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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) F O R M 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _______
Commission File Number 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
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [ ]
The aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant was $258,410,985 as of January 31, 2003.
The number of shares of the registrant's common stock outstanding at January 31,
2003 was 64,831,612.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 in connection with the registrant's 2003 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART I
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Marine Construction Services
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Government Operations
General 6
Raw Materials 6
Customers and Competition 6
Backlog 7
Factors Affecting Demand 7
D. Patents and Licenses 7
E. Research and Development Activities 7
F. Insurance 7
G. Employees 9
H. Governmental Regulations and Environmental Matters 9
I. Risk Factors 11
J. Cautionary Statement Concerning Forward-Looking Statements 19
K. Available Information 21
Item 3. LEGAL PROCEEDINGS 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 28
Item 6. SELECTED FINANCIAL DATA 29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
General 30
Critical Accounting Policies and Estimates 32
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 35
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 37
Effects of Inflation and Changing Prices 39
Liquidity and Capital Resources 39
New Accounting Standards 44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
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INDEX - FORM 10-K
PAGE
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants 48
Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 49
Consolidated Statements of Loss for the Years Ended December 31, 2002, 2001 and 2000 51
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2002, 2001 and 2000 52
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 53
2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 54
Notes to Consolidated Financial Statements 55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 102
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 102
Item 11. EXECUTIVE COMPENSATION 102
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS 103
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 103
Item 14. CONTROLS AND PROCEDURES 103
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 103
Signatures 106
Certifications 107
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Statements we make in this Annual Report on Form 10-K which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various risks, uncertainties and assumptions, including those to which we refer
under the headings "Risk Factors" and "Cautionary Statement Concerning
Forward-Looking Statements" in Items 1 and 2 of Part I of this report.
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("MII") was incorporated under the laws of the
Republic of Panama in 1959 and is the parent company of the McDermott group of
companies, which includes:
- J. Ray McDermott, S.A., a Panamanian subsidiary of MII
("JRM"), and its consolidated subsidiaries;
- McDermott Incorporated, a Delaware subsidiary of MII ("MI"),
and its consolidated subsidiaries;
- Babcock & Wilcox Investment Company, a Delaware subsidiary of
MI ("BWICO");
- BWX Technologies, Inc., a Delaware subsidiary of BWICO
("BWXT"), and its consolidated subsidiaries; and
- The Babcock & Wilcox Company, an unconsolidated Delaware
subsidiary of BWICO ("B&W").
In this Annual Report on Form 10-K, unless the context otherwise indicates,
"we," "us" and "our" mean MII and its consolidated subsidiaries.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve all their asbestos liability. As of
February 22, 2000, B&W's operations have been subject to the jurisdiction of the
Bankruptcy Court and, as a result, our access to cash flows of B&W and its
subsidiaries is restricted. The B&W Chapter 11 proceedings require a significant
amount of management's attention, and they represent an uncertainty in the
financial marketplace. See Section I, Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and Note 20 to our
consolidated financial statements for further information concerning the effects
of the Chapter 11 filing.
Due to the bankruptcy filing, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
consolidated financial statements and we have been presenting our investment in
B&W on the cost method. The Chapter 11 filing, along with subsequent filings and
negotiations, led to increased uncertainty with respect to the amounts, means
and timing of the ultimate settlement of asbestos claims and the recovery of our
investment in B&W. Due to this increased uncertainty, we wrote off our net
investment in B&W in the quarter ended June 30, 2002. On December 19, 2002,
drafts of a joint plan of reorganization and settlement agreement, together with
a draft of a related disclosure statement, were filed in the Chapter 11
proceedings, and we determined that a liability related to the proposed
settlement is probable and that the value is reasonably estimable. Accordingly,
as of December 31, 2002, we established an estimate for the cost of the
settlement of the B&W bankruptcy proceedings of $110.0 million, including
related tax expense of $23.6 million. See Management's Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 and Note 20 to our
consolidated financial statements for further information on B&W and information
regarding developments in negotiations relating to the B&W Chapter 11
proceedings.
Historically, we have operated in four business segments:
- Marine Construction Services includes the results of
operations of JRM and its subsidiaries, which supply worldwide
services to customers in the offshore oil and gas exploration
and production and hydrocarbon processing industries and to
other marine construction companies. This segment's principal
activities include the front-end and detailed engineering,
fabrication
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and installation of offshore drilling and production platforms
and other specialized structures, modular facilities, marine
pipelines and subsea production systems. This segment also
provides comprehensive project management and procurement
services. This segment operates throughout the world in most
major offshore oil and gas producing regions, including the
Gulf of Mexico, West Africa, South America, the Middle East,
India, the Caspian Sea and Southeast Asia.
- Government Operations includes the results of operations of
BWXT. This segment supplies nuclear components to the U.S.
Navy and provides various services to the U.S. Government,
including uranium processing, environmental site restoration
services and management and operating services for various
U.S. Government-owned facilities, primarily within the nuclear
weapons complex of the U.S. Department of Energy ("DOE").
Government Operations also includes the results of McDermott
Technology, Inc. ("MTI"). Historically, MTI performed research
activities for our other segments and marketed, negotiated and
administered research and development contracts. However, we
have determined to decentralize our research and development
activities and we are in the process of incorporating most of
MTI's other operations into BWXT.
- Industrial Operations included the results of operations of
McDermott Engineers & Constructors (Canada) Ltd. ("MECL"), a
subsidiary that we sold to a unit of Jacobs Engineering Group
Inc. on October 29, 2001.
- Power Generation Systems includes the results of operations of
our Power Generation Group, which is conducted primarily
through B&W and its subsidiaries. This segment provides a
variety of services, equipment and systems to generate steam
and electric power at energy facilities worldwide. Due to
B&W's Chapter 11 filing, effective February 22, 2000, we no
longer consolidate B&W's and its subsidiaries' results of
operations in our consolidated financial statements. Through
February 21, 2000, B&W's and its subsidiaries' results are
reported as Power Generation Systems B&W in the segment
information that follows. See Note 20 to our consolidated
financial statements for information on the condensed
consolidated results of B&W and its subsidiaries.
Currently, excluding B&W and its subsidiaries, our operations consist of Marine
Construction Services and Government Operations.
The following tables summarize our revenues and operating income for the years
ended December 31, 2002, 2001 and 2000. See Note 17 to our consolidated
financial statements for additional information about our business segments and
operations in different geographic areas.
Year Ended
December 31,
2002 2001 2000
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(In Millions)
REVENUES
Marine Construction Services $ 1,148.0 $ 848.5 $ 757.5
Government Operations 553.8 494.0 444.0
Industrial Operations - 507.2 426.3
Power Generation Systems - B&W - - 155.8
Power Generation Systems 46.9 47.8 33.8
Eliminations - (0.6) (3.7)
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$ 1,748.7 $ 1,896.9 $ 1,813.7
===========================================================================
2
Year Ended
December 31,
2002 2001 2000
---- ---- ----
(In Millions)
OPERATING INCOME:
Segment Operating Income (Loss):
Marine Construction Services $ (162.6) $ 14.5 $ (33.6)
Government Operations 34.6 29.3 33.2
Industrial Operations - 9.9 9.8
Power Generation Systems - B&W - - 7.2
Power Generation Systems (2.8) (3.6) (7.8)
-----------------------------------------------------------------------------
$ (130.8) $ 50.1 $ 8.8
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Gain (Loss) on Asset Disposals
and Impairments - Net:
Marine Construction Services $ (320.9) $ (3.6) $ (1.0)
Government Operations - (0.1) (1.1)
Industrial Operations - - (0.1)
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$ (320.9) $ (3.7) $ (2.2)
-----------------------------------------------------------------------------
Equity in Income (Loss) from Investees:
Marine Construction Services $ 5.3 $ 10.4 $ 2.9
Government Operations 24.6 23.0 11.1
Industrial Operations - 0.1 0.1
Power Generation Systems - B&W - - 0.8
Power Generation Systems (2.2) 0.6 (24.6)
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$ 27.7 $ 34.1 $ (9.7)
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Write-off of investment in B&W (224.7) - -
Other unallocated (1.5) - -
Corporate (23.6) (5.1) 8.0
-----------------------------------------------------------------------------
$ (673.8) $ 75.4 $ 4.9
=============================================================================
See Note 17 to our consolidated financial statements for further
information on Corporate.
B. MARINE CONSTRUCTION SERVICES
General
In January 1995, we organized JRM and contributed substantially all of our
marine construction services business to it. JRM then acquired Offshore
Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger with OPI,
JRM was a wholly owned subsidiary of MII. As a result of the merger, JRM became
a majority-owned subsidiary of MII. In June 1999, MII acquired all of the
publicly held shares of JRM common stock.
The Marine Construction Services segment's business involves the front-end and
detailed engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. This segment also provides
comprehensive project management and procurement services. This segment operates
throughout the world in most major offshore oil and gas producing regions,
including the Gulf of Mexico, West Africa, South America, the Middle East,
India, the Caspian Sea and Southeast Asia.
At December 31, 2002, JRM owned or operated six fabrication facilities
throughout the world. Its principal domestic fabrication yard and offshore base
is located on 1,114 leased acres of land near Morgan City, Louisiana. It also
wholly owns or operates fabrication facilities in the following locations: near
Corpus Christi, Texas; in Indonesia on Batam Island; and in Jebel Ali, U.A.E.
JRM also owns and operates, through a 95% interest in a consolidated subsidiary,
a ship repair yard in Veracruz, Mexico, which is also used as a fabrication
facility. JRM also operates a portion of the Shelfprojectstroy fabrication
facility in Baku, Azerbaijan. This facility is owned by the State Oil Company of
the Azerbaijan Republic.
3
JRM's fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM can fabricate a full range of offshore structures, from
conventional jacket-type fixed platforms to deepwater platform configurations
employing spar, compliant-tower and tension leg technologies, as well as
floating production, storage and offtake ("FPSO") technology. JRM also
fabricates platform deck structures and modular components, including complete
production processing systems, hydrocarbon separation and treatment systems,
pressure and flow control systems and personnel quarters.
Expiration dates, including renewal options, of leases covering land for JRM's
fabrication yards at December 31, 2002, were as follows:
Morgan City, Louisiana Years 2004-2048
Jebel Ali, U.A.E. Year 2015
Batam Island, Indonesia Year 2028
Veracruz, Mexico Year 2024
JRM owns a large fleet of marine equipment used in major offshore construction.
The nucleus of a "construction spread" is a large derrick barge, pipelaying
barge or combination derrick-pipelaying barge capable of offshore operations for
an extended period of time in remote locations. At December 31, 2002, JRM owned
or, through ownership interests in joint ventures, had interests in five derrick
vessels, one pipelaying vessel and eight combination derrick-pipelaying vessels.
The lifting capacities of the derrick and combination derrick-pipelaying vessels
range from 600 to 5,000 tons. These vessels range in length from 350 to 698 feet
and are fully equipped with stiff leg or revolving cranes, auxiliary cranes,
welding equipment, pile-driving hammers, anchor winches and a variety of
additional gear. JRM's largest vessel is the semisubmersible derrick barge 101,
which we plan to sell in 2003. Six of the vessels are self-propelled, with two
also having dynamic positioning systems. JRM also has a substantial inventory of
specialized support equipment for deepwater construction and pipelay. In
addition, JRM owns or leases a substantial number of other vessels, such as
tugboats, utility boats, launch barges and cargo barges, to support the
operations of its major marine construction vessels.
JRM participates in joint ventures involving operations in foreign countries
that require majority ownership by local interests. Through a subsidiary, JRM
also participated in an equally owned joint venture with the Brown & Root Energy
Services unit of Halliburton Company ("Brown & Root"), which was formed in
February 1995 to combine the operations of JRM's Inverness and Brown & Root's
Nigg fabrication facilities in Scotland. This joint venture was terminated
effective June 30, 2001. In addition, JRM owns a 49% interest in Construcciones
Maritimas Mexicanas, S.A. de C.V., a Mexican joint venture, which provides
marine installation services in the Gulf of Mexico.
Foreign Operations
JRM's revenues, net of intersegment revenues, segment income derived from
operations located outside of the United States, and the approximate percentages
to our total consolidated revenues and total consolidated segment income (loss),
respectively, follow:
Revenues Segment Income (Loss)
Amount Percent Amount Percent
(Dollars in thousands)
Year ended December 31, 2002 $ 528,792 30% $ (5,128)(1) 1%
Year ended December 31, 2001 $ 327,604 17% $ 8,801 11%
Year ended December 31, 2000 $ 494,689 27% $ 5,865 -
(1)Excludes $313.0 million goodwill impairment charge.
Raw Materials
Our Marine Construction Services segment uses raw materials, such as carbon and
alloy steels in various forms, welding gases, concrete, fuel oil and gasoline,
which are available from many sources. JRM is not dependent upon any single
supplier or source for any
4
of these materials. Although shortages of some of these materials and fuels have
existed from time to time, no serious shortage exists at the present time.
Customers and Competition
Our Marine Construction Services segment's principal customers are oil and gas
companies, including several foreign government-owned companies. These customers
contract with JRM for project management, engineering, procurement, fabrication
and installation of offshore drilling and production platforms and other
specialized structures, modular facilities, marine pipelines and subsea
production systems. Contracts are usually awarded on a competitive-bid basis. A
number of companies compete effectively with JRM and its joint ventures in each
of the separate marine construction phases in various parts of the world. These
competitors include Global Industries, Ltd., Gulf Island Fabrication, Inc.,
Heerema Offshore Construction Group, Inc., Hyundai Heavy Industries, Nippon
Steel Corporation, Saipem S.p.A., Stolt Offshore S.A., Technip Offshore and
Horizon Offshore, Inc.
Our Marine Construction Services segment performs a substantial number of
projects on a fixed-price basis. This segment attempts to cover increased costs
of anticipated changes in labor, material and service costs of our long-term
contracts, either through an estimation of such changes, which is reflected in
the original price, or through price escalation clauses. However, for
first-of-a-kind projects we have undertaken in recent periods, we have been
unable to forecast accurately total cost to complete until we have performed all
major phases of the project. As demonstrated by our experience on these
contracts, revenue, cost and gross profit realized on fixed-price contracts will
often vary from the estimated amounts because of changes in job conditions and
variations in labor and equipment productivity over the term of the contract.
Our Marine Construction Services segment may experience reduced profitability or
losses on projects as a result of these variations and the risks inherent in the
marine construction industry.
Backlog
At December 31, 2002 and 2001, our Marine Construction Services segment's
backlog amounted to $2.1 billion and $1.8 billion, respectively. This represents
approximately 56% and 62% of our total consolidated backlog at December 31, 2002
and 2001, respectively. Of the December 31, 2002 backlog, we expect to recognize
approximately $1.5 billion in revenues in 2003, $0.4 billion in 2004 and $0.2
billion thereafter.
JRM has historically performed work on a fixed-price, cost-plus or day-rate
basis or a combination thereof. More recently, certain contracts have introduced
a risk-and-reward element wherein a portion of total compensation is tied to the
overall performance of the partners in an alliance. Most of JRM's long-term
contracts have provisions for progress payments.
During the year ended December 31, 2002, our Marine Construction Services
segment was awarded the following contracts, among others:
- a contract for approximately $340 million for Azerbaijan
International Operating Company in Baku for the fabrication of
two integrated topside facilities;
- a fixed-price contract for approximately $250 million for
Murphy Exploration & Production Company to engineer, procure,
fabricate and install a spar offshore production facility for
the "Front Runner" development project in the deepwater Gulf
of Mexico;
- a fixed-price contract for approximately $80 million for Oil &
Natural Gas Corporation Ltd., through Engineers India Limited,
the prime contractor, to fabricate and install two platforms,
pipelines and platform modifications in the Mumbai North
Field, offshore India;
- a contract for approximately $65 million for BP Trinidad and
Tobago LLC to fabricate, construct and load out two offshore
platforms; and
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- a fixed-price contract for approximately $55 million for Al
Khafi Joint Operations to procure, fabricate and install a
utility platform and install submarine cable onshore to
offshore Saudi Arabia in the Persian Gulf.
Factors Affecting Demand
Our Marine Construction Services segment's activity depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
construction of development projects. Numerous factors influence these
expenditures, including:
- oil and gas prices, along with expectations about future
prices;
- the cost of exploring for, producing and delivering oil and
gas;
- the terms and conditions of offshore leases;
- the discovery rates of new oil and gas reserves in offshore
areas;
- the ability of businesses in the oil and gas industry to raise
capital; and
- local and international political and economic conditions.
See Section I for further information on factors affecting demand.
C. GOVERNMENT OPERATIONS
General
Our Government Operations segment provides nuclear components and various
services to the U.S. Government. Examples of this segment's activities include
environmental restoration services and the management of government-owned
facilities, primarily within the nuclear weapons complex of the DOE.
This segment's principal plants are located in Lynchburg, Virginia; Barberton,
Ohio; and Mount Vernon, Indiana. BWXT conducts all the operations of our
Government Operations segment.
Raw Materials
Our Government Operations segment relies on certain sole source suppliers for
materials used in its products. We believe these suppliers are viable, and we
and the U.S. Government expend significant effort to maintain the supplier base.
Customers and Competition
Our Government Operations' segment supplies nuclear components for the U.S.
Navy. There are a limited number of suppliers of specialty nuclear components,
with BWXT being the largest based on revenues. Through the operations of this
segment, we are also involved along with other companies in the operation of:
- the Idaho National Engineering and Environmental Laboratory
near Idaho Falls, Idaho;
- the Rocky Flats Environmental Technology Site near Boulder,
Colorado;
- the Savannah River Site in Aiken, South Carolina;
- the Strategic Petroleum Reserve in and around New Orleans,
Louisiana;
- the Pantex Site in Amarillo, Texas;
- the Oak Ridge National Lab Site (the "Y-12" facility) in Oak
Ridge, Tennessee; and
- the Miamisburg Closure Project in Miamisburg, Ohio.
All of these contracts are subject to annual funding determinations by the U.S.
Government.
The U.S. Government accounted for approximately 29%, 24% and 23% of our total
consolidated revenues for the years ended December 31, 2002, 2001 and 2000,
respectively, including 22%, 18% and 17%, respectively, related to nuclear
components.
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Backlog
At December 31, 2002 and 2001, our Government Operations segment's backlog
amounted to $1.7 billion and $1.0 billion, or approximately 44% and 36%,
respectively, of our total consolidated backlog. Of the December 31, 2002
backlog in this segment, we expect to recognize revenues of approximately $0.5
billion in 2003, $0.4 billion in 2004 and $0.8 billion thereafter, of which we
expect to recognize approximately 90% in 2005 through 2007. At December 31,
2002, this segment's backlog with the U.S. Government was $1.6 billion (of which
$266.5 million had not yet been funded), or approximately 43% of our total
consolidated backlog. During the year ended December 31, 2002, the U.S.
Government awarded this segment new orders of approximately $1.1 billion.
Factors Affecting Demand
This segment's operations are generally capital-intensive on the manufacturing
side. This segment may be impacted by U.S. Government budget restraints and
delays.
The demand for nuclear components for the U.S. Navy comprises a substantial
portion of this segment's backlog. We expect that orders for nuclear components
will continue to be an increasing part of backlog for the foreseeable future.
See Section I for further information on factors affecting demand.
D. PATENTS AND LICENSES
We currently hold a large number of U.S. and foreign patents and have numerous
pending patent applications. We have acquired patents and licenses and granted
licenses to others when we have considered it advantageous for us to do so.
Although in the aggregate our patents and licenses are important to us, we do
not regard any single patent or license or group of related patents or licenses
as critical or essential to our business as a whole. In general, we depend on
our technological capabilities and the application of know-how rather than
patents and licenses in the conduct of our various businesses.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
We have decentralized our research and development activities and now conduct
our principal research and development activities through individual business
units at our various manufacturing plants and engineering and design offices.
Our research and development activities cost approximately $61.6 million, $58.3
million and $50.2 million in the years ended December 31, 2002, 2001 and 2000,
respectively. Contractual arrangements for customer-sponsored research and
development can vary on a case-by-case basis and include contracts, cooperative
agreements and grants. Of our total research and development expenses, our
customers paid for approximately $47.8 million, $46.6 million and $34.8 million
in the years ended December 31, 2002, 2001 and 2000, respectively.
F. INSURANCE
We maintain liability and property insurance in amounts we consider adequate for
those risks we consider necessary. Some risks are not insurable or insurance to
cover them is available only at rates that we consider uneconomical. These risks
include war and confiscation of property in some areas of the world, pollution
liability in excess of relatively low limits and asbestos liability. Depending
on competitive conditions and other factors, we endeavor to obtain contractual
protection against uninsured risks from our customers. Insurance or contractual
indemnity protection, when obtained, may not be sufficient or effective under
all circumstances or against all hazards to which we may be subject.
Our insurance policies do not insure against liability and property damage
losses resulting from nuclear accidents at reactor facilities of our utility
customers. To protect against liability for damage to a customer's property, we
endeavor to obtain waivers of subrogation from the customer and its insurer and
are usually named as an additional insured under the utility customer's nuclear
property policy.
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To protect against liability from claims brought by third parties, we are
insured under the utility customer's nuclear liability policies and have the
benefit of the indemnity and limitation of any applicable liability provision of
the Price-Anderson Act. The Price-Anderson Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of a certain amount. This amount is determined by the sum of commercially
available liability insurance plus certain retrospective premium assessments
payable by operators of commercial nuclear reactors. For those sites where we
provide environmental remediation services, we seek the same protection from our
customers as we do for our other nuclear activities. The Price-Anderson Act, as
amended, includes a sunset provision and requires renewal each time that it
expires. Contracts that were entered into during a period of time that
Price-Anderson was in full force and effect continue to receive the benefit of
the Price-Anderson Act nuclear indemnity. The Price-Anderson Act last expired on
August 1, 2002, and was subsequently extended through December 31, 2004. BWXT
currently has no contracts involving nuclear materials covered by the
Price-Anderson Act that are not covered by and subject to the nuclear indemnity
of the Price-Anderson Act.
Although we do not own or operate any nuclear reactors, we have coverage under
commercially available nuclear liability and property insurance for three of our
four locations that are licensed to possess special nuclear materials. The
fourth location operates primarily as a conventional research center. This
facility is licensed to possess special nuclear material and has a small and
limited amount of special nuclear material on the premises. Two of the four
facilities are located at our Lynchburg, Virginia site. These facilities are
insured under a nuclear liability policy that also insures the facility of
Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company, which we sold
during the fiscal year ended March 31, 1993. All three licensed facilities share
the same nuclear liability insurance limit, as the commercial insurer would not
allow FCFC to obtain a separate nuclear liability insurance policy. Due to the
type or quantity of nuclear material present under contract with the U.S.
Government, the two facilities in Lynchburg have statutory indemnity and
limitation of liability under the Price-Anderson Act. In addition, our contracts
to manufacture and supply nuclear components to the U.S. Government contain
statutory indemnity clauses under which the U.S. Government has assumed the
risks of public liability claims related to nuclear incidents.
JRM's offshore construction business is subject to the usual risks of operations
at sea. JRM has additional exposure because it uses expensive construction
equipment, sometimes under extreme weather conditions, often in remote areas of
the world. In many cases, JRM also operates on or in proximity to existing
offshore facilities. These facilities are subject to damage that could result in
the escape of oil and gas into the sea. Certain contractual protections
historically provided by JRM's customers have eroded and are not available in
all cases.
As a result of the asbestos contained in commercial boilers and other products
B&W and certain of its subsidiaries sold, installed or serviced in prior
decades, B&W is subject to a substantial volume of nonemployee liability claims
asserting asbestos-related injuries. The vast majority of these claims relate to
exposure to asbestos occurring prior to 1977, the year in which the U.S.
Occupational Safety and Health Administration adopted new regulations that
impose liability on employers for, among other things, job-site exposure to
asbestos.
B&W received its first asbestos claims in 1983. Initially, B&W's primary
insurance carrier, a unit of Travelers Group, handled the claims. B&W exhausted
the limits of its primary products liability insurance coverage in 1989. Prior
to its Chapter 11 filing, B&W had been handling the claims under a
claims-handling program funded primarily by reimbursements from its
excess-coverage insurance carriers. B&W's excess coverage available for
asbestos-related products liability claims runs from 1949 through March 1986.
This coverage has been provided by a total of 136 insurance companies. B&W
obtained varying amounts of excess-coverage insurance for each year within that
period, and within each year there are typically several increments of coverage.
For each of those increments, a syndicate of insurance companies has provided
the coverage.
8
B&W had agreements with the majority of its excess-coverage insurers concerning
the method of allocating products liability asbestos claim payments to the years
of coverage under the applicable policies. See Note 20 to our consolidated
financial statements for information regarding B&W's Chapter 11 filing and
liability for nonemployee asbestos claims.
We have several wholly owned insurance subsidiaries that provide general and
automotive liability insurance and, from time-to-time, builder's risk within
certain limits, marine hull and workers' compensation insurance to our
companies. These insurance subsidiaries have not provided significant amounts of
insurance to unrelated parties. These captive insurers provide certain coverages
for our subsidiary entities and related coverages. Claims as a result of our
operations, or arising in the B&W Chapter 11 proceedings, could adversely impact
the ability of these captive insurers to respond to all claims presented,
although we believe such a result is unlikely.
BWXT, through two of its dedicated limited liability companies, has long-term
management and operating agreements with the U.S. Government for the Pantex and
Y-12 facilities. Most insurable liabilities arising from these sites are not
protected in our corporate insurance program but rely on government contractual
agreements and certain specialized self-insurance programs funded by the U.S.
Government. The U.S. Government has historically fulfilled its contractual
agreement to reimburse for insurable claims, and we expect it to continue this
process during our administration of these two facilities. However, it should be
noted that, in most situations, the U. S. Government is contractually obligated
to pay, subject to the availability of authorized government funds.
As a result of the impact of the September 11, 2001 terrorist attacks, we have
experienced higher costs, higher deductibles and more restrictive terms and
conditions as we have renewed our insurance coverage. Specifically, several of
our insurance programs, including property, onshore builder's risk and others,
now contain exclusions that were not previously applicable, including war and
acts of terrorism. This issue has been impacted by the Terrorism Risk Insurance
Act, although at this point insurers are quite divergent in the prices and
coverage they are offering. We expect to continue to maintain coverage that we
consider adequate at rates that we consider economical. However, some previously
insured risks may no longer be insurable or insurance to cover them will be
available only at rates that we consider uneconomical.
G. EMPLOYEES
At December 31, 2002, we employed approximately 18,200 persons compared with
13,300 at December 31, 2001. Approximately 7,100 of our employees were members
of labor unions at December 31, 2002, compared with approximately 4,700 at
December 31, 2001. Many of our operations are subject to union contracts, which
we customarily renew periodically.
Currently, we consider our relationship with our employees to be satisfactory.
H. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A wide range of federal, state, local and foreign laws, ordinances and
regulations apply to our operations, including those relating to:
- constructing and equipping electric power and other industrial
facilities;
- possessing and processing special nuclear materials;
- workplace health and safety; and
- protecting the environment.
We cannot determine the extent to which new legislation, new regulations or
changes in existing laws or regulations may affect our future operations.
Our operations are subject to the existing and evolving legal and regulatory
standards relating to the environment. These standards include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act and similar laws that provide for responses to and liability
for
9
releases of hazardous substances into the environment. These standards also
include similar foreign, state or local counterparts to these federal laws,
which regulate air emissions, water discharges, hazardous substances and waste,
and require public disclosure related to the use of various hazardous
substances. Our operations are also governed by laws and regulations relating to
workplace safety and worker health, primarily the Occupational Safety and Health
Act and regulations promulgated thereunder. We believe that our facilities are
in substantial compliance with current regulatory standards.
Our compliance with U.S. federal, state and local environmental control and
protection regulations necessitated capital expenditures of $0.3 million in the
year ended December 31, 2002. We expect to spend another $1.4 million on such
capital expenditures over the next five years. Complying with existing
environmental regulations resulted in pretax charges of approximately $11.0
million in the year ended December 31, 2002. We cannot predict all of the
environmental requirements or circumstances that will exist in the future but
anticipate that environmental control and protection standards will become
increasingly stringent and costly.
We have been identified as a potentially responsible party at various cleanup
sites under CERCLA. CERCLA and other environmental laws can impose liability for
the entire cost of cleanup on any of the potentially responsible parties,
regardless of fault or the lawfulness of the original conduct. Generally,
however, where there are multiple responsible parties, a final allocation of
costs is made based on the amount and type of wastes disposed of by each party
and the number of financially viable parties, although this may not be the case
with respect to any particular site. We have not been determined to be a major
contributor of wastes to any of these sites. On the basis of our relative
contribution of waste to each site, we expect our share of the ultimate
liability for the various sites will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity in any given
year.
Environmental remediation projects have been and continue to be undertaken at
certain of our current and former plant sites. During the fiscal year ended
March 31, 1995, we decided to close B&W's nuclear manufacturing facilities in
Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"), and B&W
proceeded to decommission the facilities in accordance with its existing license
from the Nuclear Regulatory Commission (the"NRC"). B&W subsequently transferred
the facilities to BWXT in the fiscal year ended March 31, 1998. During the
fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC on a
plan that provides for the completion of facilities dismantlement and soil
restoration by 2001 and license termination in 2003. BWXT expects to request
approval from the NRC to release the site for unrestricted use at that time. At
December 31, 2002, the remaining provision for the decontamination,
decommissioning and closing of these facilities was $0.4 million. By December
31, 2002, only a portion of the operation and maintenance aspect of the
decommissioning and decontamination work at the Parks facility remained to be
completed in order to receive NRC approval to terminate the NRC license. For a
discussion of certain civil litigation we are involved in concerning the Parks
Facilities, see Item 3.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination resulting from previous
operations at the facilities. BWXT now owns these facilities. PADEP has advised
BWXT that it does not intend to assess any monetary sanctions, provided that
BWXT continues its remediation program for the Parks Facilities. Whether
additional nonradiation contamination remediation will be required at the Parks
facility remains unclear. Results from recent sampling completed by PADEP have
indicated that such remediation may not be necessary.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these activities,
we are subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
The NRC's decommissioning regulations require BWXT and MTI to provide financial
assurance that they will be able to pay the expected cost of decommissioning
their facilities at the end of their service lives. BWXT and MTI will continue
to provide financial assurance
10
aggregating $29.9 million during the year ending December 31, 2003 by issuing
letters of credit for the ultimate decommissioning of all their licensed
facilities, except one. This facility, which represents the largest portion of
BWXT's eventual decommissioning costs, has provisions in its government
contracts pursuant to which all of its decommissioning costs and financial
assurance obligations are covered by the DOE.
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI's NRC licenses for byproduct and source nuclear material was
finalized in December 1999. In conjunction with the transfer of this regulatory
authority and upon notification by the NRC, MTI issued decommissioning financial
assurance instruments naming the State of Ohio as the beneficiary.
At December 31, 2002 and 2001, we had total environmental reserves (including
provisions for the facilities discussed above) of $20.6 million and $21.2
million, respectively. Of our total environmental reserves at December 31, 2002
and 2001, $8.3 million and $6.1 million, respectively, were included in current
liabilities. Our estimated recoveries of these costs totaling $0.2 million and
$3.2 million, respectively, are included in accounts receivable - other in our
consolidated balance sheet at December 31, 2002 and 2001. Inherent in the
estimates of those reserves and recoveries are our expectations regarding the
levels of contamination, decommissioning costs and recoverability from other
parties, which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in material adjustments to our
operating results, and the ultimate loss may differ materially from the amounts
we have provided for in our consolidated financial statements.
I. RISK FACTORS
We have significant liquidity issues currently facing our company, including
significant losses on our EPIC spar projects in the current year which require
funding in 2003, as well as the need to refinance our new credit facility, which
is scheduled to expire in April 2004.
Due primarily to the losses incurred on the three EPIC spar projects, we expect
JRM to experience negative cash flows during 2003. Completion of the EPIC spar
projects has and will continue to put a strain on JRM's liquidity. JRM intends
to fund its cash needs through borrowings on our new credit facility,
intercompany loans from MII and sales of nonstrategic assets, including certain
marine vessels. In addition, under the terms of our new credit facility, JRM's
letter of credit capacity was reduced from $200 million to $100 million. This
reduction does not negatively impact our ability to execute the contracts in our
current backlog. However, it will likely limit JRM's ability to pursue projects
from certain customers who require letters of credit as a condition of award. We
are exploring other opportunities to improve our liquidity position, including
better management of working capital through process improvements, negotiations
with customers to relieve tight schedule requirements and to accelerate certain
portions of cash collections, and alternative financing sources for letters of
credit for JRM. If JRM experiences additional significant contract costs on the
EPIC spar projects as a result of unforeseen events, we may be unable to fund
all our budgeted capital expenditures and meet all of our funding requirements
for contractual commitments. In this instance, we would be required to defer
certain capital expenditures, which in turn could result in curtailment of
certain of our operating activities or, alternatively, require us to obtain
additional sources of financing which may not be available to us or may be cost
prohibitive.
MI experienced negative cash flows in 2002, primarily due to payments of taxes
resulting from the exercise of MI's rights under the intercompany agreement we
describe in Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources in Item 7 of this
report. MI expects to meet its cash needs in 2003 through intercompany
borrowings from BWXT, which BWXT may fund through borrowings under our new
credit facility. MI is restricted, as a result of covenants in its debt
instruments, in its ability to transfer funds to MII and MII's other
subsidiaries through cash dividends or through unsecured loans or investments.
On a consolidated basis, we expect to incur negative cash flows in the first
three quarters of 2003. In addition, in March 2003, Moody's Investor Service
lowered MI's credit rating from B2 to B3. These factors may further impact our
access to capital and our ability to
11
refinance our new credit facility, which is scheduled to expire in April 2004.
Given our current credit rating and operating results, there can be no assurance
that we can obtain additional access to third party funds, if required.
If we are unable to finalize a settlement in the B&W Chapter 11 proceedings,
including obtaining the requisite approvals and Bankruptcy Court confirmation,
with substantially the same terms as contained in the agreement in principle,
our financial condition and results of operations may be materially and
adversely affected.
During the year ended December 31, 2002, we reached an agreement in principle
with the Asbestos Claimants Committee (the "ACC") and the Future Claimants
Representative (the "FCR") in the B&W Chapter 11 proceedings, which includes the
following key terms, among others:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
otherwise make available their rights to all applicable
insurance proceeds to the trust.
- MII would issue 4.75 million shares of restricted common stock
and cause those shares to be transferred to the trust, and MII
would effectively guarantee that those shares would have a
value of $19.00 per share on the third anniversary of the date
of their issuance.
- MI would issue promissory notes to the trust in an aggregate
principal amount of $92.0 million, with principal payments of
$8.4 million per year payable over 11 years, with interest
payable on the outstanding balance at the rate of 7.5% per
year. The payment obligations under those notes would be
guaranteed by MII.
- In exchange for those contributions, MII and its subsidiaries
(other than B&W and its subsidiaries) would be released and
indemnified from and against claims arising from B&W's use of
asbestos and would receive other protections from claims
arising from B&W activities.
The terms of the agreement in principle are reflected in a proposed consensual
plan of reorganization that is on file with the Bankruptcy Court. At December
31, 2002, we established an estimate for the cost of the proposed settlement.
However, there are continuing risks and uncertainties that will remain with us
until the requisite approvals are obtained and the final settlement is reflected
in a plan of reorganization that is confirmed by the Bankruptcy Court pursuant
to a final, nonappealable order of confirmation. An agreed or litigated
settlement, or the final decision by the Bankruptcy Court, could result in the
ultimate liability exceeding amounts recorded as of December 31, 2002.
The asbestos claims and the B&W Chapter 11 proceedings require a significant
amount of management's attention, and they represent an uncertainty in the
financial marketplace. Until the uncertainty is resolved, we may be unable to
deliver to our shareholders the maximum value potentially available to them
through our operations and businesses, taken as a whole. There is no assurance
that the proposed joint plan of reorganization, or any amendment thereto, will
be approved by the Bankruptcy Court.
There are a number of issues and matters to be resolved before the ultimate
outcome of the B&W Chapter 11 proceedings can be determined, including, among
others, the following:
- the ultimate asbestos liability of B&W and its subsidiaries;
- the outcome of negotiations with the ACC, the FCR and other
participants in the Chapter 11 proceedings, concerning, among
other things, the size and structure of the settlement trusts
to satisfy the asbestos liability and the means for funding
those trusts;
- the outcome of negotiations with our insurers as to additional
amounts of coverage available to B&W and its subsidiaries and
as to the participation of those insurers in a plan to fund
the settlement trusts;
12
- the Bankruptcy Court's decisions relating to numerous
substantive and procedural aspects of the Chapter 11
proceedings, including the Court's periodic determinations as
to whether to extend the existing preliminary injunction that
prohibits asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII;
- the continued ability of our insurers to reimburse B&W and its
subsidiaries for payments made to asbestos claimants and the
resolution of claims filed by insurers for recovery of
insurance amounts previously paid for asbestos personal injury
claims;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999, and the related ruling
issued on April 17, 2002. See Item 3 and Note 10 to our
consolidated financial statements for further information;
- the outcome of objections and potential appeals involving
approval of the disclosure statement and confirmation of the
plan of reorganization;
- final agreement regarding the proposed spin-off of the MI/B&W
pension plan; and
- final agreement on a tax sharing and tax separation
arrangement between MI and B&W.
We have significant guarantee obligations, other contingent claim exposures and
collateral agreements with creditors and customers of our subsidiaries,
including B&W, that may impact our flexibility in addressing the liquidity
issues currently facing our company or other needs for capital that may arise in
the future, including the need to refinance our new credit facility which
expires in April 2004.
In recent periods, MII has entered into credit arrangements to support its
operating subsidiaries and, in some cases, guaranteed or otherwise become
contingently liable for the credit arrangements and customer contractual
obligations of its subsidiaries. These exposures include the following:
- Parent guarantor exposure under our new credit facility. MII
is the parent guarantor under a new $180 million credit
facility for JRM and BWXT (the "New Credit Facility").
