UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 2001March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Identification No.)
Incorporation or Organization) Identification No.)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's Common Stock at October 26,
2001April 30, 2002
was 61,683,001.63,022,339.
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001March 31, 2002 and December 31, 2000 32001 4
Condensed Consolidated Statements of IncomeLoss
Three and Nine Months Ended September 30,March 31, 2002 and 2001 and 2000 56
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended September 30,March 31, 2002 and 2001 and 2000 67
Condensed Consolidated Statements of Cash Flows
NineThree Months Ended September 30,March 31, 2002 and 2001 and 2000 78
Notes to Condensed Consolidated Financial Statements 910
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 2833
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 41
Item 2 - Change in Securities and Use of Proceeds 4144
Item 6 - Exhibits and Reports on Form 8-K 4244
SIGNATURES 4345
Exhibit 3.3 - Amended and Restated Certificate of Designation of Series D
Participating Preferred Stock
2
PART I
-McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,March 31, December 31,
2002 2001
2000
------------------------- ------------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 90,643146,235 $ 84,620196,912
Investments -- 34,440158,000
Accounts receivable - trade, net 204,589 181,422192,916 139,598
Accounts receivable from The Babcock & Wilcox Company 6,785 12,3087,201 3,681
Accounts receivable - unconsolidated affiliates 83,843 31,15538,308 69,368
Accounts receivable - other 40,744 54,662
Environmental liabilities recoverable - current 1,878 1,52737,373 34,833
Contracts in progress 106,987 90,14293,249 97,326
Inventories 7,949 11,7331,760 1,825
Deferred income taxes 67,297 56,80560,649 59,370
Other current assets 17,189 28,022
-------------52,886 52,490
------------ ------------
Total Current Assets 627,904 586,836
-------------630,577 813,403
------------ ------------
Property, Plant and Equipment 1,255,015 1,239,5541,224,121 1,218,650
Less accumulated depreciation 893,455 874,198
-------------868,106 864,751
------------ ------------
Net Property, Plant and Equipment 361,560 365,356
-------------356,015 353,899
------------ Investments:
Government obligations 286,177 280,208
Other investments 44,623 46,547
------------- ------------
Total Investments 330,800 326,755
-------------in Debt Securities 171,629 173,003
------------ ------------
Investment in The Babcock & Wilcox Company 186,966 186,966
------------------------- ------------
Accounts Receivable from The Babcock & Wilcox Company 18,193 18,193
-------------18,202 17,489
------------ ------------
Goodwill less Accumulated Amortization of $65,368,000 at
September 30, 2001 and $50,579,000 at December 31, 2000 336,061 350,939
-------------330,579 330,705
------------ ------------
Prepaid Pension Costs 152,205 134,307
-------------150,557 152,510
------------ ------------
Other Assets 88,477 86,275
-------------80,509 75,865
------------ ------------
TOTAL $ 2,102,1661,925,034 $ 2,055,627
=============2,103,840
============ ============
See accompanying notes to condensed consolidated financial statements.
34
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,March 31, December 31,
2002 2001
2000
------------------------- ------------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 254,9041,322 $ 96,346209,506
Accounts payable 131,175 114,184106,868 118,811
Accounts and notes payable to The Babcock & Wilcox Company 49,431 53,073
Environmental liabilities - current 4,766 6,16237,920 34,098
Accrued employee benefits 65,330 57,57867,985 91,596
Accrued contract costs 27,738 32,86724,565 26,367
Advance billings on contracts 125,540 71,612232,056 170,329
U.S. and foreign income taxes payable 101,183 123,985
Other current liabilities 275,629 258,405
-------------202,900 203,695
------------ ------------
Total Current Liabilities 934,513 690,227
-------------774,799 978,387
------------ ------------
Long-Term Debt 96,589 323,157
-------------100,114 100,393
------------ ------------
Accumulated Postretirement Benefit Obligation 28,261 28,276
-------------27,373 23,536
------------ ------------
Environmental and Products Liabilities 14,483 10,294
-------------11,997 15,083
------------ ------------
Self-Insurance 77,067 67,878
------------ ------------
Other Liabilities 219,461 227,070
-------------154,993 148,453
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 63,396,01664,662,126 at
September 30,
2001March 31, 2002 and 62,582,38263,733,257 at December 31, 2000 63,396 62,5822001 64,662 63,733
Capital in excess of par value 1,069,680 1,062,5111,085,969 1,077,148
Accumulated deficit (208,032) (230,902)(251,517) (250,924)
Treasury stock at cost, 2,005,7922,045,792 shares at September 30,
2001March 31,
2002 and 2,005,0422,005,792 at December 31, 2000 (62,736)2001 (62,776) (62,736)
Accumulated other comprehensive loss (53,449) (54,852)
-------------(57,647) (57,111)
------------ ------------
Total Stockholders' Equity 808,859 776,603
-------------778,691 770,110
------------ ------------
TOTAL $ 2,102,1661,925,034 $ 2,055,627
=============2,103,840
============ ============
45
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMELOSS
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
2002 2001
2000 2001 2000
------------ ------------ ------------ ----------------------- -----------
(Unaudited)
(In thousands, except per share amounts)
Revenues $ 591,169399,192 $ 390,961 $ 1,519,718 $ 1,469,960
------------ ------------ ------------ ------------410,524
----------- -----------
Costs and Expenses:
Cost of operations 517,561 340,343 1,330,324 1,293,030366,579 369,315
Selling, general and
administrative expenses 51,242 43,561 152,791 142,022
------------ ------------ ------------ ------------
Total Costs and Expenses 568,803 383,904 1,483,115 1,435,052
------------ ------------ ------------ ------------42,169 41,247
----------- -----------
408,748 410,562
----------- -----------
Equity in income (loss)Income of investees 11,246 5,692 24,124 (14,582)
------------ ------------ ------------ ------------Investees 7,534 4,921
----------- -----------
Operating Income 33,612 12,749 60,727 20,326
------------ ------------ ------------ ------------(Loss) (2,022) 4,883
----------- -----------
Other Income (Expense):
Interest income 5,056 6,558 15,687 20,5963,480 5,848
Interest expense (11,871) (12,871) (31,652) (32,672)(7,165) (10,131)
Other-net 753 272 (829) 5,534
------------ ------------ ------------ ------------1,698 (2,211)
----------- -----------
Total Other Expense (6,062) (6,041) (16,794) (6,542)
------------ ------------ ------------ ------------
Income(1,987) (6,494)
Loss from Continuing Operations before
Provision for (Benefit from) Income Taxes
27,550 6,708 43,933 13,784and Extraordinary Item (4,009) (1,611)
Provision for (Benefit from) Income Taxes 8,205 1,086 21,063 10,342
------------ ------------ ------------ ------------(2,249) 3,558
----------- -----------
Loss from Continuing Operations
before Extraordinary Item (1,760) (5,169)
Income from Discontinued Operations 826 736
----------- -----------
Loss before Extraordinary Item (934) (4,433)
Extraordinary Item, net of taxes of $184,000 341 --
----------- -----------
Net IncomeLoss $ 19,345(593) $ 5,622 $ 22,870 $ 3,442
============ ============ ============ ============
Earnings(4,433)
=========== ===========
Loss per Common Share:
Basic
Loss from Continuing Operations
before Extraordinary Item $ 0.32(0.03) $ 0.09(0.09)
Net Loss $ 0.38(0.01) $ 0.06(0.07)
Diluted
Loss from Continuing Operations
before Extraordinary Item $ 0.31(0.03) $ 0.09(0.09)
Net Loss $ 0.37(0.01) $ 0.06
============ ============ ============ ============
Cash Dividends:
Per Common Share $ -- $ -- $ -- $ 0.10
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Unaudited)
(In thousands)
Net Income $ 19,345 $ 5,622 $ 22,870 $ 3,442
---------- ---------- ---------- ----------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (2,005) (11,158) (3,035) (14,490)
Unrealized losses on derivative financial instruments:
Unrealized losses on derivative financial
instruments (1,355) -- (2,289) --
Reclassification adjustment for losses included
in net income 113 -- 113
Unrealized gains on investments:
Unrealized gains arising during the period,
net of taxes (benefits) of $30,000 in the nine
months ended September 30, 2001 and
($111,000) and ($159,000), respectively, in the three
and nine months ended September 30, 2000 3,380 3,385 8,853 4,136
Reclassification adjustment for gains included
in net income, net of tax benefits of $162,000
in the nine months ended September 30, 2001 (3,351) (18) (2,239) (8)
---------- ---------- ---------- ----------
Other Comprehensive Income (Loss) (3,218) (7,791) 1,403 (10,362)
---------- ---------- ---------- ----------
Comprehensive Income (Loss) $ 16,127 $ (2,169) $ 24,273 $ (6,920)
========== ========== ========== ==========(0.07)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended
March 31,
2002 2001
---------- ----------
(Unaudited)
(In thousands)
Net Loss $ (593) $ (4,433)
---------- ----------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (493) 120
Unrealized gains (losses) on derivative financial instruments:
Unrealized gains (losses) on derivative financial instruments 1,192 (1,200)
Reclassification adjustment for losses included in net income 192 --
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period,
net of taxes (benefits) of $30,000 at March 31, 2001 (512) 4,077
Reclassification adjustment for (gains) losses
included in net income, net of tax benefit of
$162,000 at March 31, 2001 (915) 1,955
---------- ----------
Other Comprehensive Income (Loss) (536) 4,952
---------- ----------
Comprehensive Income (Loss) $ (1,129) $ 519
========== ==========
See accompanying notes to condensed consolidated financial statements.
7
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NineThree Months Ended
September 30,March 31,
2002 2001 2000
---------- ----------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net IncomeLoss $ 22,870(593) $ 3,442(4,433)
---------- ----------
Adjustments to reconcile net incomeloss to net
cash provided by (used in)(used) in operating activities:
Depreciation and amortization 48,069 47,2909,103 14,286
Income or loss of investees, less dividends (3,668) 21,449(5,558) (3,551)
Gain on asset disposals and impairments - net (1,468) (2,213)(76) (525)
Provision for deferred taxes 8,792 6,820
Deconsolidation of The Babcock & Wilcox Company9,537 799
Extraordinary gain (341) --
(19,424)
Other 4,945 6,1963,726 4,690
Changes in assets and liabilities, net of effects
of acquisitions and divestitures:
Accounts receivable (58,090) 63,799(32,343) (12,862)
Net contracts in progress and advance billings 37,943 (27,587)65,931 16,947
Accounts payable 13,982 (7,029)(7,965) (4,358)
Accrued and other current liabilities 12,887 (31,277)(2,125) (19,427)
Products and environmental liabilities 2,442 (11,157)(308) (1,651)
Other, net (24,115) (113,266)
Proceeds from insurance for products liability claims -- 26,427
Payments of products liability claims -- (23,782)(35,964) (2,728)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 64,589 (60,312)3,024 (12,813)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (27,644) (46,335)(10,558) (7,764)
Purchases of available-for-sale securities (929,393) (98,706)(646,992) (348,883)
Sales of available-for-sale securities 815,690 24,749737,819 355,875
Maturities of available-for-sale securities 147,801 87,14167,103 33,026
Proceeds from asset disposals 3,002 4,57976 543
Other (645) 500-- (1,366)
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 8,811 (28,072)
---------- ----------147,448 31,431
========== ==========
78
CONTINUED
NineThree Months Ended
September 30,March 31,
2002 2001 2000
---------- ----------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (239)(208,309) $ (2)(27)
Increase (decrease) in short-term borrowing (66,286) 42,278667 (48,838)
Issuance of common stock 65 2
Dividends paid -- (8,972)1,672 180
Other (90) 3,9204,856 3,101
---------- ----------
NET CASH PROVIDED BY (USED IN)USED IN FINANCING ACTIVITIES (66,550) 37,226(201,114) (45,584)
---------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (827) (434)(35) (617)
---------- ----------
NET INCREASE (DECREASE )DECREASE IN CASH AND CASH EQUIVALENTS 6,023 (51,592)(50,677) (27,583)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 196,912 84,620 162,734
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 90,643146,235 $ 111,142
========== ==========57,037
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 33,24911,540 $ 37,98914,317
Income taxes - net $ 7,01415,132 $ 6,198
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Deconsolidation of The Babcock & Wilcox Company debt $ -- $ 4,7602,146
========== ==========
See accompanying notes to condensed consolidated financial statements.
89
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001MARCH 31, 2002
NOTE 1 - BASIS OF PRESENTATION
We have presented our condensed consolidated financial statements in U.S.
Dollars in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information.
Accordingly, they do not include all of the information and GAAP footnotes
required for complete financial statements. We have included all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. These condensed 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.influence
over. We have eliminated all significant intercompany transactions and accounts.
We have reclassified certain amounts previously reported to conform with the
presentation at and for the three- and nine-month periodsthree-month period ended September 30,
2001.March 31, 2002.
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which includes:
o J. Ray McDermott, S.A. ("JRM"), a Panamanian subsidiary of MII, and
its consolidated subsidiaries;
o McDermott Incorporated ("MI"), a Delaware subsidiary of MII, and its
consolidated subsidiaries;
o Babcock & Wilcox Investment Company ("BWICO"), a Delaware subsidiary
of MI;
o BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and
its consolidated subsidiaries; and
o The Babcock & Wilcox Company ("B&W"), an unconsolidated Delaware
subsidiary of BWICO.
Operating results for the three and nine months ended September 30, 2001March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001.2002. For further information, refer to the consolidated financial statements
and related footnotes thereto included in MII's annual report on Form 10-K for the year
ended December 31, 2000.2001.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve their asbestos liability. B&W and its
subsidiaries are committed to operating their businesses as normal, delivering
products and services as usual and pursuing new contracts and growth
opportunities. However, asAs of February
22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy
Court and, as a result, our access to cash flows of B&W and its subsidiaries is
restricted.
910
Due to the bankruptcy filing, beginning on February 22, 2000, we no longer
consolidate B&W's financial results in our condensed consolidated financial
statements, and we present our investment in B&W on the cost method. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based on the applicable circumstances and facts and circumstances at thatsuch time,
including the terms of any plan of reorganization. The filing results in
increased uncertainty with respect to the amounts, means and timing of the
ultimate settlement of asbestos claims and the recovery of MII's net investment
in B&W which was $186,966,000 at September 30, 2001, and is subjectMarch 31, 2002. We monitor B&W's Chapter 11
reorganization proceedings for developments that could result in material
adjustments to, periodic
reviews for recoverability.including the write-off of, the carrying value of MII's
investment in B&W during any fiscal quarter or year. At September 30, 2001,March 31, 2002, the book
value of the underlying net assets of B&W exceededexceeds MII's investment by
$2,018,000. See Notes 4 and 8 for recent events
regarding the bankruptcy proceedings and other risk issues.$2,052,000. See Note 89 for the condensed consolidated financial information of
B&W.
Effective January 1, 2001,2002, based on a review performed by the company and
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 improved
our operating income by approximately $429,000 for the three months ended March
31, 2002.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, which adds to the guidance related to
accounting for derivative instruments and hedging activities. SFAS No. 133
requires us to recognize all derivatives on our consolidated balance sheet at
their fair values. Our initial adoption of SFAS No. 133, as amended by SFAS No.
