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 anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities and affiliates. We have cooperated fully with the investigations of the DOJ and the SEC into these matters. In February 2001, we were advised that the SEC has terminated its investigation and no enforcement action has been recommended.
On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees pled guilty to criminal charges by the DOJ that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the DOJ investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ that he participated in 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. Also in February 2001, we were advised that the SEC has terminated its investigation and no enforcement action has been recommended.
We have cooperated with the DOJ in its investigation. The DOJ also has requested additional information from us relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed J. Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court also dismissed the Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed this dismissal to the Fifth Circuit Court of Appeal. The Fifth Circuit affirmed the district court decision in February 2000 and Statoil has 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. A court hearing to set a trial schedule has been set in the Phillips Litigation.
In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, in certain cases, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign project claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. Subsequently, the Shell Litigation plaintiffs were allowed to amend their complaint to include non-heavy lift marine construction activity claims against the defendants. Currently, we are awaiting the court's decision on our motion to dismiss the foreign claims.
As a result of the initial allegations of wrongdoing in March 1997, we formed and have continued to maintain a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the DOJ investigation, our internal investigation, the above-referenced lawsuits or any actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. These matters could result in civil and criminal liability and have a material adverse effect on our consolidated financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania. The suit involves approximately 300 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the district court set aside the $36,700,000 judgment and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. The plaintiffs' claims against B&W in the Hall Litigation have been automatically stayed as a result of the B&W bankruptcy filing. B&W has also filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied in October 2000. B&W has appealed this decision.
In 1998, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8,000,000 for which it seeks reimbursement from other parties. There is a controversy between B&W and its insurers as to the amount of coverage available under the liability insurance policies covering the facilities. B&W filed a declaratory judgment action in a Pennsylvania State Court seeking a judicial determination as to the amount of coverage available under the policies. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies; but our insurance coverage may not be adequate and we may be materially adversely impacted if our liabilities exceed our coverage. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1999 and early 2000, several persons who allegedly purchased shares of our common stock during the period from May 21, 1999 through November 11, 1999 filed four purported class action complaints against MII and two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United States District Court for the Eastern District of Louisiana. Each of the complaints alleged that the defendants violated federal securities laws by disseminating materially false and misleading information and/or concealing material adverse information relating to our estimated liability for asbestos-related claims. Each complaint sought relief, including unspecified compensatory damages and an award for costs and expenses. The four cases were subsequently consolidated. In June 2000, the plaintiffs filed a consolidated amended complaint, and in July 2000, we filed a motion to dismiss all claims asserted in that complaint. In September 2000, the District Court dismissed with prejudice the plaintiffs' consolidated amended complaint for failure to state a claim upon which relief can be granted, which dismissal the plaintiffs appealed to the U.S. Fifth Circuit Court of Appeal in October 2000. We believe the substantive allegations contained in the consolidated amended complaint are without merit and intend to continue defending against these claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due under the installation contract, and, in January 2000, JRM instituted an arbitration proceeding against Texaco seeking the amount owed. Texaco has countered in the arbitration, claiming consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor. Texaco has also filed a lawsuit against a
number of other parties, claiming that they are responsible for the incident. It is our position that the contract between the parties prohibits Texaco's claims against JRM and JRM is entitled to the amount withheld.
Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance or warranty related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position or results of operations.
See Note 20 to the consolidated financial statements regarding B&W's potential liability for non-employee asbestos claims and the Chapter 11 reorganization proceedings commenced by B&W and certain of its subsidiaries on February 22, 2000.
Item 4.
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, 2000.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange. High and low stock prices and dividends we declared in the nine-month period ended December 31, 1999 and the year ended December 31, 2000 were as follows:
NINE-MONTH PERIOD ENDED DECEMBER 31, 1999
YEAR ENDED DECEMBER 31, 2000
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.
As of December 31, 2000, there were approximately 4,110 record holders of our common stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA
(1) Effective February 22, 2000, our consolidated financial results exclude the results of B&W and its consolidated subsidiaries.
See Note 18 to the consolidated financial statements for significant items included in the year ended December 31, 2000 and the nine-month period ended December 31, 1999.
Our results for the fiscal year ended March 31, 1999 include:
- a gain on the dissolution of a joint venture of $37,390,000;
- a gain on the settlement and curtailment of postretirement benefit plans of $27,642,000;
- interest income of $18,630,000 on domestic tax refunds;
- a gain of $12,000,000 from the sale of assets of a joint venture;
- an $8,000,000 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 $38,719,000;
- a loss of $85,185,000 for estimated costs relating to estimated future non-employee asbestos claims;
- losses of $21,897,000 related to impairment of assets and goodwill;
- various provisions of $20,327,000 related to potential settlements of litigation and contract disputes; and
- the write-off of $12,600,000 of receivables from a joint venture.
Our results for the fiscal year ended March 31, 1998 include:
- a gain of $96,059,000 from the sale of our interest in Sakhalin Energy Investment Company, Ltd.;
- a gain of $33,072,000 from the sale of our interest in Universal Fabricators Incorporated;
- a gain of $223,651,000 and a $61,637,000 distribution of earnings from the termination of the HeereMac joint venture;
- impairment losses of $285,427,000, including a write-off of goodwill associated with the acquisition of OPI of $262,901,000; and
- a $5,419,000 provision for employee severance costs.
Our results for the fiscal year ended March 31, 1997 include:
- asset impairment losses of $54,642,000;
- gains on asset disposals of $72,121,000, including the realization of $12,271,000 of the deferred gain on the sale of major marine vessels to HeereMac;
- favorable workers' compensation cost adjustments and other insurance adjustments of $21,441,000;
- a provision of $72,400,000 for estimated future non-employee asbestos claims;
- write-downs of equity investments totaling $25,875,000;
- the $12,506,000 write-down of certain claims for which recovery was not probable; and
- a $10,285,000 provision related to employee severance costs.
Item 7.
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
The amount of revenues we generate from our Marine Construction Services segment largely depends on the level of oil and gas development activity in the world's major hydrocarbon producing regions. Our revenues from this segment reflect the variability associated with the timing of significant development projects. Although oil and gas prices have increased over the past year, this is not expected to have a significant impact on our Marine Construction Services' customers' exploration and production spending for the first half of 2001. Consequently, we do not expect our Marine Construction Services segment's revenues to increase significantly until the second half of 2001. During 2001, we should begin to see modest benefits from stronger marine construction results, followed by more substantial improvements in 2002. Although the timing of the award of many marine construction projects remains uncertain, we believe this segment's backlog should continue to increase for the foreseeable future.
The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a result of reductions in the defense budget over the past several years, we do not expect this segment to experience any significant growth in the next three years. We expect this segment's backlog to remain relatively constant since it is the sole supplier to the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components for the Naval Reactors Program. We currently expect the 2001 operating activity of this segment will be about the same as in 2000.
The revenues of our Industrial Operations segment are affected by variations in the business cycles in its customers' industries and the overall economy. Legislative and regulatory issues such as environmental regulations and fluctuations in U.S. Government funding patterns also affect this segment. We currently expect the 2001 operating activity of this segment will be about the same as in 2000.
