaries, Hudson Products Corporation
("HPC"(“HPC”), formerly a component of our Industrial Operations segment. Thesalesales 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 discontinuedoperations, 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 reclassified our consolidated statements of loss for the years ended December 31, 2001 and 2000 for consistency to reflect the current year treatment of HPC as a discontinued 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.operations.66
Condensed financial information for 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 $ 4,25264
Year Ended December 31, 2003 2002 2001 (In thousands) Revenues $ 19,871 $ 46,394 $ 81,728 Income before provision for income taxes $ 3,763 $ 3,108 $ 7,194 NOTE 3
-— EQUITY METHOD INVESTMENTSWe have included in other assets investments in our worldwide joint ventures and other entities that we account for using the equity method of
$11.5$12.9 million and$21.0$11.5 million at December 31,20022003 and2001,2002, respectively. The undistributed earnings of our equity method investees were$2.6$4.0 million and$11.1$2.6 million at December 31, 2003 and 2002,and 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 (unaudited):
December 31, 2002 2001 ---- ---- (In thousands)Current Assets $ 64,607 $ 403,148 Noncurrent Assets 11,734 54,032 - ------------------------------------------------------------------------------------ Total Assets (1) $ 76,341 $ 457,180 ==================================================================================== Current Liabilities $ 23,069 $ 305,249 Noncurrent Liabilities 1,231 40,124 Owners' Equity 52,041 111,807 - ------------------------------------------------------------------------------------ Total Liabilities and Owners' Equity (1) $ 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 $ 1,800,727 $ 2,376,931 $ 1,424,127 Gross Profit $ 78,272 $ 139,300 $ 83,198 Income before Provision for Income Taxes $ 73,618 $ 89,530 $ 47,725 Provision for Income Taxes 5,789 14,783 1,449 - --------------------------------------------------------------------------------------------------- Net Income $ 67,829 $ 74,747 $ 46,276 ===================================================================================================
December 31, 2003 2002 (In thousands) Current Assets $ 52,984 $ 64,607 Noncurrent Assets 11,560 11,734
Total Assets $ 64,544 $ 76,341
Current Liabilities $ 14,183 $ 23,069 Noncurrent Liabilities 1,376 1,231 Owners’ Equity 48,985 52,041
Total Liabilities and Owners’ Equity $ 64,544 $ 76,341
Year Ended December 31, 2003 2002 2001 (In thousands) Revenues $ 1,930,948 $ 1,800,727 $ 2,376,931 Gross Profit $ 84,962 $ 78,272 $ 139,300 Income before Provision for Income Taxes $ 79,317 $ 73,618 $ 89,530 Provision for Income Taxes 2,213 5,789 14,783
Net Income $ 77,104 $ 67,829 $ 74,747
Revenues of equity method investees include $1,843.4 million, $1,653.8 million
$1,614.1 millionand$766.4$1,614.1 million of reimbursable costs recorded by limited liability companies in our Government Operations segment at December 31, 2003, 20022001and2000,2001, respectively. Our investment in equity method investees was less than our underlying equity in net assets of those investees based on stated ownership percentages by$11.0$8.5 million at December 31,2002.2003. These differences are primarily related to the timing of distribution of dividends and various adjustments 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.
6567
Reconciliation of net income per combined income statement information to equity in income
(loss)from investees per our consolidated statement of loss is as follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)Equity income based on stated ownership percentages $ 30,119 $ 33,427 $ 17,460 Impairment of investments in foreign joint venture (7,174) - (5,996) Costs to exit certain foreign joint ventures - - (17,453) Sale of shares in foreign joint venture 3,971 2,353 - All other adjustments due to amortization of basis differences, timing of GAAP adjustments, dividend distributions and other adjustments 776 (1,687) (3,806) - ----------------------------------------------------------------------------------------------------------------------- Equity in income (loss) from investees $ 27,692 $ 34,093 $ (9,795) =======================================================================================================================
Year Ended December 31, 2003 2002 2001 (In thousands) Equity income based on stated ownership percentages $ 33,945 $ 30,119 $ 33,427 Impairment of investments in foreign joint venture — (7,174 ) — Sale of shares in foreign joint venture — 3,971 2,353 All other adjustments due to amortization of basis differences, timing of GAAP adjustments, dividend distributions and other adjustments (5,563 ) 776 (1,687 )
Equity in income from investees $ 28,382 $ 27,692 $ 34,093
On June 30, 2001, JRM, through one of its subsidiaries, entered into an agreement to sell its share in a foreign joint venture, Brown & Root McDermott Fabricators Limited. JRM received initial consideration in cash of approximately $7.4 million for the sale in the year ended December 31, 2001 and an additional $2.3 million in the year ended December 31, 2002. Final purchase price adjustments and related cost issues are still being negotiated. We expect these negotiations to be finalized in
2003.2004.Our transactions with unconsolidated affiliates included the following:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)Sales to $ 81,833 $ 240,935 $ 73,961 Leasing activities (included in Sales to) $ 41,881 $ 81,194 $ 36,863 Purchases from $ - $ 11,885 $ 3,751 Dividends received $ 34,848 $ 36,920 $ 14,109Our accounts payable includes payables to unconsolidated affiliates of $3.2 million at December 31, 2001.
Year Ended December 31, 2003 2002 2001 (In thousands) Sales to $ 11,380 $ 81,833 $ 240,935 Leasing activities (included in Sales to) $ 9,125 $ 41,881 $ 81,194 Purchases from $ — $ — $ 11,885 Dividends received $ 33,859 $ 34,848 $ 36,920 Our property, plant and equipment includes cost of
$75.2$25.3 million and$131.0$75.2 million and accumulated depreciation of$49.0$22.8 million and$57.3$49.0 million, respectively, at December 31,20022003 and20012002 of marine equipment that was leased to an unconsolidated affiliate.At December 31, 2002, our other current assets include $14.4 million of marine equipment that was leased to an unconsolidated affiliate. During the year ended December 31, 2000, we recorded charges of $23.4 million to exit certain foreign joint ventures.NOTE 4
-— INCOME TAXESWe have provided for income taxes based on the tax laws and rates in the countries in which we conduct our operations. We have earned all of our income outside of Panama, and we 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 these amounts is that income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation that varies from the others. The taxation regimes vary not only with respect to nominal rate, but also with respect to the allowability of deductions, credits and other benefits. Variations 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.
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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 December 31,
20022003 and20012002 were as follows:66
December 31, 2002 2001 ---- ---- (In thousands)Deferred tax assets: Pension liability $ 122,564 $ - Prior year minimum tax credit carryforward 5,600 - Accrued warranty expense 66 149 Accrued vacation pay 6,191 5,788 Accrued liabilities for self-insurance (including postretirement health care benefits) 15,679 11,944 Accrued liabilities for executive and employee incentive compensation 25,287 25,823 Investments in joint ventures and affiliated companies 941 3,755 Operating loss carryforwards 17,916 8,587 Environmental and products liabilities 6,004 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 15,779 18,422 - --------------------------------------------------------------------------------------------------------------- Total deferred tax assets 271,807 121,006 Valuation allowance for deferred tax assets (214,827) (12,840) - --------------------------------------------------------------------------------------------------------------- Deferred tax assets 56,980 108,166 - --------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 30,914 19,494 Estimated provision for B&W Chapter 11 settlement 17,342 - Prepaid pension costs - 39,501 Investments in joint ventures and affiliated companies 2,578 2,710 Insurance and other recoverables 69 1,230 Other 3,166 3,270 - --------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 54,069 66,205 - --------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 2,911 $ 41,961 ===============================================================================================================
December 31, 2003 2002 (In thousands) Deferred tax assets: Pension liability $ 95,545 $ 122,564 Prior year minimum tax credit carryforward 4,562 5,600 Accrued warranty expense 1,244 66 Accrued vacation pay 4,141 6,191 Accrued liabilities for self-insurance (including postretirement health care benefits) 16,197 15,679 Accrued liabilities for executive and employee incentive compensation 30,023 25,287 Investments in joint ventures and affiliated companies 1,720 941 Operating loss carryforwards 83,778 17,916 Environmental and products liabilities 4,415 6,004 Long-term contracts 8,094 36,627 Drydock reserves 9,396 7,460 Accrued interest 6,395 6,395 Deferred foreign tax credits — 5,298 Other 8,893 15,779
Total deferred tax assets 274,403 271,807 Valuation allowance for deferred tax assets (199,281 ) (214,827 )
Deferred tax assets 75,122 56,980
Deferred tax liabilities: Property, plant and equipment 42,197 30,914 Estimated provision for B&W Chapter 11 settlement 13,664 17,342 Investments in joint ventures and affiliated companies 2,705 2,578 Insurance and other recoverables 71 69 Other 2,557 3,166
Total deferred tax liabilities 61,194 54,069
Net deferred tax assets $ 13,928 $ 2,911
Income (loss) from continuing operations before provision for
(benefit from)income taxes andextraordinary itemcumulative effect of accounting change was as follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)U.S. $ (384,475) $ 39,220 $ 11,447 Other than U.S. (386,666) 46,687 (25,676) - -------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before provision for income taxes and extraordinary item $ (771,141) $ 85,907 $ (14,229) ====================================================================================================================
Year Ended December 31, 2003 2002 2001 (In thousands) U.S. $ (131,703 ) $ (383,950 ) $ 40,505 Other than U.S. 50,835 (389,610 ) 44,864
Income (loss) from continuing operations before provision for income taxes and cumulative effect of accounting change $ (80,868 ) $ (773,560 ) $ 85,369
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The provision for
(benefit from)income taxes consisted of:
Current: U.S. - Federal $ (40,567) $ 88,273 $ (14,611) U.S. - State and local 252 4,729 2,034 Other than U.S. 17,337 8,058 2,294 - -------------------------------------------------------------------------------------------------------------------- Total current (22,978) 101,060 (10,283) - -------------------------------------------------------------------------------------------------------------------- Deferred: U.S. - Federal 36,284 12,410 21,860 U.S. - State and local 1,757 (368) (1,098) Other than U.S. - (2,773) 156 - -------------------------------------------------------------------------------------------------------------------- Total deferred 38,041 9,269 20,918 - -------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 15,063 $ 110,329 $ 10,635 ====================================================================================================================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 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
Year Ended December 31, 2003 2002 2001 (In thousands) Current: U.S. — Federal $ 14,195 $ (40,383 ) $ 88,723 U.S. — State and local 3,496 252 4,729 Other than U.S. 16,820 16,496 7,930
Total current 34,511 (23,635 ) 101,382
Deferred: U.S. — Federal (14,492 ) 36,284 12,410 U.S. — State and local 1,271 1,757 (368 ) Other than U.S. — — (2,773 )
Total deferred (13,221 ) 38,041 9,269
Provision for income taxes $ 21,290 $ 14,406 $ 110,651
The net pre-tax provision for the estimated cost of the B&W Chapter 11 settlement recorded in the year ended December 31, 2003 includes approximately
$154.0$24.4 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 intaxable jurisdictions.jurisdictions where we are subject to income taxation. See Note 20 for additional details regarding the settlement provision.We recorded the following charges in the year ended December 31, 2002, with little 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. 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 intended exercise of the intercompany stock purchase and sale agreement referred to in Notes 5 and 8. Our current provision for other than U.S. income taxes in the
yearsyear ended December 31,20012003 and20002001 includes a reduction of$4.1$0.8 million and$0.6$4.1 million, respectively, for the benefit of net operating loss carryforwards.Losses from foreign joint ventures that generated no corresponding tax benefit totaled $25.6 million in the year ended December 31, 2000 and amortizationAmortization of goodwill associated with the acquisition of the minority interest in JRM, which generated no corresponding tax benefit, was $18.0 million in theyearsyear ended December 31, 2001. In addition, the year ended December 31, 2001and 2000. In addition, the years ended December 31, 2001 and 2000 includeincludes a tax benefit of $5.2million and $5.5million from favorable tax settlements in foreign jurisdictions and a provision for proposed Internal Revenue Service("IRS"(“IRS”) taxdeficiencies 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 $3.8 million for B&W for the pre-filing period and a benefit of $1.4 million from the use of certain tax attributes in a foreign joint venture.deficiencies.MII and JRM would be subject to withholding taxes on distributions of earnings from their U.S. subsidiaries and certain foreign subsidiaries. For the year ended December 31,
2002,2003, the undistributed earnings of U.S. subsidiaries of MII and JRM were approximately$564.0$621.2 million. U.S. withholding taxes of approximately$169.0$186.4 million would be payable upon distribution of these earnings. For the same period, the undistributed earnings of the foreign subsidiaries of such U.S. companies amounted to approximately$79.4$68.2 million. The unrecognized deferred U.S. income tax liability on these earnings is approximately$31.0$26.4 million. Withholding taxes of approximately$4.0$3.3 million would be payable to the applicable foreign jurisdictions upon remittance of these earnings. We 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$17.0 million and applicable withholding taxes of$3.9$1.4 millionwould be due upon remittance of these earnings. Wehave been providedwithholding tax of $2.4 millionon the intended distribution ofapproximately $20.5 million. The remaining $7.4 million in undistributed earnings is considered indefinitely reinvested,these earnings.JRM and
weMI each havemade no provision for taxes on these earnings.U.S. subsidiaries that file their own consolidated U.S. income tax return. We reached settlements with the IRS concerningMI'sMI’s U.S. income tax liability through the fiscal year ended March 31, 1992, disposing of all U.S. federal income tax issues. The IRS has issued notices for MI for the fiscal years ended March 31, 1993 through March 31, 1998 and for JRM for the fiscal years ended March 31, 1995 through March 31, 1998 asserting deficiencies in the amount of taxes reported. We believe that any income taxes ultimately assessed against MI and JRM will not exceed amounts for which we have already provided.At December 31,
2002,2003, we had a valuation allowance of$214.8$199.3 million for deferred tax assets, which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that our70
remaining deferred tax assets are realizable through carrybacks,
andfuture reversals of existing taxable temporarydifferences.differences and future taxable income. We will continue to assess the adequacy of our valuation allowance on a quarterly basis. Any changes to our estimated valuation allowance could be material to the financial statements.We have foreign net operating loss carryforwards of approximately
$33.1$29.7 million available to offset future taxable income in foreign jurisdictions. Approximately$6.6$4.3 million of the foreign net operating loss carryforwards is scheduled to expire in20032004 to2009. We have2010. JRM has domestic net operating loss carryforwards of approximately$19.2$207.9 million available to offset future taxable income in domestic jurisdictions.TheThese domestic net operating loss carryforwards are scheduled to expire in years 2022 to 2023. MI has domestic net operating loss carryforwards of approximately $4.3 million, which are scheduled to expire in years 2009 to2022. 682011. NOTE 5
-— LONG-TERM DEBT AND NOTES PAYABLE
December 31, 2002 2001 ---- ---- (In thousands)Long-term debt consists of: Unsecured Debt: Series A Medium Term Notes (maturing in 2003; interest at various rates ranging from 8.99% to 9.00%)(1) $ 9,500 $ 9,500 Series B Medium Term Notes (maturities ranging from 4 to 23 years; interest at various rates ranging from 7.57% to 8.75%) 64,000 64,000 9.375% Notes due March 15, 2002 ($208,808,000 principal amount) - 208,789 9.375% Senior Subordinated Notes due 2006 ($1,234,000 principal amount) 1,221 1,218 Other notes payable through 2030 (interest at various rates ranging to 10%) 17,225 21,845 Secured Debt: Capitalized lease obligations 4,135 4,521 - --------------------------------------------------------------------------------------------------------- 96,081 309,873 Less: Amounts due within one year 9,977 209,480 - --------------------------------------------------------------------------------------------------------- Long-term debt $ 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 $ - Short-term lines of credit - secured 41,875 - Other notes payable - 26 Current maturities of long-term debt 9,977 209,480 - --------------------------------------------------------------------------------------------------------- Total $ 55,577 $ 209,506 ========================================================================================================= Weighted average interest rate on short-term borrowings 5.17% 9.37% =========================================================================================================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 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 (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 sell all of its 100,000 units to MII was approximately $243 million. MI received this amount 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.
December 31, 2003 2002 (In thousands) Long-term debt consists of: Unsecured Debt: Series A Medium Term Notes (matured in 2003; interest at 9.00%) $ — $ 9,500 Series B Medium Term Notes (maturities ranging from 2 to 20 years; interest at various rates ranging from 7.57% to 8.75%) 64,000 64,000 9.375% Senior Subordinated Notes due 2006 ($1,234 principal amount) 1,224 1,221 Other notes payable through 2009 (interest at various rates ranging to 6.8%) 17,225 17,225 Secured Debt: JRM 11% Senior Secured Notes due 2013 ($200,000 principal amount) 194,147 — Capitalized lease obligations 3,553 4,135
280,149 96,081 Less: Amounts due within one year 467 9,977
Long-term debt $ 279,682 $ 86,104
December 31, 2003 2002 (In thousands) Notes payable and current maturities of long-term debt consist of: Short-term lines of credit — unsecured $ 36,750 $ 3,725 Short-term lines of credit — secured — 41,875 Current maturities of long-term debt 467 9,977
Total $ 37,217 $ 55,577
Weighted average interest rate on short-term borrowings 4.98 % 5.17 %
Maturities of long-term debt during the five years subsequent to December 31,
20022003 are as follows:2003 - $10.0 million;2004- $0.6— $0.5 million; 2005-$12.0— $12.1 million; 2006-— $6.1 million; 2007-— $4.9 million; 2008 — $5.5 million.On December 9, 2003, we completed new financing arrangements for JRM and BWXT on a stand-alone basis. These financing arrangements include the issuance of $200 million aggregate principal amount of 11% senior secured notes due 2013 by JRM (the “JRM Secured Notes”) and the entering into of a $125 million three-year revolving credit facility by BWXT (the “BWXT Credit Facility”). The BWXT Credit Facility was increased to $135 million in January 2004 and may be increased up to $150 million. Concurrent with the new financing arrangements, we cancelled our $166.5 million omnibus revolving credit facility, which was scheduled to expire on April 4, 2004. Neither the JRM Secured Notes nor the BWXT Credit Facility is guaranteed by MII.
