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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 March 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
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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 April 30,
2001 was 61,184,820.
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McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Income (Loss)
Three Months Ended March 31, 2001 and 2000 6
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2001 and 2000 7
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 34
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 46
SIGNATURES 53
Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc.
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PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 57,037 $ 84,620
Investments -- 34,440
Accounts receivable - trade, net 169,434 181,422
Accounts receivable from The Babcock & Wilcox Company 28,491 30,501
Accounts receivable - unconsolidated affiliates 49,777 31,155
Accounts receivable - other 59,249 54,662
Environmental and products liabilities recoverable - current 1,264 1,527
Contracts in progress 94,307 90,142
Inventories 10,233 11,733
Deferred income taxes 57,502 56,805
Other current assets 18,375 28,022
------------ ------------
Total Current Assets 545,669 605,029
------------ ------------
Property, Plant and Equipment 1,238,782 1,239,554
Less accumulated depreciation 875,210 874,198
------------ ------------
Net Property, Plant and Equipment 363,572 365,356
------------ ------------
Investments:
Government obligations 273,932 280,208
Other investments 49,045 46,547
------------ ------------
Total Investments 322,977 326,755
------------ ------------
Investment in The Babcock &Wilcox Company 186,966 186,966
------------ ------------
Goodwill less Accumulated Amortization of $55,498,000
at March 31, 2001 and $50,579,000 at December 31, 2000 345,772 350,939
------------ ------------
Prepaid Pension Costs 141,487 134,307
------------ ------------
Other Assets 90,918 86,275
------------ ------------
TOTAL $ 1,997,361 $ 2,055,627
============ ============
See accompanying notes to condensed consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2001 2000
------------- -------------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 47,500 $ 96,346
Accounts payable 114,365 114,184
Accounts and notes payable to The Babcock & Wilcox Company 45,769 53,073
Environmental and products liabilities - current 4,430 6,162
Accrued employee benefits 51,914 57,578
Accrued contract costs 31,128 32,867
Advance billings on contracts 92,423 71,612
Other current liabilities 237,804 258,405
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Total Current Liabilities 625,333 690,227
------------- -------------
Long-Term Debt 322,207 323,157
------------- -------------
Accumulated Postretirement Benefit Obligation 28,425 28,276
------------- -------------
Environmental and Products Liabilities 10,112 10,294
------------- -------------
Other Liabilities 228,154 227,070
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Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 63,053,834 at
March 31, 2001 and 62,582,382 at December 31, 2000 63,054 62,582
Capital in excess of par value 1,068,047 1,062,511
Accumulated deficit (235,335) (230,902)
Treasury stock at cost, 2,005,042 shares at March 31,
2001 and December 31, 2000 (62,736) (62,736)
Accumulated other comprehensive loss (49,900) (54,852)
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Total Stockholders' Equity 783,130 776,603
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TOTAL $ 1,997,361 $ 2,055,627
============= =============
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands, except per share amounts)
Revenues $ 432,735 $ 591,711
------------ ------------
Costs and Expenses:
Cost of operations 388,124 514,760
Selling, general and administrative expenses 43,611 60,279
Equity in (income) loss of investees (4,957) 6,223
------------ ------------
Total Costs and Expenses 426,778 581,262
------------ ------------
Operating Income 5,957 10,449
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Other Income (Expense):
Interest income 5,848 7,145
Interest expense (10,131) (8,823)
Other-net (2,172) 2,413
------------ ------------
Total Other Income (Expense) (6,455) 735
------------ ------------
Income (Loss) before Provision for Income Taxes (498) 11,184
Provision for Income Taxes 3,935 3,317
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Net Income (Loss) $ (4,433) $ 7,867
------------ ------------
Earnings (Loss) per Common Share:
Basic $ (0.07) $ 0.13
Diluted $ (0.07) $ 0.13
============ ============
Cash Dividends:
Per Common Share $ -- $ 0.05
============ ============
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
March 31,
2001 2000
---------- ----------
(Unaudited)
(In thousands)
Net Income (Loss) $ (4,433) $ 7,867
---------- ----------
Other Comprehensive Income:
Currency translation adjustments:
Foreign currency translation adjustments 120 2,832
Unrealized losses on derivative financial instruments (1,200) --
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period, net of taxes
(benefits) of $30,000 at March 31, 2001
and ($8,000) at March 31, 2000 4,077 (491)
Reclassification adjustment for (gains) losses
included in net income, net of tax benefit of
$162,000 at March 31, 2001 1,955 (1)
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Other Comprehensive Income 4,952 2,340
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Comprehensive Income $ 519 $ 10,207
========== ==========
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (4,433) $ 7,867
------------ ------------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 14,623 17,133
Income or loss of investees, less dividends (3,551) 7,333
Gain on asset disposals and impairments - net (525) (1,059)
Provision for deferred taxes 760 8,180
Deconsolidation of the Babcock & Wilcox Company -- (19,424)
Other 4,690 2,176
Changes in assets and liabilities, net of effects
of acquisitions and divestitures:
Accounts receivable (12,862) 81,498
Net contracts in progress and advance billings 16,947 (41,716)
Accounts payable (4,358) 15,618
Accrued and other current liabilities (19,427) (32,267)
Products and environmental liabilities (1,651) (6,725)
Other, net (3,026) (56,447)
Proceeds from insurance for products liability claims -- 26,427
Payments of products liability claims -- (23,782)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (12,813) (15,188)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,764) (16,972)
Purchases of available-for-sale securities (348,883) (5,229)
Sales of available-for-sale securities 355,875 --
Maturities of available-for-sale securities 33,026 2,997
Proceeds from asset disposals 543 1,166
Other (1,366) 500
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 31,431 (17,538)
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CONTINUED
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (27) $ (2)
Increase (decrease) in short-term borrowing (48,838) 803
Issuance of common stock 180 --
Dividends paid -- (2,979)
Other 3,101 10
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (45,584) (2,168)
------------ ------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (617) (2,100)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,583) (36,994)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 84,620 162,734
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,037 $ 125,740
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 14,317 $ 14,494
Income taxes - net $ 2,146 $ 2,559
------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Deconsolidation of The Babcock & Wilcox Company debt $ -- $ 4,760
============ ============
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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 ("GAAP") for interim financial information. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. We have included all adjustments that we consider
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 have
significant 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 month period
ended March 31, 2001.
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 months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001. For further information, refer to the consolidated financial statements
and footnotes thereto, included in MII's annual report on Form 10-K for the year
ended December 31, 2000.
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, as of February 22, 2000, B&W's operations
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are subject to the jurisdiction of the Bankruptcy Court and, as a result, our
access to cash flows of B&W and its subsidiaries is restricted.
Due to the bankruptcy filing, beginning on February 22, 2000, we no longer
consolidate B&W's financial results in our condensed consolidated financial
statements, and our investment in B&W is presented on the cost method. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based on the applicable circumstances and facts at such 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 March 31, 2001 and is subject to periodic
reviews for recoverability. At March 31, 2001, MII's investment exceeds the
underlying net assets of B&W by $8,346,000. See Note 8 for condensed
consolidated financial information of B&W.
Effective January 1, 2001, 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. The 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.