Accordingly, to the extent either JRM or BWXT borrows under
that facility or obtains letters of credit under that
facility, MII is liable for the obligations owing to the
lenders under the facility. In addition, MII has
collateralized its guaranty obligations under the New Credit
Facility with 100% of the capital stock of MI and JRM. As of
March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under the New
Credit Facility.
- B&W letter of credit exposure. At the time of the B&W
bankruptcy filing, MII was a maker or a guarantor of
outstanding letters of credit aggregating approximately $146.5
million ($9.4 million at December 31, 2002) that were issued
in connection with the business operations of B&W and its
subsidiaries. At that time, MI and BWICO were similarly
obligated with respect to additional letters of credit
aggregating approximately $24.9 million that were issued in
connection with the business operations of B&W and its
subsidiaries. Although a permitted use of B&W's $300 million
debtor-in-possession revolving credit facility (the "DIP
Credit Facility") is the issuance of new letters of credit to
backstop or replace these preexisting letters of credit, each
of MII, MI and BWICO has agreed to indemnify and reimburse B&W
and its filing subsidiaries for any customer draw on any
letter of credit issued under the DIP Credit Facility to
backstop or replace any such preexisting letter of credit for
which it has exposure and for the associated letter of credit
fees paid under the facility. As of December 31, 2002,
approximately $51.4 million in letters of credit have been
issued under the DIP Credit Facility to replace or backstop
these preexisting letters of credit.
- Indemnification obligations under surety arrangements. MII has
agreed to indemnify our two surety companies for obligations
of various subsidiaries of MII, including B&W and several of
its subsidiaries, under surety bonds issued to meet bid bond
and performance bond requirements imposed by their customers.
As of December 31, 2002, the aggregate outstanding amount of
surety bonds that were guaranteed by MII and issued in
connection with the business operations of its subsidiaries
was approximately $121.0 million, of which $107.7 million
related to the business operations of B&W and its
subsidiaries.
13
As to the guarantee and indemnity obligations related to B&W, the proposed B&W
Chapter 11 settlement contemplates indemnification and other protections for
MII, MI and BWICO.
The existence of these arrangements may adversely impact our flexibility in
accessing new capital resources to address liquidity issues or other needs for
capital that may arise in the future.
We are subject to loss and other contingencies relating to allegations of
wrongdoing and anticompetitive acts made against MI, JRM, MII and others
involving worldwide heavy-lift activities in the marine construction services
industry.
In March 1997, we began an investigation into allegations of wrongdoing by a
limited number of our former employees and former employees of JRM and others.
The allegations concerned the heavy-lift business of one of JRM's joint
ventures, which owned and operated a fleet of large derrick vessels with lifting
capacities ranging from 3,500 to 13,200 tons, and JRM. On becoming aware of
these allegations, we notified authorities, including the Antitrust Division of
the U.S. Department of Justice ("DOJ"), the Securities and Exchange Commission
("SEC") and the European Commission. As a result of that prompt notification,
the DOJ has granted immunity to MII, JRM and certain affiliates, and our
officers, directors and employees at the time of disclosure, from criminal
prosecution for any anticompetitive acts involving worldwide heavy-lift
activities. We cooperated with the DOJ in its investigation into this and
related matters. In February 2001, we were advised that the SEC had terminated
its investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, a number of major and independent oil and gas exploration and
development companies filed lawsuits in the United States District Court for the
Southern District of Texas against, among others, MI, JRM and MII. These
lawsuits allege, among other things, that the defendants engaged in
anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects. In addition to seeking injunctions to enjoin us and the other
defendants from engaging in future anticompetitive acts, actual damages and
attorneys' fees, the plaintiffs are requesting treble damages. In December 2000,
a number of Norwegian oil companies, including Norwegian affiliates of several
of the plaintiffs in the cases pending in the Southern District of Texas, filed
lawsuits against us and others for alleged violations of the Norwegian Pricing
Act of 1953, in connection with projects completed offshore Norway. The
plaintiffs in these lawsuits are seeking recovery of alleged actual damages in
unspecified amounts. Under applicable Norwegian law, any recovery by these
plaintiffs would be limited to their actual damages, and those damages would be
recoverable only to the extent the plaintiffs have not received cost
reimbursements or other related recoveries from their customers or other third
parties. We understand that the conduct alleged by the Norwegian plaintiffs is
generally the same as the conduct alleged by the plaintiffs in the cases pending
in the Southern District of Texas.
Although we have executed agreements to settle the heavy-lift antitrust claims
filed by several of the plaintiffs in the Southern District of Texas, the
litigation continues with the other plaintiffs. The ultimate outcome of this
litigation or any actions that others may take in connection with the
allegations we describe above could have a material adverse effect on our
consolidated financial position, results of operations and cash flows. See Item
3 for additional information.
Our Marine Construction Services segment derives substantially all its revenues
from companies in the oil and gas exploration and production industry, a
historically cyclical industry with levels of activity that are significantly
affected by the levels and volatility of oil and gas prices.
The demand for marine construction services has traditionally been cyclical,
depending primarily on the capital expenditures of oil and gas companies for
construction of development projects. These capital expenditures are influenced
by such factors as:
- prevailing oil and gas prices;
- expectations about future prices;
14
- the cost of exploring for, producing and delivering oil and
gas;
- the sale and expiration dates of available offshore leases;
- the discovery rate of new oil and gas reserves in offshore
areas;
- domestic and international political, military, regulatory and
economic conditions;
- technological advances; and
- the ability of oil and gas companies to generate funds for
capital expenditures.
Prices for oil and gas historically have been extremely volatile and have
reacted to changes in the supply of and demand for oil and natural gas
(including changes resulting from the ability of the Organization of Petroleum
Exporting Countries to establish and maintain production quotas), domestic and
worldwide economic conditions and political instability in oil producing
countries. We anticipate prices for oil and natural gas will continue to be
volatile and affect the demand for and pricing of our services. A material
decline in oil or natural gas prices or activities over a sustained period of
time could materially adversely affect the demand for our services and,
therefore, our results of operations and financial condition.
War, other armed conflicts or terrorist attacks could have a material adverse
effect on our business.
Events leading to the war in Iraq, increasing military tension involving North
Korea, as well as the terrorist attacks of September 11, 2001 and subsequent
terrorist attacks and unrest, have caused instability in the world's financial
and commercial markets, have significantly increased political and economic
instability in some of the geographic areas in which we operate and have
contributed to high levels of volatility in prices for oil and gas in recent
months. The war in Iraq, as well as threats of war or other armed conflict
elsewhere, may cause further disruption to financial and commercial markets and
contribute to even higher levels of volatility in prices for oil and gas than
those experienced in recent months. In addition, the war with Iraq could lead to
acts of terrorism in the United States or elsewhere, and acts of terrorism could
be directed against companies such as ours. In addition, acts of terrorism and
threats of armed conflicts in or around various areas in which we operate, such
as the Middle East and Indonesia, could limit or disrupt our markets and
operations, including disruptions from evacuation of personnel, cancellation of
contracts or the loss of personnel or assets. Although we have not experienced
any material adverse effects on our results of operations as a result of armed
conflicts and terrorist acts to date, we can provide no assurance that armed
conflicts, terrorism and their effects on us or our markets will not
significantly affect our business and results of operations in the future.
We are subject to risks associated with contractual pricing in the offshore
marine construction industry, including the risk that, if our actual costs
exceed the costs we estimate on our fixed-price contracts, our gross margins and
profitability will decline.
Because of the highly competitive nature of the offshore marine construction
industry, our Marine Construction Services segment performs a substantial number
of its projects on a fixed-price basis. We attempt to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts,
either through estimates of cost increases, which are reflected in the original
contract price, or through price escalation clauses. Despite these attempts,
however, the revenue, cost and gross profit we realize on a fixed-price contract
will often vary from the estimated amounts because of changes in job conditions
and variations in labor and equipment productivity over the term of the
contract. These variations and the risks generally inherent in the marine
construction industry may result in the gross profits we realize being different
from those we originally estimated and may result in reduced profitability or
losses on projects. Specifically, during 2002, our Marine Construction Services
segment has experienced material losses on its three Engineer, Procure, Install
and Construct ("EPIC") spar projects: Medusa, Devils Tower and Front Runner.
These contracts are first-of-a-kind as well as long-term in nature. We have
experienced schedule delays and cost overruns on these contracts that have
adversely impacted our financial results. These projects continue to face
significant risks.
In addition, we recognize revenues under our long-term contracts in the Marine
Construction Services segment on a percentage-of-completion basis. Accordingly,
we review contract price and cost estimates periodically as the work progresses
and reflect adjustments
15
proportionate to the percentage of completion in income in the period when we
revise those estimates. To the extent these adjustments result in a reduction or
an elimination of previously reported profits with respect to a project, we
would recognize a charge against current earnings, which could be material. At
December 31, 2002, we have provided for our estimated losses on the three EPIC
spar projects and other contracts which are in a loss position. Although we
continually strive to improve our ability to estimate our contract costs and
profitability associated with our long-term projects, it is reasonably possible
that current estimates could change and adjustments to overall contract costs
may continue to be significant in future periods.
We face risks associated with recent legislative proposals that could change
laws applicable to corporations that have completed inversion transactions.
As a result of our reorganization in 1982, which we completed through a
transaction commonly referred to as an "inversion," our company is a corporation
organized under the laws of the Republic of Panama. Recently, the U.S. House and
Senate have considered legislation that would change the tax law applicable to
corporations that have completed inversion transactions. Some of the legislative
proposals have contemplated retroactive application and, in certain cases,
treatment of such corporations as United States corporations for United States
federal income tax purposes. Some of the legislative proposals have also
contemplated additional limitations on the deductibility for United States
federal income tax purposes of certain intercompany transactions, including
intercompany interest expense. It is possible the legislation enacted in this
area could substantially increase our corporate income taxes and, consequently,
decrease our future net income and increase our future cash outlays for taxes.
Other legislative proposals, if enacted, could limit or even prohibit our
eligibility to be awarded contracts with the U.S. Government in the future. We
are unable to predict with any level of certainty the likelihood or final form
in which any proposed legislation might become law or the nature of regulations
that may be promulgated under any such future legislative enactments. As a
result of these uncertainties, we are unable to assess the impact on us of any
proposed legislation in this area.
We face risks associated with investing in foreign subsidiaries and joint
ventures, including the risk that we may be restricted in our ability to access
the cash flows or assets of these entities.
We conduct some operations through foreign subsidiaries and joint ventures. We
do not manage all of these entities. Even in those joint ventures that we
manage, we are often required to consider the interests of our joint venture
partners in connection with decisions concerning the operations of the joint
ventures. Arrangements involving these subsidiaries and joint ventures may
restrict us from gaining access to the cash flows or assets of these entities.
In addition, these foreign subsidiaries and joint ventures sometimes face
governmentally imposed restrictions on their abilities to transfer funds to us.
Our international operations are subject to political, economic and other
uncertainties not encountered in our domestic operations.
We derive a significant portion of our revenues from international operations,
including customers in the Middle East. Our international operations are subject
to political, economic and other uncertainties not encountered in domestic
operations. These include:
- risks of war, particularly the risks associated with the war
involving the United States and Iraq, and civil unrest;
- expropriation, confiscation or nationalization of our assets;
- renegotiation or nullification of our existing contracts;
- changing political conditions and changing laws and policies
affecting trade and investment;
- the overlap of different tax structures; and
- the risks associated with the assertion of foreign sovereignty
over areas in which our operations are conducted.
Our Marine Construction Services segment may be particularly susceptible to
regional conditions that may adversely affect its operations. Its major marine
vessels typically require relatively long periods of time to mobilize over long
distances, which could affect our ability to withdraw them from areas of
conflict. Additionally, various foreign jurisdictions have laws limiting the
right and ability of foreign subsidiaries and joint ventures to pay dividends
and remit earnings to affiliated companies.
16
Our international operations sometimes face the additional risks of fluctuating
currency values, hard currency shortages and controls of foreign currency
exchange. We attempt to minimize our exposure to foreign currency fluctuations
by attempting to match anticipated foreign currency contract receipts with
anticipated like foreign currency disbursements. To the extent we are unable to
match the anticipated foreign currency receipts and disbursements related to our
contracts, we attempt to enter into forward contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with our committed
exposures.
Our operations are subject to operating risks and limits on insurance coverage,
which could expose us to potentially significant liability costs.
We are subject to a number of risks inherent in our operations, including:
- accidents resulting in the loss of life or property;
- pollution or other environmental mishaps;
- adverse weather conditions;
- mechanical failures;
- collisions;
- property losses;
- business interruption due to political action in foreign
countries; and
- labor stoppages.
We have been, and in the future we may be, named as defendants in lawsuits
asserting large claims as a result of litigation arising from events such as
these. Some of the risks inherent in our operations are either not insurable or
insurance is available only at rates that we consider uneconomical. This has
particularly been the case following the September 11, 2001 terrorist attacks in
New York City and Washington, D.C., which led to significant changes in various
insurance markets, including decreased coverage limits, more limited coverage,
additional exclusions in coverage, increased premium costs, and increased
deductibles and self insured retentions. These changes were in addition to
similar changes we had seen in certain markets prior to September 11, 2001.
Risks which are difficult to insure include, among others, the risk of war and
confiscation of property in certain areas of the world, losses or liability
resulting from acts of terrorism, certain risks relating to construction, and
pollution liability. Depending on competitive conditions and other factors, we
endeavor to obtain contractual protection against uninsured risks from our
customers. When obtained, such contractual indemnification protection may not in
all cases be supported by adequate insurance maintained by the customer. Such
insurance or contractual indemnity protection may not be sufficient or effective
under all circumstances or against all hazards to which we may be subject. A
successful claim for which we are not fully insured could have a material
adverse effect on us.
BWXT, through two of its dedicated limited liability companies, has long-term
management and operating agreements with the U.S. Government for the Y-12 and
the Pantex facilities. Most insurable liabilities arising from these sites are
not protected in our corporate insurance program but rely on government
contractual agreements and certain specialized self-insurance programs funded by
the U.S. Government. The U.S. Government has historically fulfilled its
contractual agreement to reimburse for insurable claims and we expect it to
continue this process during our administration of these two facilities.
However, it should be noted that, in most situations, the U. S. Government is
contractually obligated to pay, subject to the availability of authorized
government funds.
We have captive insurers which provide certain coverages for our subsidiary
entities and related coverages. Claims as a result of our operations, or arising
in the B&W Chapter 11 proceedings, could adversely impact the ability of these
captive insurers to respond to all claims presented, although we believe such a
result is unlikely.
17
We depend on significant customers.
Some of our industry segments derive a significant amount of their revenues and
profits from a small number of customers. The inability of these segments to
continue to perform services for a number of their large existing customers, if
not offset by contracts with new or other existing customers, could have a
material adverse effect on our business and operations.
Our significant customers include state and federal government agencies and
utilities. In particular, our Government Operations segment derives
substantially all its revenue from the U.S. Government. Some of our large
multiyear contracts with the U.S. Government are subject to annual funding
determinations. State and U.S. Government budget restraints and other factors
affecting these governments may adversely affect our business.
We may not be able to compete successfully against current and future
competitors.
Most industry segments in which we operate are highly competitive. Some of our
competitors or potential competitors have greater financial or other resources
than we have. Our operations may be adversely affected if our current
competitors or new market entrants introduce new products or services with
better features, performance, prices or other characteristics than those of our
products and services. This is significant to our offshore business in JRM,
where capital investment is becoming critical to our ability to compete.
The loss of the services of one or more of our key personnel, or our failure to
attract, assimilate and retain trained personnel in the future, could disrupt
our operations and result in loss of revenues.
Our success depends on the continued active participation of our executive
officers and key operating personnel. The loss of the services of any one of
these persons could adversely affect our operations.
Our operations require the services of employees having the technical training
and experience necessary to obtain the proper operational results. As a result,
our operations depend, to a considerable extent, on the continuing availability
of such personnel. If we should suffer any material loss of personnel to
competitors or be unable to employ additional or replacement personnel with the
requisite level of training and experience to adequately operate our equipment,
our operations could be adversely affected. While we believe our wage rates are
competitive and our relationships with our employees are satisfactory, a
significant increase in the wages paid by other employers could result in a
reduction in our workforce, increases in wage rates, or both. If either of these
events occurred for a significant period of time, our financial condition and
results of operations could be adversely impacted.
A substantial number of our employees are members of labor unions. Although we
expect to renew our union contracts without incident, if we are unable to
negotiate acceptable new contracts with our unions in the future, we could
experience strikes or other work stoppages by the affected employees, and new
contracts could result in increased operating costs attributable to both union
and non-union employees. If any such strikes or other work stoppages were to
occur, or if our other employees were to become represented by unions, we could
experience a significant disruption of our operations and higher ongoing labor
costs.
We are subject to government regulations that may adversely affect our future
operations.
Many aspects of our operations and properties are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to:
- construction and equipping of production platforms and other
marine facilities;
- marine vessel safety;
- currency conversions and repatriation;
- oil exploration and development;
- taxation of foreign earnings and earnings of expatriate
personnel; and
- use of local employees and suppliers by foreign contractors.
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In addition, our Marine Construction Services segment depends on the demand for
its services from the oil and gas industry and, therefore, is affected by
changing taxes, price controls and other laws and regulations relating to the
oil and gas industry generally. The adoption of laws and regulations curtailing
exploration and development drilling for oil and gas for economic and other
policy reasons would adversely affect the operations of our Marine Construction
Services segment by limiting the demand for its services. We cannot determine
the extent to which our future operations and earnings may be affected by new
legislation, new regulations or changes in existing regulations.
Environmental laws and regulations and civil liability for contamination of the
environment or related personal injuries may result in increases in our
operating costs and capital expenditures and decreases in our earnings and cash
flow.
Governmental requirements relating to the protection of the environment,
including solid waste management, air quality, water quality, the
decontamination and decommissioning of former nuclear manufacturing and
processing facilities and cleanup of contaminated sites, have had a substantial
impact on our operations. These requirements are complex and subject to frequent
change. In some cases, they can impose liability for the entire cost of cleanup
on any responsible party without regard to negligence or fault and impose
liability on us for the conduct of others or conditions others have caused, or
for our acts that complied with all applicable requirements when we performed
them. Our compliance with amended, new or more stringent requirements, stricter
interpretations of existing requirements or the future discovery of
contamination may require us to make material expenditures or subject us to
liabilities that we currently do not anticipate. See Section H for further
information. In addition, some of our operations and the operations of
predecessor owners of some of our properties have exposed us to civil claims by
third parties for liability resulting from contamination of the environment or
personal injuries caused by releases of hazardous substances into the
environment. For a discussion of civil proceedings of this nature in which we
are currently involved, see Item 3.
We are subject to other risks that we discuss in other sections of this annual
report.
For discussions of various factors that affect the demand for our products and
services in our segments, see the discussions under the heading "Factors
Affecting Demand" in each of Sections B and C. For a discussion of our insurance
coverages and uninsured exposures, see Section F. For discussions of various
legal proceedings in which we are involved, in addition to those we refer to
above, see Item 3. In addition to the risks we describe or refer to above, we
are subject to other risks, contingencies and uncertainties, including those we
have referred to under the heading "Cautionary Statement Concerning
Forward-Looking Statements" in Section J.
J. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are generally
accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "plan," "goal" or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we will
specifically describe a statement as being a forward-looking statement and refer
to this cautionary statement.
In addition, various statements this Annual Report on Form 10-K contains,
including those that express a belief, expectation or intention, as well as
those that are not statements of historical fact, are forward-looking
statements. Those forward-looking statements appear in Items 1 and 2-"Business
and Properties" and Item 3-"Legal Proceedings" in Part I of this report and in
19
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the notes to our consolidated financial statements
in Item 8 of Part II of this report and elsewhere in this report. These
forward-looking statements speak only as of the date of this report; we disclaim
any obligation to update these statements unless required by securities law, and
we caution you not to rely on them unduly. We have based these forward-looking
statements on our current expectations and assumptions about future events.
While our management considers these expectations and assumptions to be
reasonable, they are inherently subject to significant business, economic,
competitive, regulatory and other risks, contingencies and uncertainties, most
of which are difficult to predict and many of which are beyond our control.
These risks, contingencies and uncertainties relate to, among other matters, the
following:
- general economic and business conditions and industry trends;
- the continued strength of the industries in which we are
involved;
- decisions about offshore developments to be made by oil and
gas companies;
- the deregulation of the U.S. electric power market;
- the highly competitive nature of our businesses;
- our future financial performance, including compliance with
covenants in our credit facilities, availability, terms and
deployment of capital;
- the continued availability of qualified personnel;
- operating risks normally incident to offshore exploration,
development and production operations;
- our ability to replace or extend our current credit facility
on or before April 30, 2004, given our results of operations
in 2002 and our current credit rating;
- the ability of JRM to maintain its forecasted financial
performance, including its ability to manage costs associated
with its EPIC spar projects;
- changes in, or our failure or inability to comply with,
government regulations and adverse outcomes from legal and
regulatory proceedings, including the results of ongoing civil
lawsuits involving alleged anticompetitive practices in our
marine construction business;
- estimates for pending and future nonemployee asbestos claims
against B&W and potential adverse developments that may occur
in the Chapter 11 reorganization proceedings and related
settlement discussions involving B&W and certain of its
subsidiaries and MII;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999 and the related ruling
issued on April 17, 2002;
- the potential impact on available insurance due to the recent
increases in bankruptcy filings by asbestos-troubled
companies;
- the potential impact on our insurance subsidiaries of B&W
asbestos-related claims under policies issued by those
subsidiaries;
- legislation recently proposed by members of the U.S. Congress
that, if enacted, could reduce or eliminate the tax advantages
we derive from being organized under the laws of the Republic
of Panama;
- recently proposed legislation that, if enacted, could limit or
prohibit us from entering into contracts with the U.S.
Government;
- changes in existing environmental regulatory matters;
- rapid technological changes;
- realization of deferred tax assets;
20
- consequences of significant changes in interest rates and
currency exchange rates;
- difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
- social, political and economic situations in foreign countries
where we do business, including, among others, countries in
the Middle East and Southeast Asia;
- the possibilities of war, other armed conflicts or terrorist
attacks;
- effects of asserted and unasserted claims;
- our ability to obtain surety bonds and letters of credit;
- the continued ability of our insurers to reimburse us for
payments made to asbestos claimants; and
- our ability to maintain builder's risk, liability and property
insurance in amounts we consider adequate at rates that we
consider economical, particularly after the impact on the
insurance industry of the September 11, 2001 terrorist
attacks.
We believe the items we have outlined above are important factors that could
cause estimates in our financial statements to differ materially from actual
results and those expressed in a forward-looking statement made in this report
or elsewhere by us or on our behalf. We have discussed many of these factors in
more detail elsewhere in this report. These factors are not necessarily all the
important factors that could affect us. Unpredictable or unknown factors we have
not discussed in this report could also have material adverse effects on actual
results of matters that are the subject of our forward-looking statements. We do
not intend to update our description of important factors each time a potential
important factor arises, except as required by applicable securities laws and
regulations. We advise our security holders that they should (1) be aware that
important factors not referred to above could affect the accuracy of our
forward-looking statements and (2) use caution and common sense when considering
our forward-looking statements.
K. AVAILABLE INFORMATION
Our website address is www.mcdermott.com. We make available through this website
under "SEC Filing," free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after we electronically file those
materials with, or furnish those materials to, the SEC.
Item 3. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these
allegations, we notified authorities, including the Antitrust Division of the
DOJ, the SEC and the European Commission. As a result of our prompt disclosure
of the allegations, JRM, certain other affiliates and their officers, directors
and employees at the time of the disclosure were granted immunity from criminal
prosecution by the DOJ for any anticompetitive acts involving worldwide
heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities and affiliates. The DOJ had also requested additional information
from us relating to possible anticompetitive activity in the marine construction
business of McDermott-ETPM East, Inc., one of the operating companies within
JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. We also terminated the McDermott-ETPM joint venture, and on April 3,
1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed
J. Ray McDermott Middle East, Inc.
21
On December 22, 1997, HeereMac and one of its employees pled guilty to criminal
charges by the DOJ that they and others had participated in a conspiracy to rig
bids in connection with the heavy-lift business of HeereMac in the Gulf of
Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were
fined $49.0 million and $0.1 million, respectively. As part of the plea, both
HeereMac and certain employees of HeereMac agreed to cooperate fully with the
DOJ investigation. Neither MII, JRM nor any of their officers, directors or
employees were a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in an international bid-rigging conspiracy for the sale of
marine construction services. In May 2000, another former JRM officer was
indicted by the DOJ for participating in a bid-rigging conspiracy for the sale
of marine construction services in the Gulf of Mexico. His trial was held in
February 2001 and, at the conclusion of the Government's case, the presiding
judge directed a judgment of acquittal.
We cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC had terminated its
investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the U.S District Court for the Southern District of Texas against
MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema,
certain Heerema affiliates and others, alleging that the defendants engaged in
anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and
Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in
fraudulent activity and tortiously interfered with the plaintiffs' businesses in
connection with certain offshore transportation and installation projects in the
Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In
December 1998, Den norske stats oljeselskap a.s., individually and on behalf of
certain of its ventures and its participants (collectively, "Statoil"), filed a
similar lawsuit in the same court (the "Statoil Litigation"). In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Phillips Litigation and Statoil Litigation requested punitive as well as
treble damages. In January 1999, the court dismissed without prejudice, due to
the court's lack of subject matter jurisdiction, the claims of the Phillips
Plaintiffs relating to alleged injuries sustained on any foreign projects. In
July 1999, the court also dismissed the Statoil Litigation for lack of subject
matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of
Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed
the district court decision in February 2000 and Statoil filed a motion for
rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of
their request to dismiss their remaining domestic claims in the lawsuit in order
to seek an appeal of the dismissal of their claims on foreign projects, which
request was subsequently denied. On March 12, 2001, the plaintiffs' motion for
rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The
plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On
February 20, 2002, the U.S. Supreme Court denied the petition for certiorari.
The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April
15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the
year ended December 31, 2002, Heerema and MII executed agreements to settle the
heavy-lift antitrust claims against Heerema and MII with British Gas and
Phillips, and the Court has entered an order of dismissal.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the U.S. District Court for the Southern District of Texas against
MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema
and others, alleging that the defendants engaged in anticompetitive acts in
violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequently, the following parties (acting for themselves and, in certain
cases, on behalf of their respective co-venturers and for whom they operate)
intervened as plaintiffs in the Shell Litigation: Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources
Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company
and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.; Green
Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.;
22
Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and
certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also,
in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell Litigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign project claims of the
plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non heavy-lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims. During the year ended December 31, 2002, Heerema and
MII executed agreements to settle heavy-lift antitrust claims against Heerema
and MII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf
Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington
Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass
Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering
Company L.L.C., and the Court has entered an order of dismissal. In addition,
Woodside Energy, Ltd. filed a motion of dismissal with prejudice, which was
granted. Recently, we entered into a settlement agreement with Conoco, Inc. and
the Court entered an order of dismissal.
On December 15, 2000, a number of Norwegian oil companies filed lawsuits against
MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing
Act of 1953 in connection with projects in Norway. Plaintiffs include Norwegian
affiliates of various of the plaintiffs in the Shell Litigation pending in
Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates,
with some by Heerema/HeereMac and none by JRM. We understand that the conduct
alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S.
civil cases. The cases were heard by the Conciliation Boards in Norway during
the first week of October 2001. The Conciliation Boards referred the cases to
the court of first instance for further proceedings. The plaintiffs have one
year from the date of referral to proceed with the cases. Several of the
plaintiffs who filed cases before the Conciliation Boards have filed writs with
the courts of first instance in order to commence the court proceedings.
Settlement discussions are underway with these plaintiffs.
As a result of the initial allegations of wrongdoing in March 1997, we formed a
special committee of our Board of Directors to monitor and oversee our
investigation into all of these matters. Our Board of Directors concluded that
the special committee was no longer necessary, and it was dissolved in 2002.
Because we have reached settlement agreements with the vast majority of the oil
company claimants, we have adjusted our reserve to more appropriately reflect
the risks and exposures of the remaining claims.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed on
June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District
Court for the Western District of Pennsylvania. The suit involves approximately
500 separate claims for compensatory and punitive damages relating to the
operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation
allege, among other things, that they suffered personal injury, property damage
and other damages as a result of radioactive emissions from these facilities. In
September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the
first cases brought to trial, awarding $36.7 million in compensatory damages. In
June 1999, the district court set aside the $36.7 million judgment and ordered a
new trial on all issues. In November 1999, the district court allowed an
interlocutory appeal by the plaintiffs of certain issues, including the granting
of the new trial and the court's rulings on certain evidentiary matters, which,
following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined
to accept for review.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8.0 million for which B&W seeks reimbursement from other
parties. There is a controversy between B&W and its insurers as to the amount of
coverage available under
23
the liability insurance policies covering the facilities. B&W filed a
declaratory judgment action in a Pennsylvania State Court seeking a judicial
determination as to the amount of coverage available under the policies. On
April 28, 2001, in response to cross-motions for partial summary judgment, the
Pennsylvania State Court issued its ruling regarding: (1) the applicable trigger
of coverage under the Nuclear Energy Liability Policies issued by B&W's
insurers; and (2) the scope of the insurers' defense obligations to B&W under
these policies. With respect to the trigger of coverage, the Pennsylvania State
Court held that "manifestation" is an applicable trigger with respect to the
underlying claims at issue. Although the Court did not make any determination of
coverage with respect to any of the underlying claims, we believe the effect of
its ruling is to increase the amount of coverage potentially available to B&W
under the policies at issue to $320.0 million. With respect to the insurers'
duty to defend B&W, the Court held that B&W is entitled to separate and
independent counsel funded by the insurers. On May 21, 2001, the Court granted
the insurers' motion for reconsideration of the April 25, 2001 order. On October
1, 2001, the Court entered its order reaffirming its original substantive
insurance coverage rulings and further certified the order for immediate appeal
by any party. B&W's insurers filed an appeal in November 2001. On November 25,
2002, the Pennsylvania Superior Court affirmed the rulings in favor of B&W on
the trigger of coverage and duty to defend issues. On December 24, 2002, B&W's
insurers filed a petition for the allowance of an appeal in the Pennsylvania
Supreme Court. The Pennsylvania Supreme Court has not yet made any determination
regarding whether to accept discretionary review of the insurers' appeal.
The plaintiffs' remaining claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W filed a
complaint for declaratory and injunctive relief with the Bankruptcy Court
seeking to stay the pursuit of the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied
in October 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001,
the U.S. District Court for the Eastern District of Louisiana, which has
jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the
Bankruptcy Court's Order. We believe that all claims under the Hall Litigation
will be resolved within the limits of coverage of our insurance policies;
moreover, the proposed settlement agreement and plan of reorganization in the
B&W Chapter 11 proceedings include an overall settlement of this dispute.
However, should the B&W Chapter 11 settlement fail, or should the settlement
particular to the Hall Litigation and the Apollo-Parks issue not be consummated,
there may be an issue as to whether our insurance coverage is adequate and we
may be materially adversely impacted if our liabilities exceed our coverage. B&W
transferred the two facilities subject to the Hall Litigation to BWXT in June
1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of the module. In December 1999,
Texaco filed a lawsuit seeking consequential damages for delays resulting from
the incident, as well as costs incurred to complete the project with another
contractor and uninsured losses. This lawsuit was filed in the U. S. District
Court for the Eastern District of Louisiana against a number of parties, some of
which brought third-party claims against the Operator Subsidiary and another
subsidiary of JRM, the owner of the vessel that attempted the lift of the deck
module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator
Subsidiary were subsequently tendered as direct defendants to Texaco. In
addition to Texaco's claims in the federal court action, damages for the loss of
the south deck module have been sought by Texaco's builder's risk insurers in
claims against the Owner Subsidiary and the other defendants, excluding the
Operator Subsidiary, which was an additional insured under the policy. Total
damages sought by Texaco and its builder's risk insurers in the federal court
proceeding approximate $280 million. Texaco's federal court claims against the
Operator Subsidiary were stayed in favor of a pending binding arbitration
proceeding between them required by contract, which the Operator Subsidiary
initiated to collect $23 million due for work performed under the contract, and
in which Texaco also sought the same consequential damages and uninsured losses
as it seeks in the federal court action, and also seeks approximately $2 million
in other damages not sought in the federal court action. The federal court
trial, on the issue of liability only, commenced in October 2001. On March 27,
2002, the Court orally found that the Owner Subsidiary was liable to Texaco,
specifically finding that Texaco had failed to sustain its burden of proof
against all named defendants except the Owner Subsidiary relative to liability
issues, and, alternatively, that the Operator Subsidiary's highly extraordinary
negligence served as a superceding cause of the loss. The finding was
subsequently set forth in a written order dated April 5, 2002, which found
24
against the Owner Subsidiary on the claims of Texaco's builder's risk insurers
in addition to the claims of Texaco. On May 6, 2002, the Owner Subsidiary filed
a notice of appeal of the April 5, 2002 order, which appeal it subsequently
withdrew without prejudice for technical reasons. On January 13, 2003, the
district court granted the Owner Subsidiary's motions for summary judgment with
respect to Texaco's claims against the Owner Subsidiary, and vacated its
previous findings to the contrary. The Court has not yet ruled on the Owner
Subsidiary's similar motion against Texaco's builder's risk insurers. The case
had been transferred to a new district court judge, but was subsequently
transferred back to the original district court judge. The scheduled trial date
of February 10, 2003 on damages and certain insurance issues has been continued
without date. The trial in the binding arbitration proceeding commenced on
January 13, 2003 and has proceeded on various dates through March 14, and will
recommence on May 26, 2003 for one week and at various times thereafter.
Although the Owner Subsidiary is not a party to the arbitration, we believe that
the claims against the Owner Subsidiary, like those against the Operator
Subsidiary, are governed by the contractual provisions which waive the recovery
of consequential damages against the Operator Subsidiary and its affiliates. We
plan to vigorously pursue the arbitration proceeding and any appeals process, if
necessary, in the federal court action, and we do not believe that a material
loss with respect to these matters is likely. In addition, we believe our
insurance will provide coverage for the builder's risk and consequential damage
claims in the event of liability. However, the ultimate outcome of the
proceedings and any challenge by our insurers to coverage is uncertain, and an
adverse ruling in either the arbitration or court proceeding or any potential
proceeding with respect to insurance coverage for any losses, or any bonding
requirements applicable to any appeal from an adverse ruling, could have a
material adverse impact on our consolidated financial position, results of
operations and cash flow.
In early April 2001, a group of insurers that includes certain underwriters at
Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the B&W
Chapter 11 proceedings in the U.S. District Court for the Eastern District of
Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy
Court, which actions have been consolidated before the U.S. District Court for
the Eastern District of Louisiana, which has jurisdiction over portions of the
B&W Chapter 11 proceeding. The insurance policies at issue in this litigation
provide a significant portion of B&W's excess liability coverage available for
the resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions
of an agreement they entered into with these Plaintiff Insurers relating to
insurance payments by the Plaintiff Insurers as a result of asbestos claims.
They also allege that MII and B&W have wrongfully attempted to expand the
underwriters' obligations under that settlement agreement and the applicable
policies through the filing of a plan of reorganization in the B&W bankruptcy
proceeding that contemplates the transfer of rights under that agreement and
those policies to a trust that will manage the pending and future
asbestos-related claims against B&W and certain of its affiliates. The
complaints seek declarations that, among other things, the defendants are in
material breach of the settlement agreement with the Plaintiff Insurers and that
the Plaintiff Insurers owe no further obligations to MII and B&W under that
agreement. With respect to the insurance policies, if the Plaintiff Insurers
should succeed in terminating the settlement agreement, they seek to litigate
issues under the policies in order to reduce their coverage obligations. The
complaint against MII also seeks a recovery of unspecified compensatory damages.
B&W filed a counterclaim against the Plaintiff Insurers, which asserts a claim
for breach of contract for amounts owed and unpaid under the settlement
agreement, as well as a claim for anticipatory breach for amounts that will be
owed in the future under the settlement agreement. B&W seeks a declaratory
judgment as to B&W's rights and the obligations of the Plaintiff Insurers and
other insurers under the settlement agreement and under their respective
insurance policies with respect to asbestos claims. On October 2, 2001, MII and
B&W filed dispositive motions with the District Court seeking dismissal of the
Plaintiff Insurers' claim that MII and B&W had materially breached the
settlement agreement at issue. In a ruling issued January 4, 2002, the District
Court granted MII's and B&W's motion for summary judgment and dismissed the
declaratory judgment action filed by the Plaintiff Insurers. The ruling
concluded that the Plaintiff Insurers' claims lacked a factual or legal basis.
Our agreement with the
25
underwriters went into effect in April 1990 and has served as the allocation
and payment mechanism to resolve many of the asbestos claims against B&W. We
believe this ruling reflects the extent of the underwriter's contractual
obligations and underscores that this coverage is available to settle B&W's
asbestos claims. As a result of the January 4, 2002 ruling, the only claims that
remained in the litigation were B&W's counterclaims against the Plaintiff
Insurers and against other insurers. The parties agreed to dismiss without
prejudice those of B&W's counterclaims seeking a declaratory judgment regarding
the parties' respective rights and obligations under the settlement agreement.