The volume of work at JRM in the next quarter is not expected to be significantly greater than the December quarter. Under these conditions, it is not likely that the Marine Construction Services segment will generate sufficient revenues to cover its costs in the March 2001 quarter. However, operating income in our Government and Industrial Operations segments should offset these losses. After net interest expense, other expenses and taxes, we expect net results to be a loss in the next quarter. We expect profitability to improve in each of the final three quarters of 2001 as JRM markets recover and as the Y-12 and Pantex contracts recently awarded to BWXT increase income from investees in Government Operations during the second half of the year.
Effective February 22, 2000 and until B&W and its filing subsidiaries emerge from the Chapter 11 reorganization proceedings and the subsequent accounting is determined, we no longer consolidate B&W's and its subsidiaries' results of operations in our consolidated financial statements and our investment in B&W is presented on the cost method. Through February 21, 2000, B&W's and its
subsidiaries' results are included in our segment results under Power Generation Systems - B&W (see Note 17 to the consolidated financial statements). B&W and its consolidated subsidiaries' pre-bankruptcy filing revenues of $155,774,000 and operating income of $7,951,000 are included in our consolidated financial results for the year ended December 31, 2000.
In general, each of our business segments is composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues.
We evaluate the realizability of our long-lived assets, including property, plant and equipment and goodwill, whenever events or changes in circumstances indicate that we may not be able to recover the carrying amounts of those assets. We carry our property, plant and equipment at cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred.
We derive a significant portion of our revenues from foreign operations. As a result, international factors, including variations in local economies and changes in foreign currency exchange rates affect our revenues and operating results. We 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.
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
Marine Construction Services
Revenues increased $20,218,000 to $757,508,000 due to higher volumes in offshore activities in the Far East relating to the West Natuna project. Lower volumes in essentially all other geographic areas partially offset this increase.
Segment operating income decreased $76,895,000 from income of $43,361,000 to a loss of $33,534,000, primarily due to lower volumes and margins in North American activities including our Mexican ship repair business and in Eastern Hemisphere fabrication operations. The decrease also reflects the impact of the amortization of the goodwill associated with our purchase of the minority interest in JRM in June 1999. Higher volumes on the West Natuna project and potential litigation settlements recorded in the prior year partially offset these decreases.
Loss on asset disposals and impairments-net decreased $20,869,000 to $1,012,000. The loss in the prior year was due to impairment losses on fabrication facilities and fabrication and marine equipment. The prior year also included a write-off of goodwill associated with worldwide engineering and a Mexican shipyard.
Income (loss) from investees increased $12,739,000 from a loss of $9,873,000 to income of $2,866,000, primarily due to higher operating results and the recognition of a benefit on revisions to estimated withholding taxes in our Mexican joint venture. Lower operating results from our U.K. fabrication joint venture and our exit from our Far East joint venture partially offset these increases.
Backlog was $541,647,000 and $514,822,000, respectively, at December 31, 2000 and 1999.
Government Operations
Revenues increased $32,753,000 to $431,252,000, primarily due to higher volumes from nuclear fuel assemblies and reactor components for the U.S. Government.
Segment operating income decreased $9,263,000 to $39,800,000, primarily due to a settlement relating to environmental restoration costs recorded in the prior year. This segment also experienced lower margins from management and operating contracts for U.S. Government-owned facilities and higher general and administrative expenses due to increased allocations. Higher volumes from nuclear fuel assemblies and reactor components for the U. S. Government and contract adjustments on a commercial nuclear environmental services contract in the prior year partially offset these decreases.
Income from investees increased $4,521,000 to $11,107,000, primarily due to higher operating results from a joint venture in Idaho. Lower operating results from a joint venture in Colorado partially offset this increase.
Backlog was $1,078,803,000 and $1,151,960,000, respectively, at December 31, 2000 and 1999. At December 31, 2000, this segment's backlog with the U.S. Government was $1,033,706,000 (of which $8,406,000 had not yet been funded).
Industrial Operations
Revenues increased $15,466,000 to $503,970,000, primarily due to higher volumes from plant maintenance activities in Canadian operations. Lower volumes from engineering activities in Canadian operations partially offset these increases.
Segment operating income decreased $553,000 to $10,693,000, primarily due to lower volumes from engineering activities in Canadian operations. Higher volumes and margins from plant maintenance activities in Canadian operations and lower general and administrative expenses partially offset these decreases.
Loss on asset disposals and impairments-net increased $775,000 to $830,000, primarily due to asset impairments at one of our research facilities.
Income (loss) from investees increased $2,071,000 from a loss of $1,967,000 to income of $104,000, primarily due to losses in the prior year from our joint venture located in Utah. This joint venture is now consolidated.
Backlog was $396,429,000 and $415,820,000, respectively, at December 31, 2000 and 1999.
Power Generation Systems
Revenues increased $33,456,000 to $33,794,000, primarily due to the acquisition of various business units of the Ansaldo Volund Group, an international power generation operation.
Segment operating loss increased $6,846,000 to $7,783,000, primarily due to costs incurred on the initial contracts of the Ansaldo Volund Group.
Loss from investees increased $9,477,000 to $24,630,000, primarily due to charges of $23,449,000, including approximately $12,000,000 related to financial guarantees, to exit certain foreign joint ventures. The prior year included the write-off of notes and accounts receivable from a foreign joint venture in Turkey.
Other Unallocated Items
Other unallocated items improved $73,194,000 from expense of $56,285,000 to income of $16,909,000, primarily due to provisions for estimated future non-employee products liability asbestos claims and reserves for potential litigation settlements recorded in the prior year. We also experienced favorable employee benefit adjustments, primarily attributable to income from over-funded pension plans, and lower general and administrative expenses. Initial reorganization expenses incurred by MII associated with the B&W Chapter 11 filing and provisions for foreign claims settlements partially offset these improvements.
Other Income Statement Items
Interest income decreased $24,303,000 to $27,121,000, primarily due to a decrease in investments.
Interest expense decreased $6,159,000 to $43,709,000, primarily due to changes in debt obligations and prevailing interest rates.
We no longer have minority interest, primarily due to the acquisition of the minority interest in JRM in the prior year.
Other-net improved $59,192,000 from expense of $45,536,000 to income of $13,656,000. This improvement was primarily due to a loss of $45,535,000 for insolvent insurers providing coverage for estimated future non-employee products liability asbestos claims recorded in the prior year and income from over funded pension plans from prior discontinued operations.
The provision for income taxes decreased $1,227,000 to $12,105,000, while the loss before provision for income taxes and extraordinary item increased $365,000 to $9,977,000. The decrease in the provision for income taxes was primarily the result of an increase in loss before provision for income taxes. Additionally, the change in the relationship of pretax income to the provision for income taxes primarily resulted from losses on foreign joint ventures with no corresponding tax benefits of $25,640,000 and $15,751,000 in the years ended December 31, 2000 and 1999, respectively. Non-deductible amortization of goodwill of $18,007,000 and $9,929,000, respectively, is included in the years ended December 31, 2000 and 1999. The goodwill was created by the premium we paid on the acquisition of the minority interest in JRM in June 1999. The current period also includes a benefit of $5,500,000 from a favorable tax settlement in a foreign jurisdiction. Income taxes in the year ended December 31, 2000 also include a provision of $3,800,000 for B&W for the pre-filing period and a tax benefit of $1,400,000 from the use of certain tax attributes in a foreign joint venture. 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.
NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 VS. NINE-MONTH PERIOD ENDED DECEMBER 31, 1998 (UNAUDITED)
Marine Construction Services
Revenues decreased $542,280,000 to $490,719,000 due to lower volumes in essentially all geographic areas.
Segment operating income decreased $83,121,000 to $31,078,000, primarily due to the lower volumes and the amortization of the goodwill associated with our purchase of the public minority interest in JRM. Higher margins in North American offshore activities, higher margins in Middle Eastern procurement activities and lower general and administrative expenses partially offset these decreases.
Gain (loss) on asset disposals and impairments-net decreased $40,501,000 from a gain of $38,849,000 to a loss of $1,652,000. The gain in the prior period was primarily due to the termination of the McDermott-ETPM joint venture and the sale of three vessels.
Income (loss) from investees decreased $20,543,000 from income of $7,335,000 to a loss of $13,208,000, primarily due to lower operating results from our Mexican joint venture and the gain we realized in the prior period on the sale of assets in a Malaysian joint venture.
Government Operations
Revenues increased $15,793,000 to $306,282,000, primarily due to higher volumes from management and operating contracts for U.S. Government-owned facilities, nuclear fuel assemblies and reactor components for the U.S. Government and other government operations.
Segment operating income increased $9,710,000 to $28,581,000, primarily due to the $8,000,000 settlement we recorded in the prior period for punitive damages in a civil suit associated with a formerly operated Pennsylvania facility. We also generated higher margins from our commercial nuclear environmental services. Lower margins on management and operating contracts for U.S. Government-owned facilities and other government operations partially offset these increases.
Income from investees increased $2,498,000 to $4,322,000, primarily due to higher operating results from three joint ventures.
Industrial Operations
Revenues increased $60,984,000 to $366,582,000, primarily due to higher volumes of engineering and plant maintenance activities in our Canadian operations. Lower sales volumes from air-cooled heat exchangers and parts partially offset these increases.
Segment operating income decreased $5,660,000 to $8,513,000, primarily due to lower sales volumes and margins from air-cooled heat exchangers and parts and higher general and administrative expenses. Increased volumes of engineering and plant maintenance activities in our Canadian operations and reduced selling and marketing expenses partially offset these decreases.
Power Generation Systems
Revenues decreased $45,590,000 to $729,969,000, primarily due to lower volumes from the fabrication, repair and retrofit of existing facilities, boiler cleaning equipment, private power systems projects and industrial boilers. Higher volumes from replacement parts, nuclear services and replacement nuclear steam generators partially offset these decreases.
Segment operating income decreased $4,914,000 to $52,095,000, primarily due to lower volumes and margins from boiler cleaning equipment and private power systems projects, lower margins from the fabrication and erection of fossil fuel steam and environmental control systems and a lower volume of sales of industrial boilers. In addition, this segment experienced higher selling and marketing expenses. Higher volumes and margins from replacement parts and nuclear services and higher margins from fabrication, repair and retrofit services provided for existing facilities partially offset these decreases.
Income (loss) from investees decreased $6,893,000 from income of $6,255,000 to a loss of $638,000, primarily due to lower operating results in three foreign joint ventures and a payment we made relating to our decision to exit a joint venture in Turkey. Higher operating results from a joint venture operating in Pennsylvania partially offset these decreases.
Other Unallocated Expenses
Other unallocated expenses increased $5,280,000 to $6,509,000, primarily due to higher research and development and legal expenses. Lower employee benefit expenses partially offset these increases.
Other Income Statement Items
Interest income decreased $46,541,000 to $32,126,000, primarily due to interest income we recorded on settlement of disputed tax items with the IRS in the prior period and decreases in investments.
Interest expense decreased $13,394,000 to $35,743,000, primarily due to reductions in debt obligations and prevailing interest rates.
Minority interest expense decreased $55,690,000 to $5,679,000, primarily due to the purchase of the remaining publicly held shares of JRM by MII.
Our provision for income taxes increased $18,135,000 to $34,658,000, while our income before the provision for income taxes decreased $196,890,000 to $35,098,000. The change in the relationship of pretax income to the provision for income taxes primarily resulted from (1) a decrease in our tax expense of $17,925,000 in the prior period due to the change in our valuation allowance for deferred tax assets and (2) $21,367,000 we recorded in the prior period as a result of favorable tax settlements of disputed items in foreign jurisdictions. A decrease in income in non-tax jurisdictions also contributed to the change. The provision for the nine-month period ended December 31, 1999 reflects a non-deductible loss of $37,810,000 on the curtailment of a foreign pension plan and non-deductible amortization of goodwill of $9,929,000 created by the premium we paid on the acquisition of the minority interest in JRM. 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 basis (for example, revenues versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.
THE BABCOCK & WILCOX COMPANY
B&W and its subsidiaries conduct substantially all of the operations of our Power Generation Systems segment. The amount of revenues we generate from our Power Generation Systems segment primarily depends on capital spending by customers in the electric power generation industry. In that industry, persistent economic growth in the United States has brought the supply of electricity into approximate balance with energy demand, except during periods of peak demand. Electric power producers have generally been meeting these peaks with new combustion turbines rather than new base-load capacity. In January, 2001, the state of California experienced shortages of electricity during periods of peak demand. This has caused many power companies to re-examine their needs for new power plants and for improvements at existing power plants. Depending on the outcome of these studies, power companies may order new plants and may improve their existing plants. New U.S. emissions requirements have also prompted some customers to place orders for environmental equipment. Domestic demand for electrical power generation industry services and replacement nuclear steam generators continues at strong levels. The international markets remain unsettled. Economic and political instability in Asia has caused projects there to be delayed, suspended or cancelled. We currently expect the 2001 operating activity of this segment will be about the same as in 2000.
B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $186,966,000 as of December 31, 2000 is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization. See Note 20 to the consolidated financial statements for B&W's financial information at December 31, 2000.
In the year ended December 31, 2000:
B&W's revenues increased $141,357,000 to $1,162,458,000, primarily due to higher volumes from the fabrication and erection of fossil fuel steam and environmental control systems and replacement parts. Lower volumes from fabrication, repair and retrofit of existing facilities, industrial boilers and private power systems partially offset these increases;
B&W's operating income (loss) decreased $40,025,000 from income of $36,190,000 to a loss of $3,835,000, primarily due to lower margins from the fabrication and erection of fossil fuel steam and environmental control systems and private power systems. B&W also recorded additional charges to substantially completed original equipment contracts still under warranty or in dispute
resolution with primarily international customers. In addition, B&W experienced lower volumes and margins from the fabrication, repair and retrofit of existing facilities and industrial boilers, lower margins from replacement parts and reorganization expenses associated with the Chapter 11 filing. Provisions for estimated future non-employee products liability asbestos claims in the prior year partially offset these decreases. In addition, B&W experienced lower general and administrative expenses due to decreases in allocations;
Interest income decreased $8,134,000 to $4,051,000, primarily due to interest income on domestic tax refunds in the prior period;
Other-net improved $45,378,000 from expense of $44,945,000 to income of $433,000, primarily due to a loss of $45,535,000 for insolvent insurers providing coverage for estimated future non-employee products liability asbestos claims in the prior period.
