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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the Company's Common Stock at October 29,
1999 was 59,542,673.
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M c D E R M O T T I N T E R N A T I O N A L, I N C.
I N D E X - F O R M 1 0 - Q
PAGE
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PART I - FINANCIAL INFORMATION
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Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
September 30, 1999 and March 31, 1999 4
Condensed Consolidated Statement of Income
Three and Six Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statement of Comprehensive Income
Three and Six Months Ended September 30, 1999 and 1998 7
Condensed Consolidated Statement of Cash Flows
Six Months Ended September 30, 1999 and 1998 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings 37
Item 4 - Submission of Matters to a Vote of Security Holders 41
Item 5 - Shareholders Proposals for 2000 41
Item 6 - Exhibits and Reports on Form 8-K 42
SIGNATURES 43
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Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc.
Exhibit 27 - Financial Data Schedule
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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 SHEET
ASSETS
9/30/99 3/31/99
------- -------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 108,552 $ 181,503
Investments 116,077 55,646
Accounts receivable - trade, net 367,094 281,667
Accounts receivable - unconsolidated affiliates 33,511 165,154
Accounts receivable - other 205,172 125,631
Environmental and products liabilities recoverable - current 241,009 228,738
Contracts in progress 163,613 179,310
Inventories 55,199 52,656
Deferred income taxes 83,879 73,364
Other current assets 31,678 31,697
----------------- ------------------
Total Current Assets 1,405,784 1,375,366
----------------- ------------------
Property, Plant and Equipment 1,448,464 1,460,639
Less accumulated depreciation 1,012,593 1,026,678
----------------- ------------------
Net Property, Plant and Equipment 435,871 433,961
----------------- ------------------
Investments:
Government obligations 177,379 473,072
Other investments 110,151 378,181
----------------- ------------------
Total Investments 287,530 851,253
----------------- ------------------
Products Liabilities Recoverable 972,274 1,167,113
----------------- ------------------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $112,962,000 at September 30, 1999
and $104,444,000 at March 31, 1999 448,447 125,436
----------------- ------------------
Prepaid Pension Costs 145,331 130,437
----------------- ------------------
Other Assets 199,771 221,954
----------------- ------------------
TOTAL $ 3,895,008 $ 4,305,520
================= ==================
See accompanying notes to condensed consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS' EQUITY
9/30/99 3/31/99
------- -------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 133,847 $ 31,126
Accounts payable 163,413 198,500
Environmental and products liabilities - current 292,833 259,836
Accrued employee benefits 90,658 132,105
Accrued contract costs 40,111 51,619
Advance billings on contracts 197,253 240,380
Other current liabilities 332,925 352,845
----------------- ------------------
Total Current Liabilities 1,251,040 1,266,411
----------------- ------------------
Long-Term Debt 323,162 323,774
----------------- ------------------
Accumulated Postretirement Benefit Obligation 121,959 128,188
----------------- ------------------
Environmental and Products Liabilities 1,109,189 1,334,096
----------------- ------------------
Other Liabilities 268,544 263,950
----------------- ------------------
Commitments and Contingencies.
Minority Interest 1,104 195,367
----------------- ------------------
Stockholders' Equity:
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 61,443,287 at
September 30, 1999 and 61,147,775 at March 31, 1999 61,443 61,148
Capital in excess of par value 1,045,975 1,028,393
Accumulated deficit (182,703) (200,432)
Treasury stock at cost, 2,000,614 shares at September 30,
1999 and March 31, 1999 (62,731) (62,731)
Accumulated other comprehensive loss (41,974) (32,644)
----------------- ------------------
Total Stockholders' Equity 820,010 793,734
----------------- ------------------
TOTAL $ 3,895,008 $ 4,305,520
================= ==================
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
(Unaudited)
(In thousands)
Revenues $ 595,870 $ 779,983 $ 1,243,754 $ 1,599,792
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 499,495 630,176 1,037,137 1,309,853
Depreciation and amortization 22,713 21,738 44,152 48,297
Selling, general and administrative expenses 50,292 57,534 102,290 112,044
----------- ----------- ----------- -----------
572,500 709,448 1,183,579 1,470,194
----------- ----------- ----------- -----------
Gain (Loss) on Asset Disposals and Impairments - Net 907 (1,726) (1,290) 40,721
----------- ----------- ----------- -----------
Operating Income before Income (Loss) from Investees 24,277 68,809 58,885 170,319
Income (Loss) from Investees (6,759) (3,157) (7,113) 13,746
----------- ----------- ----------- -----------
Operating Income 17,518 65,652 51,772 184,065
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 9,611 25,711 24,653 58,436
Interest expense (13,034) (15,619) (25,173) (32,236)
Minority interest (56) (12,361) (4,285) (50,052)
Other-net 941 (5,671) 620 35,886
----------- ----------- ----------- -----------
(2,538) (7,940) (4,185) 12,034
----------- ----------- ----------- -----------
Income before Provision for Income Taxes 14,980 57,712 47,587 196,099
Provision for Income Taxes 11,362 6,097 23,926 22,923
----------- ----------- ----------- -----------
Net Income $ 3,618 $ 51,615 $ 23,661 $ 173,176
=========== =========== =========== ===========
Earnings per Common Share:
Basic $ 0.06 $ 0.88 $ 0.40 $ 2.92
Diluted $ 0.06 $ 0.85 $ 0.40 $ 2.76
=========== =========== =========== ===========
Cash Dividends:
Per Common Share $ 0.05 $ 0.05 $ 0.10 $ 0.10
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
(Unaudited)
(In thousands)
Net Income $ 3,618 $ 51,615 $ 23,661 $ 173,176
--------- --------- --------- ---------
Other Comprehensive Income:
Currency translation adjustments:
Foreign currency translations adjustments 12,120 1,028 4,338 2,436
Sales of investments in foreign entities -- -- -- 15,596
Purchase of J. Ray McDermott, S.A.
minority interest (5,695) -- (5,695) --
Minimum pension liability adjustment -- -- (9) --
Unrealized losses (gains) on investments:
Unrealized losses (gains) arising during the period,
net of taxes of $68,000 for the three months ended
September 30, 1999 and $313,000 and $35,000,
respectively, for the nine months ended
September 30, 1999 and 1998 (1,443) 7,267 (8,103) 7,666
Reclassification adjustment for losses (gains)
included in net income, net of taxes of $3,000 for
the nine months ended September 30, 1999 (3) (870) 139 (975)
--------- --------- --------- ---------
Other Comprehensive Income (Loss) 4,979 7,425 (9,330) 24,723
--------- --------- --------- ---------
Comprehensive Income $ 8,597 $ 59,040 $ 14,331 $ 197,899
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED
9/30/99 9/30/98
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 23,661 $ 173,176
--------- ---------
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 44,152 48,297
Income (loss) from investees,
less dividends 14,015 (9,169)
Loss (gain) on asset disposals and
impairments - net 1,290 (40,721)
Provision for (benefit from) deferred taxes 6,196 (5,829)
Other 3,253 2,281
Changes in assets and liabilities, net of effects
of divestitures:
Accounts receivable (30,144) 69,297
Net contracts in progress and advance billings (27,247) 16,755
Accounts payable (36,000) (46,487)
Accrued and other current liabilities (39,792) 45,893
Other, net 2,697 13,285
Proceeds from insurance for products liabilities claims 116,655 106,099
Payments of products liabilities claims (186,324) (130,466)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (107,588) 242,411
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (34,904) (30,100)
Acquisition of minority interest in J. Ray McDermott, S. A (526,604) --
Purchases of available-for-sale securities (93,702) (425,262)
Sales of available-for-sale securities 380,223 209,734
Maturities of available-for-sale securities 209,007 272,966
Proceeds from asset disposals 2,627 127,805
Other (4,086) (2,042)
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (67,439) 153,101
--------- ---------
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CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED
9/30/99 9/30/98
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (30,722) $ (43,716)
Increase (decrease) in short-term borrowing 133,455 (10,139)
Issuance of common stock 1,447 3,380
Issuance of subsidiary's stock 3,253 1,281
Dividends paid (5,916) (7,920)
Purchases of McDermott International, Inc. stock -- (59,156)
Acquisition of subsidiary's common stock -- (55,560)
Acquisition of subsidiary's preferred stock -- (154,631)
Other (255) (651)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 101,262 (327,112)
------------ ------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 814 (342)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (72,951) 68,058
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 181,503 277,876
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 108,552 $ 345,934
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 25,882 $ 33,385
Income taxes - net $ 31,121 $ 12,115
============ ============
See accompanying notes to condensed consolidated financial statements.
