1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- ------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the Company's Common Stock at July 30, 2001
was 61,385,422.
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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
June 30, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Income (Loss)
Three and Six Months Ended June 30, 2001 and 2000 6
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Six Months Ended June 30, 2001 and 2000 7
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 41
Item 4 - Submission of Matters to a Vote of Security Holders 41
Item 6 - Exhibits and Reports on Form 8-K 42
SIGNATURES 43
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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
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 68,536 $ 84,620
Investments -- 34,440
Accounts receivable - trade, net 167,854 181,422
Accounts receivable from The Babcock & Wilcox Company 25,876 30,501
Accounts receivable - unconsolidated affiliates 74,659 31,155
Accounts receivable - other 48,505 54,662
Environmental liabilities recoverable - current 1,296 1,527
Contracts in progress 86,120 90,142
Inventories 9,528 11,733
Deferred income taxes 57,566 56,805
Other current assets 16,546 28,022
---------- ----------
Total Current Assets 556,486 605,029
---------- ----------
Property, Plant and Equipment 1,239,726 1,239,554
Less accumulated depreciation 880,803 874,198
---------- ----------
Net Property, Plant and Equipment 358,923 365,356
---------- ----------
Investments:
Government obligations 272,374 280,208
Other investments 51,714 46,547
---------- ----------
Total Investments 324,088 326,755
---------- ----------
Investment in The Babcock & Wilcox Company 186,966 186,966
---------- ----------
Goodwill less Accumulated Amortization of $60,418,000
at June 30, 2001 and $50,579,000 at December 31, 2000 340,709 350,939
---------- ----------
Prepaid Pension Costs 148,668 134,307
---------- ----------
Other Assets 92,037 86,275
---------- ----------
TOTAL $2,007,877 $2,055,627
========== ==========
See accompanying notes to condensed consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 246,046 $ 96,346
Accounts payable 113,820 114,184
Accounts and notes payable to The Babcock & Wilcox Company 44,866 53,073
Environmental liabilities - current 4,710 6,162
Accrued employee benefits 55,926 57,578
Accrued contract costs 32,346 32,867
Advance billings on contracts 95,749 71,612
Other current liabilities 246,763 258,405
----------- -----------
Total Current Liabilities 840,226 690,227
----------- -----------
Long-Term Debt 96,350 323,157
----------- -----------
Accumulated Postretirement Benefit Obligation 28,153 28,276
----------- -----------
Environmental and Products Liabilities 12,754 10,294
----------- -----------
Other Liabilities 236,887 227,070
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 63,246,425 at
June 30, 2001 and 62,582,382 at December 31, 2000 63,246 62,582
Capital in excess of par value 1,070,605 1,062,511
Accumulated deficit (227,377) (230,902)
Treasury stock at cost, 2,005,792 shares at June 30,
2001 and 2,005,042 at December 31, 2000 (62,736) (62,736)
Accumulated other comprehensive loss (50,231) (54,852)
----------- -----------
Total Stockholders' Equity 793,507 776,603
----------- -----------
TOTAL $ 2,007,877 $ 2,055,627
=========== ===========
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Unaudited)
(In thousands, except per share amounts)
Revenues $ 495,814 $ 487,288 $ 928,549 $ 1,078,999
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of operations 424,639 437,927 812,763 952,687
Selling, general and administrative expenses 57,938 38,182 101,549 98,461
----------- ----------- ----------- -----------
Total Costs and Expenses 482,577 476,109 914,312 1,051,148
----------- ----------- ----------- -----------
Equity in income (loss) of investees 7,921 (14,051) 12,878 (20,274)
----------- ----------- ----------- -----------
Operating Income (Loss) 21,158 (2,872) 27,115 7,577
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 4,783 6,893 10,631 14,038
Interest expense (9,650) (10,978) (19,781) (19,801)
Other-net 590 2,849 (1,582) 5,262
----------- ----------- ----------- -----------
Total Other Expense (4,277) (1,236) (10,732) (501)
----------- ----------- ----------- -----------
Income (Loss) before Provision for Income Taxes 16,881 (4,108) 16,383 7,076
Provision for Income Taxes 8,923 5,939 12,858 9,256
----------- ----------- ----------- -----------
Net Income (Loss) $ 7,958 $ (10,047) $ 3,525 $ (2,180)
=========== =========== =========== ===========
Earnings (Loss) per Common Share:
Basic $ 0.13 $ (0.17) $ 0.06 $ (0.04)
Diluted $ 0.13 $ (0.17) $ 0.06 $ (0.04)
=========== =========== =========== ===========
Cash Dividends:
Per Common Share $ -- $ 0.05 $ -- $ 0.10
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Unaudited)
(In thousands)
Net Income (Loss) $ 7,958 $(10,047) $ 3,525 $ (2,180)
-------- -------- -------- --------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (1,150) (6,164) (1,030) (3,332)
Unrealized gains (losses) on derivative
financial instruments 266 -- (934) --
Unrealized gains on investments:
Unrealized gains arising during the period,
net of taxes (benefits) of $30,000 in the three
and six months ended June 30, 2001 and ($39,000)
and ($47,000), respectively, in the three
and six months ended June 30, 2000 1,396 1,241 5,473 751
Reclassification adjustment for (gains) losses
included in net income, net of tax benefits of
$162,000 in the three and six months ended
June 30, 2001 (843) 11 1,112 10
-------- -------- -------- --------
Other Comprehensive Income (Loss) (331) (4,912) 4,621 (2,571)
-------- -------- -------- --------
Comprehensive Income (Loss) $ 7,627 $(14,959) $ 8,146 $ (4,751)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
---------------------------
2001 2000
--------- ---------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 3,525 $ (2,180)
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 31,416 31,347
Income or loss of investees, less dividends (5,506) 24,715
Gain on asset disposals and impairments - net (1,488) (1,117)
Provision for (benefit from) deferred taxes 8,738 (1,227)
Deconsolidation of The Babcock & Wilcox Company -- (19,424)
Other 4,383 4,200
Changes in assets and liabilities, net of effects
of acquisitions and divestitures:
Accounts receivable (20,824) 71,961
Net contracts in progress and advance billings 28,542 (51,145)
Accounts payable (7,786) (8,640)
Accrued and other current liabilities (10,329) (43,433)
Products and environmental liabilities 1,239 (7,560)
Other, net (3,446) (58,326)
Proceeds from insurance for products liability claims -- 26,427
Payments of products liability claims -- (23,782)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 28,464 (58,184)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (14,281) (39,159)
Purchases of available-for-sale securities (485,950) (16,415)
Sales of available-for-sale securities 410,465 2,858
Maturities of available-for-sale securities 117,071 12,323
Proceeds from asset disposals 1,591 1,495
Other (1,043) 500
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 27,853 (38,398)
========= =========
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CONTINUED
Six Months Ended
June 30,
---------------------------
2001 2000
--------- ---------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (211) $ (2)
Increase (decrease) in short-term borrowing (75,103) 24,858
Issuance of common stock 451 2
Dividends paid -- (5,970)
Other 2,738 786
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (72,125) 19,674
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (276) 16
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (16,084) (76,892)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 84,620 162,734
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,536 $ 85,842
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 19,847 $ 21,280
Income taxes - net $ 3,880 $ 4,104
========= =========
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
JUNE 30, 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 the information and GAAP footnotes required for complete
financial statements. We have included all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. These condensed
consolidated financial statements include the accounts of McDermott
International, Inc. and its subsidiaries and controlled joint ventures. We use
the equity method to account for investments in joint ventures and other
entities we do not control, but over which we have significant influence. We
have eliminated all significant intercompany transactions and accounts. We have
reclassified certain amounts previously reported to conform with the
presentation at and for the three- and six-month periods ended June 30, 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 and six months ended June 30, 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 related footnotes 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 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.