NOTE 2 - INVENTORIES
Inventories are summarized below:
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
Raw Materials and Supplies $ 6,767 $ 7,412
Work in Progress 1,244 1,895
Finished Goods 2,222 2,426
------------ ------------
Total Inventories $ 10,233 $ 11,733
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NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
Currency Translation Adjustments $ (46,969) $ (47,089)
Net Unrealized Gain (Loss) on Investments 1,190 (4,842)
Net Unrealized Loss on Derivative Financial Instruments (1,200) --
Minimum Pension Liability (2,921) (2,921)
------------ ------------
Accumulated Other Comprehensive Loss $ (49,900) $ (54,852)
============ ============
NOTE 4 - INVESTIGATIONS AND LITIGATION
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these
allegations, we notified authorities, including the Antitrust Division of the
Department of Justice ("DOJ"), the Securities and Exchange Commission ("SEC")
and the European Commission. As a result of our prompt disclosure of the
allegations, MII and JRM and their officers, directors and employees at the time
of the disclosure were granted immunity from criminal prosecution by the DOJ for
any anti-competitive acts involving worldwide heavy-lift activities. In June
1999, the DOJ agreed to our request to expand the scope of the immunity to
include a broader range of our marine construction activities and affiliates. We
have cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC has terminated its
investigation and no enforcement action has been recommended.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the DOJ that they and others had participated in a
conspiracy to rig bids in connection with the heavy-lift business of HeereMac in
the Gulf of Mexico, the North Sea and the Far
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East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the DOJ investigation. Neither MII, JRM
nor any of their officers, directors or employees was a party to those
proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in a bid-rigging conspiracy for the sale of marine
construction services in the U.S. Gulf of Mexico and elsewhere. In May 2000,
another former JRM officer was indicted by the DOJ for participating in a
bid-rigging conspiracy for the sale of marine construction services in the Gulf
of Mexico. His trial was held in February 2001 and at the conclusion of the
Government's case, the presiding Judge directed a judgment of acquittal. Also in
February 2001, we were advised that the SEC has terminated its investigation and
no enforcement action has been recommended.
We have cooperated with the DOJ in its investigation. The DOJ also has requested
additional information from us relating to possible anti-competitive activity in
the marine construction business of McDermott-ETPM East, Inc., one of the
operating companies within JRM's former McDermott-ETPM joint venture with ETPM
S.A., a French company. In connection with the termination of the McDermott-ETPM
joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM
East, Inc., which was renamed J. Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates and others, alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants (collectively
"Statoil"), filed a similar lawsuit in the same court (the "Statoil
Litigation"). In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil
Litigation have requested punitive as well as treble damages. In January 1999,
the court dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects. In July 1999, the court also dismissed the
Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed
this dismissal to
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the Fifth Circuit Court of Appeals. The Fifth Circuit affirmed the district
court decision in February 2000. Statoil filed a motion for rehearing en banc
which was denied on March 12, 2001. In September 1999, the Phillips Plaintiffs
filed notice of their request to dismiss their remaining domestic claims in the
lawsuit in order to seek an appeal of the dismissal of their claims on foreign
projects, which request was subsequently denied.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others, alleging that the defendants engaged in anti-competitive
acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell
Litigation"). Subsequently, the following parties (acting for themselves and, in
certain cases, on behalf of their respective co-venturers and for whom they
operate) intervened as plaintiffs in the Shell Litigation: Amoco Production
Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc.
and certain of its affiliates; Texaco Exploration and Production Inc. and
certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington
Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil
Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.,
Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron
U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain
of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in
December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell Litigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign project claims of the
plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non-heavy lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims. In the meantime, the Court has allowed limited
discovery.
We recently learned that on December 15, 2000, lawsuits were filed by a number
of Norwegian oil companies against MII, Heeremac, Heerema and Saipem S.p.A. for
violations of the Norwegian Pricing Act of 1953 in connection with projects in
Norway. Plaintiffs include Norwegian affiliates of various of the plaintiffs 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 MII.
We understand that the
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conduct alleged by plaintiffs is the same conduct which plaintiffs allege in the
U.S. civil cases. The first appearance is scheduled for October 4, 2001 in Oslo.
As a result of the initial allegations of wrongdoing in March 1997, we formed
and have continued to maintain a special committee of our Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the DOJ investigation, our
internal investigation, the above-referenced lawsuits or any actions that may be
taken by others as a result of HeereMac's guilty plea or otherwise. These
matters could result in civil and criminal liability and have a material adverse
effect on our consolidated financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania. The suit involves approximately 300
separate claims for compensatory and punitive damages relating to the operation
of two former nuclear fuel processing facilities located in Pennsylvania (the
"Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other
things, that they suffered personal injury, property damage and other damages as
a result of radioactive emissions from these facilities. In September 1998, a
jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to
trial, awarding $36,700,000 in compensatory damages. In June 1999, the district
court set aside the $36,700,000 judgment and ordered a new trial on all issues.
In November 1999, the district court allowed an interlocutory appeal by the
plaintiffs of certain issues, including the granting of the new trial and the
court's rulings on certain evidentiary matters, which, following B&W's
bankruptcy filing, the Third Circuit Court of Appeals declined to accept for
review. The plaintiffs' claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W has also
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 has appealed this decision.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8,000,000 for which it seeks reimbursement from other parties.
There is a controversy between B&W and its insurers as to the amount of coverage
available under the liability insurance policies covering the facilities. B&W
filed a declaratory 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
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cross-motions for partial summary judgment, the Pennsylvania State Court issued
its ruling regarding: (i) the applicable trigger of coverage under the Nuclear
Energy Liability Policies issued by B&W's nuclear insurers; and (ii) 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. We believe that all claims under the Hall Litigation will
be resolved within the limits of coverage of our insurance policies; but our
insurance coverage may not be adequate and we may be materially adversely
impacted if our liabilities exceed our coverage. B&W transferred the two
facilities subject to the Hall Litigation to BWXT in June 1997 in connection
with BWXT's formation and an overall corporate restructuring.
In December 1999 and early 2000, several persons who allegedly purchased shares
of our common stock during the period from May 21, 1999 through November 11,
1999 filed four purported class action complaints against MII and two of its
executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United
States District Court for the Eastern District of Louisiana. Each of the
complaints alleged that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint sought relief, including unspecified
compensatory damages and an award for costs and expenses. The four cases were
subsequently consolidated. In June 2000, the plaintiffs filed a consolidated
amended complaint, and in July 2000, we filed a motion to dismiss all claims
asserted in that complaint. In September 2000, the District Court dismissed with
prejudice the plaintiffs' consolidated amended complaint for failure to state a
claim upon which relief can be granted, which dismissal the plaintiffs appealed
to the U.S. Fifth Circuit Court of Appeals in October 2000. On April 25, 2001,
the plaintiffs-appellants filed a motion to voluntarily dismiss their appeal and
the appeal was dismissed by the U.S. Fifth Circuit Court on April 26, 2001.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and, in January 2000, JRM instituted an
arbitration proceeding against
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Texaco seeking the amount owed. Texaco has countered in the arbitration,
claiming consequential damages for delays resulting from the incident, as well
as costs incurred to complete the project with another contractor. Texaco has
also filed a lawsuit against a number of other parties, claiming that they are
responsible for the incident. It is our position that the contract between the
parties prohibits Texaco's claims against JRM and JRM is entitled to the amount
withheld.
In early April 2001, a group of insurance underwriters 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 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. 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 complaints contain substantially identical factual
allegations. These include allegations that, in the course of settlement
discussions with the representatives of the asbestos claimants in the B&W
bankruptcy proceeding, MII and B&W breached the confidentiality provisions of an
agreement they entered into with these insurers relating to insurance payments
of the 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
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 agreement with the insurers and that
the plaintiff underwriters owe no further obligations to MII and B&W under that
agreement. With respect to the insurance policies, if the insurers should
succeed in terminating the agreement, they seek to litigate issues under the
policies in order to reduce their coverage obligations. The complaint in the
District Court case also seeks a recovery of unspecified compensatory damages.
Management believes these complaints and the substantive allegations they
contain are without merit. Management intends to contest and defend against
these actions vigorously. In management's opinion, these complaints will not
have a material adverse effect on our consolidated financial position or results
of operations.
On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding against MI, BWICO, BWXT, Hudson Products Corporation and McDermott
Technologies, Inc. seeking a judgment, among other things, that 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
involved
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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, Inc. to BWICO, and that the transfers are not voidable.
As an alternative, and only in the event that the Bankruptcy Court finds B&W
insolvent at a pertinent time, the action preserves B&W's claims against the
defendants. We believe that B&W was solvent at the time of the transfers and
that the transfers are not voidable. However, if the declaratory judgment were
adversely decided by the Bankruptcy Court, it could have a material adverse
effect on our consolidated financial position and results of operations.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance or warranty related matters under our
customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position or results of
operations.