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McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which
includes:
o J. Ray McDermott, S.A. ("JRM"), a subsidiary of MII,
o McDermott Incorporated ("MI"), a subsidiary of MII,
o Babcock & Wilcox Investment Company ("BWICO"), a subsidiary of MI,
o The Babcock & Wilcox Company ("B&W"), a subsidiary of BWICO, and
o BWX Technologies, Inc. ("BWXT"), a subsidiary of BWICO.
Unless the context otherwise requires, hereinafter, the terms "McDermott" , "we"
and "our" will be used to mean the consolidated enterprise.
On August 3, 1999, MII's Board of Directors approved the change of MII's fiscal
year from a year ending on March 31, which was the fiscal year end used in its
most recent report on Form 10-K filed with the Securities and Exchange
Commission, to the new fiscal year end of December 31. MII's report on Form 10-K
for the nine-month period ending December 31, 1999 will cover the transition
period.
The accompanying unaudited condensed consolidated financial statements are
presented in U. S. Dollars, and have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Such adjustments are of a normal,
recurring nature except for the following:
In the three and six months ended September 30, 1998:
o an $8,000,000 settlement of punitive damage claims in a civil suit
associated with a Pennsylvania facility formerly operated by B&W.
In the six months ended September 30, 1998:
o a gain on the dissolution of a joint venture of $37,390,000,
o a gain on the settlement and curtailment of postretirement benefit
plans of $27,642,000,
o interest income of $18,630,000 on settlement of outstanding Internal
Revenue Service exposure items, and
o a gain of $12,000,000 from the sale of assets of a joint venture.
Operating results for the six months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the nine months
ending December 31, 1999. For further information, refer to the
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consolidated financial statements and related footnotes included in MII's annual
report on Form 10-K for the fiscal year ended March 31, 1999.
NOTE 2 - PRODUCTS LIABILITY
As a result of asbestos-containing commercial boilers and other products sold or
installed in prior decades by B&W and certain of its subsidiaries, B&W is
subject to a substantial volume of non-employee products liability claims. 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 plueral changes).
McDermott has insurance coverage for these asbestos products liability claims
against B&W, which coverage is subject to varying insurance limits that are
dependent upon the year involved. Pursuant to agreements with the majority of
our principal insurers concerning the method of allocation of claim payments to
the years of coverage, we negotiate and settle these claims and bill the
appropriate amounts to the insurers. Since these claims began in the early
1980s, we have engaged in a strategy of grouping claims that meet certain basic
criteria and settling them at the lowest average cost per claim possible. While
we have rejected claims that we deemed invalid, as a general practice we do not
litigate asbestos liability claims. We believe that this settlement strategy has
allowed us to use our available insurance to discharge B&W's asbestos liability
claims efficiently by minimizing associated legal and administrative costs.
McDermott has recognized provisions in its financial statements to the extent
that settled claim payments are not recoverable from insurers.
At September 30 and March 31, 1999, McDermott had recorded the following with
respect to asbestos products liability claims and related insurance recoveries:
September 30, March 31,
1999 1999
---- ----
(Unaudited)
(In thousands)
Asbestos products liability:
Current $ 278,500 $ 240,000
Non-current 1,097,539 1,322,363
------------ ------------
Total $ 1,376,039 $ 1,562,363
============ ============
Asbestos products liability insurance recoverable:
Current $ 240,400 $ 199,750
Non-current 972,274 1,167,113
------------ ------------
Total $ 1,212,674 $ 1,366,863
============ ============
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Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from B&W's prior claims history and constitute
management's best estimate of such future cost, including recoverability from
insurers. Estimates of insurance recoveries are based upon management's analysis
of insurance coverage and insurer solvency. Inherent in the estimate of these
liabilities are expected trend claim severity and frequency and other factors,
which may vary significantly as claims are filed and settled. Such estimates are
based upon management's expectation that new claims will conclude within the
next 12 1/2 years, that there will be a significant decline in new claims
received after 3 1/2 years, and that the average cost per claim will continue to
increase only moderately.
Future costs to settle claims, as well as the number of claims, could be
adversely affected by changes in judicial rulings and other influences beyond
our control. Any changes in the estimates of future asbestos products liability
and insurance recoverables or differences between the proportion of any
additional asbestos products liabilities covered by insurance and that
experienced in the past could result in material changes to the results of
operations for any fiscal quarter or year. Consequently, B&W's ultimate loss for
non-employee asbestos liability claims may differ materially from amounts
provided in the consolidated financial statements and may have a material
adverse effect on McDermott's and B&W's results of operations and financial
position.
Recently, B&W has experienced an increase in the amounts demanded by certain
plaintiff's attorneys to settle mesothelioma, lung cancer and asbestosis claims.
The demanded amounts significantly exceed the average amount of B&W's historical
settlement payments for these types of claims. We are evaluating this
development to determine if it is representative of the amounts required to
settle these types of claims in the future and its overall impact on the
estimates and forecasts of B&W's ultimate exposure for non-employee asbestos
claims. If we are unsuccessful in negotiating the demanded amounts down to
historical levels, which typically have included moderate annual increases, B&W
may be forced to accept higher settlement amounts, begin litigating such claims
or take other available courses of action. Any of these actions could have a
material adverse impact on B&W's ultimate exposure for asbestos liability claims
and McDermott's (including B&W's) consolidated financial position, results of
operations and business prospects.
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NOTE 3 - INVENTORIES
Inventories at September 30 and March 31, 1999 are summarized below:
September 30, March 31,
1999 1999
---- ----
(Unaudited)
(In thousands)
Raw Materials and Supplies $ 40,285 $ 37,481
Work in Progress 6,128 7,606
Finished Goods 8,786 7,569
------------------ ------------------
$ 55,199 $ 52,656
================== ==================
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity at September 30 and March 31, 1999 are as follows:
September 30, March 31,
1999 1999
---- ----
(Unaudited)
(In thousands)
Currency Translation Adjustments $ (29,119) $ (27,762)
Net Unrealized Gain (Loss) on Investments (7,058) 906
Minimum Pension Liability (5,797) (5,788)
------------------ ------------------
$ (41,974) $ (32,644)
================== ==================
NOTE 5 - ACQUISITIONS
In the six months ended September 30, 1999, MII acquired all of the publicly
held shares of JRM common stock in a two-step acquisition. On June 10, 1999, MII
purchased 14,353,490 shares in a tender offer for the publicly held shares of
JRM for $35.62 per share. Together with the 24,668,297 shares held by MII, the
tendered shares represented approximately 99.5% of the shares of JRM common
stock outstanding at the expiration of the tender offer. On July 30, 1999, the
remaining 227,348 shares of JRM common stock were acquired for the same price in
cash in a second-step merger.
For financial statement purposes, the acquisition was accounted for using the
purchase method of accounting. The aggregate purchase price was approximately
$534,339,000, including direct acquisition costs of approximately $8,833,000.
The excess of the purchase price over net assets acquired approximated
$331,530,000 at September 30, 1999. This goodwill is being amortized over twenty
years. The financial
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statements reflect the preliminary allocation of purchase price, as the purchase
price allocation has not yet been finalized.
This acquisition has eliminated the minority interest in JRM. During the three
months ended June 30, 1999, MII recorded minority interest expense of $4,005,000
related to JRM. In the three and six months ended September 30, 1998, MII's
minority interest expense related to JRM was $15,174,000 and $49,110,000,
respectively.