138, had no material effect on our consolidated financial position or results of
operations.
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. SFAS No. 141 also establishes criteria
for the separate recognition of intangible assets acquired in a business
combination. The adoption of SFAS No. 141 will have no effect on our
consolidated financial position or results of operations. SFAS No. 142
requires that goodwillwe no longer be amortized to earnings,amortize goodwill, but instead be subject toperform periodic
testing for impairment. We have not yet completed the first step of our
transitional goodwill impairment test for the goodwill associated with The
Babcock & Wilcox Company; however, we do not currently expect to incur a
material transition goodwill impairment charge as of January 1, 2002. See Note 8
for a 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. 142 is effective144, "Accounting for fiscal years
beginning after December 15, 2001. For the
nine months ended September 30, 2001,
we had amortized approximately $14,787,000Impairment or Disposal of goodwill. We are reviewing the
effectLong-Lived Assets." SFAS No. 142 will have144 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
consolidated financial position or results
ofdiscontinued operations.
11
In June 2001, the FASBFinancial Accounting Standards Board 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 upon settlement.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We are
reviewing the effect SFAS No. 143 will have on our consolidated financial
position orand results of operations.
10
In August 2001, the FASB issuedNOTE 2 - DISCONTINUED OPERATIONS
As of March 31, 2002, we have classified our subsidiary Hudson Products
Corporation ("HPC"), a component of our Industrial Operations segment, as an
asset held for sale in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets.Assets," SFAS No. 144 addresses financial accounting and
reportingwhich we adopted on January 1,
2002. Accordingly, we have reported the results of operations for HPC in
discontinued operations. The condensed consolidated statement of loss for the
impairment or disposalthree months ended March 31, 2001 has been restated for consistency to reflect
the current year treatment of long-lived assets. It supersedes
SFAS No. 121, "AccountingHPC as a discontinued operation. Condensed
financial information for our operations reported in discontinued operations
follows:
Three Months Ended
March 31,
2002 2001
---------- ----------
(Unaudited)
(In thousands)
Revenues $ 16,065 $ 22,211
Income before Provision for Income Taxes $ 1,171 $ 1,113
We have reported the Impairment of Long-Lived assets and liabilities of HPC in our condensed consolidated
balance sheets as held 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. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. We have not yet determined the effect
SFAS No. 144 will have on our consolidated financial position or results of
operations.sale, as follows:
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
(In thousands)
Other current assets $ 33,244 $ 31,426
Other current liabilities $ 9,488 $ 8,902
12
NOTE 23 - INVENTORIES
Inventories are as follows:summarized below:
September 30,March 31, December 31,
2002 2001 2000
------------- ------------
(Unaudited)
(In thousands)
Raw Materials and Supplies $ 5,4821,603 $ 7,4121,733
Work in Progress 763 1,895
Finished Goods 1,704 2,426$ 157 $ 92
------------ ------------- ------------
Total Inventories $ 7,9491,760 $ 11,7331,825
============ ============= ============
NOTE 34 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
September 30,March 31, December 31,
2002 2001
2000
------------------------ ------------
(Unaudited)
(In thousands)
Currency Translation Adjustments $ (50,124)(50,895) $ (47,089)(50,402)
Net Unrealized Gain (Loss) on Investments 1,772 (4,842)(126) 1,301
Net Unrealized Loss on Derivative Financial Instruments (2,176) --(856) (2,240)
Minimum Pension Liability (2,921) (2,921)
------------- ------------(5,770) (5,770)
----------- -----------
Accumulated Other Comprehensive Loss $ (53,449)(57,647) $ (54,852)
============= ============(57,111)
=========== ===========
NOTE 45 - INVESTIGATIONS AND LITIGATION
On March 12, 2001, the plaintiffs' motion for rehearing en banc was denied by
the U.S. Fifth Circuit Court of Appeals for the Fifth Circuit in the December 1998 lawsuit
filed by Den norske stats oljeselskap a.s. and several related entities against
MII, JRM and others arising from alleged anti-competitive activities. The
plaintiffs have
filed a petition for writ of certiorari to the United StatesU.S. Supreme Court. By
order issued October 1, 2001, the
11
Supreme Court invited the Solicitor General of
the United States to file a brief expressing the view of the United States on
the issues presented in the writ application. On DecemberFebruary 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, 2000, lawsuits were filed by a number of Norwegian oil companies
against MII, Heeremac,2002, the U.S. Supreme
Court denied the motion for rehearing. On April 23, 2002, British Gas, Heerema
and Saipem S.p.A.MII executed an agreement to settle the British Gas anti-trust claims
against Heerema and MII, which claims were previously included in the Phillips
and Shell litigations.
In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for violationsTexaco Exploration and Production, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of the Norwegian
Pricing Act of 1953 in connectionmodule. 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 projects in Norway. Plaintiffs include
Norwegian affiliates of various of the plaintiffsanother
contractor and uninsured losses. This lawsuit was filed in the
Shell civil case
pending in Houston. Most of the projects were performed by Saipem S.p.A. or its
affiliates, with some by Heerema/HeereMac and none by JRM. We understand that
the conduct alleged by plaintiffs is the same conduct which plaintiffs allege in
the U.S. civil cases. The cases were heard by the Conciliation Boards in Norway
during the first week of October 2001. In all instances, the Boards referred the
cases to the court of first instance for further proceedings. The plaintiffs
have one year to proceed with the cases.
In 1998, B&W settled all pending and future punitive damage claims in the
lawsuit filed against B&W and Atlantic Richfield by Donald F. Hall, Mary Ann
Hall and others (the "Hall Litigation") for $8,000,000 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 nuclear insurers; and (2) the scope of
the nuclear insurers' defense obligations to B&W under these policies. With
respect to the trigger of coverage, the Pennsylvania State Court held that a
"manifestation" trigger applied 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
$320,000,000. With respect to the nuclear insurers' duty to defend B&W, the
Court held that B&W is entitled to separate and independent counsel funded by
the nuclear insurers. On May 21, 2001, the Court granted the insurers' motion
for reconsideration of the April 25, 2001 order. On October 1, 2001, the Court
entered its order reaffirming its original substantive insurance coverage
rulings and further certified the order for immediate appeal by any party. The
plaintiffs' remaining claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W filed a
complaint for declaratory and injunctive relief with the Bankruptcy Court
seeking to stay the pursuit of the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied
in October 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001,
the United States13
U. S. District Court for the Eastern District of Louisiana affirmedagainst a number of
parties, some of which brought third-party claims against the Bankruptcy Court's Order. B&W has appealedOperator
Subsidiary and another subsidiary of JRM, the decisionowner of the vessel which
attempted the lift of the deck module (the "Owner Subsidiary"). Both the Owner
Subsidiary and the Operator Subsidiary were subsequently tendered as direct
defendants to Texaco. In addition to Texaco's claims in the federal court
action, damages for the loss of the south deck module have been sought by
Texaco's builder risk insurers in claims against the Owner Subsidiary and the
other defendants, excluding the Operator Subsidiary, which was an additional
insured under the policy. Total damages sought by Texaco and its builder risk
insurers in the federal court proceeding approximate $250 million. Texaco's
federal court claims against the Operator Subsidiary were stayed in favor of a
pending binding arbitration proceeding between them required by contract, which
the Operator Subsidiary initiated to collect $23 million due for work performed
under the contract, and in which Texaco also sought consequential damages and
uninsured losses. The federal court trial, on the issue of liability only,
commenced in October 2001. On March 27, 2002, the Court orally found that the
Owner Subsidiary was liable to Texaco, specifically finding that Texaco had
failed to sustain its burden of proof against all named defendants except the
Owner Subsidiary relative to liability issues, and, alternatively, that the
Operator Subsidiary's highly extraordinary negligence served as a superceding
cause of the loss. The finding was subsequently set forth in a written order
dated April 5, 2002, which found against the Owner Subsidiary on the claims of
Texaco's builder risk insurers in addition to the United States
Fifth Circuit Courtclaims of Appeals.Texaco. The judge
has neither entered a final judgment nor issued a written opinion on this
matter. On May 6, 2002, the Owner Subsidiary filed a notice of appeal of the
April 5, 2002 order, which we believe is unsupported under the applicable law
and facts. The matter has recently been transferred to a new district court
judge and no trial date has yet been set for damages and certain insurance
issues. The trial in the arbitration proceeding, which was set to begin in
January 2002, was delayed for procedural reasons. We expect a new date will be
set for the arbitration trial. Although the Owner Subsidiary is not a party to
the arbitration, we believe that allthe claims under
12
against the Hall Litigation will be resolved withinOwner Subsidiary, like
those against the limitsOperator Subsidiary, are governed by the contractual
provisions which require arbitration and waive the recovery of coverage of our
insurance policies; however,consequential
damages against the Operator Subsidiary and its affiliates. We plan to
vigorously pursue the arbitration proceeding and any appeals process in the
federal court action, and we do not believe that a material loss with respect to
these matters is likely. In addition, we are evaluating our insurance coverage
may not be adequate and we
may be materially adversely impacted if our liabilities exceed our coverage. B&W
transferredin the two facilities subject toevent of any liability. However, the Hall Litigation to BWXT in June
1997 in connection with BWXT's formationultimate outcome of the proceedings
is uncertain, and an overall corporate restructuring.
On April 25, 2001, the plaintiffs-appellantsadverse ruling in the class action complaints
against MIIeither proceeding could have a material
adverse impact on our consolidated financial position, results of operations and
two of its executive officers alleging violation of federal
securities laws filed a motion to voluntarily dismiss their appeal, and the
appeal was dismissed by the U.S. Fifth Circuit Court on April 26, 2001.cash flow.
In early April 2001, a group of insurers (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the B&W
Chapter 11 proceeding in the U.S. District Court for the Eastern District of
Louisiana and (2) a declaratory judgment complaint against B&W in the U.S.
Bankruptcy
Court, for the Eastern District of Louisiana, which actions have been
14
consolidated before the U.S. District Court for the Eastern District of
Louisiana, which has jurisdiction over portions of the B&W Chapter 11
proceeding. The insurance policies at issue in this litigation provide a
significant portion of B&W's excess liability coverage available for the
resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions
of a settlementan agreement they entered into with these Plaintiff Insurers relating to
insurance payments by the Plaintiff Insurers as a result of asbestos claims.
They also allege that MII and B&W have wrongfully attempted to expand the
underwriters' obligations under that settlement agreement and the applicable
policies through the filing of a plan of reorganization in the B&W bankruptcy
proceeding that contemplates the transfer of rights under that agreement and
those policies to a trust that will manage the pending and future
asbestos-related claims against B&W and certain of its affiliates. The
complaints seek declarations that, among other things, the defendants are in
material breach of the settlement agreement with the Plaintiff Insurers and that
the Plaintiff Insurers owe no further obligations to MII and B&W under that
agreement. With respect to the insurance policies, if the Plaintiff Insurers
should succeed in terminating the settlement agreement, they seek to litigate
issues under the policies in order to reduce their coverage obligations. The
complaint against MII also seeks a recovery of unspecified compensatory damages.
B&W has filed a counterclaim against the Plaintiff Insurers which asserts a claim
for breach of contract for amounts owed and unpaid under the settlement
agreement, as well as a claim for anticipatory breach for amounts that will be
owed in the future under the settlement agreement. B&W seeks a declaratory
judgment as to B&W's rights and the obligations of the Plaintiff Insurers and
other London Market insurers under the settlement agreement and under their
respective insurance policies with respect to asbestos claims. The consolidated
actions have been set for trial on
13
April 15, 2002. Discovery is proceeding in the consolidated actions, and the
Court has permitted the asbestos claimants committee and the future claimants'
representative to intervene in the litigation as parties. On October 2,
2001, MII and B&W filed dispositive motions with the Court seeking dismissal of
the Plaintiff Insurers' claim that MII and B&W had materially breached the
settlement agreement at issue. In a ruling issued January 4, 2002, the U.S.
District Court for the Eastern District of Louisiana granted MII's and B&W's
motion for summary judgment and dismissed the declaratory judgment action filed
by the Plaintiff Insurers. The ruling concluded that the Plaintiff Insurers'
claims lacked a factual or legal basis. Our agreement with the underwriters went
into effect in April 1990 and has served as the allocation and payment mechanism
to resolve many of the asbestos claims against B&W. We believe this ruling
reflects the extent of the underwriter's contractual obligations and underscores
that this coverage is available to settle B&W's asbestos claims. As a result of
the January 4, 2002 ruling, the only claims that remained in the litigation were
B&W's counterclaims against the Plaintiff Insurers and against other London
Market insurers. The parties have recently agreed to dismiss without prejudice
those of B&W's counterclaims seeking a declaratory judgment regarding the
parties' respective rights and obligations under the settlement agreement. B&W's
counterclaim seeking a money judgment for approximately $6,500,000 due and owing
by London Market Insurers under the settlement agreement remains pending. A
trial of this counterclaim is scheduled for June 17, 2002.
15
Following the resolution of this remaining counterclaim, the Plaintiff Insurers
will have an opportunity to appeal the January 4, 2002 ruling. At this point,
the Plaintiff Insurers have not indicated whether they intend to pursue an
appeal.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers
Casualty and Surety Company (collectively, "Travelers") filed an adversary
proceeding against B&W and related entities in the U.S. Bankruptcy Court for the
Eastern District of Louisiana seeking a declaratory judgment that Travelers is
not obligated to provide any coverage to B&W with respect to so-called
"non-products" asbestos bodily injury liabilities on account of previous
agreements entered into by the parties. On or about the same date, Travelers
filed a similar declaratory judgment against MI and MII in the U.S. District
Court for the Eastern District of Louisiana. The cases filed against MI and MII
have been consolidated before the District Court and the Asbestos Claimants
Committee ("ACC") and the Future Claimants Representative ("FCR") have
intervened in the action. On February 4, 2002, B&W and MII filed answers to
Travelers' complaints, denying that previous agreements operate to release
Travelers from coverage responsibility for asbestos "non- products" liabilities
and asserting counterclaims requesting a declaratory judgment specifying
Travelers' duties and obligations with respect to coverage for B&W's asbestos
liabilities. The Court has not yet ruledbifurcated the case into two phases, with Phase I
addressing the issue of whether previous agreements between the parties serve to
release Travelers from any coverage responsibility for asbestos "non-products"
claims. Discovery has commenced on these motions. We
believe the Plaintiff Insurers' complaintsPhase I issues, and the substantive allegations they
contain are without merit. MII and B&W intendCourt has set June
21, 2002 as the close of Phase I discovery. No trial date has been scheduled.
This insurance, if available, would be in addition to contest and defend against
these actions vigorously. We believe the Plaintiff Insurers' complaints will not
have a material adverse effect on our consolidated financial position or results
of operations. However, if the Plaintiff Insurers are successful, our financial
position and our investmentamounts already
included in B&W will be adversely affected.&W's financial statements as of March 31, 2002.