71
The JRM Secured Notes were issued in an original aggregate principal amount of $200 million, mature on December 15, 2013 and bear interest at 11% per annum, payable semiannually on each June 15 and December 15, commencing June 15, 2004. These notes were issued at a discount, yielding proceeds to JRM of $194.1 million before payment of approximately $8.0 million in debt issuance costs. The JRM Secured Notes are senior secured obligations of JRM and are guaranteed by certain subsidiaries of JRM.
On or after December 15, 2008, JRM may redeem some or all of the JRM Secured Notes, at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest to the redemption date.
12-month period commencing December 15 in Year Percentage 2008 105.500 % 2009 103.667 % 2010 101.833 % 2011 and thereafter 100.000 % Before December 15, 2006, JRM may redeem the JRM Secured Notes with the cash proceeds from public equity offerings by JRM at a redemption price equal to 111% of the principal amount plus accrued and unpaid interest to the redemption date, in an aggregate principal amount for all such redemptions not to exceed 35% of the original aggregate principal amount of the notes, subject to specified conditions.
JRM’s obligations under the indenture governing the JRM Secured Notes are unconditionally guaranteed, jointly and severally, by (1) all subsidiaries that own a marine vessel that is or is required to become a mortgaged vessel under the terms of the indenture and related collateral agreement, and (2) all significant subsidiaries of JRM as defined in the indenture. The JRM Secured Notes are secured by first-priority liens, subject to certain exceptions and permitted liens, on (1) capital stock of some of the subsidiary guarantors and (2) specified major marine construction vessels owned by JRM and certain subsidiary guarantors. The indenture governing the JRM Secured Notes requires JRM to comply with various covenants that, among other things, restrict JRM’s ability to:
• incur additional debt or issue subsidiary preferred stock or stock with a mandatory redemption feature before the maturity of the notes; • pay dividends on its capital stock; • redeem or repurchase its capital stock; • make some types of investments and sell assets; • use proceeds from asset sales to fund working capital needs; • create liens or engage in sale and leaseback transactions; • engage in transactions with affiliates, except on an arm’s-length basis; and • consolidate or merge with, or sell its assets substantially as an entirety to, another person. The indenture also imposes various reporting obligations on JRM.
JRM is required to use commercially reasonable efforts to cause a registration statement with respect to an offer to exchange the JRM Secured Notes for notes registered under the Securities Act to be declared effective no later than June 6, 2004. If JRM fails to satisfy any of its registration and exchange offer obligations, it will be required to pay additional interest at 0.50% per annum until it satisfies those obligations.
The BWXT Credit Facility is a revolving credit agreement providing for borrowings and issuances of letters of credit in an aggregate amount of up to $135 million for a three-year term. Borrowings under the agreement may not exceed $100 million. BWXT may, at its option and subject to certain conditions, increase the aggregate commitments under the facility to $150 million. The BWXT Credit Facility requires BWXT to comply with various financial and nonfinancial covenants and reporting requirements. The financial covenants require BWXT to maintain a minimum leverage ratio; a minimum fixed charge coverage ratio; and a maximum debt to capitalization ratio. BWXT was in compliance with these covenants at December 31, 2003. The interest rate at December 31, 2003 was 5.00%. Commitment fees are charged at a per annum rate of .50%, payable quarterly. Proceeds from the BWXT Credit Facility have been used to repay an intercompany loan from MII, to repay amounts owed by BWXT under the omnibus revolving credit facility and for general corporate purposes of BWXT, its subsidiaries and joint ventures. At December 31,
2002 and 2001, we2003, BWXT hadavailable various uncommitted short-term linesborrowings ofcredit from banks totaling $10.2$36.8 millionand $8.9 million, respectively. We had no borrowingsoutstanding underthese lines of credit as of December 31, 2002 or 2001.the BWXT Credit Facility.72
On February 11, 2003, we had entered into definitive agreements with a group of lenders for
a newan omnibus revolving credit facility("New Credit Facility")to replace our previous facilitieswhich 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 69New Credit FacilityThis credit facility initiallyprovidesprovided for borrowings and issuances of letters of credit in an aggregate amount of up to $180 million, with certain sublimitson the amountsavailable to JRM and BWXT. On May 13, 2003, the maximum amount available underthe Credit Facility will bethis facility was reduced to $166.5 million. The obligations underthe New Credit Facility arethis facility were (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 mayomnibus revolving credit facility could 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 theCredit Facility isomnibus revolving credit facility was prime plus 4% or Libor plus 5% for JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment feesarewere charged at the rate of 0.75 of 1% per annum on the unused working capital commitment, payable quarterly.Prior to the omnibus revolving credit facility, we had two credit facilities, which consisted of a $100 million facility for MII and BWXT (the “MII Credit Facility”) and a $200 million facility for JRM and its subsidiaries (the “JRM Credit Facility”) that were scheduled to expire on February 21, 2003. 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 atDecember 31, 2002 and no borrowings against this facility at December 31, 2001. Letters of credit outstanding at December 31, 2002 were approximately $53.0 million. The interest rate was Libor 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 endedDecember 31, 2002. The JRM Credit Facility consisted of two tranches. One was a revolving credit facility that provided for up to $100 million for advances that could be used for working capital and general corporate purposes. The second tranche provided for up to $200 million of letters of credit. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the JRM Credit Facility could not exceed $200 million. We had borrowings of $3.7 million outstanding under the JRM Credit Facility at December 31,2002 and no borrowings against this facility at December 31, 2001. Letters of credit outstanding under the JRM Credit Facility at December 31, 2002 totaled approximately $73.2 million. The interest rate was Libor plus 2%, or prime plus 1% depending upon notification to borrow. The interest rate at December 31, 2002 was 5.25%. Commitment fees under this facility totaled approximately $1.1 million for the year ended December 31,2002.MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments.
MI and its subsidiaries are unable to incur any additional long-term debt obligations under
one of MI'sMI’s public debtindentures,indenture, other than in connection with certain extension, renewal or refunding transactions.70During 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. 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 (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 sell all of its 100,000 units to MII was approximately $243 million. MI received this amount 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 MII’s captive insurance companies and (2) reducing its short-term investments and cash and cash equivalents.
NOTE 6
-— PENSION PLANS AND POSTRETIREMENT BENEFITSWe provide retirement benefits, primarily through noncontributory pension plans, for substantially all our regular full-time employees. We do not provide retirement benefits to certain nonresident 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. We base our salaried plan benefits on final average compensation and years of service, while we base our hourly plan benefits on a flat benefit rate and years of service. Our funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act
73
of 1974
("ERISA"(“ERISA”) and, generally, to fund other pension plans as recommended by the respective plan actuaries and in accordance with applicable law.We make available postretirement health care and life insurance benefits to certain retired union employees based on their union contracts. In the year ended December 31, 2000, we curtailed retirement benefits on one of our union contracts and amended the pension plan to increase benefits for the employees affected by the curtailment, 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 required 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'sJRM’s qualified pension planwill cease.ceased. Any pension benefits earned to that datewillremain 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, 2003willwere fullyvestvested 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 the employees affected by the curtailment.We
recognized additional curtailment losses on this plan of $10.2 million and $3.9 million in the years ended December 31, 2001 and 2000 due to revisions in our expected share of the pension surplus. We are continuing to negotiate a settlement. 71
Pension Benefits Other Benefits Year Ended Year Ended December 31, December 31, 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands)Change in benefit obligation: Benefit obligation at beginning of period $ 1,833,428 $ 1,734,527 35,395 $ 35,151 Service cost 28,137 25,579 - - Interest cost 119,360 115,195 2,406 2,499 Curtailments - 10,219 - - Amendments 148 5,414 - - Transfers - 1,321 - - Change in assumptions 139,280 37,019 1,237 1,392 Actuarial (gain) loss 28,224 14,823 499 280 Foreign currency exchange rate changes - (4,132) - - Benefits paid (105,569) (106,537) (3,709) (3,927) - ----------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of period 2,043,008 1,833,428 35,828 35,395 - ----------------------------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of period 1,821,530 1,943,562 - - Actual return on plan assets (159,730) (23,520) - - Company contributions 24,073 12,899 3,709 3,927 Foreign currency exchange rate changes - (4,908) - - Benefits paid (105,569) (106,503) (3,709) (3,927) - ----------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at the end of period 1,580,304 1,821,530 - - - ----------------------------------------------------------------------------------------------------------------------------- Funded status (462,704) (11,898) (35,828) (35,395) Unrecognized net obligation 541,275 (242) - - Unrecognized prior service cost 15,599 14,550 - - Unrecognized actuarial (gain) loss (153) 93,920 8,929 7,930 - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 94,017 $ 96,330 $ (26,899) $ (27,465) ============================================================================================================================= Amounts recognized in the balance sheet: Prepaid benefit cost $ 19,311 $ 152,510 $ - $ - Accrued benefit liability (401,167) (65,848) (26,899) (27,465) Intangible asset 15,026 578 - - Accumulated other comprehensive income 460,847 9,090 - - - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 94,017 $ 96,330 $ (26,899) $ (27,465) ============================================================================================================================= Weighted average assumptions: Discount rate 6.50% 7.25% 6.50% 7.42% Expected return on plan assets 8.28% 8.33% - - Rate of compensation increase 4.00% 4.44% - -For measurement purposes, a 10% annual rate of increase in the per capita cost of coveredmake available postretirement health care and life insurance benefitswas assumed for 2002. The rate was assumedtodecrease gradually to 5.0% in 2009certain retired union employees based on their union contracts.Obligations and
remain at that level thereafter.Funded Status
Pension Benefits Other Benefits Year Ended December 31, Year Ended December 31, 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- (In thousands)Components of net periodic benefit cost (income): Service cost $ 28,137 $ 25,579 $ 25,277 $ - $ - $ - Interest cost 119,360 115,195 111,947 2,406 2,499 2,514 Expected return on plan assets (136,227) (145,738) (145,066) - - - Amortization of prior service cost 3,207 2,600 2,589 - - - Recognized net actuarial loss (gain) 11,912 (15,800) (34,449) 834 718 542 - ---------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost (income) $ 26,389 $ (18,164) $ (39,702) $ 3,240 $ 3,217 $ 3,056 ======================================================================================================================
Pension Benefits Other Benefits Year Ended Year Ended December 31, December 31, 2003 2002 2003 2002 (In thousands) Benefit obligation at beginning of period $ 2,043,008 $ 1,833,428 $ 35,828 $ 35,395 Service cost 26,277 28,137 — — Interest cost 118,913 119,360 2,493 2,406 Curtailments (347 ) — — — Amendments (29,915 ) 148 — — Other 234 — — — Change in assumptions 107,195 139,280 1,315 1,237 Actuarial (gain) loss 21,217 28,224 5,298 499 Benefits paid (111,700 ) (105,569 ) (4,102 ) (3,709 )
Benefit obligation at end of period 2,174,882 2,043,008 40,832 35,828
Fair value of plan assets at beginning of period 1,580,304 1,821,530 — — Actual return on plan assets 270,318 (159,730 ) — — Company contributions 26,247 24,073 4,102 3,709 Benefits paid (111,700 ) (105,569 ) (4,102 ) (3,709 )
Fair value of plan assets at the end of period 1,765,169 1,580,304 — —
Funded status (409,713 ) (462,704 ) (40,832 ) (35,828 ) Unrecognized actuarial loss 431,302 541,275 — — Unrecognized prior service cost 12,336 15,599 — — Unrecognized net obligation (57 ) (153 ) 13,972 8,929
Net amount recognized $ 33,868 $ 94,017 $ (26,860 ) $ (26,899 )
Prepaid benefit cost $ 18,722 $ 19,311 $ — $ — Accrued benefit liability (323,631 ) (401,167 ) (26,860 ) (26,899 ) Intangible asset 12,429 15,026 — — Accumulated other comprehensive loss 326,348 460,847 — —
Net amount recognized $ 33,868 $ 94,017 $ (26,860 ) $ (26,899 )
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
theall pension planswith accumulated benefit obligations in excess of plan assetswere $2,014.9 million, $1,913.7 million and $1,587.3 million, respectively, at December 31, 2003, and $1,883.0 million, $1,805.8 million and $1,402.4 million, respectively, at December 31,2002 and $187.2 million, $140.2 million and $103.2 million, respectively, at December 31, 2001. 722002. The accumulated benefit obligation was in excess of plan assets in all of our plans. 74
Pension Benefits Other Benefits Year Ended December 31, Year Ended December 31, 2003 2002 2001 2003 2002 2001 (In thousands) Service cost $ 26,277 $ 28,137 $ 25,579 $ — $ — $ — Interest cost 118,913 119,360 115,195 2,493 2,406 2,499 Expected return on plan assets (115,310 ) (136,227 ) (145,738 ) — — — Amortization of prior service cost 2,444 3,207 2,600 — — — Recognized net actuarial loss (gain) 56,903 11,912 (15,800 ) 1,557 834 718
Net periodic benefit cost (income) $ 89,227 $ 26,389 $ (18,164 ) $ 4,050 $ 3,240 $ 3,217
Additional Information
Pension Benefits Other Benefits 2003 2002 2003 2002 (In thousands) Increase (decrease) in minimum liability included in other comprehensive income $ (134,499 ) $ 451,756 N/A N/A Assumptions
Pension Benefits Other Benefits 2003 2002 2003 2002 Discount rate 6.00 % 6.50 % 6.00 % 6.50 % Rate of compensation increase 4.00 % 4.00 % — — Discount rate 6.50 % 7.25 % 6.50 % 7.25 % Expected return on plan assets 8.28 % 8.33 % — — Rate of compensation increase 4.00 % 4.44 % — — The expected rate of return on plan assets assumption is based on the long-term expected returns for the investment mix of assets currently in the portfolio. In setting this rate, we use a building block approach. Historic real return trends for the various asset classes in the plan’s portfolio are combined with anticipated future market conditions to estimate the real rate of return for each class. These rates are then adjusted for anticipated future inflation to determine estimated nominal rates of return for each class. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the classes within the total asset portfolio.
We have been using an expected return on plan assets assumption of 8.5%, which is consistent with the long-term asset returns of the portfolio.
2003 2002 Health-care cost trend rate assumed for next year 10.00 % 10.00 % Rates to which the cost trend rate is assumed to decline (ultimate trend rate) 5.00 % 5.00 % Year that the rate reaches ultimate trend rate 2009 2009 75
Assumed health-care cost trend rates have a significant effect on the amounts we report for our health-care plan. A one-percentage-point change in our assumed health-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 $ 150 $ (145) Effect on postretirement benefit obligation $ 2,088 $ (2,019)Multiemployer Plans One
One-Percentage- One-Percentage- Point Increase Point Decrease (In thousands) Effect on total of service and interest cost $ 50 $ (49 ) Effect on postretirement benefit obligation $ 765 $ (743 ) Plan Assets
Our domestic pension plans’ weighted average asset allocations at December 31, 2003 and 2002, by asset category were as follows:
2003 2002 Equity Securities 36 % 28 % Common/Collective Trusts 21 % 18 % Debt Securities 15 % 16 % U.S. Government Securities 14 % 16 % Partnership/Joint Venture Interests 10 % 10 % Registered Investment Companies 4 % 6 % Other — 6 %
Total 100 % 100 %
For the years ending December 31, 2003 and 2002, the investment return on domestic pension plan assets (gross of
B&W's subsidiaries contributesmanagement fees) was approximately 20.5% and (10.1%), respectively.The assets of the domestic pension plans are commingled for investment purposes and held by the Trustee, Mellon Trust of New England, N.A., in the McDermott Incorporated Master Trust (the “Trust”).
The overall investment strategy of the Trust is to
various multiemployer plans.emphasize long-term growth of principal, while avoiding excessive risk and to minimize the probability of loss of principal over the long-term. The specific investment goals that have been set for the Trust in the aggregate are (1) to ensure that plan liabilities are met when due, and (2) to achieve an investment return on Trust assets consistent with a reasonable level of risk that exceeds the custom benchmark described below, and over the long-term, exceeds the assumed actuarial rate of return set by the plans’ actuary.Based on the liability profile of the plans,
generally provide defined benefitsa well diversified policy of 60% equities and 40% fixed income has been determined tosubstantially all unionized workersbe most appropriate in terms of risk/reward trade-off, taking into account the expected funded status of the plans, cash contributions and expense. Accordingly, the following asset allocation policy has been adopted for the Trust:
Asset Class Target Allowable
RangeU.S. Large Cap Equity 24 % 21–27 % U.S. Small/Mid Cap Equity 6 % 4–8 % International Equity 12.5 % 10–15 % Private Equity 10 % 5–15 % Hedge Funds 2.5 % 1–4 % Real Estate 5 % 2–8 % Domestic Fixed Income 33 % 31–35 % High Yield Fixed Income 5 % 3–7 % Cash 2 % 0–4 % Allocations to each asset class are reviewed periodically and rebalanced if appropriate.
76
The Trust employs a professional investment advisor, and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the Trust’s overall investment objectives.
The goals of each Investment Manager are (1) to meet (in the case of passive accounts) or exceed (for actively managed accounts) the benchmark selected and agreed upon by the Manager and the Trust, and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark.
As stated above, one of the goals of the Trust is to outperform a custom benchmark which is comprised as follows:
Asset Class Weight Russell 3000 Index Equities 30 % MSCI ACWI Free (ex US) Index Intl. Equities 12.5 % NAREIT Equity Index Reits 1 % NCREIF Real Estate 4 % Lehman Aggregate Fixed Income 33 % ML High Yield High Yield 5 % 90-Day Treasury Bills Cash 2 % S&P500 + 400 bps Private Equity 10 % Treasury Bills + 500 bps Hedge Funds 2.5 % The performance objective for the Trust is to seek to outperform this
subsidiary.custom benchmark by 0.75% per annum (net of fees) or more over rolling three-year periods.The
amount charged to pension cost and contributedactive risk of the Trust (also known as tracking error) is a numerical measure of the Trust’s risk relative to the custom benchmark. Active risk is defined as the standard deviation of the relative return, and the convention is to compute it from monthly observations and then convert it to an annualized figure by multiplying it by the square root of twelve. (In a normal distribution two-thirds of the observations will fall within one standard deviation of the average. So if the expected standard deviation was 2% and the expected average was 0%, then one-sixth of the observations will be more than 2% greater than the average and one-sixth will be more than 2% below the average.) Active risk can be either ex post (measuring the actual standard deviation of the excess returns achieved by the Manager) or ex ante (using a statistical model to estimate the likely outcome.)The risk objective in respect of the Trust is to seek to achieve an ex post active risk of less than 2% per annum over rolling three-year periods.