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Due to the bankruptcy filing, beginning on February 22, 2000, we no longer
consolidate B&W's financial results in our condensed consolidated financial
statements, and we present our investment in B&W on the cost method. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based on the applicable facts and circumstances at that 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 June 30, 2001, and is subject to periodic
reviews for recoverability. At June 30, 2001, the underlying net assets of B&W
exceeded MII's investment by $3,520,000. 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. Our initial adoption of SFAS No. 133, as amended by SFAS No.
138, had no material effect on our consolidated financial position or results of
operations.
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. Use of the pooling-of-interest method
is prohibited for business combinations initiated after June 30, 2001. SFAS No.
141 also establishes criteria for the separate recognition of intangible assets
acquired in a business combination. The adoption of SFAS No. 141 will have no
effect on our consolidated financial position or results of operations. SFAS No.
142 requires that goodwill no longer be amortized to earnings, but instead be
subject to periodic testing for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. For the six months ended June 30, 2001,
we had amortized approximately $9,874,000 of goodwill. We have not yet
determined the effect SFAS No. 142 will have on our consolidated financial
position or results of operations.
In June 2001, the FASB voted to issue SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. We have not yet
determined the effect SFAS No. 143 will have on our consolidated financial
position or results of operations.
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NOTE 2 - INVENTORIES
Our inventories are summarized below:
June 30, December 31,
2001 2000
-------- ------------
(Unaudited)
(In thousands)
Raw Materials and Supplies $ 6,350 $ 7,412
Work in Progress 1,082 1,895
Finished Goods 2,096 2,426
------- -------
Total Inventories $ 9,528 $11,733
======= =======
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity are as follows:
June 30, December 31,
2001 2000
-------- ------------
(Unaudited)
(In thousands)
Currency Translation Adjustments $(48,119) $(47,089)
Net Unrealized Gain (Loss) on Investments 1,743 (4,842)
Net Unrealized Loss on Derivative Financial Instruments (934) --
Minimum Pension Liability (2,921) (2,921)
-------- --------
Accumulated Other Comprehensive Loss $(50,231) $(54,852)
======== ========
NOTE 4 - INVESTIGATIONS AND LITIGATION
On March 12, 2001, the plaintiffs' motion for rehearing en banc was denied by
the U.S. Fifth Circuit Court of Appeals in the December 1998 lawsuit filed by
Den norske stats oljeselskap a.s. and several related entities against MII, JRM
and others arising from alleged anti-competitive activities. The plaintiffs have
filed a petition for writ of certiorari.
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 JRM.
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.
In 1998, B&W settled all pending and future punitive damage claims in the
lawsuit filed against B&W and Atlantic Richfield by Donald F. Hall, Mary Ann
Hall and others (the "Hall Litigation") for $8,000,000 for
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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.
On April 25, 2001, the plaintiffs-appellants in the class action complaints
against MII and two of its executive officers alleging violation of federal
securities laws filed a motion to voluntarily dismiss their appeal and the
appeal was dismissed by the U.S. Fifth Circuit Court on April 26, 2001.
In early April 2001, a group of insurers (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the U.S.
District Court for the Eastern District of Louisiana and (2) a declaratory
judgment complaint against B&W in the B&W Chapter 11 proceeding in the U.S.
Bankruptcy Court for the Eastern District of Louisiana, which actions have been
consolidated before the U.S. District Court for the Eastern District of
Louisiana, which has jurisdiction over portions of the B&W Chapter 11
proceeding. The insurance policies at issue in this litigation provide a
significant portion of B&W's excess liability coverage available for the
resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions
of a settlement agreement they entered into with these Plaintiff Insurers
relating to insurance payments by the Plaintiff Insurers as a result of asbestos
claims. They also allege that MII and B&W have wrongfully attempted to expand
the underwriters' obligations under that settlement agreement and the applicable
policies through the filing of a plan of reorganization in the B&W bankruptcy
proceeding that contemplates the transfer of rights under that agreement and
those policies to a trust that will manage the pending and future
asbestos-related claims against
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B&W and certain of its affiliates. The complaints seek declarations that, among
other things, the defendants are in material breach of the settlement agreement
with the Plaintiff Insurers and that the Plaintiff Insurers owe no further
obligations to MII and B&W under that agreement. With respect to the insurance
policies, if the Plaintiff Insurers should succeed in terminating the settlement
agreement, they seek to litigate issues under the policies in order to reduce
their coverage obligations. The complaint against MII also seeks a recovery of
unspecified compensatory damages. B&W has filed a counterclaim against the
Plaintiff Insurers which asserts a claim for breach of contract for amounts owed
and unpaid under the settlement agreement, as well as a claim for anticipatory
breach for amounts that will be owed in the future under the settlement
agreement. B&W seeks a declaratory judgment as to B&W's rights and the
obligations of Plaintiff Insurers and other London Market insurers under the
settlement agreement and under their respective insurance policies with respect
to asbestos claims. The consolidated actions have been set for trial on April
15, 2002. We believe these complaints and the substantive allegations they
contain are without merit. MII and B&W intend to contest and defend against
these actions vigorously. We believe the Plaintiff Insurers' complaints will not
have a material adverse effect on our consolidated financial position or results
of operations. However, if the Plaintiff Insurers are successful, it could have
a material adverse effect on our financial position and on our investment in
B&W.