See Note 8 to the condensed consolidated financial statements regarding B&W's
potential liability for non-employee asbestos claims and the Chapter 11
reorganization proceedings commenced by B&W and certain of its subsidiaries on
February 22, 2000.
NOTE 5 - SEGMENT REPORTING
Our reportable segments are Marine Construction Services, Power Generation
Systems, Government Operations and Industrial Operations. These segments are
managed separately and are unique in technology, services and customer class.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration, production and
hydrocarbon processing industries and to other marine construction companies.
Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production platforms, specialized
structures, modular facilities, marine pipelines and subsea production systems.
JRM also provides project management services, engineering services, procurement
activities, and removal, salvage and refurbishment services of offshore fixed
platforms.
Government Operations supplies nuclear reactor components and nuclear fuel
assemblies to the U.S. Government, manages and operates government-owned
facilities and supplies commercial nuclear environmental services and other
government and commercial nuclear services.
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Industrial Operations is comprised of the engineering and construction
activities and plant outage maintenance of certain Canadian operations and
manufacturing of auxiliary equipment such as air-cooled heat exchangers and
replacement parts. Industrial Operations also includes contract research
activities.
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment provides
aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities. The Power Generation Systems segment's operations are conducted
primarily through B&W. Due to B&W's Chapter 11 filing, effective February 22,
2000, we no longer consolidate B&W's and its subsidiaries' results of operations
in our condensed consolidated financial statements. Through February 21, 2000,
B&W's and its subsidiaries' results are reported as Power Generation Systems -
B&W in the segment information that follows. See Note 8 for the condensed
consolidated results of B&W and its subsidiaries.
We account for intersegment sales at prices that we generally establish by
reference to similar transactions with unaffiliated customers. Other reconciling
items to income before provision for income taxes are interest income, interest
expense, minority interest and other-net. We have allocated amortization of
goodwill to the reportable segments for all periods presented. Income from
over-funded pension plans of discontinued businesses are included in corporate
for both periods presented.
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Segment Information for the Three Months Ended March 31, 2001 and 2000.
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
REVENUES
Marine Construction Services $ 134,680 $ 206,635
Government Operations 120,863 114,720
Industrial Operations 168,928 115,242
Power Generation Systems - B&W -- 155,774
Power Generation Systems 8,434 82
Adjustments and Eliminations(1) (170) (742)
------------ ------------
$ 432,735 $ 591,711
============ ============
(1) Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 34 $ 437
Government Operations Transfers 112 194
Industrial Operations Transfers 24 52
Power Generation Systems Transfers - B&W -- 59
------------ ------------
$ 170 $ 742
============ ============
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Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
OPERATING INCOME (LOSS):
Segment Operating Income:
Marine Construction Services $ (10,416) $ (5,787)
Government Operations 11,047 13,343
Industrial Operations 2,162 2,235
Power Generation Systems - B&W -- 7,172
Power Generation Systems (585) (220)
------------ ------------
$ 2,208 $ 16,743
============ ============
Gain (Loss) on Asset Disposal and Impairments - Net:
Marine Construction Services $ 522 $ 1,085
Government Operations 3 --
Industrial Operations -- 7
Power Generation Systems - B&W -- (33)
------------ ------------
$ 525 $ 1,059
============ ============
Income (Loss) from Investees:
Marine Construction Services $ (46) $ (7,546)
Government Operations 4,702 1,352
Industrial Operations 66 24
Power Generation Systems - B&W -- 812
Power Generation Systems 235 (865)
------------ ------------
$ 4,957 $ (6,223)
============ ============
SEGMENT INCOME:
Marine Construction Services $ (9,940) $ (12,248)
Government Operations 15,752 14,695
Industrial Operations 2,228 2,266
Power Generation Systems - B&W -- 7,951
Power Generation Systems (350) (1,085)
------------ ------------
7,690 11,579
Corporate (1,733) (1,130)
------------ ------------
TOTAL $ 5,957 $ 10,449
============ ============
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NOTE 6 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands, except shares and
per share amounts)
Basic:
Net income (loss) $ (4,433) $ 7,867
Weighted average common shares 60,144,541 59,396,332
Basic earnings (loss) per common share $ (0.07) $ 0.13
Diluted:
Net income (loss) $ (4,433) $ 7,867
Weighted average common shares (basic) 60,144,541 59,396,332
Effect of dilutive securities:
Stock options and restricted stock -- 435,908
------------ ------------
Adjusted weighted average common shares
and assumed conversions 60,144,541 59,832,240
------------ ------------
Diluted earnings (loss) per common share $ (0.07) $ 0.13
------------ ------------
At March 31 2001, incremental shares of 2,426,431 related to stock options and
restricted stock were excluded from the diluted share calculation as their
effect would have been anti-dilutive.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, 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. The 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.
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
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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 immediate
recognition are included as a component of other-net in our condensed
consolidated statement of income (loss).
At March 31, 2001, we had forward contracts to purchase $25,733,000 in foreign
currencies (primarily Euro and Australian Dollar), and to sell $1,326,000 in
foreign currencies (primarily Pound Sterling), at varying maturities from 2001
through 2002. At March 31, 2001, we had deferred approximately $1,200,000 of net
losses on these forward contracts, of which 38% is expected to be recognized in
income over the next twelve months. For the three months ended March 31, 2001,
the net loss on forward contracts recognized immediately was not significant.
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 8 - THE BABCOCK & WILCOX COMPANY
General
As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of non-employee liability claims asserting
asbestos-related injuries. All of these claims are similar in nature, the
primary difference being the type of alleged injury or illness suffered by the
plaintiff as a result of the exposure to asbestos fibers (e.g., mesothelioma,
lung cancer, other types of cancer, asbestosis or pleural changes).
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Beginning in the third quarter of calendar 1999, B&W experienced a significant
increase in the amount demanded by several plaintiffs' attorneys to settle
certain types of asbestos products liability claims. These increased demands
significantly impaired B&W's ability to continue to resolve its asbestos
products liability through out-of-court settlements.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the Bankruptcy Court to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon,
Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International,
Inc. B&W and these subsidiaries took this action as a means to determine and
comprehensively resolve all pending and future asbestos liability claims against
them. As a result of the filing, the Bankruptcy Court issued a temporary
restraining order prohibiting 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. The temporary restraining order was converted
to a preliminary injunction, which is subject to periodic hearings before the
Bankruptcy Court for extension. Currently, the preliminary injunction runs
through July 17, 2001. On February 20, 2001, the Bankruptcy Court appointed a
mediator to facilitate negotiations among the debtors and the committee
representing the asbestos claimants to reach a final determination of the
debtors' ultimate liability for asbestos related claims. The mediator's
appointment extends through May 23, 2001.
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 will consent to the assignment of the insurance and will
release and void any right that they have to the insurance. The trust's rights
to the insurance would be protected 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 affiliates would be released and discharged from all present and future
liability for asbestos claims arising out of exposure to B&W's products.
Under the litigation strategy, 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
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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.
Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a
strategy of negotiating and settling asbestos products liability claims brought
against them and billing the settled amounts to insurers for reimbursement. The
average amount per settled claim over the three calendar years prior to the
Chapter 11 filing was approximately $7,900. Reimbursed amounts are subject to
varying insurance limits based upon the year of coverage, insurer solvency and
collection delays (due primarily to agreed payment schedules with specific
insurers delaying reimbursement for three months or more). No claims have been
paid since the bankruptcy filing. Claims paid during the year ended December 31,
2000, prior to the bankruptcy filing, were $23,640,000 of which $20,121,000 has
been recovered or is due from insurers. At March 31, 2001, receivables of
$29,091,000 were due from insurers for reimbursement of settled claims.