B&W's backlog at December 31, 2000 and 1999 was $1,030,628,000 and $1,202,949,000, respectively.
In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into the DIP Credit Facility with a group of lenders, with Citibank, N.A. as administrative agent, for a three-year term. The facility is subject to certain financial and non-financial covenants. Presently, B&W cannot satisfy certain of these covenants and is negotiating with its lenders to obtain a waiver and/or an amendment to this facility. See Note 20 to the consolidated financial statements for further information on the DIP Credit Facility.
We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries' operating activities and meet its debt and capital requirements for the foreseeable future. However, the ability of B&W to continue as a going concern is dependent upon its ability to settle its ultimate asbestos liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a rejection of our plan of reorganization could change the amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment in B&W. See Note 20 to the consolidated financial statements for more information.
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
During the year ended December 31, 2000, our cash and cash equivalents decreased $78,114,000 to $84,620,000 and total debt increased $9,990,000 to $419,503,000, primarily due to an increase in short-term borrowings of $9,676,000. During this period, we received cash of $134,819,000 from sales and maturities of investments and $4,778,000 from the sale of assets. We used cash of $114,449,000 for the purchase of investments, $49,066,000 in operating activities, $49,300,000 for additions to property, plant and equipment, $8,972,000 for dividends on MII's common stock and $2,707,000 for B&W Volund's acquisition of certain business units of the Ansaldo Volund Group.
At December 31, 2000 and 1999, we had available various uncommitted short-term lines of credit from banks totaling $12,819,000 and $72,766,000, respectively. At December 31, 1999, borrowings against these lines of credit were $4,148,000. There were no borrowings against these lines at December 31, 2000.
On February 21, 2000, B&W and certain of its subsidiaries entered into the DIP Credit Facility to satisfy their working capital and letter of credit needs during the pendency of their bankruptcy case. As a condition to borrowing or obtaining letters of credit under the DIP Credit Facility, B&W must comply with certain financial covenants. B&W is not currently in compliance with these requirements. B&W is currently negotiating with its banks to obtain a waiver and/or an amendment to this facility to permit it to borrow and/or obtain letters of credit even though it is currently not able to comply with some of these financial covenants. We anticipate that these negotiations will be successful. There were no borrowings under this facility at December 31, 2000. See Note 20 to the consolidated financial statements for further information on the DIP Credit Facility.
On February 21, 2000, we also entered into other financing arrangements providing financing to the balance of our operations. This financing, as amended on April 24, 2000, consists of the MII Credit Facility and a $200,000,000 credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each facility is with a group of lenders, for which Citibank, N.A. is acting as the administrative agent.
The MII Credit Facility consists of two tranches, each of which has a three-year term. One is a revolving credit facility that provides for up to $100,000,000 to the borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 of letters of credit and may be used to reimburse issuers for drawings under certain outstanding letters of credit totaling $38,292,000 issued for the benefit of B&W and its subsidiaries. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the MII Credit Facility may not exceed $200,000,000. This facility is secured by a collateral account funded with various U.S. government securities with a marked-to-market value equal to 105% of the aggregate amount available for drawing under letters of credit and revolving credit borrowings then outstanding. Borrowings against this facility at December 31, 2000 were $10,000,000. At March 12, 2001, borrowings under this facility were $50,000,000.
The JRM Credit Facility also consists of two tranches. One is a revolving credit facility that provides for up to $100,000,000 for advances to borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 of letters of credit. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the JRM Credit Facility may not exceed $200,000,000. The facility is subject to certain financial and non-financial covenants. Borrowings against this facility at December 31, 2000 were $50,000,000.
At December 31, 2000, we had total cash, cash equivalents and investments of $445,815,000. Our investment portfolio consists primarily of government obligations and other investments in debt securities. The fair value of our investments at December 31, 2000 was $361,195,000. As of December 31, 2000, we had pledged approximately $43,408,000 fair value of these investments to secure a letter of credit in connection with certain reinsurance agreements and $34,440,000 fair value of these investments to secure borrowings of $33,838,000 incurred under repurchase agreements. In addition, approximately $205,876,000 fair value of these investments were pledged to secure the MII Credit Facility. We had free cash available totaling approximately $45,000,000 at December 31, 2000.
In connection with B&W's bankruptcy filing, MII entered into a support agreement pursuant to which it agreed to provide MI with standby financial support on its interest payments on its (i) $225,000,000 in aggregate principal amount of 9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in principal amount under a Pollution Control Note due 2009. MI is required to pay MII $5,000 per month under the support agreement which expires on March 15, 2002. MI's 9.375% notes with an aggregate principal amount of $225,000,000 are scheduled to mature on March 15, 2002. MI currently has insufficient cash and other liquid resources on hand to fund the repayment of its 9.375% notes. However, MI owns substantial subsidiaries outside the B&W
Chapter 11 filing, including BWXT which comprises our Government Operations segment and HPC which operates our heat exchanger business. In addition, MI has a financial asset pursuant to a stock purchase and sale agreement with MII (the "Intercompany Agreement"). For the 2001 year, MI would be entitled to $249,637,000 on the exercise of all of its rights under that agreement, which would generate tax of $87,338,000. ( See Note 11 to the consolidated financial statements for a detailed description of the terms and conditions of the Intercompany Agreement.)
MI is currently exploring various alternatives relative to extending the maturity of its 9.375% notes, as well as other potential refinancing alternatives. Therefore, MI does not currently intend to exercise its right to sell under the Intercompany Agreement (although it may in the future elect to do so). There is no assurance, however, that MI's efforts to extend the maturity of or refinance these notes will be successful. In that case MI will have to consider exercising its rights under the Intercompany Agreement, selling all or a part of one or more of its operating subsidiaries, or some combination of these and other alternatives. MI's level of indebtedness and its lack of liquidity pose substantial risks to MI and the holders of its debt securities. See Section K of Items 1 and 2 -- Business and Properties -- Risk Factors and Note 20 to the consolidated financial statements for further information on these notes.
MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. At December 31, 2000, substantially all the net assets of MI were subject to those restrictions. At December 31, 2000, JRM and its subsidiaries could make unsecured loans to or investments in MII and its other subsidiaries of approximately $72,000,000.
We have been notified by our two surety companies that they are no longer willing to issue bonds on our behalf. We obtain surety bonds in the ordinary course of business of several of our operations to secure contract bids and to meet the bonding requirements of various construction and other contracts with customers. We are currently negotiating with other surety companies. We expect to obtain the coverage we require through other surety companies as well as using our existing credit facilities for contract-related performance guarantees. We do not expect this situation to impact MII's liquidity negatively for the foreseeable future.
We expect to incur negative cash flows in the first two quarters of 2001, with the third and fourth quarters returning to a positive cash flow position. We expect to meet capital expenditure, working capital and debt maturity requirements from cash and cash equivalents and short-term borrowings.