NOTE 6 - INVESTIGATIONS AND LITIGATION
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
After receiving the allegations, we initiated action to terminate JRM's interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture,
Heerema, acquired JRM's interest in exchange for cash and title to several
pieces of equipment. On December 21, 1997, HeereMac and one of its employees
pled guilty to criminal charges by the Department of Justice that they and
others had participated in a conspiracy to rig bids in connection with the
heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
In July 1999, a former JRM officer was indicted by the Department of Justice for
participating in an international bid-rigging conspiracy for the sale of marine
construction services and pled guilty.
We have cooperated and are continuing to cooperate with the Department of
Justice in its investigation. The Department of Justice also has requested
additional information from us relating to possible anti-competitive
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activity in the marine construction business of McDermott-ETPM East, Inc., one
of the operating companies within JRM's former McDermott-ETPM joint venture with
ETPM S.A., a French company. In connection with the termination of the
McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of
McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East,
Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates, and others alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, North Sea and Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants (collectively
"Statoil"), filed a similar lawsuit in the same court (the "Statoil
Litigation"). In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil
Litigation have requested punitive as well as treble damages. In January 1999,
the court dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects. In July 1999, the court dismissed the Statoil
Litigation for lack of subject matter jurisdiction. In August 1999, Statoil
filed its notice of appeal of the dismissal. In September 1999, the Phillips
Plaintiffs filed notice of their request to dismiss their remaining claims in
the lawsuit. That motion is pending.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others alleging that the defendants engaged in anti-competitive acts
in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.;
Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco
Exploration and Production Inc. and certain of its affiliates; Elf Exploration
UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc. and The Louisiana
Land & Exploration Company; Marathon Oil Company and certain of its affiliates;
VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.
and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas
Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside
Energy, Ltd; and Saga Petroleum, S.A. intervened (acting for themselves and, if
applicable, on behalf of their respective co-venturers and for whom they
operate) as plaintiffs in the Shell Litigation. Also, in December 1998, Total
Oil Marine p.l.c. and Norsk
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Hydro Produksjon a.s., individually and on behalf of their respective
co-venturers, filed similar lawsuits in the same court, which lawsuits were
consolidated with the Shell Litigation. In addition to seeking injunctive
relief, actual damages and attorneys' fees, the plaintiffs in the Shell
Litigation request treble damages.
We are also cooperating with a Securities and Exchange Commission ("SEC")
investigation into whether MII and JRM may have violated U.S. securities laws in
connection with, but not limited to, the matters described above. MII and JRM
are subject to a judicial order entered in 1976, with the consent of MI (which
at that time was the parent of the McDermott group of companies), pursuant to an
SEC complaint (the "Consent Decree"). The Consent Decree prohibits the companies
from making false entries in their books, maintaining secret or unrecorded funds
or using corporate funds for unlawful purposes. Violations of the Consent Decree
could result in substantial civil and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, MII formed
and continues to maintain a special committee of its Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, our internal investigation, the
above-referenced lawsuits, or any actions that may be taken by others as a
result of HeereMac's guilty plea or otherwise. However, these matters could
result in civil and criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F.
Hall, Mary Ann Hall and others in the United States District Court for the
Western District of Pennsylvania involving approximately 200 separate cases
relating to the operation of two former nuclear fuel processing facilities
located in Pennsylvania (the "Hall Litigation"), alleging, among other things,
that they suffered personal injury and other damages as a result of radioactive
emissions from these facilities. In September 1998, a jury found B&W and
Atlantic Richfield Company liable to the plaintiffs in the first eight cases
brought to trial, awarding $36,700,000 in compensatory damages. In June 1999,
the court set aside the judgement and ordered a new trial on all issues.
Recently, the court allowed an interlocutory appeal by the plaintiffs of certain
issues, including the granting of the new trial and the court's rulings on
certain evidentiary matters. We do not expect any further trials on the other
cases until a decision is rendered on the appeal. We believe that adequate
insurance is available to meet any possible liability in this matter. However,
there is a controversy between B&W and its insurers as to the amount of
insurance coverage under the insurance policies covering these facilities. B&W
has filed an action seeking a judicial determination of this matter, which is
currently pending in a Pennsylvania court. We believe
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that any award and all other claims will be resolved within the limits and
coverage of such insurance policies; however, no assurance on insurance coverage
or financial impact if limits of coverage are exceeded can be given. In
connection with the foregoing, B&W settled all pending and future punitive
damage claims represented by the plaintiffs' lawyers in the Hall Litigation for
$8,000,000 and seeks reimbursement of this amount from other parties.
Two purported class actions were filed in March and April 1999 in the Civil
District Court for the Parish of Orleans, State of Louisiana, by alleged public
shareholders of JRM, challenging MII's initial proposal to acquire the publicly
traded shares of JRM common stock in a stock for stock merger. This initial
proposal was subsequently abandoned and MII later acquired all of JRM's publicly
traded common stock for $35.62 per share pursuant to a cash tender offer
followed by a second-step cash merger. In September 1999, these actions were
dismissed by the court without prejudice.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation related to our business activities. It is
management's opinion that none of this litigation will have a material adverse
effect on McDermott's consolidated financial position or results of operations.
NOTE 7 - SEGMENT REPORTING
Our reportable segments are Marine Construction Services, Power Generation
Systems, Government Operations and Industrial Operations. These segments are
managed separately and are unique in technology, services and customer class.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration, production and
hydrocarbon processing industries and to other marine construction companies.
Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production platforms, specialized
structures, modular facilities, marine pipelines and subsea production systems.
JRM also provides project management services, engineering services, procurement
activities, and removal, salvage and refurbishment services of offshore fixed
platforms.
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment provides
aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities.
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Government Operations supplies nuclear reactor components and nuclear fuel
assemblies to the U.S. Government, manages and operates government-owned
facilities and supplies commercial nuclear environmental services and other
government and commercial nuclear services.
Industrial Operations is comprised of the engineering and construction
activities and plant outage maintenance of certain Canadian operations and the
manufacturing of auxiliary equipment such as air-cooled heat exchangers and
replacement parts. Industrial Operations also includes contract research
activities.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses, non-employee products liability asbestos claims provisions, contract
and insurance claims provisions, legal expenses and gains on sales of corporate
assets. Other reconciling items to income before provision for income taxes are
interest income, interest expense, minority interest and other-net. Assets
excluded from segment assets are primarily insurance recoverables for products
liability claims, excess cost over fair value of net assets purchased,
investments and prepaid pension costs. Amortization of the excess of cost over
fair value of net assets purchased was allocated to the reportable segments for
all periods presented.
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Segment Information for the Three and Six Months ended September 30, 1999 and
1998.