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 Technologies,Technology,
Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at
the time of, or rendered insolvent as a result of, a corporate reorganization
that we completed in the fiscal year ended March 31, 1999, which included, among
other things, B&W's cancellation of a $313,000,000 note receivable and B&W's
transfer of all the capital stock of Hudson Products Corporation, Tracy Power,
BWXT and McDermott Technologies,Technology, Inc. to BWICO, and (2) the transfers are not
voidable. As an alternative, and only in the event that the Bankruptcy Court
finds B&W was insolvent at a pertinent time and the transactions are voidable
under applicable law, the action preserved B&W's claims against the defendants.
The Bankruptcy Court has permitted the asbestos
claimants committeeACC and the future claimants' representativeFCR in the Chapter 11 proceedingproceedings
to intervene and proceed as plaintiff-intervenors and has realigned B&W as a
defendant in this action. The asbestos claimants committeeACC and the future claimants' representativeFCR 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 has ruled that Louisiana law
will applyapplied to the solvency issue in this action. Trial commenced on October 22,
2001 to determine B&W's solvency at the
16
time of the corporate reorganization and concluded on November 2, 2001, following which2001. In a
ruling filed on February 8, 2002, the Bankruptcy Court requested written briefing and has taken the matter under consideration. We
believe thatfound B&W was solvent at the
time of the transferscorporate reorganization. On February 19, 2002, the ACC and FCR
filed a motion with the District Court seeking leave to appeal the February 8,
2002 ruling. On February 20, 2002, MI, BWICO, BWXT, Hudson Products Corporation
and McDermott Technology, Inc. filed a motion for summary judgment asking that
judgment be entered on a variety of additional pending counts presented by the
transfersACC and FCR that we believe are not voidable. However, ifresolved by the transferred asset action is decided against us
byFebruary 8, 2002 ruling. On
March 20, 2002, at a hearing in the Bankruptcy Court, it could havethe judge granted this
motion and dismissed all claims asserted in complaints filed by the ACC and the
FCR regarding the 1998 transfer of certain assets from B&W to its parent, which
ruling was memorialized in an Order and Judgment dated April 17, 2002 that
dismissed the proceeding with prejudice. On April 26, 2002, the ACC and FCR
filed a material adverse effect on our
consolidated financial positionnotice of appeal of the April 17, 2002 Order and results of operations. It could also have a
material adverse effect on MI's ability to repay its 9.375%, $225,000,000 notes
due March 15, 2002 described in Part I, Section K - Risk Factors of MII's annual
report on Form 10-K for the year ended December 31, 2000.Judgment. In addition,
an injunction preventing asbestos suits from being brought against non-filing
affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not involved
in the Chapter 11 extends through JanuaryJuly 15, 2002.
14
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.
Other than as noted above, the following legal proceedings have had no change in
status from that disclosed in Item 3 - "Legal Proceedings," included in Part I
of MII's annual report on Form 10-K for the year ended December 31, 2000:2001:
o The Department of Justice investigation into allegations of wrongdoing
by a limited number of former employees of MII and JRM concerning the
heavy-lift business of JRM's Heeremac joint venture with Heerema
Offshore Construction Group, Inc. and the heavy-lift business of JRM.
o The Department of Justice investigation into possible anti-competitive
activity in the marine construction business of McDermott-ETPM East,
Inc., one of the operating companies within JRM's former McDermott-ETPM
joint venture with ETPM, S.A., a French company.
o The June 1998 lawsuit filed by Phillips Petroleum Company and several
related entities against MII and others, referred to as the "Phillips
Litigation" in our annual report.
o The June 1998 lawsuit filed by Shell Offshore, Inc. and several related
entities against MII and others, referred to as the "Shell Litigation"
in our annual report.
o JRM's arbitration proceedingsThe December 2000 lawsuits filed by a number of Norwegian oil companies
against Texaco ExplorationMII and Production, Inc. ("Texaco") concerning Texaco's withheld paymentothers alleging violations of $23,000,000 duethe Norwegian Pricing Act
of 1953 in connection with projects in Norway.
17
o The lawsuit filed by Donald F. Hall, Mary Ann Hall and others against
B&W and Atlantic Richfield Company, referred to as the "Hall
Litigation" in our annual report, as well as the controversy between
B&W and its insurers as to the amount of coverage available under an installation contract.the
liability policies covering the facilities involved in this litigation.
For a detailed description of these proceedings, please refer to Note 11 to the
consolidated financial statements included in Part III of MII's annual report on
Form 10-K for the year ended December 31, 2000.2001. Also, see Note 89 to the
condensed consolidated financial statements regarding B&W's potential liability
for non-employee asbestos claims and additional information concerning the
Chapter 11 reorganization proceedings commenced by B&W and certain of its
subsidiaries on February 22, 2000.
NOTE 56 - SEGMENT REPORTING
There are no differences from our last annual reportFor the three months ended March 31, 2002, we have reported the results of
operations for HPC in discontinued operations. In addition, we have included the
results of McDermott Technology, Inc. ("MTI") in Government Operations. HPC and
MTI were previously included in our basis of
segmentation orIndustrial Operations segment.
Segment information for the three months ended March 31, 2001 has been restated
to reflect these changes in our reportable segments. We have not changed our
basis of measurement of segment profit or loss except
for the inclusion of income from over-funded pension plans of discontinued
operations in Corporate.our last annual report. An
analysis of our operations by segment is as follows:
15
Segment Information for the Three and Nine Months Ended September 30, 2001March 31, 2002 and 2000.2001.
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
2002 2001 2000 2001 2000
------------ ------------
------------ ------------
(Unaudited)
(In thousands)
REVENUES
Marine Construction Services $ 262,776264,171 $ 161,922 $ 602,605 $ 614,699134,680
Government Operations 118,475 95,949 356,349 322,712121,791 125,368
Industrial Operations 198,007 120,961 527,714 365,674-- 142,097
Power Generation Systems - B&W -- -- -- 155,774
Power Generation Systems 12,059 14,829 33,486 14,97513,242 8,434
Adjustments and Eliminations(1) (148) (2,700) (436) (3,874)
------------ ------------(12) (55)
------------ ------------
$ 591,169399,192 $ 390,961 $ 1,519,718 $ 1,469,960
============ ============410,524
============ ============
(1) Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 10712 $ 224 $ 237 $ 80534
Government Operations Transfers 37 226 184 657
Industrial Operations Transfers 4 78 15 181
Power Generation Systems
Transfers - B&W -- -- -- 59
Adjustments and Eliminations -- 2,172 -- 2,172
-------- -------- -------- --------21
------------ ------------
$ 14812 $ 2,700 $ 436 $ 3,874
======== ======== ======== ========55
============ ============
1618
OPERATING INCOME (LOSS):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Unaudited)
(In thousands)
OPERATING INCOME:
Segment Operating Income:Income (Loss):
Marine Construction Services $ 17,581(10,209) $ (9,142) $ 15,526 $ (16,930)(10,416)
Government Operations 3,814 8,175 22,813 30,04311,847 10,853
Industrial Operations 4,009 4,689 9,773 9,723-- 1,318
Power Generation Systems - B&W -- -- -- 7,172
Power Generation Systems (1,010) (2,055) (2,787) (2,419)
---------- ---------- ---------- ----------(568) (585)
--------- ---------
$ 24,3941,070 $ 1,667 $ 45,325 $ 27,589
========== ========== ========== ==========1,170
========= =========
Gain (Loss) on Asset Disposal and Impairments - Net:
Marine Construction Services $ (43)75 $ 1,087 $ 672 $ 2,028522
Government Operations 14 9 776 208
Industrial Operations 9 -- 20 10
Power Generation Systems - B&W -- -- -- (33)
---------- ---------- ---------- ----------1 3
--------- ---------
$ (20)76 $ 1,096 $ 1,468 $ 2,213
========== ========== ========== ==========525
========= =========
Income (Loss) from Investees:
Marine Construction Services $ 4,7621,594 $ 3,143 $ 6,048 136(46)
Government Operations 6,110 4,483 16,868 7,7625,910 4,702
Industrial Operations 11 80 127 151-- 30
Power Generation Systems - B&W -- -- -- 812
Power Generation Systems 363 (2,014) 1,081 (23,443)
---------- ---------- ---------- ----------30 235
--------- ---------
$ 11,2467,534 $ 5,692 $ 24,124 $ (14,582)
========== ========== ========== ==========
SEGMENT4,921
========= =========
OPERATING INCOME (LOSS):
Marine Construction Services $ 22,300(8,540) $ (4,912) $ 22,246 $ (14,766)(9,940)
Government Operations 9,938 12,667 40,457 38,01317,758 15,558
Industrial Operations 4,029 4,769 9,920 9,884-- 1,348
Power Generation Systems - B&W -- -- -- 7,951
Power Generation Systems (647) (4,069) (1,706) (25,862)
---------- ---------- ---------- ----------
35,620 8,455 70,917 15,220(538) (350)
--------- ---------
8,680 6,616
Corporate (2,008) 4,294 (10,190) 5,106
---------- ---------- ---------- ----------(10,702) (1,733)
--------- ---------
TOTAL $ 33,612(2,022) $ 12,749 $ 60,727 $ 20,326
========== ========== ========== ==========4,883
========= =========
1719
NOTE 67 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earningsloss per
share:
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
2002 2001 2000 2001 2000
------------ ------------
------------ ------------
(Unaudited)
(In thousands, except shares and
per share amounts)
Basic and Diluted:
Loss from Continuing Operations $ (1,760) $ (5,169)
Income from Discontinued Operations 826 736
Extraordinary Item 341 --
------------ ------------
Net Loss $ (593) $ (4,433)
------------ ------------
Weighted Average Common Shares 61,024,612 60,144,541
============ ============
Basic and Diluted Loss per Common Share:
Loss from Continuing Operations $ (0.03) $ (0.09)
Income from Discontinued Operations $ 0.01 $ 0.01
Extraordinary Item $ 0.01 $ --
Net Loss $ (0.01) $ (0.07)
Due to rounding, for the quarter ended March 31, 2001, the net loss per share
does not equal the sum of the per share amounts for the individual components of
the net loss.
At March 31, 2002 and 2001, incremental shares of 2,199,012 and 2,426,431,
respectively, related to stock options and restricted stock were excluded from
the diluted share calculation as their effect would have been anti-dilutive.
NOTE 8 - GOODWILL
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, we no longer amortize goodwill to earnings, but
instead we periodically test for impairment. Following is our reconciliation of
reported net income to adjusted net income, which excludes goodwill amortization
expense (including related tax effects), for the periods presented:
20
Three Months Ended
March 31,
2002 2001
---------- ----------
(Unaudited)
(In thousands, except
per share amounts)
Basic:Loss before extraordinary item $ (934) $ (4,433)
Add back: goodwill amortization -- 4,940
---------- ----------
Adjusted income (loss) before extraordinary item $ (934) $ 507
========== ==========
Net loss $ (593) $ (4,433)
Add back: goodwill amortization -- 4,940
---------- ----------
Adjusted net income (loss) $ 19,345(593) $ 5,622507
========== ==========
Basic and diluted earnings (loss) per share before
extraordinary item:
Loss before extraordinary item $ 22,870(0.02) $ 3,442(0.07)
Add back: goodwill amortization -- 0.08
---------- ----------
Adjusted earnings (loss) per share before
extraordinary item $ (0.02) $ 0.01
========== ==========
Basic and diluted earnings (loss) per share:
Net loss $ (0.01) $ (0.07)
Add back: goodwill amortization -- 0.08
---------- ----------
Adjusted earnings (loss) per share $ (0.01) $ 0.01
========== ==========
Changes in the carrying amount of goodwill for the three months ended March 31,
2002 are as follows:
Marine Power
Construction Government Generation
Services Operations Systems
Segment Segment Segment Total
------------ ------------ ------------ ------------
Weighted average common shares 60,832,878 59,908,646 60,499,071 59,657,556(in thousands)
Balance as of January 1, 2002 $ 313,008 $ 12,926 $ 4,771 $ 330,705
Currency Translation Adjustment -- -- (126) (126)
------------ ------------ ------------ ------------
Basic earnings per common shareBalance as of March 31, 2002 $ 0.32313,008 $ 0.0912,926 $ 0.384,645 $ 0.06
------------ ------------ ------------ ------------
Diluted:
Net income $ 19,345 $ 5,622 $ 22,870 $ 3,442
------------ ------------ ------------ ------------
Weighted average common shares (basic) 60,832,878 59,908,646 60,499,071 59,657,556
Effect of dilutive securities:
Stock options and restricted stock 1,645,429 1,280,288 2,099,995 894,244
------------ ------------ ------------ ------------
Adjusted weighted average common shares
and assumed conversions 62,478,307 61,188,934 62,599,066 60,551,800
------------ ------------ ------------ ------------
Diluted earnings per common share $ 0.31 $ 0.09 $ 0.37 $ 0.06330,579
============ ============ ============ ============
NOTE 7 - 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 which are
denominated in currencies other than our operating entities' functional
currencies. We do not hold or issue derivative financial instruments for trading
or other speculative purposes.
We enter into forward contracts 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 offset against the change in fair value of the hedged firm
commitment through earnings or deferred in stockholders' equity (as a component
of accumulated other comprehensive loss) until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. The gain or loss on a derivative financial
instrument not designated as a hedging instrument is also immediately recognized
in earnings. Gains and losses on forward contracts that require
18
immediate recognition are included as a component of other-net in our condensed
consolidated statement of income.
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.
NOTE 89 - THE BABCOCK & WILCOX COMPANY
General
As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of non-employee liability claims asserting
asbestos-related injuries. All of thesethe personal injury claims are similar in
nature, the primary
21
difference being the type of alleged injury or illness suffered by the plaintiff
as a result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer,
other types of cancer, asbestosis or pleural changes).
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the Bankruptcy Court for the U.S. District Court for the Eastern
District of Louisiana to reorganize under Chapter 11 of the U.S. Bankruptcy
Code as a means to determine and comprehensively resolve all pending
and future asbestos liability claims against them.Code. Included in the filing are B&W and its subsidiaries Americon, Inc.,
Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc.
On February 20, 2001,(the "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 appointedissued a mediator to facilitate negotiations among the debtorspreliminary injunction
prohibiting asbestos liability lawsuits and the
committee representing the asbestos claimants to reach a final determinationother actions for which there is
shared insurance from being brought against non-filing affiliates of the
debtors' ultimate liability for asbestos-related claims.Debtors, including MI, JRM and MII. The mediator's
appointmentpreliminary injunction is authorized through January 31, 2002.
On February 22, 2001, B&W and its debtors filed a plan of reorganization and a
disclosure statement. The plan of reorganization contemplates a resolution under
either the settlement process or a strategy of litigating asbestos claims. Under
the settlement process, there would be a consensual agreement of 75% of the
asbestos personal injury claimants. A trust would be formed and assigned all of
B&W's and its filing subsidiaries' insurance rights with an aggregate products
liability value of approximately $1,150,000,000. In addition, $50,000,000 cash
and a $100,000,000 subordinated 10-year note payable would be transferred into
the trust. The debtors and non-debtor affiliates would consentsubject to
the assignment
of the insurance and would release and void any right that they have to the
insurance, with the non-debtor defendants receiving a full release and
protection underperiodic hearings before the Bankruptcy Code against future asbestos products liability
claims relating to B&W. The trust's rights toCourt for extension. Currently, the
insurance would be protectedpreliminary injunction runs through July 15, 2002.