MI and its subsidiaries are unable to incur additional long-term debt obligations under one of MI's public debt indentures, other than in connection with certain extension, renewal or refunding transactions (including an extension or refinancing of MI's 9.375% notes).
As a result of its bankruptcy filing, B&W and its filing subsidiaries are precluded from paying dividends to shareholders and making payments on any pre-bankruptcy filing accounts or notes payable that are due and owing to any other entity within the McDermott group of companies (the "Pre-Petition Inter-company Payables") and other creditors during the pendency of the bankruptcy case, without the Bankruptcy Court's approval.
We believe that the bankruptcy filing and the weak Marine Construction Services markets have contributed to the reduction in our credit rating from BA1 to BA3 by Moody's Investor Service and BB to B by Standard & Poors and, consequently, could adversely impact our access to capital. As a result, we have assessed our ability to continue as a going concern and have concluded that we can continue to fund our operating activities and capital requirements for the foreseeable future.
At December 31, 2000, we had a valuation allowance for deferred tax assets of $15,478,000, which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that our remaining deferred tax assets are realizable through carrybacks and future reversals of existing taxable temporary differences, future taxable income and, if necessary, the implementation of
tax planning strategies involving sales of appreciated assets. Uncertainties that affect the ultimate realization of our deferred tax assets include the risk of incurring losses in the future and the possibility of declines in value of appreciated assets involved in the tax planning strategies we have identified. We have considered these factors in determining our valuation allowance. We will continue to assess the adequacy of our valuation allowance on a quarterly basis.
We have evaluated and expect to continue evaluating possible strategic acquisitions, some of which may be material. At any given time we may be engaged in discussions or negotiations or enter into agreements relating to potential acquisition transactions.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require us to recognize all derivatives on our consolidated balance sheet at their fair values. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," which adds to the guidance related to accounting for derivative instruments and hedging activities. We have determined that the adoption of SFAS No. 133, as amended by SFAS No. 138, will have no material effect on our consolidated financial position or results of operations.
Item 7A.
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 our unsecured and committed revolving credit facilities (see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources). At December 31, 2000 and 1999, we had borrowed $60,000,000 and $4,148,000, respectively, against these short-term 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. The current year information does not include B&W, due to its deconsolidation effective February 22, 2000.
Principal Amount by Expected Maturity (In thousands)
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.
Contract Amount by Expected Maturity (In thousands)
THE BABCOCK & WILCOX COMPANY
Currently, 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. B&W has exposure to market risk from changes in interest rates related primarily to its investment portfolio, which is primarily comprised of investments in U.S. government obligations and other highly liquid debt securities denominated in U.S. dollars with maturities of three months or less. The fair value of B&W's investments at December 31, 2000 was $66,373,000, which was equal to amortized cost.
Interest Rate Sensitivity
B&W has exposure to changes in interest rates on the DIP Credit Facility. At December 31, 2000, B&W had no borrowings against this facility. B&W also has exposure to changes in interest rates on its long-term debt obligation which totaled $4,717,000 at December 31, 2000. This debt currently bears interest at 5.30%, matures $50,000 per year over the next five years and has an estimated fair value of $4,717,000.
B&W has operations in foreign locations, and, as a result, its 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, B&W regularly hedges those risks with foreign currency forward contracts. B&W does not enter into speculative forward contracts.
Exchange Rate Sensitivity
The following table provides information about B&W's foreign currency forward contracts and presents such information in U.S. dollar equivalents. The table presents notional amounts and related weighted-average exchange rates by expected (contractual) maturity dates and constitutes a forward-looking statement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.
Contract Amount by Expected Maturity (In thousands)
REPORT OF INDEPENDENT ACCOUNTANTS
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 income (loss), comprehensive income (loss), stockholders' equity, and cash flows present fairly, in all material respects, the financial position of McDermott International, Inc. and subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for the year ended December 31, 2000, the nine-month period ended December 31, 1999, and the fiscal year ended March 31, 1999, 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 20 to the consolidated financial statements, in late 1999, The Babcock & Wilcox Company ("B&W"), a subsidiary of the Company, experienced a greater-than-anticipated increase in the amounts demanded to settle certain asbestos-related claims. As a result, on February 22, 2000, B&W filed a voluntary petition with the U.S. Bankruptcy Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Those increased demands and the Chapter 11 filing result in increased uncertainty with respect to the amounts, means, and timing of the ultimate settlement of asbestos-related claims and the recovery of the Company's net investment in B&W, which was $186,966,000 at December 31, 2000. A subsidiary of the Company has $225 million of debt scheduled to mature on March 15, 2002. As described in Note 20 to the consolidated financial statements, the inability to refinance or extend this debt could have a material adverse impact on the Company.
PricewaterhouseCoopers LLP New Orleans, Louisiana February 23, 2001
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS)
See accompanying notes to consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
See accompanying notes to consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
McDERMOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000
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 have significant influence over. We have eliminated all significant intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform with the presentation at December 31, 2000.
McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes:
- J. Ray McDermott, S.A. ("JRM"), a Panamanian subsidiary of MII, and its consolidated subsidiaries;
- McDermott Incorporated ("MI"), a Delaware subsidiary of MII, and its consolidated subsidiaries;
- Babcock & Wilcox Investment Company ("BWICO"), a Delaware subsidiary of MI;
- BWX Technologies, Inc. ("BWXT"), a Delaware subsidiary of BWICO, and its consolidated subsidiaries; and
- The Babcock & Wilcox Company ("B&W"), an unconsolidated Delaware subsidiary of BWICO.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S. Bankruptcy Code. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve their asbestos liability. B&W and its subsidiaries are committed to operating their businesses as normal, delivering products and services as usual and pursuing new contracts and growth opportunities. However, as of February 22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy Court and, as a result, our access to cash flows of B&W and its subsidiaries is restricted.
Due to the bankruptcy filing, beginning on February 22, 2000, we no longer consolidate B&W financial results in our consolidated financial statements, and our investment in B&W is presented on the cost method. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based on the applicable circumstances and facts at such time, including the terms of any plan of reorganization. The filing results in increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of MII's net investment in B&W which was $186,966,000 at December 31, 2000. At December 31, 2000, the MII's investment exceeds the underlying net assets of B&W by $13,749,000. See Note 20 for further information on B&W's asbestos liabilities and condensed consolidated financial information of B&W.
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.
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 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 non-current 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. 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 $3,533,000, ($1,651,000) and $3,384,000 for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively. In the fiscal year ended March 31, 1999, we transferred a loss of $15,596,000 from currency translation adjustments to gain (loss) on asset disposals and impairments - net due to the sale of foreign investments.
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 a material adjustment 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 collection is probable. At December 31, 2000 and 1999, we have included in accounts receivable and contracts in progress approximately $19,484,000 and $11,614,000, respectively, relating to commercial and U.S. Government contracts claims whose final settlement is subject to future determination through negotiations or other procedures which had not been completed.
We are usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems' contracts. We do not recognize those settlements or claims for additional compensation until we reach final settlements with our customers.