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 (1) B&W was not
insolvent at the time of, or rendered insolvent as a result of, a corporate
reorganization that we completed in the fiscal year ended March 31, 1999, which
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 (2) that the transfers are not
voidable. As an alternative, and only in the event that the Bankruptcy Court
finds B&W was insolvent at a pertinent time and the transactions are voidable
under applicable law, the action preserved B&W's claims against the defendants.
The Bankruptcy Court has permitted the asbestos claimants committee and the
future claimants in the Chapter 11 to intervene and proceed as
plaintiff-intervenors and has realigned B&W as a defendant in this action. The
asbestos claimants committee and the future claimants are asserting in this
action, among other things, that B&W was insolvent at the time of the transfers
and that the transfers should be voided. 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 action is decided against us by the Bankruptcy Court, it
could have a material adverse effect on our consolidated financial position and
results of operations. The Bankruptcy Court has ruled that Louisiana law will
apply to the solvency issues in this action and has set a trial date of October
22, 2001 to determine B&W's solvency at the time of the corporate
reorganization. In addition, an injunction preventing asbestos suits from being
brought against non-filing affiliates of B&W,
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including MI, JRM and MII, and B&W subsidiaries not involved in the Chapter 11
extends through October 17, 2001.
The following legal proceedings have had no change in status from that disclosed
in Item 3 - "Legal Proceedings", included in Part I of MII's annual report on
Form 10-K for the year ended December 31, 2000:
o The Department of Justice investigation into allegations of wrongdoing
by a limited number of former employees of MII and JRM concerning the
heavy-lift business of JRM's Heeremac joint venture with Heerema
Offshore Construction Group, Inc. and the heavy-lift business of JRM.
o The Department of Justice investigation into possible anti-competitive
activity in the marine construction business of McDermott-ETPM East,
Inc., one of the operating companies within JRM's former McDermott-ETPM
joint venture with ETPM, S.A., a French company.
o The June 1998 lawsuit filed by Phillips Petroleum Company and several
related entities against MII and others, referred to as the "Phillips
Litigation" in our annual report.
o The June 1998 lawsuit filed by Shell Offshore, Inc. and several related
entities against MII and others, referred to as the "Shell Litigation"
in our annual report.
o JRM's arbitration proceedings against Texaco Exploration and
Production, Inc. ("Texaco") concerning Texaco's withheld payment of
$23,000,000 due under an installation contract.
For a detailed description of these proceedings please refer to Note 11 to the
consolidated financial statements included in Part I of MII's annual report on
Form 10-K for the year ended December 31, 2000. Also, see Note 8 to the
condensed consolidated financial statements regarding B&W's potential liability
for non-employee asbestos claims and additional information concerning the
Chapter 11 reorganization proceedings commenced by B&W and certain of its
subsidiaries on February 22, 2000.
NOTE 5 - SEGMENT REPORTING
There are no differences from our last annual report in our basis of
segmentation or in our basis of measurement of segment profit or loss, except
for the inclusion of income from over-funded pension plans of discontinued
operations in Corporate. An analysis of our operations by segment is as follows:
Segment Information for the Three and Six Months Ended June 30, 2001 and 2000.
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Unaudited)
(In thousands)
REVENUES
Marine Construction Services $ 205,149 $ 246,142 $ 339,829 $ 452,777
Government Operations 117,011 112,043 237,874 226,763
Industrial Operations 160,779 129,471 329,707 244,713
Power Generation Systems - B&W -- -- -- 155,774
Power Generation Systems 12,993 64 21,427 146
Adjustments and Eliminations(1) (118) (432) (288) (1,174)
----------- ----------- ----------- -----------
$ 495,814 $ 487,288 $ 928,549 $ 1,078,999
=========== =========== =========== ===========
(1) Segment revenues are net of the following intersegment transfers
and other adjustments:
Marine Construction Services Transfers $ 96 $ 144 $ 130 $ 581
Government Operations Transfers 35 237 147 431
Industrial Operations Transfers (13) 51 11 103
Power Generation Systems Transfers - B&W -- -- -- 59
----------- ----------- ----------- -----------
$ 118 $ 432 $ 288 $ 1,174
=========== =========== =========== ===========
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Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Unaudited)
(In thousands)
OPERATING INCOME (LOSS):
Segment Operating Income:
Marine Construction Services $ 8,361 $ (2,001) $ (2,055) $ (7,788)
Government Operations 7,952 8,525 18,999 21,868
Industrial Operations 3,602 2,799 5,764 5,034
Power Generation Systems - B&W -- -- -- 7,172
Power Generation Systems (1,192) (144) (1,777) (364)
-------- -------- -------- --------
$ 18,723 $ 9,179 $ 20,931 $ 25,922
======== ======== ======== ========
Gain (Loss) on Asset Disposal and
Impairments - Net:
Marine Construction Services $ 193 $ (144) $ 715 $ 941
Government Operations 759 199 762 199
Industrial Operations 11 3 11 10
Power Generation Systems - B&W -- -- -- (33)
-------- -------- -------- --------
$ 963 $ 58 $ 1,488 $ 1,117
======== ======== ======== ========
Income (Loss) from Investees:
Marine Construction Services $ 1,332 $ 4,539 $ 1,286 $ (3,007)
Government Operations 6,056 1,927 10,758 3,279
Industrial Operations 50 47 116 71
Power Generation Systems - B&W -- -- -- 812
Power Generation Systems 483 (20,564) 718 (21,429)
-------- -------- -------- --------
$ 7,921 $(14,051) $ 12,878 $(20,274)
======== ======== ======== ========
SEGMENT INCOME (LOSS):
Marine Construction Services $ 9,886 $ 2,394 $ (54) $ (9,854)
Government Operations 14,767 10,651 30,519 25,346
Industrial Operations 3,663 2,849 5,891 5,115
Power Generation Systems - B&W -- -- -- 7,951
Power Generation Systems (709) (20,708) (1,059) (21,793)
-------- -------- -------- --------
27,607 (4,814) 35,297 6,765
Corporate (6,449) 1,942 (8,182) 812
-------- -------- -------- --------
TOTAL $ 21,158 $ (2,872) $ 27,115 $ 7,577
======== ======== ======== ========
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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 Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited)
(In thousands, except shares and per share amounts)
Basic:
Net income (loss) $ 7,958 $ (10,047) $ 3,525 $ (2,180)
------------ ------------ ------------ ------------
Weighted average common shares 60,519,795 59,667,689 60,332,168 59,532,010
------------ ------------ ------------ ------------
Basic earnings (loss) per common share $ 0.13 $ (0.17) $ 0.06 $ (0.04)
------------ ------------ ------------ ------------
Diluted:
Net income (loss) $ 7,958 $ (10,047) $ 3,525 $ (2,180)
------------ ------------ ------------ ------------
Weighted average common shares (basic) 60,519,795 59,667,689 60,332,168 59,532,010
Effect of dilutive securities:
Stock options and restricted stock 2,228,125 -- 2,327,279 --
------------ ------------ ------------ ------------
Adjusted weighted average common shares
and assumed conversions 62,747,920 59,667,689 62,659,447 59,532,010
------------ ------------ ------------ ------------
Diluted earnings (loss) per common share $ 0.13 $ (0.17) $ 0.06 $ (0.04)
------------ ------------ ------------ ------------
For the three and six months ended June 30, 2000, incremental shares of 966,537
and 701,223, respectively, 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 SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, which adds to
the guidance related to accounting for derivative instruments and hedging
activities. SFAS No. 133 requires us to recognize all derivatives on our
consolidated balance sheet at their fair values. Our initial adoption of SFAS
No. 133, as amended by SFAS No. 138, had no material effect on our consolidated
financial position or results of operations.