Insurance Coverage and could be dedicated solely to the resolution of the asbestos claims. As a
result of the creation of the trust, B&W and all its affiliates would be
released and discharged from all present and future liability for asbestos
claims arising out of exposure to B&W's products.
19
Under the litigation strategy of the proposed plan, if B&W is not able to reach
a consensual agreement with the plaintiffs, a cram-down option is available. The
claims would still be channeled through a trust with $50,000,000 cash and a
$100,000,000 subordinated 10-year note payable, but the debtors and their
affiliates would not transfer their insurance rights. The debtors would manage
the insurance rights, and claims would be handled through the litigation process
by the trust. Funding of the trust would be from the insurance, the cash, the
note payable, and equity of the debtors, if necessary. The period of exclusivity
for filing a plan of reorganization extends through January 31, 2002.Pending Claims
Prior to its bankruptcy filing, B&W and its subsidiariesthe Debtors had engaged in a strategy of
negotiating and settling asbestos products liabilitypersonal injury claims brought against them
and billing the settled amounts to insurers for reimbursement. The
average amount per settled claim over the three calendar years prior to the
Chapter 11 filing was approximately $7,900. Reimbursed amounts are subject to
varying insurance limits based on the year of coverage, insurer solvency and
collection delays (due primarily to agreed payment schedules with specific
insurers delaying reimbursement for three months or more). No claims have been
paid since the bankruptcy filing. Claims paid during the year ended DecemberAt March 31,
2000, prior to the bankruptcy filing, aggregated $23,640,000 of which
$20,121,000 has been recovered or is due from insurers. At September 30, 2001,2002, receivables of $28,991,000$27,288,000 were due from insurers for reimbursement of
settled claims and approximately $1,152,500,000 was recorded as an insurance recoverable
for unasserted claims.paid by the Debtors prior to the Chapter 11 filing. Currently,
certain insurers are refusing to reimburse B&Wthe Debtors for settled claimsthese receivables
until B&W'sthe Debtors' assumption, in bankruptcy, of its pre-bankruptcy filing
contractual reimbursement arrangements with thosesuch insurers. To date, this has not
had a material adverse impact on B&W'sthe Debtors' liquidity or the conduct of itstheir
business and we do not expect it to in the future. We anticipate that B&Wthe
Debtors will eventually recover these insurance reimbursements.
Pursuant to the Bankruptcy Court's order, a March 29, 2001 bar date was set for
the submission of allegedly unpaid pre-Chapter 11 settled asbestos claims and a
July 30, 2001 bar date
was set for all other asbestos personal injury claims, asbestos
property damage claims, derivative asbestos claims and claims relating to
alleged nuclear liabilities arising from the operation of the Apollo Parks
Township facilities against B&W and its filing subsidiaries.the Debtors. As of the March 29, 2001 bar date, over
49,000 allegedly settled claims had been filed. B&W hasThe Debtors have accepted
approximately 7,6008,100 as pre-Chapter 11 binding settled claims at this time with
an approximate value of $49,000,000. The Bankruptcy Court has disallowed
approximately 19,000 claims as settled claims and isthe Debtors are in the process
of challenging a
significant numbervirtually all of the remaining claims. If the Bankruptcy Court
determines these claims were not settled prior to the filing of the Chapter 11
petition, these claims may be refiled as unsettled personal injury claims. As of
July 30, 2001, approximately 220,000 additional asbestos personal injury claims,
60,000 related party claims, 168 property damage claims, 212 derivative asbestos
claims and 524 claims relating to the Apollo Parks Township facilities had been
filed. Since the July 30, 2001 bar date, approximately 4,224 additional personal
injury claims were filed. The estimated total alleged value, as
22
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 coverages. As set
forth in the proposed Litigation Protocol filed with the U. S. District Court on
October 18, 2001, wethe Debtors intend to challenge all unsupported claims and
believe that a significant number may be disallowed by the Bankruptcy Court. WhileThe
ACC and FCR filed briefs opposing the Litigation Protocol and requesting an
estimation of pending and future claims.
Amended Plan of Reorganization
On February 22, 2001, the Debtors filed a plan of reorganization and a
disclosure statement. On May 7, 2002, the Debtors filed an amended plan of
reorganization and an amended disclosure statement (collectively, the "Amended
Plan"), which supercede the plan and disclosure statement filed in February
2001.
The Amended Plan contemplates a resolution of the cases based on the principle
that all creditors with valid claims, including, but not limited to, valid
asbestos-related claims, will be paid in full. If the Amended Plan is approved,
all of the shares of B&W will be transferred to a new corporation (the "Funding
Facility"), which will be owned by BWICO, B&W's present shareholder. Payments
under the Amended Plan will generally be funded from three sources: (1)
available cash on the effective date of the Amended Plan generated from the
Debtors' operations and available financing; (2) available cash generated from
the reorganized Debtors, after reserves for letter of credit and working capital
needs; and (3) insurance proceeds. The Funding Facility would (a) pay directly
claims for which it is responsible under the Amended Plan, including
administrative claims not arising in the ordinary course of the Debtors'
businesses, general unsecured claims, asbestos personal injury claims based on
pre-chapter 11 binding settlement agreements ("Settled Asbestos Claims"), and
any valid asbestos property damage claims; (b) provide an initial $2.8 million
(which we continuebelieve to reviewbe covered by insurance) and an assignment of certain
insurance rights to a trust ("Apollo/Parks Township Litigation Facility Trust")
established to pay certain claims arising from alleged nuclear radiation
exposure at two of the filedDebtors' former facilities in Western Pennsylvania (the
"Apollo/Parks Township Claims"); and (c) provide a trust (the "Asbestos PI
Trust") established to resolve asbestos personal injury claims, with annual
payments of up to $150 million from the three sources described above to satisfy
such claims in full. All asbestos personal injury claims against the Debtors
would be channeled to the Asbestos PI Trust.
With respect to the insurance proceeds described above, on the effective date of
the Amended Plan, the Debtors would assign to the Funding Facility their rights
against their insurance coverage that relate to asbestos personal injury and
property damage claims against the Debtors. The Debtors' affiliates would also
waive their rights against that insurance to the extent that those rights would
deplete the available $1.15 billion face value products liability coverage,
except that MI, JRM and Hudson Products Corporation would
23
retain the right to pursue claims for coverage on account of asbestos
liabilities, if any, relating to their own operations. The Amended Plan
contemplates that the Debtors will receive a full release and discharge from all
present and future liability for asbestos personal injury claims, asbestos
property damage claims, the Apollo/Parks Township Claims, and any other claims
against them in their Chapter 11 proceedings (with the exception of certain
ordinary course obligations and other obligations of the Debtors not related to
the impaired claims discussed above, which would remain as unimpaired
obligations of the reorganized Debtors). In addition, in consideration of their
waiver of insurance rights, the Debtors' affiliates would be protected by a
channeling injunction against present and future liability for asbestos personal
injury claims arising from the Debtors' operations. If resources later become
depleted, and the Asbestos PI Trust can no longer pay claims that are due and
owing, the Amended Plan contemplates that the injunction may be lifted as to MI,
MII and certain other affiliates. The Amended Plan also provides for a release
of the affiliates from claims related to transactions with the Debtors that were
generally outside the ordinary course of business and did not include the
operations or management of the Debtors' present businesses, assets or
obligations.
The Amended Plan provides that, under certain conditions involving a continuing
uncured adjudicated payment default of the Funding Facility's obligations to
fund the Asbestos PI Trust, the Funding Facility would be required to transfer
to the Asbestos PI Trust all of the shares of The Babcock & Wilcox Company. If
that should occur, we would lose our ownership interest in The Babcock & Wilcox
Company, resulting in a write-off of the carrying value, if any at that time, of
MII's investment ($186,996,000 at March 31, 2002). The Amended Plan also
contemplates that, commencing in the fifth year after the effective date of the
Amended Plan, and on an annual basis thereafter, the Funding Facility would have
the opportunity to make a lump-sum payment to the Asbestos PI Trust in an
amount, approved by the Bankruptcy Court, of the then estimated present and
future liability on account of Asbestos PI Claims, and upon making such payment
would have no further obligation to fund the Asbestos PI Trust. If that should
occur, the financial results of B&W would be reconsolidated with MII and MII
would have access to the cash flows of B&W. A third possible alternative would
be the satisfaction of all claims against the Debtors by the Funding Facility,
which would also result in the financial results of B&W being reconsolidated
with MII and MII having access to the cash flows of B&W.
We have considered the impact of the Amended Plan on our estimate of the
Debtors' ultimate asbestos liability ofand on our investment in B&W and its subsidiaries remains uncertain,
20
we&W. We continue
to believe that the $1,307,725,000 that B&W has provided for asbestos products
liability claims at September 30, 2001 continues to representMarch 31, 2002 represents our best estimate of its ultimatethe Debtors'
minimum liability for asbestos claims under a settlement strategy. It is not
possible to estimate the range of loss under the strategy proposed in the
Amended Plan. However, amounts claimed by the asbestos claimants are in a wide
range and exceed the value of B&W and certain assets transferred by B&W to its
parent in a corporate reorganization completed in fiscal year 1999 and our known
available products liability and property damage coverages.
24
Specific Treatment of the Debtors' Claims Under the Amended Plan
Asbestos Personal Injury Claims and Derivative PI Claims. The Amended Plan would
establish a mechanism to channel all asbestos personal injury claims against the
Debtors to the Asbestos PI Trust. Further, the Amended Plan would establish
three classes of asbestos personal injury claims: a malignant class, a
nonmalignant class, and an administrative convenience class. The administrative
convenience class would be required to irrevocably elect, in connection with
voting on the plan, to accept a single lump sum payment of $400 from the
Asbestos PI Trust. The malignant and non-malignant claims that do not elect the
$400 lump sum payment would be processed, liquidated and paid in full by the
Asbestos PI Trust pursuant to the trust's distribution procedures ("TDP"). The
TDP will provide claimants who meet criteria respecting exposure, an existing
cause of action and a compensable medical condition an offer of payment provided
on an established schedule or grid. If a claimant fails to meet such criteria,
or is not satisfied with the proposed payment under the grid, the claimant would
be permitted to elect to commence a mediation to settle the claim with the
Asbestos PI Trust; and, if mediation proves to be unsuccessful, then the
claimant would have the option to litigate the claim in the Eastern District of
Louisiana. Derivative personal injury claims (claims for contribution or
indemnity) would be paid by the Asbestos PI Trust only if the derivative
claimant's aggregate liability for the direct claimant's claim has been fixed,
liquidated and paid by the derivative claimant by settlement or final order. In
no event would the Asbestos PI Trust be required to pay more to a derivative
claimant than its liability or obligation to the direct claimant.
Asbestos Property Damage Claims, Settled Asbestos Claims, Derivative Property
Damage Claims, General Unsecured Claims, and certain other claims. These claims
would be resolved by the Funding Facility. The Funding Facility would have all
the Debtors' defenses and pending objections relating to any of these claims and
would pay claims that are allowed by the Bankruptcy Court in full. These allowed
claims would generally be paid 75% of the amount of their claim within 30 days
from the time the claim becomes allowed, and the remaining 25% eighteen months
from the effective date of the Amended Plan.
Apollo/Parks Township Claims. The Apollo/Parks Township Litigation Facility
Trust would be established to process, litigate and pay Apollo/Parks Township
Claims. Through the Funding Facility, on the effective date of the Amended Plan,
the Debtors would contribute $2.8 million (which we believe to be covered by
insurance) and assign approximately $1.2 million in insurance reimbursement
claims due the Debtors. The Amended Plan further contemplates that the Atlantic
Richfield Company ("ARCO"), a codefendant of B&W in litigation involving these
claims, would contribute up to $4 million to the Apollo/Parks Township
Litigation Facility Trust, and the Debtors and ARCO would assign to the
Apollo/Parks Township Litigation Facility Trust approximately $300 million in
insurance coverage that is specifically available to cover present and future
Apollo/Parks Township Claims.
25
Intercompany Claims. Ordinary course claims between the Debtors and their
affiliates would either be resolved through a process of setoff, or will be left
unimpaired under the Amended Plan.
Termination of The Debtors' Exclusive Right to File a Plan
The Debtors maintained the exclusive right to file a plan of reorganization in
their cases (the "exclusive period") from February 2000 through May 8, 2002, at
which time the Bankruptcy Court terminated the exclusive period and permitted
other parties in the Chapter 11 proceeding to file competing plans of
reorganization. The ACC and FCR have indicated that they intend to file a joint
plan of reorganization within sixty days of May 8, 2002. Should such a plan be
submitted, litigation may ensue regarding objections by the Debtors and others
to the ACC/FCR plan, objections by the ACC/FCR to the Debtors' plan and related
issues concerning the confirmation and effectuation of either plan, or some
other alternative that may emerge in those proceedings. Confirmation of the
Debtors' plan of reorganization or any plan which may be submitted by the ACC
and/or FCR will require a finding that such plan satisfies all the conditions
set forth in the Bankruptcy Code as well as the conditions specified in the
plan. We cannot assure that either of these requirements will be met with
respect to the Debtors' plan or any other plan. In the event the Bankruptcy
Court were to find that more than one submitted plan meets the tests set forth
in the Bankruptcy Code for confirmation, the Court may confirm only one plan
and, in exercising its discretion to do so, is required to consider the
preferences of creditors and equity security holders. We cannot assure the
confirmation of the Debtors' plan.
While the B&W Chapter 11 reorganization proceedings continue to progress, there are
a number of issues and matters related to B&W'sthe Debtors' asbestos liability to be
resolved prior to its emergence from the proceedings. In addition to the solvency issue relating to
the reorganization we completed in the fiscal year ended March 31, 1999,
remainingRemaining issues and
matters to be resolved include, but are not limited to:
o the ultimate asbestos liability of B&W and its subsidiaries;the Debtors;
o the outcome of negotiations with the asbestos claimants committee,ACC, the future claimants representativeFCR and other
participants in the Chapter 11 proceedings, concerning, among other
things, the size and structure of a trust to satisfy the asbestos
liability and the means for funding that trust;
o the outcome of the declaratory judgment actions filed by certain
insurers and negotiations with our insurers as to additional amounts
of coverage of B&W and its subsidiariesthe Debtors and their participation in a plan to fund
the settlement trust;
o the Bankruptcy Court's decisions relating to numerous substantive and
procedural aspects of the Chapter 11 proceedings, including the
Court's periodic determinations as to whether to extend the existing
preliminary injunction that prohibits asbestos liability lawsuits and
other actions for which there is shared insurance from being brought
against non-filing affiliates of B&W, including MI, JRM and MII;
26
o the possibleanticipated need for an extension of the three-year term of the
$300,000,000 debtor-in-possession revolving credit and letter of
credit facility ("DIP(the "DIP Credit Facility"), which is scheduled to
expire in February 2003, to accommodate the issuance of letters of
credit expiring after that date in connection with new construction
and other contracts on which B&W intendsthe Debtors intend to bid; and
o the continued ability of our insurers to reimburse us for payments
made to asbestos claimants.