Currently, certain insurers are refusing to reimburse B&W for settled claims
until B&W's assumption, in bankruptcy, of its pre-bankruptcy filing contractual
reimbursement arrangements with such insurers. To date, this has not had a
material adverse impact on B&W's liquidity or the conduct of its business and we
do not expect it to in the future. We anticipate that B&W will eventually
recover these insurance reimbursements.
At February 21, 2000, the day prior to the bankruptcy filing, B&W had recorded
an asbestos products liability of $1,307,583,000 and an asbestos products
liability insurance recoverable of $1,153,619,000. Historically, B&W's estimated
liabilities for pending and future non-employee products liability asbestos
claims have been derived from its prior claims history. Inherent in the estimate
of such liabilities were expected trend claim severity, frequency, and other
factors. B&W's estimated liabilities were based on the assumption that B&W would
continue to settle claims rather than litigate them, that new claims would
conclude by 2012, that there would be a significant decline in new claims
received after 2003, and that the average cost per claim would continue to
increase only moderately. During the fiscal year ended March 31, 1999, we
revised our estimate of the liability for pending and future non-employee
asbestos claims and recorded an additional liability of $902,847,000, additional
estimated insurance recoveries of $817,662,000 and a loss of $85,185,000 for
future claims for which recovery from insurance carriers was not considered
probable.
In early April 2001, a group of insurance underwriters 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 U.S. District
Court for the Eastern District of Louisiana and (2) a declaratory judgment
complaint
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against B&W in the U.S. Bankruptcy Court for the Eastern District of Louisiana.
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 complaints contain substantially identical factual allegations. These
include allegations that, in the course of settlement discussions with the
representatives of the asbestos claimants in the B&W bankruptcy proceeding, MII
and B&W breached the confidentiality provisions of an agreement they entered
into with these insurers relating to insurance payments of the 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 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 agreement with the insurers and that the plaintiff
underwriters owe no further obligations to MII and B&W under that agreement.
With respect to the insurance policies, if the insurers should succeed in
terminating the agreement, they seek to litigate issues under the policies in
order to reduce their coverage obligations. The complaint in the District Court
case also seeks a recovery of unspecified compensatory damages. Management
believes these complaints and the substantive allegations they contain are
without merit. Management intends to contest and defend against these actions
vigorously. In management's opinion, these complaints will not have a material
adverse effect on our consolidated financial position or results of operations.
Pursuant to the Bankruptcy Court's order, a March 29, 2001 bar date was set for
the submission of allegedly settled asbestos claims and a July 30, 2001 bar date
was set for all other personal injury claims including unsettled asbestos claims
against B&W and its filing subsidiaries. As of the March 29, 2001, bar date over
49,000 allegedly settled claims had been filed. While the B&W Chapter 11
reorganization proceedings continue to progress, there are a number of issues
and matters related to
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B&W's asbestos liability to be resolved prior to its emergence from the
proceedings. Remaining issues and matters to be resolved include, but are not
limited:
o the ultimate asbestos liability of B&W and its subsidiaries;
o the outcome of negotiations with the asbestos claimants
committee, the future claimants representative and other
participants in the Chapter 11, 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 subsidiaries 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; and
o the possible 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 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 intends to bid.
The timing and ultimate outcome of the Chapter 11 proceedings are uncertain. Any
changes in the estimate of B&W's non-employee asbestos liability and insurance
recoverables, and differences between the proportion of such liabilities covered
by insurance and that experienced in the past, could result in material
adjustments to the B&W financial statements and could negatively impact our
ability to realize our net investment in B&W totaling $186,966,000.
In addition, if the asbestos liability of B&W and its subsidiaries is ultimately
determined to be substantially in excess of the amount we have estimated and
reflected in our net investment in B&W, B&W, the asbestos claimants and/or other
creditors in the B&W Chapter 11 proceedings may pursue claims against other
entities within MI based on allegations relating to various pre-petition
transfers by B&W to BWICO and other entities within MI. Although no formal
claims of this nature have been made by the asbestos claimants committee in the
B&W Chapter 11 proceedings, representatives of the asbestos claimants committee
have asserted that the corporate reorganization that we completed in the fiscal
year ended March 31, 1999, which involved 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
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McDermott Technologies, Inc. to BWICO, included transfers which may be voided
under applicable federal bankruptcy and/or state law. On April 30, 2001, B&W
filed a declaratory judgment action in the Chapter 11 proceedings against MI,
BWICO, BWXT, Hudson Products Corporation and McDermott Technologies, Inc.
seeking a judgment, among other things, that B&W was not insolvent at the time
of, or rendered insolvent as a result of, the transfers and cancellation of the
note receivable and that the transfers are not voidable under applicable law. As
an alternative, and only in the event that the Bankruptcy Court finds B&W
insolvent at a pertinent time and the transfers are voidable, the action
preserves B&W's claims against the defendants. We believe that B&W was solvent
at the time of the transfers and that the transfers are not voidable. However,
if the declaratory judgment were adversely decided by the Bankruptcy Court, it
could have a material adverse effect on our consolidated financial position and
results of operations.
Debtor-In-Possession Financing
In connection with the bankruptcy filing, B&W and its filing subsidiaries
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. B&W's and its filing
subsidiaries' obligations under the facility are (1) guaranteed by substantially
all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by
a security interest on B&W Canada Ltd.'s assets. Additionally, B&W and
substantially all of its domestic subsidiaries executed a pledge and security
agreement pursuant to which they have granted a security interest in their
assets to the lenders under the DIP Credit Facility upon the defeasance or
refinancing of MI's public debt. The DIP Credit Facility generally provides for
borrowings by B&W and its filing subsidiaries for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and non-performance letters of credit issued under
the facility cannot exceed $100,000,000 in the aggregate. The DIP Credit
Facility also imposes certain financial and non-financial covenants on B&W and
its subsidiaries. There were no borrowings under this facility at March 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
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of all such pre-existing letters of credit totaled approximately $172,000,000
(the "Pre-existing LCs"). MII, MI and BWICO have agreed to indemnify and
reimburse B&W and its filing subsidiaries for any customer draw on any letter of
credit issued under the DIP Credit Facility to backstop or replace any
Pre-existing LC for which it already has exposure and for the associated letter
of credit fees paid under the facility. As of March 31, 2001, approximately
$75,672,000 in letters of credit have been issued under the DIP Credit Facility
of which approximately $51,353,000 were to replace or backstop Pre-existing LCs.
Financial Results and Reorganization Items
The B&W condensed consolidated financial statements set forth below have been
prepared in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP
90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by
the Bankruptcy Court as of the bankruptcy filing date and identification of all
transactions and events that are directly associated with the reorganization.
Liabilities subject to compromise include prepetition unsecured claims, which
may be settled at amounts which differ from those recorded in the B&W condensed
consolidated financial statements.