We have included in accounts receivable - trade the following amounts representing retainages on contracts:
Of the long-term retainages at December 31, 2000, we anticipate collecting $302,000 in 2002, $7,592,000 in 2003, $1,817,000 in 2004 and $383,000 in 2005.
Inventories
We carry our inventories at the lower of cost or market. We determine cost on an average cost basis except for certain materials inventories at B&W, for which we use the last-in first-out ("LIFO") method. We determined the cost of approximately 17% of our total inventories using the LIFO method at December 31, 1999. Inventories are summarized below:
Comprehensive Income (Loss)
The components of accumulated other comprehensive loss included in stockholders' equity are as follows:
Warranty Expense
We accrue estimated expense to satisfy contractual warranty requirements, primarily of our Power Generation Systems segment, when we recognize the associated revenue on the related contracts. With respect to JRM, 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 accruals.
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 condition 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 clean-up 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 will 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 $15,748,000, $17,047,000 and $12,312,000 in the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively. In addition, our customers paid for expenditures we made on research and development activities of approximately $34,838,000, $18,487,000 and $15,752,000 in the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively.
Minority Interest
Minority interest expense includes dividends on MI preferred stock (see Note 8) and the recognition of minority shareholder participation in the results of operations of less-than-wholly owned subsidiaries.
Long-Lived Assets
We evaluate the realizability of our long-lived assets, including property, plant and equipment and goodwill, whenever events or changes in circumstances indicate that we may not be able to recover the carrying amounts of those assets.
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, and 50% of cumulative straight-line depreciation. Our depreciation expense was $39,270,000, $47,415,000 and $84,404,000 for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively.
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,
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.
Goodwill and Other Intangible Assets
The majority of our goodwill pertains to the acquisition of minority interest in JRM (see Note 2). We amortize goodwill on a straight-line basis, using a twenty-year period for the JRM minority interest acquisition, a forty-year period for the B&W acquisition, and periods of ten to twenty years for all other goodwill. Our acquisition of various business units of the Ansaldo Volund Group resulted in additional goodwill of $5,745,000 during the year ended December 31, 2000 (see Note 2). The deconsolidation of B&W reduced goodwill by $78,897,000 during the year ended December 31, 2000. The B&W goodwill is included in our investment in B&W at December 31, 2000. Our acquisition of the JRM minority interest resulted in additional goodwill of $333,219,000 during the nine-month period ended December 31, 1999. We recorded impairments of goodwill of $10,461,000 in the fiscal year ended March 31, 1999 (see Note 7).
Our goodwill amortization expense was $20,130,000, $14,434,000 and $8,290,000 for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively.
We have included other intangible assets of $10,453,000 and $14,347,000 in other assets at December 31, 2000 and 1999, respectively. These intangible assets consist primarily of trademarks, rights to use technology, investments in oil and gas properties, non-competition agreements and debt issuance costs. Amortization expense for these intangible assets was $2,972,000, $4,086,000 and $6,909,000 for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively. This amortization expense includes $267,000, $2,409,000 and $3,212,000 for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively, for non-competition agreements. During the year ended December 31, 2000, we recorded additions of $8,444,000 (primarily debt issuance costs), and reductions of $5,056,000 (due to the deconsolidation of B&W) in other intangible assets.
Capitalization of Interest Cost
Interest is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost." We incurred total interest of $46,098,000 in the year ended December 31, 2000, $37,678,000 in the nine-month period ended December 31, 1999, and $63,839,000 in the fiscal year ended March 31, 1999, of which we capitalized $2,389,000 in the year ended December 31, 2000, $1,936,000 in the nine-month period ended December 31, 1999, and $578,000 in the fiscal year ended March 31, 1999.
Cash Equivalents
Our cash equivalents are highly liquid investments, with maturities of three months or less when purchased, which we do not hold as part of our investment portfolio.
Derivative Financial Instruments
We attempt to minimize our exposure to changes in foreign currency exchange rates by matching foreign currency contract receipts with like foreign currency disbursements. To the extent that we are unable to match the foreign currency receipts and disbursements related to our contracts, we enter into derivatives, primarily forward contracts, to reduce the impact of foreign exchange rate movements on operating results. Gains and losses on forward
contracts that qualify as hedges of firm purchase and sale commitments are deferred and recognized in income or as adjustments of carrying amounts when the hedged transactions occur. Gains and losses on forward contracts that hedge foreign currency assets or liabilities are recognized in income as incurred. Those amounts effectively offset gains and losses on the foreign currency assets or liabilities that are hedged.
Stock-Based Compensation
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related Interpretations in accounting for our employee stock plans. Under APB 25, if the exercise price of the employee stock options 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.
Change in Fiscal Year
On August 3, 1999, our Board of Directors approved the change of our fiscal year from a year ending on March 31 to the new fiscal year end of December 31. The accompanying consolidated financial statements for the year ended December 31, 1999 are unaudited. In our opinion, all normal recurring adjustments that are necessary for a fair statement of our operations have been reflected in the consolidated financial statements for these periods.
The following unaudited financial information for the nine-month period ended December 31, 1998 is presented to provide comparative results to the nine-month transition period ended December 31, 1999, included in the accompanying Consolidated Statements of Income (Loss). The operating results for the nine-month period do not necessarily indicate results that can be expected for a twelve-month period.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require us to recognize all derivatives on our consolidated balance sheet at their fair values. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," which adds to the guidance related to accounting for derivative instruments and hedging activities. We have determined that the initial adoption of SFAS No. 133, as amended by SFAS No. 138, will have no material effect on our consolidated financial position or results of operations.
NOTE 2 - ACQUISITIONS
In June 2000, we acquired, through our Babcock & Wilcox Volund ApS ("B&W 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. B&W Volund is not a subsidiary of B&W, and is therefore not a party to B&W's Chapter 11 bankruptcy filing.
We used the purchase method of accounting for this acquisition. We have included the operating results of B&W Volund in our consolidated financial results from the date of acquisition. The acquisition cost was $2,707,000 plus assumed liabilities which resulted in goodwill of $5,745,000. This goodwill will be amortized on a straight-line basis over ten years.
During the nine-month period ended December 31, 1999, MII acquired all of the publicly held shares of JRM common stock in a two-step acquisition. On June 10, 1999, MII purchased 14,353,490 shares in a tender offer for the publicly held shares of JRM for $35.62 per share in cash. Together with the 24,668,297 shares held by MII, the tendered shares represented approximately 99.5% of the shares of JRM common stock outstanding at the expiration of the tender offer. On July 30, 1999, the remaining 215,008 shares of JRM common stock were acquired for the same price in cash in a second-step merger. Also on that date, 12,340 restricted shares of JRM common stock were converted to 15,836 restricted shares of MII common stock. Outstanding restricted shares of JRM were either acquired for cash or converted to restricted shares of MII in accordance with the terms of the merger agreement. In addition, MII assumed 542,221 options to purchase JRM common stock and converted them into 696,000 options to purchase MII common stock. These options are included in the disclosures in Note 10.
The acquisition and the allocation of the purchase price were accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. The aggregate purchase price was approximately $536,027,000, including direct acquisition costs of approximately $9,335,000. The aggregate purchase price also includes the fair value of the options assumed of approximately $7,323,000 and the fair value of the restricted shares issued of approximately $439,000. The goodwill acquired approximated $333,219,000. We are amortizing this goodwill over twenty years.