B&W's counterclaim seeking a money judgment for approximately $6.5 million due
and owing by insurers under the settlement agreement remains pending. A trial of
this counterclaim is scheduled for April 24, 2003. The parties have reached a
preliminary agreement in principle to settle B&W's counterclaim for in excess of
the claimed amounts, and approximately $4.3 million has been received to date
from the insurers, subject to reimbursement in the event a final settlement
agreement is not reached. Following the resolution of this remaining
counterclaim, the Plaintiff Insurers will have an opportunity to appeal the
January 4, 2002 ruling. At this point, the Plaintiff Insurers have not indicated
whether they intend to pursue an appeal.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers
Casualty and Surety Company (collectively, "Travelers") filed an adversary
proceeding against B&W and related entities in the U.S. Bankruptcy Court for the
Eastern District of Louisiana seeking a declaratory judgment that Travelers is
not obligated to provide any coverage to B&W with respect to so-called
"non-products" asbestos bodily injury liabilities on account of previous
agreements entered into by the parties. On or about the same date, Travelers
filed a similar declaratory judgment against MI and MII in the U.S. District
Court for the Eastern District of Louisiana. The cases filed against MI and MII
have been consolidated before the District Court and the ACC and the FCR have
intervened in the action. On February 4, 2002, B&W and MII filed answers to
Travelers' complaints, denying that previous agreements operate to release
Travelers from coverage responsibility for asbestos "non-products" liabilities
and asserting counterclaims requesting a declaratory judgment specifying
Travelers' duties and obligations with respect to coverage for B&W's asbestos
liabilities. The Court has bifurcated the case into two phases, with Phase I
addressing the issue of whether previous agreements between the parties serve to
release Travelers from any coverage responsibility for asbestos "non-products"
claims. On August 14, 2002, the Court granted B&W's and MII's motion for leave
to file an amended answer and counterclaims, adding additional counterclaims
against Travelers. Discovery was completed in September 2002 and the parties
filed cross-motions for summary judgment, which were heard on February 26, 2003.
We are awaiting the Court's ruling on these motions. No trial date has been
scheduled.
On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana
against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology,
Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at
the time of, or rendered insolvent as a result of, a corporate reorganization
that we completed in the fiscal year ended March 31, 1999, which included, among
other things, B&W's cancellation of a $313 million note receivable and B&W's
transfer of all the capital stock of Hudson Products Corporation, Tracy Power,
BWXT and McDermott Technology, Inc. to BWICO, and (2) the transfers are not
voidable. As an alternative, and only in the event that the Bankruptcy Court
finds B&W was insolvent at a pertinent time and the transactions are voidable
under applicable law, the action preserved B&W's claims against the defendants.
The Bankruptcy Court permitted the ACC and the FCR in the Chapter 11 proceeding
to intervene and proceed as plaintiff-intervenors and realigned B&W as a
defendant in this action. The ACC and the FCR are asserting in this action,
among other things, that B&W was insolvent at the time of the transfers and that
the transfers should be voided. The Bankruptcy Court ruled that Louisiana law
applied to the solvency issue in this action. Trial commenced on October 22,
2001 to determine B&W's solvency at the time of the corporate reorganization and
concluded on November 2, 2001. In a ruling filed on February 8, 2002, the
Bankruptcy Court found B&W solvent at the time of the corporate reorganization.
On February 19, 2002, the ACC and FCR filed a motion with the District Court
seeking leave to appeal the February 8, 2002 ruling. On February 20, 2002, MI,
BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed a
motion for summary judgment asking that judgment be entered on a variety of
additional pending counts
26
presented by the ACC and FCR that we believe are resolved by the February 8,
2002 ruling. On March 20, 2002, at a hearing in the Bankruptcy Court, the judge
granted this motion and dismissed all claims asserted in complaints filed by the
ACC and the FCR regarding the 1998 transfer of certain assets from B&W to its
parent, which ruling was memorialized in an Order and Judgment dated April 17,
2002 that dismissed the proceeding with prejudice. On April 26, 2002, the ACC
and FCR filed a notice of appeal of the April 17, 2002 Order and Judgment and on
June 20, 2002 filed their appeal brief. On July 22, 2002, MI, BWICO, BWXT,
Hudson Products Corporation and McDermott Technology, Inc. filed their brief in
opposition. The ACC and FCR have not yet filed their reply brief pending
discussions regarding settlement and a consensual joint plan of reorganization.
In addition, an injunction preventing asbestos suits from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not
involved in the Chapter 11 extends through April 14, 2003. See Note 20 to our
consolidated financial statements for information regarding B&W's potential
liability for nonemployee asbestos claims and additional information concerning
the B&W Chapter 11 proceedings.
On July 12, 2002, AE Energietechnic GmbH ("Austrian Energy") applied for the
appointment of a receiver in the Bankruptcy Court of Graz, Austria. Austrian
Energy is a subsidiary of Babcock-Borsig AG, which filed for bankruptcy on July
4, 2002 in Germany. Babcock and Wilcox Volund ApS ("Volund"), which we sold to
B&W in October 2002, is jointly and severally liable with Austrian Energy
pursuant to both their consortium agreement as well as their contract with the
ultimate customer, SK Energi, for construction of a biomass boiler facility in
Denmark. As a result of performance delays attributable to Austrian Energy and
other factors, SK Energi has asserted claims for damages associated with the
failure to complete the construction and commissioning of the facility on
schedule. On August 30, 2002, Volund filed a claim against Austrian Energy in
the Austrian Bankruptcy Court to establish Austrian Energy's liability for SK
Energi's claims, which was subsequently rejected in its entirety by Austrian
Energy. On October 8, 2002, Austrian Energy notified Volund that it had
terminated its consortium agreement with Volund in accordance with Austrian
bankruptcy laws. Volund is pursuing its claims in the Austrian Bankruptcy Court
as well as other potential remedies available under applicable law. Assuming no
recovery from Austrian Energy, the cost to Volund is currently estimated at $2.5
million, which we accrued during the three months ended September 30, 2002. See
Note 2 to our consolidated financial statements for information concerning the
sale of Volund to B&W.
In February 2002, one of our subsidiaries, J. Ray McDermott West Africa, Inc.
("JRMWA"), and Global Energy Company Limited ("GEC") entered into a joint
venture agreement related to a construction project. The parties entered into an
associated escrow agreement, with Citibank as the escrow agent, pursuant to
which JRMWA deposited $10.2 million into an escrow account at Citibank. The
joint venture agreement provided that, under certain circumstances of
termination, GEC would be entitled to certain amounts from the escrow account
and such transfer would constitute a full and final release of JRMWA from all
obligations, and JRMWA would retain the remainder of the escrowed funds. On July
15, 2002, GEC filed two instruments with the High Court of Lagos State, Nigeria
against JRMWA, and Citibank: (1) an application for injunction to restrain
Citibank from remitting the sum of $10.2 million to JRMWA; and (2) a lawsuit
seeking a declaration that GEC is entitled to specific performance and that the
$10.2 million held by Citibank can only be exchanged for shares representing a
12.75 % interest in Nigerdock Nigeria PLC. Also on July 15, 2002, JRMWA filed an
application for injunction to restrain Citibank from remitting $1.3 million to
GEC, which application for injunctive relief JRMWA subsequently dismissed as
duplicative. On August 19, 2002, JRMWA filed a motion to stay proceedings in
Nigeria in lieu of arbitration in London, as provided for in the joint venture
agreement. GEC had attempted through a series of motions to dismiss JRMWA's
motion to stay proceedings in lieu of arbitration. The hearing on JRMWA's motion
to stay was set for October 30, 2002 and on that date the parties agreed to a
settlement. Pursuant to the settlement, GEC received $1.8 million and JRMWA
received $8.4 million of the escrowed funds, JRMWA waived invoiced amounts of
approximately $1.0 million and each party was granted a full and final release
and discharge of all claims. This settlement was entered as an order of the
Nigerian High Court on October 31, 2002.
In September 2002, we were advised that the Securities and Exchange Commission
and the New York Stock Exchange were conducting inquiries into the trading of
MII securities occurring prior to our public announcement of August 7, 2002 with
respect to our second quarter 2002 results, our revised 2002 guidance and
developments in negotiations relating to the B&W Chapter 11 proceedings. We have
27
recently become aware of a formal order of investigation issued by the SEC in
connection with its inquiry, pursuant to which the Staff of the SEC has
requested additional information from us and several of our current and former
officers and directors. We continue to cooperate fully with both inquiries and
have provided all information that has been requested. Several of our current
and former officers and directors have voluntarily given interviews and have
responded, or are in the process of responding, to SEC subpoenas requesting
additional information.
Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance- or warranty-related matters under
our customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.
See Note 20 to our consolidated financial statements for information regarding
B&W's potential liability for nonemployee asbestos claims and the settlement
negotiations and other activities related to the B&W Chapter 11 reorganization
proceedings commenced by B&W and certain of its subsidiaries on February 22,
2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of security holders, through the
solicitation of proxies or otherwise during the quarter ended December 31, 2002.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the New York Stock Exchange. High and low stock
prices in the years ended December 31, 2001 and 2002 were as follows:
YEAR ENDED DECEMBER 31, 2001
SALES PRICE
-----------
QUARTER ENDED HIGH LOW
---- ---
March 30, 2001 $ 16.850 $ 10.125
June 29, 2001 $ 14.440 $ 9.890
September 28, 2001 $ 12.020 $ 7.500
December 31, 2001 $ 12.570 $ 7.310
YEAR ENDED DECEMBER 31, 2002
SALES PRICE
-----------
QUARTER ENDED HIGH LOW
---- ---
March 31, 2002 $ 16.420 $ 10.950
June 30, 2002 $ 17.290 $ 5.600
September 30, 2002 $ 8.100 $ 2.950
December 31, 2002 $ 6.640 $ 2.340
In the third quarter of 2000, MII's Board of Directors determined to suspend the
payment of regular dividends on MII's common stock for an indefinite period.
28
As of December 31, 2002, there were approximately 3,792 record holders of our
common stock.
The following table provides information on our equity compensation plans as of
December 31, 2002:
Number of Weighted- Number of
securities to be average securities
issued upon exercise exercise price remaining
of outstanding of outstanding available for
Plan Category options and rights options and rights future issuance
- ---------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 5,483,538 $15.16 2,101,567
Equity compensation plans not
approved by security holders(1) 2,321,126 $14.08 694,849
- ---------------------------------------------------------------------------------------------
Total 7,804,664 $14.84 2,796,416
=============================================================================================
(1) Reflects information on our 1992 Senior Management Stock Plan, which is our
only equity compensation plan that has not been approved by our
stockholders and that (1) has any outstanding awards that have not been
exercised or (2) can be used for future grants of equity-based awards. See
Note 9 to our consolidated financial statements for more information
regarding this plan.
Item 6. SELECTED FINANCIAL DATA
For the For the
Nine-Month Fiscal
For the Years Ended Period Ended Year Ended
December 31, December 31, March 31,
2002 2001 2000(1) 1999 1999
---- ---- ------- ------------- ----
(In thousands, except for per share amounts)
Revenues $ 1,748,681 $ 1,896,948 $ 1,813,670 $ 1,844,298 $ 3,056,920
Income (Loss) from Continuing Operations $ (786,204) $ (24,422) $ (24,864) $ (1,435) $ 185,183
Income (Loss) before Extraordinary Item $ (776,735) $ (20,857) $ (22,082) $ 440 $ 192,081
Net Income (Loss) $ (776,394) $ (20,022) $ (22,082) $ 440 $ 153,362
Basic Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations $ (12.71) $ (0.40) $ (0.42) $ (0.02) $ 3.14
Income (Loss) before Extraordinary Item $ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.25
Net Income (Loss) $ (12.55) $ (0.33) $ (0.37) $ 0.01 $ 2.60
Diluted Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations $ (12.71) $ (0.40) $ (0.42) $ (0.02) $ 3.05
Income (Loss) before Extraordinary Item $ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.16
Net Income (Loss) $ (12.55) $ (0.33) $ (0.37) $ 0.01 $ 2.53
Total Assets $ 1,278,171 $ 2,103,840 $ 2,055,627 $ 3,874,891 $ 4,305,520
Current Maturities of Long-Term Debt $ 55,577 $ 209,480 $ 258 $ 87 $ 31,126
Long-Term Debt $ 86,104 $ 100,393 $ 323,157 $ 323,014 $ 323,774
Cash Dividends per Common Share $ - $ - $ 0.10 $ 0.15 $ 0.20
(1) Effective February 22, 2000, our consolidated financial results exclude the
results of B&W and its consolidated subsidiaries.
See Note 18 to our consolidated financial statements for significant items
included in the years ended December 31, 2002 and 2001.
Pretax results for the year ended December 31, 2000 include losses totaling
$23.4 million to exit certain foreign joint ventures.
Pretax results for the nine-month period ended December 31, 1999 include a loss
on the curtailment of a foreign pension plan of $37.8 million.
Our results for the fiscal year ended March 31, 1999 include:
- a gain on the dissolution of a joint venture of $37.4 million;
29
- a gain on the settlement and curtailment of postretirement
benefit plans of $27.6 million;
- interest income of $18.6 million on domestic tax refunds;
- a gain of $12.0 million from the sale of assets of a joint
venture;
- an $8.0 million settlement of punitive damage claims in a
civil suit associated with a Pennsylvania facility we formerly
operated;
- an extraordinary loss on the retirement of debt of $38.7
million;
- a loss of $85.2 million for estimated costs relating to
estimated future nonemployee asbestos claims;
- losses of $21.9 million related to impairment of assets and
goodwill;
- various provisions of $20.3 million related to potential
settlements of litigation and contract disputes; and
- the write-off of $12.6 million of receivables from a joint
venture.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements we make in the following discussion which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward-looking statements that are subject to risks, uncertainties and
assumptions. Our actual results, performance or achievements, or industry
results, could differ materially from those we express in the following
discussion as a result of a variety of factors, including the risks and
uncertainties we have referred to under the headings "Risk Factors" and
"Cautionary Statement Concerning Forward-Looking Statements" in Items 1 and 2 of
Part I of this report.
GENERAL
In general, our business segments are composed of capital-intensive businesses
that rely on large contracts for a substantial amount of their revenues.
The amount of revenues we generate from our Marine Construction Services segment
largely depends on the level of oil and gas development activity in the world's
major hydrocarbon-producing regions. Our revenues from this segment reflect the
variability associated with the timing of significant oil and gas development
projects. We expect our Marine Construction Services segment's revenues to
increase during 2003, primarily for deepwater projects and projects in the
Azerbaijan sector of the Caspian Sea. We believe the oil and gas exploration and
production industry is focused on deepwater projects and that the deepwater
floater market will be robust over the next several years. JRM's future success
is heavily dependent on its ability to compete successfully in the deepwater
market. While we expect our Marine Construction Services segment revenues to
increase in 2003, our Gulf of Mexico marine operations will face challenges in
2003, due to an extremely competitive environment. We are in the process of
performing a strategic analysis of our Gulf of Mexico marine business and plan
to take a number of actions to improve our ability to compete in this market on
a rational basis. These actions may include downsizing our operational support
base, selling or disposing of some of our marine equipment and other cost
cutting measures. These factors may have a significant impact on our anticipated
Marine Construction Services segment income in future periods.
Due to the deterioration in this segment's financial performance during the year
ended December 31, 2002, we revised our expectations concerning this segment's
future earnings and cash flow and tested the goodwill of the Marine Construction
Services segment for impairment. During the year ended December 31, 2002, we
recorded an impairment charge of $313.0 million, which was the total amount of
this segment's goodwill.
The revenues of our Government Operations segment are largely a function of
capital spending by the U.S. Government. As a supplier of nuclear components for
the U.S. Navy, BWXT is a significant participant in the defense industry. We
recognized an increase in bookings during the year ended December 31, 2002 that
has allowed us to reach a record backlog in our Government Operations.
Additionally, with BWXT's unique capability of full life-cycle management of
special nuclear materials, facilities and technologies, BWXT
30
is poised to continue to participate in the continuing cleanup and management of
the Department of Energy's nuclear sites and weapons complexes. We currently
expect the operating results of this segment to continue to improve in 2003.
The results of operations of our Industrial Operations segment include only the
results of MECL, which we sold in October 2001. The results of Hudson Products
Corporation ("HPC") are reported in discontinued operations. We sold HPC in July
2002. See Note 2 to our consolidated financial statements for further
information on discontinued operations. In addition, we now include the results
of MTI in Government Operations. MTI was previously included in our Industrial
Operations segment.
The results of operations of our Power Generation Systems segment include
primarily the results of Volund, which we sold to B&W on October 11, 2002. See
Note 2 to our consolidated financial statements for information concerning that
sale.
As a result of the Chapter 11 reorganization proceedings involving B&W and
several of its subsidiaries, we stopped consolidating the results of operations
of B&W and its subsidiaries in our consolidated financial statements and we have
been presenting our investment in B&W on the cost method. The Chapter 11 filing,
along with subsequent filings and negotiations, led to increased uncertainty
with respect to the amounts, means and timing of the ultimate settlement of
asbestos claims and the recovery of our investment in B&W. Due to this increased
uncertainty, we wrote off our net investment in B&W in the quarter ended June
30, 2002. The total impairment charge of $224.7 million included our investment
in B&W of $187.0 million and other related assets totaling $37.7 million,
primarily consisting of accounts receivable from B&W, for which we provided an
allowance of $18.2 million. This charge was precipitated by a combination of
factors, including a change in our expectations regarding our ability to retain
our equity in B&W. During the quarter ended September 30, 2002, we reached an
agreement in principle with representatives of the present and future asbestos
personal injury claimants in the B&W Chapter 11 proceedings on several key
terms, which served as a basis for continuing negotiations. On December 19,
2002, drafts of a joint plan of reorganization and settlement agreement,
together with a draft of a related disclosure statement, were filed in the
Chapter 11 proceedings, and we determined that a liability related to the
proposed settlement is probable and that the value is reasonably estimable.
Accordingly, at December 31, 2002, we established an estimate for the cost of
the settlement of the B&W bankruptcy proceedings of $110.0 million, including
related tax expense of $23.6 million. See Note 20 to our consolidated financial
statements for details regarding this estimate and for further information
regarding developments in negotiations relating to the B&W Chapter 11
proceedings. Through February 21, 2000, B&W's and its subsidiaries' results are
included in our segment results under Power Generation Systems - B&W (see Note
17 to our consolidated financial statements). Accordingly, B&W and its
consolidated subsidiaries' pre-bankruptcy filing revenues of $155.8 million and
operating income of $8.0 million are included in our consolidated financial
results for the year ended December 31, 2000.
At December 31, 2002, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 87, Employers' Accounting for Pensions," we recognized a
minimum pension liability of approximately $452 million. This recognition
resulted in a decrease in our prepaid pension asset of $122 million, an increase
in our pension liability of $345 million and an increase in other intangible
assets of $15 million. The increase in our minimum pension liability primarily
resulted from the combination of the downturn in financial markets in 2002 and
the low interest rates in effect at December 31, 2002.
As negotiations relating to the B&W Chapter 11 proceedings have progressed, it
has, in our judgment, become probable that we will spin off the portion of MI's
qualified pension plan related to the active and retired employees of B&W as
part of a final settlement. If we effect such a spin-off, we will be required to
recognize any curtailment and settlement gains or losses associated with the
spin-off at the time we effect the spin-off. Curtailment and settlement gains or
losses are determined based on actuarial calculations as of the date of the
spin-off. Based on data provided by our actuary, if this anticipated spin-off
had occurred on December 31, 2002, we would have recorded curtailment and
settlement losses totaling $117 million, with no associated tax benefits. In
addition, based on data provided by our actuary at December 31, 2002, we would
have also recorded a reduction in our charge to Other Comprehensive Income for
31
recognition of our minimum pension liability totaling approximately $226
million. If we had recorded these items at December 31, 2002, our Stockholders'
Equity (Deficit) would have improved by approximately $109 million. However,
under generally accepted accounting principles, we cannot record the effect of
the spin-off until the event actually occurs. We anticipate that the spin-off
will occur in 2003. We will record the effect of the spin-off based on actuarial
calculations as of the date of the spin-off, which could be materially different
from the effect that would have been recorded if the spin-off had been completed
as of December 31, 2002.
As a result of our reorganization in 1982, which we completed through a
transaction commonly referred to as an "inversion," our company is a corporation
organized under the laws of the Republic of Panama. Recently, the U.S. House and
Senate have considered legislation that would change the tax law applicable to
corporations that have completed inversion transactions. We have engaged an
independent consultant to undertake an analysis of the potential
re-domestication of MII from Panama to the U.S. Additionally, we recently
entered into an agreement with two shareholders pursuant to which management
will sponsor and recommend a proposal for re-domestication on the proxy
statement for the annual meeting in the event the tax, costs and other
considerations impacted by re-domestication are determined by our Board of
Directors to be in the best interests of our shareholders. In the event that
re-domestication is determined by the our Board of Directors not to be in the
best interests of our shareholders, pursuant to our agreement described above,
management will present the re-domestication proposal on the proxy but may
recommend against it. The timing of any such management proposal is contingent
upon the completion of the analysis by the independent consultant and the
completion of the B&W reorganization proceedings.
Effective January 1, 2002, based on a review performed by us and our independent
consultants, we changed our estimate of the useful lives of new major marine
vessels from 12 years to 25 years to better reflect the service lives of our
assets and industry norms. Consistent with this change, we also extended the
lives of major upgrades to existing vessels. We continue to depreciate our major
marine vessels using the units-of-production method, based on the utilization of
each vessel. The change in estimated useful lives reduced our operating loss by
approximately $3.2 million for the year ended December 31, 2002.
We derive a significant portion of our revenues from foreign operations. As a
result, international factors, including variations in local economies and
changes in foreign currency exchange rates, affect our revenues and operating
results. We attempt to limit our exposure to changes in foreign currency
exchange rates by attempting to match anticipated foreign currency contract
receipts with like foreign currency disbursements. To the extent that we are
unable to match the foreign currency receipts and disbursements related to our
contracts, we enter into forward contracts to reduce the impact of foreign
exchange rate movements on our operating results. Because we generally do not
hedge beyond our exposure, we believe this practice minimizes the impact of
foreign exchange rate movements on our operating results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe the following are our most critical accounting policies that we apply
in the preparation of our financial statements. These policies require our most
difficult, subjective and complex judgements, often as a result of the need to
make estimates of matters that are inherently uncertain.
Contracts and Revenue Recognition. We generally recognize contract revenues and
related costs on a percentage-of-completion method for individual contracts or
combinations of contracts. Under this method, estimated contract income and
resulting revenue are generally recognized based on costs incurred to date as a
percentage of total estimated costs. Total estimated costs, and resulting
contract income, are affected by changes in the expected cost of materials and
labor, productivity, scheduling and other factors. Additionally, external
factors such as weather, customer requirements and other factors outside of our
control, may also affect the progress and estimated cost of a project's
completion and therefore the timing of income and revenue recognition. We
routinely review estimates related to our contracts and revisions to
profitability are reflected in earnings immediately. If a current estimate of
total contract cost indicates a loss on a contract, the projected loss is
recognized in full when determined. In prior years, we have had
32
significant adjustments to earnings as a result of revisions to contract
estimates. Such revisions have been primarily due to the fact that many of our
contracts have been "first-of-a-kind" or have been inherently difficult to
estimate due to the long-term nature of the project, changing customer
requirements and other factors outside of our control. In addition, for
first-of-a-kind projects undertaken by our Marine Construction Services segment
in recent periods, we have been unable to forecast accurately total cost to
complete until we have performed all major phases of the project. As
demonstrated by our experience on these contracts in 2002, revenue, cost and
gross profit realized on fixed-price contracts will often vary from estimated
amounts. Although we are continually striving to improve our ability to estimate
our contract costs and profitability, adjustments to overall contract costs due
to unforeseen events may continue to be significant in future periods.
We recognize claims for extra work or for changes in scope of work in contract
revenues, to the extent of costs incurred, when we believe collection is
probable. Any amounts not collected are reflected as an adjustment to earnings.
We regularly assess customer credit risk inherent in contract costs. We
recognize contract claim income when formally agreed with the customer.
Property, Plant and Equipment. We carry our property, plant and equipment at
depreciated cost, reduced by provisions to recognize economic impairment when we
determine impairment has occurred. Factors that impact our determination of
impairment include forecasted utilization of equipment and estimates of cash
flow from projects to be performed in future periods. Our estimates of cash flow
may differ from actual cash flow due to, among other things, technological
changes, economic conditions or changes in operating performance. It is
reasonably possible that changes in such factors may negatively affect our
business segments and result in future asset impairments.
Except for major marine vessels, we depreciate our property, plant and equipment
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. We depreciate
major marine vessels using the units-of-production method based on the
utilization of each vessel. Our depreciation expense calculated under the
units-of-production method may be less than, equal to or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation and 50% of
cumulative straight-line depreciation.
We expense the costs of maintenance, repairs and renewals, which do not
materially prolong the useful life of an asset, as we incur them except for
drydocking costs. We accrue estimated drydock costs for our marine fleet over
the period of time between drydockings, generally 3 to 5 years. We accrue
drydock costs in advance of the anticipated future drydocking, commonly known as
the "accrue in advance" method. Actual drydock costs are charged against the
liability when incurred and any differences between actual costs and accrued
costs are recognized over the remaining months of the drydock cycle. Our actual
drydock costs often differ from our estimates due to the long period between
drydockings and the inherent difficulties in estimating cost of vessel repairs,
which are not necessarily visible until the drydock occurs.
Pension Plans and Postretirement Benefits. We estimate income or expense related
to our pension and postretirement benefit plans based on actuarial assumptions,
including assumptions regarding discount rates and expected returns on plan
assets. We determine our discount rate based on a review of published financial
data and discussions with our actuary regarding rates of return on high-quality
fixed-income investments currently available and expected to be available during
the period to maturity of our pension obligations. Based on historical data and
discussions with our actuary, we determine our expected return on plan assets
based on the expected long-term rate of return on our plan assets and the
market-related value of our plan assets. Changes in these assumptions can result
in significant changes in our estimated pension income or expense. We revise our
assumptions on an annual basis based upon changes in current interest rates,
return on plan assets and the underlying demographics of our workforce. These
assumptions are reasonably likely to change in future periods and may have a
material impact on future earnings.
33
Loss Contingencies. We estimate liabilities for loss contingencies when it is
probable that a liability has been incurred and the amount of loss is reasonably
estimable. Disclosure is required when there is a reasonable possibility that
the ultimate loss will exceed the recorded provision. We are currently involved
in certain investigations and litigation as discussed in Note 10 to our
consolidated financial statements. We have accrued our estimates of the probable
losses associated with these matters. However, our losses are typically resolved
over long periods of time and are often difficult to estimate due to the
possibility of multiple actions by third parties. Therefore, it is possible
future earnings could be affected by changes in our estimates related to these
matters. Our most significant loss contingencies include our estimate of the
cost of the potential settlement of the B&W Chapter 11 proceedings which is now
dependent on the finalization of the proposed settlement based on the agreement
in principle discussed in this report (see Notes 10 and 20 to our consolidated
financial statements).
Goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that we
no longer amortize goodwill, but instead perform periodic testing for
impairment. It requires a two-step impairment test to identify potential
goodwill impairment and measure the amount of a goodwill impairment loss. The
first step of the test compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of the impairment loss, if any. Both steps of
goodwill impairment testing involve significant estimates. As a result of the
write-off of the goodwill associated with our Marine Construction Services
segment, our total goodwill has been substantially reduced.
Environmental Clean-Up Costs. We accrue for future decommissioning of our
nuclear facilities that will permit the release of these facilities to
unrestricted use at the end of each facility's life, which is a requirement of
our licenses from the Nuclear Regulatory Commission. We reflect the accruals,
based on the estimated cost of those activities and net of any cost-sharing
arrangements, over the economic useful life of each facility, which we typically
estimate at 40 years. We adjust the estimated costs as further information
develops or circumstances change. We do not discount costs of future
expenditures for environmental cleanup to their present values. An exception to
this accounting treatment relates to the work we perform for one facility, for
which the U.S. Government is obligated to pay all the decommissioning costs. We
recognize recoveries of environmental clean-up costs from other parties as
assets when we determine their receipt is probable. Effective January 1, 2003,
we will adopt SFAS No. 143, requiring us to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When
we initially record such a liability, we will capitalize a cost by increasing
the carrying amount of the related long-lived asset. Over time, the liability
will be accreted to its present value each period, and the capitalized cost will
be depreciated over the useful life of the related asset. Upon settlement of a
liability, we will settle the obligation for its recorded amount or incur a gain
or loss.
Deferred Taxes. We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income, carrybacks, future reversals and ongoing
prudent and feasible tax planning strategies in prior years in assessing the
need for a valuation allowance, given our operating results for 2002, we have
not assumed that future taxable income or tax planning strategies will be
available to us as of December 31, 2002 in determining our valuation allowance.
If we were to subsequently determine that we would be able to realize deferred
tax assets in the future in excess of our net recorded amount, an adjustment to
deferred tax assets would increase income in the period such determination was
made. We will continue to assess the adequacy of the valuation allowance on a
quarterly basis. Any changes to our estimated valuation allowance could be
material to our consolidated financial condition and results of operations.
Warranty. With respect to our Marine Construction Services segment, we include
warranty costs as a component of our total contract cost estimate to satisfy
contractual requirements. In addition, we make specific provisions where we
expect the costs of warranty to significantly exceed the accrued estimates.
Factors that impact our estimate of warranty costs include prior history of
warranty claims and our estimates of future costs of materials and labor. At our
Marine Construction Services segment, warranty periods are generally
34
limited and we have had minimal warranty cost in prior years. It is reasonably
possible that our future warranty provisions may vary from what we have
experienced in the past. In our Government Operations segment, we accrue
estimated expenses to satisfy contractual warranty requirements when we
recognize the associated revenue on the related contracts.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Marine Construction Services
Revenues increased 35% to $1,148.0 million. The increase is a result of
increased activity for our EPIC spar projects, a topside fabrication and a
pipeline installation project in the Azerbaijan sector of the Caspian Sea, two
fabrication and installation projects in Southeast Asia, one deck fabricated in
the Middle East for the West African market and a topsides fabrication contract
at our Morgan City fabrication facility. These increases are partially offset by
reduced activity on other Gulf of Mexico projects and a decline in charters to
our Mexican joint venture. Pemex, the national oil company of Mexico, is the
primary customer of this joint venture.
Although revenues increased, segment operating income, which is before equity in
income from investees, declined to a loss of $162.6 million compared with income
of $14.5 million for the year ended December 31, 2001. The loss is due primarily
to charges totaling $149.3 million relating to additional cost overruns,
schedule delays and higher-than-expected forecasted costs to complete our three
EPIC spar projects, each of which is now in a loss position. At December 31,
2002, the financial percent complete on each of these projects was estimated as
follows: Medusa, 74%; Devils Tower, 48%; and Front Runner, 30%. In addition, we
incurred losses on Gulf of Mexico pipeline work and a project for the South
American market. We also experienced reduced activity on other Gulf of Mexico
projects, lower charter activity to our Mexican joint venture and increased
costs to complete a fabrication project for the West African market due to poor
productivity. This project is also in a loss position. We also experienced lower
utilization of our marine fleet in the Gulf of Mexico. Higher volumes from two
fabrication and installation projects in Southeast Asia, a topside fabrication
and a pipeline installation project in the Azerbaijan sector of the Caspian Sea
and a topsides fabrication contract at our Morgan City fabrication facility
partially offset these losses. In addition, we experienced lower general and
administrative expenses and a favorable adjustment to potential settlements of
litigation. For the year ended December 31, 2001, segment operating income
included goodwill amortization expense of $18.0 million.
The net loss on asset disposal and impairments for the year ended December 31,
2002 is due primarily to the goodwill impairment charge of $313.0 million. See
Note 1 to our consolidated financial statements for information concerning this
impairment charge. During the year ended December 31, 2002, we also recorded
charges totaling approximately $15.0 million relating to a reorganization of our
Western Hemisphere organization. These charges include an impairment charge of
$6.8 million related to land at one of our facilities and $1.9 million to reduce
to net realizable value four material barges and certain marine equipment that
we expect to sell in 2003.
Equity in income from investees decreased $5.1 million to $5.3 million,
primarily due to a $2.4 million charge related to the impairment of an
investment in an international joint venture and its favorable operating results
recorded in the prior year. Favorable contract closeout adjustments associated
with our U.K. joint venture partially offset these decreases.
Backlog was $2.1 billion and $1.8 billion, respectively, at December 31, 2002
and 2001. At December 31, 2002, the Marine Construction Services backlog
included $345.0 million related to uncompleted work on our three EPIC spar
projects and $265.0 million related to other contracts in loss positions.
Government Operations
Revenues increased $59.8 million to $553.8 million, primarily due to higher
volumes from the manufacture of nuclear components for certain U.S. Government
programs, the management and operating contracts for U.S. Government-owned
facilities, commercial work and other government operations. Lower volumes from
commercial nuclear environmental services partially offset these increases.
35
Segment operating income, which is before equity in income from investees,
increased $5.3 million to $34.6 million, primarily due to higher volumes from
the manufacture of nuclear components for certain U.S. Government programs and
commercial work, higher margins from management and operating contracts for U.S.
Government-owned facilities and other government operations. In addition, we
received an insurance settlement relating to environmental restoration costs.
However, we experienced lower margins from nuclear component manufacturing for
certain U.S. Government programs along with higher facility management oversight
costs and lower volumes from commercial nuclear environmental services. We also
incurred costs associated with the decentralization of our research and
development division and increased spending on fuel cell research and
development.
Equity in income from investees increased $1.6 million to $24.6 million,
primarily due to improved operating results from one of our joint ventures
operating in Texas, partially offset by higher general and administrative
expenses.
Backlog was $1.7 billion and $1.0 billion, respectively, at December 31, 2002
and 2001. At December 31, 2002, this segment's backlog with the U.S. Government
was $1.6 billion, of which $266.5 million had not yet been funded.
Power Generation Systems
Revenues decreased $0.9 million to $46.9 million as a result of lower volumes
from after-market services and the sale of Volund to B&W in October 2002.
Segment operating loss, which is before equity in income from investees,
decreased $0.8 million to $2.8 million, primarily due to lower general and
administrative expenses and the sale of Volund to B&W. The loss provision we
recorded related to the claims involving Volund and Austrian Energy described in
Note 10 partially offset these decreases.
Equity in income from investees decreased $2.9 million to a loss of $2.3
million, primarily due to a $3.3 million charge related to the impairment of an
investment in a foreign joint venture operating in India.
Corporate
Corporate expenses increased $18.5 million to $23.6 million, primarily due to
the recognition of expense from our pension plans in the current period compared
to income from those plans and a nonrecurring favorable insurance recovery in
the year ended December 31, 2001. Lower legal and professional services expenses
related to the B&W Chapter 11 proceedings, lower insurance expenses and the
improved performance of our captive insurance subsidiaries for the year ended
December 31, 2002 partially offset these increases.
During the year ended December 31, 2002, we recognized expense from certain of
our qualified pension plans of approximately $11.1 million. During the year
ended December 31, 2001, we recognized income from these plans of approximately
$29.0 million. We expect to recognize approximately $72.1 million of expense in
2003 related to these plans. The significant increase expected in 2003 from 2002
levels is due principally to changes in our discount rate and plan asset
performance.
Other Unallocated Items
During the year ended December 31, 2002, we recorded a provision of $1.5 million
for environmental costs associated with MECL, which we sold in 2001.
Other Income Statement Items
Interest income decreased $11.0 million to $8.6 million, primarily due to a
decrease in investments and prevailing interest rates.
Interest expense decreased $24.5 million to $15.1 million, primarily due to
changes in debt obligations and prevailing interest rates.
36
Other-net declined $11.1 million to expense of $4.4 million. For the year ended
December 31, 2002, we recorded $2.5 million of minority interest expense
associated with a Marine Construction Services segment joint venture. In
addition, we had a $2.0 million decrease in gains on the sale of investment
securities as well as an increase in miscellaneous other expenses.
We recorded the following charges in the year ended December 31, 2002, with
little or no associated tax benefit:
- the impairment of the remaining $313.0 million of goodwill
attributable to the premium we paid on the acquisition of the
minority interest in JRM in June 1999;
- the write-off of the investment in B&W and other related
assets totaling $224.7 million; and
- the net pre-tax provision of $86.4 million for the estimated
cost of settlement of the B&W Chapter 11 proceedings.
The net pre-tax provision for the estimated cost of the B&W Chapter 11
settlement includes approximately $154.0 million of expenses with no associated
tax benefits. The remaining items, consisting primarily of estimated benefits we
expect to receive as a result of the settlement, constitute income in taxable
jurisdictions. See Note 20 to our consolidated financial statements for
additional details regarding the settlement provision.
In addition, our valuation allowance for the realization of deferred tax assets
increased by $202.0 million from $12.8 million at December 31, 2001 to $214.8
million at December 31, 2002. The provision for income taxes for the year ended
December 31, 2001 reflects nondeductible amortization of goodwill of $19.5
million, of which $18.0 million was attributable to JRM. Income taxes for the
year ended December 31, 2001 also include a tax benefit related to favorable tax
settlements in foreign jurisdictions totaling approximately $5.2 million and a
provision for proposed U.S. federal income tax deficiencies. The provision for
income taxes for the year ended December 31, 2001 also includes a charge of
$85.4 million associated with the exercise of the intercompany stock purchase
and sale agreement discussed in Note 5 to our consolidated financial statements.
We operate in many different tax jurisdictions. Within these jurisdictions, tax
provisions vary because of nominal rates, allowability of deductions, credits
and other benefits and tax bases (for example, revenue versus income). These
variances, along with variances in our mix of income from these jurisdictions,
are responsible for shifts in our effective tax rate.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Marine Construction Services
Revenues increased $91.0 million to $848.5 million, primarily due to higher
volumes in North American activities, including the deepwater markets of the
Gulf of Mexico, and in the Eastern Hemisphere fabrication operations. Lower
volume in offshore activities in Southeast Asia relating to the West Natuna
project partially offset this increase.
Segment operating income increased $48.0 million from a loss of $33.5 million to
income of $14.5 million, primarily due to higher volumes and margins in North
American activities and in the Eastern Hemisphere fabrication operations. Lower
volumes on the West Natuna project, increased cost estimates relating to several
Gulf of Mexico projects, especially two large first-of-a-kind EPIC contracts,
and higher general and administrative expenses partially offset these increases.
Loss on asset disposals and impairments - net increased $2.6 million to $3.6
million primarily due to the decision in the fourth quarter of 2001 to scrap the
derrick barge Ocean Builder.
Equity in income from investees increased $7.6 million to $10.4 million,
primarily due to favorable contract closeout adjustments from our U.K. joint
venture that was terminated in June 2001. In addition, the year ended December
31, 2000 included higher losses associated with our U.K. joint venture.