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THE BABCOCK & WILCOX COMPANY
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited)
(In thousands)
Revenues $ 355,859 $ 272,567
------------ ------------
Costs and Expenses:
Cost of operations 301,789 226,653
Selling, general and administrative
expenses 28,601 27,055
Equity in income of investees (367) (1,433)
Reorganization charges 4,943 3,922
------------ ------------
Total Costs and Expenses 334,966 256,197
------------ ------------
Operating Income 20,893 16,370
------------ ------------
Other Income (Expense):
Interest income 2,364 963
Interest expense (1,475) (174)
Other-net (3,248) (894)
------------ ------------
Total Other Income (Expense) (2,359) (105)
------------ ------------
Income before Provision for Income Taxes 18,534 16,265
Provision for Income Taxes 7,869 6,630
------------ ------------
Net Income $ 10,665 $ 9,635
============ ============
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THE BABCOCK & WILCOX COMPANY
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
(In thousands)
Assets:
Current Assets $ 532,922 $ 553,937
Property, Plant and Equipment 77,969 80,459
Products Liabilities Recoverable 1,152,489 1,153,761
Goodwill 75,901 77,093
Prepaid Pension Costs 21,096 20,369
Other Assets 158,571 128,043
----------- -----------
Total Assets $ 2,018,948 $ 2,013,662
----------- -----------
Liabilities:
Current Liabilities $ 372,750 $ 364,977
Liabilities Subject to Compromise(A) 1,450,822 1,456,313
Accrued Postretirement Benefit Obligation 594 566
Other long-term liabilities 16,162 18,589
Stockholder's Equity:
Common Stock 1,001 1,001
Capital in Excess of Par Value 134,733 134,733
Retained Earnings 71,489 60,824
Accumulated Other Comprehensive Loss (28,603) (23,341)
----------- -----------
Total Liabilities and Stockholder's Equity $ 2,018,948 $ 2,013,662
----------- -----------
(A) Liabilities subject to compromise consist of the following:
Accounts payable $ 3,011 $ 3,113
Provision for warranty 19,986 21,742
Other current liabilities 24,238 25,302
Products liabilities 1,307,725 1,307,725
Accumulated postretirement benefit obligation 74,215 75,910
Other long-term liabilities 21,647 22,521
----------- -----------
$ 1,450,822 $ 1,456,313
=========== ===========
B&W and its subsidiaries routinely engage in intercompany transactions with
other entities within the McDermott group of companies in the ordinary course of
business. These transactions include services received by B&W and its
subsidiaries from MII and MI under a support services agreement. These services
include the following: accounting, treasury, tax administration, and other
financial services; human relations; public relations; corporate secretarial;
and corporate officer services. In addition, B&W is responsible for its share of
federal income taxes included in MI's federal tax return under a tax-sharing
arrangement. As a result of its bankruptcy filing, B&W and its filing
subsidiaries are precluded from paying dividends to shareholders and making
payments on any pre-bankruptcy filing accounts or notes
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payable that are due and owing to any other entity within the McDermott group of
companies (the "Pre-Petition Inter-company Payables") and other creditors during
the pendency of the bankruptcy case, without the Bankruptcy Court's approval.
Moreover, no assurances can be given that any of the Pre-Petition Inter-company
Payables will be paid or otherwise satisfied in connection with the confirmation
of a B&W plan of reorganization. As of February 21, 2000, the day prior to the
bankruptcy filing, B&W and its filing subsidiaries had Pre-Petition
Inter-company Payables of approximately $51,350,000 and pre-petition
inter-company receivables from other entities within the McDermott group of
companies (other than subsidiaries of B&W) of approximately $58,143,000. In the
course of the conduct of B&W's and its subsidiaries' business, MII and MI have
agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. In addition to this indemnity, these two surety companies requested
and, in June 2000, obtained from the Bankruptcy Court, subject to DIP Credit
Facility and certain professional fees, super-priority administrative expense
status in bankruptcy for their claims against B&W and its filing subsidiaries
resulting from their exposure under any bond issued post-bankruptcy filing for
B&W's and its subsidiaries' businesses. At March 31, 2001, the total value of
B&W's and its subsidiaries' customer contracts yet to be completed covered by
such indemnity arrangements was approximately $235,756,000 of which
approximately $140,305,000 relates to bonds issued after February 21, 2000.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $166,234,000, as of February 21, 2000,
increased to $186,966,000 due to post-bankruptcy filing adjustments to the net
assets of B&W and is subject to periodic reviews for recoverability. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based upon the applicable circumstances and facts at such
time, including the terms of any plan of reorganization.
We have assessed B&W's liquidity position as a result of the bankruptcy filing
and believe that B&W can continue to fund its and its subsidiaries' operating
activities and meet its debt and capital requirements for the foreseeable
future. However, the ability of B&W to continue as a going concern is dependent
upon its ability to settle its ultimate asbestos liability from its net assets,
future profits and cash flow and available
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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 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 periods
ended December 31, 2000 and 1999 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 Statements of Income, assuming
the deconsolidation of B&W, for the three months ended March 31, 2000:
Assumes deconsolidation as of the beginning of the period presented:
(Unaudited)
(In thousands)
Revenues $435,996
Operating Income $ 1,039
Income before Benefit from Income Taxes $ 1,890
Net Income $ 2,362
Earnings per Common Share:
Basic $ 0.04
Diluted $ 0.04
We believe that the bankruptcy filing and the weak Marine Construction Services
markets have contributed to the reduction in our credit rating from BA1 to BA3
by Moody's Investor Service and BB to B by Standard & Poors and, consequently,
could adversely impact our access to capital. 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 this regard, management will be
required to address several significant issues:
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o Negative cash flows. We expect to incur negative cash flows in the
next quarter, with a return to a positive cash flow position in the
third and fourth quarters of the year. We expect to satisfy our
working capital needs and fund negative cash flows in the first two
quarters of 2001 through increased borrowings on our existing credit
facilities. We expect to return to positive cash flows through a
combination of improved market conditions, as well as a reduction in
general and administrative costs.
o Reduction in surety bond capacity. We have been notified by our two
surety companies 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 expect to obtain the coverage we require through other
surety companies as well as using our existing credit facilities for
contract-related performance guarantees. We do not expect this
situation to impact MII's liquidity negatively for the foreseeable
future.
o Upcoming maturity of MI's 9.375% notes. MI's 9.375% notes, which have
an aggregate outstanding 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 of its
9.375% notes. We are currently exploring various alternatives relative
to extending the maturity of these notes, as well as other potential
refinancing alternatives. We expect these efforts will be successful.
In addition, for the 2001 year, MI would be entitled to $249,637,000
on the exercise of all of its rights under the Intercompany Agreement,
which would generate tax 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). There is no assurance,
however, that MI's efforts to extend the maturity of or refinance
these notes will be successful. In that case MI will have to consider
exercising its rights under the Intercompany Agreement, selling all or
a part of one or more of its operating subsidiaries, or some
combination of these and other alternatives. MI's level of
indebtedness and its lack of liquidity pose substantial risks to MI
and the holders of its debt securities. The inability to refinance the
notes successfully could have a material adverse impact on MII's
liquidity, financial position and results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
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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, we disclaim any obligation to update these statements, 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;
o decisions about offshore developments to be made by oil and gas
companies;
o the deregulation of the U.S. electric power market;
o the highly competitive nature of our businesses;
o our future financial performance, including availability, terms and
deployment of capital;
o the continued availability of qualified personnel;
o changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from legal and regulatory
proceedings, including the results of ongoing governmental
investigations 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;
o changes in existing environmental regulatory matters;
o rapid technological changes;
o difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
o social, political and economic situations in foreign countries where
we do business;
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o effects of asserted and unasserted claims; and
o our ability to obtain surety bonds and letters of credit.
We believe the items we have outlined above are important factors that could
cause our actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by us or on our
behalf. We have discussed many of these factors in more detail elsewhere in this
report. These factors are not necessarily all the important factors that could
affect us. Unpredictable or unknown factors we have not discussed in this report
could also have material adverse effects on actual results of matters that are
the subject of our forward-looking statements. We do not intend to update our
description of important factors each time a potential important factor arises.
We advise our security holders that they should (1) be aware that important
factors not referred to above could affect the accuracy of our forward-looking
statements and (2) use caution and common sense when considering our
forward-looking statements.
GENERAL
The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant development projects.
Although oil and gas prices have increased over the past year, this is not
expected to have a significant impact on our Marine Construction Services'
customers' exploration and production spending for the first half of 2001.
Consequently, we do not expect our Marine Construction Services segment's
revenues to increase significantly until the second half of 2001. During 2001,
we should begin to see modest benefits from stronger marine construction
results, followed by more substantial improvements in 2002. Although the timing
of the award of many marine construction projects remains uncertain, we believe
this segment's backlog should continue to increase for the foreseeable future.
The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. Government. As a result of reductions in the
defense budget over the past several years, we do not expect this segment to
experience any significant growth in the next three years. We expect this
segment's backlog to remain relatively constant since it is the sole supplier to
the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components
for the Naval Reactors Program. We currently expect the 2001 operating activity
of this segment will be about the same as in 2000.
The revenues of our Industrial Operations segment are affected by variations in
the business cycles in its customers' industries and the overall economy.