This acquisition eliminated the minority interest in JRM. We recorded minority interest expense of $4,005,000 and $45,137,000 related to JRM during the three-month period ended June 30, 1999 and the fiscal year ended March 31, 1999, respectively.
In the fiscal year ended March 31, 1999, we acquired a portion of the outstanding minority interest of JRM, as a result of JRM's purchase of treasury shares.
NOTE 3 - EQUITY METHOD INVESTMENTS
We have included in other assets investments in joint ventures and other entities that we account for using the equity method of $25,405,000 and $63,606,000 at December 31, 2000 and 1999, respectively. The undistributed earnings of our equity method investees were $18,371,000 and $33,977,000 at December 31, 2000 and 1999, respectively. Since one of our non-consolidated foreign joint ventures has changed from a three-month lag to a one-month lag in reporting its results to us, we have included in income (loss) from investees for the year ended December 31, 2000, fourteen months of activity. The additional two months resulted in income of approximately $1,500,000.
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):
Revenues of equity method investees include $766,353,000, $196,237,000 and $166,195,000 of reimbursable costs recorded by limited liability companies in our Government Operations segment, wherein such costs are recorded as revenues and expenses, at December 31, 2000 and 1999, and March 31, 1999, 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 $27,474,000 at December 31, 2000. These differences are primarily related to the impairment of a foreign joint venture, cumulative losses, provisions for loss contracts, the timing of distribution of dividends and various adjustments under generally accepted accounting principles.
We have investments in several joint ventures and other entities on a worldwide basis. None of these investees was significant for the periods presented.
Reconciliation of net income per combined income statement information to income (loss) from investees per consolidated statement of income is as follows:
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM joint venture, and JRM recognized a gain on the termination of $37,353,000. Pursuant to the termination, JRM received cash of approximately $105,000,000, ETPM S.A.'s derrick/lay barge 1601 and ETPM S.A.'s interests in McDermott-ETPM East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received JRM's lay barge 200 and JRM's interests in McDermott Subsea Constructors Limited ("MSCL") and McDermott-ETPM West, Inc.
During the fiscal year ended March 31, 1999, JRM's Malaysian joint venture sold two combination pipelay and derrick barges. The joint venture, in which JRM holds a 49% interest, received approximately $47,000,000 in cash for the barges.
During the nine-month period ended December 31, 1999, JRM acquired an additional interest in its Deep Oil Technology joint venture for $2,575,000 in cash. In addition, the purchase agreement includes additional contingent consideration based on future performance levels over fifteen years. In the year ended December 31, 2000, we paid $1,360,000 of this additional contingent consideration. The remaining possible contingent consideration is $2,000,000 plus interest.
Our transactions with unconsolidated affiliates included the following:
Our other assets include non-current accounts receivable from unconsolidated affiliates of $2,702,000 at December 31, 1999. Our accounts payable includes payables to unconsolidated affiliates of $7,357,000 and $17,986,000 at December 31, 2000 and 1999, respectively. Our property, plant and equipment includes cost of $63,704,000 and $63,704,000 and accumulated depreciation of $36,708,000 and $34,119,000, respectively, at December 31, 2000 and 1999 of marine equipment that was leased to an unconsolidated affiliate. Included in the year ended December 31, 2000 are charges of $23,449,000 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 which 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, 2000 and 1999 were as follows:
Income (loss) before provision for (benefit from) income taxes and extraordinary item was as follows:
The provision for (benefit from) income taxes consisted of:
There is no provision for (benefit from) income taxes associated with the extraordinary item of $38,719,000 recorded by JRM in the fiscal year ended March 31, 1999.
Our current provision for other than U.S. income taxes in the year ended December 31, 2000 and the fiscal year ended March 31, 1999 includes a reduction of $573,000 and $525,000, respectively, for the benefit of net operating loss carryforwards. The provision for the nine-month period ended December 31, 1999 reflects a non-deductible loss of $37,810,000 on the curtailment of a foreign pension plan and non-deductible amortization of goodwill of $9,929,000 created by the premium we paid on the acquisition of the minority interest in JRM. Losses from foreign joint ventures which generated no corresponding tax benefit totaled $25,640,000 and amortization of goodwill associated with the acquisition of the minority interest in JRM was $18,007,000 in the year ended December 31, 2000. The provision for the fiscal year ended March 31, 1999 includes a benefit totaling approximately $25,456,000 for a reduction in the valuation allowance for deferred taxes. This reduction is the result of tax planning strategies, use of operating loss carrybacks and forecast taxable income. Included in the reduction of the valuation allowance was an amount that resulted from the sale of a foreign subsidiary, which generated no tax benefit. The fiscal year ended March 31, 1999 also reflects favorable tax settlements in U.S. and foreign jurisdictions totaling approximately $30,429,000. In addition, the year ended December 31, 2000 includes a tax benefit of $5,500,000 from a favorable tax settlement in a foreign jurisdiction and $1,400,000 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, 2000, the undistributed earnings of U.S. subsidiaries of MII and JRM were approximately $343,300,000. U.S. withholding taxes of approximately $103,000,000 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 $68,600,000. The unrecognized deferred U.S. income tax liability on these earnings is approximately $26,700,000. Withholding taxes of approximately $6,200,000 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. There were no undistributed earnings of foreign subsidiaries of MII and JRM that would be subject to foreign withholding taxes.
We reached settlements with the Internal Revenue Service ("IRS") concerning MI's U.S. income tax liability through the fiscal year ended March 31, 1990, disposing of all U.S. federal income tax issues. The IRS has issued notices for the fiscal years ended March 31, 1991 and March 31, 1992 asserting deficiencies in the amount of taxes reported, based on issues substantially similar to those raised in earlier years. We believe that any income taxes ultimately assessed against MI will not exceed amounts we have already provided for.
We have provided a valuation allowance ($15,478,000 at December 31, 2000) for deferred tax assets that cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that our remaining deferred tax assets at December 31, 2000 are realizable through carrybacks and future reversals of existing taxable temporary differences, future taxable income and, if necessary, the implementation of tax planning strategies involving the sales of appreciated assets. Uncertainties that affect the ultimate realization of our deferred tax assets include the risk of incurring losses in the future and the possibility of declines in value of appreciated assets involved in the tax planning strategies we have identified. We have considered these factors in determining the valuation allowance. We will continue to assess the adequacy of the valuation allowance on a quarterly basis.