Our worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments, primarily
forward contracts, to reduce the impact of changes in foreign exchange rates on
our operating results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts which are
denominated in currencies other than our
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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).
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).
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 as a means to determine and comprehensively resolve all pending
and future asbestos liability claims against them. Included in the filing are
B&W and its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc.
and Diamond Power International, Inc. On February 20, 2001, the 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 August 30, 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
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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 would consent to the assignment
of the insurance and would 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 its affiliates would be released and
discharged from all present and future liability for asbestos claims arising out
of exposure to B&W's products.
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 affiliates would
not transfer their insurance rights. The debtors would manage the insurance
rights and claims would be handled through the litigation process by the trust.
Funding of the trust would be from the insurance, the cash, the note payable,
and equity of the debtors, if necessary. The period of exclusivity for filing a
plan of reorganization extends through October 30, 2001.
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 on the year of coverage, insurer solvency and
collection delays (due primarily to agreed payment schedules with specific
insurers delaying reimbursement for three months or more). No claims have been
paid since the bankruptcy filing. Claims paid during the year ended December 31,
2000, prior to the bankruptcy filing, aggregated $23,640,000 of which
$20,121,000 has been recovered or is due from insurers. At June 30, 2001,
receivables of $28,991,000 were due from insurers for reimbursement of settled
claims and approximately $1,152,500,000 was recorded as an insurance recoverable
for unasserted claims. 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 those 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.
In early April 2001, a group of insurers (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the 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,
which actions have been consolidated before the U.S. District 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 consolidated complaints contain
substantially identical factual allegations. These include allegations that, in
the course of settlement discussions with the representatives of the asbestos
claimants in the B&W bankruptcy proceeding, MII and B&W breached the
confidentiality provisions of a settlement agreement they entered into with
these Plaintiff Insurers relating to insurance payments by the Plaintiff
Insurers as a result of asbestos claims. They also allege that MII and B&W have
wrongfully attempted to expand the underwriters' obligations under that
settlement agreement and the applicable policies through the filing of a plan of
reorganization in the B&W bankruptcy proceeding that contemplates the transfer
of rights under that agreement and those policies to a trust that will manage
the pending and future asbestos-related claims against B&W and certain of its
affiliates. The complaints seek declarations that, among other things, the
defendants are in material breach of the settlement agreement with the Plaintiff
Insurers and that the Plaintiff Insurers owe no further obligations to MII and
B&W under that agreement. With respect to the insurance policies, if the
Plaintiff Insurers should succeed in terminating the settlement agreement, they
seek to litigate issues under the policies in order to reduce their coverage
obligations. The complaint against MII also seeks a recovery of unspecified
compensatory damages. B&W has filed a counterclaim against the Plaintiff
Insurers which asserts a claim for breach of contract for amounts owed and
unpaid under the settlement agreement, as well as a claim for anticipatory
breach for amounts that will be owed in the future under the settlement
agreement. B&W seeks a declaratory judgment as to B&W's rights and the
obligations of Plaintiff Insurers and other London Market insurers under the
settlement agreement and under their respective insurance policies with respect
to asbestos claims. The consolidated actions have been set for trial on April
15, 2002. We believe these complaints and the substantive allegations they
contain are without merit. MII and B&W intend to contest and defend against
these actions vigorously. We believe the Plaintiff Insurers' complaints will not
have a material adverse effect on our consolidated financial position or results
of operations. However, if the Plaintiff Insurers are successful, it could have
a material adverse effect on our financial position and on our investment in
B&W.
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 (1) B&W was not
insolvent at the time of, or rendered insolvent as a result of, a corporate
reorganization that we completed in the fiscal year ended March 31, 1999, which
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 (2) that the transfers
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are not voidable. As an alternative, and only in the event that the Bankruptcy
Court finds B&W was insolvent at a pertinent time and the transactions are
voidable under applicable law, the action preserved B&W's claims against the
defendants. The Bankruptcy Court has permitted the asbestos claimants committee
and the future claimants in the Chapter 11 to intervene and proceed as
plaintiff-intervenors and has realigned B&W as a defendant in this action. The
asbestos claimants committee and the future claimants are asserting in this
action, among other things, that B&W was insolvent at the time of the transfers
and that the transfers should be voided. 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 action is decided against us by the Bankruptcy Court, it
could have a material adverse effect on our consolidated financial position,
cash flow and results of operations. The Bankruptcy Court has ruled that
Louisiana law will apply to the solvency issues in this action and has set a
trial date of October 22, 2001 to determine B&W's solvency at the time of the
corporate reorganization. In addition, an injunction preventing asbestos suits
from being brought against non-filing affiliates of B&W, including MI, JRM and
MII, and B&W subsidiaries not involved in the Chapter 11 extends through October
17, 2001.