The investment performance of total portfolios, as well as asset class components, is periodically measured against commonly accepted benchmarks, including the individual investment manager benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact ability to achieve desired investment results.
The Trust’s overall investment policy is reviewed at least annually to assure the continued relevance of the goals, objectives and strategies.
Cash Flows
Contributions
We expect to contribute approximately $12.2 million to our domestic pension plans
was $2.4and $13.2 million to our domestic other postretirement benefit plans in 2004.77
Estimated Future Benefit Payments
We expect the
year ended December 31, 2000.following benefit payments, which reflect expected future service, as appropriate, to be made from our domestic plans:
Pension Other Benefits Benefits (In thousands) 2004 $ 119,157 $ 13,236 2005 $ 120,979 $ 13,361 2006 $ 126,171 $ 13,342 2007 $ 131,008 $ 13,062 2008 $ 136,132 $ 12,643 2009-2013 $ 753,566 $ 44,830 NOTE 7
-— IMPAIRMENT OF LONG-LIVED ASSETSImpairment losses to write down property, plant and equipment to estimated fair values are summarized by segment as follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)Property, plant and equipment and other assets: Assets to be held and used: Marine Construction Services $ 6,800 $ - $ - Assets to be disposed of: Marine Construction Services 1,943 6,318 3,346 Government Operations - - 833 - -------------------------------------------------------------------------------------------------------------- Total $ 8,743 $ 6,318 $ 4,179 ==============================================================================================================
Year Ended December 31, 2003 2002 2001 (In thousands) Property, plant and equipment and other assets: Assets to be held and used: Marine Construction Services $ — $ 6,800 $ — Assets to be disposed of: Marine Construction Services — 1,943 6,318
Total $ — $ 8,743 $ 6,318
Property, plant and equipment and other assets
-— assets to be held and usedDuring the 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 is no longer expected to recover its carrying value through future cash flows. We determined fair value based on an appraisal of the land. Prior to impairment, the land had a book value of approximately $13.5 million.
Property, plant and equipment and other
assets-assetsassets — assets to be disposed ofDuring the year ended December 31, 2002, our Marine Construction Services segment recorded impairment losses totaling $1.9 million to reduce four material barges and certain other marine equipment to net realizable value. Prior to 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 vessel had a net book value of approximately $6.9 million. During the year ended December 31, 2002, we sold the vessel for net proceeds of $0.6 million and recorded an additional impairment loss of $43,000.
During the year ended 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 $0.3 million adjustment to a building for sale near London that we sold in 2001, and $1.1 million writedown of fixed assets in our Inverness facility. 73During the year ended December 31, 2000, our Government Operations segment recorded an impairment loss totaling $0.8 million at our research facility in Alliance, Ohio for fixed assets that will no longer be used.NOTE 8
-— CAPITAL STOCKThe 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 an offeror be finalized before that person acquires beneficial ownership of more than five 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 our Board of Directors. Transfers of shares of common stock in violation of these regulations are invalid and cannot be registered for transfer.
78
We issue shares of our common stock in connection with our 2001 Directors and Officers Long-Term Incentive Plan, our 1996 Officer Long-Term Incentive Plan (and its predecessor programs), our 1992 Senior Management Stock Plan and contributions to our Thrift Plan. At December 31, 2003 and 2002, 13,459,422 and
2001,15,180,999and 9,026,795shares of common stock, respectively, were reserved for issuance in connection with those plans.MII Preferred Stock
At December 31, 2001, 100,000 shares of our nonvoting Series A Participating Preferred Stock (the
"Participating“Participating PreferredStock"Stock”) were issued and owned by MI. During the year ended December 31, 2002, we purchased the 100,000 shares of Participating Preferred Stock pursuant to the exercise of the 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 under the applicable mandatory redemption provisions.We designated a series of our authorized but unissued preferred stock as Series D Participating Preferred Stock in connection with our Stockholder Rights Plan. As of December 31,
2002,2003, no shares of Series D Participating Preferred Stock were outstanding.Our issuance of additional shares 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 our Board of Directors without stockholder approval.
MII Rights
On October 17, 2001, our Board of Directors adopted a Stockholder Rights Plan and declared a dividend of one right to purchase preferred stock for each outstanding share of our common stock to stockholders of record at the close of business on November 1, 2001. Each right initially entitles the registered holder to purchase from us a fractional share consisting of one one-thousandth of a share of our Series D Participating Preferred Stock, par value $1.00 per share, at a purchase price of $35.00 per fractional share, subject to adjustment. The rights generally will not become exercisable until ten days after a public announcement that a person or group has acquired 15% or more of our common stock (thereby becoming an
"Acquiring Person"“Acquiring Person”) or the tenth business day after the commencement of a tender or exchange offer that would result in a person or group becoming an Acquiring Person (we refer to the earlier of those dates as the"Distribution Date"“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 therights'rights’ then current exercise price, shares of our74common stock having a market value of two times the exercise price of the right. If, after there is an Acquiring Person, and we or a majority of our assets is acquired in certain transactions, each right not owned by an Acquiring Person will entitle its holder to purchase, at a discount, shares of common stock of the acquiring entity (or its parent) in the transaction. At any time until ten days after a public 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 receive dividends or any other rights of a stockholder. The plan was approved at our 2002 annual meeting of stockholders and is scheduled to expire on the fifth anniversary of the date of its adoption. NOTE 9
-— STOCK PLANS2001 Directors and Officers Long-Term Incentive Plan
In May 2002, our shareholders approved the 2001 Directors and Officers Long-Term Incentive Plan. Members of the Board of Directors, executive officers, key employees and consultants are eligible to participate in the plan. The
79
Compensation Committee of the Board of Directors selects the participants for the plan. The plan provides 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 percent30% may be awarded pursuant to grants in the form of restricted 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 this plan, we granted performance-based restricted stock awards to certain officers and key employees. Under the provisions of the performance-based awards, no shares were issued at the time of the initial award, and the number of shares ultimately issued was determined based on the change in the market value of our common stock over a specified performance period.
1997 Director Stock Program
Under our 1997 Director Stock Program, we grant options to purchase 900 shares in the first year of a
director'sdirector’s term and 300 shares in subsequent years at a purchase price that is not less than 100% of the fair market value on the date of grant. These options become exercisable, in full, six months after the date of grant and expire ten years and one day after the date of grant. Under this program, we also grant rights to purchase 450 shares in the first year of adirector'sdirector’s term and 150 shares in subsequent years at par value ($1.00 per share). Those shares are subject to restrictions on transfer that lapse at the end of such term.At December 31,
2002,2003, we had a total of2,101,5671,722,926 shares of our common stock available for award under the 2001 Directors and Officers Long-Term Incentive Plan, the 1996 Officer Long-Term Incentive Plan and the 1997 Director Stock Program.75The 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 =============================================================================
Year Ended December 31, 2003 2002 2001 Outstanding, beginning of period 1,354 961 837 Restricted shares granted 152 404 299 Restricted shares issued pursuant to performance-based awards — 700 27 Notional shares lapsed — (516 ) (22 ) Restricted shares released (94 ) (162 ) (180 ) Cancelled/forfeited — (33 ) —
Outstanding, end of period 1,412 1,354 961
The weighted average fair values of the restricted shares granted during the years ended December 31, 2003, 2002 and 2001 were $3.20, $11.62 and
2000 were $11.62,$14.54and $7.66per 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 Plan
Under our 1992 Senior Management Stock Plan, 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,
2002,2003, we had a total of694,849572,245 shares of common stock available for stock option grants under this plan.80
In the event of a change in control of our company, all these 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 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 our stock options (share data in thousands):
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, beginning of period 6,557 $ 15.58 4,865 $ 16.12 4,812 $ 24.38 Granted 1,597 14.03 1,921 14.53 2,479 9.19 Exercised (113) 9.12 (12) 9.37 (4) 4.67 Cancelled/forfeited (508) 15.13 (217) 18.78 (2,422) 25.45 - --------------------------------------------------------------------------------------------------------------------- Outstanding, end of period 7,533 $ 15.38 6,557 $ 15.58 4,865 $ 16.12 ===================================================================================================================== Exercisable, end of period 4,246 $ 16.92 3,304 $ 18.84 2,435 $ 23.04 =====================================================================================================================76
Year Ended December 31, 2003 2002 2001 Weighted- Weighted- Weighted- Number Average Number Average Number Average of Exercise of Exercise of Exercise Options Price Options Price Options Price Outstanding, beginning of period 7,533 $ 15.38 6,557 $ 15.58 4,865 $ 16.12 Granted 1,156 3.38 1,597 14.03 1,921 14.53 Exercised — — (113 ) 9.12 (12 ) 9.37 Cancelled/forfeited (806 ) 25.06 (508 ) 15.13 (217 ) 18.78
Outstanding, end of period 7,883 $ 12.63 7,533 $ 15.38 6,557 $ 15.58
Exercisable, end of period 5,184 $ 14.19 4,246 $ 16.92 3,304 $ 18.84
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-average remaining contractual life of the options outstanding and the range of exercise prices for the options exercisable at December 31,
20022003 (share data in thousands):
Options Outstanding Options Exercisable --------------------------------------------- ------------------------------ Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life in Years Price Exercisable Price - ------------------ --------------------------------------------- ------------------------------$ 3.83 - 7.65 32 9.7 $ 6.82 - $ - 7.66 - 11.48 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 ----- ----- $ 3.83 - 34.00 7,533 6.4 $ 15.38 4,246 $ 16.92 ===== =====
Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life in Years Price Exercisable Price $3.15- 3.83 1,014 9.3 $ 3.15 — $ — 3.83- 7.65 163 9.3 5.31 15 6.32 7.65-11.48 2,157 6.3 9.21 2,152 9.21 11.48-15.30 3,346 7.4 14.36 1,814 14.36 15.30-19.13 25 2.4 17.29 25 17.29 19.13-22.95 480 2.7 20.15 480 20.15 22.95-26.78 686 3.1 24.92 686 24.92 26.78-33.13 12 4.5 30.41 12 30.41
$3.15-33.13 7,883 6.7 $ 12.63 5,184 $ 14.19
The fair value of each option grant was estimated at the date of grant using a Black-Scholes option-pricing model, with the following weighted-average assumptions:
Year Ended December 31, 2002 2001 2000 ---- ---- ----Risk-free interest rate 4.69% 4.80% 6.41% Volatility factor of the expected market price of MII's common stock 0.51 0.51 0.48 Expected life of the option in years 6.10 5.00 5.00 Expected dividend yield of MII's common stock 0.0% 0.0% 0.0%
Year Ended December 31, 2003 2002 2001 Risk-free interest rate 3.40 % 4.69 % 4.80 % Volatility factor of the expected market price of MII’s common stock 0.65 0.51 0.51 Expected life of the option in years 6.53 6.10 5.00 Expected dividend yield of MII’s common stock 0.0 % 0.0 % 0.0 % The weighted average fair values of the stock options granted in the years ended December 31, 2003, 2002 and 2001 were $2.16, $8.23 and
2000 were $8.23,$7.26,and $4.61,respectively.81
Thrift Plan
On
bothNovember 12, 1991,and June 5, 1995,5,000,000 of the authorized and unissued shares of MII common stock were reserved for issuance for the employer match to the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the"Thrift Plan"“Thrift Plan”). On 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 arenon-forfeitablenonforfeitable after three years of service or upon retirement, death, lay-off or approved disability. The Thrift Plan allows employees to sell their interest inMII'sMII’s common stock fund at any time, except as limited by applicable securities laws and regulations. During the years ended December 31, 2003, 20022001and2000,2001, we issued 1,298,560, 1,394,887711,943and910,287711,943 shares, respectively, ofMII'sMII’s common stock as employer contributions pursuant to the Thrift Plan. At December 31,2002, 4,579,9192003, 3,281,359 shares ofMII'sMII’s common stock remained available for issuance under the Thrift Plan.NOTE 10
-— CONTINGENCIES AND COMMITMENTSInvestigations and Litigation
In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the DOJ, the SEC and the European Commission. As a result of 77our prompt disclosure of the allegations, JRM, certain other affiliates and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the DOJ for any anticompetitive acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities and affiliates. The DOJ had also requested additional information from us relating to possible anticompetitive 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. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. We also terminated the McDermott-ETPM joint venture, and on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was 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 several related entities
(the "Phillips Plaintiffs"(collectively, the “Phillips Plaintiffs”) filed a lawsuit in the U.S District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, Heerema Offshore Construction Group, Inc. (“Heerema”), JRM’s former HeereMac joint venture with Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anticompetitive 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 theplaintiffs'plaintiffs’ businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea andthe Far EastAsia Pacific (the"Phillips Litigation"“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"“Statoil”), filed a similar lawsuit in the same court (the"Statoil Litigation"“Statoil Litigation”). In addition to seeking injunctive relief, actual damages andattorneys'attorneys’ fees, the plaintiffs in the Phillips Litigation and Statoil Litigation requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to thecourt'scourt’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"“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, theplaintiffs'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 endedAs of December 31,2002, 782003, Heerema, MII and MIISaipem had executed agreements to settle the heavy-lift antitrust claimsagainst Heerema and MIIwithBritish Gas and Phillips, and the Court has entered an order of dismissal.all claimants in these proceedings. The cases have now all been concluded.In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the U.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 anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act (the
"Shell Litigation"“Shell Litigation”). 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 itsaffiliates;affiliates (collectively, “Chevron Texaco”); Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of itsaffiliates;affiliates (collectively, “Marathon”); VK-Main Pass Gathering Company, L.L.C.; Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum,S.A..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 andattorneys'attorneys’ fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign project claims82
of the plaintiffs in the Shell Litigation due to the Texas district
court'scourt’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 thecourt'scourt’s decision on our motion to dismiss the foreign claims.During the year endedAs of December 31,2002,2003, Heerema and MII had executed agreements to settle or dismiss the heavy-lift antitrust claims against Heerema and MII withExxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf Exploration UK PLCall plaintiffs except Chevron Texaco andElf 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 anMarathon. An order ofdismissal.dismissal related to the cases settled or dismissed has been entered by the court. We do not believe that a material loss, above amounts already provided for, with respect to these matters is likely. Inaddition, Woodside Energy, Ltd.December 2003, Chevron Texaco fileda motionsuit in the High Court ofdismissal with prejudice, which was granted. Recently, we entered into a settlement agreement with Conoco, Inc.London alleging antitrust injury regarding seven named projects occurring in the period from 1993 to 1997. We are presently reviewing the claims presented andthe Court entered an order of dismissal.have engaged U.K. counsel to advise us on this matter.On December 15, 2000, a number of Norwegian oil companies filed lawsuits against MII,
Heeremac,HeereMac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing Act of 1953 in connection with projects in Norway. Plaintiffsincludeincluded Norwegian affiliates of various of the plaintiffs in the ShellLitigation pending in Houston.Litigation. 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 casesAs of December 31, 2003, these Norwegian lawsuits wereheardsettled and an order of dismissal of all pending litigation was entered by theConciliation Boards in Norway during the first week of October 2001. The Conciliation Boards referred the cases to the court of first instance for further proceedings. The plaintiffs have one year from the date of referral to proceed with the cases. Several of the plaintiffs who filed cases before the Conciliation Boards have filed writs with the courts of first instance in order to commence the court proceedings. Settlement discussions are underway with these plaintiffs. As a result of the initial allegations of wrongdoing in March 1997, we formed a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. Our Board of Directors concluded that the special committee was no longer necessary, and it was dissolved in 2002. Because we have reached settlement agreements with the vast majority of the oil company claimants, we have adjusted our reserve to more appropriately reflect the risks and exposures of the remaining claims. 79Norwegian court. B&W and Atlantic Richfield Company
("ARCO"(“ARCO”) are defendants in a lawsuit filed on June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District Court for the Western District of Pennsylvania. The suit involves approximately 500 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the"Hall Litigation"“Hall Litigation”). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36.7 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 thecourt'scourt’s rulings on certain evidentiary matters, which, following B&W's&W’s bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review.In 1998, B&W settled 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 a controversy between B&W and its insurers as to the amount of coverage available under the liability insurance policies covering the facilities. B&W filed a declaratory judgment action in a Pennsylvania State Court seeking a judicial determination as to the amount of coverage available under the policies. 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&W’s insurers; and (2) the scope of theinsurers'insurers’ defense obligations to B&W under these policies. With respect to the trigger of coverage, the Pennsylvania State Court held that"manifestation"“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 theinsurers'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 theinsurers'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&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&W’s insurers filed a petition for the allowance of an appeal in the Pennsylvania Supreme Court. The Pennsylvania Supreme Courthas not yet made any determination regarding whether to accept discretionary reviewdenied the insurer’s petition for allowance ofthe insurers' appeal.appeal by order dated December 2, 2003.The
plaintiffs'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&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 BankruptcyCourt'sCourt’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 BankruptcyCourt'sCourt’s Order. We believe that all claims under the Hall Litigation will be resolved within the limits of83
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'sBWXT’s formation and an overall corporate restructuring.In December 1998, a subsidiary of JRM (the
"Operator Subsidiary"“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"(“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 complete the project 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, the owner of the vessel that attempted the lift of the deck module (the"Owner Subsidiary"“Owner Subsidiary”). Both the Owner Subsidiary and the Operator Subsidiary were subsequently tendered as direct defendants to Texaco. In80addition to Texaco'sTexaco’s claims in the federal court action, damages for the loss of the south deck module have been sought byTexaco's builder'sTexaco’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 itsbuilder'sbuilder’s risk insurers in the federal court proceedingapproximateapproximated $280 million.Texaco'sTexaco’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 OperatorSubsidiary'sSubsidiary’s highly extraordinary negligence served as a superceding cause of the loss. The finding was subsequently set forth in a written order dated April 5, 2002, which found against the Owner Subsidiary on the claims ofTexaco's builderTexaco’s builder’s risk insurers in addition to the claims of Texaco. On May 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 OwnerSubsidiary'sSubsidiary’s motions for summary judgment with respect toTexaco'sTexaco’s claims against the Owner Subsidiary, and vacated its previous findings to the contrary.The Court has not yet ruled onOn March 31, 2003, the district court granted the OwnerSubsidiary's similarSubsidiary’s motion for dismissal againstTexaco's builder'sTexaco’s builder’s risk underwriters. A final judgment was entered by the district court on October 30, 2003 from which an appeal has been taken by Texaco’s builder’s risk insurers.The case had been transferredIn the fourth quarter of 2003, Texaco, JRM and JRM’s underwriters settled the claims of Texaco for consequential damages. We have an agreement with our insurers under which based on this settlement we are obligated to pay $1.25 million per year through 2008 as an adjustment to premiums of prior years. This agreement resulted in anew district court judge, but was subsequently transferred back tocharge of approximately $5.4 million for theoriginal district court judge. The scheduled trial date of February 10, 2003 on damages and certain insurance issues has been continued without date.year ended December 31, 2003. The trial in the binding arbitration proceeding commenced on January 13, 2003,and hasproceeded on various intermittent datesthrough March 14,thereafter andwill recommence on May 26,concluded in December 2003,for one week and at various times thereafter. Although the Owner Subsidiary is not a partywith final briefs relating tothe arbitration, we believe that theJRM’s claims against Texaco filed in March 2004. An arbitration decision with regard to JRM’s claims is expected in theOwner Subsidiary, like those against the Operator Subsidiary, are governed by the contractual provisions which waive the recoverysecond quarter ofconsequential damages against the Operator Subsidiary and its affiliates.2004. We plan to vigorously pursue the arbitration proceeding and defend any appeals processif necessary,in the federal court action, and we do not believe that a material loss, above amounts already provided for, with respect to these matters is likely. In addition, we believe our insurance will provide coverage for thebuilder's risk and consequential damagefederal court claims in the event of liability. However, the ultimate outcome of the proceedingsand any challenge by our insurers to coverageis uncertain, andan 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 froman 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'sLloyd’s and Turegum Insurance Company (the"Plaintiff Insurers"“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&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 the84
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.