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
(Unaudited)
(In thousands)
REVENUES:
Marine Construction Services $ 175,179 $ 349,099 $ 333,984 $ 719,651
Power Generation Systems 203,688 223,755 471,142 482,884
Government Operations 109,357 100,740 202,247 201,156
Industrial Operations 107,039 108,897 239,165 199,078
Adjustments and Eliminations (1) 607 (2,508) (2,784) (2,977)
----------- ----------- ------------ ------------
Total Revenues $ 595,870 $ 779,983 $ 1,243,754 $ 1,599,792
=========== =========== ============ ============
(1) Segment revenues are net of the following intersegment transfers and other adjustments:
Marine Construction Services Transfers $ 528 $ 755 $ 952 $ 2,077
Power Generation Systems Transfers 60 (13) 1,201 424
Government Operations Transfers 308 73 621 131
Industrial Operations Transfers 129 92 168 103
Adjustments and Eliminations (1,632) 1,601 (158) 242
----------- ----------- ------------ ------------
Total $ (607) $ 2,508 $ 2,784 $ 2,977
=========== =========== ============ ============
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THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
(Unaudited)
(In thousands)
OPERATING INCOME:
Segment Operating Income:
Marine Construction Services $ 4,013 $ 55,028 $ 21,321 $ 92,267
Power Generation Systems 15,665 15,161 32,036 34,648
Government Operations 7,194 6,322 17,104 11,777
Industrial Operations 4,364 5,500 8,736 9,362
--------- --------- --------- ---------
Total Segment Operating Income $ 31,236 $ 82,011 $ 79,197 $ 148,054
--------- --------- --------- ---------
Gain (Loss) on Asset Disposals and Impairments - Net:
Marine Construction Services $ 638 $ (1,969) $ (1,212) $ 43,078
Power Generation Systems 273 81 1,276 205
Government Operations (4) 132 (4) 138
Industrial Operations -- 10 1 75
--------- --------- --------- ---------
Total Gain (Loss) on Asset Disposals and
Impairments - Net $ 907 $ (1,746) $ 61 $ 43,496
--------- --------- --------- ---------
Income (Loss) from Investees:
Marine Construction Services $ (5,724) $ (3,782) $ (6,813) $ 9,733
Power Generation Systems (1,506) 732 (1,018) 3,709
Government Operations 700 561 1,339 1,207
Industrial Operations (229) (668) (621) (903)
--------- --------- --------- ---------
Total Income (Loss) from Investees $ (6,759) $ (3,157) $ (7,113) $ 13,746
--------- --------- --------- ---------
SEGMENT INCOME (LOSS):
Marine Construction Services $ (1,073) $ 49,277 $ 13,296 $ 145,078
Power Generation Systems 14,432 15,974 32,294 38,562
Government Operations 7,890 7,015 18,439 13,122
Industrial Operations 4,135 4,842 8,116 8,534
--------- --------- --------- ---------
Total Segment Income 25,384 77,108 72,145 205,296
--------- --------- --------- ---------
Other Unallocated Items 1,799 (3,148) (196) (1,884)
General Corporate Expenses - Net (9,665) (8,308) (20,177) (19,347)
--------- --------- --------- ---------
Total Operating Income $ 17,518 $ 65,652 $ 51,772 $ 184,065
========= ========= ========= =========
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NOTE 8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
(Unaudited)
(In thousands, except shares
and per share amounts)
Basic:
Net income $ 3,618 $ 51,615 $ 23,661 $ 173,176
----------- ----------- ----------- -----------
Weighted average common shares 59,035,083 58,835,380 58,988,577 59,362,161
----------- ----------- ----------- -----------
Basic earnings per common share $ 0.06 $ 0.88 $ 0.40 $ 2.92
----------- ----------- ----------- -----------
Diluted:
Net income $ 3,618 $ 51,615 $ 23,661 $ 173,176
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock -- 1,202 -- 2,752
----------- ----------- ----------- -----------
Net income for diluted computation $ 3,618 $ 52,817 $ 23,661 $ 175,928
----------- ----------- ----------- -----------
Weighted average common shares (basic) 59,035,083 58,835,380 58,988,577 59,362,161
Effect of dilutive securities:
Stock options and restricted stock 810,719 932,500 901,769 1,497,887
Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock -- 2,205,923 -- 2,512,301
Series C $2.875 Cumulative Convertible
Preferred Stock -- -- -- 380,914
----------- ----------- ----------- -----------
Adjusted weighted average common
shares and assumed conversions 59,845,802 61,973,803 59,890,346 63,753,263
----------- ----------- ----------- -----------
Diluted earnings per common share $ 0.06 $ 0.85 $ 0.40 $ 2.76
----------- ----------- ----------- -----------
NOTE 9 - NEW ACCOUNTING STANDARDS
During the six months ended September 30, 1999, McDermott adopted the American
Institute of Certified Public Accountants Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities," for accounting for the costs of
start-up activities. SOP 98-5 requires that entities expense start-up costs and
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organization costs as they are incurred. The effect of the adoption of SOP 98-5
on McDermott's consolidated financial position and results of operations was not
material.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require McDermott to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. In June 1999, the FASB issued SFAS No. 137, " Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133
to all fiscal quarters of all fiscal years beginning after June 15, 2000. We
have not yet determined what the effect of SFAS No. 133 will have on McDermott's
consolidated financial position or results of operations.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which
includes:
o J. Ray McDermott, S.A. ("JRM"), a subsidiary of MII,
o McDermott Incorporated ("MI"), a subsidiary of MII,
o Babcock & Wilcox Investment Company ("BWICO"), a subsidiary of MI,
o The Babcock & Wilcox Company ("B&W"), a subsidiary of BWICO, and
o BWX Technologies, Inc. ("BWXT"), a subsidiary of BWICO.
Unless the context otherwise requires, hereinafter, the terms "McDermott" , "we"
and "our" will be used to mean the consolidated enterprise.
Revenues of the Marine Construction Services segment are largely a function of
the level of oil and gas development activity in the world's major hydrocarbon
producing regions. Consequently, revenues reflect the variability associated
with the timing of significant development projects. As a result of continuing
lower oil prices, Marine Construction Services' customers have significantly
reduced capital expenditures for exploration and production spending. At the
current backlog level, we expect revenues to be as much as fifty percent lower
than in the previous fiscal year, and profitability to be lower because of the
volume decline. Economic and political instability in Asia have also had an
adverse effect on the timing of exploration and production spending.
Revenues of the Power Generation Systems segment are largely a function of
capital spending by the electric power generation industry. In the electric
power generation industry, persistent economic growth in the United States has
brought the supply of electricity into approximate balance with energy demand,
except at periods of peak demand. However, electric power producers have
generally chosen to meet these peaks with new combustion turbines rather than
with base-load capacity. New emissions requirements have also prompted some
customers to place orders for environmental equipment. Demand for electrical
power generation industry services and replacement nuclear steam generators
continues at strong levels. International markets remain unsettled, and economic
and political instability in Asia have caused projects in these emerging markets
to be delayed, suspended or cancelled. In the process industry, demand for
services remains strong, and the pulp and paper industry has begun to make
inquiries relating to the refurbishment or replacement of existing recovery
boilers. We expect operating activity of this segment to be about the same as in
the previous fiscal year.
Revenues of the Government Operations segment are largely a function of capital
spending by the U.S. Government. We do not expect this segment to experience any
significant growth as a result of reductions in
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the defense budgets. However, this segment's backlog should remain relatively
constant since this segment is the sole-source provider of nuclear fuel
assemblies and nuclear reactor components to the U.S. Navy. We expect operating
activity of this segment to be about the same as in the previous fiscal year.
Revenues of Industrial Operations are affected by variations in the business
cycles in its customers' industries and the overall economy. Legislative issues
such as environmental regulations and fluctuations in U.S. Government funding
patterns also affect Industrial Operations. Backlog for Industrial Operations
has improved significantly from a year ago, primarily because of significant new
contracts in engineering and construction. We expect operating activity of this
segment to be about the same as in the previous fiscal year.
In general, all of McDermott's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
A significant portion of McDermott's revenues and operating results are derived
from its foreign operations. As a result, McDermott's operations and financial
results are affected by international factors, such as changes in foreign
currency exchange rates. We attempt to minimize McDermott's exposure to changes
in foreign currency exchange rates by matching foreign currency contract
receipts with like foreign currency disbursements. To the extent that we are
unable to match the foreign currency receipts and disbursements related to our
contracts, we enter into forward exchange contracts to reduce the impact of
foreign exchange rate movements on operating results.
Statements made herein which express a belief, expectation or intention, as well
as those that are not historical fact, are forward looking. They involve a
number of risks and uncertainties that may cause actual results to differ
materially from such forward-looking statements. These risks and uncertainties
include:
o decisions about offshore developments to be made by oil and gas
companies,
o the deregulation of the U.S. energy market,
o governmental regulation and the continued funding of McDermott's
contracts with U.S. government agencies,
o estimates for pending and future non-employee asbestos claims,
o the highly competitive nature of McDermott's businesses,
o operating risks associated with the marine construction services
business,
o economic and political conditions in Asia,
o the results of our and the U.S. Department of Justice's ongoing
investigation into possible anti-competitive practices by MII and JRM,
and related civil lawsuits, and
o the results of the ongoing SEC investigation into whether McDermott
may have violated U.S. securities laws in connection with such
anti-competitive practices and other matters.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1998
Marine Construction Services
Revenues decreased $173,920,000 to $175,179,000 due to lower volume in
essentially all activities in all geographic areas.