37
Government Operations
Revenues increased $50.0 million to $494.0 million, primarily due to higher
volumes from nuclear components for the U.S. Government and commercial work.
Lower volumes from management and operating contracts for U.S. Government-owned
facilities and other government operations partially offset these increases.
Segment operating income decreased $3.9 million to $29.3 million, primarily due
to lower volume and margins from management and operating contracts for U.S.
Government-owned facilities and other government operations and higher general
and administrative expenses. Higher volume and margins from commercial work,
higher volumes from nuclear components for the U.S. Government and higher
margins from commercial nuclear environmental services partially offset these
decreases.
Loss on asset disposals and impairments - net decreased $0.9 million, primarily
due to asset impairments at one of our research facilities in the year ended
December 31, 2000.
Equity in income from investees increased $11.9 million to $23.0 million,
primarily due to higher operating results from a joint venture in Idaho and the
start-up of the Pantex and Y-12 joint ventures. Lower operating results from a
joint venture in Colorado partially offset these increases.
Industrial Operations
Revenues increased $81.0 million to $507.3 million, primarily due to higher
volumes from engineering and construction activities performed by MECL. Lower
volumes from plant maintenance activities partially offset these increases.
Power Generation Systems
Revenues increased $14.0 million to $47.8 million, primarily due to increased
volume from Volund, an international power generation operation which we
acquired in June 2000.
Segment operating loss decreased $4.1 million to $3.7 million, primarily due to
contract loss provisions recorded in the year ended December 31, 2000.
Equity in income (loss) from investees increased $25.2 million from a loss of
$24.6 million to income of $0.6 million, primarily due to charges to exit and
impair certain foreign joint ventures in the year ended December 31, 2000.
Corporate
Corporate expense, net increased $13.1 million from income of $8.0 million to
expense of $5.1 million. While we achieved a 30% reduction in our corporate
departmental expenses attributable to cost cutting programs, income recognized
on our overfunded pension plans was down substantially in 2001 from 2000. During
the years ended December 31, 2001 and 2000, we recognized income from certain of
our qualified pension plans of approximately $29.0 million and $48.0 million,
respectively. We also experienced significantly higher legal and professional
service expenses in 2001 related to the B&W Chapter 11 proceedings.
Other Income Statement Items
Interest income decreased $7.5 million to $19.6 million, primarily due to a
decrease in investments and prevailing interest rates.
Interest expense decreased $3.9 million to $39.7 million, primarily due to
changes in short-term debt obligations and prevailing interest rates.
38
Other-net income increased $3.9 million to $6.6 million, primarily due to the
reversal of prior years' rent accruals on a fabrication yard in the Middle East
and gains on the sale of investment securities in the year ended December 31,
2001.
The provision for income taxes for the years ended December 31, 2001 and 2000
reflected nondeductible amortization of goodwill totaling approximately $19.5
million and $20.1 million, respectively, of which $18.0 million is attributable
to the premium we paid on the acquisition of the minority interest in JRM in
June 1999. The provision for income taxes in the year ended December 31, 2001
also included a charge of approximately $85.4 million associated with the
intended exercise of an intercompany stock purchase and sale agreement. The
provision for income taxes for the year ended December 31, 2000 included a
provision of $3.8 million for B&W for the prefiling period and a tax benefit of
$1.4 million from the use of certain tax attributes in a foreign joint venture.
Also included are tax benefits primarily related to favorable tax settlements in
foreign jurisdictions totaling approximately $5.2 million and $5.5 million for
the years ended December 31, 2001 and 2000, respectively, and a provision for
proposed IRS tax deficiencies in the year ended December 31, 2001. In addition,
income before the provision for income taxes for the year ended December 31,
2000 included losses and charges of $25.6 million to exit certain foreign joint
ventures which had no associated tax benefits. We operate in many different tax
jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits and tax
bases (for example, revenue versus income). These variances, along with
variances in our mix of income from these jurisdictions, are responsible for
shifts in our effective tax rate.
EFFECTS OF INFLATION AND CHANGING PRICES
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, using historical U.S. dollar
accounting ("historical cost"). Statements based on historical cost, however, do
not adequately reflect the cumulative effect of increasing costs and changes in
the purchasing power of the dollar, especially during times of significant and
continued inflation.
In order to minimize the negative impact of inflation on our operations, we
attempt to cover the increased cost of anticipated changes in labor, material
and service costs, either through an estimate of those changes, which we reflect
in the original price, or through price escalation clauses in our contracts.
LIQUIDITY AND CAPITAL RESOURCES
On February 11, 2003, we entered into definitive agreements with a group of
lenders for a new credit facility ("New Credit Facility") to replace our
previous facilities, which consisted of a $100 million credit facility for MII
and BWXT (the "MII Credit Facility") and a $200 million credit facility for JRM
and its subsidiaries (the "JRM Credit Facility") that were scheduled to expire
on February 21, 2003. The New Credit Facility initially provides for borrowings
and issuances of letters of credit in an aggregate amount of up to $180 million,
with certain sublimits on the amounts available to JRM and BWXT. On May 13,
2003, the maximum amount available under the New Credit Facility will be reduced
to $166.5 million. The obligations under the New Credit Facility are (1)
guaranteed by MII and various subsidiaries of JRM and (2) collateralized by all
our capital stock in MI, JRM and certain subsidiaries of JRM and substantially
all the JRM assets and various intercompany promissory notes. The New Credit
Facility requires us to comply with various financial and nonfinancial covenants
and reporting requirements. The financial covenants require us to maintain a
minimum amount of cumulative earnings before taxes, depreciation and
amortization; a minimum fixed charge coverage ratio; a minimum level of tangible
net worth (for MII as a whole, as well as for JRM and BWXT separately); and a
minimum variance on expected costs to complete the Front Runner EPIC spar
project. In addition, we must provide as additional collateral fifty percent of
any net after-tax proceeds from significant asset sales. The New Credit Facility
is scheduled to expire on April 30, 2004.
39
Proceeds from the New Credit Facility may be used by JRM and BWXT, with
sublimits for JRM of $100 million for letters of credit and $10 million for cash
advances and for BWXT of $60 million for letters of credit and $50 million for
cash advances. At March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under this facility. Pricing for
cash advances under the Credit Facility is prime plus 4% or Libor plus 5% for
JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at
the rate of 0.75 of 1% per annum on the unused working capital commitment,
payable quarterly.
The MII Credit Facility was canceled resulting in the release of $107.8 million
in cash collateral that has been used, together with an additional $10 million
of cash, to provide JRM and BWXT with intercompany loans in the amount of $90
million and $25 million, respectively. JRM and BWXT are using the proceeds of
those intercompany loans for working capital needs and general corporate
purposes.
During 2002, JRM experienced material losses on its three EPIC spar projects:
Medusa, Devils Tower and Front Runner. These contracts are first-of-a-kind as
well as long term in nature. We have experienced schedule delays and cost
overruns on these contracts that have adversely impacted our financial results.
These projects continue to face significant issues. The remaining challenges to
completing Medusa within its revised schedule and budget are finishing the
topsides fabrication and the marine installation portion of the project. Our
revised schedule requires installation activities during the second quarter of
2003. We believe the major challenge in completing Devils Tower within its
revised budget is to remain on track with the revised schedule for topsides
fabrication due to significant liquidated damages that are associated with the
contract. A substantial portion of the costs and delay impacts on Devils Tower
are attributable to remedial activities undertaken with regard to the paint
application. On March 21, 2003, we filed an action against the paint vendors for
recovery of the remediation costs, delays and other damages. The key issues for
the Front Runner contract relate to subcontractors and liquidated damages due to
schedule slippage either by JRM or one or more of the subcontractors. At
December 31, 2002, we have provided for our estimated losses on these contracts.
Although we continually strive to improve our ability to estimate our contract
costs associated with these projects, it is reasonably possible that current
estimates could change and adjustments to overall contract costs may continue to
be significant in future periods.
Due primarily to the losses incurred on the three EPIC spar projects, we expect
JRM to experience negative cash flows during 2003. Completion of the EPIC spar
projects has and will continue to put a strain on JRM's liquidity. JRM intends
to fund its cash needs through borrowings on the New Credit Facility,
intercompany loans from MII and sales of nonstrategic assets, including certain
marine vessels. In addition, under the terms of the New Credit Facility, JRM's
letter of credit capacity was reduced from $200 million to $100 million. This
reduction does not negatively impact our ability to execute the contracts in our
current backlog. However, it will likely limit JRM's ability to pursue projects
from certain customers who require letters of credit as a condition of award. We
are exploring other opportunities to improve our liquidity position, including
better management of working capital through process improvements, negotiations
with customers to relieve tight schedule requirements and to accelerate certain
portions of cash collections, and alternative financing sources for letters of
credit for JRM. In addition, we plan to refinance BWXT on a stand-alone basis,
thereby freeing up additional letter of credit capacity for JRM and are
currently in the process of evaluating terms and conditions with certain
financial institutions. We also intend to seek a replacement credit facility for
JRM prior to the scheduled expiration of the New Credit Facility, in order to
provide for increased letter of credit capacity. Our ability to obtain such a
replacement facility will depend on numerous factors, including JRM's operating
performance and overall market conditions. If JRM experiences additional
significant contract costs on the EPIC spar projects as a result of unforeseen
events, we may be unable to fund all our budgeted capital expenditures and meet
all of our funding requirements for our contractual commitments. In this
instance, we would be required to defer certain capital expenditures, which in
turn could result in curtailment of certain of our operating activities or,
alternatively, require us to obtain additional sources of financing which may
not be available to us or may be cost prohibitive.
MI experienced negative cash flows in 2002, primarily due to payments of taxes
resulting from the exercise of MI's rights under the intercompany agreement we
discuss below. MI expects to meet its cash needs in 2003 through intercompany
borrowings from BWXT, which BWXT may fund through operating cash flows or
borrowings under the New Credit Facility.
40
MI is restricted, as a result of covenants in its debt instruments, in its
ability to transfer funds to MII and MII's other subsidiaries through cash
dividends or through unsecured loans or investments.
On a consolidated basis, we expect to incur negative cash flows in the first
three quarters of 2003. In addition, in March 2003, Moody's Investor Service
lowered MI's credit rating from B2 to B3. These factors may further impact our
access to capital and our ability to refinance the New Credit Facility, which is
scheduled to expire in April 2004. Our current credit rating and operating
performance in 2002 could limit our alternatives and ability to refinance the
New Credit Facility.
At December 31, 2002 and December 31, 2001, we had available various uncommitted
short-term lines of credit from banks totaling $10.2 million and $8.9 million,
respectively. We had no borrowings against these lines at December 31, 2002 or
December 31, 2001.
At December 31, 2002, we had total cash, cash equivalents and investments of
$348.4 million. Our investment portfolio consists primarily of investments in
government obligations and other highly liquid debt securities. The fair value
of our investments at December 31, 2002 was $173.2 million. As of December 31,
2002, we had pledged approximately $46.3 million fair value of these investments
to secure a letter of credit in connection with certain reinsurance agreements.
In addition, as of December 31, 2002, we had pledged investment portfolio assets
having a fair market value of approximately $107.8 million as cash collateral to
secure our obligations under the MII Credit Facility. In February 2003, the MII
Credit Facility was terminated, resulting in the release of the cash collateral.
Our cash requirements as of December 31, 2002 under current contractual
obligations are as follows:
Less than 1-3 3-5 After
Total 1 Year Years Years 5 Years
(In thousands)
Long-term debt $ 91,946 $ 9,500 $ 11,500 $ 9,721 $ 61,225
Capital leases $ 4,135 $ 477 $ 1,133 $ 1,265 $ 1,260
Operating leases $ 62,801 $ 6,932 $ 9,712 $ 6,509 $ 39,648
Take-or-pay contract $ 12,600 $ 1,800 $ 3,600 $ 3,600 $ 3,600
Note: Less than 1 Year includes MI's Series "A" Medium Term Notes
totaling $9.5 million, the repayment of which we funded on February 11,
2003.
Our contingent commitments, excluding amounts guaranteed related to B&W, under
letters of credit currently outstanding expire as follows:
Less than 1-3 3-5
Total 1 Year Years Years
(In thousands)
$ 183,160 $164,655 $3,190 $15,315
At March 24, 2003, our liquidity position was as follows (in millions):
JRM MI Other Consolidated
Cash, cash equivalents and investments $ 124 $ - $ 91 $ 215
Less: Pledged securities - - (46) (46)
Captive insurer requirements (21) - (30) (51)
Restricted foreign cash (8) - (1) (9)
- -------------------------------------------------------------------------------------------
Total free cash available 95 - 14 109
Amount available under New Credit Facility(1) 10 40 - 50
- -------------------------------------------------------------------------------------------
Total available liquidity $ 105 $ 40 $ 14 $ 159
===========================================================================================
(1) Reflects amount available for cash advances. We had an additional $9 million
in letter of credit capacity.
41
During the year ended December 31, 2002, MI repurchased or repaid the remaining
$208.8 million in aggregate principal amount of its 9.375% Notes due March 15,
2002 for aggregate payments of $208.3 million, resulting in an extraordinary net
after-tax gain of $0.3 million. In order to repay the remaining notes, MI
exercised its right pursuant to a stock purchase and sale agreement with MII
(the "Intercompany Agreement"). Under this agreement, MI had the right to sell
to MII and MII had the right to buy from MI, 100,000 units, each of which
consisted of one share of MII common stock and one share of MII Series A
Participating Preferred Stock. MI held this financial asset since prior to the
1982 reorganization transaction under which MII became the parent of MI. MI
received approximately $243 million from the exercise of the Intercompany
Agreement. MII funded that payment by (1) receiving dividends of $80 million
from JRM and $20 million from one of our captive insurance companies and (2)
reducing its short-term investments and cash and cash equivalents. The proceeds
paid to MI were subject to U.S. federal, state and other applicable taxes, and
we recorded a tax provision totaling approximately $85.4 million at December 31,
2001. Through December 31, 2002, we have made estimated tax payments for the
associated tax liability.
On February 21, 2000, B&W and certain of its subsidiaries entered into the DIP
Credit Facility to satisfy their working capital and letter of credit needs
during the pendency of their bankruptcy case. As a condition to borrowing or
obtaining letters of credit under the DIP Credit Facility, B&W must comply with
certain financial covenants. B&W had no borrowings outstanding under this
facility at December 31, 2002 or December 31, 2001. Letters of credit
outstanding under the DIP Credit Facility at December 31, 2002 totaled
approximately $140.9 million. This facility, which was scheduled to expire on
February 22, 2003, has been amended and extended to February 22, 2004, with an
additional one-year extension at the option of B&W. The amendment also provides
for a reduction of the facility from $300 million to $227.75 million. See Note
20 to our consolidated financial statements for further information on the DIP
Credit Facility.
At December 31, 2002, MII was a maker or guarantor on $9.4 million of letters of
credit issued in connection with B&W's operations prior to B&W's Chapter 11
filing. In addition, MII, MI and BWICO have agreed to indemnify B&W for any
customer draw on $51.4 million in letters of credit that have been issued under
the DIP Facility to replace or backstop letters of credit on which MII, MI and
BWICO were makers or guarantors as of the time of B&W's Chapter 11 filing. We
are not aware that B&W has ever had a letter of credit drawn on by a customer.
However, MII, MI and BWICO do not currently have sufficient cash or other liquid
resources available, either individually or combined, to satisfy their primary,
guaranty or indemnity obligations relating to letters of credit issued in
connection with B&W's operations should customer draws occur on a significant
amount of these letters of credit. In addition, as of December 31, 2002, MII
guaranteed surety bonds of approximately $121.0 million, of which $107.7 million
related to the business operations of B&W and its subsidiaries. We are not aware
that either MII or any of its subsidiaries, including B&W, have ever had a
surety bond called. However, MII does not currently have sufficient cash or
other liquid resources available if contract defaults require it to fund a
significant amount of its surety bond guarantee obligations. As to the guarantee
and indemnity obligations involving B&W, the proposed B&W Chapter 11 settlement
contemplates indemnification and other protections for MII, MI and BWICO.
As a result of its bankruptcy filing, B&W and its filing subsidiaries are
precluded from paying dividends to shareholders and making payments on any
pre-bankruptcy filing accounts or notes payable that are due and owing to any
other entity within the McDermott group of companies (the "Pre-Petition
Intercompany Payables") and other creditors during the pendency of the
bankruptcy case, without the Bankruptcy Court's approval.
As a result of the B&W bankruptcy filing, our access to the cash flows of B&W
and its subsidiaries has been restricted. In addition, MI and JRM and their
respective subsidiaries are limited, as a result of covenants in debt
instruments, in their ability to transfer funds to MII and its other
subsidiaries through cash dividends or through unsecured loans or investments.
Completion of the EPIC spar projects has and will continue to put a strain on
JRM's liquidity. As a result, we have assessed our ability to continue as a
viable business and have concluded that we can continue to fund our operating
activities and capital requirements. However, our ability to obtain a successful
and timely resolution to the B&W Chapter 11 proceedings has impacted our
42
ability to obtain additional financing. Our current credit rating has also
impacted our access to, and sources of, capital and has resulted in additional
collateral requirements for our debt obligations, as reflected under the New
Credit Facility.
As discussed in Note 20 to our consolidated financial statements, we are
continuing our discussions with the ACC and FCR concerning a potential
settlement. As a result of those discussions, we reached an agreement in
principle in August 2002 with representatives of the ACC and FCR on several key
terms, which served as a basis for continuing negotiations; however, a number of
significant issues and numerous details remain to be negotiated and resolved.
Should the remaining issues and details not be negotiated and resolved to the
mutual satisfaction of the parties, the parties may be unable to resolve the B&W
Chapter 11 proceedings through settlement. Additionally, the potential
settlement will be subject to various conditions, including the requisite
approval of the asbestos claimants, the Bankruptcy Court confirmation of a plan
of reorganization reflecting the settlement and the approval by MII's Board of
Directors and stockholders. The parties are currently working to address the
remaining unresolved issues and details in a joint plan of reorganization and
related settlement agreement. On December 19, 2002, B&W and its filing
subsidiaries, the ACC, the FCR, and MI filed drafts of a joint plan of
reorganization and settlement agreement, together with a draft of a related
disclosure statement, which include the following key terms:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
otherwise make available their rights to all applicable
insurance proceeds to the trust.
- MII would issue 4.75 million shares of restricted common stock
and cause those shares to be transferred to the trust. The
resale of the shares would be subject to certain limitations,
in order to provide for an orderly means of selling the shares
to the public. Certain sales by the trust would also be
subject to an MII right of first refusal. If any of the shares
issued to the trust are still held by the trust after three
years, and to the extent those shares could not have been sold
in the market at a price greater than or equal to $19.00 per
share (based on quoted market prices), taking into account the
restrictions on sale and any waivers of those restrictions
that may be granted by MII from time to time, MII would
effectively guarantee that those shares would have a value of
$19.00 per share on the third anniversary of the date of their
issuance. MII would be able to satisfy this guaranty
obligation by making a cash payment or through the issuance of
additional shares of its common stock. If MII elects to issue
shares to satisfy this guaranty obligation, it would not be
required to issue more than 12.5 million shares.
- MI would issue promissory notes to the trust in an aggregate
principal amount of $92 million. The notes would be unsecured
obligations and would provide for payments of principal of
$8.4 million per year to be payable over 11 years, with
interest payable on the outstanding balance at the rate of
7.5% per year. The payment obligations under those notes would
be guaranteed by MII.
- MII and all its past and present directors, officers and
affiliates, including its captive insurers, would receive the
full benefit of Section 524(g) of the Bankruptcy Code with
respect to personal injury claims attributable to B&W's use of
asbestos and would be released and protected from all pending
and future asbestos-related claims stemming from B&W's
operations, as well as other claims (whether contract claims,
tort claims or other claims) of any kind relating to B&W,
including but not limited to claims relating to the 1998
corporate reorganization that has been the subject of
litigation in the Chapter 11 proceedings.
- The settlement would be conditioned on the approval by MII's
Board of Directors and stockholders of the terms of the
settlement outlined above.
As the settlement discussions proceed, we expect that some of the court
proceedings in or relating to the B&W Chapter 11 case will continue and that the
parties will continue to maintain their previously asserted positions. The
Bankruptcy Court has directed the
43
parties to file an amended disclosure statement by March 28, 2003 that, among
other things, updates the status of the negotiations, and has set a disclosure
statement hearing for April 9, 2003. Following that filing and hearing, the
Bankruptcy Court will schedule further proceedings concerning this matter. The
process of finalizing and implementing the settlement could take up to a year,
depending on, among other things, the nature and extent of any objections or
appeals in the bankruptcy case.
Based on recent developments in the settlement negotiations, we determined that
a liability related to the proposed settlement is probable and that the value is
reasonably estimable. Accordingly, at December 31, 2002, we established an
estimate for the cost of the settlement of the B&W bankruptcy proceedings of
$110.0 million, including tax expense of $23.6 million. This charge is in
addition to the $220.9 million after-tax charge we recorded in the quarter ended
June 30, 2002 to write off our investment in B&W and other related assets. For
details regarding this estimate, see Note 20 to our consolidated financial
statements.
Despite our recent progress in our settlement discussions, there are continuing
risks and uncertainties that will remain with us until the requisite approvals
are obtained and the final settlement is reflected in a plan of reorganization
that is confirmed by the Bankruptcy Court pursuant to a final, nonappealable
order of confirmation. One of the remaining issues to be resolved as
negotiations relating to the B&W Chapter 11 proceedings continue relates to the
proposed spin-off of the MI/B&W pension plan. In our judgment, it has become
probable that we will spin off the portion of MI's qualified pension plan
related to the active and retired employees of B&W as part of a final
settlement. If we effect such a spin-off, we will be required to recognize any
curtailment and settlement gains or losses associated with the spin-off at the
time we effect the spin-off. Curtailment and settlement gains or losses are
determined based on actuarial calculations as of the date of the spin-off. Based
on data provided by our actuary, if this anticipated spin-off had occurred on
December 31, 2002, we would have recorded curtailment and settlement losses
totaling $117 million, with no associated tax benefits. In addition, based on
data provided by our actuary at December 31, 2002, we would have also recorded a
reduction in our charge to Other Comprehensive Income for recognition of our
minimum pension liability totaling approximately $226 million. If we had
recorded these items at December 31, 2002, our Stockholders' Equity (Deficit)
would have improved by approximately $109 million. However, under generally
accepted accounting principles, we cannot record the effect of the spin-off
until the event actually occurs. We anticipate that the spin-off will occur in
2003. We will record the effect of the spin-off based on actuarial calculations
as of the date of the spin-off, which could be materially different from the
effect that would have been recorded if the spin-off had been completed as of
December 31, 2002.
NEW ACCOUNTING STANDARDS
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that we no longer amortize goodwill,
but instead perform periodic testing for impairment. We completed our
transitional goodwill impairment test and did not incur an impairment charge as
of January 1, 2002. However, due to the deterioration in JRM's financial
performance during the three months ended September 30, 2002 and our revised
expectations concerning JRM's future earnings and cash flow, we tested the
goodwill of the Marine Construction Services segment for impairment and
determined that an impairment charge was warranted. See Note 1 to our
consolidated financial statements for disclosure concerning the goodwill
impairment charge and our reconciliation of reported net income to adjusted net
income, which excludes goodwill amortization expense for all periods presented.
Effective January 1, 2002, we also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Pronouncements Bulletin No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. See Note 2 to our consolidated
financial statements for information on our discontinued operations.
44
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss.
We must adopt SFAS No. 143 effective January 1, 2003 and expect to record as the
cumulative effect of an accounting change income of approximately $3.0 million
upon adoption.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting
for Intangible Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for
Leases." In addition, it amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings or describe their
applicability under changed conditions. We must adopt the provisions of SFAS No.
145 related to the rescission of SFAS No. 4 as of January 1, 2003, and we expect
to reclassify the extraordinary gain on extinguishment of debt we recorded in
2001 and 2002, because (as a result of the change in accounting principles) it
will no longer meet the criteria for classification as an extraordinary item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. It is effective for
exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. We do not expect the adoption of the
recognition and measurement provisions of this Interpretation to have a material
effect on our consolidated financial position or results of operations. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Therefore, our financial
statements for the year ended December 31, 2002 contain the disclosures required
by Interpretation No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002 and for interim periods beginning
after December 15, 2002. Our financial statements for the year ended December
31, 2002 contain the disclosures required by SFAS No. 148.
45
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk from changes in interest rates relates primarily to
our investment portfolio, which is primarily comprised of investments in U.S.
Government obligations and other highly liquid debt securities denominated in
U.S. dollars. We are averse to principal loss and ensure the safety and
preservation of our invested funds by limiting default risk, market risk and
reinvestment risk. All our investments in debt securities are classified as
available-for-sale.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of these
obligations have fixed interest rates. We have exposure to changes in interest
rates on our short-term uncommitted lines of credit and the New Credit Facility
(see Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources). At December 31, 2002
we had $45.6 million of outstanding borrowings under our credit facilities. At
December 31, 2001, we had no outstanding borrowings under our credit facilities.
We have operations in many foreign locations, and, as a result, our financial
results could be significantly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in those foreign markets. In
order to manage the risks associated with foreign currency exchange
fluctuations, we regularly hedge those risks with foreign currency forward
contracts. We do not enter into speculative forward contracts.
Interest Rate Sensitivity
The following tables provide information about our financial instruments that
are sensitive to changes in interest rates. The tables present principal cash
flows and related weighted-average interest rates by expected maturity dates.
Principal Amount by Expected Maturity
(In thousands)
At December 31, 2002:
Fair Value
at
Years Ending December 31, December 31,
2003 2004 2005 2006 2007 Thereafter Total 2002
Investments(1) $ 143,857 $ 27,830 $ - $ - $ - $ - $ 171,687 $ 173,227
Average Interest Rate 0.54% 3.16% - - - -
Long-term Debt-
Fixed Rate $ 9,500 $ - $ 11,500 $ 5,484 $ 4,250 $ 61,225 $ 91,959 $ 56,596
Average Interest Rate 9.00% - 7.81% 7.38% 6.80% 8.44%
At December 31, 2001:
Fair Value
at
Years Ending December 31, December 31,
2002 2003 2004 2005 2006 Thereafter Total 2001
Investments $ 81,411 $ 227,270 $ 2,700 $ - $ - $ - $ 311,381 $ 331,003
Average Interest Rate 4.54% 3.20% 5.25%
Long-term Debt-
Fixed Rate $ 209,018 $ 11,501 $ 209 $11,715 $ 5,706 $ 67,239 $ 305,388 $ 292,849
Average Interest Rate 9.37% 8.14% 5.79% 7.77% 7.32% 8.27%
(1)In February 2003, we liquidated approximately $108 million of our investment
portfolio for working capital and general corporate purposes.
Exchange Rate Sensitivity
The following tables provide information about our foreign currency forward
contracts and present such information in U.S. dollar equivalents. The tables
present notional amounts and related weighted-average exchange rates by expected
(contractual) maturity dates and constitute a forward-looking statement. These
notional amounts generally are used to calculate the contractual payments to be
exchanged under the contract.
46
At December 31, 2002 (all forward contracts are expected to mature in 2003):
Year Ending Fair Value Average Contractual
Foreign Currency December 31, 2003 at December 31, 2002 Exchange Rate
Forward Contracts to Purchase
Foreign Currencies for U.S. Dollars:
Indonesian Rupiah $ 3,679 $ 157 9703.900
Euro $ 11,260 $ 245 1.025
Pound Sterling $ 525 $ 3 1.596
Forward Contracts to Sell Foreign
Currencies for U.S. Dollars:
Swedish Krona $ 675 $ (18) 10.668
Pound Sterling $ 263 $ (1) 1.598
At December 31, 2001 (all forward contracts matured in 2002):
Year Ending Fair Value Average Contractual
Foreign Currency December 31, 2002 at December 31, 2001 Exchange Rate
Forward Contracts to Purchase
Foreign Currencies for U.S. Dollars:
Indonesian Rupiah $ 14,249 $ (722) 10667.600
Australian Dollar $ 11,161 $ (844) 0.549
Euro $ 10,017 $ (250) 0.912
Singapore Dollar $ 7,390 $ (127) 1.810
Forward Contracts to Sell
Foreign Currencies for U.S. Dollars:
Euro $ 385 $ (1) 0.900
Pound Sterling $ 340 $ (11) 1.460
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
47
R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S
To the Board of Directors and Stockholders of
McDermott International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of loss, comprehensive loss, stockholders' equity
(deficit), and cash flows present fairly, in all material respects, the
financial position of McDermott International, Inc. and subsidiaries (the
"Company") at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets and
the accounting for the impairment or disposal of long lived assets on January 1,
2002.
As discussed in Notes 1, 12, 20 and 21 to the consolidated financial statements,
on February 22, 2000, The Babcock & Wilcox Company ("B&W"), a wholly owned
subsidiary of the Company, filed a voluntary petition with the U.S. Bankruptcy
Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Subsequent to
this Filing, certain parties asserted that assets transferred by B&W to its
parent as part of a corporate reorganization during fiscal year 1999 should be
returned to B&W. On February 8, 2002, a ruling in favor of the Company was
issued by the U.S. Bankruptcy Court on the assets transferred by B&W. This
ruling is currently under appeal. The Company has recently entered into a
preliminary settlement agreement with certain claimants to resolve the Chapter
11 filing and the transferred asset claims, as well as other matters, and has
filed a proposed consensual plan of reorganization with the U.S. Bankruptcy
Court. The final resolution and timing of these matters remain uncertain. In
addition, during 2002, the Company's wholly owned subsidiary, J. Ray McDermott,
S.A., recorded significant losses on certain construction projects. These
matters, among others, have negatively impacted the Company's results of
operations for the year ended December 31, 2002 and its liquidity.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
March 24, 2003
48
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2002 2001
---- ----
(In thousands)
Current Assets:
Cash and cash equivalents $ 175,177 $ 196,912
Investments 108,269 158,000
Accounts receivable - trade, net 194,603 139,598
Accounts receivable from The Babcock & Wilcox Company 12,273 3,681
Accounts and notes receivable - unconsolidated affiliates 17,695 69,368
Accounts receivable - other 64,718 34,833
Contracts in progress 149,162 97,326
Inventories 686 1,825
Deferred income taxes 3,350 59,370
Other current assets 36,972 52,490
- ------------------------------------------------------------------------------------------------------
Total Current Assets 762,905 813,403
- ------------------------------------------------------------------------------------------------------
\
Property, Plant and Equipment:
Land 12,520 19,897
Buildings 132,538 138,443
Machinery and equipment 1,032,244 1,022,932
Property under construction 62,625 37,378
- ------------------------------------------------------------------------------------------------------
1,239,927 1,218,650
Less accumulated depreciation 885,827 864,751
- ------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 354,100 353,899
- ------------------------------------------------------------------------------------------------------
Investments:
Government obligations 48,681 171,702
Other investments 16,277 1,301
- ------------------------------------------------------------------------------------------------------
Total Investments 64,958 173,003
- ------------------------------------------------------------------------------------------------------
Investment in The Babcock & Wilcox Company - 186,966
- ------------------------------------------------------------------------------------------------------
Accounts Receivable from The Babcock & Wilcox Company - 17,489
- ------------------------------------------------------------------------------------------------------
Goodwill 12,926 330,705
- ------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 19,311 152,510
- ------------------------------------------------------------------------------------------------------
Other Assets 63,971 75,865
- ------------------------------------------------------------------------------------------------------
TOTAL $ 1,278,171 $ 2,103,840
======================================================================================================
See accompanying notes to consolidated financial statements.
49
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31,
2002 2001
---- ----
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 55,577 $ 209,506
Accounts payable 166,251 118,811
Accounts payable to The Babcock & Wilcox Company 32,379 34,098
Accrued employee benefits 62,109 91,596
Accrued liabilities - other 185,320 203,695
Accrued contract cost 53,335 26,367
Advance billings on contracts 329,557 170,329
U.S. and foreign income taxes payable 32,521 123,985
- -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 917,049 978,387
- -----------------------------------------------------------------------------------------------------------------
Long-Term Debt 86,104 100,393
- -----------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 26,898 23,536
- -----------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 12,258 15,083
- -----------------------------------------------------------------------------------------------------------------
Self-Insurance 71,918 67,878
- -----------------------------------------------------------------------------------------------------------------
Pension Liability 392,072 42,063
- -----------------------------------------------------------------------------------------------------------------
Accrued Cost of The Babcock & Wilcox Company Bankruptcy Settlement 86,377 -
- -----------------------------------------------------------------------------------------------------------------
Other Liabilities 102,252 106,390
- -----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies. (Note 10)
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficit):
Common stock, par value $1.00 per
share, authorized 150,000,000 shares; issued
66,351,478 and 63,733,257 shares at
December 31, 2002 and 2001, respectively 66,351 63,733
Capital in excess of par value 1,093,428 1,077,148
Accumulated deficit (1,027,318) (250,924)
Treasury stock at cost, 2,061,407 and 2,005,792 shares at
December 31, 2002 and 2001, respectively (62,792) (62,736)
Accumulated other comprehensive loss (486,426) (57,111)
- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) (416,757) 770,110
- -----------------------------------------------------------------------------------------------------------------
TOTAL $ 1,278,171 $ 2,103,840
=================================================================================================================
50
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share amounts)
Revenues $ 1,748,681 $1,896,948 $ 1,813,670
- ------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 1,744,138 1,657,889 1,613,742
Loss on write-off of investment in The
Babcock & Wilcox Company 224,664 - -
Impairment of J. Ray McDermott, S.A. goodwill 313,008 - -
Losses (gains) on asset disposals and impairments - net 7,849 3,739 2,803
Selling, general and administrative expenses 160,474 194,041 182,457
- ------------------------------------------------------------------------------------------------------
2,450,133 1,855,669 1,799,002
- ------------------------------------------------------------------------------------------------------
Equity in Income (Loss) from Investees 27,692 34,093 (9,795)
- ------------------------------------------------------------------------------------------------------
Operating Income (Loss) (673,760) 75,372 4,873
- ------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 8,560 19,561 27,108
Interest expense (15,124) (39,663) (43,605)
Estimated loss on The Babcock & Wilcox Company
bankruptcy settlement (86,377) - -
Gain on sale of McDermott Engineers &
Constructors (Canada) Ltd. - 27,996 -
Curtailments and settlements of
employee benefit plans - (4,000) (5,297)
Other-net (4,440) 6,641 2,692
- ------------------------------------------------------------------------------------------------------
(97,381) 10,535 (19,102)
- ------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Provision for Income Taxes
and Extraordinary Item (771,141) 85,907 (14,229)
Provision for Income Taxes 15,063 110,329 10,635
- ------------------------------------------------------------------------------------------------------
Loss from Continuing Operations
before Extraordinary Item (786,204) (24,422) (24,864)
Income from Discontinued Operations 9,469 3,565 2,782
- ------------------------------------------------------------------------------------------------------
Loss before Extraordinary Item (776,735) (20,857) (22,082)
Extraordinary Gain on Debt Extinguishment 341 835 -
- ------------------------------------------------------------------------------------------------------
Net Loss $ (776,394) $ (20,022) $ (22,082)
======================================================================================================
Loss per Common Share:
Basic:
Loss from Continuing Operations
before Extraordinary Item $ (12.71) $ (0.40) $ (0.42)
Net Loss $ (12.55) $ (0.33) $ (0.37)
Diluted:
Loss from Continuing Operations
before Extraordinary Item $ (12.71) $ (0.40) $ (0.42)
Net Loss $ (12.55) $ (0.33) $ (0.37)
===================================================================================================
Cash Dividends:
Per Common Share $ - $ - $ 0.10
===================================================================================================
See accompanying notes to consolidated financial statements.
51
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Net Loss $ (776,394) $ (20,022) $ (22,082)
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments 267 (4,826) (11,615)
Reclassification adjustment for impairments
of investments 18,435 - -
Sales of investments in foreign entities 1,041 1,513 (6,077)
Unrealized gains (losses) on derivative financial instruments:
Unrealized gains (losses) on derivative financial instruments 3,858 (2,506) -
Reclassification adjustment for (gains) losses included in net income (534) 266 -
Minimum pension liability adjustment:
Net of tax benefits of $0, $1,554,000 and $1,250,000 in the years
ended December 31, 2002, 2001 and 2000, respectively (451,756) (2,849) 2,372
Deconsolidation of The Babcock & Wilcox Company - - 2,562
Unrealized gains on investments:
Unrealized gains arising during the period,
net of taxes of $0, $30,000 and $210,000 in the years
ended December 31, 2002, 2001 and 2000, respectively 371 9,286 4,887
Reclassification adjustment for net gains included in
net loss, net of tax benefits of $0 and $162,000 in the
years ended December 31, 2002 and 2001, respectively (997) (3,143) -
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss (429,315) (2,259) (7,871)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Loss $(1,205,709) $ (22,281) $ (29,953)
===========================================================================================================================
See accompanying notes to consolidated financial statements.