Legislative and regulatory issues such as environmental regulations and
fluctuations in U.S. Government funding patterns also affect this segment. We
currently expect the 2001 operating activity of this segment will be about the
same as in 2000.
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After net interest expense, other expenses and taxes, we expect net results to
be positive in the next quarter. We expect profitability to improve in each of
the final three quarters of 2001 as JRM markets recover and as the Y-12 and
Pantex contracts recently awarded to BWXT increase income from investees in
Government Operations during the second half of the year.
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 three months ended March 31, 2000.
In general, each of our business segments is composed of capital-intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
We evaluate the realizability of our long-lived assets, including property,
plant and equipment and goodwill, whenever events or changes in circumstances
indicate that we may not be able to recover the carrying amounts of those
assets. We carry our property, plant and equipment at cost, reduced by
provisions to recognize economic impairment when we determine impairment has
occurred.
We derive a significant portion of our revenues from foreign operations. As a
result, international factors, including variations in local economies and
changes in foreign currency exchange rates affect our revenues and operating
results. We use derivative financial instruments, primarily forward contracts,
to reduce the impact of changes in foreign exchange rates on 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. Because we generally
do not hedge beyond our exposure, we believe this practice minimizes the impact
of foreign exchange rate movements on our operating results.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED
MARCH 31, 2000
Marine Construction Services
Revenues decreased $71,955,000 to $134,680,000 due to lower volume in offshore
activities in the Far East relating to the West Natuna project. Higher volumes
from engineering and North American activities partially offset this decrease.
Segment operating loss increased $4,629,000 to $10,416,000, primarily due to
lower volume in offshore activities in the Far East relating to the West Natuna
project. Higher volumes and margins in North American activities and lower
general and administrative expenses partially offset these decreases.
Loss from investees decreased $7,500,000 to $46,000, primarily due to higher
operating results in our Mexican and SPARS joint ventures. The prior year
included higher losses associated with our U.K. fabrication joint venture.
Government Operations
Revenues increased $6,143,000 to $120,863,000, primarily due to higher volumes
from nuclear fuel assemblies and reactor components for the U.S. Government and
commercial work. Lower volumes from other government operations and management
and operating contracts for U.S. Government-owned facilities partially offset
these increases.
Segment operating income decreased $2,296,000 to $11,047,000, primarily due to
lower margins from management and operating contracts for U.S. Government-owned
facilities and lower volumes and margins from other government operations.
Higher volumes and margins from commercial work and lower general and
administrative expenses partially offset these decreases.
Income from investees increased $3,350,000 to $4,702,000, primarily due to
higher operating results from a joint venture in Idaho and the start-up of our
Pantex and Y-12 joint ventures.
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Industrial Operations
Revenues increased $53,686,000 to $168,928,000, primarily due to higher volumes
from engineering and plant maintenance activities in Canadian operations and
from air-cooled heat exchangers.
Power Generation Systems
Revenues increased $8,352,000 to $8,434,000, primarily due to the acquisition of
various business units of the Ansaldo Volund Group, an international power
generation operation.
Income (loss) from investees increased $1,100,000 from a loss of $865,000 to
income of $235,000, primarily due to the operating loss of a certain foreign
joint venture exited in the prior year.
Other Income Statement Items
Interest income decreased $1,297,000 to $5,848,000, primarily due to a decrease
in investments.
Interest expense increased $1,308,000 to $10,131,000, primarily due to changes
in prevailing interest rates.
Other-net decreased $4,585,000 from income of $2,413,000 to a loss of
$2,172,000. The three months ended March 31, 2001 includes an impairment loss of
approximately $2,800,000 relating to available-for-sale securities whose decline
in value has been judged to be other than temporary.
The provision for income taxes increased $618,000 to $3,935,000, while the
income (loss) before provision for income taxes decreased $11,682,000 from
income of $11,184,000 to a loss of $498,000. The change in the relationship of
pretax income to the provision for income taxes primarily resulted from earnings
decreasing in non-taxable jurisdictions. The provision for the three months
ended March 31, 2001 and 2000 reflect non-deductible amortization of goodwill of
$4,502,000. The goodwill was created by the premium we paid on the acquisition
of the minority interest in JRM in June 1999. Income taxes in the three months
ended March 31, 2000 also include a provision of $3,800,000 for B&W for the
pre-filing period. Also included are tax benefits relating to favorable tax
settlements in foreign jurisdictions totaling approximately $2,300,000 and
$5,500,000 at March 31, 2001 and 2000, respectively. 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.
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Backlog
3/31/01 12/31/00
---------- ----------
(Unaudited)
(In thousands)
Marine Construction Services $ 807,241 $ 541,647
Government Operations 972,819 1,078,803
Industrial Operations 475,393 396,429
Power Generation Systems 43,790 48,631
---------- ----------
TOTAL BACKLOG $2,299,243 $2,065,510
========== ==========
Backlog for the Marine Construction Services segment increased primarily because
of recent awards of new offshore construction programs.
At March 31, 2001, Government Operations' backlog with the U. S. Government was
$926,078,000 (of which $9,835,000 had not been funded). This segment's backlog
is not expected to experience significant growth as a result of reductions in
defense budgets. However, management expects this segment's backlog to remain
relatively constant since it is the sole source provider of nuclear fuel
assemblies and nuclear reactor components for the U. S. Government.
Liquidity and Capital Resources
During the three months ended March 31, 2001, our cash and cash equivalents
decreased $27,583,000 to $57,037,000 and total debt decreased $49,796,000 to
$369,707,000, primarily due to a decrease in short-term borrowings of
$48,838,000. During this period, we received cash of $388,901,000 from sales and
maturities of investments and $543,000 from the sale of assets. We used cash of
$348,883,000 for the purchase of investments, $12,813,000 in operating
activities and $7,764,000 for additions to property, plant and equipment.
At March 31, 2001 and December 31, 2000, we had available various uncommitted
short-term lines of credit from banks totaling $12,439,000 and $12,819,000,
respectively. There were no borrowings against these lines at March 31, 2001 or
December 31, 2000.
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 were no borrowings under this facility at
March 31, 2001 or
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December 31, 2000. See Note 8 to the condensed consolidated
financial statements for further information on the DIP Credit Facility.
On February 21, 2000, we also entered into other financing arrangements
providing financing to the balance of our operations. This financing, as amended
on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and
Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000
credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each
facility is with a group of lenders, for which Citibank, N.A. is acting as the
administrative agent.
The MII Credit Facility consists of two tranches, each of which has a three-year
term. One is a revolving credit facility that provides for up to $100,000,000 to
the borrowers. Borrowings under this facility may be used for working capital
and general corporate purposes. The second tranche provides for up to
$200,000,000 of letters of credit and may be used to reimburse issuers for
drawings under certain outstanding letters of credit totaling $31,519,000 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. This facility is secured by a
collateral account funded with various U.S. government securities with a
marked-to-market value equal to 105% of the aggregate amount available for
drawing under letters of credit and revolving credit borrowings then
outstanding. Borrowings against this facility at March 31, 2001 and December 31,
2000 were $20,000,000 and $10,000,000, respectively. Borrowings increased to
$40,000,000 as of May 8, 2001. Letters of credit against this facility
outstanding at March 31, 2001 totaled approximately $51,000,000.
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 March 31, 2001 and
December 31, 2000 were $25,000,000 and $50,000,000, respectively. Borrowings
increased to $30,000,000 as of May 8, 2001. Letters of credit outstanding
against this facility at March 31, 2001 totaled approximately $68,000,000.
At March 31, 2001, we had total cash, cash equivalents and investments of
$380,014,000. Our investment portfolio consists primarily of government
obligations and other investments in debt
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securities. The fair value of our investments at March 31, 2001 was
$322,977,000. As of March 31, 2001, we had pledged approximately $44,742,000
fair value of these investments to secure a letter of credit in connection with
certain reinsurance agreements. In addition, approximately $206,159,000 fair
value of these investments were pledged to secure the MII Credit Facility. We
had free cash available totaling approximately $46,000,000 at March 31, 2001.