Segment operating income decreased $51,015,000 to $4,013,000, primarily due to
lower volume and goodwill amortization associated with the purchase of JRM's
minority interest. These decreases were partially offset by lower general and
administrative expenses.
Gain (loss) on asset disposals and impairments-net increased $2,607,000 from a
loss of $1,969,000 to a gain of $638,000. The loss in the prior period was
primarily due to the sale of a marine vessel.
Loss from investees increased $1,942,000 to $5,724,000, primarily due to lower
results from a Mexican joint venture partially offset by improved results from a
Far East joint venture.
Power Generations Systems
Revenues decreased $20,067,000 to $203,688,000, primarily due to lower volume
from the fabrication and erection of fossil fuel steam and environmental control
systems, fabrication, repair and retrofit of existing facilities, private power
systems projects and boiler cleaning equipment. These decreases were partially
offset by higher volume from nuclear services and replacement nuclear steam
generators.
Segment operating income increased $504,000 to $15,665,000, primarily due to
higher margins from fabrication, repair and retrofit of existing facilities and
higher volume and margins from nuclear services and replacement nuclear steam
generators. In addition, there were lower selling and general and administrative
expenses. These increases were partially offset by lower volume and margins from
fabrication and erection of fossil fuel steam and environmental control systems
and boiler cleaning equipment.
Income (loss) from investees decreased $2,238,000 from income of $732,000 to a
loss of $1,506,000, primarily due to provisions to exit a joint venture located
in Turkey.
Government Operations
Revenues increased $8,617,000 to $109,357,000, primarily due to higher volume
from management and operation contracts for U. S. Government-owned facilities
and from nuclear fuel assemblies and reactor components for the U.S. Government.
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Segment operating income increased $872,000 to $7,194,000, primarily due to an
$8,000,000 settlement in the prior period for punitive damages in a civil suit
associated with a Pennsylvania facility formerly operated by B&W. This increase
was partially offset by lower margins from commercial nuclear environmental
services, nuclear fuel assemblies and reactor components for the U.S. Government
and management and operation contracts for U. S. Government-owned facilities.
Industrial Operations
Revenues decreased $1,858,000 to $107,039,000, primarily due to lower volume
from air-cooled heat exchangers, plant maintenance activities in Canadian
operations and the parts business. These decreases were partially offset by
higher volume from engineering activities in Canadian operations.
Segment operating income decreased $1,136,000 to $4,364,000, primarily due to
lower volume from air-cooled heat exchangers and lower volume and margins from
the parts business. These decreases were partially offset by higher volume from
engineering activities in Canadian operations.
Other Unallocated Items
Other unallocated items increased $4,947,000 from expense of $3,148,000 to
income of $1,799,000, primarily due to lower employee benefit and general and
administrative expenses. These changes were partially offset by higher research
and development expenses.
Other Income Statement Items
Interest income decreased $16,100,000 to $9,611,000, primarily due to interest
income on settlement of Internal Revenue Service exposure items in the prior
year and decreases in investments.
Interest expense decreased $2,585,000 to $13,034,000, primarily due to changes
in debt obligations and prevailing interest rates.
Minority interest expense decreased $12,305,000 to $56,000, primarily due to the
acquisition of the minority interest in JRM.
Other-net increased $6,612,000 from expense of $5,671,000 to income of $941,000.
This increase was primarily due to a net loss on the settlement and curtailment
of postretirement benefit plans recorded in the prior period. This increase was
partially offset by foreign currency transaction losses in the current period
compared to gains in the prior period.
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27
The provision for income taxes increased $5,265,000 to $11,362,000, while income
before provision for income taxes decreased $42,732,000 to $14,980,000. The
change in the relationship of pretax income to the provision for income taxes
was primarily the result of a decrease in income during the current period along
with a decrease in tax expense for the prior period due to a favorable tax
settlement of disputed items. Also contributing to the change in the
relationship of pretax income to the provision for income taxes were losses
incurred from two foreign joint ventures with no corresponding tax benefits.
McDermott operates in many different tax jurisdictions. Within these
jurisdictions, tax provisions vary because of nominal rates, allowability of
deductions, credits and other benefits, and tax basis (for example, revenues
versus income). These variances, along with variances in the mix of income
within jurisdictions, are responsible for shifts in the effective tax rate.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1999 VS. SIX MONTHS ENDED
SEPTEMBER 30, 1998
Marine Construction Services
Revenues decreased $385,667,000 to $333,984,000 due to lower volume in
essentially all activities in all geographic areas.
Segment operating income decreased $70,946,000 to $21,321,000, primarily due to
lower volume and the goodwill amortization associated with the purchase of JRM's
minority interest. These decreases were partially offset by higher margins in
procurement activities in the Middle East, higher margins in offshore activities
in North America and lower general and administrative expenses.
Gain (loss) on asset disposals and impairments-net decreased $44,290,000 from a
gain of $43,078,000 to a loss of $1,212,000. The gain in the prior period was
primarily due to the termination of the McDermott-ETPM joint venture and the
sale of three Gulf of Mexico vessels.
Income (loss) from investees decreased $16,546,000 from income of $9,733,000 to
a loss of $6,813,000, primarily due to a gain on the sale of assets in a
Malaysian joint venture in the prior period. In addition, there were lower
operating results from Brown & Root McDermott Fabricators Limited, a Mexican
joint venture and a North American joint venture.
Power Generations Systems
Revenues decreased $11,742,000 to $471,142,000, primarily due to lower volume
from fabrication and erection of fossil fuel steam and environmental control
systems, private power systems projects, boiler cleaning equipment and
industrial boilers. These decreases were partially offset by higher volume from
the fabrication, repair and retrofit of existing facilities and replacement
parts.
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Segment operating income decreased $2,612,000 to $32,036,000, primarily due to
lower volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems, private power systems projects and boiler
cleaning equipment and lower volume from industrial boilers. In addition, there
were higher selling and general and administrative expenses. These decreases
were partially offset by higher volume and margins from fabrication, repair and
retrofit of existing facilities, nuclear services and replacement parts.
Gain on asset disposals and impairments-net increased $1,071,000 to $1,276,000.
This increase was primarily due to a gain on the sale of this segment's interest
in a domestic cogeneration facility.
Income from investees decreased $4,727,000 from income of $3,709,000 to a loss
of $1,018,000, primarily due to lower operating results in two foreign joint
ventures and a provision to exit a joint venture located in Turkey. These
decreases were partially offset by higher operating results from a domestic
joint venture located in Pennsylvania.
Government Operations
Revenues increased $1,091,000 to $202,247,000, primarily due to higher volume
from management and operation contracts for U. S. Government-owned facilities
and other government operations. These increases were partially offset by lower
volume from nuclear fuel assemblies and reactor components for the U.S.
Government.
Segment operating income increased $5,327,000 to $17,104,000, primarily due to
an $8,000,000 settlement in the prior period for punitive damages in a civil
suit associated with a Pennsylvania facility formerly operated by B&W. There
were also higher margins from commercial nuclear environmental services. These
increases were partially offset by lower margins from management and operation
contracts for U. S. Government-owned facilities and other government operations
and from lower volume and margins from nuclear fuel assemblies and reactor
components for the U. S. Government.
Industrial Operations
Revenues increased $40,087,000 to $239,165,000, primarily due to higher volume
from engineering and plant maintenance activities in Canadian operations. These
increases were partially offset by lower volume from air-cooled heat exchangers
and the parts business.