TheyOur 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. The Plaintiff Insurers also allege that MII and B&W have wrongfully attempted to expand theunderwriters'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 the81settlement 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 terminatingvacating 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&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 PlaintiffInsurers'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 grantedMII'sMII’s and B&W's&W’s motion for summary judgment and dismissed the declaratory judgment action filed by the Plaintiff Insurers. The ruling concluded that the PlaintiffInsurers'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 theunderwriter'sunderwriter’s contractual obligations and underscores that this coverage is available to settle B&W's&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&W’s counterclaims against the Plaintiff Insurers and against other insurers. The parties agreed to dismiss without prejudice those of B&W's&W’s counterclaims seeking a declaratory judgment regarding theparties'parties’ respective rights and obligations under the settlement agreement. B&W's&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&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. A trial of this counterclaim is presently scheduled for April 19, 2004, but the parties are working to finalize a settlement of the counterclaim prior to commencement of the trial. 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 August 5, 2003, certain underwriters at Lloyd’s, London and certain London Market companies (the “London Insurers”) commenced a new adversary proceeding against B&W in the Bankruptcy Court for the Eastern District of Louisiana, which makes allegations similar to those made in the prior adversary action. The complaint of the London Insurers alleges that B&W anticipatorily repudiated the 1990 settlement agreement between B&W and the London Insurers. The alleged anticipatory repudiation is based primarily on B&W’s submission of the Joint Plan to the Bankruptcy Court. The complaint alleges that the London Insurers’ claims from the first adversary action that were ruled to be premature are now ripe for adjudication, given that B&W has reached agreement on a consensual plan of reorganization with the representatives of asbestos claimants. In addition to seeking unspecified damages for this alleged anticipatory repudiation, the complaint also seeks declaratory relief as to the London Insurers’ obligations to indemnify B&W for its asbestos-related claims and seeks to prevent the assignment of rights to asbestos bodily injury coverage to the Asbestos PI Trust. On or about August 6, 2003, a similar lawsuit was filed in the District Court by the London Insurers against MII. The London Insurers also filed a motion to withdraw the reference with respect to the action pending in the Bankruptcy Court, seeking to transfer it from the Bankruptcy Court to the District Court. B&W and MII have each filed motions to dismiss or, in the alternative, to stay the actions filed against each of them by the London Insurers. The Court has not ruled on the London Insurers’ motion to withdraw the reference or on B&W’s or MII’s motion to dismiss or stay. No discovery has been taken in either case. However, we do not believe that a material loss with respect to these matters is likely.
On or about August 22, 2003, Continental Insurance Co. (“Continental”) commenced an action in the Eastern District of Louisiana against MII and MI and a similar adversary action against B&W in the Bankruptcy Court. These actions make allegations similar to those made in the prior adversary actions of the London Market Insurers. The complaints of Continental allege, among other things, that MII anticipatorily repudiated the settlement agreement MII and B&W had entered into in 2000 with Continental relating to insurance payments by Continental as a result of
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asbestos-related products liability claims. The parties have reached a settlement of these actions, and the Bankruptcy Court has approved the settlement.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers Casualty and Surety Company (collectively,
"Travelers"“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"“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 toTravelers'Travelers’ complaints, denying that previous agreements operate to release Travelers from coverage responsibility for asbestos"non-products"“non-products” liabilities and asserting counterclaims requesting a declaratory judgment specifyingTravelers'Travelers’ duties and obligations with respect to coverage for B&W's&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 partiesserveserved to release Travelers from any coverage responsibility for asbestos"non-products" claims. On August 14, 2002,“non-products” claims and Phase II addressing whether, in theCourt grantedabsence of such a release, Travelers would be obligated to cover any additional asbestos-related bodily injury claims asserted against B&W's and MII's motion for leave to file an amended answer and counterclaims, adding additional counterclaims against Travelers. Discovery&W. After discovery was completed,in September 2002 andthe parties filed cross-motions for summary judgment on Phase I issues. On August 22, 2003, the Court granted summary judgment to B&W, the ACC, the FCR, MI and MII, and against Travelers, finding that the agreements did not release Travelers from all asbestos liability and further finding that MII and MI were not liable to indemnify Travelers for asbestos-related non-products claims under those agreements. One of our captive insurers reinsured certain coverages provided by Travelers to B&W, and therefore, our captive insurer may have certain exposures, subject to the terms, conditions and limits of liability of the reinsurance coverages, in the event Travelers is ultimately found liable for any amounts to B&W, on account of asbestos-related non-products personal injury claims. The issue of whether Travelers will have any additional coverage liability to B&W will be considered in Phase II of the litigation, whichwere heard on February 26, 2003. We are awaiting the Court's ruling on these motions. No trial datehasbeen scheduled.not yet commenced.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&W’s cancellation of a $313 million note82receivable and B &W's&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&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&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 the 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 the FCR that we believe are resolved by the February 8, 2002 ruling.On March 20,By Order and Judgment dated April 17, 2002,at a hearing inthe Bankruptcy Courtthe judgegranted 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 OrderandJudgment dated April 17, 2002 thatdismissed the proceeding with prejudice. On April 26, 2002, the ACC and the 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 the FCR have not yet filed their reply brief pending discussions regarding settlement and a consensual joint plan of reorganization. If a consensual joint plan of reorganization is confirmed, the ACC and the FCR have agreed to dismiss this appeal with prejudice. 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 April14, 2003.12, 2004. See Note 20 to our consolidated financial statements for information regarding B&W's&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.86
In September 2002, we were advised that the Securities and Exchange Commission (the “SEC”) 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 ofAs we reported in our annual report on Form 10-K for the year ended December 31, 2002, the SEC has issued a formal order of investigationissued by the SECin connection with its inquiry, pursuant to which theStaffstaff of the SEC has requested additional information from us and several of our current and former officers and directors. We continue to cooperate fully with both inquiries and have provided all information that has been requested. Several of our current and former officers and directors have voluntarily given interviews and have respondedor are in the process of responding,to SEC subpoenas requesting additionalinformation. 83documents and testimony. We have been advised by the New York Stock Exchange that it is reviewing transactions in MII securities prior to our May 6, 2003 earnings announcement. We have provided all information requested by the New York Stock Exchange and intend to cooperate fully with its review.
On July 12, 2002, AE Energietechnic GmbH (“Austrian Energy”) filed 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, the former SK Energi, now Energi E2 A/S (“E2”), for construction of a biomass boiler facility in Denmark. As a result of performance delays attributable to Austrian Energy and other factors, E2 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 E2’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. In June 2003, Volund reached a settlement with E2 in this matter and recorded a $1.1 million charge to earnings. This amount has been re-evaluated and reduced to $0.4 million in December 2003. In February 2004, Volund and Austrian Energy reached agreement on a claim amount of approximately $4.0 million to be entered into the Austrian Bankruptcy Court for approval. While a dividend of the claim is expected, the amount of that dividend is not currently known. Depending on the final resolution of the E2 claims and Volund’s claims against Austrian Energy, an adjustment of the purchase price from the sale of Volund to B&W may be required. Such adjustment would be recorded as a change to the estimated cost of the B&W Chapter 11 settlement. See Note 2 to our consolidated financial statements for information concerning the sale of Volund to B&W.
On July 8, 2003, Bay Ltd. (“Bay”), a subcontractor for two of JRM’s Spar projects, theMedusaand theDevils Towerprojects, filed a demand for arbitration in Houston, Texas seeking approximately $32.2 million in damages and asserting various liens against theMedusaandDevils Towerfacilities. On July 17, 2003, JRM filed a Complaint and Motion to Compel Arbitration in the U.S. District Court for the Southern District of Texas against Bay. The federal court ruled that arbitration should proceed in accordance with the applicable provisions of the Spar agreement. JRM filed its own demand for arbitration in Houston, Texas, seeking damages against Bay arising from Bay’s performance of work on theDevils Towerproject. Bay filed a counterclaim in that action, seeking approximately $7.6 million. No dates for the arbitration have been scheduled. On December 30, 2003, Bay dismissed its arbitration demand filed in Houston, Texas.
In addition, JRM filed a Complaint for Preliminary and Permanent Injunctive Relief and for Damages in the U.S. District Court for the Eastern District of Louisiana with regard to claims against Bay arising from Bay’s performance of work on theMedusaproject. In that complaint, JRM seeks in excess of $10 million as a result of Bay’s various breaches of contract. Bay filed a counterclaim in the proceedings seeking damages of approximately $24 million and enforcement of its alleged lien rights. The matter is set for trial in March 2005.
We plan to vigorously prosecute our claims in the Bay arbitration and defend the counterclaim. We have provided for our estimated losses in these matters as part of related contract costs, and we do not believe any additional material loss with respect to these matters is likely. However, the ultimate outcome of these proceedings is uncertain and an adverse ruling, either in the arbitration or the court proceedings, could have a material adverse impact on our consolidated financial position, results of operations and cash flow.
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On December 9, 2002, a class action proceeding entitledDoug Benoit, et al. v. J. Ray McDermott, Inc. et al.was initiated against one of JRM’s subsidiaries and numerous third-party defendants in the 58th Judicial District Court of Jefferson County, Texas. This proceeding involves approximately 140 plaintiffs who have alleged injuries as a result of exposures to asbestos and welding fumes while working onboard JRM’s marine construction vessels or in JRM’s fabrication facilities. Trial of some of these claims is set for July 5, 2004. We believe that most or all of these claims are subject to applicable workers’ compensation laws or comparable provisions of the Jones Act. We cannot now determine the result of these claims, and we anticipate that other similar claims may be filed in the future. Nevertheless, we do not expect that the outcome of these actions will have a material adverse impact on our financial position, results of operations or cash flows.
On or about November 5, 2003 a class action proceeding entitledJose Fragoso, et al. v. J. Ray McDermott, Inc. et al.was commenced in the 404th Judicial District Court of Cameron County, Texas. This proceeding involves 163 nonemployee plaintiffs who have alleged negligence for exposure to silica while working at an unspecified location. Thereafter, nine similar lawsuits were filed in the same district by the same law firm. In total, there are approximately 500 plaintiffs. In addition to JRM and MII, the suits name seven other premises defendants and allege additional claims against more than 70 product defendants. These ten proceedings are in the initial stages, and no trial has been set at this time in any of these proceedings.
Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or arbitration proceedings or subject to disputes or claims related to our business activities, including
performance-performance or warranty-related matters under our customer and supplier contracts and other businessarrangements.arrangements, as well as workers’ compensation and similar claims under the Jones Act. In ourmanagement'smanagement’s opinion, none ofthis litigationthese proceedings, disputes ordisputes andclaims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.See Note 20 for information regarding B
&W's&W’s potential liability for nonemployee asbestos 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.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”). 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 be undertaken at certain of our current and former plant sites. During the fiscal year ended March 31, 1995, we decided to close B
&W's&W’s nuclear manufacturing facilities in Parks Township, Armstrong County, Pennsylvania (the"Parks Facilities"“Parks Facilities”), and B&W proceeded to decommission the facilities in accordance with its existing license from the Nuclear Regulatory Commission("NRC"(the “NRC”)license.. B&W subsequently transferred the facilities to BWXT in the fiscal year ended March 31, 1998. During the fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC on a plan that provides for the completion of facilities dismantlement and soil restoration by 2001 and license termination in 2003. Substantially all work has been completed and BWXT expects torequest approval fromfile the application for license termination in the first quarter of 2004. BWXT expects that the NRCto releasewill grant thesite for unrestricted use at that time.request and terminate the license in the normal course. At December 31,2002,2003, the remaining provision for the decontamination, decommissioning and closing of these facilities was$0.4$0.3 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"(“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,88
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'sNRC’s decommissioning regulations require BWXT and McDermott Technology, Inc.("MTI"(“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$27.1 million during the year ending December 31,20032004 by issuing letters of credit for the84ultimate decommissioning of all their licensed facilities, except one. This facility, which represents the largest portion of BWXT'sBWXT’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'sMTI’s NRC licenses forbyproductby-product 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 December 31,
20022003 and2001,2002, we had total environmental reserves (including provisions for the facilities discussed above) of$20.6$17.0 million and$21.2$20.6 million, respectively. Of our total environmental reserves at December 31, 2003 and 2002,and 2001, $8.3$9.0 million and$6.1$8.3 million, respectively, were included in current liabilities. Our estimated recoveries of these costs totaling $0.2 millionand $3.2 million, respectively,are included in accounts receivable-– other in our consolidated balance sheet at December 31,20022003 and2001.2002. 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.Operating Leases
Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at December 31,
20022003 are as follows:
Fiscal Year Ending December 31, Amount - ------------------------------- ------2003 $ 6,932,000 2004 $ 5,584,000 2005 $ 4,128,000 2006 $ 3,246,000 2007 $ 3,263,000 thereafter $ 39,948,000
Fiscal Year Ending December 31, Amount 2004 $ 8,108,000 2005 $ 5,476,000 2006 $ 4,017,000 2007 $ 3,780,000 2008 $ 2,956,000 thereafter $ 36,831,000 Total rental expense for the years ended December 31, 2003, 2002 and 2001
and 2000was $47.4 million, $45.0 million$43.3 millionand$44.1$43.3 million, respectively. These expense amounts include contingent rentals and are net of sublease income, neither of which is material.89
Other
We have a take-or-pay contract with the primary provider of our
long distancelong-distance telecommunications service. Under the terms of this agreement, we are obligated to pay a minimum of $1.8 million per year through 2009.As a result of the settlement in the Texaco matter, we have an agreement with our insurers under which we are obligated to pay $1.25 million per year through 2008 as an adjustment to premiums of prior years.
We perform significant amounts of work for the U.S. Government under both prime contracts and subcontracts. As a result, various aspects of our operations are subject to continuing reviews by governmental agencies.
We maintain liability and property insurance against such risk and in such amounts as we consider adequate. However, certain risks are either not insurable or insurance is available only at rates we consider uneconomical.
We have several wholly owned insurance subsidiaries that provide general and automotive liability insurance and, from time-to-time,
builder'sbuilder’s risk within certain limits, marine hull andworkers'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.85WeAt December 31, 2003, we are contingently liable under standby letters of credit totaling
$183.2$145.0 million,at December 31, 2002,all of which were issued in the normal course of business. We haveguaranteed a $2.5restricted cash of $98.2 millionline of credit, of which $5,000 was outstanding at December 31, 2002, to an unconsolidated foreign joint venture.collateralizing these contingent obligations. At December 31,2002,2003, we had pledged approximately$154.1$41.2 million fair value of our investment portfolio of$173.2 million: $107.8 million to secure the MII Credit Facility and $46.3$42.8 million to secure payments under and in connection with certain reinsurance agreements. InFebruaryaddition, at December 31, 2003, weentered intohad $22.0 million of cash temporarily reserved to pay theNew Credit Facility described in Note 5next two succeeding payments of interest on the JRM Secured Notes. This temporary interest reserve is required until the last to occur of (1) acceptance by the customer of theDevils Towerproduction platform and (2) acceptance by the customer of theFront Runnerproduction platform.As of December 31, 2003, MII
Credit Facility was terminated, resultinghad outstanding performance guarantees for six JRM projects. We are not aware that MII has ever had to satisfy a performance guaranty for JRM or any of its other subsidiaries. Five of these guarantees (with a total cap of $136 million) relate to projects which have been completed and are in thereleasewarranty periods, the latest of which would expire in January 2006. JRM has incurred minimal warranty costs in prior years and any substantial warranty costs in the future could possibly be covered in whole or in part by insurance. However, if JRM incurs substantial warranty liabilities and is unable to respond, and such liabilities are not covered by insurance, MII would ultimately have to satisfy those claims. The remaining MII performance guaranty for JRM (with a cap of $24 million) is for a pipeline project which is currently in progress and expected to be completed prior to April 15, 2004. This performance guaranty also runs through the one-year warranty period, which we expect to expire prior to April 15, 2005.As of December 31, 2003, MII had outstanding performance guarantees for five Volund contracts. Volund is currently owned by B&W. These guarantees, the last of which will expire on December 31, 2005, were all executed in 2001 and have a cap of $46 million. These projects have all been completed and MII has never had to satisfy a performance guaranty for Volund. Under the terms of an agreement between MII and B&W, B&W must reimburse MII for any costs MII may incur under any of these performance guarantees. As of December 31, 2003, B&W has sufficient liquidity to cover its obligations under this agreement. However, if Volund incurs and is unable to satisfy substantial warranty liabilities on these projects prior to expiration of the
$107.8 million of pledged investments.guaranty periods and B&W is not able to satisfy its contractual obligation to MII and such liabilities are not covered by insurance, MII would be liable.90
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“DIP CreditFacility"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 31,2002,2003, approximately$51.4$42.0 million in letters of credithavehas 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,
2002,2003, 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$84.3 million, of which$107.7$80.1 million related to the business operations of B&W and its subsidiaries.NOTE 11
-— RELATED PARTY TRANSACTIONSA company affiliated with two of our directors
managesmanaged andoperatesoperated an offshore producing oil and gas property for JRM. During 2003, JRM sold its interest in this property recording a gain on asset disposal of approximately $1.4 million and, as a result, terminated the production and operation agreement. The management and operation agreementrequiresrequired 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 $0.5 million, $0.9 millionannuallyand $0.9 million in fees and costs under the agreement during the years ended December 31, 2003, 20022001and2000.2001. JRM subsidiaries also sold natural gas at established market prices to the related party. JRM has periodically entered into agreements to design, fabricate and install offshore pipelines for the same company. In addition, JRM received approximately $2.2 million$2.1 millionand$5.0$2.1 million for work performed on those agreements in the years ended December 31, 2002 and 2001,and 2000,respectively. No such transactions occurred during the year ended December 31, 2003.From time to time, one or more of our subsidiaries purchases raw materials, products or services from a company or one or more of its affiliated companies affiliated with another one of our directors. During 2003, such purchases amounted to approximately $2.5 million.