52
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Total
Common Stock Capital Other Stockholders'
------------ in Excess Accumulated Comprehensive Treasury Equity
Shares Par Value of Par Value Deficit Loss Stock (Deficit)
------ --------- ------------ ------- ---- ----- --------
(In thousands, except for share amounts)
Balance December 31, 1999 61,625,434 61,625 1,048,848 (208,904) (46,980) (62,731) 791,858
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loss - - - (22,082) - - (22,082)
Minimum pension liability - - - - 4,933 - 4,933
Unrealized gain on investments - - - - 4,887 - 4,887
Translation adjustments - - - - (11,615) - (11,615)
Common stock dividends - - - (5,993) - - (5,993)
Exercise of stock options 3,851 4 14 - - - 18
Vesting of deferred stock units 947 1 - - - - 1
Restricted stock purchases - net 40,000 40 (42) - - - (2)
Directors stock plan 1,863 2 - - - - 2
Contributions to thrift plan 910,287 910 7,602 - - - 8,512
Sale of investments
in foreign entities - - - 6,077 (6,077) - -
Purchase of treasury shares - - - - - (5) (5)
Stock based compensation charges - - 6,089 - - - 6,089
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 62,582,382 62,582 1,062,511 (230,902) (54,852) (62,736) 776,603
Net loss - - - (20,022) - - (20,022)
Minimum pension liability - - - - (2,849) - (2,849)
Unrealized gain on investments - - - - 6,143 - 6,143
Translation adjustments - - - - (3,313) - (3,313)
Unrealized loss on derivatives - - - - (2,240) - (2,240)
Exercise of stock options 11,674 12 98 - - - 110
Vesting of deferred stock units 100,701 101 (101) - - - -
Restricted stock purchases - net 324,007 324 (347) - - - (23)
Directors stock plan 2,550 2 - - - - 2
Contributions to thrift plan 711,943 712 7,272 - - - 7,984
Stock based compensation charges - - 7,715 - - - 7,715
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 63,733,257 $ 63,733 $ 1,077,148 $ (250,924) $ (57,111) $(62,736) $ 770,110
Net loss - - - (776,394) - - (776,394)
Minimum pension liability - - - - (451,756) - (451,756)
Unrealized loss on investments - - - - (626) - (626)
Translation adjustments - - - - 19,743 - 19,743
Unrealized gain on derivatives - - - - 3,324 - 3,324
Exercise of stock options 113,800 113 1,281 - - - 1,394
Vesting of deferred stock units 6,123 6 (6) - - - -
Restricted stock issuances - net 403,700 404 (816) - - (56) (468)
Performance based stock issuances 699,711 700 4,238 - - - 4,938
Contributions to thrift plan 1,394,887 1,395 8,481 - - - 9,876
Stock based compensation charges - - 3,102 - - - 3,102
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 66,351,478 $ 66,351 $ 1,093,428 $(1,027,318) $(486,426) $(62,792) $(416,757)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
53
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (776,394) $ (20,022) $ (22,082)
Depreciation and amortization 40,811 62,371 63,890
Income or loss of investees, less dividends 7,156 2,616 23,850
Loss on asset disposals and impairments - net 7,850 3,733 2,800
Provision for (benefit from) deferred taxes (33,678) 9,269 20,918
Gain on sale of businesses (15,044) (27,996) -
Impairment of J. Ray McDermott, S.A. goodwill 313,008 - -
Loss on write-off of investment in The Babcock & Wilcox Company 224,664 - -
Extraordinary gain on debt extinguishment (341) (835) -
Estimated loss on The Babcock & Wilcox bankruptcy settlement 86,377 - -
Deconsolidation of The Babcock & Wilcox Company - - (19,424)
Other 12,093 1,112 12,880
Changes in assets and liabilities, net
of effects from acquisitions and divestitures:
Accounts receivable (51,733) (31,066) 29,554
Accounts payable 53,332 28,337 12,148
Inventories 176 4,293 (4,134)
Net contracts in progress and advance billings 105,498 82,088 (18,231)
Income taxes (18,635) 95,113 (15,845)
Accrued liabilities 16,844 (32,107) (40,680)
Products and environmental liabilities 3,091 3,085 (10,332)
Other, net 15,852 (4,176) (87,023)
Proceeds from insurance for products liability claims - - 26,427
Payments of products liability claims - - (23,782)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (9,073) 175,815 (49,066)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (644) (2,707)
Purchases of property, plant and equipment (64,852) (45,008) (49,300)
Purchases of available-for-sale securities (1,361,752) (1,352,266) (114,449)
Maturities of available-for-sale securities 744,538 161,901 108,437
Sales of available-for-sale securities 775,441 1,226,107 26,382
Proceeds from asset disposals 41,095 53,056 4,778
Investments in equity investees - (800) (1,132)
Other 49 (162) -
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 134,519 42,184 (27,991)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (208,416) (15,110) (2)
Increase (decrease) in short-term borrowing 60,056 (96,062) 9,676
Issuance of common stock 1,394 1,000 47
Dividends paid - - (8,972)
Purchase of McDermott International, Inc. stock - - (5)
Other (334) 4,500 (999)
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (147,300) (105,672) (255)
- ------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 119 (35) (802)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,735) 112,292 (78,114)
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 196,912 84,620 162,734
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 175,177 $ 196,912 $ 84,620
============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 20,792 $ 38,166 $ 44,872
Income taxes (net of refunds) $ 119,962 $ (2,057) $ 12,402
============================================================================================================
See accompanying notes to consolidated financial statements.
54
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
We have presented our consolidated financial statements in U.S. Dollars in
accordance with accounting principles generally accepted in the United States
("GAAP"). These consolidated financial statements include the accounts of
McDermott International, Inc. and its subsidiaries and controlled joint
ventures. We use the equity method to account for investments in joint ventures
and other entities we do not control, but over which we have significant
influence. We have eliminated all significant intercompany transactions and
accounts. We have reclassified certain amounts previously reported to conform
with the presentation at December 31, 2002. We present the notes to our
consolidated financial statements on the basis of continuing operations, unless
otherwise stated.
McDermott International, Inc., a Panamanian corporation ("MII"), is the parent
company of the McDermott group of companies, which includes:
- J. Ray McDermott, S.A., a Panamanian subsidiary of MII
("JRM"), and its consolidated subsidiaries;
- McDermott Incorporated, a Delaware subsidiary of MII ("MI"),
and its consolidated subsidiaries;
- Babcock & Wilcox Investment Company, a Delaware subsidiary of
MI ("BWICO");
- BWX Technologies, Inc., a Delaware subsidiary of BWICO
("BWXT"), and its consolidated subsidiaries; and
- The Babcock & Wilcox Company, an unconsolidated Delaware
subsidiary of BWICO ("B&W").
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve their asbestos liability. As of February
22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy
Court and, as a result, our access to cash flows of B&W and its subsidiaries is
restricted.
Due to the bankruptcy filing, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
consolidated financial statements, and we have been presenting our investment in
B&W on the cost method. The Chapter 11 filing, along with subsequent filings and
negotiations, led to increased uncertainty with respect to the amounts, means
and timing of the ultimate settlement of asbestos claims and the recovery of our
investment in B&W. Due to this increased uncertainty, we wrote off our net
investment in B&W in the quarter ended June 30, 2002. The total impairment
charge of $224.7 million included our investment in B&W of $187.0 million and
other related assets totaling $37.7 million, primarily consisting of accounts
receivable from B&W, for which we provided an allowance of $18.2 million. On
December 19, 2002, drafts of a joint plan of reorganization and settlement
agreement, together with a draft of a related disclosure statement, were filed
in the Chapter 11 proceedings, and we determined that a liability related to the
proposed settlement is probable and that the value is reasonably estimable.
Accordingly, as of December 31, 2002, we established an estimate for the cost of
the settlement of the B&W bankruptcy proceedings of $110.0 million, including
tax expense of $23.6 million. See Note 20 for details regarding this estimate
and for further information regarding developments in negotiations relating to
the B&W Chapter 11 proceedings.
Use of Estimates
We use estimates and assumptions to prepare our financial statements in
conformity with GAAP. These estimates and assumptions affect the amounts we
report in our financial statements and accompanying notes. Our actual results
could differ from those estimates. Variances could result in a material effect
on our results of operations and financial position in future periods.
55
Earnings Per Share
We have computed earnings per common share on the basis of the weighted average
number of common shares, and, where dilutive, common share equivalents,
outstanding during the indicated periods.
Investments
Our investments, primarily government obligations and other highly liquid debt
securities, are classified as available-for-sale and are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive loss. We classify investments available for
current operations in the balance sheet as current assets, while we classify
investments held for long-term purposes as noncurrent assets. We adjust the
amortized cost of debt securities for amortization of premiums and accretion of
discounts to maturity. That amortization is included in interest income. We
include realized gains and losses on our investments in other income (expense).
The cost of securities sold is based on the specific identification method. We
include interest on securities in interest income.
Foreign Currency Translation
We translate assets and liabilities of our foreign operations, other than
operations in highly inflationary economies, into U.S. Dollars at current
exchange rates, and we translate income statement items at average exchange
rates for the periods presented. We record adjustments resulting from the
translation of foreign currency financial statements as a component of
accumulated other comprehensive loss. We report foreign currency transaction
gains and losses in income. We have included in other income (expense)
transaction gains (losses) of ($2.8) million, ($1.7) million and $3.5 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
Contracts and Revenue Recognition
We generally recognize contract revenues and related costs on a
percentage-of-completion method for individual contracts or combinations of
contracts based on work performed, man hours, or a cost-to-cost method, as
applicable to the product or activity involved. Certain partnering contracts
contain a risk-and-reward element, whereby a portion of total compensation is
tied to the overall performance of the alliance partners. We include revenues
and related costs so recorded, plus accumulated contract costs that exceed
amounts invoiced to customers under the terms of the contracts, in contracts in
progress. We include in advance billings on contracts billings that exceed
accumulated contract costs and revenues and costs recognized under the
percentage-of-completion method. Most long-term contracts contain provisions for
progress payments. We expect to invoice customers for all unbilled revenues. We
review contract price and cost estimates periodically as the work progresses and
reflect adjustments proportionate to the percentage-of-completion in income in
the period when those estimates are revised. We make provisions for all known or
anticipated losses. Variations from estimated contract performance could result
in material adjustments to operating results for any fiscal quarter or year. We
include claims for extra work or changes in scope of work to the extent of costs
incurred in contract revenues when we believe collection is probable. At
December 31, 2002 and 2001, we have included in accounts receivable
approximately $19.5 million relating to commercial contracts claims whose final
settlement is subject to future determination through negotiations or other
procedures that had not been completed.
December 31,
2002 2001
---- ----
(In thousands)
Included in Contracts in Progress:
Costs incurred less costs of revenue recognized $ 46,217 $ 45,032
Revenues recognized less billings to customers 102,945 52,294
- -------------------------------------------------------------------------------------------------
Contracts in Progress $ 149,162 $ 97,326
=================================================================================================
56
December 31,
2002 2001
---- ----
(In thousands)
Included in Advance Billings on Contracts:
Billings to customers less revenues recognized $ 477,599 $ 221,209
Costs incurred less costs of revenue recognized (148,042) (50,880)
- -------------------------------------------------------------------------------------------------
Advance Billings on Contracts $ 329,557 $ 170,329
=================================================================================================
We have included in accounts receivable - trade the following amounts
representing retainages on contracts:
December 31,
2002 2001
---- ----
(In thousands)
Retainages $ 34,137 $ 32,156
=================================================================================================
Retainages expected to be collected after one year $ 14,325 $ 13,082
=================================================================================================
Of the long-term retainages at December 31, 2002, we anticipate collecting $11.9
million in 2004 and $2.4 million in 2005.
Inventories
We carry our inventories at the lower of cost or market. We determine cost on an
average cost basis. Inventories are summarized below:
December 31,
2002 2001
---- ----
(In thousands)
Raw Materials and Supplies $ 393 $ 1,733
Work in Progress 293 92
- -------------------------------------------------------------
Total Inventories $ 686 $ 1,825
=============================================================
Comprehensive Loss
The components of accumulated other comprehensive loss included in stockholders'
equity (deficit) are as follows:
December 31,
2002 2001
---- ----
(In thousands)
Currency Translation Adjustments $ (30,659) $ (50,402)
Net Unrealized Gain on Investments 675 1,301
Net Unrealized Gain (Loss) on Derivative Financial Instruments 1,084 (2,240)
Minimum Pension Liability (457,526) (5,770)
- -----------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss $ (486,426) $ (57,111)
===============================================================================================
Warranty Expense
We accrue estimated expense to satisfy contractual warranty requirements,
primarily of our Government Operations segment, when we recognize the associated
revenue on the related contracts. We include warranty costs associated with our
Marine Construction Services segment as a component of our total contract cost
estimate to satisfy contractual requirements. In addition, we make specific
provisions where we expect the actual costs of a warranty to significantly
exceed the accrued estimates. Such provisions could have a material effect on
our consolidated financial position, results of operations and cash flows.
Environmental Clean-up Costs
We accrue for future decommissioning of our nuclear facilities that will permit
the release of these facilities to unrestricted use at the end of each
facility's life, which is a requirement of our licenses from the Nuclear
Regulatory Commission. We reflect the accruals, based on the estimated cost of
those activities and net of any cost-sharing arrangements, over the economic
useful life of each facility, which we typically estimate at 40 years. The total
estimated cost of future decommissioning of our nuclear facilities is estimated
to be $30.0
57
million, of which we have recorded $1.5 million in accrued liabilities - other
and $9.9 million in other liabilities. We adjust the estimated costs as further
information develops or circumstances change. We do not discount costs of future
expenditures for environmental cleanup to their present value. An exception to
this accounting treatment relates to the work we perform for one facility, for
which the U.S. Government is obligated to pay all the decommissioning costs. We
recognize recoveries of environmental clean-up costs from other parties as
assets when we determine their receipt is probable.
Research and Development
Research and development activities are related to development and improvement
of new and existing products and equipment and conceptual and engineering
evaluation for translation into practical applications. We charge to operations
the costs of research and development that is not performed on specific
contracts as we incur them. These expenses totaled approximately $13.8 million,
$11.7 million and $15.4 million in the years ended December 31, 2002, 2001 and
2000, respectively. In addition, our customers paid for expenditures we made on
research and development activities of approximately $47.8 million, $46.6
million and $34.8 million in the years ended December 31, 2002, 2001 and 2000,
respectively.
Property, Plant and Equipment
We carry our property, plant and equipment at cost, reduced by provisions to
recognize economic impairment when we determine impairment has occurred.
Except for major marine vessels, we depreciate our property, plant and equipment
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. We depreciate
major marine vessels using the units-of-production method based on the
utilization of each vessel. Our depreciation expense calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation or 50% of
cumulative straight-line depreciation. Our depreciation expense was $35.7
million, $38.2 million and $38.0 million for the years ended December 31, 2002,
2001 and 2000, respectively.
Effective January 1, 2002, based on a review performed by us and our independent
consultants, we changed our estimate of the useful lives of new major marine
vessels from 12 years to 25 years to better reflect the service lives of our
assets and industry norms. Consistent with this change, we also extended the
lives of major upgrades to existing vessels. We continue to depreciate our major
marine vessels using the units-of-production method, based on the utilization of
each vessel. The change in estimated useful lives reduced our operating loss by
approximately $3.2 million for the year ended December 31, 2002.
We expense the costs of maintenance, repairs and renewals that do not materially
prolong the useful life of an asset as we incur them except for drydocking
costs. We accrue estimated drydock costs, including labor, raw materials,
equipment and regulatory fees, for our marine fleet over the period of time
between drydockings, which is generally 3 to 5 years. We accrue drydock costs in
advance of the anticipated future drydocking, commonly known as the "accrue in
advance" method. Actual drydock costs are charged against the liability when
incurred and any differences between actual costs and accrued costs are
recognized over the remaining months of the drydock cycle. Such differences
could have a material effect on our consolidated financial position, results of
operations and cash flows.
Goodwill
On January 1, 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, we
no longer amortize goodwill to earnings, but instead we periodically test for
impairment. Due to the deterioration in our Marine Construction Services
segment's financial performance during the three months ended September 30, 2002
and our revised expectations concerning this segment's future earnings and cash
flow, we tested the goodwill of the Marine
58
Construction Services segment for impairment as of September 30, 2002. With the
assistance of an independent consultant, we completed the first step of the
goodwill impairment test and determined that the carrying amount including
goodwill of the reporting unit, JRM, exceeded its fair value at September 30,
2002. Accordingly, we concluded that it was probable that a goodwill impairment
loss had occurred and recorded an estimated impairment charge of $313 million,
which was the total amount of JRM's goodwill. The fair value of JRM was
estimated using a discounted cash flow approach. We completed the second step of
the goodwill impairment test, the measurement of the potential loss, during the
quarter ended December 31, 2002 and concluded that no adjustment to the
estimated loss was required.
Following is our reconciliation of reported net loss to adjusted net loss, which
excludes goodwill amortization expense (including related tax effects), for the
periods presented:
Year Ended
December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share amounts)
Loss before extraordinary item $(776,735) $ (20,857) $(22,082)
Add back: goodwill amortization - 19,480 20,130
-------------------------------------------
Adjusted loss before extraordinary item $(776,735) $ (1,377) $ (1,952)
===========================================
Net loss $(776,394) $ (20,022) $(22,082)
Add back: goodwill amortization - 19,480 20,130
-------------------------------------------
Adjusted net loss $(776,394) $ (542) $ (1,952)
===========================================
Basic and diluted loss per share before
extraordinary item:
Loss before extraordinary item $ (12.56) $ (0.34) $ (0.37)
Add back: goodwill amortization - 0.32 0.34
-------------------------------------------
Adjusted basic and diluted loss per share before
extraordinary item $ (12.56) $ (0.02) $ (0.03)
===========================================
Basic and diluted loss per share:
Net loss $ (12.55) $ (0.33) $ (0.37)
Add back: goodwill amortization - 0.32 0.34
-------------------------------------------
Adjusted basic and diluted loss per share $ (12.55) $ (0.01) $ (0.03)
===========================================
59
Changes in the carrying amount of goodwill by segment are as follows:
Power Power
Marine Generation Generation
Construction Government Industrial Systems Systems
Services Operations Operations - B&W - Other Total
(In thousands)
Balance as of January 1, 2000 $ 349,023 $ 14,517 $ 1,149 $ 79,531 $ - $ 444,220
Deconsolidation of B&W - - (78,897) - (78,897)
Acquisition of various business units
of the Ansaldo Volund Group - - - - 5,745 5,745
Amortization expense (18,007) (796) (357) (635) (335) (20,130)
Other including currency
translation adjustments (1) 1 - 1 - 1
-------------------------------------------------------------------------------
Balance as of December 31, 2000 331,015 13,722 792 - 5,410 350,939
Acquisition of various business units
of the Ansaldo Volund Group - - - - (1,109) (1,109)
Amortization expense (18,007) (796) (268) - (409) (19,480)
Other including currency
translation adjustments - - (524) - 879 355
-------------------------------------------------------------------------------
Balance as of December 31, 2001 313,008 12,926 - - 4,771 330,705
Impairment loss (313,008) - - - - (313,008)
Sale of Volund - - - - (5,231) (5,231)
Other including currency
translation adjustments - - - - 460 460
-------------------------------------------------------------------------------
Balance as of December 31, 2002 $ - $ 12,926 $ - $ - $ - $ 12,926
===============================================================================
Other Intangible Assets
Pursuant to our adoption of SFAS No. 142, we evaluated our other intangible
assets and determined that all our other intangible assets as of January 1, 2002
have definite useful lives. We continue to amortize these intangible assets. We
have included our other intangible assets, consisting primarily of rights to use
technology, in other assets, as follows:
December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Gross cost $ 959 $ 9,459 $ 9,477
Accumulated amortization (556) (8,386) (7,826)
- -------------------------------------------------------------------------------------
Net $ 403 $ 1,073 $ 1,651
=====================================================================================
The following summarizes the changes in the carrying amount of other intangible
assets:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Balance at beginning of period $ 1,073 $ 1,651 $ 8,083
Additions (reductions) 108 (18) 977
Deconsolidation of B&W - - (4,980)
Amortization expense - non-competition
agreements - - (267)
Amortization expense - technology rights (778) (560) (2,162)
- -----------------------------------------------------------------------------------------------
Balance at end of period $ 403 $ 1,073 $ 1,651
===============================================================================================
During the year ended December 31, 2000, we acquired certain technology rights
with a cost of $902,000, an estimated useful life of 5 years and no residual
value.
Estimated amortization expense for the next five fiscal years is: 2003 -
$195,000; 2004 - $195,000; 2005 - $12,000; 2006 - $0; 2007 - $0.
60
Other Non-Current Assets
We have included deferred debt issuance costs and investments in oil and gas
properties in other assets. We amortize deferred debt issuance cost as interest
expense over the life of the related debt. We report depletion expense of
investments in oil and gas properties as amortization expense. Following are the
changes in the carrying amount of these assets:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Balance at beginning of period $ 6,878 $ 8,802 $ 6,264
Additions - 1,611 7,467
Deconsolidation of B&W - - (76)
Depletion expense - oil and gas investment (691) (797) (543)
Interest expense - debt issuance costs (2,580) (2,738) (4,310)
- -----------------------------------------------------------------------------------------------
Balance at end of period $ 3,607 $ 6,878 $ 8,802
===============================================================================================
Capitalization of Interest Cost
We capitalize interest in accordance with SFAS No. 34, "Capitalization of
Interest Cost." We incurred total interest of $17.9 million, $41.0 million and
$46.1 million in the years ended December 31, 2002, 2001 and 2000, respectively,
of which we capitalized $2.8 million, $1.4 million and $2.4 million in the years
ended December 31, 2002, 2001 and 2000, respectively.
Cash Equivalents
Our cash equivalents are highly liquid investments, with maturities of three
months or less when we purchase them, which we do not hold as part of our
investment portfolio.
Derivative Financial Instruments
Our worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments, primarily
forward contracts, to reduce the impact of changes in foreign exchange rates on
our operating results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts that are
denominated in currencies other than our operating entities' functional
currencies. We record these contracts at fair value on our consolidated balance
sheet. Depending on the hedge designation at the inception of the contract, the
related gains and losses on these contracts are either deferred in stockholders'
equity (as a component of accumulated other comprehensive loss) until the hedged
item is recognized in earnings or offset against the change in fair value of the
hedged firm commitment through earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings. The
gain or loss on a derivative financial instrument not designated as a hedging
instrument is also immediately recognized in earnings. Gains and losses on
forward contracts that require immediate recognition are included as a component
of other-net in our consolidated statement of loss.
Stock-Based Compensation
At December 31, 2002, we have several stock-based employee compensation plans,
which are described more fully in Note 9. We account for those plans using the
intrinsic value method under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Under APB 25, if the exercise price of the employee stock
option equals or exceeds the fair value of the underlying stock on the
measurement date, no compensation expense is recognized. If the measurement date
is later than the date of grant, compensation expense is recorded to the
measurement date based on the quoted market price of the underlying stock at the
end of each reporting period. Stock options granted to employees of B&W during
the Chapter 11 filing are accounted for using the fair value method of SFAS No.
123 "Accounting for Stock-Based Compensation," as B&W employees are not
considered employees of MII for purposes of APB 25.
61
The following table illustrates the effect on net loss and loss per share if we
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share data)
Net loss, as reported $ (776,394) $ (20,022) $ (22,082)
Add back: stock-based compensation
cost included in net loss, net of
related tax effects 5,161 3,651 5,920
Deduct: total stock-based compensation
cost determined under fair-value-
based method, net of related tax effects (11,720) (6,968) (8,595)
----------------------------------------------
Pro forma net loss $ (782,953) $ (23,339) $ (24,757)
==============================================
Loss per share:
Basic and diluted, as reported $ (12.55) $ (0.33) $ (0.37)
Basic and diluted, pro forma $ (12.66) $ (0.38) $ (0.41)
For the years ended December 31, 2002, 2001 and 2000, charges to income include
amounts related to approximately 1,053,000 stock options that require variable
accounting as a consequence of the DSU program described in Note 9.
New Accounting Standards
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that we no longer amortize goodwill,
but instead perform periodic testing for impairment. We have completed our
transitional goodwill impairment test and did not incur an impairment charge as
of January 1, 2002. However, due to the deterioration in JRM's financial
performance during the three months ended September 30, 2002 and our revised
expectations concerning JRM's future earnings and cash flow, we tested the
goodwill of the Marine Construction Services segment for impairment. See the
Goodwill section of this note for disclosure concerning the goodwill impairment
charge and our reconciliation of reported net income to adjusted net income,
which excludes goodwill amortization expense for all periods presented.
Effective January 1, 2002, we also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Pronouncements Bulletin No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. See Note 2 for information on our
discontinued operations.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss.
We must adopt SFAS No. 143 effective January 1, 2003 and expect to record as the
cumulative effect of an accounting change income of approximately $3.0 million
upon adoption.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting
for Intangible
62
Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for Leases." In
addition, it amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. We must adopt the provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 as of January 1, 2003, and we expect to reclassify the
extraordinary gain on extinguishment of debt we recorded in 2001 and 2002,
because (as a result of the change in accounting principles) it will no longer
meet the criteria for classification as an extraordinary item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. It is effective for
exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. We do not expect the adoption of the
recognition and measurement provisions of this Interpretation to have a material
effect on our consolidated financial position or results of operations. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Therefore, our financial
statements for the year ended December 31, 2002 contain the disclosures required
by Interpretation No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002 and for interim periods beginning
after December 15, 2002. Our financial statements for the year ended December
31, 2002 contain the disclosures required by SFAS No. 148.
NOTE 2 - ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS
Acquisitions
In June 2000, we acquired, through our Babcock & Wilcox Volund ApS ("Volund")
subsidiary, various business units of the Ansaldo Volund Group, a group of
companies owned by Finmeccanica S.p.A. of Italy. We acquired waste-to-energy,
biomass, gasification and stoker-fired boiler businesses and projects, as well
as an engineering and manufacturing facility in Esbjerg, Denmark from the
Ansaldo Volund Group. We used the purchase method of accounting for this
acquisition. The acquisition cost was $2.7 million plus assumed liabilities,
which resulted in goodwill of $5.7 million. We reduced goodwill by $1.1 million
in 2001 due to the adjustment of certain assumed liabilities.
Volund acquired the BS Incineration business from FLS Miljo A/S, in October
2001. This acquisition was a natural complement to Volund's service business.
The cost of the acquisition was $1.3 million. Volund paid cash of $0.6 million
in October 2001 and paid the remaining acquisition cost in June 2002. Volund
recorded goodwill of $1.1 million on this acquisition. This acquisition is not
considered significant.
63
Dispositions
On October 11, 2002, we sold Volund to B&W. The consideration received by MII
from B&W included a $3 million note and funding for the repayment of
approximately $14.5 million of principal and interest on a loan owed by Volund
to MII. The purchase price is subject to a possible downward adjustment,
depending on the final resolution of the customer claims relating to the
construction of a biomass facility in Denmark and Volund's related claims
against Austrian Energy. See Note 10 for a discussion of those claims. Terms of
the sale also included replacement by the debtor-in-possession revolving credit
and letter of credit facility of approximately $11.0 million of letters of
credit previously issued under MII's credit facility. We have deferred
recognition of a gain on the sale of Volund until final resolution of the B&W
bankruptcy proceedings.
In October 2001, we sold McDermott Engineers & Constructors (Canada) Ltd.
("MECL") to Jacobs Canada Inc. ("Jacobs"), a wholly owned Canadian subsidiary of
Jacobs Engineering Group, Inc. Under the terms of the sale, we received cash of
$47.5 million and retained certain liabilities, including environmental
liabilities, executive termination and pension liabilities and professional
fees, of MECL and its subsidiaries. The retained liabilities relate to prior
operations of MECL and certain of its subsidiaries and are not debt obligations.
We do not consider these liabilities significant. We sold our stock in MECL with
a net book value of $11.9 million, including goodwill of $0.5 million. The
estimated costs of the sale were $7.6 million. The sale resulted in a gain of
$28.0 million and tax expense of $2.4 million. Our consolidated income statement
includes the following for MECL up to the date of sale:
Year Ended December 31,
2001 2000
---- ----
(In thousands)
Revenues $ 507,223 $ 425,974
Operating income $ 9,984 $ 9,185
Net income $ 6,639 $ 8,059
Discontinued Operations
On July 10, 2002, we completed the sale of one of our subsidiaries, Hudson
Products Corporation ("HPC"), formerly a component of our Industrial Operations
segment. The sale price of $39.5 million consisted of $37.5 million in cash and
a $2 million subordinated promissory note. In the year ended December 31, 2002,
we recorded a gain on the sale of HPC of $9.4 million, net of a provision for
income taxes of $5.7 million. We have reported the gain on sale and results of
operations for HPC in discontinued operations, and HPC is classified at December
31, 2001 as an asset held for sale in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which we adopted on
January 1, 2002. We have reclassified our consolidated statements of loss for
the years ended December 31, 2001 and 2000 for consistency to reflect the
current year treatment of HPC as a discontinued operation. At December 31, 2001,
we have reported HPC's assets totaling $31.4 million in other current assets and
HPC's liabilities totaling $8.9 million in other current liabilities in our
consolidated balance sheet. Condensed financial information for our operations
reported in discontinued operations follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues $ 31,534 $ 72,858 $ 64,083
Income before provision
for income taxes $ 164 $ 5,371 $ 4,252
64
NOTE 3 - EQUITY METHOD INVESTMENTS
We have included in other assets investments in our worldwide joint ventures and
other entities that we account for using the equity method of $11.5 million and
$21.0 million at December 31, 2002 and 2001, respectively. The undistributed
earnings of our equity method investees were $2.6 million and $11.1 million at
December 31, 2002 and 2001, respectively.
Summarized below is combined balance sheet and income statement information,
based on the most recent financial information, for investments in entities we
accounted for using the equity method (unaudited):
December 31,
2002 2001
---- ----
(In thousands)
Current Assets $ 64,607 $ 403,148
Noncurrent Assets 11,734 54,032
- ------------------------------------------------------------------------------------
Total Assets (1) $ 76,341 $ 457,180
====================================================================================
Current Liabilities $ 23,069 $ 305,249
Noncurrent Liabilities 1,231 40,124
Owners' Equity 52,041 111,807
- ------------------------------------------------------------------------------------
Total Liabilities and Owners' Equity (1) $ 76,341 $ 457,180
====================================================================================
(1) The reduction in 2002 is attributable to our joint ventures in Mexico and
Beijing being placed on the cost method of accounting.
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues $ 1,800,727 $ 2,376,931 $ 1,424,127
Gross Profit $ 78,272 $ 139,300 $ 83,198
Income before Provision for Income Taxes $ 73,618 $ 89,530 $ 47,725
Provision for Income Taxes 5,789 14,783 1,449
- ---------------------------------------------------------------------------------------------------
Net Income $ 67,829 $ 74,747 $ 46,276
===================================================================================================
Revenues of equity method investees include $1,653.8 million, $1,614.1 million
and $766.4 million of reimbursable costs recorded by limited liability companies
in our Government Operations segment at December 31, 2002, 2001 and 2000,
respectively. Our investment in equity method investees was less than our
underlying equity in net assets of those investees based on stated ownership
percentages by $11.0 million at December 31, 2002. These differences are
primarily related to the timing of distribution of dividends and various
adjustments under generally accepted accounting principles.
The provision for income taxes is based on the tax laws and rates in the
countries in which our investees operate. There is no expected relationship
between the provision for income taxes and income before taxes. The taxation
regimes vary not only with respect to nominal rate, but also with respect to the
allowability of deductions, credits and other benefits. For certain of our U.S.
investees, U.S. income taxes are the responsibility of the owner.
65
Reconciliation of net income per combined income statement information to equity
in income (loss) from investees per our consolidated statement of loss is as
follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Equity income based on stated ownership percentages $ 30,119 $ 33,427 $ 17,460
Impairment of investments in foreign joint venture (7,174) - (5,996)
Costs to exit certain foreign joint ventures - - (17,453)
Sale of shares in foreign joint venture 3,971 2,353 -
All other adjustments due to amortization of basis differences,
timing of GAAP adjustments, dividend distributions and
other adjustments 776 (1,687) (3,806)
- -----------------------------------------------------------------------------------------------------------------------
Equity in income (loss) from investees $ 27,692 $ 34,093 $ (9,795)
=======================================================================================================================
On June 30, 2001, JRM, through one of its subsidiaries, entered into an
agreement to sell its share in a foreign joint venture, Brown & Root McDermott
Fabricators Limited. JRM received initial consideration in cash of approximately
$7.4 million for the sale in the year ended December 31, 2001 and an additional
$2.3 million in the year ended December 31, 2002. Final purchase price
adjustments and related cost issues are still being negotiated. We expect these
negotiations to be finalized in 2003.
Our transactions with unconsolidated affiliates included the following:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Sales to $ 81,833 $ 240,935 $ 73,961
Leasing activities (included in Sales to) $ 41,881 $ 81,194 $ 36,863
Purchases from $ - $ 11,885 $ 3,751
Dividends received $ 34,848 $ 36,920 $ 14,109
Our accounts payable includes payables to unconsolidated affiliates of $3.2
million at December 31, 2001. Our property, plant and equipment includes cost of
$75.2 million and $131.0 million and accumulated depreciation of $49.0 million
and $57.3 million, respectively, at December 31, 2002 and 2001 of marine
equipment that was leased to an unconsolidated affiliate. At December 31, 2002,
our other current assets include $14.4 million of marine equipment that was
leased to an unconsolidated affiliate. During the year ended December 31, 2000,
we recorded charges of $23.4 million to exit certain foreign joint ventures.
NOTE 4 - INCOME TAXES
We have provided for income taxes based on the tax laws and rates in the
countries in which we conduct our operations. We have earned all of our income
outside of Panama, and we are not subject to income tax in Panama on income
earned outside of Panama. Therefore, there is no expected relationship between
the provision for, or benefit from, income taxes and income, or loss, before
income taxes. The major reason for the variations in these amounts is that
income is earned within and subject to the taxation laws of various countries,
each of which has a regime of taxation that varies from the others. The taxation
regimes vary not only with respect to nominal rate, but also with respect to the
allowability of deductions, credits and other benefits. Variations also exist
because the proportional extent to which income is earned in, and subject to tax
by, any particular country or countries varies from year to year. MII and
certain of its subsidiaries keep books and file tax returns on the completed
contract method of accounting.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of December 31, 2002 and
2001 were as follows:
66
December 31,
2002 2001
---- ----
(In thousands)
Deferred tax assets:
Pension liability $ 122,564 $ -
Prior year minimum tax credit carryforward 5,600 -
Accrued warranty expense 66 149
Accrued vacation pay 6,191 5,788
Accrued liabilities for self-insurance
(including postretirement health care benefits) 15,679 11,944
Accrued liabilities for executive and employee incentive compensation 25,287 25,823
Investments in joint ventures and affiliated companies 941 3,755
Operating loss carryforwards 17,916 8,587
Environmental and products liabilities 6,004 6,087
Long-term contracts 36,627 17,392
Drydock reserves 7,460 9,429
Accrued interest 6,395 6,395
Deferred foreign tax credits 5,298 7,235
Other 15,779 18,422
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax assets 271,807 121,006
Valuation allowance for deferred tax assets (214,827) (12,840)
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets 56,980 108,166
- ---------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 30,914 19,494
Estimated provision for B&W Chapter 11 settlement 17,342 -
Prepaid pension costs - 39,501
Investments in joint ventures and affiliated companies 2,578 2,710
Insurance and other recoverables 69 1,230
Other 3,166 3,270
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 54,069 66,205
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 2,911 $ 41,961
===============================================================================================================
Income (loss) from continuing operations before provision for (benefit from)
income taxes and extraordinary item was as follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
U.S. $ (384,475) $ 39,220 $ 11,447
Other than U.S. (386,666) 46,687 (25,676)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before provision
for income taxes and extraordinary item $ (771,141) $ 85,907 $ (14,229)
====================================================================================================================
The provision for (benefit from) income taxes consisted of:
Current:
U.S. - Federal $ (40,567) $ 88,273 $ (14,611)
U.S. - State and local 252 4,729 2,034
Other than U.S. 17,337 8,058 2,294
- --------------------------------------------------------------------------------------------------------------------
Total current (22,978) 101,060 (10,283)
- --------------------------------------------------------------------------------------------------------------------
Deferred:
U.S. - Federal 36,284 12,410 21,860
U.S. - State and local 1,757 (368) (1,098)
Other than U.S. - (2,773) 156
- --------------------------------------------------------------------------------------------------------------------
Total deferred 38,041 9,269 20,918
- --------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 15,063 $ 110,329 $ 10,635
====================================================================================================================
We recorded the following charges in the year ended December 31, 2002, with
little or no associated tax benefit:
- the impairment of the remaining $313.0 million of goodwill
attributable to the premium we paid on the acquisition of the
minority interest of JRM in June 1999;
- the write-off of the investment in B&W and other related
assets totaling $224.7 million; and
- the net pre-tax provision of $86.4 million for the estimated
cost of settlement of the B&W Chapter 11 proceedings.
67
The net pre-tax provision for the estimated cost of the B&W Chapter 11
settlement includes approximately $154.0 million of expenses with no associated
tax benefits. The remaining items, consisting primarily of estimated benefits we
expect to receive as a result of the settlement, constitute income in taxable
jurisdictions. See Note 20 for additional details regarding the settlement
provision.
For the year ended December 31, 2001, our current provision for U.S. income
taxes includes a charge of approximately $85.4 million associated with the
intended exercise of the intercompany stock purchase and sale agreement referred
to in Notes 5 and 8. Our current provision for other than U.S. income taxes in
the years ended December 31, 2001 and 2000 includes a reduction of $4.1 million
and $0.6 million, respectively, for the benefit of net operating loss
carryforwards. Losses from foreign joint ventures that generated no
corresponding tax benefit totaled $25.6 million in the year ended December 31,
2000 and amortization of goodwill associated with the acquisition of the
minority interest in JRM was $18.0 million in the years ended December 31, 2001
and 2000. In addition, the years ended December 31, 2001 and 2000 include a tax
benefit of $5.2 million and $5.5 million from favorable tax settlements in
foreign jurisdictions, and a provision for proposed Internal Revenue Service
("IRS") tax deficiencies was recorded in the year ended December 31, 2001. The
provision for income taxes for the year ended December 31, 2000 also includes a
provision of $3.8 million for B&W for the pre-filing period and a benefit of
$1.4 million from the use of certain tax attributes in a foreign joint venture.
MII and JRM would be subject to withholding taxes on distributions of earnings
from their U.S. subsidiaries and certain foreign subsidiaries. For the year
ended December 31, 2002, the undistributed earnings of U.S. subsidiaries of MII
and JRM were approximately $564.0 million. U.S. withholding taxes of
approximately $169.0 million would be payable upon distribution of these
earnings. For the same period, the undistributed earnings of the foreign
subsidiaries of such U.S. companies amounted to approximately $79.4 million. The
unrecognized deferred U.S. income tax liability on these earnings is
approximately $31.0 million. Withholding taxes of approximately $4.0 million
would be payable to the applicable foreign jurisdictions upon remittance of
these earnings. We have not provided for any taxes, as we treat these earnings
as indefinitely reinvested. The undistributed taxable earnings of foreign
subsidiaries of MII and JRM were $27.9 million and applicable withholding taxes
of $3.9 million would be due upon remittance of these earnings. We have provided
withholding tax of $2.4 million on the intended distribution of approximately
$20.5 million. The remaining $7.4 million in undistributed earnings is
considered indefinitely reinvested, and we have made no provision for taxes on
these earnings.