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 asbestos personal injury claims, asbestos property damage
claims, derivative asbestos claims and claims relating to alleged nuclear
liabilities arising from the operation of the Apollo Parks Township facilities
against B&W and its filing subsidiaries. As of the March 29, 2001 bar date, over
49,000 allegedly settled claims had been filed. B&W has accepted approximately
7,600 as settled claims at this time and is in the process of challenging a
significant number of claims. If the Bankruptcy Court determines these claims
were not settled prior to the filing of the Chapter 11, these claims may be
refiled as unsettled claims. As of July 30, 2001, approximately 220,000
additional asbestos personal injury claims had been filed. We intend to
challenge all unsupported claims and believe that a significant number may be
disallowed by the Bankruptcy Court. While the B&W Chapter 11 reorganization
proceedings continue to progress, there are a number of issues and matters
related to B&W's asbestos liability to be resolved prior to its emergence from
the proceedings. In addition to the solvency issue relating to the fiscal year
ended March 31, 1999 reorganization, remaining issues and matters to be resolved
include, but are not limited to:
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;
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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;
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; and
o the continued ability of our insurers to reimburse us for payments
made to asbestos claimants.
For further information concerning B&W and its bankruptcy filing, refer to Note
20 to the consolidated financial statements included in MII's annual report on
Form 10-K for the year ended December 31, 2000.
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. There were no borrowings under this facility
at June 30, 2001. A permitted use of the DIP Credit Facility is the issuance of
new letters of credit to backstop or replace pre-existing letters of credit
issued in connection with B&W's and its subsidiaries' business operations, but
for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000,
the aggregate amount of all such pre-existing letters of credit totaled
approximately $172,000,000 (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 June 30,
2001, approximately $109,000,000 in letters of credit have been issued under the
DIP Credit Facility of which approximately $58,400,000 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 (LOSS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited)
(In thousands)
Revenues $ 365,916 $ 298,246 $ 721,775 $ 570,813
--------- --------- --------- ---------
Costs and Expenses:
Cost of operations 311,123 274,121 614,368 500,774
Selling, general and administrative
expenses 28,471 28,726 57,072 55,781
Reorganization charges 6,321 4,043 11,264 7,965
--------- --------- --------- ---------
Total Costs and Expenses 345,915 306,890 682,704 564,520
--------- --------- --------- ---------
Equity in income (loss) of investees (605) 1,264 1,218 2,697
--------- --------- --------- ---------
Operating Income (Loss) 19,396 (7,380) 40,289 8,990
--------- --------- --------- ---------
Other Income (Expense):
Interest income 2,002 1,829 4,366 2,792
Interest expense (2,598) (1,216) (4,073) (1,390)
Other-net (2,608) (59) (5,856) (953)
--------- --------- --------- ---------
Total Other Income (Expense) (3,204) 554 (5,563) 449
--------- --------- --------- ---------
Income (Loss) before Provision for
(Benefit from) Income Taxes 16,192 (6,826) 34,726 9,439
Provision for (Benefit from) Income Taxes 8,066 (3,445) 15,935 3,185
--------- --------- --------- ---------
Net Income (Loss) $ 8,126 $ (3,381) $ 18,791 $ 6,254
========= ========= ========= =========
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THE BABCOCK & WILCOX COMPANY
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
(In thousands)
Assets:
Current Assets $ 526,041 $ 553,937
Property, Plant and Equipment 77,449 80,459
Products Liabilities Recoverable from Insurers 1,152,489 1,153,761
Goodwill 74,738 77,093
Prepaid Pension Costs 21,620 20,369
Other Assets 156,086 128,043
----------- -----------
Total Assets $ 2,008,423 $ 2,013,662
=========== ===========
Liabilities:
Current Liabilities $ 352,143 $ 364,977
Liabilities Subject to Compromise(1) 1,448,718 1,456,313
Accrued Postretirement Benefit Obligation 726 566
Other long-term liabilities 16,350 18,589
Stockholder's Equity:
Common Stock 1,001 1,001
Capital in Excess of Par Value 134,737 134,733
Retained Earnings 79,615 60,824
Accumulated Other Comprehensive Loss (24,867) (23,341)
----------- -----------
Total Liabilities and Stockholder's Equity $ 2,008,423 $ 2,013,662
=========== ===========
(1) Liabilities subject to compromise consist of the following:
Accounts payable $ 3,017 $ 3,113
Provision for warranty 18,436 21,742
Other current liabilities 24,985 25,302
Products liabilities 1,307,725 1,307,725
Accumulated postretirement benefit obligation 72,576 75,910
Other long-term liabilities 21,979 22,521
----------- -----------
$ 1,448,718 $ 1,456,313
=========== ===========
In the course of the conduct of B&W's and its subsidiaries' business, MII and MI
have agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. At June 30, 2001, the total value of B&W's and its subsidiaries'
customer contracts yet to be completed covered by such indemnity arrangements
was approximately $191,000,000 of which approximately $132,000,000 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 (1) whose
financial statements were previously consolidated with those of its parent (as
B&W's were
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with ours) and (2) that files for protection under the U.S. Bankruptcy Code,
whether solvent or insolvent, must be prospectively deconsolidated from the
parent and presented on the cost method. The cost method requires us to present
the net assets of B&W at February 22, 2000 as an investment and not recognize
any income or loss from B&W in our results of operations during the
reorganization period. This investment of $166,234,000, as of February 21, 2000,
increased to $186,966,000 due to post-bankruptcy filing adjustments to the net
assets of B&W and is subject to periodic reviews for recoverability. When B&W
emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting
will be determined based upon the applicable facts and circumstances at that
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 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 Statement of Loss, assuming
the deconsolidation of B&W, for the six months ended June 30, 2000:
Assumes deconsolidation as of the beginning of the period presented:
Six Months
Ended June 30, 2000
(Unaudited)
(In thousands)
Revenues $ 923,284
Operating Loss $ (1,833)
Loss before Benefit from Income Taxes $ (2,218)
Net Loss $ (7,685)
Loss per Common Share:
Basic $ (0.13)
Diluted $ (0.13)
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Liquidity
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 Service and from BB+ to B in December 2000 by
Standard & Poors and, consequently, could adversely impact our access to
capital.
We expect to meet capital expenditure, working capital and debt maturity
requirements for the remainder of 2001 from cash and cash equivalents and
short-term borrowings.
MI and its subsidiaries are unable to incur additional long-term debt
obligations under one of MI's public debt indentures, other than in connection
with certain extension, renewal or refunding transactions (including an
extension or refinancing of MI's 9.375% notes).
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.
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.
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, we have generated a significant amount of cash flow in the June 2001
quarter which gives us some confidence we will be able to generate significant
cash flows from operations for the rest of this year and prior to March 2002. We
are also exploring other alternatives including asset sales or encumbrances,
early bond redemptions and potential refinancing or extension of these notes. We
expect these efforts to be successful, however there is no assurance that MI's
efforts to extend the maturity of or refinance these notes will be successful.
Further, MI's ability to satisfy, extend or refinance these notes could be
significantly influenced by the results of the litigation involving our
corporate reorganization completed in the fiscal year ended March 31, 1999.