See Note 3 for transactions with unconsolidated affiliates and Note 20 for transactions with B&W.
NOTE 12
-— RISKS AND UNCERTAINTIESDuring 2002, our Marine Construction Services segment experiencedOur recent operating results have been adversely affected by material losses on
itsseveral large marine construction contracts, including the contracts related to: threeEPIC sparSpar projects,totaling $149.3 million:Medusa, Devils TowerandFront Runner;theCarina Ariesproject off the coast of Argentina; andFront Runner. ThesetheBelanakFPSO project on Batam Island. Each of these projects was a first-of-a-kind project for JRM entered into on a fixed-price basis during 2001 and early 2002. Given the risks inherent in fixed-price contracts,are first-of-a-kind as well as long termwe continue to have difficulty estimating costs to complete these contracts and, therefore, adjustments to overall contract costs due to unforeseen events may continue to be significant innature.future periods since our backlog will continue to contain fixed-price contracts.We recorded estimated losses of $149.3 million during 2002 and $27.9 million during 2003 on the three Spar projects. During 2003, we also recorded estimated losses of $66.5 million on theCarina Ariesproject and $25.2 million on theBelanakFPSO project. Although we have
experienced schedule delays andalready reflected these losses in our income statement, the negative cash flows associated with the cost overruns on thesecontractsprojects continue to be incurred. We expect thathave adversely impacted our financial results. Thesethese negative cash flows will continue through three of the four quarters in 2004.91
The Spar projects continue to face significant issues. The primary issue remaining
challengesrelated tocompletingMedusais resolution of a dispute with a subcontractor, Bay Ltd. (See Note 10 to our consolidated financial statements.) The one-year warranty period on Medusawithin its revised scheduleexpires on August 22, 2004. We have accrued warranty reserves which we believe are adequate to cover all known andbudget are finishing the topsides fabricationlikely warranty claims at this time. However, our experience with respect to Spar warranty is limited andthe marine installation portion of the project. Our revised schedule requires installation activities during the second quarter ofit is possible that actual warranty claims will exceed amounts provided for at December 31, 2003.We believeIn early 2003, our assessment was that the major challenge in completingDevils Towerwithin its revised budget
iswas to remain on track with the revised schedule for86topsides fabrication due to significant liquidated damages that are associated with the contract. AAt that time, it appeared that a substantial portion of the costs and delay impacts onDevils Towerarewas attributable to remedial activities undertaken with regard to the paintapplication. Onapplication, and, on March 21, 2003, we filed an action against the paintvendorssupplier and certain of its related parties for recovery of the remediation costs, delays and other damages. During the third week of April 2003, we encountered difficulties in installing the piles necessary to moor theDevils Towerhull in place and suspended offshore work on this activity. In June 2003, we reached a settlement with the customer relating to schedule and developed a plan for paint and pile installation issues. Since then, eight of the nine piles onDevils Towerhave been successfully installed and accepted by the United States Minerals Management Service (the “USMMS”), the U.S. Government regulatory agency for offshore structures. The remaining pile was installed to a depth 9 feet short of the design penetration of 114 feet. The American Bureau of Shipping has provided a recommendation to the USMMS suggesting approval of the as-installed pile. Based on this recommendation, we believe it is probable that the pile will be accepted. However, should the USMMS reject the pile, JRM would be required to fabricate and install a replacement pile. JRM estimates that additional cost of $7.4 million would be incurred to fabricate and install a replacement pile, and it believes that a majority of this cost would be recoverable in a future period through an insurance claim. We received a certificate of substantial completion from our customer on this project in February 2004. Additional remaining issues include a dispute with the subcontractor, Bay Ltd., and the one-year warranty period, which will begin on the receipt of the certificate of final completion. (See Note 10 to our consolidated financial statements.)TheFront Runnerhull has been completed and is currently moored at a shipyard on the Gulf of Mexico awaiting installation, which is currently scheduled in late May 2004. The topsides are being fabricated by a subcontractor and are scheduled for installation in late June 2004. The key remaining issues for theFront Runnercontract
relateare the completion of fabrication and installation of the topsides. During the quarter ended December 31, 2003, we incurred substantial cost overruns on the reimbursable scopes of work performed by our topsides subcontractor. Our forecasted fabrication completion date has also been extended. Due to these items, our estimated loss on this project was increased by approximately $10 million in the quarter ended December 31, 2003.With regard to theCarina Ariesproject, we have provided for our best estimate of the total cost to achieve project completion and recorded losses totaling $66.5 million for the year ended December 31, 2003. During the March 2003 quarter, we recorded losses of approximately $2.0 million for offshore pipelay and platform installation productivity below forecast. During the June 2003 quarter, we recorded approximately $40 million of losses attributable to cost incurred as a result of a June 2003 storm that damaged our pipelay equipment and required us to pay subcontractors for standby or contract termination as we made repairs to recommence work. On October 30, 2003, we signed a change order and addendum to the master agreement with the customer. This agreement, among other things, reduced our liquidated damages and risk of loss exposures, transferred weather risk to the customer and changed the contract from a lump-sum contract to a partial lump-sum and unit rate contract. During the December 2003 quarter, we recorded additional losses of approximately $6.0 million for fabrication cost overruns and $18.5 million for offshore pipelay and platform installation productivity below forecast, especially unforeseen mechanical downtime which is not reimbursable under the amended contract. We also have a pending insurance claim from which we expect to recover a portion of the June 2003 storm loss, which has not been reflected in the total cost to complete. After completing the pipeline portion of this contract, we need to install the topsides. We believe the topsides installation scope of work presents potentially less risk than the pipeline installation.
With regard to theBelanakFPSO project, which involves a subcontract to JRM for the fabrication of wellhead platforms and topsides for an FPSO in Indonesia, we have provided for our best estimate of the total cost to achieve project completion and recorded losses totaling $25.2 million for the year ended December 31, 2003. The increase in cost is attributable to overruns of the material and subcontractor cost estimates, as well as labor costs to complete. We have a pending contract amendment awaiting approval by an Indonesian governmental agency, which would
92
reduce the now expected total cost to complete this project. Under our current subcontract, we are subject to liquidated damages of approximately $148,000 per day for late completion of our scope of work, with a cap of approximately $16 million. Late performance by JRM would not give rise to liquidated damages if first oil flows into the FPSO by December 15, 2004, as that date may be adjusted under the contract. A finally approved contract amendment would, among other things, extend our liquidated damages date. Further, even without that contract amendment or without first oil date satisfaction, we believe we are entitled to an extension of the schedule for liquidated damages due to
schedule slippage either by JRM or one or morethe actions of thesubcontractors. Atprime contractor. Therefore, we believe JRM is not likely to incur liquidated damages. In addition to the liquidated damages exposure, remaining issues relate to our ability to meet our forecast of required manhours to complete this project, which we have been unable to accurately estimate in the past.As of December 31,
2002,2003, we have provided for our estimated losses on these contracts and our estimated costs to complete all our other contracts.ItHowever, it isreasonablypossible 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. As with the projects specifically discussed above, such adjustments could have a material adverse impact on our results of operations, financial condition and cash flow. Alternatively, positive adjustments to overall contract costs at completion could materially improve our results of operations, financial condition and cash flow. Also, in addition to theCarina Ariesinsurance claim and theBelanakFPSO contract amendment previously discussed, we are pursuing other claims and contract amendments. Any such recovery would positively impact JRM’s operating income in the period in which it is received.NOTE 13
-— FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISKOur Marine Construction Services
segment'ssegment’s principal customers are businesses in the offshore oil, natural gas and hydrocarbon processing industries and other marine construction companies. The primary customer of our Government Operations segment is the U.S. Government (including its contractors). These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic or other conditions. In addition, we and many of our customers operate worldwide and are therefore exposed to risks associated with the economic and political forces of various countries and geographic areas. Approximately54%58% of our trade receivables are due from foreign customers. (See Note 17 for additional information about our operations in different geographic areas.) We generally do not obtain any collateral for our receivables.We believe that our provision for possible losses on uncollectible accounts receivable is adequate for our credit loss exposure. At December 31,
20022003 and2001,2002, the allowance for possible losses we deducted from accounts receivable-trade on the accompanying balance sheet was $1.3 million and $1.6 million,and $1.1 million,respectively.NOTE 14
-— INVESTMENTSThe following is a summary of our available-for-sale securities at December 31,
2002:2003:
Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value (In thousands) U.S. Treasury securities and obligations of U.S. Government agencies $ 17,616 $ 8 $ — $ 17,624 Money market instruments 25,206 — 30 25,176
$ 42,822 $ 8 $ 30 $ 42,800
Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses(1) Fair Value ---- ---------------- ----------------- ---------- (In thousands)Debt securities: U.S. Treasury securities and obligationsvalue ofU.S. Government agencies $ 156,365 $ 585 $ - $ 156,950 Corporate notes and bonds 10,366 95 1 10,460 Other debt securities 5,821 - 4 5,817 - ----------------------------------------------------------------------------------------------------------------- Total $ 172,552 $ 680 $ 5 $ 173,227 =================================================================================================================$41.2 million pledged to secure payments under certain reinsurance agreements.In FebruaryAt December 31, 2003,
we liquidated approximately $108 millionall our available-for-sale debt securities have contractual maturities ofour investment portfolio for working capital and general corporate purposes.less than one year.93
The following is a summary of our available-for-sale securities at December 31,
2001:2002:
Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value (In thousands) U.S. Treasury securities and obligations of U.S. Government agencies $ 156,365 $ 585 $ — $ 156,950 Corporate notes and bonds 10,366 95 1 10,460 Other debt securities 5,821 — 4 5,817
$ 172,552 $ 680 $ 5 $ 173,227
Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses(1) Fair Value ---- ---------------- ----------------- ---------- (In thousands)Debt securities: U.S. Treasury securities and obligationsvalue ofU.S. Government agencies $ 295,753 $ 1,015 $ 9 $ 296,759 Corporate notes and bonds 18,672 256 21 18,907 Other debt securities 15,277 60 - 15,337 - ----------------------------------------------------------------------------------------------------------------- Total $ 329,702 $ 1,331 $ 30 $ 331,003 =================================================================================================================$46.3 million pledged to secure payments under certain reinsurance agreements.87Proceeds, gross realized gains and gross realized losses on sales of available-for-sale securities were as follows:
Gross Gross Proceeds Realized Gains Realized Losses -------- -------------- --------------- (In thousands)Year Ended December 31, 2002 $ 775,441 $ 997 $ - Year Ended December 31, 2001 $1,229,087 $ 7,614 $ 4,634 Year Ended December 31, 2000 $ 26,375 $ 23 $ 22The amortized cost and estimated fair value of available-for-sale debt securities at December 31, 2002, by contractual maturity, are as follows:
Amortized Estimated Cost Fair Value ---- ---------- (In thousands)Due in one year or less $ 144,688 $ 144,846 Due after one through three years 27,864 28,381 - ----------------------------------------------------------------------------------- Total $ 172,552 $ 173,227 - -----------------------------------------------------------------------------------
Gross Gross Proceeds Realized Gains Realized Losses (In thousands) Year Ended December 31, 2003 $ 417,156 $ 405 $ — Year Ended December 31, 2002 $ 775,441 $ 997 $ — Year Ended December 31, 2001 $ 1,229,087 $ 7,614 $ 4,634 NOTE 15
-— DERIVATIVE FINANCIAL INSTRUMENTSOur worldwide operations give rise to exposure to market risks from changes in foreign exchange rates. We use derivative financial instruments
primarily forward contracts,to reduce the 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 operatingentities'entities’ functional currencies. We do not hold or issue financial instruments for trading or other speculative purposes.We enter into
forward contractsderivative financial instruments 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 instockholders'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 aderivative'sderivative’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 onforward contractsderivative financial instruments that require immediate recognition are included as a component of other-net in our consolidated statement of loss.At December 31, 2003, we had foreign currency option contracts outstanding to purchase 9.1 million Euros at a weighted-average strike price of 1.245 with varying expiration dates through November 30, 2004. At December 31, 2002,
and 2001,we had forward contracts to purchase $15.5 millionand $42.8 million, respectively,in foreign currencies (primarily Indonesian Rupiah and Euro) and to sell $0.9 millionand $0.7 million, respectively,in foreign currencies at varying maturities through August 2003. We have designated substantially all of these contracts as cash flow hedging instruments.TheFor the option contracts entered during 2003, the hedged risk is the risk of changes inourforecasted U.S. dollar equivalent cash flows related to long-term contracts attributable to movements in the exchange rate above the strike prices. We assess effectiveness based upon total changes in cash flows of the option contracts. For forward contracts, the hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in spot exchange rates of forecasted transactions related toourlong-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. At December 31,2002,2003, we had deferred approximately$1.1$0.8 million of net gains on theseforward contracts, 82%derivative financial instruments, 75% of which we expect to recognize in income over the next 12 months primarily in accordance with the percentage-of-completion method of accounting. At December 31,2001,2002, we had deferred approximately$2.2$1.1 million of netlossesgains on forward contracts. For the years ended December 31, 2003 and 2002,and 2001,we immediately recognized net gainson forward contractsof94
approximately
$1.5$0.1 million and$0.1$1.5 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. We mitigate this risk by using major financial institutions with high credit ratings.
88NOTE 16
-— FAIR VALUES OF FINANCIAL INSTRUMENTSWe used the following methods and assumptions in estimating our 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.
Investments: We estimate the fair values of investments based on quoted market prices. For investments for which there are no quoted market prices, we derive fair values from available yield curves for investments of similar quality and terms.
Long- and short-term debt: We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values 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.
Foreign currency
forward contracts:derivative instruments: We estimate the fair values of foreign currency option contracts and forward contracts by obtaining quotes from brokers. At December 31, 2003, we had foreign currency option contracts outstanding to purchase 9.1 million Euro with a total fair value of $0.4 million. At December 31, 2002,and 2001,we had net forward contracts outstanding to purchase foreign currencies, primarily Euro and Indonesian Rupiah, with a total notionalvaluesvalue of $14.5 million and$42.1 million, respectively, anda total fairvaluesvalue of $0.4million and ($2.0) million, respectively.million.The estimated fair values of our financial instruments are as follows:
December 31, 2002 December 31, 2001 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In thousands)Balance Sheet Instruments - ------------------------- Cash and cash equivalents $ 175,177 $ 175,177 $ 196,912 $ 196,912 Investments $ 173,227 $ 173,227 $ 331,003 $ 331,003 Debt excluding capital leases $ 137,546 $ 102,196 $ 305,379 $ 292,875
December 31, 2003 December 31, 2002 Carrying Fair Carrying Fair Balance Sheet Instruments Amount Value Amount Value (In thousands) Cash and cash equivalents $ 174,790 $ 174,790 $ 129,517 $ 129,517 Restricted cash and cash equivalents $ 180,480 $ 180,480 $ 44,824 $ 44,824 Investments $ 42,800 $ 42,800 $ 173,227 $ 173,227 Debt excluding capital leases $ 313,346 $ 296,908 $ 137,546 $ 102,196 NOTE 17
-— SEGMENT REPORTINGOur reportable segments are Marine Construction Services, Government Operations, Industrial Operations and Power Generation 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, 2002 and 2001
and 2000toreflect changes inexclude the results of operations of Menck, a component of ourreportable segments.Marine Construction Services segment which we sold on August 29, 2003. The results of operations ofMcDermott Technology, Inc. ("MTI")Menck are nowincluded in our Government Operations segment. The results of operations of HPC, which we sold in July 2002, arereported in discontinued operations.MTI and HPC were previously included in our Industrial Operations segment.Our Industrial Operations segmentnowincludes 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
95
platforms, specialized structures, modular facilities, marine pipelines and subsea production systems. JRM also provides project management services, engineering services and procurement
activities, and removal, salvage and refurbishment services of offshore fixed platforms. 89activities. 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 provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities.
Included in the year ended December 31, 2000 are charges of $23.4 million to exit certain foreign joint ventures.The Power Generation Systemssegment'ssegment’s operations are conducted primarily through B&W. Due to B&W's&W’s Chapter 11 filing, effective February 22, 2000, we stopped consolidating B&W's&W’s and itssubsidiaries'subsidiaries’ results of operations in our consolidated financial statements.Through February 21, 2000, B&W's and its subsidiaries' results are reported as Power Generation Systems - B&W in the segment information that follows.See Note 20 for the condensed consolidated results of B&W and its subsidiaries.We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, contract and insurance claims provisions, legal expenses and gains (losses) on sales of corporate assets. Other reconciling items to income before provision for income taxes are interest income, interest expense, minority interest and other-net.