In connection with B&W's bankruptcy filing, MII entered into a support agreement
pursuant to which it agreed to provide MI with standby financial support on its
interest payments on its (i) $225,000,000 in aggregate principal amount of
9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A
Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of
Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in
principal amount under a Pollution Control Note due 2009. MI is required to pay
MII $5,000 per month under the support agreement which expires on March 15,
2002.
MI's 9.375% 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 of its 9.375% notes.
However, 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. In addition, MI
has a financial asset pursuant to a stock purchase and sale agreement with MII
(the "Intercompany Agreement"). For 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 tax of $87,338,000.
We are currently exploring various alternatives relative to extending the
maturity of these notes, as well as other potential refinancing alternatives. We
expect these efforts will be successful. 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). There is no assurance, however, that MI's efforts to
extend the maturity of or refinance these notes will be successful. In that case
MI will have to consider exercising its rights under
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the Intercompany Agreement, selling all or a part of one or more of its
operating subsidiaries, or some combination of these and other alternatives.
MI's level of indebtedness and its lack of liquidity pose substantial risks to
MI and the holders of its debt securities. The inability to refinance the notes
successfully could have a material adverse impact on the MII's liquidity,
financial position and results of operations.
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 March 31, 2001, substantially all the net assets of MI were
subject to those restrictions. At March 31, 2001, JRM and its subsidiaries could
make unsecured loans to or investments in MII and its other subsidiaries of
approximately $72,000,000.
Our two surety companies have notified us 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 negotiating with other surety companies. We expect to obtain
the coverage we require through other surety companies as well as using our
existing credit facilities for contract-related performance guarantees. This
issue primarily effects B&W and its subsidiaries. We do not expect this
situation to impact MII's liquidity negatively for the foreseeable future.
We expect to incur negative cash flows in the next quarter of 2001, with the
third and fourth quarters returning to a positive cash flow position. We expect
to meet capital expenditure, working capital and debt maturity requirements 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).
As a result of its bankruptcy filing, B&W and its filing subsidiaries are
precluded from paying dividends to shareholders and making payments on any
pre-bankruptcy filing accounts or notes payable that are due and owing to any
other entity within the McDermott group of companies (the "Pre-Petition
Inter-company Payables") and other creditors during the pendency of the
bankruptcy case, without the Bankruptcy Court's approval.
We believe that the bankruptcy filing and the weak Marine Construction Services
markets contributed to the reduction in our credit rating in June 2000 from BA1
to BA3 by Moody's Investor
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Service and from BB+ to B in December 2000 by Standard & Poors and,
consequently, could adversely impact our access to capital. 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.
At March 31, 2001, we had a valuation allowance for deferred tax assets of
$15,959,000, which cannot be realized through carrybacks and future reversals of
existing taxable temporary differences. We believe that our remaining deferred
tax assets are realizable through carrybacks and future reversals of existing
taxable temporary differences, future taxable income and, if necessary, the
implementation of tax planning strategies involving sales of appreciated assets.
Uncertainties that affect the ultimate realization of our deferred tax assets
include the risk of incurring losses in the future and the possibility of
declines in value of appreciated assets involved in the tax planning strategies
we have identified. We have considered these factors in determining our
valuation allowance. We will continue to assess the adequacy of our valuation
allowance on a quarterly basis.
We have evaluated and expect to continue evaluating possible strategic
acquisitions, some of which may be material. At any given time we may be engaged
in discussions or negotiations or enter into agreements relating to potential
acquisition transactions.
The Babcock & Wilcox Company
B&W and its subsidiaries conduct substantially all of the operations of our
Power Generation Systems segment. The amount of revenues we generate from our
Power Generation Systems segment primarily depends on capital spending by
customers in the electric power generation industry. In that industry,
persistent economic growth in the United States has brought the supply of
electricity into approximate balance with energy demand, except during periods
of peak demand. Electric power producers have generally been meeting these peaks
with new combustion turbines rather than new base-load capacity. In January,
2001, the state of California experienced shortages of electricity during
periods of peak demand. This has caused many power companies to re-examine their
needs 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. New U.S. emissions requirements have also
prompted some customers to place orders for environmental equipment. Domestic
demand for electrical power generation industry services and replacement nuclear
steam generators continues at strong levels. The international markets remain
unsettled.
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We currently expect the 2001 operating activity of this segment will be about
the same as in 2000.
B&W's financial results are included in our consolidated results through
February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally
accepted accounting principles specifically require that any entity whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $186,966,000 as of March 31, 2001 is
subject to periodic reviews for recoverability. When B&W emerges from the
jurisdiction of the Bankruptcy Court, the subsequent accounting will be
determined based upon the applicable circumstances and facts at such time,
including the terms of any plan of reorganization. See Note 8 to the condensed
consolidated financial statements for B&W's financial information at March 31,
2001.
In the three months ended March 31, 2001:
B&W's revenues increased $83,292,000 to $355,859,000, primarily due to
higher volumes from the fabrication and erection of fossil fuel steam and
environmental control systems, fabrication, repair and retrofit of existing
facilities, replacement parts and nuclear services;
B&W's operating income increased $4,523,000 to $20,893,000, primarily due
to higher volumes from fabrication and erection of fossil fuel steam and
environmental control systems and replacement parts and higher volumes and
margins from the fabrication, repair and retrofit of existing facilities
and nuclear services. In addition , B&W experienced lower sales and
marketing expenses. Lower margins from replacement nuclear steam
generators, higher reorganization expenses associated with the Chapter 11
filing and lower operating results from a joint venture located in Canada
partially offset these increases. In addition, B&W experienced favorable
employee benefit adjustments in the prior year, primarily due to income
from over-funded pension plans;
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Other net expense for the three months ended March 31, 2001 includes 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, 2001 and December 31, 2000 was $1,343,879,000 and
$1,030,628,000, respectively.
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 is subject to
certain financial and non-financial covenants. See Note 8 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, the ability of B&W to continue as a going concern is 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 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 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 in B&W.
See Note 8 to the condensed consolidated financial statements for more
information.
PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these
allegations, we notified authorities, including the Antitrust Division of the
Department of Justice ("DOJ"), the Securities and Exchange Commission ("SEC")
and the European Commission. As a result of our prompt disclosure of the
allegations, MII and JRM and their officers, directors and employees at the time
of the disclosure were granted immunity from criminal prosecution by the DOJ for
any anti-
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competitive acts involving worldwide heavy-lift activities. In June 1999, the
DOJ agreed to our request to expand the scope of the immunity to include a
broader range of our marine construction activities and affiliates. We have
cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC has terminated its
investigation and no enforcement action has been recommended.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. On December 21, 1997, HeereMac and one of its employees pled guilty
to criminal charges by the DOJ that they and others had participated in a
conspiracy to rig bids in connection with the heavy-lift business of HeereMac in
the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac
employee were fined $49,000,000 and $100,000, respectively. As part of the plea,
both HeereMac and certain employees of HeereMac agreed to cooperate fully with
the DOJ investigation. Neither MII, JRM nor any of their officers, directors or
employees was a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in a bid-rigging conspiracy for the sale of marine
construction services in the U.S. Gulf of Mexico and elsewhere. In May 2000,
another former JRM officer was indicted by the DOJ for participating in a
bid-rigging conspiracy for the sale of marine construction services in the Gulf
of Mexico. His trial was held in February 2001 and at the conclusion of the
Government's case, the presiding Judge directed a judgment of acquittal. Also in
February 2001, we were advised that the SEC has terminated its investigation and
no enforcement action has been recommended.