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MI owns substantial subsidiaries outside the B&W Chapter 11 filing, including
BWXT which comprises our Government Operations segment and Hudson Products
Corporation which operates our heat exchanger business. BWXT and Hudson Products
Corporation are defendants in the action brought in the Chapter 11 proceeding
concerning our corporate reorganization completed in the fiscal year ended March
31, 1999, and our alternatives regarding these subsidiaries may be limited
until, and depending upon, a resolution in our favor of the action seeking to
void the transfers. 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. 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). If MI fails to
generate sufficient cash flow to repay these notes at maturity, and its
extension or refinancing alternatives do not materialize, 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. As a result, MI's inability to successfully
refinance or repay these notes could have a material adverse impact on MII's
liquidity, financial position and results of operations. MI's level of
indebtedness and its lack of liquidity pose substantial risks to MI and the
holders of its debt securities.
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.
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-
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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 the potential impact on available insurance due to the recent
increases in bankruptcy filings by asbestos-troubled companies;
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;
o effects of asserted and unasserted claims;
o our ability to obtain surety bonds and letters of credit; and
o the continued ability of our insurers to reimburse us for payments
made to asbestos claimants.
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 and in our annual report on Form 10-K for the year ended December 31,
2000. 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.
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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 the timing of the award of many marine construction projects remains
uncertain, we believe this segment's backlog should continue to increase for the
remainder of 2001.
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.
For the third quarter, we expect a sequential increase in revenue and income,
based on current backlogs and sales activity in each of our operating groups.
The strengthening marine construction market and our increased focus on reducing
costs and improving profitability at JRM, combined with the solid, more stable
results of our Government and our Industrial segments, support the continued
improvement in financial performance we project for the third quarter.
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 six months ended June 30, 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.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS
ENDED JUNE 30, 2000
Marine Construction Services
Revenues decreased $40,993,000 to $205,149,000 due to lower volume in offshore
activities in the Far East relating to the West Natuna project. Higher volumes
in essentially all other geographic areas partially offset this decrease.
Segment operating income (loss) increased $10,362,000 from a loss of $2,001,000
to income of $8,361,000, primarily due to higher volumes and margins in North
American activities. Lower volumes in offshore activities in the Far East
relating to the West Natuna project, lower engineering margins and higher
general and administrative expenses partially offset these increases.
Income from investees decreased $3,207,000 to $1,332,000, primarily due to a
resolution of a prior year tax matter in our Mexican joint venture and lower
operating results from our U.K. joint venture. We terminated our interest in
this joint venture in June 2001. Higher operating results in our SPARS and
Mexican joint ventures partially offset these decreases.
Government Operations
Revenues increased $4,968,000 to $117,011,000, 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 $573,000 to $7,952,000, primarily due to
lower volume and margins from management and operating contracts for U.S.
Government-owned facilities and higher general and administrative expenses.
Higher volumes and margins from nuclear assemblies and reactor components for
the U.S. Government, commercial work and commercial nuclear environmental
services partially offset these decreases.
Income from investees increased $4,129,000 to $6,056,000, primarily due to
higher operating results from a joint venture in Idaho and the start-up of our
Pantex and Y-12 joint ventures.
Industrial Operations
Revenues increased $31,308,000 to $160,779,000, primarily due to higher volumes
from engineering and construction activities in Canadian operations and from
air-cooled heat exchangers.
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Segment operating income increased $803,000 to $3,602,000, primarily due to
higher volumes from engineering and construction activities in Canadian
operations. Higher general and administrative expenses partially offset these
increases.
Power Generation Systems
Revenues increased $12,929,000 to $12,993,000, primarily due to the acquisition
of various business units of the Ansaldo Volund Group ("Volund"), an
international power generation operation.
Segment operating loss increased $1,048,000 to $1,192,000, primarily due to
losses on the run-out of pre-existing contracts of Volund.
Income (loss) from investees increased $21,047,000 from a loss of $20,564,000 to
income of $483,000, primarily due to charges to exit and impair certain foreign
joint ventures in the prior year.
Corporate
Corporate expenses increased $8,391,000 from income of $1,942,000 to expense of
$6,449,000, primarily due to higher employee-related costs, including severance,
and higher general and administrative expenses, including legal and professional
fees relating to the declaratory action with respect to the assets transferred
out of B&W. We also had lower income from over-funded pension plans. A favorable
insurance recovery partially offset these increases.
Other Income Statement Items
Interest income decreased $2,110,000 to $4,783,000, primarily due to a decrease
in investments.
Interest expense decreased $1,328,000 to $9,650,000, primarily due to changes in
debt obligations and prevailing interest rates.
Other-net income decreased $2,259,000 from $2,849,000 to $590,000, primarily due
to foreign currency transaction losses in the current period as compared to
gains in the prior period.
The provision for income taxes for the three months ended June 30, 2001 and 2000
reflect nondeductible 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 June 30, 2001 included
a tax benefit of $1,415,000 primarily related to favorable tax settlements in
foreign jurisdictions. In addition, the loss before provision for income taxes
for the three months ended June 30, 2000 included charges of $21,600,000 to exit
certain foreign joint ventures which had no associated tax benefits. We operate
in many
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different tax jurisdictions. Within these jurisdictions, tax provisions vary
because of nominal rates, allowability of deductions, credits and other benefits
and tax bases (for example, revenue versus income). These variances, along with
variances in our mix of income from these jurisdictions, are responsible for
shifts in our effective tax rate.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE
30, 2000
Marine Construction Services
Revenues decreased $112,948,000 to $339,829,000 due to lower volume in offshore
activities in the Far East relating to the West Natuna project. Higher volumes
in essentially all other geographic areas partially offset this decrease.
Segment operating loss decreased $5,733,000 to $2,055,000, primarily due to
higher volumes and margins in North American activities and in the Eastern
Hemisphere fabrication operations. Lower volumes on the West Natuna project and
lower engineering margins partially offset these increases.
Income (loss) from investees increased $4,293,000 from a loss of $3,007,000 to
income of $1,286,000, primarily due to higher operating results in our SPARS
joint venture. The prior year included higher losses associated with our U.K.
joint venture. We terminated our interest in this joint venture in June 2001.
Government Operations
Revenues increased $11,111,000 to $237,874,000, 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 $2,869,000 to $18,999,000, primarily due to
lower volume and margins from management and operating contracts for U.S.
Government-owned facilities and higher general and administrative expenses.
Higher volumes from nuclear fuel assemblies and reactor components for the U.S.