We reached settlements with the IRS concerning MI's U.S. income tax liability
through the fiscal year ended March 31, 1992, disposing of all U.S. federal
income tax issues. The IRS has issued notices for MI for the fiscal years ended
March 31, 1993 through March 31, 1998 and for JRM for the fiscal years ended
March 31, 1995 through March 31, 1998 asserting deficiencies in the amount of
taxes reported. We believe that any income taxes ultimately assessed against MI
and JRM will not exceed amounts for which we have already provided.
At December 31, 2002, we had a valuation allowance of $214.8 million for
deferred tax assets, which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. We believe that our
remaining deferred tax assets are realizable through carrybacks and future
reversals of existing taxable temporary differences. We will continue to assess
the adequacy of our valuation allowance on a quarterly basis. Any changes to our
estimated valuation allowance could be material to the financial statements.
We have foreign net operating loss carryforwards of approximately $33.1 million
available to offset future taxable income in foreign jurisdictions.
Approximately $6.6 million of the foreign net operating loss carryforwards is
scheduled to expire in 2003 to 2009. We have domestic net operating loss
carryforwards of approximately $19.2 million available to offset future taxable
income in domestic jurisdictions. The domestic net operating loss carryforwards
are scheduled to expire in years 2009 to 2022.
68
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
December 31,
2002 2001
---- ----
(In thousands)
Long-term debt consists of:
Unsecured Debt:
Series A Medium Term Notes (maturing in 2003; interest at
various rates ranging from 8.99% to 9.00%)(1) $ 9,500 $ 9,500
Series B Medium Term Notes (maturities ranging from 4 to 23
years; interest at various rates ranging from 7.57% to 8.75%) 64,000 64,000
9.375% Notes due March 15, 2002 ($208,808,000 principal amount) - 208,789
9.375% Senior Subordinated Notes due 2006
($1,234,000 principal amount) 1,221 1,218
Other notes payable through 2030 (interest at
various rates ranging to 10%) 17,225 21,845
Secured Debt:
Capitalized lease obligations 4,135 4,521
- ---------------------------------------------------------------------------------------------------------
96,081 309,873
Less: Amounts due within one year 9,977 209,480
- ---------------------------------------------------------------------------------------------------------
Long-term debt $ 86,104 $ 100,393
=========================================================================================================
(1) We funded the repayment of these notes on February 11, 2003.
December 31,
2002 2001
---- ----
(In thousands)
Notes payable and current maturities of long-term debt consist of:
Short-term lines of credit - unsecured $ 3,725 $ -
Short-term lines of credit - secured 41,875 -
Other notes payable - 26
Current maturities of long-term debt 9,977 209,480
- ---------------------------------------------------------------------------------------------------------
Total $ 55,577 $ 209,506
=========================================================================================================
Weighted average interest rate on short-term borrowings 5.17% 9.37%
=========================================================================================================
During the year ended December 31, 2002, MI repurchased or repaid the remaining
$208.8 million in aggregate principal amount of its 9.375% Notes due March 15,
2002 for aggregate payments of $208.3 million, resulting in an extraordinary net
after-tax gain of $0.3 million. In order to repay the remaining notes, MI
exercised its right pursuant to a stock purchase and sale agreement with MII
(the "Intercompany Agreement"). Under this agreement, MI had the right to sell
to MII and MII had the right to buy from MI, 100,000 units, each of which
consisted of one share of MII common stock and one share of MII Series A
Participating Preferred Stock. MI held this financial asset since prior to the
1982 reorganization transaction under which MII became the parent of MI. The
price was based on (1) MII's stockholders' equity at the close of the fiscal
year preceding the date on which the right to sell or buy, as the case may be,
was exercised and (2) the price-to-book value of the Dow Jones Industrial
Average. At January 1, 2002, the aggregate unit value of MI's right to sell all
of its 100,000 units to MII was approximately $243 million. MI received this
amount from the exercise of the Intercompany Agreement. MII funded that payment
by (1) receiving dividends of $80 million from JRM and $20 million from one of
our captive insurance companies and (2) reducing its short-term investments and
cash and cash equivalents.
Maturities of long-term debt during the five years subsequent to December 31,
2002 are as follows: 2003 - $10.0 million; 2004 - $0.6 million; 2005 -$12.0
million; 2006 - $6.1 million; 2007 - $4.9 million.
At December 31, 2002 and 2001, we had available various uncommitted short-term
lines of credit from banks totaling $10.2 million and $8.9 million,
respectively. We had no borrowings outstanding under these lines of credit as of
December 31, 2002 or 2001.
On February 11, 2003, we entered into definitive agreements with a group of
lenders for a new credit facility ("New Credit Facility") to replace our
previous facilities, which consisted of a $100 million credit facility for MII
and BWXT (the "MII Credit Facility") and a $200 million credit facility for JRM
and its subsidiaries (the "JRM Credit Facility") that were scheduled to expire
on February 21, 2003. The
69
New Credit Facility initially provides for borrowings and issuances of letters
of credit in an aggregate amount of up to $180 million, with certain sublimits
on the amounts available to JRM and BWXT. On May 13, 2003, the maximum amount
available under the Credit Facility will be reduced to $166.5 million. The
obligations under the New Credit Facility are (1) guaranteed by MII and various
subsidiaries of JRM and (2) collateralized by all our capital stock in MI, JRM
and certain subsidiaries of JRM and substantially all the JRM assets and various
intercompany promissory notes. The New Credit Facility requires us to comply
with various financial and nonfinancial covenants and reporting requirements.
The financial covenants require us to maintain a minimum amount of cumulative
earnings before taxes, depreciation and amortization; a minimum fixed charge
coverage ratio; a minimum level of tangible net worth (for MII as a whole, as
well as for JRM and BWXT separately); and a minimum variance on expected costs
to complete the Front Runner EPIC spar project. In addition, we must provide as
additional collateral fifty percent of any net after-tax proceeds from
significant asset sales. The New Credit Facility is scheduled to expire on April
30, 2004.
Proceeds from the New Credit Facility may be used by JRM and BWXT, with
sublimits for JRM of $100 million for letters of credit and $10 million for cash
advances and for BWXT of $60 million for letters of credit and $50 million for
cash advances. At March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under this facility. Pricing for
cash advances under the Credit Facility is prime plus 4% or Libor plus 5% for
JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at
the rate of 0.75 of 1% per annum on the unused working capital commitment,
payable quarterly.
The MII Credit Facility served as a revolving credit and letter of credit
facility. Borrowings under this facility could be used for working capital and
general corporate purposes. The aggregate amount of loans and amounts available
for drawing under letters of credit outstanding under the MII Credit Facility
could not exceed $100 million. This facility was secured by a collateral account
funded with various U.S. Government securities with a minimum marked-to-market
value equal to 105% of the aggregate amount available for drawing under letters
of credit and revolving credit borrowings outstanding. We had borrowings of
$41.9 million outstanding under the MII Credit Facility at December 31, 2002 and
no borrowings against this facility at December 31, 2001. Letters of credit
outstanding at December 31, 2002 were approximately $53.0 million. The interest
rate was Libor plus 0.425%, or prime depending upon notification to borrow. The
interest rate at December 31, 2002 was 4.25%. Commitment fees under this
facility totaled approximately $0.3 million for the year ended December 31,
2002.
The JRM Credit Facility consisted of two tranches. One was a revolving credit
facility that provided for up to $100 million for advances that could be used
for working capital and general corporate purposes. The second tranche provided
for up to $200 million of letters of credit. The aggregate amount of loans and
amounts available for drawing under letters of credit outstanding under the JRM
Credit Facility could not exceed $200 million. We had borrowings of $3.7 million
outstanding under the JRM Credit Facility at December 31, 2002 and no borrowings
against this facility at December 31, 2001. Letters of credit outstanding under
the JRM Credit Facility at December 31, 2002 totaled approximately $73.2
million. The interest rate was Libor plus 2%, or prime plus 1% depending upon
notification to borrow. The interest rate at December 31, 2002 was 5.25%.
Commitment fees under this facility totaled approximately $1.1 million for the
year ended December 31, 2002.
MI and JRM and their respective subsidiaries are restricted, as a result of
covenants in debt instruments, in their ability to transfer funds to MII and its
other subsidiaries through cash dividends or through unsecured loans or
investments.
MI and its subsidiaries are unable to incur any additional long-term debt
obligations under one of MI's public debt indentures, other than in connection
with certain extension, renewal or refunding transactions.
70
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
We provide retirement benefits, primarily through noncontributory pension plans,
for substantially all our regular full-time employees. We do not provide
retirement benefits to certain nonresident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada or the United Kingdom. We base our
salaried plan benefits on final average compensation and years of service, while
we base our hourly plan benefits on a flat benefit rate and years of service.
Our funding policy is to fund applicable pension plans to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974
("ERISA") and, generally, to fund other pension plans as recommended by the
respective plan actuaries and in accordance with applicable law.
We make available postretirement health care and life insurance benefits to
certain retired union employees based on their union contracts. In the year
ended December 31, 2000, we curtailed retirement benefits on one of our union
contracts and amended the pension plan to increase benefits for the employees
affected by the curtailment, resulting in a curtailment loss of $1.4 million.
At December 31, 2002, in accordance with SFAS No. 87, "Employers' Accounting for
Pensions," we were required to recognize a minimum pension liability of
approximately $452 million. This recognition resulted in a decrease in our
prepaid pension asset of $122 million, an increase in our pension liability of
$345 million and an increase in other intangible assets of $15 million. The
increase in the minimum pension liability is a direct result of the combination
of the downturn in financial markets in 2002 and the low interest rates in
effect at December 31, 2002.
Effective March 31, 2003, benefit accruals under JRM's qualified pension plan
will cease. Any pension benefits earned to that date will remain payable
pursuant to the plan upon retirement, but no future benefits will accrue. All
employees participating in the JRM qualified pension plan on March 31, 2003 will
fully vest at that time.
In the nine-month period ended December 31, 1999, we curtailed a pension plan in
the United Kingdom and increased the benefits payable to the employees affected
by the curtailment. We recognized additional curtailment losses on this plan of
$10.2 million and $3.9 million in the years ended December 31, 2001 and 2000 due
to revisions in our expected share of the pension surplus. We are continuing to
negotiate a settlement.
71
Pension Benefits Other Benefits
Year Ended Year Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 1,833,428 $ 1,734,527 35,395 $ 35,151
Service cost 28,137 25,579 - -
Interest cost 119,360 115,195 2,406 2,499
Curtailments - 10,219 - -
Amendments 148 5,414 - -
Transfers - 1,321 - -
Change in assumptions 139,280 37,019 1,237 1,392
Actuarial (gain) loss 28,224 14,823 499 280
Foreign currency exchange rate changes - (4,132) - -
Benefits paid (105,569) (106,537) (3,709) (3,927)
- -----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of period 2,043,008 1,833,428 35,828 35,395
- -----------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of period 1,821,530 1,943,562 - -
Actual return on plan assets (159,730) (23,520) - -
Company contributions 24,073 12,899 3,709 3,927
Foreign currency exchange rate changes - (4,908) - -
Benefits paid (105,569) (106,503) (3,709) (3,927)
- -----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at the end of period 1,580,304 1,821,530 - -
- -----------------------------------------------------------------------------------------------------------------------------
Funded status (462,704) (11,898) (35,828) (35,395)
Unrecognized net obligation 541,275 (242) - -
Unrecognized prior service cost 15,599 14,550 - -
Unrecognized actuarial (gain) loss (153) 93,920 8,929 7,930
- -----------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 94,017 $ 96,330 $ (26,899) $ (27,465)
=============================================================================================================================
Amounts recognized in the balance sheet:
Prepaid benefit cost $ 19,311 $ 152,510 $ - $ -
Accrued benefit liability (401,167) (65,848) (26,899) (27,465)
Intangible asset 15,026 578 - -
Accumulated other comprehensive income 460,847 9,090 - -
- -----------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 94,017 $ 96,330 $ (26,899) $ (27,465)
=============================================================================================================================
Weighted average assumptions:
Discount rate 6.50% 7.25% 6.50% 7.42%
Expected return on plan assets 8.28% 8.33% - -
Rate of compensation increase 4.00% 4.44% - -
For measurement purposes, a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2002. The rate was assumed to
decrease gradually to 5.0% in 2009 and remain at that level thereafter.
Pension Benefits Other Benefits
Year Ended December 31, Year Ended December 31,
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
(In thousands)
Components of net periodic
benefit cost (income):
Service cost $ 28,137 $ 25,579 $ 25,277 $ - $ - $ -
Interest cost 119,360 115,195 111,947 2,406 2,499 2,514
Expected return on plan assets (136,227) (145,738) (145,066) - - -
Amortization of prior service cost 3,207 2,600 2,589 - - -
Recognized net actuarial loss (gain) 11,912 (15,800) (34,449) 834 718 542
- ----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (income) $ 26,389 $ (18,164) $ (39,702) $ 3,240 $ 3,217 $ 3,056
======================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $1,883.0 million, $1,805.8 million and $1,402.4
million, respectively at December 31, 2002 and $187.2 million, $140.2 million
and $103.2 million, respectively, at December 31, 2001.
72
Assumed health-care cost trend rates have a significant effect on the amounts we
report for our health-care plan. A one-percentage-point change in our assumed
health-care cost trend rates would have the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
-------------- --------------
(In thousands)
Effect on total of service and interest
cost components $ 150 $ (145)
Effect on postretirement benefit obligation $ 2,088 $ (2,019)
Multiemployer Plans
One of B&W's subsidiaries contributes to various multiemployer plans. The plans
generally provide defined benefits to substantially all unionized workers in
this subsidiary. The amount charged to pension cost and contributed to the plans
was $2.4 million in the year ended December 31, 2000.
NOTE 7 - IMPAIRMENT OF LONG-LIVED ASSETS
Impairment losses to write down property, plant and equipment to estimated fair
values are summarized by segment as follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Property, plant and equipment and other assets:
Assets to be held and used:
Marine Construction Services $ 6,800 $ - $ -
Assets to be disposed of:
Marine Construction Services 1,943 6,318 3,346
Government Operations - - 833
- --------------------------------------------------------------------------------------------------------------
Total $ 8,743 $ 6,318 $ 4,179
==============================================================================================================
Property, plant and equipment and other assets - assets to be held and used
During the year ended December 31, 2002, our Marine Construction Services
segment recorded an impairment loss of $6.8 million on land at one of our
facilities that is no longer expected to recover its carrying value through
future cash flows. We determined fair value based on an appraisal of the land.
Prior to impairment, the land had a book value of approximately $13.5 million.
Property, plant and equipment and other assets-assets to be disposed of
During the year ended December 31, 2002, our Marine Construction Services
segment recorded impairment losses totaling $1.9 million to reduce four material
barges and certain other marine equipment to net realizable value. Prior to the
impairment charges, this marine equipment had a total net book value of
approximately $2.1 million. We expect to sell this equipment in 2003.
During the year ended December 31, 2001, our Marine Construction Services
segment recorded an impairment loss totaling $6.3 million to reduce an idled
derrick barge to scrap value. Prior to impairment, the vessel had a net book
value of approximately $6.9 million. During the year ended December 31, 2002, we
sold the vessel for net proceeds of $0.6 million and recorded an additional
impairment loss of $43,000.
During the year ended December 31, 2000, our Marine Construction Services
segment recorded impairment losses totaling $3.3 million. These provisions
included $2.0 million for salvaged structures that were written down to net
realizable value, a $0.3 million adjustment to a building for sale near London
that we sold in 2001, and $1.1 million writedown of fixed assets in our
Inverness facility.
73
During the year ended December 31, 2000, our Government Operations segment
recorded an impairment loss totaling $0.8 million at our research facility in
Alliance, Ohio for fixed assets that will no longer be used.
NOTE 8 - CAPITAL STOCK
The Panamanian regulations that relate to acquisitions of securities of
companies registered with the National Securities Commission, such as MII, have
certain requirements. They require, among other matters, that detailed
disclosure concerning an offeror be finalized before that person acquires
beneficial ownership of more than five percent of the outstanding shares of any
class of our stock pursuant to a tender offer. The detailed disclosure is
subject to review by either the Panamanian National Securities Commission or our
Board of Directors. Transfers of shares of common stock in violation of these
regulations are invalid and cannot be registered for transfer.
We issue shares of our common stock in connection with our 2001 Directors and
Officers Long-Term Incentive Plan, our 1996 Officer Long-Term Incentive Plan
(and its predecessor programs), our 1992 Senior Management Stock Plan and
contributions to our Thrift Plan. At December 31, 2002 and 2001, 15,180,999 and
9,026,795 shares of common stock, respectively, were reserved for issuance in
connection with those plans.
MII Preferred Stock
At December 31, 2001, 100,000 shares of our nonvoting Series A Participating
Preferred Stock (the "Participating Preferred Stock") were issued and owned by
MI. During the year ended December 31, 2002, we purchased the 100,000 shares of
Participating Preferred Stock pursuant to the exercise of the Intercompany
Agreement and cancelled them. Under the Intercompany Agreement, MI had the right
to sell to MII and MII had the right to buy from MI, 100,000 units, each of
which consisted of one share of MII common stock and one share of MII Series A
Participating Preferred Stock. MI held this financial asset since prior to the
1982 reorganization under which MII became the parent of MI. During the quarter
ended March 31, 2002, MI exercised its right pursuant to this agreement and
received approximately $243 million. During the year ended December 31, 2001, we
redeemed the last 10,000 shares of the Series B nonvoting Preferred Stock, which
were owned by MI, at $250 per share under the applicable mandatory redemption
provisions.
We designated a series of our authorized but unissued preferred stock as Series
D Participating Preferred Stock in connection with our Stockholder Rights Plan.
As of December 31, 2002, no shares of Series D Participating Preferred Stock
were outstanding.
Our issuance of additional shares of preferred stock in the future and the
specific terms thereof, such as the dividend rights, conversion rights, voting
rights, redemption prices and similar matters, may be authorized by our Board of
Directors without stockholder approval.
MII Rights
On October 17, 2001, our Board of Directors adopted a Stockholder Rights Plan
and declared a dividend of one right to purchase preferred stock for each
outstanding share of our common stock to stockholders of record at the close of
business on November 1, 2001. Each right initially entitles the registered
holder to purchase from us a fractional share consisting of one one-thousandth
of a share of our Series D Participating Preferred Stock, par value $1.00 per
share, at a purchase price of $35.00 per fractional share, subject to
adjustment. The rights generally will not become exercisable until ten days
after a public announcement that a person or group has acquired 15% or more of
our common stock (thereby becoming an "Acquiring Person") or the tenth business
day after the commencement of a tender or exchange offer that would result in a
person or group becoming an Acquiring Person (we refer to the earlier of those
dates as the "Distribution Date"). The rights are attached to all certificates
representing our currently outstanding common stock and will attach to all
common stock certificates we issue prior to the Distribution Date. Until the
Distribution Date, the rights will be evidenced by the certificates representing
our common stock and will be transferable only with our common stock. Generally,
if any person or group becomes an Acquiring Person, each right, other than
rights beneficially owned by the Acquiring Person (which will thereupon become
void), will thereafter entitle its holder to purchase, at the rights' then
current exercise price, shares of our
74
common stock having a market value of two times the exercise price of the right.
If, after there is an Acquiring Person, and we or a majority of our assets is
acquired in certain transactions, each right not owned by an Acquiring Person
will entitle its holder to purchase, at a discount, shares of common stock of
the acquiring entity (or its parent) in the transaction. At any time until ten
days after a public announcement that the rights have been triggered, we will
generally be entitled to redeem the rights for $.01 per right and to amend the
rights in any manner other than to reduce the redemption price. Certain
subsequent amendments are also permitted. Until a right is exercised, the holder
thereof, as such, will have no rights to vote or receive dividends or any other
rights of a stockholder. The plan was approved at our 2002 annual meeting of
stockholders and is scheduled to expire on the fifth anniversary of the date of
its adoption.
NOTE 9 - STOCK PLANS
2001 Directors and Officers Long-Term Incentive Plan
In May 2002, our shareholders approved the 2001 Directors and Officers Long-Term
Incentive Plan. Members of the Board of Directors, executive officers, key
employees and consultants are eligible to participate in the plan. The
Compensation Committee of the Board of Directors selects the participants for
the plan. The plan provides for a number of forms of stock-based compensation,
including nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, deferred stock units, performance shares
and performance units, subject to satisfaction of specific performance goals. Up
to 3,000,000 shares of our common stock were authorized for issuance through the
plan, of which a maximum of 30 percent may be awarded pursuant to grants in the
form of restricted stock, deferred stock units and performance shares. Options
to purchase shares are granted at not less than 100% of the fair market value on
the date of grant, become exercisable at such time or times as determined when
granted, and expire not more than ten years after the date of the grant.
1996 Officer Long-Term Incentive Plan
Our 1996 Officer Long-Term Incentive Plan permits grants of nonqualified stock
options, incentive stock options and restricted stock to officers and key
employees. Under this plan, we granted performance-based restricted stock awards
to certain officers and key employees. Under the provisions of the
performance-based awards, no shares were issued at the time of the initial
award, and the number of shares ultimately issued was determined based on the
change in the market value of our common stock over a specified performance
period.
1997 Director Stock Program
Under our 1997 Director Stock Program, we grant options to purchase 900 shares
in the first year of a director's term and 300 shares in subsequent years at a
purchase price that is not less than 100% of the fair market value on the date
of grant. These options become exercisable, in full, six months after the date
of grant and expire ten years and one day after the date of grant. Under this
program, we also grant rights to purchase 450 shares in the first year of a
director's term and 150 shares in subsequent years at par value ($1.00 per
share). Those shares are subject to restrictions on transfer that lapse at the
end of such term.
At December 31, 2002, we had a total of 2,101,567 shares of our common stock
available for award under the 2001 Directors and Officers Plan, the 1996 Officer
Long-Term Incentive Plan and the 1997 Director Stock Program.
75
The following table summarizes activity for the restricted stock and
performance-based restricted stock awards under these plans (share data in
thousands):
Year Ended December 31,
2002 2001 2000
- -----------------------------------------------------------------------------
Outstanding, beginning of period 961 837 571
Restricted shares granted 404 299 42
Notional shares granted pursuant to
performance-based awards - - 516
Restricted shares issued pursuant to
performance-based awards 700 27 -
Notional shares lapsed (516) (22) (215)
Restricted shares released (162) (180) (55)
Cancelled/forfeited (33) - (22)
- -----------------------------------------------------------------------------
Outstanding, end of period 1,354 961 837
=============================================================================
The weighted average fair values of the restricted shares granted during the
years ended December 31, 2002, 2001 and 2000 were $11.62, $14.54 and $7.66 per
share, respectively. The weighted average fair values of the restricted shares
issued pursuant to performance-based awards during the years ended December 31,
2002 and 2001 were $16.05 and $9.66, respectively. The weighted average fair
value of the performance-based awards granted in the year ended December 31,
2000 was $8.30.
1992 Senior Management Stock Plan
Under our 1992 Senior Management Stock Plan, options to purchase shares are
granted at a purchase price that is not less than 100% of the fair market value
on the date of grant, become exercisable at such time or times as determined
when granted and expire not more than ten years after the date of grant. Our
Board of Directors determines the total number of shares available for grant
from time to time. At December 31, 2002, we had a total of 694,849 shares of
common stock available for stock option grants under this plan.
In the event of a change in control of our company, all these programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of outstanding options.
As of March 20, 2000, individuals were provided the opportunity to elect to
cancel, on a grant-by-grant basis, outstanding stock options granted prior to
February 22, 2000, and in exchange, receive Deferred Stock Units ("DSUs"). A DSU
is a contractual right to receive a share of MII common stock at a point in the
future, provided applicable vesting requirements have been satisfied. DSUs
granted as a result of this election will vest 50% upon judicial confirmation of
a plan of reorganization in connection with the Chapter 11 proceedings related
to B&W and 50% one year later, or 100% on the fifth anniversary of the date of
grant, whichever is earlier. Under this program, 2,208,319 stock options were
cancelled and 347,488 DSUs were granted with a weighted average fair value of
$9.41 at the date of grant.
The following table summarizes activity for our stock options (share data in
thousands):
Year Ended December 31,
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 6,557 $ 15.58 4,865 $ 16.12 4,812 $ 24.38
Granted 1,597 14.03 1,921 14.53 2,479 9.19
Exercised (113) 9.12 (12) 9.37 (4) 4.67
Cancelled/forfeited (508) 15.13 (217) 18.78 (2,422) 25.45
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 7,533 $ 15.38 6,557 $ 15.58 4,865 $ 16.12
=====================================================================================================================
Exercisable, end of period 4,246 $ 16.92 3,304 $ 18.84 2,435 $ 23.04
=====================================================================================================================
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Included in the table above are 365,000 options granted to B&W employees during
2001. These options are accounted for using the fair value method of SFAS No.
123, as B&W employees are not considered employees of MII for purposes of APB
25.
The following tables summarize the range of exercise prices and the
weighted-average remaining contractual life of the options outstanding and the
range of exercise prices for the options exercisable at December 31, 2002 (share
data in thousands):
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ------------------ --------------------------------------------- ------------------------------
$ 3.83 - 7.65 32 9.7 $ 6.82 - $ -
7.66 - 11.48 2,172 7.2 9.21 1,589 9.23
11.48 - 15.30 3,409 8.4 14.36 737 14.30
15.30 - 19.13 25 3.4 17.29 25 17.29
19.13 - 22.95 483 3.7 20.15 483 20.15
22.95 - 26.78 1,133 1.3 24.65 1,133 24.65
26.78 - 30.60 188 0.8 29.13 188 29.13
30.60 - 34.00 91 0.3 33.86 91 33.86
----- -----
$ 3.83 - 34.00 7,533 6.4 $ 15.38 4,246 $ 16.92
===== =====
The fair value of each option grant was estimated at the date of grant using a
Black-Scholes option-pricing model, with the following weighted-average
assumptions:
Year Ended December 31,
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.69% 4.80% 6.41%
Volatility factor of the expected market
price of MII's common stock 0.51 0.51 0.48
Expected life of the option in years 6.10 5.00 5.00
Expected dividend yield of MII's common stock 0.0% 0.0% 0.0%
The weighted average fair values of the stock options granted in the years ended
December 31, 2002, 2001 and 2000 were $8.23, $7.26 and $4.61, respectively.
Thrift Plan
On both November 12, 1991 and June 5, 1995, 5,000,000 of the authorized and
unissued shares of MII common stock were reserved for issuance for the employer
match to the Thrift Plan for Employees of McDermott Incorporated and
Participating Subsidiary and Affiliated Companies (the "Thrift Plan"). On
October 11, 2002, an additional 5,000,000 of the authorized and unissued shares
of MII common stock were reserved for issuance for the employer match to the
Thrift Plan. Those matching employer contributions equal 50% of the first 6% of
compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are non-forfeitable after three years of service or upon
retirement, death, lay-off or approved disability. The Thrift Plan allows
employees to sell their interest in MII's common stock fund at any time, except
as limited by applicable securities laws and regulations. During the years ended
December 31, 2002, 2001 and 2000, we issued 1,394,887, 711,943 and 910,287
shares, respectively, of MII's common stock as employer contributions pursuant
to the Thrift Plan. At December 31, 2002, 4,579,919 shares of MII's common stock
remained available for issuance under the Thrift Plan.
NOTE 10 - CONTINGENCIES AND COMMITMENTS
Investigations and Litigation
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these
allegations, we notified authorities, including the Antitrust Division of the
DOJ, the SEC and the European Commission. As a result of
77
our prompt disclosure of the allegations, JRM, certain other affiliates and
their officers, directors and employees at the time of the disclosure were
granted immunity from criminal prosecution by the DOJ for any anticompetitive
acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to
our request to expand the scope of the immunity to include a broader range of
our marine construction activities and affiliates. The DOJ had also requested
additional information from us relating to possible anticompetitive activity in
the marine construction business of McDermott-ETPM East, Inc., one of the
operating companies within JRM's former McDermott-ETPM joint venture with ETPM
S.A., a French company.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. We also terminated the McDermott-ETPM joint venture, and on April 3,
1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed
J. Ray McDermott Middle East, Inc.
On December 22, 1997, HeereMac and one of its employees pled guilty to criminal
charges by the DOJ that they and others had participated in a conspiracy to rig
bids in connection with the heavy-lift business of HeereMac in the Gulf of
Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were
fined $49.0 million and $0.1 million, respectively. As part of the plea, both
HeereMac and certain employees of HeereMac agreed to cooperate fully with the
DOJ investigation. Neither MII, JRM nor any of their officers, directors or
employees were a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in an international bid-rigging conspiracy for the sale of
marine construction services. In May 2000, another former JRM officer was
indicted by the DOJ for participating in a bid-rigging conspiracy for the sale
of marine construction services in the Gulf of Mexico. His trial was held in
February 2001 and, at the conclusion of the Government's case, the presiding
judge directed a judgment of acquittal.
We cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC had terminated its
investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the U.S District Court for the Southern District of Texas against
MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema,
certain Heerema affiliates and others, alleging that the defendants engaged in
anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and
Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in
fraudulent activity and tortiously interfered with the plaintiffs' businesses in
connection with certain offshore transportation and installation projects in the
Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In
December 1998, Den norske stats oljeselskap a.s., individually and on behalf of
certain of its ventures and its participants (collectively, "Statoil"), filed a
similar lawsuit in the same court (the "Statoil Litigation"). In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Phillips Litigation and Statoil Litigation requested punitive as well as
treble damages. In January 1999, the court dismissed without prejudice, due to
the court's lack of subject matter jurisdiction, the claims of the Phillips
Plaintiffs relating to alleged injuries sustained on any foreign projects. In
July 1999, the court also dismissed the Statoil Litigation for lack of subject
matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of
Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed
the district court decision in February 2000 and Statoil filed a motion for
rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of
their request to dismiss their remaining domestic claims in the lawsuit in order
to seek an appeal of the dismissal of their claims on foreign projects, which
request was subsequently denied. On March 12, 2001, the plaintiffs' motion for
rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The
plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On
February 20, 2002, the U.S. Supreme Court denied the petition for certiorari.
The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April
15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the
year ended December 31, 2002,
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Heerema and MII executed agreements to settle the heavy-lift antitrust claims
against Heerema and MII with British Gas and Phillips, and the Court has entered
an order of dismissal.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the U.S. District Court for the Southern District of Texas against
MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema
and others, alleging that the defendants engaged in anticompetitive acts in
violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequently, the following parties (acting for themselves and, in certain
cases, on behalf of their respective co-venturers and for whom they operate)
intervened as plaintiffs in the Shell Litigation: Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources
Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company
and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.; Green
Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A.
Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its
affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December
1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and
on behalf of their respective co-venturers, filed similar lawsuits in the same
court, which lawsuits were consolidated with the Shell Litigation. In addition
to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs
in the Shell Litigation request treble damages. In February 1999, we filed a
motion to dismiss the foreign project claims of the plaintiffs in the Shell
Litigation due to the Texas district court's lack of subject matter
jurisdiction, which motion is pending before the court. Subsequently, the Shell
Litigation plaintiffs were allowed to amend their complaint to include non
heavy-lift marine construction activity claims against the defendants.
Currently, we are awaiting the court's decision on our motion to dismiss the
foreign claims. During the year ended December 31, 2002, Heerema and MII
executed agreements to settle heavy-lift antitrust claims against Heerema and
MII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf
Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington
Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass
Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering
Company L.L.C., and the Court has entered an order of dismissal. In addition,
Woodside Energy, Ltd. filed a motion of dismissal with prejudice, which was
granted. Recently, we entered into a settlement agreement with Conoco, Inc. and
the Court entered an order of dismissal.
On December 15, 2000, a number of Norwegian oil companies filed lawsuits against
MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing
Act of 1953 in connection with projects in Norway. Plaintiffs include Norwegian
affiliates of various of the plaintiffs in the Shell Litigation pending in
Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates,
with some by Heerema/HeereMac and none by JRM. We understand that the conduct
alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S.
civil cases. The cases were heard by the Conciliation Boards in Norway during
the first week of October 2001. The Conciliation Boards referred the cases to
the court of first instance for further proceedings. The plaintiffs have one
year from the date of referral to proceed with the cases. Several of the
plaintiffs who filed cases before the Conciliation Boards have filed writs with
the courts of first instance in order to commence the court proceedings.
Settlement discussions are underway with these plaintiffs.
As a result of the initial allegations of wrongdoing in March 1997, we formed a
special committee of our Board of Directors to monitor and oversee our
investigation into all of these matters. Our Board of Directors concluded that
the special committee was no longer necessary, and it was dissolved in 2002.
Because we have reached settlement agreements with the vast majority of the oil
company claimants, we have adjusted our reserve to more appropriately reflect
the risks and exposures of the remaining claims.
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B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed on
June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District
Court for the Western District of Pennsylvania. The suit involves approximately
500 separate claims for compensatory and punitive damages relating to the
operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation
allege, among other things, that they suffered personal injury, property damage
and other damages as a result of radioactive emissions from these facilities. In
September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the
first cases brought to trial, awarding $36.7 million in compensatory damages. In
June 1999, the district court set aside the $36.7 million judgment and ordered a
new trial on all issues. In November 1999, the district court allowed an
interlocutory appeal by the plaintiffs of certain issues, including the granting
of the new trial and the court's rulings on certain evidentiary matters, which,
following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined
to accept for review.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8.0 million for which B&W seeks reimbursement from other
parties. There is a controversy between B&W and its insurers as to the amount of
coverage available under the liability insurance policies covering the
facilities. B&W filed a declaratory judgment action in a Pennsylvania State
Court seeking a judicial determination as to the amount of coverage available
under the policies. On April 28, 2001, in response to cross-motions for partial
summary judgment, the Pennsylvania State Court issued its ruling regarding: (1)
the applicable trigger of coverage under the Nuclear Energy Liability Policies
issued by B&W's insurers; and (2) the scope of the insurers' defense obligations
to B&W under these policies. With respect to the trigger of coverage, the
Pennsylvania State Court held that "manifestation" is an applicable trigger with
respect to the underlying claims at issue. Although the Court did not make any
determination of coverage with respect to any of the underlying claims, we
believe the effect of its ruling is to increase the amount of coverage
potentially available to B&W under the policies at issue to $320.0 million. With
respect to the insurers' duty to defend B&W, the Court held that B&W is entitled
to separate and independent counsel funded by the insurers. On May 21, 2001, the
Court granted the insurers' motion for reconsideration of the April 25, 2001
order. On October 1, 2001, the Court entered its order reaffirming its original
substantive insurance coverage rulings and further certified the order for
immediate appeal by any party. B&W's insurers filed an appeal in November 2001.
On November 25, 2002, the Pennsylvania Superior Court affirmed the rulings in
favor of B&W on the trigger of coverage and duty to defend issues. On December
24, 2002, B&W's insurers filed a petition for the allowance of an appeal in the
Pennsylvania Supreme Court. The Pennsylvania Supreme Court has not yet made any
determination regarding whether to accept discretionary review of the insurers'
appeal.
The plaintiffs' remaining claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W filed a
complaint for declaratory and injunctive relief with the Bankruptcy Court
seeking to stay the pursuit of the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied
in October 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001,
the U.S. District Court for the Eastern District of Louisiana, which has
jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the
Bankruptcy Court's Order. We believe that all claims under the Hall Litigation
will be resolved within the limits of coverage of our insurance policies;
moreover, the proposed settlement agreement and plan of reorganization in the
B&W Chapter 11 proceedings include an overall settlement of this dispute.
However, should the B&W Chapter 11 settlement fail, or should the settlement
particular to the Hall Litigation and the Apollo-Parks issue not be consummated,
there may be an issue as to whether our insurance coverage is adequate and we
may be materially adversely impacted if our liabilities exceed our coverage. B&W
transferred the two facilities subject to the Hall Litigation to BWXT in June
1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of the module. In December 1999,
Texaco filed a lawsuit seeking consequential damages for delays resulting from
the incident, as well as costs incurred to complete the project with another
contractor and uninsured losses. This lawsuit was filed in the U. S. District
Court for the Eastern District of Louisiana against a number of parties, some of
which brought third-party claims against the Operator Subsidiary and another
subsidiary of JRM, the owner of the vessel that attempted the lift of the deck
module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator
Subsidiary were subsequently tendered as direct defendants to Texaco. In
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addition to Texaco's claims in the federal court action, damages for the loss of
the south deck module have been sought by Texaco's builder's risk insurers in
claims against the Owner Subsidiary and the other defendants, excluding the
Operator Subsidiary, which was an additional insured under the policy. Total
damages sought by Texaco and its builder's risk insurers in the federal court
proceeding approximate $280 million. Texaco's federal court claims against the
Operator Subsidiary were stayed in favor of a pending binding arbitration
proceeding between them required by contract, which the Operator Subsidiary
initiated to collect $23 million due for work performed under the contract, and
in which Texaco also sought the same consequential damages and uninsured losses
as it seeks in the federal court action, and also seeks approximately $2 million
in other damages not sought in the federal court action. The federal court
trial, on the issue of liability only, commenced in October 2001. On March 27,
2002, the Court orally found that the Owner Subsidiary was liable to Texaco,
specifically finding that Texaco had failed to sustain its burden of proof
against all named defendants except the Owner Subsidiary relative to liability
issues, and, alternatively, that the Operator Subsidiary's highly extraordinary
negligence served as a superceding cause of the loss. The finding was
subsequently set forth in a written order dated April 5, 2002, which found
against the Owner Subsidiary on the claims of Texaco's builder risk insurers in
addition to the claims of Texaco. On May 6, 2002, the Owner Subsidiary filed a
notice of appeal of the April 5, 2002 order, which appeal it subsequently
withdrew without prejudice for technical reasons. On January 13, 2003, the
district court granted the Owner Subsidiary's motions for summary judgment with
respect to Texaco's claims against the Owner Subsidiary, and vacated its
previous findings to the contrary. The Court has not yet ruled on the Owner
Subsidiary's similar motion against Texaco's builder's risk insurers. The case
had been transferred to a new district court judge, but was subsequently
transferred back to the original district court judge. The scheduled trial date
of February 10, 2003 on damages and certain insurance issues has been continued
without date. The trial in the binding arbitration proceeding commenced on
January 13, 2003 and has proceeded on various dates through March 14, and will
recommence on May 26, 2003 for one week and at various times thereafter.