For information regarding ongoing investigationsclaimants; and
litigation involvingo the ultimate resolution of the ruling issued by the Bankruptcy Court
on February 8, 2002 which found B&W seesolvent 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"), and the appeals from these rulings. See Note 4. For5 for
further information concerninginformation.
Any changes in (1) the estimates of the Debtors' nonemployee asbestos liability
and insurance, (2) the differences between the proportion of those liabilities
covered by insurance and that experienced in the past and (3) the ultimate
resolution of the Transfer Case could result in material adjustments to B&W's
financial statements and negatively impact our ability to realize our net
investment in B&W and certain assets transferred by B&W to its bankruptcy filing,
refer to Note 20 toparent in the
consolidated financial statements included in MII's
annual report on Form 10-K for the year ended December 31, 2000.corporate reorganization.
Debtor-In-Possession Financing
In connection with the bankruptcy filing, B&W and its filing subsidiariesthe Debtors entered into the DIP
Credit facility with Citibank, N.A. and Salomon Smith Barney Inc. with a
three-year term. The Bankruptcy Court approved the full amount of this facility,
giving all amounts owed under the facility a super-priority administrative
expense status in bankruptcy. The Debtors' obligations under the facility are
(1) guaranteed by substantially all of B&W's other domestic subsidiaries and B&W
Canada Ltd. and (2) secured by a security interest on B&W Canada Ltd.'s assets.
Additionally, B&W and substantially all of its domestic subsidiaries granted a
security interest in their assets to the lenders under the DIP Credit Facility
upon the defeasance or repayment of MI's public debt. The DIP Credit Facility
generally provides for borrowings by the Debtors for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and non-performance letters of credit issued under
the facility cannot exceed $100,000,000 in the aggregate. The DIP Credit
Facility also imposes certain financial and non-financial covenants on B&W and
its subsidiaries. There were no borrowings under this facility at September 30,March 31, 2002
or December 31, 2001. A permitted use of the DIP Credit Facility is the issuance
of new letters of credit to backstop or replace pre-existing letters of credit
issued in connection with B&W's and its subsidiaries' business operations, but
for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000,
the aggregate amount of all such pre-existing letters of credit totaled
approximately 21
$172,000,000 (the "Pre-existing LCs")., $19,024,000 of which remain
outstanding at March 31, 2002. MII, MI and BWICO have agreed to indemnify and
reimburse B&W and its filing subsidiariesthe Debtors
27
for any customer draw on any letter of credit issued under the DIP Credit
Facility to backstop or replace any pre-existingPre-existing LC for which it already has
exposure and for the associated letter of credit fees paid under the facility.
As of September 30, 2001,March 31, 2002, approximately $111,100,000$112,282,000 in letters of credit have been
issued under the DIP Credit Facility of which approximately $60,700,000$55,434,000 were to
replace or backstop pre-existingPre-existing LCs. At December 31, 2001, B&W was in violation
of a covenant under the DIP Credit Facility caused by the acquisition of 80% of
the common stock of a company for approximately $90,000. B&W received a consent
from the lenders that remedied this covenant violation on March 18, 2002.
Financial Results and Reorganization Items
The B&W condensed consolidated financial statements are set forth below.below have been
prepared in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP
90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by
the Bankruptcy Court as of the bankruptcy filing date and identification of all
transactions and events that are directly associated with the reorganization.
Liabilities subject to compromise include prepetition unsecured claims, which
may be settled at amounts which differ from those recorded in the B&W condensed
consolidated financial statements.
28
THE BABCOCK & WILCOX COMPANY
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
2002 2001
2000 2001 2000
------------ ------------ ------------ ---------------------- ----------
(Unaudited)
(In thousands)
Revenues $ 304,575378,957 $ 250,385 $ 1,026,350 $ 821,198
------------ ------------ ------------ ------------355,859
---------- ----------
Costs and Expenses:
Cost of operations 261,227 217,045 875,595 717,819325,033 301,789
Selling, general and administrative
expenses 30,208 28,382 87,280 84,16329,413 28,601
Reorganization charges 11,364 4,834 22,628 12,799
------------ ------------ ------------ ------------6,378 4,943
---------- ----------
Total Costs and Expenses 302,799 250,261 985,503 814,781
------------ ------------ ------------ ------------360,824 335,333
---------- ----------
Equity in income of investees 783 1,217 2,001 3,914
------------ ------------ ------------ ------------880 367
---------- ----------
Operating Income 2,559 1,341 42,848 10,331
------------ ------------ ------------ ------------19,013 20,893
---------- ----------
Other Income (Expense):
Interest income 1,893 2,761 6,259 5,5531,440 2,364
Interest expense (1,073) (1,107) (5,146) (2,497)(1,266) (1,475)
Other-net 387 1,280 (5,469) 327
------------ ------------ ------------ ------------
Total Other Income (Expense) 1,207 2,934 (4,356) 3,383
------------ ------------ ------------ ------------(234) (3,248)
---------- ----------
(60) (2,359)
---------- ----------
Income before Provision for Income Taxes 3,766 4,275 38,492 13,71418,953 18,534
Provision for Income Taxes 830 5,532 16,765 8,717
------------ ------------ ------------ ------------8,415 7,869
---------- ----------
Net Income (Loss) $ 2,93610,538 $ (1,257)10,665
========== ==========
Effect of no longer amortizing goodwill:
Net Income $ 21,72710,665
Add back: goodwill amortization (net of tax) 1,126
----------
Adjusted Net Income $ 4,997
============ ============ ============ ============11,791
==========
2229
THE BABCOCK & WILCOX COMPANY
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30,March 31, December 31,
2002 2001
2000
------------------------ ------------
(Unaudited)
(In thousands)
Assets:
Current Assets $ 547,149608,419 $ 553,937592,968
Property, Plant and Equipment 75,996 80,45978,526 77,185
Products Liabilities Recoverable from Insurers 1,152,489 1,153,7611,152,489
Goodwill 75,452 77,09376,301 74,394
Prepaid Pension Costs 19,444 20,36911,575 12,411
Other Assets 158,104 128,043
------------- ------------160,597 159,692
----------- -----------
Total Assets $ 2,028,6342,087,907 $ 2,013,662
============= ============2,069,139
=========== ===========
Liabilities:
Current Liabilities $ 380,771443,490 $ 364,977431,702
Liabilities Subject to Compromise(1) 1,443,301 1,456,313Compromise(A) 1,438,901 1,441,869
Accrued Postretirement Benefit Obligation 773 566771 897
Other long-term liabilities 14,805 18,58915,727 14,693
Stockholder's Equity:
Common Stock 1,001 1,001
Capital in Excess of Par Value 134,737 134,733134,717 134,729
Retained Earnings 82,551 60,82488,861 78,323
Accumulated Other Comprehensive Loss (29,305) (23,341)
------------- ------------(35,561) (34,075)
----------- -----------
Total Liabilities and Stockholder's Equity $ 2,028,6342,087,907 $ 2,013,662
============= ============
(1)2,069,139
=========== ===========
(A) Liabilities subject to compromise consist of the following:
Accounts payable $ 2,9633,703 $ 3,1133,720
Provision for warranty 17,870 21,74214,463 16,346
Other current liabilities 21,890 25,30225,673 25,758
Products liabilities 1,307,725 1,307,725
Accumulated postretirement benefit obligation 70,891 75,91070,319 70,909
Other long-term liabilities 21,962 22,521
------------- ------------17,018 17,411
----------- -----------
$ 1,443,3011,438,901 $ 1,456,313
============= ============1,441,869
=========== ===========
Liabilities subject to compromise include prepetitionpre-petition unsecured claims, which
may be settled at amounts which differ from those recorded in the B&W condensed
consolidated financial statements.
In the course of the conduct of B&W's and its subsidiaries' business, MII and MI
have agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. At September 30, 2001,March 31, 2002, the total value of B&W's and its subsidiaries'
customer contracts yet to be completed covered by such indemnity arrangements
was approximately $174,000,000$136,000,000 of which approximately $92,000,000$58,000,000 relates to
bonds issued after February 21, 2000.
2330
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity (1) whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) and (2) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $166,234,000, as
of February 21, 2000, increased to $186,966,000 due to post-bankruptcy filing
adjustments to the net assets of B&W and is subject to periodic
reviews for recoverability. The results of our assessment of recoverability are
dependent on our expected resolution of the overall asbestos liability, timing
of cash flow distributions from B&W as contemplated under the Amended Plan and
market conditions. When B&W emerges from the jurisdiction of the Bankruptcy
Court, the subsequent accounting will be determined based upon the applicable
circumstances and facts and
circumstances at thatsuch time, including the terms of any plan of
reorganization. It is possible that a material adjustment to our financial
statements will be required in the course of or on the completion of the B&W
reorganization.
We have assessed B&W's liquidity position as a result of the bankruptcy filing
and believe that B&W can continue to fund its and its subsidiaries' operating
activities and meet its debt and capital requirements for the foreseeable
future. However, theB&W's ability of B&W to continue as a going concern is dependent
upondepends 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 condensed
consolidated financial information set forth above has been prepared on a going
concern basis which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. As a result
of the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a rejection of our
planthe
Amended Plan of reorganization could change the amounts reported in the B&W
financial statements and cause a material decrease in the carrying amount of our
investment. The independent accountant's report on the separate consolidated
financial statements of B&W for the periodsyears ended December 31, 20002001 and 19992000
includes an explanatory paragraph indicating that these issues raise substantial
doubt about B&W's ability to continue as a going concern.
Following is our condensed Pro Forma Consolidated Statement of Loss, assuming
the deconsolidation of B&W, for the nine months ended September 30, 2000:
24
Assumes deconsolidation as of the beginning of the period presented:
Nine Months
Ended September 30, 2000
(Unaudited)
(In thousands)
Revenues $ 1,314,245
Operating Income $ 3,850
Income before Benefit from Income Taxes $ 4,490
Net Loss $ (2,063)
Loss per Common Share:
Basic $ (0.03)
Diluted $ (0.03)
Liquidity
In September 2001, Moody's Investor Service lowered MI's credit rating from BA3
to B2. JRM's credit rating remained unchanged at BA3. Our rating by Standard &
Poors remains unchanged at B. This downgrade by Moody's Investor Service has
impacted our cost of capital and could impact our access to capital.
We expect to meet capital expenditure, working capital and debt maturity
requirements for the remainder of 2001 from cash and cash equivalents and
short-term borrowings.
MI and its subsidiaries are unable to incur additional long-term debt
obligations under one of MI's public debt indentures, other than in connection
with certain extension, renewal or refunding transactions (including an
extension or refinancing of MI's 9.375% notes).NOTE 10 - LIQUIDITY
As a result of itsthe B&W bankruptcy filing, our access to the cash flows of B&W
and its filingsubsidiaries has been restricted. In addition, MI and JRM and their
respective subsidiaries are precluded from payinglimited, 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.
As a result, we have assessed our ability to stockholderscontinue as a going
31
concern and makinghave concluded that we can continue to fund our operating activities
and capital requirements for the foreseeable future. In this regard, management
will be required to address several significant issues:
o MI's Negative Cash Flows. We expect MI to experience negative cash
flows in 2002, primarily due to tax payments on any
pre-bankruptcy filing accountsthe exercise of MI's
rights under an Intercompany Agreement referred to below. MI expects
to meet its cash needs through short-term borrowings by BWXT on the
MII Credit Facility, sale of assets, obtaining loans from either JRM
or notes payable that are due and owingMII, a capital contribution from MII or some combination of those
sources. While we expect MI's cash flow to any
other entity withinimprove considerably in
2003, MI's lack of liquidity poses substantial risk in the McDermott groupshort term.
o Reduction in Surety Bond Capacity. Two of companies (the "Pre-Petition
Inter-company Payables") and other creditors during the pendency of the
bankruptcy case, without the Bankruptcy Court's approval.
Our twoour surety companies
notified us in the first quarter of 2001 that they are no longer
willing to issue bonds on our behalf. We obtain surety bonds in the
ordinary course of business of several of our operations to secure
contract bids and to meet the bonding requirements of various
construction and other contracts with customers. We are currently
canvassing the surety market to obtain additional bonding capacity.
Since we received the notice from our surety companies, we have been
satisfying most of our bonding requirements by letters of credit and
enhanced contract terms and conditions. However, if we fail to obtain
replacement bonding capacity, our ability to secure customer contracts
and pursue additional projects in the future may be materially
adversely affected. 25
As a result of the impactMarch 31, 2002, MII guaranteed previously
issued surety bonds of the September 11, 2001, terrorist attacks on the
insurance industry, our insurers have indicated that we will incur higher costs,
higher deductibles$147,000,000, $136,000,000, of which were
issued in connection with business operations of B&W and more restrictive terms and conditions as we renew our
historical insurance coverages in the future. 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.its
subsidiaries. We do not expect this situationbelieve 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 bonds.
o Credit Rating Downgrade. In September 2001, Moody's Investor Service
lowered MI's credit rating from BA3 to B2. JRM's credit rating
remained unchanged at BA3. Our rating by Standard & Poors remained
unchanged at B. This downgrade by Moody's Investor Service has
impacted our cost of capital and could impact our liquidity negatively foraccess to capital.
o Upcoming Maturity of our Credit Facilities. The MII, JRM and B&W DIP
Credit Facilities are scheduled to expire in February 2003. We plan to
renegotiate these facilities. However, if we are unable to renegotiate
these facilities, this could impact our access to capital as we may
not be able to obtain alternative financing.
During the foreseeable future.
MI's 9.375% notes with anthree months ended March 31, 2002, MI repurchased or repaid the
remaining $208,808,000 in aggregate principal amount of $225,000,000 are
scheduled to mature onits 9.375% Notes due
March 15, 2002.2002 for aggregate payments of $208,283,000, resulting in an
extraordinary net after tax gain of $341,000. In order to repay the remaining
notes, MI currently has insufficient cash and
other liquid resources on hand to fund the repayment ofexercised its 9.375% notes.
However, we have generated a significant amount of cash flow in the June and
September 2001 quarters which gives us some confidence that our fourth quarter
cash flow from operations will also be positive. We completed the sale of
McDermott Engineers & Constructors (Canada) Ltd. on October 29, 2001, which
generated additional cash that we may use to pay down debt (see Note 9 to the
condensed consolidated financial statements). We are also exploring other
alternatives including further asset sales, early bond redemptions and potential
refinancing or extension of these notes. MI's ability to satisfy, extend or
refinance these notes will be significantly influenced by the results of the
litigation involving our corporate reorganization completed in the fiscal year
ended March 31, 1999. If the action in this litigation is decided against us by
the Bankruptcy Court, it could have a material adverse effect on MI's ability to
satisfy, extend or refinance these notes.