Certain 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 excludethe following assets from segment assets: investments in debt securities,prepaid pension costsand our investment in B&W. Previously, we also excluded insurance recoverables for products liability claims and certain goodwillfrom segment assets.We have restated segment assets for prior periods to conform to the current presentation of segment assets.SEGMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2003, 2002
2001AND2000.2001.1. Information about Operations in our Different Industry Segments:
Year Ended December 31, 2003 2002 2001 (In thousands) Marine Construction Services $ 1,803,924 $ 1,133,181 $ 839,658 Government Operations 531,522 553,827 494,018 Industrial Operations — — 507,262 Power Generation Systems — 46,881 47,778 Adjustments and Eliminations (82 ) (68 ) (638 )
$ 2,335,364 $ 1,733,821 $ 1,888,078
Marine Construction Services Transfers $ 69 $ 68 $ 282 Government Operations Transfers 20 — 318 Industrial Operations Transfers — — 38 Adjustments and Eliminations (7 ) — —
$ 82 $ 68 $ 638
96
Year Ended December 31, 2003 2002 2001 (In thousands) OPERATING INCOME (LOSS): Segment Operating Income (Loss): Marine Construction Services $ (51,093 ) $ (165,299 ) $ 12,390 Government Operations 58,212 34,600 29,320 Industrial Operations — — 9,928 Power Generation Systems (771 ) (2,825 ) (3,656 )
$ 6,348 $ (133,524 ) $ 47,982
Gain (Loss) on Asset Disposal and Impairments — Net: Marine Construction Services $ 5,745 $ (320,951 ) $ (3,624 ) Government Operations 426 88 (128 ) Industrial Operations — — 13
$ 6,171 $ (320,863 ) $ (3,739 )
Equity in Income (Loss) from Investees: Marine Construction Services $ (534 ) $ 5,311 $ 10,442 Government Operations 28,018 24,645 23,004 Industrial Operations — — 43 Power Generation Systems 898 (2,264 ) 604
$ 28,382 $ 27,692 $ 34,093
SEGMENT INCOME (LOSS): Marine Construction Services $ (45,882 ) (480,939 ) $ 19,208 Government Operations 86,656 59,333 52,196 Industrial Operations — — 9,984 Power Generation Systems 127 (5,089 ) (3,052 )
40,901 (426,695 ) 78,336
Write-off of investment in B&W — (224,664 ) — Other unallocated — (1,452 ) — (93,590 ) (23,628 ) (5,080 )
$ (52,689 ) $ (676,439 ) $ 73,256
Year Ended December 31, 2003 2002 2001 (In thousands) (1) Corporate Departmental Expenses $ (42,769 ) $ (45,104 ) $ (42,502 ) Legal/Professional Services related to Chapter 11 Proceedings (1,902 ) (1,612 ) (15,471 ) Other Corporate Expenses 204 (2,698 ) (13,693 ) Income (Expense) from Qualified Pension Plans (75,749 ) (11,087 ) 28,553 Insurance-related Items 2,434 9,447 6,690
Gross Corporate General & Administrative Expenses (117,782 ) (51,054 ) (36,423 ) General & Administrative Expenses Allocated to Segments 24,192 27,426 31,343
Total $ (93,590 ) $ (23,628 ) $ (5,080 )
97
Year Ended December 31, 2003 2002 2001 (In thousands) SEGMENT ASSETS: Marine Construction Services $ 809,004 $ 687,276 $ 1,000,610 Government Operations 287,449 308,301 260,812 Power Generation Systems 8,917 8,739 38,162
Total Segment Assets 1,105,370 1,004,316 1,299,584 Corporate Assets 143,504 254,110 763,139 Discontinued Operations — 19,745 41,117
Total Assets $ 1,248,874 $ 1,278,171 $ 2,103,840
CAPITAL EXPENDITURES: $ 15,520 $ 44,541 $ 25,485 Government Operations 19,645 23,761 19,648 Industrial Operations — — 1,466 Power Generation Systems — 356 719
Segment Capital Expenditures 35,165 68,658 47,318 Corporate Capital Expenditures 2,932 106 1,092 Discontinued Operations — 505 1,148
Total Capital Expenditures $ 38,097 $ 69,269 $ 49,558
DEPRECIATION AND AMORTIZATION: Marine Construction Services $ 28,253 $ 24,793 $ 46,527 Government Operations 13,174 11,388 10,567 Industrial Operations — — 559 Power Generation Systems 11 550 1,106
Segment Depreciation and Amortization 41,438 36,731 58,759 Corporate Depreciation and Amortization 3,066 3,889 2,122 Discontinued Operations — 191 1,490
Total Depreciation and Amortization $ 44,504 $ 40,811 $ 62,371
INVESTMENT IN UNCONSOLIDATED AFFILIATES: Marine Construction Services $ 3,290 $ 4,863 $ 6,524 Government Operations 7,184 4,300 5,434 Power Generation Systems 2,450 2,380 9,037
Segment Investment in Unconsolidated Affiliates 12,924 11,543 20,995 Discontinued Operations — — 3,164
Total Investment in Unconsolidated Affiliates $ 12,924 $ 11,543 $ 24,159
Year Ended(1) Includes new capital leases of $4,417,000 and $4,550,000 at December 31, 2002 and 2001, 2000 ---- ---- ---- (In thousands)REVENUES: (1) Marine Construction Services $ 1,148,041 $ 848,528 $ 757,508 Government Operations 553,827 494,018 444,042 Industrial Operations - 507,262 426,262 Power Generation Systems - B&W - - 155,774 Power Generation Systems 46,881 47,778 33,794 Adjustments and Eliminations (68) (638) (3,710) - ---------------------------------------------------------------------------------------------------- $ 1,748,681 $ 1,896,948 $ 1,813,670 ====================================================================================================respectively.(1) Segment revenues are net of the following intersegment transfers and other adjustments:
Marine Construction Services Transfers $ 68 $ 282 $ 896 Government Operations Transfers - 318 300 Industrial Operations Transfers - 38 283 Power Generation Systems Transfers - B&W - - 59 Eliminations - - 2,172 - ---------------------------------------------------------------------------------------------------- $ 68 $ 638 $ 3,710 ====================================================================================================90
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)OPERATING INCOME (LOSS): Segment Operating Income (Loss): Marine Construction Services $ (162,626) $ 14,506 $ (33,534) Government Operations 34,600 29,320 33,224 Industrial Operations - 9,928 9,767 Power Generation Systems - B&W - - 7,172 Power Generation Systems (2,825) (3,656) (7,783) - ---------------------------------------------------------------------------------------------------- $ (130,851) $ 50,098 $ 8,846 - ---------------------------------------------------------------------------------------------------- Gain (Loss) on Asset Disposal and Impairments - Net: Marine Construction Services $ (320,945) $ (3,624) $ (1,012) Government Operations 88 (128) (1,047) Industrial Operations - 13 (141) Power Generation Systems - B&W - - (33) - ---------------------------------------------------------------------------------------------------- $ (320,857) $ (3,739) $ (2,233) - ---------------------------------------------------------------------------------------------------- Equity in Income (Loss) from Investees: Marine Construction Services $ 5,311 $ 10,442 $ 2,866 Government Operations 24,645 23,004 11,107 Industrial Operations - 43 50 Power Generation Systems - B&W - - 812 Power Generation Systems (2,264) 604 (24,630) - ---------------------------------------------------------------------------------------------------- $ 27,692 $ 34,093 $ (9,795) - ---------------------------------------------------------------------------------------------------- SEGMENT INCOME (LOSS): Marine Construction Services $ (478,260) $ 21,324 $ (31,680) Government Operations 59,333 52,196 43,284 Industrial Operations - 9,984 9,676 Power Generation Systems - B&W - - 7,951 Power Generation Systems (5,089) (3,052) (32,413) - ---------------------------------------------------------------------------------------------------- (424,016) 80,452 (3,182) - ---------------------------------------------------------------------------------------------------- Write-off of investment in B&W (224,664) - - Other unallocated (1,452) - - Corporate(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) from Qualified Pension Plans (11,087) 28,553 47,983 Insurance-related Items 9,447 6,690 7,156 - ------------------------------------------------------------------------------------------------------------- Gross Corporate General & Administrative Expenses (51,054) (36,423) (27,849) General & Administrative Expenses Allocated to Segments 27,426 31,343 35,904 - ------------------------------------------------------------------------------------------------------------- Total $ (23,628) $ (5,080) $ 8,055 =============================================================================================================91
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)SEGMENT ASSETS: Marine Construction Services $ 707,021 $ 1,010,300 $ 896,815 Government Operations 308,301 260,812 246,601 Industrial Operations - - 79,306 Power Generation Systems 8,739 38,162 39,780 - -------------------------------------------------------------------------------------------------------------------- Total Segment Assets 1,024,061 1,309,274 1,262,502 Corporate Assets 254,110 763,139 756,625 Discontinued Operations - 31,427 36,500 - -------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,278,171 $ 2,103,840 $ 2,055,627 ==================================================================================================================== CAPITAL EXPENDITURES: Marine Construction Services (1) $ 45,046 $ 25,670 $ 31,341 Government Operations 23,761 19,648 15,992 Industrial Operations - 1,466 33 Power Generation Systems - B&W - - 496 Power Generation Systems (2) 356 719 6,990 - -------------------------------------------------------------------------------------------------------------------- Segment Capital Expenditures 69,163 47,503 54,852 Corporate Capital Expenditures 106 1,092 101 Discontinued Operations - 963 1,291 - -------------------------------------------------------------------------------------------------------------------- Total Capital Expenditures $ 69,269 $ 49,558 $ 56,244 ==================================================================================================================== DEPRECIATION AND AMORTIZATION: Marine Construction Services $ 24,984 $ 46,634 $ 45,819 Government Operations 11,388 10,567 11,260 Industrial Operations - 559 673 Power Generation Systems - B&W - - 2,489 Power Generation Systems 550 1,106 763 - -------------------------------------------------------------------------------------------------------------------- Segment Depreciation and Amortization 36,922 58,866 61,004 Corporate Depreciation and Amortization 3,889 2,122 1,616 Discontinued Operations - 1,383 1,270 - -------------------------------------------------------------------------------------------------------------------- Total Depreciation and Amortization $ 40,811 $ 62,371 $ 63,890 ==================================================================================================================== INVESTMENT IN UNCONSOLIDATED AFFILIATES: Marine Construction Services $ 4,863 $ 6,524 $ 11,086 Government Operations 4,300 5,434 2,527 Industrial Operations - - 274 Power Generation Systems 2,380 9,037 9,565 - -------------------------------------------------------------------------------------------------------------------- Segment Investment in Unconsolidated Affiliates 11,543 20,995 23,452 Discontinued Operations - 3,164 1,953 - -------------------------------------------------------------------------------------------------------------------- Total Investment in Unconsolidated Affiliates $ 11,543 $ 24,159 $ 25,405 ====================================================================================================================(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 $6,944,000 acquired in the acquisition of B&W Volund in the year ended December 31, 2000. 9298
2. Information about our Product and Service Lines:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)REVENUES: Marine Construction Services: Offshore Operations $ 283,308 $ 331,724 $ 294,399 Fabrication Operations 258,545 176,908 170,883 Engineering Operations 119,570 69,987 76,819 Procurement Activities 845,955 407,855 255,512 Eliminations (359,337) (137,946) (40,105) - -------------------------------------------------------------------------------------------------------------------- 1,148,041 848,528 757,508 - -------------------------------------------------------------------------------------------------------------------- Government Operations: Nuclear Component Program 370,734 327,938 288,890 Management & Operation Contracts of U.S. Government Facilities 110,696 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 12,297 9,036 16,132 Other Industrial Operations 667 5,249 1,919 Eliminations (2,525) (8,801) (15,537) - -------------------------------------------------------------------------------------------------------------------- 553,827 494,018 444,042 - -------------------------------------------------------------------------------------------------------------------- Industrial Operations: Engineering & Construction - 312,028 190,199 Plant Outage Maintenance - 200,148 237,796 Eliminations - (4,914) (1,733) - -------------------------------------------------------------------------------------------------------------------- - 507,262 426,262 - -------------------------------------------------------------------------------------------------------------------- Power Generation Systems - B&W: Original Equipment Manufacturers' Operations - - 42,674 Nuclear Equipment Operations - - 9,051 Aftermarket Goods and Services - - 95,717 Operations and Maintenance - - 6,304 Boiler Auxiliary Equipment - - 8,258 Eliminations - - (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 (68) (638) (3,710) - -------------------------------------------------------------------------------------------------------------------- $ 1,748,681 $ 1,896,948 $ 1,813,670 ====================================================================================================================93
Year Ended December 31, 2003 2002 2001 (In thousands) REVENUES: Marine Construction Services: Offshore Operations $ 573,507 $ 268,448 $ 322,854 Fabrication Operations 296,854 258,545 176,908 Engineering Operations 285,356 119,570 69,987 Procurement Activities 848,711 845,955 407,855 Eliminations (200,504 ) (359,337 ) (137,946 )
1,803,924 1,133,181 839,658
Government Operations: Nuclear Component Program 461,289 370,734 327,938 Management & Operation Contracts of U.S. Government Facilities 9,455 110,696 93,204 Other Commercial Operations 27,763 31,489 26,706 Nuclear Environmental Services 18,629 14,171 24,046 Contract Research 10,708 16,298 16,640 Other Government Operations 9,359 12,297 9,036 Other Industrial Operations 188 667 5,249 Eliminations (5,869 ) (2,525 ) (8,801 )
531,522 553,827 494,018
Industrial Operations: Engineering & Construction — — 312,028 Plant Outage Maintenance — — 200,148 Eliminations — — (4,914 )
— — 507,262
Power Generation Systems: Original Equipment Manufacturers’ Operations — 30,791 27,848 Plant Enhancements — 15,868 21,004 Other — 222 (1,074 )
— 46,881 47,778
Eliminations (82 ) (68 ) (638 )
$ 2,335,364 $ 1,733,821 $ 1,888,078
99
3. Information about our Operations in Different Geographic Areas:
Year Ended December 31, 2003 2002 2001 (In thousands) United States $ 1,195,182 $ 1,043,210 $ 892,235 Azerbaijan 262,055 121,603 4,851 Indonesia 249,054 87,018 19,645 Qatar 186,577 57,110 46,404 Argentina 87,924 23,198 3,129 Saudi Arabia 87,242 981 26,249 Vietnam 85,901 33,161 9,646 India 80,597 11,215 15,135 Thailand 27,446 22,572 35,350 Nigeria 24,452 51,408 23,989 Mexico 15,052 54,999 108,038 Trinidad 9,489 65,304 59,934 Malaysia 8,594 19,825 55,869 Australia 4,091 86,594 26,194 Canada 1,167 6,512 474,372 Denmark — 26,599 24,686 United Kingdom — 806 30,465 Other Countries 10,541 21,706 31,887
$ 2,335,364 $ 1,733,821 $ 1,888,078
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands)REVENUES:(1) United States $ 1,045,245 $ 892,558 $ 867,337 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 54,999 108,038 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 6,512 474,372 320,583 United Kingdom 998 30,592 59,300 Saudi Arabia 982 26,249 23,324 Other Countries 32,639 39,441 46,138 - -------------------------------------------------------------------------------------------------------------------- $ 1,748,681 $ 1,896,948 $ 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 ====================================================================================================================We allocate geographic revenues based on the location of the customer. (1) We allocate geographic revenues based on the location of the customer.
Year Ended December 31, 2003 2002 2001 (In thousands) PROPERTY, PLANT AND EQUIPMENT, NET: United States $ 225,729 $ 226,824 $ 190,592 Indonesia 62,760 61,281 61,167 United Arab Emirates 30,485 32,298 34,035 Mexico 27,108 14,497 51,678 Singapore 7,739 8,147 3,706 Denmark — — 6,276 Other Countries 9,941 10,349 6,154
$ 363,762 $ 353,396 $ 353,608
4. Information about our Major Customers:
In the years ended December 31, 2003, 2002
2001and2000,2001, the U.S. Government accounted for approximately29%21%,24%29% and23%24%, respectively, of our total revenues. We have included these revenues in our Government Operations segment. In the year ended December 31, 2003, revenues from two distinct customers of our Marine Construction Services segment were $303.2 million and $261.4 million and represented approximately 13% and 11%, respectively, of our total revenues. In the year ended December 31, 2002, revenues from another one of our Marine Construction Services segment customers were $174.5 million or approximately 10% of our total revenues.94100
NOTE 18
-— QUARTERLY FINANCIAL DATA (UNAUDITED)The following tables set forth selected unaudited quarterly financial information for the years ended December 31,
20022003 and2001:2002:
Year Ended December 31, 2003 Quarter Ended March 31, June 30, Sept. 30, Dec. 31, 2003(2) 2003 2003 2003 (In thousands, except per share amounts) Revenues $ 512,737 $ 595,475 $ 645,334 $ 581,818 $ 13,935 $ (13,918 ) $ 8,386 $ (61,092 ) Equity in income from investees $ 7,888 $ 5,237 $ 6,457 $ 8,800 Income (loss) from continuing operations before cumulative effect of accounting change $ 29,625 $ (60,547 ) $ 10,135 $ (81,371 ) Net income (loss) $ 35,546 $ (59,852 ) $ 11,784 $ (82,707 ) Earnings (loss) per common share: Basic: From continuing operations before cumulative effect of accounting change $ 0.47 $ (0.95 ) $ 0.16 $ (1.26 ) Net income (loss) $ 0.56 $ (0.94 ) $ 0.18 $ (1.28 ) Diluted: From continuing operations before cumulative effect of accounting change $ 0.46 $ (0.95 ) $ 0.15 $ (1.26 ) Net income (loss) $ 0.55 $ (0.94 ) $ 0.18 $ (1.28 )
Year Ended December 31, 2002 Quarter Ended ---------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 2002 2002 2002 2002 ---------------------------------------------------------------------- (In thousands, except per share amounts)Revenues $ 399,192 $ 465,709 $ 435,632 $ 448,148 Operating loss(1) $ (2,022) $ (237,480) $ (365,163) $ (69,095) EquityIncludes equity in income frominvestees $ 7,534 $ 2,418 $ 4,469 $ 13,271 Lossinvestees.
(2) Restated due to discontinued operations. See Note 17.