Government and higher volume and margins from commercial work partially offset
these decreases.
Income from investees increased $7,479,000 to $10,758,000, 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 $84,994,000 to $329,707,000, primarily due to higher volumes
from engineering, construction and plant maintenance activities in Canadian
operations and from air-cooled heat exchangers.
Segment operating income increased $730,000 to $5,764,000, primarily due to
higher volumes from engineering and construction activities in Canadian
operations. Higher general and administrative expenses partially offset these
increases.
Power Generation Systems
Revenues increased $21,281,000 to $21,427,000, primarily due to the acquisition
of Volund, an international power generation operation.
Segment operating loss increased $1,413,000 to $1,777,000, primarily due to
losses on the run-out of pre-existing contracts of Volund.
Income (loss) from investees increased $22,147,000 from a loss of $21,429,000 to
income of $718,000, primarily due to charges to exit and impair certain foreign
joint ventures in the prior year.
Corporate
Corporate expenses increased $8,994,000 from income of $812,000 to expense of
$8,182,000, primarily due to higher employee-related costs, including severance,
and higher general and administrative expenses, including legal and professional
fees relating to the declaratory action with respect to the assets transferred
out of B&W. We also had lower income from our over-funded pension plans. A
favorable insurance recovery partially offset these increases.
Other Income Statement Items
Interest income decreased $3,407,000 to $10,631,000, primarily due to a decrease
in investments.
Other-net decreased $6,844,000 from income of $5,262,000 to a loss of
$1,582,000, primarily due to foreign currency transaction losses in the current
period as compared to gains in the prior period. In addition, we experienced
increased losses on sales of investment securities.
The provision for income taxes for the six months ended June 30, 2001 and 2000
reflect non-deductible amortization of goodwill of $9,004,000. 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 six months ended June 30, 2000 also
include a provision of $3,800,000 for B&W for the pre-filing period. Also
included are tax benefits primarily related to
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favorable tax settlements in foreign jurisdictions totaling approximately
$3,715,000 and $5,500,000 for the six months ended June 30, 2001 and 2000,
respectively. In addition, income before the provision for income taxes for the
six months ended June 30, 2000 included charges of $21,600,000 to exit certain
foreign joint ventures which had no associated tax benefits. We operate in many
different tax jurisdictions. Within these jurisdictions, tax provisions vary
because of nominal rates, allowability of deductions, credits and other benefits
and tax bases (for example, revenue versus income). These variances, along with
variances in our mix of income from these jurisdictions, are responsible for
shifts in our effective tax rate.
Backlog
6/30/01 12/31/00
---------- ----------
(Unaudited)
(In thousands)
Marine Construction Services $1,229,983 $ 541,647
Government Operations 900,318 1,078,803
Industrial Operations 450,459 396,429
Power Generation Systems 52,232 48,631
---------- ----------
TOTAL BACKLOG $2,632,992 $2,065,510
========== ==========
Backlog for the Marine Construction Services segment increased primarily because
of recent awards relating to new offshore construction projects in the Gulf of
Mexico and the Eastern Hemisphere.
At June 30, 2001, Government Operations' backlog with the U. S. Government was
$851,179,000 (of which $36,724,000 had not been funded). We do not expect this
segment's backlog to experience significant growth as a result of reductions in
defense budgets. However, we expect this segment's backlog to remain relatively
constant since it is the sole source provider of nuclear fuel assemblies and
nuclear reactor components for the U. S. Government.
Liquidity and Capital Resources
During the six months ended June 30, 2001, our cash and cash equivalents
decreased $16,084,000 to $68,536,000 and our total debt decreased $77,107,000 to
$342,396,000, primarily due to a decrease in short-term borrowings of
$75,103,000. During this period, our operating activities generated cash of
$28,464,000 and we received cash of $527,536,000 from sales and maturities of
investments and $1,591,000 from the sale of assets. We used cash of $485,950,000
for the purchase of investments and $14,281,000 for additions to property, plant
and equipment.
At June 30, 2001 and December 31, 2000, we had available various uncommitted
short-term lines of credit from banks totaling $14,327,000 and $12,819,000,
respectively. Borrowings outstanding against these lines at June 30, 2001 were
$999,000. There were no borrowings against these lines at December 31, 2000.
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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
June 30, 2001 or 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 $30,624,000 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 June 30, 2001 and December 31,
2000 were $20,000,000 and $10,000,000, respectively. As of August 8, 2001,
borrowings against this facility were $35,000,000. Letters of credit against
this facility outstanding at June 30, 2001 totaled approximately $62,000,000.
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 December 31, 2000
were $50,000,000. There were no borrowings against this facility at June 30,
2001. As of August 8, 2001, borrowings against this facility were $25,000,000.
Letters of credit outstanding against this facility at June 30, 2001 totaled
approximately $51,000,000.
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37
At June 30, 2001, we had total cash, cash equivalents and investments of
$392,624,000. Our investment portfolio consists primarily of government
obligations and other investments in debt securities. The fair value of our
investments at June 30, 2001 was $324,088,000. As of June 30, 2001, we had
pledged approximately $43,779,000 fair value of these investments to secure a
letter of credit in connection with certain reinsurance agreements. In addition,
approximately $207,000,000 fair value of these investments were pledged to
secure the MII Credit Facility.
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, we have generated a significant amount of cash flow in the June 2001
quarter which gives us some confidence we will be able to generate significant
cash flows from operations for the rest of this year and prior to March 2002. We
are also exploring other alternatives including asset sales or encumbrances,
early bond redemptions and potential refinancing or extension of these notes. We
expect these efforts to be successful, however there is no assurance that MI's
efforts to extend the maturity of or refinance these notes will be successful.
Further, MI's ability to satisfy, extend or refinance these notes could be
significantly influenced by the results of the litigation involving our
corporate reorganization completed in the fiscal year ended March 31, 1999.
MI owns substantial subsidiaries outside the B&W Chapter 11 filing, including
BWXT which comprises our Government Operations segment and Hudson Products
Corporation which operates our heat exchanger business. BWXT and Hudson Products
Corporation are defendants in the action brought in the Chapter 11 proceeding
concerning our corporate reorganization completed in the fiscal year ended March
31, 1999, and our alternatives regarding these subsidiaries may be limited
until, and depending upon, a resolution in our favor of the action seeking to
void the transfers. 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. MI does
not currently intend to exercise its right to sell under the Intercompany
Agreement
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(although it may in the future elect to do so). If MI fails to generate
sufficient cash flow to repay these notes at maturity, and its extension or
refinancing alternatives do not materialize, 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. As a result, MI's inability to successfully refinance or repay
these notes could have a material adverse impact on MII's liquidity, financial
position and results of operations. MI's level of indebtedness and its lack of
liquidity pose substantial risks to MI and the holders of its debt securities.