Segment operating income decreased $626,000 to $8,736,000, primarily due to
lower volume from air-cooled heat exchangers, lower volume and margins from the
parts business and higher general and administrative
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expenses. These decreases were partially offset by higher volume from
engineering activities, higher volume and margins from plant maintenance
activities in Canadian operations and lower sales and marketing expenses.
Other Unallocated Items
Other unallocated items decreased $1,688,000 to $196,000, primarily due to lower
employee benefit and general and administrative expenses. These decreases were
partially offset by higher research and development expenses.
Other Income Statement Items
Interest income decreased $33,783,000 to $24,653,000, primarily due to interest
income on settlement of Internal Revenue Service exposure items in the prior
year and decreases in investments.
Interest expense decreased $7,063,000 to $25,173,000, primarily due to changes
in debt obligations and prevailing interest rates.
Minority interest expense decreased $45,767,000 to $4,285,000, primarily due to
lower operating results of JRM as well as the acquisition of the minority
interest in JRM.
Other-net income decreased $35,266,000 to $620,000. This decrease was primarily
due to a net gain on the settlement and curtailment of postretirement benefit
plans recorded in the prior period and foreign currency transaction losses in
the current period compared to gains in the prior period.
The provision for income taxes increased $1,003,000 to $23,926,000, while income
before provision for income taxes decreased $148,512,000 to $47,587,000. The
change in the relationship of pretax income to the provision for income taxes
was primarily the result of a decrease in income during the current period along
with a decrease in tax expense for the prior period due to a change in the
valuation allowance for deferred tax assets and a favorable tax settlement of
disputed items. Also contributing to the change in the relationship of pretax
income to the provision for income taxes were losses incurred from two foreign
joint ventures with no corresponding tax benefits. McDermott operates in many
different tax jurisdictions. Within these jurisdictions, tax provisions vary
because of nominal rates, allowability of deductions, credits and other
benefits, and tax basis (for example, revenues versus income). These variances,
along with variances in the mix of income within jurisdictions, are responsible
for shifts in the effective tax rate.
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Backlog
9/30/99 3/31/99
------- -------
(Unaudited)
(In thousands)
Marine Construction Services $ 609,992 $ 407,223
Power Generation Systems 1,334,055 905,042
Government Operations 758,390 860,981
Industrial Operations 321,802 400,649
Adjustments and Other Eliminations (562) (799)
- ------------------------------------------------------------------------------------------------------------------
TOTAL BACKLOG $ 3,023,677 $ 2,573,096
==================================================================================================================
In general, all of McDermott's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
Backlog for the Marine Construction Services segment increased primarily as a
result of Conoco's West Natuna Pipeline Transportation System award.
Power Generation Systems' foreign markets have been adversely impacted by
suspensions of power projects in Southeast Asia and Pakistan. Also, the U.S.
market for industrial and utility boilers remains weak. However, the U.S. market
for services and replacement nuclear steam generators is expected to remain
strong and to make significant contributions to operating income into the
foreseeable future.
At September 30, 1999, Government Operations' backlog with the U. S. Government
was $655,563,000 (of which $10,959,000 had not been funded). This segment's
backlog is not expected to experience significant growth as a result of
reductions in defense budgets. However, this segment's backlog should remain
relatively constant since it is the sole source provider of nuclear fuel
assemblies and nuclear reactor components for the U. S. Navy.
Liquidity and Capital Resources
During the six months ended September 30, 1999, McDermott's cash and cash
equivalents decreased $72,951,000 to $108,552, 000 and total debt increased
$102,109,000 to $457,009,000, primarily due to an increase in short-term
borrowing of $133,455,000. During this period, McDermott received cash of
$495,528,000 from net sales and maturities of investments. McDermott used cash
of $526,604,000 for the acquisition of JRM's minority interest, $107,588,000 in
operating activities, $34,904,000 for additions to property, plant and
equipment, and $5,916,000 for dividends on MII's common stock.
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Working capital increased $45,789,000 from $108,955,000 at March 31, 1999 to
$154,744,000 at September 30, 1999. Expenditures for property, plant and
equipment increased $4,804,000 to $34,904,000 for the six month period ended
September 30, 1999 compared to the same period a year ago. The majority of these
expenditures were to maintain, replace and upgrade existing facilities and
equipment.
Pursuant to agreements with the majority of our principal insurers, we negotiate
and settle B&W's non-employee product liability asbestos claims and bills these
amounts to the appropriate insurers. Reimbursement of such claims is subject to
varying insurance limits based upon the year involved. Moreover, as a result of
collection delays inherent in this process and the effect of agreed payment
schedules with specific insurers, reimbursement is usually delayed for three
months or more. The average amount of these claims (historical average of
approximately $7,600 per claim over the last three years) has continued to rise.
Claims paid during the six months ended September 30, 1999 were $186,324,000, of
which $154,209,000 has been recovered or is due from insurers. At September 30,
1999, receivables of $122,944,000 were due from insurers for reimbursement of
settled claims. The collection delays, and the amount of claims paid for which
insurance recovery is not probable, have not had a material adverse effect upon
McDermott's liquidity to date.
At September 30, 1999, B&W's estimated liability for pending and future
non-employee products liability asbestos claims was $1,376,039,000 and estimated
insurance recoveries were $1,212,674,000. Estimated liabilities for pending and
future non-employee products liability asbestos claims are derived from B&W's
prior claims history and constitute management's best estimate of such future
cost, including recoverability from insurers. Estimates of insurance recoveries
are based upon management's analysis of insurance coverage and insurer solvency.
Inherent in the estimate of these liabilities are expected trend claim severity
and frequency and other factors, which may vary significantly as claims are
filed and settled. Such estimates are based upon management's expectation that
new claims will conclude within the next 12 1/2 years, that there will be a
significant decline in new claims received after 3 1/2 years, and that the
average cost per claim will continue to increase only moderately. Future costs
to settle claims, as well as the number of claims, could be adversely affected
by changes in judicial rulings and influences beyond our control. Accordingly,
changes in the estimates of future asbestos products liability and insurance
recoverables or differences between the proportion of any additional asbestos
products liabilities covered by insurance and that experienced in the past could
result in material adjustments to the results of operations for any fiscal
quarter or year, and the ultimate loss may differ materially from amounts
provided in the consolidated financial statements.
Recently, B&W has experienced an increase in the amounts demanded by certain
plaintiff's attorneys to settle mesothelioma, lung cancer and asbestosis claims.
The demanded amounts significantly exceed the average
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amount of B&W's historical settlement payments for these types of claims. We are
evaluating this development to determine if it is representative of the amounts
required to settle these types of claims in the future and its overall impact on
the estimates and forecasts of B&W's ultimate exposure for non-employee asbestos
claims. If we are unsuccessful in negotiating the demanded amounts down to
historical levels, which typically have included moderate annual increases, B&W
may be forced to accept higher settlement amounts, begin litigating such claims
or take other available courses of action. Any of these actions could have a
material adverse impact on B&W's ultimate exposure for asbestos liability claims
and McDermott's (including B&W's) consolidated financial position, results of
operations and business prospects.
On May 7, 1999, MII and JRM entered into a merger agreement pursuant to which
MII initiated a tender offer for all non-owned shares of JRM for $35.62 per
share in cash. MII obtained the funds necessary to purchase such shares from
cash on hand and from a $525,000,000 senior secured term loan facility with
Citibank, N.A. On August 4, 1999, the borrowings against the facility were
repaid and the facility was terminated.
At September 30, 1999, McDermott had total cash, cash equivalents and
investments of $512,159,000. McDermott's investment portfolio consists primarily
of government obligations and other investments in debt securities. The fair
value of short and long-term investments at September 30, 1999 was $403,607,000.
At September 30, 1999, approximately $48,161,000 fair value of these obligations
were pledged to secure a letter of credit in connection with certain reinsurance
agreements and $140,427,000 fair value of these obligations were pledged to
secure borrowings of $133,371,000 incurred under repurchase agreements.