MI owns substantial subsidiaries outside the B&W Chapter 11 filing, including
BWXT, which comprises our Government Operations segment, and Hudson Products
Corporation, which operates our heat exchanger business. BWXT and Hudson
Products Corporation are defendants in the action brought in the Chapter 11
proceeding concerning our corporate reorganization completed in the fiscal year
ended March 31, 1999, and our alternatives regarding these subsidiaries may be
limited until, and depending upon, a resolution in our favor of the action
seeking to void the transfers by B&W of the capital stock of BWXT and Hudson
Products Corporation to BWICO (the parent of B&W) in connection with the
reorganization. In addition, MI has a financial assetright pursuant to a stock purchase and sale agreement
with MII (the "Intercompany Agreement"). For, under which MI had the
2001 year, MI would be entitled to $249,637,000 on the exercise of all of its
rights under that agreement, which would generate a tax liability of
$87,338,000. MI does not currently intend to exercise its right to sell underto
MII and MII had the Intercompany Agreement (although it may in the future electright to do so). Sincebuy from MI, is not expected to generate sufficient operating cash flow to repay the
9.375% notes at maturity, and if its extension or refinancing alternatives do
not materialize, MI will have to consider exercising its rights under the
Intercompany Agreement, selling all or a part100,000 units, each of which consisted
of one or more of its operating
subsidiaries, requesting a capital contribution or loan from MII or some
combination of these and other alternatives. As a result, MI's inability to
successfully refinance or repay these notes could have a material adverse impact
on MII's liquidity, financial
26
position and results of operations. MI's level of indebtedness and its lack of
liquidity pose substantial risks to the holders of its debt securities and to
its ability to continue as a going concern.
NOTE 9 -SUBSEQUENT EVENTS
On October 29, 2001, we sold McDermott Engineers & Constructors (Canada) Ltd.
("MECL") to a unit of Jacobs Engineering Group Inc. MECL provides engineering,
construction and maintenance services to customers in a wide range of industries
including upstream oil and gas, petroleum refining, petrochemicals and
chemicals. The consolidated net assets of MECL included in our results at
September 30, 2001 totaled approximately $25,000,000. MECL, which is included in
our Industrial Operations segment, had revenues of approximately $452,000,000
and segment income of approximately $7,000,000 for the nine months ended
September 30, 2001. We expect to record a gain on the sale of MECL. The cash
proceeds will be used to pay down debt.
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 ourMII common stock and one share of MII Series A Participating
Preferred Stock. MI held this financial asset since prior to
stockholders32
the 1982 reorganization transaction under which MII became the parent of recordMI. The
price was based on (1) the stockholders' equity of MII at the close of businessthe
fiscal year preceding the date on Novemberwhich 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, 2001. Each2002, the aggregate unit value of MI's right
initially entitlesto sell all of its 100,000 units to MII was approximately $243,000,000. MI
received this amount from the registered
holder to purchaseexercise of the Intercompany Agreement. MII funded
that payment by (1) receiving dividends of $80,000,000 from us a fractional share consistingJRM and of
$20,000,000 from 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,captive insurance companies and (2) reducing its
short-term investments and cash and cash equivalents. The proceeds paid to MI
were 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") 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"). The rights are attached to all certificates
representing our currently outstanding common stockU.S. federal, state and will attach to all
common stock certificates we issue prior to the Distribution Date. Until the
Distribution Date, the rights will be evidenced by the certificates representing
our common stock and will be transferable only with our common stock. Generally,
if any person or group becomes an Acquiring Person, each right, other than
rights beneficially owned by the Acquiring Person (which will thereupon become
void), will thereafter entitle its holder to purchase, at the rights' then
current exercise price, shares of our common stock having a market value of two
times the exercise price of the right. If, after there is an Acquiring Person,applicable taxes, and we orrecorded
a majoritytax provision totaling approximately $85,400,000 at December 31, 2001. Payment
of this amount may put a strain on 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. As adopted by our board
of directors, the stockholder rights plan includes a provision that requires us
to put the plan up for a vote at our 2002 annual meeting of stockholders. If the
resolution in favor of the stockholder rights plan is defeated, the plan
provides that the board
27
of directors will redeem the rights or terminate the plan, except in the case of
certain disclosed acquisition plans or proposals. If our stockholders approve
the plan, it is scheduled to expire on the fifth anniversary of the date of its
adoption.liquidity.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONSManagement's Discussion And Analysis Of Financial Condition and Results
Of Operations
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are generally
accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "plan," "goal" or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we will
specifically describe a statement as being a forward-looking statement and refer
to this cautionary statement.
In addition, various statements this Quarterly Report on Form 10-Q contains,
including those that express a belief, expectation or intention, as well as
those that are not statements of historical fact, are forward-looking
statements. These forward-looking statements speak only as of the date of this
report. Wereport, we disclaim any obligation to update these statements unless required by
securities law, and we caution you not to rely on them unduly. We have based
these forward-looking statements on our current expectations and assumptions
about future events. While our management considers these expectations and
assumptions to be reasonable, they are inherently subject to significant
business, economic, competitive, regulatory and other risks, contingencies and
uncertainties, most of which are difficult to predict and many of which are
beyond our control. These risks, contingencies and uncertainties relate to,
among other matters, the following:
o general economic and business conditions and industry trends;
o the continued strength of the industries in which we are involved;
33
o decisions about offshore developments to be made by oil and gas
companies;
o the deregulation of the U.S. electric power market;
o the highly competitive nature of our businesses;
o our future financial performance, including availability, terms and
deployment of capital;
o the continued availability of qualified personnel;
28
o operating risks normally incident to offshore exploration, development
and production operations;
o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings, including the results of ongoing governmental
investigations and related civil lawsuits involving alleged
anticompetitive practices in our marine construction business;
o estimates for pending and future nonemployee asbestos claims against
B&W and potential adverse developments that may occur in the Chapter
11 reorganization proceedings involving B&W and certain of its
subsidiaries;subsidiaries, which could result in material adjustments to, including
the write-off of, the $186,966,000 carrying value of MII's investment
in B&W;
o the potential impact on available insurance due to the recent
increases in bankruptcy filings by asbestos-troubled companies;
o the potential impact on our insurance subsidiaries of B&W
asbestos-related claims under policies issued by those subsidiaries;
o changes in existing environmental regulatory matters;
o rapid technological changes;
o realization of deferred tax assets;
o consequences of significant changes in interest rates and currency
exchange rates;
o difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
o social, political and economic situations in foreign countries where
we do business, specificallyincluding among others, countries in the Middle East based upon the September 11,
2001 terrorist attacks;East;
o effects of asserted and unasserted claims;
o our ability to obtain surety bonds and letters of credit;
o the continued ability of our insurers to reimburse us for payments
made to asbestos claimants; and
o our ability to maintain builder's risk, liability and property
insurance in amounts we consider adequate at rates that we consider
economical, due
toparticularly after the impact on the insurance industry of
the September 11, 2001 terrorist attacks on the
insurance industry.attacks.
We believe the items we have outlined above are important factors that could
cause estimates in our actual resultsfinancial 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 and in our annual report on Form 10-K for
the year ended December 31, 2000.2001. 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.arises, except as required by applicable securities laws and
regulations. We advise our security holders that they should (1) be aware that
important factors not referred to above could affect the accuracy of our
forward-looking statements and (2) use caution and common sense when considering
our forward-looking statements.
34
GENERAL
The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant development projects.
Although oil and gas prices remain lower than we anticipated for 2002, we expect
revenues to increase at our Marine Construction Services segment for 2002,
primarily for deepwater projects. We believe the oil and gas industry is focused
on deepwater projects, and that the deepwater floater market will be robust over
the next several years, with around 70 prospects worldwide. JRM's future is tied
to the deepwater market. However, timing of the award of many marine construction
projects is uncertain. In addition, the Marine Construction Services market
remains uncertain, we believe this segment's backlog should continue to increase for the
remainder of 2001.competitive, which may have a significant impact on our anticipated
segment income in future periods.
The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. Government. As a result of reductions in the
defense budget over the past several years, we do not expect this
29
segment to experience any significant growth in the next three years. We expect
this segment's backlog to remain relatively constant since it is the sole supplier to the U.S. Navy of nuclear fuel
assemblies and major nuclear reactor
components for certain U.S. Government programs,
BWXT is a significant participant in the Naval Reactors Program. We currently expectdefense industry. Additionally, with
BWXT's unique capability of full life-cycle management of special nuclear
materials, facilities and technologies, BWXT is poised to participate in the
2001
operating activitycontinuing cleanup and management of this segment will be about the same as in 2000.Department of Energy's nuclear sites
and weapons complexes.
The revenuesresults of operations of our Industrial Operations segment include only the
results of McDermott Engineers & Constructors (Canada) Ltd., which we sold in
October 2001. The results of our Hudson Products Corporation ("HPC") subsidiary
are affected by variationsreported in the business cycles in its customers' industries and the overall economy.
Legislative and regulatory issues such as environmental regulations and
fluctuations in U.S. Government funding patterns also affect this segment. With
the sale of MECL completed, we expect the 2001 operating activity of this
segment to be below the level of 2000.discontinued operations. We expect a sequential decreaseto sell our interest in earnings next quarter, dueHPC
in 2002. See Note 2 to seasonal
weaknessthe condensed consolidated financial statements for
further information on discontinued operations. In addition, we have included
the results of McDermott Technology, Inc. ("MTI") in JRM's marine business.Government Operations. MTI
was previously included in our Industrial Operations segment.
Effective February 22, 2000 and until B&W and its filing subsidiaries emerge
from the Chapter 11 reorganization proceedings and the subsequent accounting is
determined, we no longer consolidate B&W's and its subsidiaries' results of
operations in our condensed consolidated financial statements and our investment
in B&W is presented on the cost method.
Through February 21, 2000, B&W's and its
subsidiaries' results are included in our segment results under Power Generation
Systems - B&W (see Note 5 to the condensed consolidated financial statements).
B&W and its consolidated subsidiaries' pre-bankruptcy filing revenues of
$155,774,000 and operating income of $9,410,000 are included in our consolidated
financial results for the nine months ended September 30, 2000.
In general, each of our business segments isare composed of capital-intensive businesses
that rely on large contracts for a substantial amount of their revenues.
Effective January 1, 2002, based on a review performed by the company and
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
35
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 improved our operating income
by approximately $429,000 for the three months ended March 31, 2002.
For a summary of our accounting policies that we believe are important to an
understanding of our financial statements, please refer to Item 7 included in
Part II of our annual report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001MARCH 31, 2002 VS. THREE MONTHS ENDED
SEPTEMBER 30, 2000MARCH 31, 2001
Marine Construction Services
Revenues increased $100,854,000$129,491,000 to $262,776,000,$264,171,000. The increase is a result of new
offshore construction projects, primarily for the deepwater market. Fabrication
hours in the current quarter were 3.7 million hours versus 1.5 million in the
quarter ended March 31, 2001. However, in offshore construction activities, we
recorded 379 marine days, 19% fewer than in the quarter ended March 31, 2001.
The decline in marine days is attributable to reduced time charters to our
Mexican joint venture. Pemex, the national oil company of Mexico, is the primary
customer of this joint venture.
Segment operating loss, which is before income from investees, decreased
$207,000 to $10,209,000, primarily due to higher volumesincreased activity in North American activities, including the deepwater marketscurrent
quarter and the elimination of goodwill amortization. These improvements were
offset by cost overruns on our first EPIC spar contract and difficulties setting
a topside. On the topside, we recorded a charge of $1,400,000, primarily due to
equipment problems and weather delays in the Gulf of Mexico, and fabrication operationsMexico. On the EPIC spar
contract, which we estimated to be approximately 53% complete at March 31, 2002
, we recorded a $9,500,000 charge in the Eastern Hemisphere.
Segment operating incomecurrent quarter primarily due to
engineering and scope changes, which resulted in productivity deterioration. We
have two other EPIC spar contracts in our backlog. At March 31, 2002, we
estimate one to be approximately 22% complete, and work has just begun on the
other contract.
Income (loss) increased $26,723,000 from a loss of $9,142,000investees improved $1,640,000 to income of $17,581,000,$1,594,000,
primarily due to higher volumes and margins in North
American activities and fabrication operations in the Eastern Hemisphere. Higher
general and administrative expenses partially offset these increases.
30
Incomeimproved operating results from investees increased $1,619,000our Mexican joint venture.
Government Operations
Revenues decreased $3,577,000 to $4,762,000,$121,791,000, primarily due to favorable contract closeout adjustmentslower volumes
from our U.K. joint venture that was
terminated in June 2001. Lowermanagement and operating results in our SPARS joint venture
partially offset this increase.
Government Operations
Revenues increased $22,526,000 to $118,475,000, primarily due to higher volumes
fromcontracts for U.S. Government-owned facilities,
nuclear fuel assemblies and reactor components for the U.S. Government.Government and
commercial nuclear environmental services. Higher volumes from other government
operations and commercial work partially offset these decreases.
36
Segment operating income, decreased $4,361,000which is before income from investees, increased
$994,000 to $3,814,000,$11,847,000, primarily due to lowerhigher volumes and margins from other
government operations and commercial work and higher margins from management and
operating contracts for U.S. Government-owned facilities. In addition, we
received an insurance settlement relating to environmental restoration costs.
Lower volumes and margins from nuclear fuel assemblies and reactor components
for the U.S. Government, higher general and lower volumesadministrative expenses and
margins from managementincreased spending on fuel cell research and operating contracts
for U.S. Government-owned facilities.development partially offset these
increases.
Income from investees increased $1,627,000$1,208,000 to $6,110,000,$5,910,000, primarily due to
higherimproved operating results from the start-up of our Pantex and Y-12 joint ventures. Lower operating results from a joint venture in Colorado partially
offset these increases.
Industrial Operationsventure.
Power Generation Systems
Revenues increased $77,046,000$4,808,000 to $198,007,000,$13,242,000, primarily due to higher volumes
from engineering, construction and plant maintenance activities in Canadian
operations.
Segment operating income decreased $680,000 to $4,009,000, primarily due to
lower margins from plant maintenance activities in Canadian operations and
higher selling, general and administrative expenses. Higher volumes from
engineering and construction activities in Canadian operations partially offset
these decreases.
Power Generation Systems
Revenues decreased $2,770,000 to $12,059,000, primarily due to lower volumes
from the fabrication of utility and industrial boilers. Higher volumesboilers and from after-market
service activities partially offset these decreases.
Segment operating loss decreased $1,045,000 to $1,010,000, primarily due to
lower selling, general and administrative expenses.
Income (loss) from investees increased $2,377,000 from a loss of $2,014,000 to
income of $363,000, primarily due to charges to exit and impair certain foreign
joint ventures in the prior year.activities.
Corporate
Corporate expenses increased $6,302,000 from income of $4,294,000$8,969,000 to expense of
$2,008,000,$10,702,000, primarily due to lower incomethe
recognition of expense from our over-funded pension plans legal and professional fees relating to the
31
declaratory action with respect to the assets transferred out of B&W, higher
insurance expenses and costs associated with the termination of our information
technology arrangement with AT&T Solutions. Lower employee-related costs,
including severance, lower net general and administrative expenses and legal
fees related to claims in the prior year partially offsetcurrent quarter
compared to income from these increases.plans in the quarter ended March 31, 2001. Also,
variable stock-based compensation expense increased due to increases in our
stock price.
Other Income Statement Items
Interest income decreased $1,502,000$2,368,000 to $5,056,000,$3,480,000, primarily due to a decreasedecreases
in investments.investments and prevailing interest rates.
Interest expense decreased $2,966,000 to $7,165,000, primarily due to reduced
interest rates and borrowings on our credit lines and the repayment of MI's
remaining 9.375% Notes due March 15, 2002.