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 June 30, 2001, substantially all the net assets of MI were
subject to those restrictions. At June 30, 2001, JRM and its subsidiaries could
make unsecured loans to or investments in MII and its other subsidiaries of
approximately $71,000,000.
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 meet capital expenditure, working capital and debt maturity
requirements for the remainder of 2001 from cash and cash equivalents and
short-term borrowings.
MI and its subsidiaries are unable to incur additional long-term debt
obligations under one of MI's public debt indentures, other than in connection
with certain extension, renewal or refunding transactions (including an
extension or refinancing of MI's 9.375% notes).
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.
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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 Service and from BB+ to B in December 2000 by
Standard & Poors and, consequently, could adversely impact our access to
capital.
The Babcock & Wilcox Company
B&W and its subsidiaries conduct substantially all 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. In
recent years, electric power producers have generally been meeting these peaks
with new combustion turbines rather than new base-load capacity. In January
2001, the state of California began experiencing shortages of electricity during
periods of peak demand. This has caused many power companies to re-examine their
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. We currently expect the 2001 operating activity of this segment to 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 (1) whose
financial statements were previously consolidated with those of its parent (as
B&W's were with ours) and (2) that files for protection under the U.S.
Bankruptcy Code, whether solvent or insolvent, must be prospectively
deconsolidated from the parent and presented on the cost method. The cost method
requires us to present the net assets of B&W at February 22, 2000 as an
investment and not recognize any income or loss from B&W in our results of
operations during the reorganization period. This investment of $186,966,000 as
of June 30, 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 facts and circumstances at that
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
June 30, 2001.
In the three months ended June 30, 2001:
B&W's revenues increased $67,670,000 to $365,916,000, primarily due to
higher volumes from the fabrication, repair and retrofit of existing
facilities, fabrication and erection of fossil fuel steam and
environmental control systems, replacement nuclear generators, nuclear
services and replacement parts;
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40
B&W's operating income (loss) increased $26,776,000 from a loss of
$7,380,000 to income of $19,396,000, primarily due to higher volumes and
margins from the fabrication, repair and retrofit of existing facilities,
higher volumes from nuclear services, replacement nuclear steam
generators and replacement parts. In addition, B&W experienced higher
volumes from fabrication and erection of fossil fuel steam and
environmental control systems which were partially offset by additional
charges in the prior year to substantially completed original equipment
contracts still under warranty or in dispute resolution. Higher
reorganization expenses associated with the Chapter 11 filing and lower
operating results from a joint venture in Pennsylvania partially offset
these increases;
Interest expense increased $1,382,000 to $2,598,000, primarily due to the
settlement of an ongoing state income tax dispute;
Other-net expense increased $2,549,000 to $2,608,000, primarily due to
foreign currency transaction losses in the current period as compared to
gains in the prior period.
In the six months ended June 30, 2001:
B&W's revenues increased $150,962,000 to $721,775,000, 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, nuclear services and replacement nuclear steam
generators;
B&W's operating income increased $31,299,000 to $40,289,000, primarily
due to higher volumes and margins from the fabrication, repair and
retrofit of existing facilities and nuclear services and higher volumes
from replacement parts. In addition, B&W experienced higher volumes from
fabrication and erection of fossil fuel steam and environmental control
systems which were partially offset by additional charges in the prior
year to substantially completed original equipment contracts still under
warranty or in dispute resolution. Higher reorganization expenses
associated with the Chapter 11 filing and lower operating results from
joint ventures in Pennsylvania and Canada partially offset these
increases;
Interest expense increased $2,683,000 to $4,073,000, primarily due to an
increase in expenses related to the DIP Credit Facility and the
settlement of an ongoing state income tax dispute;
Other-net expense increased $4,903,000 to $5,856,000, primarily due to a
loss on the sale of investment securities. In addition, there were
foreign currency transaction losses in the current period as compared to
gains in the prior period.
B&W's backlog at June 30, 2001 and December 31, 2000 was $1,431,218,000 and
$1,030,628,000, respectively.
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41
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, B&W's ability to continue as a going concern depends on its
ability to settle its ultimate asbestos liability from its net assets, future
profits and cash flow and available insurance proceeds, whether through the
confirmation of a plan of reorganization or otherwise. 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.
See Note 1 to the condensed consolidated financial statements for information on
new accounting standards.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For information regarding ongoing investigations and litigation see Note 4 to
the condensed consolidated financial statements in Part I of this report, which
we incorporate by reference into this Item. In addition, 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, which we
incorporate by reference into this Item.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on May 4, 2001, we submitted the
following matters to our stockholders, with voting as follows:
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(a) The election of four directors:
Class I - For a three-year term
Nominee Votes For Votes Withheld
------- --------- --------------
Philip J. Burguieres 55,187,536 934,039
Ronald C. Cambre 53,186,894 934,681
Bruce DeMars 53,254,421 867,154
John W. Johnstone, Jr. 53,242,482 879,093
Joe B. Foster, Robert L. Howard, Kathryn D. Sullivan, John N. Turner,
Bruce W. Wilkinson and Richard E. Woolbert also continued as directors
immediately after the meeting. On June 1, 2001, Ms. Sullivan resigned
from our Board of Directors.
(b) A proposal to retain PricewaterhouseCoopers LLP as our independent
accountants for the fiscal year ending December 31, 2001:
Votes For Votes Against Abstentions
--------- ------------- -----------
53,579,045 292,187 250,343
(c) A stockholder proposal relating to our activities in Burma:
Votes For Votes Against Broker Non-Votes Abstentions
--------- ------------- ---------------- -----------
6,059,541 32,054,069 11,523,100 4,484,865
(c) A stockholder proposal for the adoption of a stockholder resolution
requesting that we not extend or enter into a new stockholder rights
agreement unless we obtain the affirmative vote of our stockholders:
Votes For Votes Against Broker Non-Votes Abstentions
--------- ------------- ---------------- -----------
21,857,648 17,995,207 11,523,100 2,745,620
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. (incorporated by reference to Exhibit 3.2 of McDermott
International, Inc.'s Form 10-Q for the quarter ended March 31, 2001).
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three months ended
June 30, 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)
August 13, 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.
(incorporated by reference to Exhibit 3.2 of McDermott
International, Inc.'s Form 10-Q for the quarter ended March 31,
2001).