At September 30 and March 31, 1999, McDermott had available various uncommitted
short-term lines of credit from banks totaling $72,304,000 and $87,578,000,
respectively. At September 30, 1999, borrowings against these lines of credit
were $84,000. There were no borrowings against these lines at March 31, 1999.
B&W, jointly and severally with BWICO and BWXT, is party to a $200,000,000
three-year, unsecured credit agreement (the "BWICO Credit Agreement") with a
group of banks. Borrowings by the three companies against the BWICO Credit
Agreement cannot exceed an aggregate amount of $50,000,000. The remaining
$150,000,000 is reserved for the issuance of letters of credit. There were no
borrowings under the agreement at September 30 or March 31, 1999.
At March 31, 1999, JRM and certain of its subsidiaries were parties to a
$200,000,000 three-year, unsecured credit agreement (the "JRM Credit Agreement")
with a group of banks. Borrowings against the JRM Credit Agreement cannot exceed
$50,000,000. The remaining $150,000,000 was reserved for the issuance of letters
of credit. During the six months ended September 30, 1999, JRM elected to reduce
the letter of credit
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commitments on the JRM Credit Agreement from $150,000,000 to $50,000,000. There
were no borrowings under the JRM Credit Agreement at September 30 or March 31,
1999. We do not anticipate JRM will need to borrow funds under the JRM Credit
Agreement in the nine months ending December 31, 1999.
MI and JRM and their respective subsidiaries are restricted, as a result of
covenants in debt instruments, in their ability to transfer funds to MII and its
other subsidiaries through cash dividends or through unsecured loans or
investments. At September 30, 1999, substantially all of the net assets of MI
were subject to such restrictions. At September 30, 1999, JRM and its
subsidiaries could make unsecured loans to or investments in MII and its other
subsidiaries of approximately $69,000,000 and pay dividends to MII of
approximately $4,400,000.
As a result of MI's reclassification of its investment in MII to a reduction of
stockholder's equity on March 31, 1999, MI and its subsidiaries, including B&W
and BWXT, are unable to incur any additional long-term debt obligations under
one of MI's public debt indentures. We do not believe that this will materially
impact McDermott's immediate working capital and liquidity requirements. We
expect to obtain funds to meet capital expenditure, working capital and debt
maturity requirements from operating activities, cash and cash equivalents, and
short-term borrowings. Leasing agreements for equipment, which are short-term in
nature, are not expected to impact McDermott's liquidity or capital resources.
At September 30, 1999, MII had a valuation allowance for deferred tax assets of
$40,736,000 which cannot be realized through carrybacks and future reversals of
existing taxable temporary differences. We believe that remaining deferred tax
assets are realizable through carrybacks and future reversals of existing
taxable temporary differences, future taxable income, and, if necessary, the
implementation of tax planning strategies involving sales of appreciated assets.
Uncertainties that affect the ultimate realization of deferred tax assets are
the risk of incurring losses in the future and the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
These factors have been considered in determining the valuation allowance. We
will continue to assess the adequacy of the valuation allowance on a quarterly
basis.
Impact of the Year 2000
The McDermott company-wide Year 2000 Project is proceeding on schedule and
approaching completion. The project addresses information technology components
(hardware and software) in internal business systems and infrastructure and the
embedded systems in offices, plants and products delivered to customers. In
addition, an analysis of critical suppliers is being performed to ensure the
supply of materials and services that are strategic to business continuity. The
final phase of Year 2000 preparation includes the development of contingency
plans to further minimize the risk and mitigate the impact of the century date
change.
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The Year 2000 Project began company-wide with a planning phase during the latter
part of 1996 followed by a company-wide assessment, which was completed in early
1997. Based upon the results of the assessment and the diverse nature of
McDermott's product lines, strategies for business systems were developed that
fit the requirements of each of the McDermott business units. Some entities are
replacing legacy systems with commercial enterprise systems, others are
employing a combination of proprietary and third-party client/server systems,
while a third strategy is based primarily upon remediation of legacy
applications. Embedded systems and the critical supplier analysis are being
addressed with a common methodology across McDermott.
A consistent work breakdown structure for the project is being employed
throughout McDermott:
o Business Applications and IT Infrastructure ("IT Systems")
o Facilities (office buildings)
o Embedded Systems (in plants and construction equipment)
o Customer Products (embedded systems in customer products)
o Critical Suppliers
The general phases of the project common to all of the above functions are:
(1) establish priorities,
(2) inventory items with potential Year 2000 impact,
(3) assess and create a solution strategy for those items determined to be
material to McDermott,
(4) implement solutions defined for those items assessed to have Year 2000
impact,
(5) test and validate solutions, and
(6) develop contingency plans.
The status is as follows:
IT Systems - Inventory prioritization and assessment of all critical systems
were completed. The remediation and replacement tasks are substantially
complete.
Facilities and Embedded Systems - The critical components at all of McDermott's
major operating locations have been made Year 2000 ready. Embedded Systems
replacements are pending on a few pieces of marine equipment where construction
schedules have rendered the vessels unavailable for component upgrades. The
outstanding compliance work is substantially complete.
Customer Products - This phase of the project has been completed at all of
McDermott's locations.
Critical Suppliers - This analysis includes the determination of the compliance
status of the suppliers' businesses as well as the products they produce. All of
McDermott's major sites except two have completed this analysis, and the
remaining sites are substantially complete.
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Contingency Plan - McDermott is taking steps to mitigate the risk of a material
impact of Year 2000 on its operations with the development of contingency plans.
These plans, prepared using a common methodology across the corporation, focus
on the mission critical processes and third-party dependencies that could be at
risk with the century date change. Contingency plans have been completed at all
of McDermott's operations locations. The contingency plan for the corporate
office will be completed by November 30, 1999.
As an alternative to the remediation of the legacy payroll systems, McDermott
has elected to outsource its payroll function. The transition to the payroll
service provider has been completed.
McDermott does not expect that the cost associated with the modifications to
critical systems and other compliance activities will have a material impact on
its consolidated financial condition, cash flows or results of operations. The
cost of the Year 2000 Project is estimated at $38,000,000 and is being funded
through operating cash flows. Of the total project cost, $8,000,000 is
attributable to the purchase of hardware and software, which will be
capitalized, and the remaining $30,000,000 will be expensed as incurred.
Expenditures through September 30, 1999 include $8,000,000 of capital and
$28,000,000 of expense.
McDermott's Year 2000 compliance is also dependent upon the Year 2000 readiness
of external agents and third-party suppliers on a timely basis. The failure of
McDermott or its agents or suppliers to achieve Year 2000 compliance could
result in, among other things, plant production interruptions, delays in the
delivery of products, delays in construction completions, delays in the receipt
of supplies, invoice and collection errors, and inaccurate inventories. These
consequences could have a material adverse impact on McDermott's results of
operations, financial condition and cash flow if it is unable to conduct its
businesses in the ordinary course.
Although McDermott is unable to determine at this time whether the consequences
of Year 2000 failures will have a material impact on its results of operations,
McDermott believes that its Year 2000 Project, including contingency plans,
should significantly reduce the adverse effect that any such disruptions may
have.
Statements made herein which express a belief, expectation or intention, as well
as those which are not historical fact, are forward looking. They involve a
number of risks and uncertainties which may cause actual results to differ
materially from such forward-looking statements. The dates on which McDermott
believes the Year 2000 Project will be completed are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved or that there will not be a delay in, or
increased costs associated with, the implementation of the Year 2000 Project.
Specific factors that might cause differences between the estimates and actual
results include, but are not limited to:
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o the availability and cost of personnel trained in these areas,
o the ability to locate and correct all relevant computer code,
o timely responses to and corrections by third parties and suppliers,
o the ability to implement interfaces between the new systems and the
systems not being replaced, and
o similar uncertainties.
The general uncertainty inherent in the Year 2000 problem results in part from
the uncertainty of the Year 2000 readiness of third parties and the
interconnection of global businesses. Due to this general uncertainty, McDermott
cannot ensure its ability to timely and cost-effectively resolve problems
associated with the Year 2000 issue that may affect its operations and business
or expose it to third-party liability.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require McDermott to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. In June 1999, the FASB issued SFAS No. 137, " Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133
to all fiscal quarters of all fiscal years beginning after June 15, 2000.