Although the Owner Subsidiary is not a party to the arbitration, we believe that
the claims against the Owner Subsidiary, like those against the Operator
Subsidiary, are governed by the contractual provisions which waive the recovery
of consequential damages against the Operator Subsidiary and its affiliates. We
plan to vigorously pursue the arbitration proceeding and any appeals process, if
necessary, in the federal court action, and we do not believe that a material
loss with respect to these matters is likely. In addition, we believe our
insurance will provide coverage for the builder's risk and consequential damage
claims in the event of liability. However, the ultimate outcome of the
proceedings and any challenge by our insurers to coverage is uncertain, and an
adverse ruling in either the arbitration or court proceeding or any potential
proceeding with respect to insurance coverage for any losses, or any bonding
requirements applicable to any appeal from an adverse ruling, could have a
material adverse impact on our consolidated financial position, results of
operations and cash flow.
In early April 2001, a group of insurers that includes certain underwriters at
Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have
previously provided insurance to B&W under our excess liability policies filed
(1) a complaint for declaratory judgment and damages against MII in the B&W
Chapter 11 proceedings in the U.S. District Court for the Eastern District of
Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy
Court, which actions have been consolidated before the U.S. District Court for
the Eastern District of Louisiana, which has jurisdiction over portions of the
B&W Chapter 11 proceeding. The insurance policies at issue in this litigation
provide a significant portion of B&W's excess liability coverage available for
the resolution of the asbestos-related claims that are the subject of the B&W
Chapter 11 proceeding. The consolidated complaints contain substantially
identical factual allegations. These include allegations that, in the course of
settlement discussions with the representatives of the asbestos claimants in the
B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions
of an agreement they entered into with these Plaintiff Insurers relating to
insurance payments by the Plaintiff Insurers as a result of asbestos claims.
They also allege that MII and B&W have wrongfully attempted to expand the
underwriters' obligations under that settlement agreement and the applicable
policies through the filing of a plan of reorganization in the B&W bankruptcy
proceeding that contemplates the transfer of rights under that agreement and
those policies to a trust that will manage the pending and future
asbestos-related claims against B&W and certain of its affiliates. The
complaints seek declarations that, among other things, the defendants are in
material breach of the
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settlement agreement with the Plaintiff Insurers and that the Plaintiff
Insurers owe no further obligations to MII and B&W under that agreement. With
respect to the insurance policies, if the Plaintiff Insurers should succeed in
terminating the settlement agreement, they seek to litigate issues under the
policies in order to reduce their coverage obligations. The complaint against
MII also seeks a recovery of unspecified compensatory damages. B&W filed a
counterclaim against the Plaintiff Insurers, which asserts a claim for breach of
contract for amounts owed and unpaid under the settlement agreement, as well as
a claim for anticipatory breach for amounts that will be owed in the future
under the settlement agreement. B&W seeks a declaratory judgment as to B&W's
rights and the obligations of the Plaintiff Insurers and other insurers under
the settlement agreement and under their respective insurance policies with
respect to asbestos claims. On October 2, 2001, MII and B&W filed dispositive
motions with the District Court seeking dismissal of the Plaintiff Insurers'
claim that MII and B&W had materially breached the settlement agreement at
issue. In a ruling issued January 4, 2002, the District Court granted MII's and
B&W's motion for summary judgment and dismissed the declaratory judgment action
filed by the Plaintiff Insurers. The ruling concluded that the Plaintiff
Insurers' claims lacked a factual or legal basis. Our agreement with the
underwriters went into effect in April 1990 and has served as the allocation and
payment mechanism to resolve many of the asbestos claims against B&W. We believe
this ruling reflects the extent of the underwriter's contractual obligations and
underscores that this coverage is available to settle B&W's asbestos claims. As
a result of the January 4, 2002 ruling, the only claims that remained in the
litigation were B&W's counterclaims against the Plaintiff Insurers and against
other insurers. The parties agreed to dismiss without prejudice those of B&W's
counterclaims seeking a declaratory judgment regarding the parties' respective
rights and obligations under the settlement agreement. B&W's counterclaim
seeking a money judgment for approximately $6.5 million due and owing by
insurers under the settlement agreement remains pending. A trial of this
counterclaim is scheduled for April 24, 2003. The parties have reached a
preliminary agreement in principle to settle B&W's counterclaim for in excess of
the claimed amounts, and approximately $4.3 million has been received to date
from the insurers, subject to reimbursement in the event a final settlement
agreement is not reached. Following the resolution of this remaining
counterclaim, the Plaintiff Insurers will have an opportunity to appeal the
January 4, 2002 ruling. At this point, the Plaintiff Insurers have not indicated
whether they intend to pursue an appeal.
On or about November 5, 2001, The Travelers Indemnity Company and Travelers
Casualty and Surety Company (collectively, "Travelers") filed an adversary
proceeding against B&W and related entities in the U.S. Bankruptcy Court for the
Eastern District of Louisiana seeking a declaratory judgment that Travelers is
not obligated to provide any coverage to B&W with respect to so-called
"non-products" asbestos bodily injury liabilities on account of previous
agreements entered into by the parties. On or about the same date, Travelers
filed a similar declaratory judgment against MI and MII in the U.S. District
Court for the Eastern District of Louisiana. The cases filed against MI and MII
have been consolidated before the District Court and the ACC and the FCR have
intervened in the action. On February 4, 2002, B&W and MII filed answers to
Travelers' complaints, denying that previous agreements operate to release
Travelers from coverage responsibility for asbestos "non-products" liabilities
and asserting counterclaims requesting a declaratory judgment specifying
Travelers' duties and obligations with respect to coverage for B&W's asbestos
liabilities. The Court has bifurcated the case into two phases, with Phase I
addressing the issue of whether previous agreements between the parties serve to
release Travelers from any coverage responsibility for asbestos "non-products"
claims. On August 14, 2002, the Court granted B&W's and MII's motion for leave
to file an amended answer and counterclaims, adding additional counterclaims
against Travelers. Discovery was completed in September 2002 and the parties
filed cross-motions for summary judgment, which were heard on February 26, 2003.
We are awaiting the Court's ruling on these motions. No trial date has been
scheduled.
On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11
proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana
against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology,
Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at
the time of, or rendered insolvent as a result of, a corporate reorganization
that we completed in the fiscal year ended March 31, 1999, which included, among
other things, B&W's cancellation of a $313 million note
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receivable and B&W's transfer of all the capital stock of Hudson Products
Corporation, Tracy Power, BWXT and McDermott Technology, Inc. to BWICO, and (2)
the transfers are not voidable. As an alternative, and only in the event that
the Bankruptcy Court finds B&W was insolvent at a pertinent time and the
transactions are voidable under applicable law, the action preserved B&W's
claims against the defendants. The Bankruptcy Court permitted the ACC and the
FCR in the Chapter 11 proceeding to intervene and proceed as
plaintiff-intervenors and realigned B&W as a defendant in this action. The ACC
and the FCR are asserting in this action, among other things, that B&W was
insolvent at the time of the transfers and that the transfers should be voided.
The Bankruptcy Court ruled that Louisiana law applied to the solvency issue in
this action. Trial commenced on October 22, 2001 to determine B&W's solvency at
the time of the corporate reorganization and concluded on November 2, 2001. In a
ruling filed on February 8, 2002, the Bankruptcy Court found B&W solvent at the
time of the corporate reorganization. On February 19, 2002, the ACC and FCR
filed a motion with the District Court seeking leave to appeal the February 8,
2002 ruling. On February 20, 2002, MI, BWICO, BWXT, Hudson Products Corporation
and McDermott Technology, Inc. filed a motion for summary judgment asking that
judgment be entered on a variety of additional pending counts presented by the
ACC and FCR that we believe are resolved by the February 8, 2002 ruling. On
March 20, 2002, at a hearing in the Bankruptcy Court, the judge granted this
motion and dismissed all claims asserted in complaints filed by the ACC and the
FCR regarding the 1998 transfer of certain assets from B&W to its parent, which
ruling was memorialized in an Order and Judgment dated April 17, 2002 that
dismissed the proceeding with prejudice. On April 26, 2002, the ACC and FCR
filed a notice of appeal of the April 17, 2002 Order and Judgment and on June
20, 2002 filed their appeal brief. On July 22, 2002, MI, BWICO, BWXT, Hudson
Products Corporation and McDermott Technology, Inc. filed their brief in
opposition. The ACC and FCR have not yet filed their reply brief pending
discussions regarding settlement and a consensual joint plan of reorganization.
In addition, an injunction preventing asbestos suits from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not
involved in the Chapter 11 extends through April 14, 2003. See Note 20 to our
consolidated financial statements for information regarding B&W's potential
liability for nonemployee asbestos claims and additional information concerning
the B&W Chapter 11 proceedings.
On July 12, 2002, AE Energietechnic GmbH ("Austrian Energy") applied for the
appointment of a receiver in the Bankruptcy Court of Graz, Austria. Austrian
Energy is a subsidiary of Babcock-Borsig AG, which filed for bankruptcy on July
4, 2002 in Germany. Babcock and Wilcox Volund ApS ("Volund"), which we sold to
B&W in October 2002, is jointly and severally liable with Austrian Energy
pursuant to both their consortium agreement as well as their contract with the
ultimate customer, SK Energi, for construction of a biomass boiler facility in
Denmark. As a result of performance delays attributable to Austrian Energy and
other factors, SK Energi has asserted claims for damages associated with the
failure to complete the construction and commissioning of the facility on
schedule. On August 30, 2002, Volund filed a claim against Austrian Energy in
the Austrian Bankruptcy Court to establish Austrian Energy's liability for SK
Energi's claims, which was subsequently rejected in its entirety by Austrian
Energy. On October 8, 2002, Austrian Energy notified Volund that it had
terminated its consortium agreement with Volund in accordance with Austrian
bankruptcy laws. Volund is pursuing its claims in the Austrian Bankruptcy Court
as well as other potential remedies available under applicable law. Assuming no
recovery from Austrian Energy, the cost to Volund is currently estimated at $2.5
million, which we accrued during the three months ended September 30, 2002. See
Note 2 to our consolidated financial statements for information concerning the
sale of Volund to B&W.
In September 2002, we were advised that the Securities and Exchange Commission
and the New York Stock Exchange were conducting inquiries into the trading of
MII securities occurring prior to our public announcement of August 7, 2002 with
respect to our second quarter 2002 results, our revised 2002 guidance and
developments in negotiations relating to the B&W Chapter 11 proceedings. We have
recently become aware of a formal order of investigation issued by the SEC in
connection with its inquiry, pursuant to which the Staff of the SEC has
requested additional information from us and several of our current and former
officers and directors. We continue to cooperate fully with both inquiries and
have provided all information that has been requested. Several of our current
and former officers and directors have voluntarily given interviews and have
responded, or are in the process of responding, to SEC subpoenas requesting
additional information.
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Additionally, due to the nature of our business, we are, from time to time,
involved in routine litigation or subject to disputes or claims related to our
business activities, including performance- or warranty-related matters under
our customer and supplier contracts and other business arrangements. In our
management's opinion, none of this litigation or disputes and claims will have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.
See Note 20 for information regarding B&W's potential liability for nonemployee
asbestos claims and the settlement negotiations and other activities related to
the B&W Chapter 11 reorganization proceedings commenced by B&W and certain of
its subsidiaries on February 22, 2000.
Environmental Matters
We have been identified as a potentially responsible party at various cleanup
sites under the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended ("CERCLA"). CERCLA and other environmental laws can
impose liability for the entire cost of cleanup on any of the potentially
responsible parties, regardless of fault or the lawfulness of the original
conduct. Generally, however, where there are multiple responsible parties, a
final allocation of costs is made based on the amount and type of wastes
disposed of by each party and the number of financially viable parties, although
this may not be the case with respect to any particular site. We have not been
determined to be a major contributor of wastes to any of these sites. On the
basis of our relative contribution of waste to each site, we expect our share of
the ultimate liability for the various sites will not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity in any given year.
Environmental remediation projects have been and continue to be undertaken at
certain of our current and former plant sites. During the fiscal year ended
March 31, 1995, we decided to close B&W's nuclear manufacturing facilities in
Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"), and B&W
proceeded to decommission the facilities in accordance with its existing Nuclear
Regulatory Commission ("NRC") license. B&W subsequently transferred the
facilities to BWXT in the fiscal year ended March 31, 1998. During the fiscal
year ended March 31, 1999, BWXT reached an agreement with the NRC on a plan that
provides for the completion of facilities dismantlement and soil restoration by
2001 and license termination in 2003. BWXT expects to request approval from the
NRC to release the site for unrestricted use at that time. At December 31, 2002,
the remaining provision for the decontamination, decommissioning and closing of
these facilities was $0.4 million. By December 31, 2002, only a portion of the
operation and maintenance aspect of the decommissioning and decontamination work
at the Parks facility remained to be completed in order to receive NRC approval
to terminate the NRC license.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination resulting from previous
operations at the facilities. BWXT now owns these facilities. PADEP has advised
BWXT that it does not intend to assess any monetary sanctions, provided that
BWXT continues its remediation program for the Parks Facilities. Whether
additional nonradiation contamination remediation will be required at the Parks
facility remains unclear. Results from recent sampling completed by PADEP have
indicated that such remediation may not be necessary.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these activities,
we are subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
The NRC's decommissioning regulations require BWXT and McDermott Technology,
Inc. ("MTI") to provide financial assurance that they will be able to pay the
expected cost of decommissioning their facilities at the end of their service
lives. BWXT and MTI will continue to provide financial assurance aggregating
$29.9 million during the year ending December 31, 2003 by issuing letters of
credit for the
84
ultimate decommissioning of all their licensed facilities, except one. This
facility, which represents the largest portion of BWXT's eventual
decommissioning costs, has provisions in its government contracts pursuant to
which all of its decommissioning costs and financial assurance obligations are
covered by the DOE.
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI's NRC licenses for byproduct and source nuclear material was
finalized in December 1999. In conjunction with the transfer of this regulatory
authority and upon notification by the NRC, MTI issued decommissioning financial
assurance instruments naming the State of Ohio as the beneficiary.
At December 31, 2002 and 2001, we had total environmental reserves (including
provisions for the facilities discussed above) of $20.6 million and $21.2
million, respectively. Of our total environmental reserves at December 31, 2002
and 2001, $8.3 million and $6.1 million, respectively, were included in current
liabilities. Our estimated recoveries of these costs totaling $0.2 million and
$3.2 million, respectively, are included in accounts receivable - other in our
consolidated balance sheet at December 31, 2002 and 2001. Inherent in the
estimates of those reserves and recoveries are our expectations regarding the
levels of contamination, decommissioning costs and recoverability from other
parties, which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in material adjustments to our
operating results, and the ultimate loss may differ materially from the amounts
we have provided for in our consolidated financial statements.
Operating Leases
Future minimum payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year at December 31, 2002
are as follows:
Fiscal Year Ending December 31, Amount
- ------------------------------- ------
2003 $ 6,932,000
2004 $ 5,584,000
2005 $ 4,128,000
2006 $ 3,246,000
2007 $ 3,263,000
thereafter $ 39,948,000
Total rental expense for the years ended December 31, 2002, 2001 and 2000 was
$45.0 million, $43.3 million and $44.1 million, respectively. These expense
amounts include contingent rentals and are net of sublease income, neither of
which is material.
Other
We have a take-or-pay contract with the primary provider of our long distance
telecommunications service. Under the terms of this agreement, we are obligated
to pay a minimum of $1.8 million per year through 2009.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts. As a result, various aspects of our operations are
subject to continuing reviews by governmental agencies.
We maintain liability and property insurance against such risk and in such
amounts as we consider adequate. However, certain risks are either not insurable
or insurance is available only at rates we consider uneconomical.
We have several wholly owned insurance subsidiaries that provide general and
automotive liability insurance and, from time-to-time, builder's risk within
certain limits, marine hull and workers' compensation insurance to our
companies. These insurance subsidiaries have not provided significant amounts of
insurance to unrelated parties. These captive insurers provide certain coverages
for our subsidiary entities and related coverages. Claims as a result of our
operations, or arising in the B&W Chapter 11 proceedings, could adversely impact
the ability of these captive insurers to respond to all claims presented,
although we believe such a result is unlikely.
85
We are contingently liable under standby letters of credit totaling $183.2
million at December 31, 2002, all of which were issued in the normal course of
business. We have guaranteed a $2.5 million line of credit, of which $5,000 was
outstanding at December 31, 2002, to an unconsolidated foreign joint venture. At
December 31, 2002, we had pledged approximately $154.1 million fair value of our
investment portfolio of $173.2 million: $107.8 million to secure the MII Credit
Facility and $46.3 million to secure payments under and in connection with
certain reinsurance agreements. In February 2003, we entered into the New Credit
Facility described in Note 5 and the MII Credit Facility was terminated,
resulting in the release of the $107.8 million of pledged investments.
At the time of the B&W bankruptcy filing, MII was a maker or a guarantor of
outstanding letters of credit aggregating approximately $146.5 million ($9.4
million at December 31, 2002) which were issued in connection with the business
operations of B&W and its subsidiaries. At that time, MI and BWICO were
similarly obligated with respect to additional letters of credit aggregating
approximately $24.9 million which were issued in connection with the business
operations of B&W and its subsidiaries. Although a permitted use of the
debtor-in-possession revolving credit and letter of credit facility (the "DIP
Credit Facility") is the issuance of new letters of credit to backstop or
replace these preexisting letters of credit, each of MII, MI and BWICO has
agreed to indemnify and reimburse B&W and its filing subsidiaries for any
customer draw on any letter of credit issued under the DIP Credit Facility to
backstop or replace any such preexisting letter of credit for which it has
exposure and for the associated letter of credit fees paid under the facility.
As of December 31, 2002, approximately $51.4 million in letters of credit have
been issued under the DIP Credit Facility to replace or backstop these
preexisting letters of credit.
MII has agreed to indemnify our two surety companies for obligations of various
subsidiaries of MII, including B&W and several of its subsidiaries, under surety
bonds issued to meet bid bond and performance bond requirements imposed by their
customers. As of December 31, 2002, the aggregate outstanding amount of surety
bonds that were guaranteed by MII and issued in connection with the business
operations of its subsidiaries was approximately $121.0 million, of which $107.7
million related to the business operations of B&W and its subsidiaries.
NOTE 11 - RELATED PARTY TRANSACTIONS
A company affiliated with two of our directors manages and operates an offshore
producing oil and gas property for JRM. The management and operation agreement
requires JRM to pay an operations management fee of approximately $11,000 per
month, a marketing service fee based on production, a minimum accounting and
property supervision fee of approximately $5,500 per month, and certain other
costs incurred in connection with the agreement. JRM paid approximately $0.9
million annually in fees and costs under the agreement during the years ended
December 31, 2002, 2001 and 2000. JRM subsidiaries also sold natural gas at
established market prices to the related party. JRM has periodically entered
into agreements to design, fabricate and install offshore pipelines for the same
company. In addition, JRM received approximately $2.2 million, $2.1 million and
$5.0 million for work performed on those agreements in the years ended December
31, 2002, 2001 and 2000, respectively.
See Note 3 for transactions with unconsolidated affiliates and Note 20 for
transactions with B&W.
NOTE 12 - RISKS AND UNCERTAINTIES
During 2002, our Marine Construction Services segment experienced material
losses on its three EPIC spar projects totaling $149.3 million: Medusa, Devils
Tower and Front Runner. These contracts are first-of-a-kind as well as long term
in nature. We have experienced schedule delays and cost overruns on these
contracts that have adversely impacted our financial results. These projects
continue to face significant issues. The remaining challenges to completing
Medusa within its revised schedule and budget are finishing the topsides
fabrication and the marine installation portion of the project. Our revised
schedule requires installation activities during the second quarter of 2003. We
believe the major challenge in completing Devils Tower within its revised budget
is to remain on track with the revised schedule for
86
topsides fabrication due to significant liquidated damages that are associated
with the contract. A substantial portion of the costs and delay impacts on
Devils Tower are attributable to remedial activities undertaken with regard to
the paint application. On March 21, 2003, we filed an action against the paint
vendors for recovery of the remediation costs, delays and other damages. The key
issues for the Front Runner contract relate to subcontractors and liquidated
damages due to schedule slippage either by JRM or one or more of the
subcontractors. At December 31, 2002, we have provided for our estimated losses
on these contracts. It is reasonably possible that current estimates could
change due to unforeseen events which could result in adjustments to overall
contract costs and these may continue to be significant in future periods.
NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
Our Marine Construction Services segment's principal customers are businesses in
the offshore oil, natural gas and hydrocarbon processing industries and other
marine construction companies. The primary customer of our Government Operations
segment is the U.S. Government (including its contractors). These concentrations
of customers may impact our overall exposure to credit risk, either positively
or negatively, in that our customers may be similarly affected by changes in
economic or other conditions. In addition, we and many of our customers operate
worldwide and are therefore exposed to risks associated with the economic and
political forces of various countries and geographic areas. Approximately 54% of
our trade receivables are due from foreign customers. (See Note 17 for
additional information about our operations in different geographic areas.) We
generally do not obtain any collateral for our receivables.
We believe that our provision for possible losses on uncollectible accounts
receivable is adequate for our credit loss exposure. At December 31, 2002 and
2001, the allowance for possible losses we deducted from accounts
receivable-trade on the accompanying balance sheet was $1.6 million and $1.1
million, respectively.
NOTE 14 - INVESTMENTS
The following is a summary of our available-for-sale securities at December 31,
2002:
Amortized Gross Gross Estimated
Cost Unrealized Gains Unrealized Losses Fair Value
---- ---------------- ----------------- ----------
(In thousands)
Debt securities:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 156,365 $ 585 $ - $ 156,950
Corporate notes and bonds 10,366 95 1 10,460
Other debt securities 5,821 - 4 5,817
- -----------------------------------------------------------------------------------------------------------------
Total $ 172,552 $ 680 $ 5 $ 173,227
=================================================================================================================
In February 2003, we liquidated approximately $108 million of our investment
portfolio for working capital and general corporate purposes.
The following is a summary of our available-for-sale securities at December 31,
2001:
Amortized Gross Gross Estimated
Cost Unrealized Gains Unrealized Losses Fair Value
---- ---------------- ----------------- ----------
(In thousands)
Debt securities:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 295,753 $ 1,015 $ 9 $ 296,759
Corporate notes and bonds 18,672 256 21 18,907
Other debt securities 15,277 60 - 15,337
- -----------------------------------------------------------------------------------------------------------------
Total $ 329,702 $ 1,331 $ 30 $ 331,003
=================================================================================================================
87
Proceeds, gross realized gains and gross realized losses on sales of
available-for-sale securities were as follows:
Gross Gross
Proceeds Realized Gains Realized Losses
-------- -------------- ---------------
(In thousands)
Year Ended December 31, 2002 $ 775,441 $ 997 $ -
Year Ended December 31, 2001 $1,229,087 $ 7,614 $ 4,634
Year Ended December 31, 2000 $ 26,375 $ 23 $ 22
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 2002, by contractual maturity, are as follows:
Amortized Estimated
Cost Fair Value
---- ----------
(In thousands)
Due in one year or less $ 144,688 $ 144,846
Due after one through three years 27,864 28,381
- -----------------------------------------------------------------------------------
Total $ 172,552 $ 173,227
- -----------------------------------------------------------------------------------
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
Our worldwide operations give rise to exposure to market risks from changes in
foreign exchange rates. We use derivative financial instruments, primarily
forward contracts, to reduce the impact of changes in foreign exchange rates on
our operating results. We use these instruments primarily to hedge our exposure
associated with revenues or costs on our long-term contracts that are
denominated in currencies other than our operating entities' functional
currencies. We do not hold or issue financial instruments for trading or other
speculative purposes.
We enter into forward contracts primarily as hedges of certain firm purchase and
sale commitments denominated in foreign currencies. We record these contracts at
fair value on our consolidated balance sheet. Depending on the hedge designation
at the inception of the contract, the related gains and losses on these
contracts are either deferred in stockholders' equity (as a component of
accumulated other comprehensive loss) until the hedged item is recognized in
earnings or offset against the change in fair value of the hedged firm
commitment through earnings. The ineffective portion of a derivative's change in
fair value and any portion excluded from the assessment of effectiveness are
immediately recognized in earnings. The gain or loss on a derivative instrument
not designated as a hedging instrument is also immediately recognized in
earnings. Gains and losses on forward contracts that require immediate
recognition are included as a component of other-net in our consolidated
statement of loss.
At December 31, 2002 and 2001, we had forward contracts to purchase $15.5
million and $42.8 million, respectively, in foreign currencies (primarily
Indonesian Rupiah and Euro) and to sell $0.9 million and $0.7 million,
respectively, in foreign currencies at varying maturities through August 2003.
We have designated substantially all of these contracts as cash flow hedging
instruments. The hedged risk is the risk of changes in our
functional-currency-equivalent cash flows attributable to changes in spot
exchange rates of forecasted transactions related to our long-term contracts. We
exclude from our assessment of effectiveness the portion of the fair value of
the forward contracts attributable to the difference between spot exchange rates
and forward exchange rates. At December 31, 2002, we had deferred approximately
$1.1 million of net gains on these forward contracts, 82% of which we expect to
recognize in income over the next 12 months primarily in accordance with the
percentage-of-completion method of accounting. At December 31, 2001, we had
deferred approximately $2.2 million of net losses on forward contracts. For the
years ended December 31, 2002 and 2001, we recognized net gains on forward
contracts of approximately $1.5 million and $0.1 million, respectively.
Substantially all of these net gains represent changes in the fair value of
forward contracts excluded from hedge effectiveness.
We are exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. We mitigate this risk by
using major financial institutions with high credit ratings.
88
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts we have reported in the
accompanying balance sheet for cash and cash equivalents approximate their fair
values.
Investments: We estimate the fair values of investments based on quoted market
prices. For investments for which there are no quoted market prices, we derive
fair values from available yield curves for investments of similar quality and
terms.
Long- and short-term debt: We base the fair values of debt instruments on quoted
market prices. Where quoted prices are not available, we base the fair values on
the present value of future cash flows discounted at estimated borrowing rates
for similar debt instruments or on estimated prices based on current yields for
debt issues of similar quality and terms.
Foreign currency forward contracts: We estimate the fair values of foreign
currency forward contracts by obtaining quotes from brokers. At December 31,
2002 and 2001, we had net forward contracts outstanding to purchase foreign
currencies with notional values of $14.5 million and $42.1 million,
respectively, and fair values of $0.4 million and ($2.0) million, respectively.
The estimated fair values of our financial instruments are as follows:
December 31, 2002 December 31, 2001
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Balance Sheet Instruments
- -------------------------
Cash and cash equivalents $ 175,177 $ 175,177 $ 196,912 $ 196,912
Investments $ 173,227 $ 173,227 $ 331,003 $ 331,003
Debt excluding capital leases $ 137,546 $ 102,196 $ 305,379 $ 292,875
NOTE 17 - SEGMENT REPORTING
Our reportable segments are Marine Construction Services, Government Operations,
Industrial Operations and Power Generation Systems. These segments are managed
separately and are unique in technology, services and customer class.
We have restated our segment information for the years ended December 31, 2001
and 2000 to reflect changes in our reportable segments. The results of
operations of McDermott Technology, Inc. ("MTI") are now included in our
Government Operations segment. The results of operations of HPC, which we sold
in July 2002, are reported in discontinued operations. MTI and HPC were
previously included in our Industrial Operations segment. Our Industrial
Operations segment now includes only the results of MECL, which we sold to a
unit of Jacobs Engineering Group Inc. on October 29, 2001. MECL had revenues of
approximately $507.2 million and segment income of approximately $10.0 million
through October 29, 2001, the date of the sale. We recognized a gain of
approximately $28.0 million on the sale. See Note 2 for further information.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration, production and
hydrocarbon processing industries and to other marine construction companies.
Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production 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.
89
Government Operations supplies nuclear components to the U.S. Navy, manages and
operates government-owned facilities and supplies commercial nuclear
environmental services and other government and commercial nuclear services.
Government Operations also includes contract research activities.
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment provides
aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities. Included in the year ended December 31, 2000 are charges of $23.4
million to exit certain foreign joint ventures. The Power Generation Systems
segment's operations are conducted primarily through B&W. Due to B&W's Chapter
11 filing, effective February 22, 2000, we stopped consolidating B&W's and its
subsidiaries' results of operations in our consolidated financial statements.
Through February 21, 2000, B&W's and its subsidiaries' results are reported as
Power Generation Systems - B&W in the segment information that follows. See Note
20 for the condensed consolidated results of B&W and its subsidiaries.
We account for intersegment sales at prices that we generally establish by
reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses, contract and insurance claims provisions, legal expenses and gains
(losses) on sales of corporate assets. Other reconciling items to income before
provision for income taxes are interest income, interest expense, minority
interest and other-net. Certain amounts previously reported as other unallocated
items are allocated to the reportable segments. In addition, income from
over-funded pension plans of discontinued businesses previously reported in
other-net is included in corporate. We have restated segment income and
corporate for prior periods to conform to the current presentation. We exclude
the following assets from segment assets: investments in debt securities,
prepaid pension costs and our investment in B&W. Previously, we also excluded
insurance recoverables for products liability claims and certain goodwill from
segment assets. We have restated segment assets for prior periods to conform to
the current presentation of segment assets.
SEGMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000.
1. Information about Operations in our Different Industry Segments:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
REVENUES: (1)
Marine Construction Services $ 1,148,041 $ 848,528 $ 757,508
Government Operations 553,827 494,018 444,042
Industrial Operations - 507,262 426,262
Power Generation Systems - B&W - - 155,774
Power Generation Systems 46,881 47,778 33,794
Adjustments and Eliminations (68) (638) (3,710)
- ----------------------------------------------------------------------------------------------------
$ 1,748,681 $ 1,896,948 $ 1,813,670
====================================================================================================
(1) Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 68 $ 282 $ 896
Government Operations Transfers - 318 300
Industrial Operations Transfers - 38 283
Power Generation Systems Transfers - B&W - - 59
Eliminations - - 2,172
- ----------------------------------------------------------------------------------------------------
$ 68 $ 638 $ 3,710
====================================================================================================
90
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Marine Construction Services $ (162,626) $ 14,506 $ (33,534)
Government Operations 34,600 29,320 33,224
Industrial Operations - 9,928 9,767
Power Generation Systems - B&W - - 7,172
Power Generation Systems (2,825) (3,656) (7,783)
- ----------------------------------------------------------------------------------------------------
$ (130,851) $ 50,098 $ 8,846
- ----------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposal and
Impairments - Net:
Marine Construction Services $ (320,945) $ (3,624) $ (1,012)
Government Operations 88 (128) (1,047)
Industrial Operations - 13 (141)
Power Generation Systems - B&W - - (33)
- ----------------------------------------------------------------------------------------------------
$ (320,857) $ (3,739) $ (2,233)
- ----------------------------------------------------------------------------------------------------
Equity in Income (Loss) from Investees:
Marine Construction Services $ 5,311 $ 10,442 $ 2,866
Government Operations 24,645 23,004 11,107
Industrial Operations - 43 50
Power Generation Systems - B&W - - 812
Power Generation Systems (2,264) 604 (24,630)
- ----------------------------------------------------------------------------------------------------
$ 27,692 $ 34,093 $ (9,795)
- ----------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS):
Marine Construction Services $ (478,260) $ 21,324 $ (31,680)
Government Operations 59,333 52,196 43,284
Industrial Operations - 9,984 9,676
Power Generation Systems - B&W - - 7,951
Power Generation Systems (5,089) (3,052) (32,413)
- ----------------------------------------------------------------------------------------------------
(424,016) 80,452 (3,182)
- ----------------------------------------------------------------------------------------------------
Write-off of investment in B&W (224,664) - -
Other unallocated (1,452) - -
Corporate(1) (23,628) (5,080) 8,055
- ----------------------------------------------------------------------------------------------------
$ (673,760) $ 75,372 $ 4,873
====================================================================================================
(1) Corporate Departmental Expenses $ (45,104) $ (42,502) $ (60,594)
Legal/Professional Services related to
Chapter 11 Proceedings (1,612) (15,471) (2,860)
Other Corporate Expenses (2,698) (13,693) (19,534)
Income (Expense) from Qualified Pension Plans (11,087) 28,553 47,983
Insurance-related Items 9,447 6,690 7,156
- -------------------------------------------------------------------------------------------------------------
Gross Corporate General & Administrative
Expenses (51,054) (36,423) (27,849)
General & Administrative Expenses
Allocated to Segments 27,426 31,343 35,904
- -------------------------------------------------------------------------------------------------------------
Total $ (23,628) $ (5,080) $ 8,055
=============================================================================================================
91
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
SEGMENT ASSETS:
Marine Construction Services $ 707,021 $ 1,010,300 $ 896,815
Government Operations 308,301 260,812 246,601
Industrial Operations - - 79,306
Power Generation Systems 8,739 38,162 39,780
- --------------------------------------------------------------------------------------------------------------------
Total Segment Assets 1,024,061 1,309,274 1,262,502
Corporate Assets 254,110 763,139 756,625
Discontinued Operations - 31,427 36,500
- --------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,278,171 $ 2,103,840 $ 2,055,627
====================================================================================================================
CAPITAL EXPENDITURES:
Marine Construction Services (1) $ 45,046 $ 25,670 $ 31,341
Government Operations 23,761 19,648 15,992
Industrial Operations - 1,466 33
Power Generation Systems - B&W - - 496
Power Generation Systems (2) 356 719 6,990
- --------------------------------------------------------------------------------------------------------------------
Segment Capital Expenditures 69,163 47,503 54,852
Corporate Capital Expenditures 106 1,092 101
Discontinued Operations - 963 1,291
- --------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 69,269 $ 49,558 $ 56,244
====================================================================================================================
DEPRECIATION AND AMORTIZATION:
Marine Construction Services $ 24,984 $ 46,634 $ 45,819
Government Operations 11,388 10,567 11,260
Industrial Operations - 559 673
Power Generation Systems - B&W - - 2,489
Power Generation Systems 550 1,106 763
- --------------------------------------------------------------------------------------------------------------------
Segment Depreciation and Amortization 36,922 58,866 61,004
Corporate Depreciation and Amortization 3,889 2,122 1,616
Discontinued Operations - 1,383 1,270
- --------------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 40,811 $ 62,371 $ 63,890
====================================================================================================================
INVESTMENT IN UNCONSOLIDATED AFFILIATES:
Marine Construction Services $ 4,863 $ 6,524 $ 11,086
Government Operations 4,300 5,434 2,527
Industrial Operations - - 274
Power Generation Systems 2,380 9,037 9,565
- --------------------------------------------------------------------------------------------------------------------
Segment Investment in Unconsolidated Affiliates 11,543 20,995 23,452
Discontinued Operations - 3,164 1,953
- --------------------------------------------------------------------------------------------------------------------
Total Investment in Unconsolidated
Affiliates $ 11,543 $ 24,159 $ 25,405
====================================================================================================================
(1) Includes new capital leases in the Eastern Hemisphere of $4,417,000 and
$4,550,000 at December 31, 2002 and 2001, respectively.
(2) Includes property, plant and equipment of $6,944,000 acquired in the
acquisition of B&W Volund in the year ended December 31, 2000.
92
2. Information about our Product and Service Lines:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
REVENUES:
Marine Construction Services:
Offshore Operations $ 283,308 $ 331,724 $ 294,399
Fabrication Operations 258,545 176,908 170,883
Engineering Operations 119,570 69,987 76,819
Procurement Activities 845,955 407,855 255,512
Eliminations (359,337) (137,946) (40,105)
- --------------------------------------------------------------------------------------------------------------------
1,148,041 848,528 757,508
- --------------------------------------------------------------------------------------------------------------------
Government Operations:
Nuclear Component Program 370,734 327,938 288,890
Management & Operation Contracts
of U.S. Government Facilities 110,696 93,204 102,080
Other Commercial Operations 31,489 26,706 16,369
Nuclear Environmental Services 14,171 24,046 22,296
Contract Research 16,298 16,640 11,893
Other Government Operations 12,297 9,036 16,132
Other Industrial Operations 667 5,249 1,919
Eliminations (2,525) (8,801) (15,537)
- --------------------------------------------------------------------------------------------------------------------
553,827 494,018 444,042
- --------------------------------------------------------------------------------------------------------------------
Industrial Operations:
Engineering & Construction - 312,028 190,199
Plant Outage Maintenance - 200,148 237,796
Eliminations - (4,914) (1,733)
- --------------------------------------------------------------------------------------------------------------------
- 507,262 426,262
- --------------------------------------------------------------------------------------------------------------------
Power Generation Systems - B&W:
Original Equipment Manufacturers'
Operations - - 42,674
Nuclear Equipment Operations - - 9,051
Aftermarket Goods and Services - - 95,717
Operations and Maintenance - - 6,304
Boiler Auxiliary Equipment - - 8,258
Eliminations - - (6,230)
- --------------------------------------------------------------------------------------------------------------------
- - 155,774
- --------------------------------------------------------------------------------------------------------------------
Power Generation Systems:
Original Equipment Manufacturers'
Operations 30,791 27,848 16,837
Plant Enhancements 15,868 21,004 15,958
New Equipment - - 145
Other 222 (1,074) 854
- --------------------------------------------------------------------------------------------------------------------
46,881 47,778 33,794
- --------------------------------------------------------------------------------------------------------------------
Eliminations (68) (638) (3,710)
- --------------------------------------------------------------------------------------------------------------------
$ 1,748,681 $ 1,896,948 $ 1,813,670
====================================================================================================================
93
3. Information about our Operations in Different Geographic Areas:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
REVENUES: (1)
United States $ 1,045,245 $ 892,558 $ 867,337
Azerbaijan 121,603 4,851 -
Indonesia 88,520 19,645 348,656
Australia 86,594 26,194 166
Trinidad 65,304 59,934 21,016
Qatar 57,110 46,404 3,698
Mexico 54,999 108,038 56,559
Nigeria 51,408 23,989 -
Vietnam 33,161 10,160 158
Denmark 26,599 24,686 18,750
Argentina 23,198 3,129 -
Thailand 22,572 35,702 3,212
Malaysia 20,022 55,869 3,585
India 11,215 15,135 41,188
Canada 6,512 474,372 320,583
United Kingdom 998 30,592 59,300
Saudi Arabia 982 26,249 23,324
Other Countries 32,639 39,441 46,138
- --------------------------------------------------------------------------------------------------------------------
$ 1,748,681 $ 1,896,948 $ 1,813,670
====================================================================================================================
PROPERTY, PLANT AND EQUIPMENT, NET:
United States $ 226,824 $ 190,592 $ 190,517
Indonesia 61,281 61,167 64,513
United Arab Emirates 32,298 34,035 18,149
Mexico 14,497 51,678 56,712
Singapore 8,147 3,706 9,406
Denmark - 6,276 6,518
Other Countries 11,053 6,445 8,378
- --------------------------------------------------------------------------------------------------------------------
$ 354,100 $ 353,899 $ 354,193
====================================================================================================================
(1) We allocate geographic revenues based on the location of the customer.