We have cooperated with the DOJ in its investigation. The DOJ also has requested
additional information from us relating to possible anti-competitive activity in
the marine construction business of McDermott-ETPM East, Inc., one of the
operating companies within JRM's former McDermott-ETPM joint venture with ETPM
S.A., a French company. In connection with the termination of the McDermott-ETPM
joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM
East, Inc., which was renamed J. Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates and others, alleging that the defendants
engaged in anti-
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competitive acts in violation of Sections 1 and 2 of the Sherman Act and
Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in
fraudulent activity and tortiously interfered with the plaintiffs' businesses in
connection with certain offshore transportation and installation projects in the
Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In
December 1998, Den norske stats oljeselskap a.s., individually and on behalf of
certain of its ventures and its participants (collectively "Statoil"), filed a
similar lawsuit in the same court (the "Statoil Litigation"). In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Phillips Litigation and Statoil Litigation have requested punitive as well
as treble damages. In January 1999, the court dismissed without prejudice, due
to the court's lack of subject matter jurisdiction, the claims of the Phillips
Plaintiffs relating to alleged injuries sustained on any foreign projects. In
July 1999, the court also dismissed the Statoil Litigation for lack of subject
matter jurisdiction. Statoil appealed this dismissal to the Fifth Circuit Court
of Appeals. The Fifth Circuit affirmed the district court decision in February
2000. Statoil filed a motion for rehearing en banc which was denied on March 12,
2001. In September 1999, the Phillips Plaintiffs filed notice of their request
to dismiss their remaining domestic claims in the lawsuit in order to seek an
appeal of the dismissal of their claims on foreign projects, which request was
subsequently denied.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others, alleging that the defendants engaged in anti-competitive
acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell
Litigation"). Subsequently, the following parties (acting for themselves and, in
certain cases, on behalf of their respective co-venturers and for whom they
operate) intervened as plaintiffs in the Shell Litigation: Amoco Production
Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc.
and certain of its affiliates; Texaco Exploration and Production Inc. and
certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington
Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil
Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.,
Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron
U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain
of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in
December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell Litigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign project claims of the
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plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non-heavy lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims. In the meantime, the Court has allowed limited
discovery.
We recently learned that on December 15, 2000, lawsuits were filed by a number
of Norwegian oil companies against MII, Heeremac, Heerema and Saipem S.p.A. for
violations of the Norwegian Pricing Act of 1953 in connection with projects in
Norway. Plaintiffs include Norwegian affiliates of various of the plaintiffs 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 MII.
We understand that the conduct alleged by plaintiffs is the same conduct which
plaintiffs allege in the U.S. civil cases. The first appearance is scheduled for
October 4, 2001 in Oslo.
As a result of the initial allegations of wrongdoing in March 1997, we formed
and have continued to maintain a special committee of our Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the DOJ investigation, our
internal investigation, the above-referenced lawsuits or any actions that may be
taken by others as a result of HeereMac's guilty plea or otherwise. These
matters could result in civil and criminal liability and have a material adverse
effect on our consolidated financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania. The suit involves approximately 300
separate claims for compensatory and punitive damages relating to the operation
of two former nuclear fuel processing facilities located in Pennsylvania (the
"Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other
things, that they suffered personal injury, property damage and other damages as
a result of radioactive emissions from these facilities. In September 1998, a
jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to
trial, awarding $36,700,000 in compensatory damages. In June 1999, the district
court set aside the $36,700,000 judgment and ordered a new trial on all issues.
In November 1999, the district court allowed an interlocutory appeal by the
plaintiffs of certain issues, including the granting of the new trial and the
court's rulings on certain evidentiary matters, which, following B&W's
bankruptcy filing, the Third Circuit Court of Appeals declined to accept for
review. The plaintiffs' claims against B&W in the Hall
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Litigation have been automatically stayed as a result of the B&W bankruptcy
filing. B&W has also 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 has appealed this decision.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8,000,000 for which it seeks reimbursement from other parties.
There is a controversy between B&W and its insurers as to the amount of coverage
available under the liability insurance policies covering the facilities. B&W
filed a declaratory 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: (i) the
applicable trigger of coverage under the Nuclear Energy Liability Policies
issued by B&W's nuclear insurers; and (ii) 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. We
believe that all claims under the Hall Litigation will be resolved within the
limits of coverage of our insurance policies; but our insurance coverage may not
be adequate and we may be materially adversely impacted if our liabilities
exceed our coverage. B&W transferred the two facilities subject to the Hall
Litigation to BWXT in June 1997 in connection with BWXT's formation and an
overall corporate restructuring.
In December 1999 and early 2000, several persons who allegedly purchased shares
of our common stock during the period from May 21, 1999 through November 11,
1999 filed four purported class action complaints against MII and two of its
executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United
States District Court for the Eastern District of Louisiana. Each of the
complaints alleged that the defendants violated federal securities laws by
disseminating materially false and misleading information and/or concealing
material adverse information relating to our estimated liability for
asbestos-related claims. Each complaint sought relief, including unspecified
compensatory damages and an award for costs and expenses. The four cases were
subsequently consolidated. In June 2000, the plaintiffs filed a consolidated
amended complaint, and in July 2000, we filed a motion to dismiss all claims
asserted in that complaint. In September 2000, the District Court dismissed with
prejudice the plaintiffs' consolidated
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amended complaint for failure to state a claim upon which relief can be granted,
which dismissal the plaintiffs appealed to the U.S. Fifth Circuit Court of
Appeals in October 2000. On April 25, 2001, the plaintiffs-appellants filed a
motion to voluntarily dismiss their appeal and the appeal was dismissed by the
U.S. Fifth Circuit Court on April 26, 2001.
In December 1998, JRM was in the process of installing a deck module on a
compliant tower in the Gulf of Mexico for Texaco Exploration and Production,
Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of
the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due
under the installation contract, and, in January 2000, JRM instituted an
arbitration proceeding against Texaco seeking the amount owed. Texaco has
countered in the arbitration, claiming consequential damages for delays
resulting from the incident, as well as costs incurred to complete the project
with another contractor. Texaco has also filed a lawsuit against a number of
other parties, claiming that they are responsible for the incident. It is our
position that the contract between the parties prohibits Texaco's claims against
JRM and JRM is entitled to the amount withheld.
In early April 2001, a group of insurance underwriters 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 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. 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 complaints contain substantially identical factual
allegations. These include allegations that, in the course of settlement
discussions with the representatives of the asbestos claimants in the B&W
bankruptcy proceeding, MII and B&W breached the confidentiality provisions of an
agreement they entered into with these insurers relating to insurance payments
of the 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
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 agreement with the insurers and that
the plaintiff underwriters owe no further obligations to MII and B&W under that
agreement. With respect to the insurance policies, if the insurers should
succeed in terminating the agreement, they seek to litigate issues under the
policies in order to reduce their coverage obligations. The complaint in the
District Court case also seeks a recovery of unspecified compensatory damages.
Management believes these complaints and the substantive allegations they
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contain are without merit. Management intends to contest and defend against
these actions vigorously. In management's opinion, these complaints will not
have a material adverse effect on our consolidated financial position or results
of operations.
On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding against MI, BWICO, BWXT, Hudson Products Corporation and McDermott
Technologies, Inc. seeking a judgment, among other things, that 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
involved 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, Inc. to BWICO, and that the transfers are not voidable.
As an alternative, and only in the event that the Bankruptcy Court finds B&W
insolvent at a pertinent time, the action preserves B&W's claims against the
defendants. We believe that B&W was solvent at the time of the transfers and
that the transfers are not voidable. However, if the declaratory judgment were
adversely decided by the Bankruptcy Court, it could have a material adverse
effect on our consolidated financial position and results of operations.
See Note 8 to the condensed consolidated financial statements 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.
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 of
McDermott International, Inc.'s Form 10-K for the fiscal year ended
March 31, 1996).
Exhibit 3.2 - Amended and Restated By-Laws of McDermott International.
Inc.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 31, 2001.
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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
-----------------------------------------
By: Bruce F. Longaker
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Representative)
May 11, 2001
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EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.1 McDermott International, Inc.'s Articles of Incorporation,
as amended (incorporated by reference to Exhibit 3.1 of
McDermott International, Inc.'s Form 10-K for the fiscal
year ended March 31, 1996).
3.2 Amended and Restated By-laws of McDermott International, Inc.