McDermott has not yet determined what the effect of SFAS No. 133 will have on
its consolidated financial position or results of operations.
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PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema"). Upon becoming aware of these allegations, we notified authorities,
including the Antitrust Division of the U.S. Department of Justice and the
European Commission. As a result of our prompt disclosure of the allegations,
both MII and JRM and their officers, directors and employees at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
In June 1999, the Department of Justice agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities.
After receiving the allegations, we initiated action to terminate JRM's interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture,
Heerema, acquired JRM's interest in exchange for cash and title to several
pieces of equipment. On December 21, 1997, HeereMac and one of its employees
pled guilty to criminal charges by the Department of Justice that they and
others had participated in a conspiracy to rig bids in connection with the
heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
In July 1999, a former JRM officer was indicted by the Department of Justice for
participating in an international bid-rigging conspiracy for the sale of marine
construction services and pled guilty.
We have cooperated and are continuing to cooperate with the Department of
Justice in its investigation. The Department of Justice also has requested
additional information from us relating to possible anti-competitive activity in
the marine construction business of McDermott-ETPM East, Inc., one of the
operating companies within JRM's former McDermott-ETPM joint venture with ETPM
S.A., a French company. In connection with the termination of the McDermott-ETPM
joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM
East, Inc., which has been renamed J. Ray McDermott Middle East, Inc.
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In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates, and others alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, North Sea and Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants (collectively
"Statoil"), filed a similar lawsuit in the same court (the "Statoil
Litigation"). In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil
Litigation have requested punitive as well as treble damages. In January 1999,
the court dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects. In July 1999, the court dismissed the Statoil
Litigation for lack of subject matter jurisdiction. In August 1999, Statoil
filed its notice of appeal of the dismissal. In September 1999, the Phillips
Plaintiffs filed notice of their request to dismiss their remaining claims in
the lawsuit. That motion is pending.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others alleging that the defendants engaged in anti-competitive acts
in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.;
Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco
Exploration and Production Inc. and certain of its affiliates; Elf Exploration
UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc. and The Louisiana
Land & Exploration Company; Marathon Oil Company and certain of its affiliates;
VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.
and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas
Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside
Energy, Ltd; and Saga Petroleum, S.A. intervened (acting for themselves and, if
applicable, on behalf of their respective co-venturers and for whom they
operate) as plaintiffs in the Shell Litigation. Also, in December 1998, Total
Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of
their respective co-venturers, filed similar lawsuits in the same court, which
lawsuits were consolidated with the Shell Litigation. In addition to seeking
injunctive relief, actual damages and attorneys' fees, the plaintiffs in the
Shell Litigation request treble damages.
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We are also cooperating with a Securities and Exchange Commission ("SEC")
investigation into whether MII and JRM may have violated U.S. securities laws in
connection with, but not limited to, the matters described above. MII and JRM
are subject to a judicial order entered in 1976, with the consent of MI (which
at that time was the parent of the McDermott group of companies), pursuant to an
SEC complaint (the "Consent Decree"). The Consent Decree prohibits the companies
from making false entries in their books, maintaining secret or unrecorded funds
or using corporate funds for unlawful purposes. Violations of the Consent Decree
could result in substantial civil and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, MII formed
and continues to maintain a special committee of its Board of Directors to
monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, our internal investigation, the
above-referenced lawsuits, or any actions that may be taken by others as a
result of HeereMac's guilty plea or otherwise. However, these matters could
result in civil and criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F.
Hall, Mary Ann Hall and others in the United States District Court for the
Western District of Pennsylvania involving approximately 200 separate cases
relating to the operation of two former nuclear fuel processing facilities
located in Pennsylvania (the "Hall Litigation"), alleging, among other things,
that they suffered personal injury and other damages as a result of radioactive
emissions from these facilities. In September 1998, a jury found B&W and
Atlantic Richfield Company liable to the plaintiffs in the first eight cases
brought to trial, awarding $36,700,000 in compensatory damages. In June 1999,
the court set aside the judgement and ordered a new trial on all issues.
Recently, the court allowed an interlocutory appeal by the plaintiffs of certain
issues, including the granting of the new trial and the court's rulings on
certain evidentiary matters. We do not expect any further trials on the other
cases until a decision is rendered on the appeal. We believe that adequate
insurance is available to meet any possible liability in this matter. However,
there is a controversy between B&W and its insurers as to the amount of
insurance coverage under the insurance policies covering these facilities. B&W
has filed an action seeking a judicial determination of this matter, which is
currently pending in a Pennsylvania court. We believe that any award and all
other claims will be resolved within the limits and coverage of such insurance
policies; however, no assurance on insurance coverage or financial impact if
limits of coverage are exceeded can be given. In connection with the foregoing,
B&W settled all pending and future punitive damage claims represented by
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the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks
reimbursement of this amount from other parties.
Two purported class actions were filed in March and April 1999 in the Civil
District Court for the Parish of Orleans, State of Louisiana, by alleged public
shareholders of JRM, challenging MII's initial proposal to acquire the publicly
traded shares of JRM common stock in a stock for stock merger. This initial
proposal was subsequently abandoned and MII later acquired all of JRM's publicly
traded common stock for $35.62 per share pursuant to a cash tender offer
followed by a second-step cash merger. In September 1999, these actions were
dismissed by the court without prejudice.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation related to our business activities. It is
management's opinion that none of this litigation will have a material adverse
effect on McDermott's consolidated financial position or results of operations.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on August 3, 1999, we submitted the
following matters to our shareholders with voting as follows:
(a) The election of three directors:
Class II - For a three year term
Nominee Votes For Votes Withheld
------- --------- --------------
Joe B. Foster 53,598,015 318,335
Kathryn D. Sullivan 53,590,760 325,590
Richard E. Woolbert 53,559,532 356,818
Messrs. Philip J. Burguieres, Bruce DeMars, Robert L. Howard, John W.
Johnstone, Jr. , Roger E. Tetrault and John N. Turner also continued
as directors immediately after the meeting.
(b) A proposal to amend our 1996 Officer Long-Term Incentive Plan to
increase the number of shares authorized for issuance under the plan
from 2,500,000 to 4,000,000:
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
50,913,695 3,002,655 Not Applicable
(c) A proposal to reapprove our 1994 Variable Supplemental Compensation
Plan for tax deductibility reasons:
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
44,813,090 950,776 8,152,484
(d) A proposal to retain PricewaterhouseCoopers LLP as our independent
accountants for the fiscal year ending December 31, 1999:
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
53,693,967 222,383 Not Applicable
Item 5. SHAREHOLDERS PROPOSALS FOR 2000
As a result of the change in our fiscal year to a year ending on December 31,
our next annual shareholders meeting will be held on May 2, 2000. Any
shareholder who wishes to have a qualified proposal considered for inclusion in
our proxy materials for such meeting must send notice of the proposal to MII's
Corporate Secretary at our executive offices no later than December 1, 1999.
Any shareholder who intends to submit a proposal for consideration at the annual
meeting, but not for inclusion in our proxy materials, or intends to submit
nominees for election as directors at the meeting also must notify MII's
Corporate Secretary. Under MII's By-Laws, such notice must be received at our
executive offices no
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earlier than January 3, 2000 or later than February 2, 2000 and must satisfy
certain requirements. A copy of the pertinent By-Laws provisions can be obtained
from the Corporate Secretary upon written request.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.2 - Amended and Restated By-Laws of McDermott International,
Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 1999.
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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/ Daniel R. Gaubert
-----------------------------------
By: Daniel R. Gaubert
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer and
Duly Authorized Representative)
November 11, 1999
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EXHIBIT INDEX
Exhibit Description
3.2 Amended and Restated By-Laws of McDermott International, Inc.
27 Financial Data Schedule