Other-net included a lossimproved $3,909,000 from expense of $4,000,000 related$2,211,000 to income of
$1,698,000. The improvement is primarily attributable to gains on sales of
investment securities and foreign currency transaction gains.
For the three months ended March 31, 2002, income earned in low tax
jurisdictions contributed to the curtailment of a foreign
pension plan and gainseffective tax rate of approximately $3,300,000a 56%
benefit on the sale of securities.our pre-tax loss. The provision for income taxes for the three months
ended September 30,March 31, 2001 and
2000 reflected nondeductiblereflects non-deductible amortization of goodwill of
$4,502,000. The
goodwill$4,940,000, of which $4,502,000 was created byattributable to the premium we paid on the
acquisition of the minority interest in JRM in June 1999. The provision for incomeIncome taxes for the
three months ended September 30,March 31, 2001 includedalso includes a tax benefit of $1,500,000, primarily
relatedrelating to
favorable tax settlements in foreign jurisdictions and a provision
for proposed IRS tax deficiencies. In addition, the income before provision for
income taxes for the three months ended September 30, 2000 included losses and
charges of $2,340,000 to exit certain foreign joint ventures which had no
associated tax benefits.totaling $2,300,000. We
operate in many different tax jurisdictions. Within these jurisdictions, tax
provisions vary because of nominal rates, allowability of deductions, credits
and
other benefits and tax bases (for example, revenue
versus income). These variances, along with variances in our mix of income from
these jurisdictions, are responsible for shifts in our effective tax rate.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. NINE MONTHS
ENDED SEPTEMBER 30, 2000
Marine Construction Services
Revenues decreased $12,094,000 to $602,605,000, primarily due to lower volume in
offshore activities in the Far East relating to the West Natuna project. Higher
volumes in North American activities, including the deepwater markets of the
Gulf of Mexico, and in the Eastern Hemisphere fabrication operations partially
offset this decrease.
Segment operating income (loss) increased $32,456,000 from a loss of $16,930,000
to income of $15,526,000, 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 and higher general and administrative
expenses partially offset these increases.
3237
Income from investees increased $5,912,000 to $6,048,000, primarily due to
favorable contract closeout adjustments from our U.K. joint venture that was
terminated in June 2001. In addition, the prior year included higher losses
associated with our U.K. joint venture.
Government Operations
Revenues increased $33,637,000 to $356,349,000, primarily due to higher volumes
from nuclear fuel assemblies and reactor 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 $7,230,000 to $22,813,000, primarily due to
lower volume and margins from management and operating contracts for U.S.
Government-owned facilities and higher general and administrative expenses.
Higher volume and margins from commercial work partially offset these decreases.
Income from investees increased $9,106,000 to $16,868,000, primarily due to
higher operating results from a joint venture in Idaho and the start-up of our
Pantex and Y-12 joint ventures. Lower operating results from a joint venture in
Colorado partially offset these increases.
Industrial Operations
Revenues increased $162,040,000 to $527,714,000, primarily due to higher volumes
from engineering, construction and plant maintenance activities in Canadian
operations and from air-cooled heat exchangers.
Power Generation Systems
Revenues increased $18,511,000 to $33,486,000, primarily due to the acquisition
of Babcock & Wilcox Volund ApS, an international power generation operation in
the prior year.
Income (loss) from investees increased $24,524,000 from a loss of $23,443,000 to
income of $1,081,000, primarily due to charges to exit and impair certain
foreign joint ventures in the prior year.
Corporate
Corporate expenses increased $15,296,000 from income of $5,106,000 to expense of
$10,190,000, primarily due to lower income from our over-funded pension plans,
legal and professional fees relating to the declaratory action with respect to
the assets transferred out of B&W, higher insurance expenses, severance costs,
and costs associated with the termination of our information technology
arrangement with AT&T Solutions. A favorable insurance recovery and legal fees
related to claims in the prior year partially offset these increases.
33
Other Income Statement Items
Interest income decreased $4,909,000 to $15,687,000, primarily due to a decrease
in investments.
Other-net decreased $6,363,000 from income of $5,534,000 to a loss of $829,000,
primarily due to foreign currency transaction losses in the current period as
compared to gains in the prior period. In addition, a loss of $4,000,000 was
recorded in the current period related to the curtailment of a foreign pension
plan.
The provision for income taxes for the nine months ended September 30, 2001 and
2000 reflected non-deductible amortization of goodwill of $13,506,000. The
goodwill was created by the premium we paid on the acquisition of the minority
interest in JRM in June 1999. The provision for income taxes for the nine months
ended September 30, 2000 also included a provision of $3,800,000 for B&W for the
pre-filing period and a tax benefit of $1,400,000 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 $5,215,000 and $5,500,000 for the nine months ended September 30,
2001 and 2000, respectively, and a provision for proposed IRS tax deficiencies
in the nine months ended September 30, 2001. In addition, income before the
provision for income taxes for the nine months ended September 30, 2000 included
losses and charges of $23,940,000 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.
Backlog
9/30/3/31/02 12/31/01
12/31/00
----------- --------------------- ----------
(Unaudited)
(In thousands)
Marine Construction Services $ 1,530,167 $ 541,647$2,053,527 $1,800,491
Government Operations 903,959 1,078,803
Industrial Operations 363,519 396,4291,101,493 1,025,400
Power Generation Systems 56,859 48,631
----------- -----------38,888 49,970
---------- ----------
TOTAL BACKLOG $ 2,854,504 $ 2,065,510
=========== ===========$3,193,908 $2,875,861
========== ==========
Backlog for the Marine Construction Services segment increased primarily because
of recent awards relating toof new offshore construction projects in the Gulf of Mexico,
Southeast Asia and the Eastern Hemisphere.
Backlog for our Industrial Operations segment included MECL backlog of
approximately $329,000,000 at September 30, 2001.
34
Middle East.
At September 30, 2001,March 31, 2002, Government Operations' backlog with the U. S. Government was
$821,654,000$1,021,421,000 (of which $33,608,000$25,304,000 had not been funded). However, we expect
this segment's backlog to remain relatively constant since it is the sole source
provider of nuclear fuel assemblies and nuclear reactor components for the U. S.
Government.
Liquidity and Capital Resources
During the ninethree months ended September 30, 2001,March 31, 2002, our cash and cash equivalents
increased $6,023,000decreased $50,677,000 to $90,643,000$146,235,000, and our total debt decreased $68,010,000$208,463,000
to $351,493,000,$101,436,000, primarily due to a decrease in short-term borrowingspayments of $66,286,000.long-term debt of $208,309,000.
During this period, our operating activities generated cash of
$64,589,000 and we received cash of $963,491,000$804,922,000 from sales and maturities
of investments, $3,024,000 from operating activities, $1,672,000 from the
issuance of common stock pursuant to our employee stock plans and $3,002,000$76,000 from
the sale of assets. We used cash of $929,393,000$646,992,000 for the purchase of investments
and $27,644,000$10,558,000 for additions to property, plant and equipment.
At September 30, 2001March 31, 2002 and December 31, 2000,2001, we had available various uncommitted
short-term lines of credit from banks totaling $14,873,000$8,685,000 and $12,819,000,$8,885,000,
respectively. Borrowings outstandingWe had borrowings of $693,000 against these lines at September 30, 2001 were $216,000. There wereMarch 31,
2002 and no borrowings against these lines at December 31, 2000.2001.
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. As a condition to borrowing or
obtaining letters of credit under the DIP Credit Facility, B&W must comply with
certain financial covenants. There wereAt December 31, 2001, B&W was in violation of a
covenant under the DIP Credit Facility caused by the acquisition of 80% of the
common stock of a company for approximately $90,000. B&W received a consent from
the lenders that remedied this covenant violation on March 18, 2002. B&W had no
borrowings outstanding under this facility at September 30, 2001March 31, 2002 or December 31,
2000.2001. Letters of credit outstanding under the DIP Credit Facility at March 31,
2002 totaled approximately $112,282,000. This facility is scheduled to expire in
February 2003. We plan to renegotiate this facility at September 30, 2001 totaled approximately $111,000,000.and expect to be successful.
See Note 89 to the condensed consolidated financial statements for further
information on the DIP Credit Facility.
38
At March 31, 2002, MII was a maker or guarantor on $19,024,000 of letters of
credit issued in connection with B&W operations prior to its Chapter 11 filing.
In addition, MII, MI and BWICO have agreed to indemnify B&W for any customer
draw on $55,435,000 in letters of credit which 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 B&W's Chapter 11 filing. We believe that B&W has
never had a letter of credit drawn on by a customer. However, MII, MI and BWICO
do not currently have sufficient cash or other liquid resources available,
either individually or combined, to satisfy their maker, guarantor or indemnity
obligations to letter of credit issuers of B&W should customer draws occur on a
significant amount of these letters of credit.
On the day before B&W's Chapter 11 filing, February 21, 2000, we also entered
into other financing arrangements providing financing to the balance of our
operations. This financing, as amended on April 24, 2000, consistsconsisted of a
$200,000,000 credit facility for MII, BWXT and Hudson Products Corporation (the
"MII Credit Facility") and a $200,000,000 credit facility for JRM and its
subsidiaries (the "JRM Credit Facility"). Each facility is with a group of
lenders, for which Citibank, N.A. is acting as the administrative agent. TheThese
facilities are scheduled to expire in February 2003. We plan to renegotiate
these facilities and expect to be successful.
On March 26, 2002, the MII Credit Facility consists of two tranches, each of which has a three-year
term. One iswas reduced to $100,000,000. This
facility serves as a revolving credit facility that provides for up to $100,000,000 to
the borrowers.and letter of credit facility. Borrowings
under this facility may be used for working capital and general corporate
purposes. The second tranche provides for up to
$200,000,000 of letters of credit and may be used to reimburse issuers for
drawings under certain outstanding
35
letters of credit totaling $25,412,000 issued for the benefit of B&W and its
subsidiaries. The aggregate amount of loans and amounts available for drawing under
letters of credit outstanding under the MII Credit Facility may not exceed
$200,000,000.$100,000,000. This facility is 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 then outstanding. BorrowingsWe had no borrowings against this
facility at September 30, 2001 andMarch 31, 2002 or December 31, 2000 were $29,600,000 and $10,000,000,
respectively.2001. Letters of credit against this facility outstanding
at September
30, 2001 totaledMarch 31, 2002 were approximately $61,000,000. Borrowings against this facility
were $8,600,000 at November 1, 2001.$57,928,000.
The JRM Credit Facility also consists of two tranches. One is a revolving credit
facility that provides for up to $100,000,000 for advances to borrowers.
Borrowings under this facility may be used for working capital and general
corporate purposes. The second tranche provides for up to $200,000,000 of
letters of credit. The aggregate amount of loans and amounts available for
drawing under letters of credit outstanding under the JRM Credit Facility may
not exceed $200,000,000. The facility is subject to certain financial and
non-financial covenants. Borrowings against this facility at December 31, 2000
were $50,000,000. There wereWe had no borrowings against this facility at September
30,March 31,
2002 or December 31, 2001. Letters of credit outstanding against this facilityunder the JRM Credit
Facility at September 30,
2001March 31, 2002 totaled approximately $62,000,000. There were no borrowings under this
facility at November 1, 2001.$95,894,000.
At September 30, 2001,March 31, 2002, we had total cash, cash equivalents and investments of
$421,443,000.$317,864,000. Our investment portfolio consists primarily of government
obligations and other investments in debt securities. The fair value of our
investments at September 30, 2001March 31, 2002 was $330,800,000.$171,629,000. As of September 30, 2001,March 31, 2002, we had
pledged approximately
$45,912,00039
$46,069,000 fair value of these investments to secure a letter of credit in
connection with certain reinsurance agreements. In addition, approximately $210,413,000as of March 31,
2002, we had pledged investment portfolio assets having a fair market value of
these investments were
pledgedapproximately $111,000,000 to secure our obligations under the MII Credit
Facility. In connection with B&W's bankruptcy filing, MII entered into a support agreement
pursuant to which it agreed to provideWe had free cash available totaling approximately $94,000,000 at March
31, 2002.
During the three months ended March 31, 2002, MI with standby financial support on its
interest payments on its (i) $225,000,000repurchased or repaid the
remaining $208,808,000 in aggregate principal amount of its 9.375% Notes due
2002, (ii) $9,500,000 in aggregate principal amount of Series A
Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of
Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in
principal amount under a Pollution Control Note due 2009. MI is required to pay
MII $5,000 per month under the support agreement which expires on March 15, 2002.
MI's 9.375%2002 for aggregate payments of $208,283,000, resulting in an
extraordinary net after tax gain of $341,000. In order to repay the remaining
notes, with an aggregate principal amount of $225,000,000 are
scheduled to mature on March 15, 2002. MI currently has insufficient cash and
other liquid resources on hand to fund the repayment ofexercised its 36
9.375% notes. However, we have generated a significant amount of cash flow in
the June and September 2001 quarters which gives us some confidence that our
fourth quarter cash flow from operations will also be positive. We completed the
sale of McDermott Engineers & Constructors (Canada) Ltd. on October 29, 2001
which generated additional cash that we may use to pay down debt (see Note 9 to
the condensed consolidated financial statements). We are also exploring other
alternatives, including further asset sales, early bond redemptions and
potential refinancing or extension of these notes. MI's ability to satisfy,
extend or refinance these notes will be significantly influenced by the results
of the litigation involving our corporate reorganization completed in the fiscal
year ended March 31, 1999. If the action in this litigation is decided against
us by the Bankruptcy Court, it could have a material adverse effect on MI's
ability to satisfy, extend or refinance these notes.
MI owns substantial subsidiaries outside the B&W Chapter 11 filing, including
BWXT, which comprises our Government Operations segment, and Hudson Products
Corporation, which operates our heat exchanger business. BWXT and Hudson
Products Corporation are defendants in the action brought in the Chapter 11
proceeding concerning our corporate reorganization completed in the fiscal year
ended March 31, 1999, and our alternatives regarding these subsidiaries may be
limited until, and depending upon, a resolution in our favor of the action
seeking to void the transfers of B&W of the capital stock of BWXT and Hudson
Products Corporation to BWICO (the parent of B&W) in connection with the
reorganization. In addition, MI has a financial assetright pursuant to a stock purchase and sale agreement
with MII (the "Intercompany Agreement"). ForUnder this agreement, MI had the 2001right
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 held by MI since prior to the 1982 reorganization
transaction under which MII became the parent of MI. MI received approximately
$243,000,000 from the exercise of the Intercompany Agreement. MII funded that
payment by (1) receiving dividends of $80,000,000 from JRM and of $20,000,000
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 $85,400,000 at December 31, 2001. Payment of
this amount may put a strain on our liquidity.