Year Ended December 31, 2002(2) Quarter Ended March 31, June 30, Sept. 30, Dec. 31, 2002 2002 2002 2002 (In thousands, except per share amounts) Revenues $ 397,924 $ 462,562 $ 430,937 $ 442,398 $ (1,311 ) $ (237,344 ) $ (367,239 ) $ (70,545 ) Equity in income from investees $ 7,534 $ 2,418 $ 4,469 $ 13,271 Loss from continuing operations $ (644 ) $ (235,405 ) $ (366,314 ) $ (185,603 ) Net loss $ (593 ) $ (234,216 ) $ (357,056 ) $ (184,529 ) Loss per common share: Basic and Diluted: From continuing operations $ (0.01 ) $ (3.82 ) $ (5.91 ) $ (2.96 ) Net Loss $ (0.01 ) $ (3.80 ) $ (5.76 ) $ (2.94 )
(1) Includes equity in income from continuing operations before extraordinary item $ (1,760) $ (234,972) $ (364,943) $ (184,529) Net loss $ (593) $ (234,216) $ (357,056) $ (184,529) Loss per common share: Basic and Diluted: From continuing operations before extraordinary item $ (0.03) $ (3.81) $ (5.88) $ (2.94) Net Loss $ (0.01) $ (3.80) $ (5.76) $ (2.94)investees.(2) Restated due to discontinued operations. See Note 17. (1) Includes equity in income from investees. Results101
Quarterly results for the
quarteryear endedMarchDecember 31,20022003 includean extraordinary gainincome or expense for the revaluation of$0.3 million, netcertain components oftaxes of $0.2 million,the estimated settlement cost related to theearly retirement of debt.Chapter 11 proceedings involving B&W as follows:
Income (expense), Quarter ended net of tax Related taxes (in millions) March 31, 2003 $ 23.6 $ 0.5 June 30, 2003 ($40.0 ) $ 0.6 September 30, 2003 $ 8.2 $ 1.5 December 31, 2003 ($9.8 ) $ 0.9 Results for the quarter ended June 30, 2002 include an impairment charge of $224.7 million to write off our net investment in B&W of $187.0 million and other related assets totaling $37.7 million.
Results for the quarter ended September 30, 2002 include an impairment charge of $313.0 million related to
JRM'sJRM’s goodwill and a gain on the sale of HPC of $9.4 million, net of taxes of $5.7 million, which is reported in discontinued operations.Results for the quarter ended December 31, 2002 include a provision for the estimated costs of the settlement of the B&W Chapter 11 proceedings of $110.0 million, including associated tax expense of $23.6 million.
Year Ended December 31, 2001 Quarter Ended ---------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 2001 2001 2001 2001 ---------------------------------------------------------------------- (In thousands, except per share amounts)Revenues $ 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) from continuing operations before extraordinary item $ (5,169) $ 7,257 $ 18,416 $ (44,926) Net income (loss) $ (4,433) $ 7,958 $ 19,345 $ (42,892) Earnings (loss) per common share: Basic: From continuing operations before extraordinary item $ (0.09) $ 0.12 $ 0.30 $ (0.73) Net income (loss) $ (0.07) $ 0.13 $ 0.32 $ (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)(1) Includes equity in income from investees. 95Results for the quarter ended December 31, 2001 include a pre-tax gain on our sale of MECL totaling $28.0 million, tax of approximately $85.4 million associated with the intended exercise of an intercompany stock purchase and sale agreement and an extraordinary item of $0.8 million, net of taxes of $0.5 million, related to the early retirement of debt.NOTE 19
-— EARNINGS (LOSS) PER SHAREThe following table sets forth the computation of basic and diluted earnings (loss) per share:
Year Ended 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 from discontinued operations 9,469 3,565 2,782 Extraordinary item 341 835 - --------------------------------------------------------------------------------------------------------- Net loss for basic computation $ (776,394) $ (20,022) $ (22,082) ========================================================================================================= Weighted average common shares 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 from discontinued operations $ 0.15 $ 0.06 $ 0.05 Extraordinary item $ 0.01 $ 0.01 $ - 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 341 835 - --------------------------------------------------------------------------------------------------------- Net loss for diluted computation $ (776,394) $ (20,022) $ (22,082) ========================================================================================================= Weighted average common shares (basic) 61,860,585 60,663,565 59,769,662 Effect of dilutive securities: Stock options and restricted stock - - - --------------------------------------------------------------------------------------------------------- Adjusted weighted average common shares and assumed conversions 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 from discontinued operations $ 0.15 $ 0.06 $ 0.05 Extraordinary item $ 0.01 $ 0.01 $ - Net loss $ (12.55) $ (0.33) $ (0.37)
Year Ended December 31, 2003 2002 2001 (In thousands, except shares and per share amounts) Basic and Diluted: Loss from continuing operations before cumulative effect of accounting change $ (102,158 ) $ (787,966 ) $ (25,282 ) Income from discontinued operations 3,219 11,572 5,260 Cumulative effect of accounting change 3,710 — —
Net loss for basic and diluted computation$ (95,229 ) $ (776,394) $ (20,022 )
Weighted average common shares 64,108,274 61,860,585 60,663,565 Basic and diluted earnings (loss) per common share: Loss from continuing operations before cumulative effect of accounting change $ (1.59 ) $ (12.74 ) $ (0.42 ) Income from discontinued operations $ 0.05 $ 0.19 $ 0.09 Cumulative effect of accounting change $ 0.05 $ — $ — Net loss $ (1.49 ) $ (12.55 ) $ (0.33 ) At December 31, 2003, 2002
2001and2000,2001, we excluded from the diluted share calculation incremental shares of 2,033,805 1,940,5111,983,314and1,050,242,1,983,314, respectively, related to stock options and restricted stock, as their effect would have been antidilutive.See Note 20 for information regarding shares that may be issued as part of the B&W settlement.
NOTE 20
-— THE BABCOCK & WILCOX COMPANYGeneral
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.(e.g., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes).102
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"“Bankruptcy Court”) to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc.(collectively, the 96"Debtors").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 April14, 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.12, 2004.Settlement Negotiations
We
are continuing our discussions with the ACC and FCR concerning a potential settlement. As a result of those discussions, wereached an agreement in principlein August 2002withrepresentatives ofthe ACC and the FCR concerning a potential settlement for the B&W Chapter 11 proceedings. That agreement in principle includes 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 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. 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 a 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 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 would be guaranteed by MII. • MII and all of its subsidiaries, including its captive insurers, and all of their respective directors and officers, would receive the full benefit of the protections afforded by Section 524(g) of the Bankruptcy Code with respect 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 kind 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 proposed settlement is conditioned on the approval by MII’s Board of Directors of the terms of the settlement outlined above. The proposed settlement has been reflected in a third amended joint plan of reorganization and accompanying form of settlement agreement filed by the parties with the Bankruptcy Court on
several key terms, which servedJune 25, 2003, and as amended through December 30, 2003, together with abasis for continuing negotiations; however, a numberthird amended joint disclosure statement filed on June 25, 2003. The Bankruptcy Court commenced hearings on the confirmation ofsignificant issuesthe proposed plan of reorganization on September 22, 2003. These hearings were completed at the Bankruptcy Court level on January 9, 2004, andnumerous details remain to be negotiatedthe record before the Bankruptcy Court has closed. The plan proponents andresolved. Shouldtheremaining issues and details not be negotiated and resolvedobjectors to themutual satisfactionplan filed proposed findings of fact and conclusions of law on February 17, 2004. Responses are due by March 15, 2004. It is uncertain how the Bankruptcy Court will proceed at that point or how long it will take for the Bankruptcy Court to issue its opinion and order respecting confirmation of theparties,plan, and it is also uncertain when and how theparties may be unableDistrict Court will take action after the Bankruptcy Court has issued its opinion and order.At a special meeting of our shareholders on December 17, 2003, our shareholders voted on and approved a resolution relating to a proposed settlement agreement that would resolve the B&W Chapter 11
proceedings through settlement. Additionally, the potential settlement will be subject to various conditions, including the requisiteproceedings. The shareholders’ approval of theasbestos claimants,resolution is conditioned on the subsequent approval of the proposed settlement by MII’s Board of Directors (the “Board”). We would become bound to the settlement agreement only when the plan of reorganization becomes effective, and the plan of reorganization cannot become effective without the approval of the Board within 30 days prior to the effective time of the plan. The Board’s decision will be made after consideration of any developments103
that might occur prior to the effective date, including any changes in the status of the Fairness in Asbestos Injury Resolution legislation pending in the United States Senate. According to documents filed with 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 those documents, 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 ofthe asbestos personal injuryclaimants. - 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. The resaleclaimants have voted in favor of theshares would beproposed B&W plan of reorganization sufficient to meet legal requirements.As noted above, the proposed settlement is subject to
certain limitations, in order to provide for an orderly meansapproval by MII’s Board ofselling the shares to the public. Certain salesDirectors. We expect that approval will be impacted by the progress of pending federal legislation entitled “The Fairness in Asbestos Injury Resolution Act of 2003” (Senate Bill 1125, the “FAIR Bill”). The FAIR Bill would create a privately funded, federally administered trustwould also be subjectfund toan 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 a 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 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 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 Bankruptcy Code with respect to personal injury claims attributable to B&W's use of asbestos and would be released and protected from allresolve pending and future asbestos-related personal injury claims. The bill has not been approved by the Senate and has not been introduced in the House of Representatives.Under the terms of the FAIR Bill as approved by the Senate Judiciary Committee, companies that have been defendants in asbestos personal injury litigation, as well as insurance companies, would contribute amounts to a national trust on a periodic basis to fund payment of claims
stemming fromfiled by asbestos personal injury claimants who qualify for payment under the FAIR Bill based on an allocation methodology the FAIR Bill specifies. The FAIR Bill also contemplates, among other things, that the national fund would terminate if the administrator could not certify that 95% of the previous year’s eligible claimants had been paid, in which case the claimants and defendants would return to the tort system. There are many other provisions in the FAIR Bill that would affect its impact on B&W's operations,&W and the other Debtors, the Chapter 11 proceedings and our company.It is not possible to determine whether the FAIR Bill will ever be presented for a vote or adopted by the full Senate or the House of Representatives, or whether the FAIR Bill will be signed into law. Nor is it possible at this time to predict the final terms of any bill that might become law or its impact on B&W and the other Debtors or the Chapter 11 proceedings. We anticipate that, during the legislative process, the terms of the FAIR Bill, as approved by the Senate Judiciary Committee, will change and that any such changes may be material to the FAIR Bill’s impact on B&W and the other Debtors. Many organized labor organizations, including the AFL-CIO, have indicated their opposition to the FAIR Bill, and the American Insurance Association, a national organization of insurance companies, has also expressed opposition to the FAIR Bill in the form approved by the Senate Judiciary Committee. In light of that opposition, as well as other
claims (whether contract claims, tort claimsfactors, we cannot currently predict whether the FAIR Bill will be enacted or,other claims) of any kind 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 settlementif enacted, how it wouldbe conditioned on the approval by MII's Board of Directors and stockholders of the terms of the settlement outlined above. 97As the settlement discussions proceed, we expect that some of the court proceedings in or relating toimpact the B&W Chapter 11case will continue and thatproceedings, theparties will continue to maintain theirDebtors or our company.As 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. Asnoted, as of December 31, 2002, wedetermined that a final settlement is probable andestablished an estimate for the cost of the proposed settlement of$110.0$110 million, including tax expense of $23.6 million, reflecting the present value of ourcontributions andcontemplatedpaymentscontributions to the trusts as outlined above. As of December 31, 2003, we have updated our estimated cost of the proposed settlement to reflect current conditions, and for the year ended December 31, 2003 we recorded an aggregate increase in the provision of $18.0 million, including associated tax expense of $3.4 million. The provision for the estimated cost of theB&Wproposed settlement is comprised of thefollowing (in thousands):following:
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 ===========
December 31, 2003 2002 (Unaudited) (In thousands) Promissory notes to be issued $ 86,733 $ 83,081 MII common shares to be issued 56,763 20,805 Share price guaranty obligation 26,921 42,026 Other 3,435 3,435 Estimated impact of tax separation and sharing agreement (34,690 ) (29,000 ) Forgiveness of certain intercompany balances (38,246 ) (33,970 ) Total $ 100,916 $ 86,377 Plus: tax expense 27,032 23,593 Net provision for estimated cost of settlement $ 127,948 $ 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, 2003 and 2002 of
$4.38.$11.95 and $4.38, respectively. The fair value of the share price guaranty obligation as of each of those dates was based on a present value calculation using our closing stock price onDecember 31, 2002,that date, assuming the number of shares to be issued is approximately 2.8 million and 12.5million.million at December 31, 2003 and 2002, respectively. Thevalueestimated impact of thefuturetaxreimbursementsseparation and sharing agreement was based onthe104
a present value of projected future tax reimbursements to be received
frompursuant to such arrangement between MI and B&W.TheIf the proposed settlement is finalized, the final value of the overall settlementand each of its componentsmay 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 proposed settlement on a quarterly basis and at the time the securities are issued.Upon issuanceIf the proposed settlement is finalized, it would generate significant tax benefits, which MI and B&W would share under the terms of
the debt and equity securities, we will record such amountsa proposed tax separation agreement. This tax separation agreement would allocate those tax benefits asliabilities or stockholders' equity based on the nature of the individual securities. Remaining Issuesfollows:
• MI would have the economic benefit of any tax deductions arising from the transfer of the MII common stock, payments on the MI promissory notes and any payments made under the share price guaranty; and • B&W would have the economic benefit of any tax deductions arising from the contribution of its common stock and any cash payments made to the trust, other than payments on the MI promissory notes or the share price guaranty. Neither B&W nor MI would be entitled to
be Resolved While the Chapter 11 reorganization proceedings continue to progress, there areanumber of issues and matters relateddeduction to theDebtors' asbestos liability toextent that the trust is funded through insurance proceeds or the proposed transfer of rights under various insurance policies. The proposed tax separation agreement provides that MI and B&W will beresolved priorentitled to theiremergencerespective economic benefits on a proportionate basis, as the deductions resulting from theproceedings. Remaining issuesproperty transferred to the trust are used to offset income of either the MI consolidated group or B&W.If the proposed settlement is not finalized, we would be subject to various risks and
matters to be resolved include, among other things,uncertainties associated with thefollowing: - the ultimatepending and future asbestos liability of B&W and theDebtors; -other Debtors (in theoutcomeabsence ofnegotiations withfederal legislation that comprehensively resolves those liabilities on terms that are not materially less favorable to us than theACC, the FCR and other participants in the Chapter 11 proceedings, concerning, among other things, the size and structureterms of thesettlement trustsproposed settlement). These risks and uncertainties include potential future rulings by the Bankruptcy Court that could be adverse tosatisfy the asbestos liabilityus and themeans for funding those trusts; - the outcome of negotiationsrisks and uncertainties associated withour insurers as to additional 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 98prohibits 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 theappeals 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 (collectively, the "Transfer Case"). See Note 10 for further information; - the outcome of objections and potential appeals involving approval2002.Remaining Issues to Be Resolved
Even assuming all requisite approvals of the
disclosure statementproposed plan of reorganization andconfirmationthe proposed settlement are obtained, there are a number of issues and matters to be resolved prior to finalization of theplan of reorganization; - final agreement regardingB&W Chapter 11 proceedings. Remaining issues and matters to be resolved include, among other things, theproposed 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.following:
• the ultimate asbestos liability of the Debtors; • the outcome of negotiations with our insurers as to additional amounts of coverage of the Debtors and their participation in the funding of the settlement trusts; • the Bankruptcy Court’s decisions relating to numerous substantive and procedural aspects of the Chapter 11 proceedings; • the outcome of objections, including by our insurers, and potential appeals involving approval of the disclosure statement and confirmation of the plan of reorganization; • conversion of B&W’s debtor-in-possession financing to exit financing; • the pension plan spin-off; • 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; and • other insurance-related issues. Insurance Coverage and
PendingClaimsPrior 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,
2002,2003, receivables of$23.1$20.7 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 theDebtors'Debtors’ assumption, in bankruptcy, of their pre-bankruptcy filing contractual reimbursement arrangements with such insurers.Pursuant to the Bankruptcy
Court'sCourt’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 otherasbestosasbestos-related personal injury claims, asbestos105
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
9,2008,910 as pre-Chapter 11 binding settled claims at this time, with an aggregate liability of approximately$77$69 million. The Bankruptcy Court has disallowed approximately 33,000 claims as settledclaims, and the Debtors are in the process of challenging virtually all the remainingclaims. If the Bankruptcy Courtdeterminesdetermined these claims were not settled prior to the filing of the Chapter 11 petition, these claimsmay bewere refiled as unsettled personal injury claims. As of July 30, 2001, approximately 223,000 additional asbestos personal injury claims, 60,000 related party claims,168183 property damage claims,212225 derivative asbestos claims and524571 claims relating to the Apollo/Parks Township facilities had been filed. Since the July 30, 2001 bar date, approximately13,00015,000 additional personal injury claims were filed, includingat least 2,000approximately 10,000 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. Approximately 3,900 additional related-party claims, 28 property damage claims, 218 derivative claims and three Apollo/Parks Township claims also were filed since the July 30, 2001 bar date. A bar date of January 15, 2003 was set for the filing of certain general unsecured claims. As of January 15, 2003,in excess ofapproximately 2,700 general unsecured claims were filed, and the Debtorshavecommenced an analysis of theseclaims. Although the analysis is incomplete, the Debtors have identified a numberclaims and filed objections to many ofclaims that they intend to contest, including approximately $183 million inthem. These include claims filed by various insurance companies seeking recovery from the Debtors under varioustheories. Additionally, approximately $788 million intheories, and 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, theThe Debtors believe thatthethese claims are without merit andintend to contestare contesting them. The Debtorswillcontinue to analyze theremaining claims.claims filed by the January 15, 2003 bar date. 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 the FCR filed briefs opposing the Litigation Protocol and requesting an estimation of pending and future claims.99No decision was rendered by the Court, and these matters were stayed pending the consensual settlement negotiations between the parties. Debtor-In-Possession Financing
In connection with the bankruptcy filing, the Debtors entered into
the DIPa $300 million debtor-in-possession revolving credit facility (the “DIP CreditFacilityFacility”), which was subsequently reduced to $227.5 million, with a group of lenders providing for athree-year term. The Bankruptcy Court approved the full amount of this facility, giving allterm currently scheduled to expire in February 2005. All amounts owed under the facility have a super-priority administrative expense status inbankruptcy.the bankruptcy proceedings. TheDebtors'Debtors’ obligations under the facility are (1) guaranteed by substantially all of B&W's&W’s other domestic subsidiaries and B&W Canada Ltd. and (2) secured by a security interest on B&W Canada Ltd.'s’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 Facilityeffectiveupon the defeasance or repayment ofMI'sMI’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 andnonperformancenon-performance 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 31,20022003 or2001.2002. The DIP Credit Facility also imposes certain financial and non-financial covenants on B&W and its subsidiaries. At December 31, 2003, B&W was in violation of one of the covenants due to a certain subsidiary entering into foreign currency forward exchange contracts without first inquiring whether the lenders were willing to provide such contracts. On March 5, 2004, B&W received a waiver from the lenders under the DIP Credit Facility to remedy this violation.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&W’s and itssubsidiaries'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"“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 31,2002,2003, approximately$140.9$169.2 million in letters of credithashad been issued under the DIP Credit Facility of which approximately$51.4$42.0 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. 100In the course of the conduct of B
&W's&W’s and itssubsidiaries'subsidiaries’ business, MII and MI have agreed to indemnify two surety companies for B&W's&W’s and itssubsidiaries'subsidiaries’ obligations under surety bonds issued in connection with their customer contracts. At December 31,2002,2003, the total value of B&W's&W’s and itssubsidiaries'subsidiaries’ customer contracts yet to be106
completed covered by such indemnity arrangements was approximately
$107.7$80.1 million, of which approximately$31.9$12.8 million relates to bonds issued after February 21, 2000.As to the guarantee and indemnity obligations related to B
&W's&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.Financial Results and Reorganization Items
Summarized financial data for B
&W's&W is as follows:INCOME STATEMENT INFORMATION
Year Ended December 31, 2003 2002 2001 (In thousands) Revenues $ 1,408,128 $ 1,497,401 $ 1,431,908 $ (7,604 ) $ (232,435 ) $ 35,377 Net Income (Loss) $ 1,274 $ (213,723 ) $ 17,499
(1) Includes a provision for an increase in B&W’s asbestos liability totaling $74.0 million and $287.0 million in the years ended December 31, 2003 and 2002, respectively. BALANCE SHEET INFORMATION
December 31, 2003 2002 (In thousands) Assets: Current Assets $ 701,380 $ 706,718 Noncurrent Assets 1,596,073 1,550,354
Total Assets $ 2,297,453 $ 2,257,072
Liabilities: Current Liabilities $ 504,033 $ 551,228 1,813,736 1,743,737 Stockholder’s Deficit (20,316 ) (37,893 )
Total Liabilities and Stockholder’s Equity (Deficit) $ 2,297,453 $ 2,257,072
(1) Includes liabilities subject to compromise of approximately $1.8 billion, which primarily result from asbestos-related issues. 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&W’s assets will be realized or that B&W's&W’s liabilities will be liquidated or settled for the amounts recorded. The independentaccountant'saccountant’s report on the separate consolidated financial statements of B&W for the years ended December 31, 2003, 20022001and20002001 includes an explanatory paragraph indicating that these issues raise substantial doubt about B&W's&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
-— RESTRICTED CASH AND LIQUIDITYAt December 31, 2003, we had total cash and cash equivalents of $355.3 million. However, our ability to use $180.5 million of these funds is restricted due to the following: $98.2 million serves as collateral for letters of credit; $5.4 million serves as collateral for foreign exchange trading and other financial obligations; $48.1 million is required to meet reinsurance reserve requirements of our captive insurance companies; $22.0 is temporarily reserved to
107
pay the next two succeeding payments of interest on the JRM Secured Notes as required by the indenture; and $6.8 million is held in restricted foreign accounts. The $22.0 million temporary interest reserve is required until the last to occur of (1) the acceptance by the customer under the existing construction contract for theDevils Towerproduction platform and (2) the acceptance by the customer under the existing construction contract for theFront Runnerproduction platform.