4. Information about our Major Customers:
In the years ended December 31, 2002, 2001 and 2000, the U.S.
Government accounted for approximately 29%, 24% and 23%, respectively,
of our total revenues. We have included these revenues in our
Government Operations segment. In the year ended December 31, 2002,
revenues from one of our Marine Construction Services segment customers
were $174.5 million or approximately 10% of our total revenues.
94
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the years ended December 31, 2002 and 2001:
Year Ended December 31, 2002
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002
----------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 399,192 $ 465,709 $ 435,632 $ 448,148
Operating loss (1) $ (2,022) $ (237,480) $ (365,163) $ (69,095)
Equity in income from investees $ 7,534 $ 2,418 $ 4,469 $ 13,271
Loss from continuing operations
before extraordinary item $ (1,760) $ (234,972) $ (364,943) $ (184,529)
Net loss $ (593) $ (234,216) $ (357,056) $ (184,529)
Loss per common share:
Basic and Diluted:
From continuing operations
before extraordinary item $ (0.03) $ (3.81) $ (5.88) $ (2.94)
Net Loss $ (0.01) $ (3.80) $ (5.76) $ (2.94)
(1) Includes equity in income from investees.
Results for the quarter ended March 31, 2002 include an extraordinary gain of
$0.3 million, net of taxes of $0.2 million, related to the early retirement of
debt.
Results for the quarter ended June 30, 2002 include an impairment charge of
$224.7 million to write off our net investment in B&W of $187.0 million and
other related assets totaling $37.7 million.
Results for the quarter ended September 30, 2002 include an impairment charge of
$313.0 million related to JRM's goodwill and a gain on the sale of HPC of $9.4
million, net of taxes of $5.7 million, which is reported in discontinued
operations.
Results for the quarter ended December 31, 2002 include a provision for the
estimated costs of the settlement of the B&W Chapter 11 proceedings of $110.0
million, including tax expense of $23.6 million.
Year Ended December 31, 2001
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001
----------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 410,524 $ 477,816 $ 572,631 $ 435,977
Operating income (1) $ 4,883 $ 20,133 $ 32,291 $ 18,065
Equity in income from investees $ 4,921 $ 7,871 $ 11,247 $ 10,054
Income (loss) from continuing
operations before extraordinary item $ (5,169) $ 7,257 $ 18,416 $ (44,926)
Net income (loss) $ (4,433) $ 7,958 $ 19,345 $ (42,892)
Earnings (loss) per common share:
Basic:
From continuing operations
before extraordinary item $ (0.09) $ 0.12 $ 0.30 $ (0.73)
Net income (loss) $ (0.07) $ 0.13 $ 0.32 $ (0.70)
Diluted:
From continuing operations
before extraordinary item $ (0.09) $ 0.12 $ 0.29 $ (0.73)
Net income (loss) $ (0.07) $ 0.13 $ 0.31 $ (0.70)
(1) Includes equity in income from investees.
95
Results for the quarter ended December 31, 2001 include a pre-tax gain on our
sale of MECL totaling $28.0 million, tax of approximately $85.4 million
associated with the intended exercise of an intercompany stock purchase and sale
agreement and an extraordinary item of $0.8 million, net of taxes of $0.5
million, related to the early retirement of debt.
NOTE 19 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands, except shares and per share amounts)
Basic:
Loss from continuing operations $ (786,204) $ (24,422) $ (24,864)
Income from discontinued operations 9,469 3,565 2,782
Extraordinary item 341 835 -
---------------------------------------------------------------------------------------------------------
Net loss for basic computation $ (776,394) $ (20,022) $ (22,082)
=========================================================================================================
Weighted average common shares 61,860,585 60,663,565 59,769,662
=========================================================================================================
Basic earnings (loss) per common share:
Loss from continuing operations $ (12.71) $ (0.40) $ (0.42)
Income from discontinued operations $ 0.15 $ 0.06 $ 0.05
Extraordinary item $ 0.01 $ 0.01 $ -
Net loss $ (12.55) $ (0.33) $ (0.37)
Diluted:
Loss from continuing operations $ (786,204) $ (24,422) $ (24,864)
Income from discontinued operations 9,469 3,565 2,782
Extraordinary item 341 835 -
---------------------------------------------------------------------------------------------------------
Net loss for diluted computation $ (776,394) $ (20,022) $ (22,082)
=========================================================================================================
Weighted average common shares (basic) 61,860,585 60,663,565 59,769,662
Effect of dilutive securities:
Stock options and restricted stock - - -
---------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares
and assumed conversions 61,860,585 60,663,565 59,769,662
=========================================================================================================
Diluted earnings (loss) per common share:
Loss from continuing operations $ (12.71) $ (0.40) $ (0.42)
Income from discontinued operations $ 0.15 $ 0.06 $ 0.05
Extraordinary item $ 0.01 $ 0.01 $ -
Net loss $ (12.55) $ (0.33) $ (0.37)
At December 31, 2002, 2001 and 2000, we excluded from the diluted share
calculation incremental shares of 1,940,511, 1,983,314 and 1,050,242,
respectively, related to stock options and restricted stock, as their effect
would have been antidilutive.
NOTE 20 - THE BABCOCK & WILCOX COMPANY
General
As a result of asbestos-containing commercial boilers and other products B&W and
certain of its subsidiaries sold, installed or serviced in prior decades, B&W is
subject to a substantial volume of nonemployee liability claims asserting
asbestos-related injuries. All of the personal injury claims are similar in
nature, the primary difference being the type of alleged injury or illness
suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g.,
mesothelioma, lung cancer, other types of cancer, asbestosis or pleural
changes).
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon,
Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International,
Inc. (collectively, the
96
"Debtors"). The Debtors took this action as a means to determine and
comprehensively resolve all pending and future asbestos liability claims against
them. Following the filing, the Bankruptcy Court issued a preliminary injunction
prohibiting asbestos liability lawsuits and other actions for which there is
shared insurance from being brought against nonfiling affiliates of the Debtors,
including MI, JRM and MII. The preliminary injunction is subject to periodic
hearings before the Bankruptcy Court for extension. Currently, the preliminary
injunction extends through April 14, 2003.
As discussed in Note 1, we wrote off our net investment in B&W in the quarter
ended June 30, 2002. The total impairment charge of $224.7 million included our
investment in B&W of $187.0 million and other related assets totaling $37.7
million, primarily consisting of accounts receivable from B&W, for which we
provided an allowance of $18.2 million.
Settlement Negotiations
We are continuing our discussions with the ACC and FCR concerning a potential
settlement. As a result of those discussions, we reached an agreement in
principle in August 2002 with representatives of the ACC and FCR on several key
terms, which served as a basis for continuing negotiations; however, a number of
significant issues and numerous details remain to be negotiated and resolved.
Should the remaining issues and details not be negotiated and resolved to the
mutual satisfaction of the parties, the parties may be unable to resolve the B&W
Chapter 11 proceedings through settlement. Additionally, the potential
settlement will be subject to various conditions, including the requisite
approval of the asbestos claimants, the Bankruptcy Court confirmation of a plan
of reorganization reflecting the settlement and the approval by MII's Board of
Directors and stockholders. The parties are currently working to address the
remaining unresolved issues and details in a joint plan of reorganization and
related settlement agreement. On December 19, 2002, B&W and its filing
subsidiaries, the ACC, the FCR and MI filed drafts of those documents, together
with a draft of a related disclosure statement, which include the following key
terms:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
otherwise make available their rights to all applicable
insurance proceeds to the trust.
- MII would issue 4.75 million shares of restricted common stock
and cause those shares to be transferred to the trust. The
resale of the shares would be subject to certain limitations,
in order to provide for an orderly means of selling the shares
to the public. Certain sales by the trust would also be
subject to an MII right of first refusal. If any of the shares
issued to the trust are still held by the trust after three
years, and to the extent those shares could not have been sold
in the market at a price greater than or equal to $19.00 per
share (based on quoted market prices), taking into account the
restrictions on sale and any waivers of those restrictions
that may be granted by MII from time to time, MII would
effectively guarantee that those shares would have a value of
$19.00 per share on the third anniversary of the date of their
issuance. MII would be able to satisfy this guaranty
obligation by making a cash payment or through the issuance of
additional shares of its common stock. If MII elects to issue
shares to satisfy this guaranty obligation, it would not be
required to issue more than 12.5 million shares.
- MI would issue promissory notes to the trust in an aggregate
principal amount of $92 million. The notes would be unsecured
obligations and would provide for payments of principal of
$8.4 million per year to be payable over 11 years, with
interest payable on the outstanding balance at the rate of
7.5% per year. The payment obligations under those notes would
be guaranteed by MII.
- MII and all its past and present directors, officers and
affiliates, including its captive insurers, would receive the
full benefit of Section 524(g) of the Bankruptcy Code with
respect to personal injury claims attributable to B&W's use of
asbestos and would be released and protected from all pending
and future asbestos-related claims stemming from B&W's
operations, as well as other claims (whether contract claims,
tort claims or other claims) of any kind relating to B&W,
including but not limited to claims relating to the 1998
corporate reorganization that has been the subject of
litigation in the Chapter 11 proceedings.
- The settlement would be conditioned on the approval by MII's
Board of Directors and stockholders of the terms of the
settlement outlined above.
97
As the settlement discussions proceed, we expect that some of the court
proceedings in or relating to the B&W Chapter 11 case will continue and that the
parties will continue to maintain their previously asserted positions. The
Bankruptcy Court has directed the parties to file an amended disclosure
statement by March 28, 2003, that, among other things, updates the status of the
negotiations, and has set a disclosure statement hearing for April 9, 2003.
Following that filing and hearing, the Bankruptcy Court will schedule further
proceedings concerning this matter. The process of finalizing and implementing
the settlement could take up to a year, depending on, among other things, the
nature and extent of any objections or appeals in the bankruptcy case.
Despite our recent progress in our settlement discussions, there are continuing
risks and uncertainties that will remain with us until the requisite approvals
are obtained and the final settlement is reflected in a plan of reorganization
that is confirmed by the Bankruptcy Court pursuant to a final, nonappealable
order of confirmation.
As of December 31, 2002, we determined that a final settlement is probable and
established an estimate for the cost of the settlement of $110.0 million,
including tax expense of $23.6 million, reflecting the present value of our
contributions and contemplated payments to the trusts as outlined above. The
provision for the estimated cost of the B&W settlement is comprised of the
following (in thousands):
Promissory notes to be issued $ 83,081
MII common shares to be issued 20,805
Share price guaranty obligation 42,026
Other 3,435
Future tax reimbursements (29,000)
Forgiveness of certain intercompany balances (33,970)
-----------
Total $ 86,377
Plus: tax expense 23,593
-----------
Net provision for estimated cost of settlement $ 109,970
===========
The fair value of the promissory notes to be issued was based on the present
value of future cash flows discounted at borrowing rates currently assumed to be
available for debt with similar terms and maturities. The MII common shares to
be issued were valued at our closing stock price on December 31, 2002 of $4.38.
The fair value of the share price guaranty obligation was based on a present
value calculation using our closing stock price on December 31, 2002, assuming
the number of shares to be issued is 12.5 million. The value of the future tax
reimbursements was based on the present value of projected future tax
reimbursements to be received from B&W. The final value of the overall
settlement and each of its components may differ significantly from the
estimates currently recorded depending on a variety of factors, including
changes in market conditions and the market value of our common shares when
issued. Accordingly, we will revalue the estimate of the settlement on a
quarterly basis and at the time the securities are issued. Upon issuance of the
debt and equity securities, we will record such amounts as liabilities or
stockholders' equity based on the nature of the individual securities.
Remaining Issues to be Resolved
While the Chapter 11 reorganization proceedings continue to progress, there are
a number of issues and matters related to the Debtors' asbestos liability to be
resolved prior to their emergence from the proceedings. Remaining issues and
matters to be resolved include, among other things, the following:
- the ultimate asbestos liability of the Debtors;
- the outcome of negotiations with the ACC, the FCR and other
participants in the Chapter 11 proceedings, concerning, among
other things, the size and structure of the settlement trusts
to satisfy the asbestos liability and the means for funding
those trusts;
- the outcome of negotiations with our insurers as to additional
amounts of coverage of the Debtors and their participation in
a plan to fund the settlement trusts;
- the Bankruptcy Court's decisions relating to numerous
substantive and procedural aspects of the Chapter 11
proceedings, including the Bankruptcy Court's periodic
determinations as to whether to extend the existing
preliminary injunction that
98
prohibits asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII;
- the continued ability of our insurers to reimburse B&W and its
subsidiaries for payments made to asbestos claimants and the
resolution of claims filed by insurers for recovery of
insurance amounts previously paid for asbestos personal injury
claims;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999, and the related ruling
issued on April 17, 2002 (collectively, the "Transfer Case").
See Note 10 for further information;
- the outcome of objections and potential appeals involving
approval of the disclosure statement and confirmation of the
plan of reorganization;
- final agreement regarding the proposed spin-off of the MI/B&W
pension plan, which could significantly impact amounts
recorded at December 31, 2002; and
- final agreement on a tax sharing and tax separation
arrangement between MI and B&W.
Insurance Coverage and Pending Claims
Prior to their bankruptcy filing, the Debtors had engaged in a strategy of
negotiating and settling asbestos personal injury claims brought against them
and billing the settled amounts to insurers for reimbursement. At December 31,
2002, receivables of $23.1 million were due from insurers for reimbursement of
settled claims paid by the Debtors prior to the Chapter 11 filing. Currently,
certain insurers are refusing to reimburse the Debtors for these receivables
until the Debtors' assumption, in bankruptcy, of their pre-bankruptcy filing
contractual reimbursement arrangements with such insurers.
Pursuant to the Bankruptcy Court's order, a March 29, 2001 bar date was set for
the submission of allegedly unpaid pre-Chapter 11 settled asbestos claims and a
July 30, 2001 bar date for all other asbestos personal injury claims, asbestos
property damage claims, derivative asbestos claims and claims relating to
alleged nuclear liabilities arising from the operation of the Apollo/Parks
Township facilities against the Debtors. As of the March 29, 2001 bar date, over
49,000 allegedly settled claims had been filed. The Debtors have accepted
approximately 9,200 as pre-Chapter 11 binding settled claims at this time, with
an aggregate liability of approximately $77 million. The Bankruptcy Court has
disallowed approximately 33,000 claims as settled claims, and the Debtors are in
the process of challenging virtually all the remaining claims. If the Bankruptcy
Court determines these claims were not settled prior to the filing of the
Chapter 11 petition, these claims may be refiled as unsettled personal injury
claims. As of July 30, 2001, approximately 223,000 additional asbestos personal
injury claims, 60,000 related party claims, 168 property damage claims, 212
derivative asbestos claims and 524 claims relating to the Apollo/Parks Township
facilities had been filed. Since the July 30, 2001 bar date, approximately
13,000 additional personal injury claims were filed, including at least 2,000
claims originally filed as allegedly settled claims that were disallowed by the
Bankruptcy Court as settled claims and subsequently refiled as unsettled
personal injury claims. A bar date of January 15, 2003 was set for the filing of
certain general unsecured claims. As of January 15, 2003, in excess of 2,700
general unsecured claims were filed, and the Debtors have commenced an analysis
of these claims. Although the analysis is incomplete, the Debtors have
identified a number of claims that they intend to contest, including
approximately $183 million in claims filed by various insurance companies
seeking recovery from the Debtors under various theories. Additionally,
approximately $788 million in priority tax claims were filed, which appear to be
estimates of liability by taxing authorities for ongoing audits of MI. As to
both categories of claims, the Debtors believe that the claims are without merit
and intend to contest them. The Debtors will continue to analyze the remaining
claims. The estimated total alleged liability, as asserted by the claimants in
the Chapter 11 proceeding and in filed proofs of claim, of the asbestos-related
claims, including the alleged settled claims, exceeds the combined value of the
Debtors and certain assets transferred by B&W to its parent in a corporate
reorganization completed in fiscal year 1999 and the known available products
liability and property damage insurance coverages. The Debtors filed a proposed
Litigation Protocol with the U. S. District Court on October 18, 2001, setting
forth the intention of the Debtors to challenge all unsupported claims and
taking the position that a significant number of those claims may be disallowed
by the Bankruptcy Court. The ACC and FCR filed briefs opposing the Litigation
Protocol and requesting an estimation of pending and future claims.
99
Debtor-In-Possession Financing
In connection with the bankruptcy filing, the Debtors entered into the DIP
Credit Facility with a group of lenders providing for a three-year term. The
Bankruptcy Court approved the full amount of this facility, giving all amounts
owed under the facility a super-priority administrative expense status in
bankruptcy. The Debtors' obligations under the facility are (1) guaranteed by
substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and
(2) secured by a security interest on B&W Canada Ltd.'s assets. Additionally,
B&W and substantially all of its domestic subsidiaries granted a security
interest in their assets to the lenders under the DIP Credit Facility, effective
upon the defeasance or repayment of MI's public debt. The DIP Credit Facility
generally provides for borrowings by the Debtors for working capital and other
general corporate purposes and the issuance of letters of credit, except that
the total of all borrowings and nonperformance letters of credit issued under
the facility cannot exceed $100 million in the aggregate. The DIP Credit
Facility also imposes certain financial and nonfinancial covenants on B&W and
its subsidiaries. There were no borrowings under this facility at December 31,
2002 or 2001. A permitted use of the DIP Credit Facility is the issuance of new
letters of credit to backstop or replace pre-existing letters of credit issued
in connection with B&W's and its subsidiaries' business operations, but for
which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000, the
aggregate amount of all such pre-existing letters of credit totaled
approximately $172 million (the "Pre-existing LCs"), $9.4 million of which
remains outstanding at December 31, 2002. MII, MI and BWICO have agreed to
indemnify and reimburse the Debtors for any customer draw on any letter of
credit issued under the DIP Credit Facility to backstop or replace any
Pre-existing LC for which they already have exposure and for the associated
letter of credit fees paid under the facility. As of December 31, 2002,
approximately $140.9 million in letters of credit has been issued under the DIP
Credit Facility of which approximately $51.4 million was to replace or backstop
Pre-existing LCs. The DIP Credit Facility, which was scheduled to expire on
February 22, 2003, has been amended and extended to February 22, 2004, with an
additional one-year extension at the option of B&W. The amendment also provides
for a reduction of the facility from $300 million to $227.75 million.
Financial Results and Reorganization Items
Summarized financial data for B&W is as follows:
INCOME STATEMENT INFORMATION
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In thousands)
Revenues $ 1,497,401 $ 1,431,908 $ 1,162,458
Income (Loss) before Provision for Income Taxes $ (232,435)(1) $ 35,377 $ (3,572)
Net Income (Loss) $ (213,723) $ 17,499 $ (4,308)
(1) Includes a provision totaling $287.0 million for an increase in B&W's
asbestos liability.
BALANCE SHEET INFORMATION
December 31,
2002 2001
---- ----
(In thousands)
Assets:
Current Assets $ 709,730 $ 592,968
Noncurrent Assets 1,547,342 1,476,171
- --------------------------------------------------------------------------------------------
Total Assets $ 2,257,072 $ 2,069,139
============================================================================================
Liabilities:
Current Liabilities $ 551,228 $ 431,702
Noncurrent Liabilities(1) 1,743,737 1,457,459
Stockholder's Equity (Deficit) (37,893) 179,978
- --------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity (Deficit) $ 2,257,072 $ 2,069,139
============================================================================================
(1) Includes liabilities subject to compromise of approximately $1.7 billion,
which primarily result from asbestos-related issues.
100
In the course of the conduct of B&W's and its subsidiaries' business, MII and MI
have agreed to indemnify two surety companies for B&W's and its subsidiaries'
obligations under surety bonds issued in connection with their customer
contracts. At December 31, 2002, the total value of B&W's and its subsidiaries'
customer contracts yet to be completed covered by such indemnity arrangements
was approximately $107.7 million, of which approximately $31.9 million relates
to bonds issued after February 21, 2000.
As to the guarantee and indemnity obligations related to B&W's letters of credit
and surety bonds, the proposed B&W Chapter 11 settlement contemplates
indemnification and other protections for MII, MI and BWICO.
B&W's ability to continue as a going concern depends on its ability to settle
its ultimate asbestos liability from its net assets, future profits and cash
flow and available insurance proceeds, whether through the confirmation of a
plan of reorganization or otherwise. The B&W summarized financial information
set forth above has been prepared on a going-concern basis, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. As a result of the bankruptcy filing and
related events, we can provide no assurance that the carrying amounts of B&W's
assets will be realized or that B&W's liabilities will be liquidated or settled
for the amounts recorded. The independent accountant's report on the separate
consolidated financial statements of B&W for the years ended December 31, 2002,
2001 and 2000 includes an explanatory paragraph indicating that these issues
raise substantial doubt about B&W's ability to continue as a going concern.
Following are our condensed Pro Forma Consolidated Statements of Income (Loss)
data, assuming the deconsolidation of B&W for all periods presented.
Assumes deconsolidation as of the beginning of the period presented, all data
unaudited:
Year Ended
December 31,
2000
----
(In thousands)
Revenues $ 1,722,038
Operating Loss $ (9,699)
Loss before Provision for Income Taxes $ (19,271)
Net Loss $ (27,587)
Loss per Common Share:
Basic $ (0.46)
Diluted $ (0.46)
NOTE 21 - LIQUIDITY
As a result of the B&W bankruptcy filing in February 2000, our access to the
cash flows of B&W and its subsidiaries has been restricted. In addition and as
discussed in Note 12, JRM has incurred substantial overruns on its three EPIC
Spar projects. We also have recently received a credit downgrade. Accordingly,
our access to additional financing beyond what we currently have available may
be limited, particularly at JRM. Further, MI is restricted, as a result of
covenants in its debt instruments, in its ability to transfer funds to MII and
MII's other subsidiaries, including JRM, through cash dividends or through
unsecured loans or investments. Given these issues, we have assessed our ability
to continue as a viable business and have concluded that we can fund our
operating activities and capital requirements. Management's plans with regards
to these issues are as follows:
- B&W Chapter 11 Filing. Our ability to obtain a successful and timely
resolution to the B&W Chapter 11 proceedings has impacted our access
to, and sources of, capital. We believe the completion of the overall
settlement outlined in Note 20 will alleviate the impact of this
uncertainty.
- JRM's Negative Cash Flows Resulting from EPIC Spar Projects. Due
primarily to the losses anticipated to be incurred on the three EPIC
spar projects recorded during the year ended December 31, 2002 (see
Note 12), we expect JRM to experience negative cash flows during 2003.
Completion of the EPIC spar projects has, and will continue to, put a
strain on JRM's liquidity. JRM intends to fund its cash needs through
borrowings on the New Credit Facility (see Note 5), intercompany loans
from MII and sales of nonstrategic assets, including certain marine
101
vessels. In addition, under the terms of the New Credit Facility, JRM's
letter of credit capacity was reduced from $200 million to $100
million. This reduction does not negatively impact our ability to
execute the contracts in our current backlog. However, it will likely
limit JRM's ability to pursue projects from certain customers who
require letters of credit as a condition of award. We are exploring
other opportunities to improve our liquidity position, including
better management of working capital through process improvements,
negotiations with customers to relieve tight schedule requirements and
to accelerate certain portions of cash collections, and alternative
financing sources for letters of credit for JRM. In addition, we plan
to refinance BWXT on a stand-alone basis, thereby freeing up additional
letter of credit capacity for JRM and are currently in the process of
evaluating terms and conditions with certain financial institutions. We
also intend to seek a replacement credit facility for JRM prior to the
scheduled expiration of the New Credit Facility, in order to provide
for increased letter of credit capacity. Our ability to obtain such a
replacement facility will depend on numerous factors, including JRM's
operating performance and overall market conditions. If JRM experiences
additional significant contract costs on its EPIC Spar projects as a
result of unforeseen events, we may be unable to fund all of our
budgeted capital expenditures and meet all of our funding requirements
for our contractual commitments. In this instance, we would be required
to defer certain capital expenditures, which in turn could result in
curtailment of certain of our operating activities or, alternatively,
require us to obtain additional sources of financing which may not be
available to us or may be cost prohibitive.
- MI's Liquidity Issues. MI experienced negative cash flows in 2002,
primarily due to payments of taxes resulting from the exercise of MI's
rights under the Intercompany Agreement. MI expects to meet its cash
needs in 2003 through intercompany borrowings from BWXT, which BWXT may
fund through operating cash flows or borrowings under the New Credit
Facility.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the years ended December 31, 2002, 2001 and 2000, we had no disagreements
with PricewaterhouseCoopers LLP on any accounting or financial disclosure
issues.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers" in The Proxy Statement
for our 2003 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" in The Proxy
Statement for our 2003 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference to the material
appearing under the headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in The Proxy
Statement for our 2003 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Note 11 to our consolidated financial statements included in
this report is incorporated by reference.
102
Item 14. CONTROLS AND PROCEDURES
Within the 90-day period immediately preceding the filing of this report, our
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures were effective as of the date of that
evaluation. However, as we have disclosed in this report, for first-of-a-kind
projects undertaken by our Marine Construction Services segment in recent
periods, we have been unable to forecast accurately total costs to complete
until we have performed all major phases of the project. This has been primarily
due to unexpected design and production inefficiencies and execution
difficulties. We have addressed these problems by improving controls throughout
the bidding, contracting and project management process, as well as making
changes in operating management personnel at JRM. Except for those changes,
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
the evaluation referred to in the first sentence of this Item 14.
P A R T I V
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual
Report or incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheets as of December 31, 2002
and 2001
Consolidated Statements of Loss for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Loss for the
Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 2002, 2001
and 2000
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002, 2001 and 2000 Notes to
Consolidated Financial Statements for the Years Ended
December 31, 2002, 2001 and 2000
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required financial statement schedules will be
filed by amendment to this Form 10-K on Form 10-K/A.
3. EXHIBITS
Exhibit Number Description
3.1 McDermott International, Inc.'s Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1 of McDermott
International, Inc.'s Annual Report on Form 10-K for the fiscal
year ended March 31, 1996 (File No. 1-08430)).
3.2 McDermott International, Inc.'s Amended and Restated By-Laws.
3.3 Amended and Restated Certificate of Designation of Series D
Participating Preferred Stock (incorporated by reference herein
to Exhibit 3.1 to McDermott International, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001
(File No. 1-08430)).
4.1 Rights Agreement dated as of October 17, 2001 between McDermott
International, Inc. and EquiServe Trust Company, N.A., as
Rights Agent (incorporated by reference herein to Exhibit 1 to
McDermott International, Inc.'s Current Report on Form 8-K
dated October 17, 2001 (File No. 1-08430)).
4.2 Omnibus Credit Agreement dated as of February 10, 2003 among J.
Ray McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray
McDermott, Inc. and BWX Technologies, Inc., as borrowers,
McDermott International, Inc., as parent guarantor, the initial
lenders and initial
103
issuing banks named therein, Citicorp USA, Inc., as
administrative agent and collateral agent, Salomon Smith Barney
Inc., as lead arranger and book runner, The Bank of Nova
Scotia, as documentation agent, and Credit Lyonnais New York
Branch, as syndication agent.
4.3 Security Agreement dated February 10, 2003 from the grantors
referred to therein to Citicorp USA, Inc., as collateral agent.
4.4 Form of Subsidiary Guarantee related to the Omnibus Credit
Agreement.
We and certain of our consolidated subsidiaries are parties to other debt
instruments under which the total amount of securities authorized does not
exceed 10% of our total consolidated assets. Pursuant to paragraph 4(iii)(A) of
Item 601 (b) of Regulation S-K, we agree to furnish a copy of those instruments
to the Commission on request.
10.1* McDermott International, Inc.'s Supplemental Executive
Retirement Plan, as amended (incorporated by reference to
Exhibit 10 of McDermott International, Inc.'s Annual Report on
Form 10-K/A for fiscal year ended March 31, 1994 filed with the
Commission on June 27, 1994 (File No. 1-08430)).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10
to McDermott International, Inc.'s Annual Report on Form 10-K,
as amended, for the fiscal year ended March 31, 1983 (File No.
1-08430)).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated
by reference to Exhibit 10 to McDermott International, Inc.'s
Annual Report on Form 10-K, as amended, for the fiscal year
ended March 31, 1990 (File No. 1-08430)).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental
Compensation Plan (incorporated by reference to Exhibit A to
McDermott International, Inc.'s Proxy Statement for its Annual
Meeting of Stockholders held on August 9, 1994, as filed with
the Commission under a Schedule 14A (File No. 1-08430)).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance
Incentive Compensation Program (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s Annual Report on
Form 10-K, as amended, for the fiscal year ended March 31, 1988
(File No. 1-08430)).
10.6* McDermott International, Inc.'s 1992 Senior Management Stock
Option Plan (incorporated by reference to Exhibit 10 of
McDermott International, Inc.'s Annual Report on Form10-K/A for
fiscal year ended March 31, 1994 filed with the Commission on
June 27, 1994 (File No. 1-08430)).
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive
Program (incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s Annual Report on Form 10-K, as amended
for the fiscal year ended March 31, 1992 (File No. 1-08430)).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s Annual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1992 (File No. 1-08430)).
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term
Incentive Plan, as amended (incorporated by reference to
Appendix B to McDermott International, Inc.'s Proxy Statement
for its Annual Meeting of Stockholders held on September 2,
1997, as filed with the Commission under a Schedule 14A (File
No. 1-08430)).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on September 2, 1997, as filed with the
Commission under a Schedule 14A (File No. 1-08430)).
10.12 Support Agreement between McDermott International, Inc. and
McDermott Incorporated (incorporated by reference to Exhibit
10.11 of McDermott International, Inc.'s Annual Report
104
on Form 10-K for the nine-month transition period ended
December 31, 1999 (File No. 1-08430)).
10.13 McDermott International, Inc.'s 2001 Directors & Officers
Long-Term Incentive Plan (incorporated by reference to Appendix
A to McDermott International, Inc.'s Proxy Statement for its
Annual Meeting of Stockholders held on May 1, 2002, as filed
with the Commission under a Schedule 14A (File No. 1-08430)).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Significant Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to the requirements
of Item 15(c) of Form 10-K.
(b) Reports on Form 8-K:
On October 4, 2002, we filed a current report on Form 8-K
dated October 3, 2002, reporting under Item 5 - Other Events
that we had issued a press release in which we announced our
revised 2002 earnings outlook and set the date for our third
quarter earnings release.
On October 15, 2002, we filed a current report on Form 8-K
dated October 15, 2002, reporting under Item 5 - Other Events
that one of our subsidiaries had signed fabrication contracts
with the Azerbaijan International Operating Company.
On November 7, 2002, we filed a current report on Form 8-K
dated November 7, 2002, reporting under Item 5 - Other Events
that we had announced our results for the third quarter of
2002 and guidance for 2003.
On December 20, 2002, we filed a current report on Form 8-K
dated December 20, 2002, reporting under Item 5 - Other Events
that we had issued a press release in which we announced that
we, together with the ACC and the FCR, had filed a joint plan
of reorganization and a draft settlement agreement with the
Bankruptcy Court in the B&W Chapter 11 proceedings.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/ Bruce W. Wilkinson
----------------------------
March 21, 2003 By: Bruce W. Wilkinson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
Signature Title
/s/ Bruce W. Wilkinson Chairman of the Board, Chief Executive Officer
- ------------------------ and Director (Principal Executive Officer)
Bruce W. Wilkinson
/s/ Francis S. Kalman Executive Vice President and Chief Financial Officer
- ------------------------ (Principal Financial and Accounting Officer)
Francis S. Kalman
/s/ Philip J. Burguieres Director
- ------------------------
Philip J. Burguieres
/s/ Ronald C. Cambre Director
- ------------------------
Ronald C. Cambre
/s/ Bruce DeMars Director
- ------------------------
Bruce DeMars
/s/ Joe B. Foster Director
- ------------------------
Joe B. Foster
/s/ Robert L. Howard Director
- ------------------------
Robert L. Howard
/s/ John W. Johnstone, Jr. Director
- --------------------------
John W. Johnstone, Jr.
/s/ Richard E. Woolbert Director
- --------------------------
Richard E. Woolbert
March 21, 2003
106
CERTIFICATIONS
I, Bruce W. Wilkinson, Chief Executive Officer of McDermott International, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of McDermott
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 24, 2003
/s/ Bruce W. Wilkinson
-----------------------
Bruce W. Wilkinson
Chief Executive Officer
107
I, Francis S. Kalman, Chief Financial Officer of McDermott International, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of McDermott
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
March 24, 2003
/s/ Francis S. Kalman
-----------------------
Francis S. Kalman
Chief Financial Officer
108
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- -----
2.1 Agreement and Plan of Merger dated as of May 7, 1999 between McDermott
International, Inc. and J. Ray McDermott, S.A. (incorporated by
reference to Annex A of Exhibit (a)(1) to the Schedule 14D-1 filed by
McDermott International, Inc. with the Commission on May 13, 1999).
3.2 McDermott International, Inc.'s Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 of McDermott International,
Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31,
1996 (File No. 1-08430)).
3.2 McDermott International, Inc.'s Amended and Restated By-Laws.
3.3 Amended and Restated Certificate of Designation of Series D
Participating Preferred Stock (incorporated by reference herein to
Exhibit 3.1 to McDermott International, Inc.'s Quarterly Report on Form
10-Q for the quarter ended September 30, 2001 (File No. 1-08430)).
4.1 Rights Agreement dated as of October 17, 2001 between McDermott
International, Inc. and EquiServe Trust Company, N.A., as Rights Agent
(incorporated by reference herein to Exhibit 1 to McDermott
International, Inc.'s Current Report on Form 8-K dated October 17, 2001
(File No. 1-08430)).
4.2 Omnibus Credit Agreement dated as of February 10, 2003 among J. Ray
McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray McDermott,
Inc. and BWX Technologies, Inc., as borrowers, McDermott International,
Inc., as parent guarantor, the initial lenders and initial issuing
banks named therein, Citicorp USA, Inc., as administrative agent and
collateral agent, Salomon Smith Barney Inc., as lead arranger and book
runner, The Bank of Nova Scotia, as documentation agent, and Credit
Lyonnais New York Branch, as syndication agent.
4.3 Security Agreement dated February 10, 2003 from the grantors referred
to therein to Citicorp USA, Inc., as collateral agent.
4.4 Form of Subsidiary Guarantee related to the Omnibus Credit Agreement.
10.1* McDermott International, Inc.'s Supplemental Executive Retirement Plan,
as amended (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s Annual Report on Form 10-K/A for fiscal year
ended March 31, 1994 filed with the Commission on June 27, 1994 (File
No. 1-08430)).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s Annual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1983 (File No. 1-08430)).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10 to McDermott International, Inc.'s Annual
Report on Form 10-K, as amended, for the fiscal year ended March 31,
1990 (File No. 1-08430)).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental Compensation
Plan (incorporated by reference to Exhibit A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994, as filed with the Commission under
a Schedule 14A (File No. 1-08430)).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive
Compensation Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s Annual Report on Form 10-K, as amended,
for the fiscal year ended March 31, 1988 (File No. 1-08430)).
10.6* McDermott International, Inc.'s 1992 Senior Management Stock Option
Plan (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s Annual Report on Form10-K/A for fiscal year ended
March 31, 1994 filed with the Commission on June 27, 1994 (File No.
1-08430)).
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s Annual Report on Form 10-K, as amended for the fiscal year ended
March 31, 1992 (File No. 1-08430)).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992 (File No. 1-08430)).
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- -----
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term
Incentive Plan, as amended (incorporated by reference to Appendix B to
McDermott International, Inc.'s Proxy Statement for its Annual Meeting
of Stockholders held on September 2, 1997, as filed with the Commission
under a Schedule 14A (File No. 1-08430)).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on
September 2, 1997, as filed with the Commission under a Schedule 14A
(File No. 1-08430)).
10.12 Support Agreement between McDermott International, Inc. and McDermott
Incorporated (incorporated by reference to Exhibit 10.11 of McDermott
International, Inc.'s Annual Report on Form 10-K for the nine-month
transition period ended December 31, 1999 (File No. 1-08430)).
10.13 McDermott International, Inc.'s 2001 Directors & Officers Long-Term
Incentive Plan (incorporated by reference to Appendix A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on May 1, 2002, as filed with the Commission under a
Schedule 14A (File No. 1-08430)).
12.1 Ratio of Earnings to Fixed Charges.
21.1 Significant Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.