As of March 31, 2002, our projected liquidity position for 2002 has not changed
significantly from that disclosed in Part II of MII's annual report on Form 10-K
for the year ended December 31, 2001. We anticipate incurring negative cash
flows in 2002. We expect to meet capital expenditure, working capital and debt
maturity requirements from cash and cash equivalents, short-term borrowings and
the sale of HPC. We also expect MI would be entitled to $249,637,000experience negative cash flows in 2002,
primarily due to tax payments on the exercise of all of its
rights under that agreement, which would generate a tax liability of
$87,338,000. MI does not currently intend to exercise its right to sell under
the Intercompany Agreement (although it may in the future elect to do so). Since
MI is not expected to generate sufficient operating cash flow to repay the
9.375% notes at maturity, and if its extension or refinancing alternatives do
not materialize, MI will have to consider exercising itsMI's rights under the
Intercompany Agreement, selling allAgreement. MI expects to meet its cash needs through short-term
borrowings by BWXT on the MII Credit Facility, sale of assets, obtaining loans
from either JRM or a part of one or more of its operating
subsidiaries, requestingMII, a capital contribution or loan from MII or some combination of
these and other alternatives. As a result,those sources. While we expect MI's inabilitycash flow to successfully refinance or repay these notes could have a material adverse impact
on MII's liquidity, financial position and results of operations.improve in 2003, MI's level of
indebtedness and its lack of
liquidity poseposes substantial risksrisk to us and to the holders of its outstanding
debt securities and to its ability to continue as a going concern.in the short term.
MI and JRM and their respective subsidiaries are restricted, as a result of
covenants in debt instruments, in their ability to transfer funds to MII and its
other subsidiaries through cash dividends or through unsecured loans or
investments. At September 30, 2001,March 31, 2002, substantially all the net assets of MI were
subject to those restrictions. At September 30, 2001,March 31, 2002, JRM and its subsidiaries could
make unsecured loans to or investments in MII and its other subsidiaries of
approximately $71,000,000.
37
Our two surety companies notified us in the first quarter of 2001 that they are
no longer willing to issue bonds on our behalf. We obtain surety bonds in the
ordinary course of business of several of our operations to secure contract bids
and to meet the bonding requirements of various construction and other contracts
with customers.
40
We are currently canvassing the surety market to obtain additional bonding
capacity. Since we received the notice from our surety companies, we have been
satisfying most of our bonding requirements by letters of credit and enhanced
contract terms and conditions. However, if we fail to obtain replacement bonding
capacity, our ability to secure customer contracts and pursue additional
projects in the future may be materially adversely affected. As of March 31,
2002, MII guaranteed previously issued surety bonds of $147,000,000,
$136,000,000 of which were issued in connection with business operations of B&W
and its subsidiaries. We do not believe 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 bonds.
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.
As a result, we have assessed our ability to continue as a going concern and
have concluded that we can continue to fund our operating activities and capital
requirements for the foreseeable future.
In September 2001, Moody's Investor Service lowered MI's credit rating from BA3
to B2. JRM's credit rating remained unchanged at BA3. Our rating by Standard &
Poors remained unchanged at B. This downgrade by Moody's Investor Service has
impacted our cost of capital and could impact our access to capital.
As a result of the impact of the September 11, 2001 terrorist attacks, on the
insurance industry, our
insurers have indicated that we will incur higher costs, higher deductibles and
more restrictive terms and conditions as we renew our historical insurance
coverages in the future. 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 willmay be
available only at rates that we consider uneconomical.
We do not expect this situation to impact our liquidity negatively for the
foreseeable future.
Wehave evaluated and expect to meet capital expenditure, working capital and debt maturity
requirements for the remainder of 2001 from cash and cash equivalents and
short-term borrowings.
MI and its subsidiaries are unablecontinue evaluating possible strategic
acquisitions. At any given time, we may be engaged in discussions or
negotiations or enter into agreements relating to incur additional long-term debt
obligations under one of MI's public debt indentures, other than in connection
with certain extension, renewal or refunding transactions (including an
extension or refinancing of MI's 9.375% notes).
As a result of its bankruptcy filing, B&W and its filing subsidiaries are
precluded from paying dividends to stockholders and making payments on any
pre-bankruptcy filing accounts or notes payable that are due and owing to any
other entity within the McDermott group of companies (the "Pre-Petition
Inter-company Payables") and other creditors during the pendency of the
bankruptcy case, without the Bankruptcy Court's approval.
In September 2001, Moody's Investor Service lowered MI's credit rating form BA3
to B2. JRM's credit rating remained unchanged at BA3. Our rating by Standard &
Poors remain unchanged at B. This downgrade by Moody's Investor Service has
impacted our cost of capital and could impact our access to capital.potential acquisition
transactions.
41
The Babcock & Wilcox Company
B&W and its subsidiaries conduct substantially all of the operations of our
Power Generation Systems segment. The amount of revenues we generate from our
Power Generation Systems segment primarily depends on 38
capital spending by
customers in the electric power generation industry. In that
industry, persistent economic growthThe economy of the U.S.
slowed down in the United States has brought the supplylate 2001, easing demand for electricity and for new generating
capacity. This slowdown also resulted in a slowing of electricity into approximate balance with energy demand, except during
periods of peak demand. In recent years, electric power producers have generally
been meeting these peaks with new combustion turbines rather than new base-load
capacity. In January 2001, the state of California began experiencing shortages
of electricity during periods of peak demand. This has caused many power
companies to re-examine their needsinquiries for new power
plants and for improvements at
existing power plants. Depending on the outcome of these studies, power
companies may order new plants and may improve their existing plants. Newplant upgrades. Current U.S. emissions requirements have also promptedcontinue to
prompt some customers to place orders for environmental equipment. Domestic
demand for electrical power generation industry services and replacement nuclear
steam generators continues at strong levels. The international markets remain
unsettled. Economic and political instability in Asia has caused projects there
to be delayed, suspended or cancelled. We currently expect the 2001
operating activity of this segmentsegment's 2002
revenues to be about the same as in 2000. In addition,
the September 11, 2001 terrorist attacks have increased the risk associated with
certain contracts in the Middle East.2001.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity (1) whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) and (2) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $186,966,000 as of September 30, 2001March 31, 2002 is
subject to periodic reviews for recoverability. The results of our assessment of
recoverability are dependent on our expected resolution of the overall asbestos
liability, timing of cash flow distributions from B&W as contemplated under the
amended plan of reorganization and market conditions. When B&W emerges from the
jurisdiction of the Bankruptcy Court, the subsequent accounting will be
determined based upon the applicable circumstances and facts and circumstances
at thatsuch time,
including the terms of any plan of reorganization. It is possible that a
material adjustment to our financial statements will be required in the course
of or on the completion of the B&W reorganization. See Note 89 to the condensed
consolidated financial statements for B&W's financial information at September 30, 2001.March 31,
2002.
In the three months ended September 30, 2001:March 31, 2002:
B&W's revenues increased $54,190,000$23,098,000 to $304,575,000,$378,957,000, primarily due to
higher volumes from the fabrication, repair and retrofit of existing
facilities, replacement nuclear services,steam generators, boiler cleaning
equipment and nuclear services. Lower volumes from the fabrication and
erection of fossil fuel steam and environmental control systems replacement nuclear steam
generators and
replacement parts;parts partially offset these increases.
B&W's operating income increased $1,218,000decreased $1,880,000 to $2,559,000,$19,013,000, primarily
due to higher(1) lower volumes and margins from the fabrication and erection
of fossil fuel steam and environmental control systems and boiler cleaning
equipmentoperation
and maintenance contracts and (2) higher reorganization expenses
associated with the
42
Chapter 11 filing. Higher volumes and margins from nuclear services and
higher volumes from nuclear services. Lower margins from the fabrication, repair and retrofit of existing
facilities replacement
parts,partially offset these decreases.
Other-net expense decreased $3,014,000. Other-net expense for the three
months ended March 31, 2001 included an impairment loss of $3,000,000
relating to available-for-sale securities whose decline in value had
been judged to be other than temporary.
B&W's backlog at March 31, 2002 and higher generalDecember 31, 2001 was
$1,334,562,000 and 39
administrative$1,379,736,000, respectively.
Our outlook for B&W in 2002 remains positive, despite the significant decline in
natural gas prices towards the end of 2001, and subsequent drop in interest in
coal-fired power generation. We expect our U.S. construction and service
business to remain strong with overall revenues remaining flat for B&W in 2002.
We expect operating income to increase in 2002 due to lower bankruptcy related
expenses and reorganization expenses associated withimproved results in our original equipment manufacturers' ("OEM")
business. The OEM market outlook has changed dramatically from the summer of
2001. Energy prices are low, and our prior outlook for the potential of new
coal-fired base load power plants has diminished. We believe this is a viable
long-term market for new capacity and electric generating capacity only if
energy prices rise, and only if we experience a lasting recovery that
fundamentally affects the demand for electricity itself.
Presently, the Chapter 11 filing partially offset these increases;
In the nine months ended September 30, 2001:proceedings have not fundamentally affected B&W's
revenues increased $205,152,000 to $1,026,350,000, primarilybusiness due to higher volumes from the fabrication and erectionits current mix of fossil fuel steam and
environmental control systems, fabrication, repair and retrofit of
existing facilities, nuclear services, replacement nuclear steam
generators, boiler cleaning equipment and replacement parts;
B&W's operating income increased $32,517,000 to $42,848,000, primarily
due to higher volumes and margins from the fabrication and erection of
fossil fuel steam and environmental control systems which, in the prior
year, included additional charges to substantially completed original
equipment contracts still under warranty or in dispute resolution. In
addition,work. However, if B&W experienced higher volumes and margins from the
fabrication, repair and retrofit of existing facilities and nuclear
services. Higher general and administrative expenses and reorganization
expenses associated with theremains in Chapter 11,
filing and lower operating
results from a joint venture in Pennsylvania partially offset these
increases;
Interest expense increased $2,649,000 to $5,146,000, primarily due to an increase in expenses related to the DIP facility and the settlement of an
ongoing state income tax dispute;
Other-net expense increased $5,796,000 from income of $327,000 to expense
of $5,469,000, primarily due to a loss on the sale of investment
securities. In addition,OEM market does not return, B&W experienced higher income inwould be affected because of the prior
period from estimated future non-employee products liability asbestos
claim recoveries.
B&W's backlog at September 30, 2001lack of
surety capacity and December 31, 2000 was $1,413,162,000 and
$1,030,628,000, respectively.related factors.
In connection with the bankruptcy filing, B&W and its filing subsidiaries
entered into the DIP Credit Facility with a group of lenders, with Citibank,
N.A. as administrative agent, for a three-year term. The facility requires
compliance with certain financial and non-financial covenants. At December 31,
2001, B&W was in violation of a covenant under the DIP Credit Facility. B&W
received a consent from the lenders that remedied this covenant violation on
March 18, 2002. See Note 89 to the condensed consolidated financial statements
for further information on the DIP Credit Facility.
We have assessed B&W's liquidity position as a result of the bankruptcy filing
and believe that B&W can continue to fund its and its subsidiaries' operating
activities and meet its debt and capital requirements for the foreseeable
future. However, B&W's ability to continue as a going concern depends onis dependent upon
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. As a result of the
bankruptcy 40
filing and related events, there is no assurance that the carrying
amounts of assets will be realized or that liabilities will be liquidated or
settled for the amounts recorded. In addition, a rejection of B&W's
43
amended plan of reorganization or any amendment thereto could change the liability amounts
reported in the B&W financial statements and cause a material decrease in the
carrying amount of our investment in B&W. See Note 89 to the condensed
consolidated financial statements for more information.
See Note 1 to the condensed consolidated financial statements for information on
new accounting standards.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGSLegal Proceedings
For information regarding ongoing investigations and litigation, see Note 45 to
the condensed consolidated financial statements in Part I of this report, which
we incorporate by reference into this Item. In addition, see Note 89 to the
condensed consolidated financial statements included in this report regarding
B&W's potential liability for non-employee asbestos claims and the Chapter 11
reorganization proceedings commenced by B&W and certain of its subsidiaries on
February 22, 2000, which we incorporate by reference into this Item.
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
(b) Adoption of Shareholder Rights Plan. On October 17, 2001, our
board of directors adopted a stockholder rights plan6. Exhibits and declared
a dividend of one right to purchase preferred stock for each
outstanding share of our common stock, par value $1.00 per share,
to stockholders of record at the close of businessReports on November 1,
2001. The rights will have antitakeover effects. They will cause
substantial dilution to any person or group that attempts to
acquire us without the approval of our board of directors. As a
result, the overall effect of the rights may be to render more
difficult or discourage any attempt to acquire us, even if that
acquisition may be favorable to the interests of our stockholders.
Because our board of directors can redeem the rights or approve a
permitted offer under the plan, the rights should not interfere
with a merger or other business combination the board of directors
approves. We have issued the rights to protect our stockholders
from coercive or abusive takeover tactics and to afford our board
of directors more negotiating leverage in dealing with prospective
acquirers. The rights are described in (1) Note 9 to the condensed
consolidated financial statements included in this report and (2)
the Form 8-K that we filed with the SEC on October 17, 2001.
41
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.1* - McDermott International, Inc.'s Articles of
Incorporation, as amended (incorporated by reference to Exhibit 3.1 ofto
McDermott International, Inc.'s Form 10-K for the fiscal year ended
March 31, 1996)1996 (File No. 1-08430)).
Exhibit 3.2*3.2 - Amended and Restated By-Laws of McDermott International,
Inc.
(incorporated by reference to Exhibit 4.2 of McDermott
International, Inc.'s Registration Statement on Form S-3 Reg. No.
333-69474).
Exhibit 3.33.3* - Amended and Restated Certificate of Designation of
Series D Participating Preferred Stock.
Exhibit 4.1* - Rights Agreement dated as of October 17, 2001 between
McDermott International, Inc. and EquiServe Trust Company, N.A., as
Rights AgentStock (incorporated by reference
herein to Exhibit 13.1 to McDermott International, Inc.'s CurrentQuarterly
Report on Form 8-K dated October 17,
2001)10-Q for the quarter ended September 30, 2001 (File No.
1-08430)).
(b) Reports on Form 8-K
We did not file any reportsOn March 27, 2002, we filed a report on Form 8-K during the three months ended
September 30, 2001.dated March 20, 2002.
Our report included Item 5 - Other Events.
- ----------
* Incorporated by reference to the filing indicated.
4244
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/ Bruce F. Longaker
--------------------------------------------Francis S. Kalman
---------------------------------------------------
By: Bruce F. LongakerFrancis S. Kalman
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer
and Duly Authorized Representative)
November 2, 2001
43May 13, 2002
45
EXHIBIT INDEX
Exhibit Description
3.1
Exhibit Description
- ------- -----------
3.1* McDermott International, Inc.'s Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1 to McDermott
International, Inc.'s Form 10-K for the fiscal year ended March 31,
1996 (File No. 1-08430)).
3.2 Amended and Restated By-Laws of McDermott International, Inc.
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)).
- ----------
* Incorporated by reference to Exhibit 3.1 of McDermott
International, Inc.'s Form 10-K for the fiscal year ended
March 31, 1996).
3.2 Amended and Restated By-Laws of McDermott International, Inc.
(incorporated by reference to Exhibit 3.2 of McDermott
International, Inc.'s Form 10-Q for the quarter ended March
31, 2001).
3.3 Amended and Restated Certificate of Designation of Series D
Participating Preferred Stock.
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 to Exhibit 1
to McDermott International, Inc.'s Current Report on Form 8-K
dated October 17, 2001).filing indicated.