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
EPICSparprojects. 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.projects, theCarina Ariesproject and theBelanakFPSO project. Further, MI is restricted, as a result of covenants in its debt instruments, in its ability to transfer funds to MII andMII'sMII’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'sManagement’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 101vessels. 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.
• 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.Due primarily to the losses anticipated to be incurred on three Spar projects, theCarina Aries project and theBelanakFPSO project recorded during the years ended December 31, 2003 and 2002 (see Note 12), we expect JRM to experience negative cash flows for three of the four quarters in 2004. We intend to fund JRM’s negative cash flows with the proceeds from the JRM Secured Notes (see Note 5), other potential borrowings or credit facilities permitted under indenture governing the JRM Secured Notes, including a planned new letter of credit facility for JRM, and sales of nonstrategic assets, including certain marine vessels. However, with regard to asset sales, covenants in the indenture governing the JRM Secured Notes contain various restrictions on asset sales in excess of $10 million and generally prohibit JRM’s use of such proceeds to fund working capital needs. Also, if JRM experiences additional significant contract costs on its Spar projects, theCarina Ariesproject, theBelanakFPSO project or any other project 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 that may not be available to us or may be cost-prohibitive. • JRM’s Letters of Credit.JRM’s letters of credit are currently secured by collateral accounts funded with cash equal to 105% of the amount outstanding. Therefore, we are currently seeking a new letter of credit facility that would not require cash collateral, which is critical to JRM’s liquidity. If we are unable to obtain this new facility, JRM’s ability to pursue projects from customers who require letters of credit as a condition of award will be limited and JRM’s liquidity will continue to be restricted. Our ability to obtain a new letter of credit facility for JRM will depend on numerous factors, including JRM’s operating performance and overall market conditions, including conditions impacting potential third party lenders. • Outlook. If we are unable to obtain additional third party financing for a new letter of credit facility for JRM, obtain other borrowings or sell JRM assets, we expect JRM will be unable to meet its working capital needs. These factors, in addition to those outlined above, cause substantial doubt about JRM’s ability to continue as a going concern. JRM would have to consider various alternatives including a potential restructuring or filing for receivership. A Chapter 11 filing would be an event of default under the indenture governing JRM’s recently issued notes. Should JRM file to reorganize under Chapter 11, we believe MII and its other subsidiaries, including, MI, BWICO, BWXT and B&W would not be a party to these proceedings. In addition, MII, MI, BWICO, BWXT and B&W have assessed their ability to continue as viable businesses and have concluded that they can fund their operating activities and capital requirements. MII has not committed to support JRM should it be unable to acquire additional third party financing. However, there are numerous risks and uncertainties that could arise from a Chapter 11 filing of JRM and we can not fully predict its potential impact on MII and its other subsidiaries. As discussed in Note 10, MII has issued performance guarantees related to JRM construction contracts. A Chapter 11 filing by JRM would require us to give notice to the U.S. Pension Benefit Guaranty Corporation (the “PBGC”). This would cause the PBGC to consider, among other things, whether it would be prudent for them to involuntarily terminate the JRM pension plan. JRM is current on all required pension funding obligations to date. However, if the JRM qualified pension plan were terminated by the PBGC, we believe its termination liability would not exceed $55 million. If JRM were unable to meet this obligation, under law, MII and its other subsidiaries would be jointly and severally liable to make up any shortfall. Based on our experience in the B&W Chapter 11 proceedings, we believe that it is unlikely that the PBGC would exercise its right to terminate the JRM pension plan. However, if the JRM pension plan were terminated and JRM were unable to fully fund its termination liability, we believe that one or more of MII’s U.S. subsidiaries would be required to make up any shortfall. Although we do not believe that this is likely, based on the current liquidity forecast for our other U.S. subsidiaries, a $55 million shortfall could be met. Although we believe an action by the PBGC is remote, it could result in a potential event of default under the BWXT Credit Facility which could have material adverse impact on MII's liquidity. 108
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTSAUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSUREFor the years ended December 31, 2003, 2002
2001and2000,2001, we had no disagreements with PricewaterhouseCoopers LLP on any accounting or financial disclosure issues.PART IIIItem
10. DIRECTORS9A. CONTROLS ANDEXECUTIVE OFFICERS OF THE REGISTRANT Information required by this itemPROCEDURESIn accordance with
respect to directorsRules 13a-15 andexecutive officers is incorporated by reference to the material appearing15d-15 under theheadings "ElectionSecurities Act ofDirectors" and "Executive Officers" in The Proxy Statement for our 2003 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material appearing1934, we carried out an evaluation, under theheading "Compensationsupervision and with the participation ofExecutive Officers" in The Proxy Statement formanagement, including our2003 Annual Meeting of Stockholders. Item 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 Directorschief executive officer andExecutive Officers" and "Security Ownership of Certain Beneficial Owners" in The Proxy Statement for our 2003 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in Note 11 to our consolidatedchief financialstatements included in this report is incorporated by reference. 102Item 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 effectivenessofficer, of thedesign and operationeffectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934).as of the end of the period covered by this report. Based on that evaluation, ourChief Executive Officerchief executive officer andChief Financial Officerchief financial officer concluded thatthe design and operation ofour disclosure controls and procedures were effective as of December 31, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under thedateSecurities Exchange Act ofthat evaluation.1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. However, as we have disclosed in this report,for first-of-a-kind projects undertaken bywe have identified certain matters involving internal controls and operations of our Marine Construction Services segmentin recent periods, we have been unablewhich, among other things, impact our ability to forecast accurately total costs to complete fixed-price contracts, primarily first-of-a-kind projects, until we have performed all major phases of theproject. This has been primarily duework. In addition, our auditors have advised us that these matters are considered a “material weakness” in JRM’s ability tounexpected design and production inefficiencies and execution difficulties.accurately estimate costs to complete first-of-a-kind projects. 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, therehavehas been nosignificant changeschange in our internalcontrolscontrol over financial reporting that occurred during the three months ended December 31, 2003 that has materially affected, orin other factors that could significantlyis reasonably likely to materially affect,those controls subsequentour internal control over financial reporting.P A R T I I I
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors and executive officers is incorporated by reference to the
datematerial appearing under the headings “Election ofthe evaluation referred toDirectors” and “Executive Officers” in thefirst sentenceProxy Statement for our 2004 Annual Meeting of Stockholders.Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the material appearing under the heading “Compensation of Executive Officers” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to (1) the final table appearing in Item 5 – “Market for the Registrant’s Common Equity and Related Stockholder Matters” in Part II of this report and (2) the material appearing under the headings “Security Ownership of Directors and Executive Officers” and “Security Ownership of Certain Beneficial Owners” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Note 11 to our consolidated financial statements included in this report is incorporated by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the material appearing under the heading “Ratification of Retention of Independent Accountants for Fiscal Year 2004” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.
109
P A R T I V
Item 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
(a) The following documents are filed as part of this Annual Report or incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent
AccountantsAuditorsConsolidated Balance Sheets as of December 31,
20022003 and20012002Consolidated Statements of Loss for the Years Ended December 31, 2003, 2002
2001and20002001Consolidated Statements of Comprehensive
LossIncome (Loss) for the Years Ended December 31, 2003, 20022001and20002001Consolidated Statements of
Stockholders'Stockholders’ Equity (Deficit) for the Years Ended December 31, 2003, 20022001and20002001Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002
2001and20002001Notes to Consolidated Financial Statements for the Years Ended December 31, 2003, 2002
2001and2000 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES2001
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
3. EXHIBITS
Exhibit Number Description 3.1 McDermott International, Inc. 's’s Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of McDermott International, Inc.'s’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’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’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’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 initial103
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 certain of our consolidated subsidiaries are parties to other debt instruments under which the total amount of securities authorized does not exceed 10% of our total consolidated assets. Pursuant to paragraph 4(iii)(A) of Item 601 (b) of Regulation S-K, we agree to furnish a copy of those instruments to the Commission on request.
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 Report104
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: On 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 a 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 Azerbaijan 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. 105SIGNATURES 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/ Bruce W. Wilkinson ---------------------------- March 21, 2003 By: Bruce 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/ 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/ Richard E. Woolbert Director - -------------------------- Richard E. Woolbert March 21, 2003 106CERTIFICATIONS 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 107I, 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 108INDEX 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). 3.2 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 (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)). 4.2Omnibus 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. 110
Exhibit Number Description 4.5 Indenture dated as of December 9, 2003 among J. Ray McDermott, S.A., the guarantors party thereto and The Bank of New York, as trustee (the “JRM Indenture”). 4.6 Form of Mortgage related to the JRM Indenture. 4.7 Pledge Agreement dated as of December 9, 2003 among J. Ray McDermott, S.A., its subsidiaries party thereto and The Bank of New York, as collateral agent. 4.8 Revolving Credit Agreement dated as of December 9, 2003 among BWX Technologies, Inc., as borrower, certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial lenders named therein, Credit Lyonnais New York Branch, as administrative agent, and Credit Lyonnais Securities, as lead arranger and sole bookrunner. We and certain of our consolidated subsidiaries are parties to other debt instruments under which the total amount of securities authorized does not exceed 10% of our total consolidated assets. Pursuant to paragraph 4(iii)(A) of Item 601 (b) of Regulation S-K, we agree to furnish a copy of those instruments to the Commission on request. 10.1* McDermott International, Inc. 's’s Supplemental Executive Retirement Plan, as amended (incorporated by reference to Exhibit 10 of McDermott International, Inc.'s’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*10.2* Trust for Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10 to McDermott International, Inc. 's’s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1990 (File No. 1-08430)).10.4*10.3* McDermott International, Inc. 's’s 1994 Variable Supplemental Compensation Plan (incorporated by reference to Exhibit A to McDermott International, Inc.'s’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*10.4* McDermott International, Inc. 's’s 1987 Long-Term Performance Incentive Compensation Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s’s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1988 (File No. 1-08430)).10.6*10.5* McDermott International, Inc. 's’s 1992 Senior Management Stock Option Plan (incorporated by reference to Exhibit 10 of McDermott International, Inc.'s’s Annual Report onForm10-K/Form 10-K/A for fiscal year ended March 31, 1994 filed with the Commission on June 27, 1994 (File No. 1-08430)).10.7*10.6* McDermott International, Inc. 's’s 1992 Officer Stock Incentive Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s’s Annual Report on Form 10-K, as amended for the fiscal year ended March 31, 1992 (File No. 1-08430)).10.8*10.7* McDermott International, Inc. 's’s 1992 Directors Stock Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s’s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1992 (File No. 1-08430)).111
SequentiallyExhibit NumberedNumberDescription Pages - ------ ----------- -----10.9*10.8* McDermott International, Inc. 's’s Restated 1996 Officer Long-Term Incentive Plan, as amended (incorporated by reference to Appendix B to McDermott International, Inc.'s’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*10.9* McDermott International, Inc. 's’s 1997 Director Stock Program (incorporated by reference to Appendix A to McDermott International, Inc.'s’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 between10.10 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’s 2001 Directors & Officers Long-Term Incentive Plan (incorporated by reference to Appendix A to McDermott International, Inc.'s’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)).10.11 Purchase Agreement dated as of December 9, 2003 among J. Ray McDermott, S.A., the guarantors named therein and Morgan Stanley & Co. Incorporated. 10.12 Registration Rights Agreement dated December 9, 2003 among J. Ray McDermott, S.A., the guarantors named therein and Morgan Stanley & Co. Incorporated. 12.1 Ratio of Earnings to Fixed Charges. 21.1 Significant Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants.Auditors.31.1 Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer. 32.1 Section 1350 certification of Chief Executive Officer. 32.2 Section 1350 certification of Chief Financial Officer.
* 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: On November 5, 2003, we furnished to the SEC a current report on Form 8-K dated November 4, 2003, relating to our press release regarding our earnings for the third quarter of 2003, under Item 12 – Results of Operations and Financial Condition.
On November 19, 2003, we furnished to the SEC a current report on Form 8-K dated November 19, 2003, relating to a presentation made to members of the financial community, under Items 9 and 12 – Regulation FD Disclosure and Results of Operations and Financial Condition.
On March 1, 2004, we furnished to the SEC a current report on Form 8-K dated March 1, 2004, relating to our press release regarding major items expected for the fourth quarter of 2003 and our outlook for 2004, under Item 12 – Results of Operations and Financial Condition.
On March 12, 2004, we furnished to the SEC a current report on Form 8-K dated March 11, 2004, relating to our press release regarding our earnings for the fourth quarter of 2003, under Item 12 – Results of Operations and Financial Condition.
112
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/ Bruce W. Wilkinson March 11, 2004 By: Bruce W. Wilkinson
Chairman of the Board and Chief Executive OfficerPursuant 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/ Bruce W. Wilkinson
Bruce W. WilkinsonChairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)/s/ Francis S. Kalman
Francis S. KalmanExecutive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)/s/ Philip J. Burguieres
Philip J. BurguieresDirector /s/ Ronald C. Cambre
Ronald C. CambreDirector /s/ Bruce DeMars
Bruce DeMarsDirector /s/ Joe B. Foster
Joe B. FosterDirector /s/ Robert L. Howard
Robert L. HowardDirector /s/ John W. Johnstone, Jr.
John W. Johnstone, Jr.Director /s/ D. Bradley McWilliams
D. Bradley McWilliamsDirector /s/ Thomas C. Schievelbein
Thomas C. SchievelbeinDirector /s/ Richard E. Woolbert
Richard E. WoolbertDirector March 11, 2004 113
INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Description Pages 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 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. 4.5 Indenture dated as of December 9, 2003 among J. Ray McDermott, S.A., the guarantors party thereto and The Bank of New York, as trustee (the “JRM Indenture”). 4.6 Form of Mortgage related to the JRM Indenture. 4.7 Pledge Agreement dated as of December 9, 2003 among J. Ray McDermott, S.A., its subsidiaries party thereto and The Bank of New York, as collateral agent. 4.8 Revolving Credit Agreement dated as of December 9, 2003 among BWX Technologies, Inc., as borrower, certain subsidiaries of BWX Technologies, Inc. as guarantors, the initial lenders named therein, Credit Lyonnais New York Branch, as administrative agent, and Credit Lyonnais Securities, as lead arranger and sole bookrunner. 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* 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)). 10.3* 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)).
Sequentially Exhibit Numbered Number Description Pages 10.4* 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)). 10.5* McDermott International, Inc.’s 1992 Senior Management Stock Option Plan (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)). 10.6* 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)). 10.7* 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)). 10.8* 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)). 10.9* 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)). 10.10 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)). 10.11 Purchase Agreement dated as of December 9, 2003 among J. Ray McDermott, S.A., the guarantors named therein and Morgan Stanley & Co. Incorporated. 10.12 Registration Rights Agreement dated December 9, 2003 among J. Ray McDermott, S.A., the guarantors named therein and Morgan Stanley & Co. Incorporated. 12.1 Ratio of Earnings to Fixed Charges. 21.1 Significant Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 31.1 Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer. 32.1 Section 1350 certification of Chief Executive Officer. 32.2 Section 1350 certification of Chief Financial Officer.