We have foreign net operating loss carryforwards of approximately $31,200,000 available to offset future taxable income in foreign jurisdictions. Approximately $8,600,000 of the foreign net operating loss carryforwards expire in 2001 to 2007. We have domestic net operating loss carryforwards of approximately $26,200,000 available to offset future taxable income in domestic jurisdictions. The domestic net operating loss carryforwards expire in years 2009 to 2020.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"), MI has the right to sell to MII and MII has the right to buy from MI, 100,000 units, each of which consists of one share of MII Common Stock and one share of MII Series A Participating
Preferred Stock held by MI since prior to the 1982 reorganization transaction under which MII became the parent of MI. The price is based on (1) the stockholders' equity of MII at the close of the fiscal year preceding the date at which the right to sell or buy, as the case may be, is exercised and (2) the price-to-book value of the Dow Jones Industrial Average. At January 1, 2001, the aggregate unit value if MI exercised its right to sell all of its 100,000 units to MII was $249,637,000. The net proceeds to MI from the exercise of any rights under the Intercompany Agreement would be subject to U.S. federal, state and other applicable taxes. We have not established a tax provision for this arrangement because MI does not currently intend to exercise its rights to sell under the Intercompany Agreement (although it may in the future elect to do so). The indentures relating to the notes issued by MI (see Note 5) limit our ability to amend the Intercompany Agreement. See Note 11 for further information on the Intercompany Agreement.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
The indentures relating to the 9.375% Notes due 2002 and the Series A and B Medium Term Notes contain certain restrictive covenants, including limitations on indebtedness, liens securing indebtedness, and dividends and loans. See Note 20 for further information on these notes.
On March 5, 1999, JRM completed an offer to purchase all its outstanding 9.375% Senior Subordinated Notes at a purchase price of 113.046% of their principal amount ($1,130.46 per $1,000 principal amount), plus accrued and unpaid interest. On that date, JRM purchased $248,575,000 in principal amount of the notes for a total purchase price of $284,564,000, including accrued interest of $3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In connection with the purchase of the notes, JRM received consents to certain amendments that amended or eliminated certain restrictive covenants and other provisions contained in the indenture relating to the notes. Specifically, the covenants contained in the indenture that restricted JRM's ability to pay dividends, repurchase or redeem its capital stock or transfer funds through unsecured loans to or investments in MII were eliminated.
Maturities of long-term debt during the five years subsequent to December 31, 2000 are as follows: 2001 - $258,000; 2002 - $227,032,000; 2003 - $9,713,000; 2004 -$217,000; 2005 - $11,724,000.
At December 31, 2000 and 1999, we had available various uncommitted short-term lines of credit from banks totaling $12,819,000 and $72,766,000, respectively. At December 31, 1999, our outstanding borrowings under these lines of credit were $4,148,000. There were no borrowings outstanding under these lines of credit as of December 31, 2000.
On February 21, 2000, B&W and certain of its subsidiaries entered into their $300,000,000 debtor-in-possession revolving credit and letter of credit facility ("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 executing letters of credit under this facility, B&W must comply with certain requirements. Presently, B&W cannot satisfy these requirements. B&W is negotiating with its banks to obtain a waiver, and/or an amendment, to this facility. There were no borrowings outstanding under this facility at December 31, 2000. See Note 20 to the consolidated financial statements.
On February 21, 2000, we also entered into other financing arrangements providing financing to the balance of our operations. This financing, as amended on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000 credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each facility is with a group of lenders, for which Citibank, N.A. is acting as the administrative agent to the amounts outstanding under each facility.
The MII Credit Facility consists of two tranches, each of which has a three-year term. One is a revolving credit facility that provides for up to $100,000,000 to the borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 of letters of credit and may be used to reimburse issuers for drawings under certain outstanding letters of credit totaling $38,292,000 issued for the benefit of B&W and its subsidiaries. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the MII Credit Facility may not exceed $200,000,000. Letters of credit outstanding at December 31, 2000 were approximately $45,915,000. This facility is secured by a collateral account funded with various U.S. government securities with a marked-to-market value equal to 105% of the aggregate amount available for drawing under letters of credit and revolving credit borrowings then outstanding. Borrowings against this facility at December 31, 2000 were $10,000,000 (increased to $50,000,000 at March 12, 2001). The interest rate is Libor plus 0.425%, or prime depending upon notification to borrow. The interest rate at December 31, 2000 was 9.50%. Commitment fees under this facility totaled approximately $540,000 for the year ended December 31, 2000.
The JRM Credit Facility also consists of two tranches. One is a revolving credit facility that provides for up to $100,000,000 for advances to borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 of letters of credit. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the JRM Credit Facility may not exceed $200,000,000. Letters of credit outstanding at December 31, 2000 were approximately $64,472,000. The facility is subject to certain financial and non-financial covenants. Borrowings against this facility at December 31, 2000 were $50,000,000. The interest rate is Libor plus 2%, or prime plus 0.25% depending upon notification to borrow. The interest rate at December 31, 2000 was 10.50%. Commitment fees under this facility totaled approximately $819,000 for the year ended December 31, 2000.
MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. At December 31, 2000, substantially all the net assets of MI were subject to those restrictions. At December 31, 2000, JRM and its subsidiaries could make unsecured loans to or investments in MII and its other subsidiaries of approximately $72,000,000.
MI and its subsidiaries are unable to incur any additional long-term debt obligations under one of MI's public debt indentures. See Note 20 for matters impacting our liquidity.
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
We provide retirement benefits, primarily through non-contributory pension plans, for substantially all our regular full-time employees. We do not provide retirement benefits to certain non-resident 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 supply postretirement health care and life insurance benefits to our union employees based on our union contracts. Effective April 1, 1998, we terminated all postretirement benefits for non-union employees. On the same date, we amended the pension plans for the employees affected by the termination to increase the benefits payable to the participants to offset the cost of postretirement health care and life insurance. We measured the decrease in our postretirement benefit obligation against the increase in our projected benefit obligation of the pension plans, and recognized a resulting curtailment gain of $21,940,000 in the fiscal year ended March 31, 1999. 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 $1,437,000.
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. As a result, we recognized a curtailment loss of $37,810,000, of which $14,168,000 related to estimated excise taxes payable. We recognized an additional curtailment loss on this plan of $3,860,000 in the year ended December 31, 2000 due to revisions in our expected share of the pension surplus. We are continuing to negotiate a settlement, but we do not believe the ultimate settlement loss will be significantly different from the amounts already provided for in the consolidated financial statements.
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001.
The rate was assumed to decrease gradually to 5.5% in 2006 and remain at that level thereafter.
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 $171,815,000, $143,860,000 and $102,969,000, respectively, at December 31, 2000 and $170,642,000, $134,812,000 and $87,681,000, respectively, at December 31, 1999.
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:
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. Amounts charged to pension cost and contributed to the plans were $2,428,000, $5,336,000 and $11,295,000 in the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively.
NOTE 7 - IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Impairment losses to write-down property, plant and equipment to estimated fair values and to write-off goodwill are summarized by segment as follows:
Property, plant and equipment and other assets - assets to be held and used
During the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, we identified certain long-lived assets that were no longer expected to recover their entire carrying value through future cash flows. We generally determined fair values based on sales prices of comparable assets. The assets include non-core, surplus and obsolete property and equipment and fabrication facilities in our Marine Construction Services segment.
Property, plant and equipment and other assets - assets to be disposed of
During the year ended December 31, 2000, our Marine Construction Services segment recorded impairment losses totaling $3,346,000. These provisions include $1,982,000 for salvaged structures which were written down to net realizable value, a $292,000 adjustment to a building for sale in London which we expect to sell in 2001, and $1,072,000 of fixed assets in our Inverness facility.
During the year ended December 31, 2000, our Industrial Operations segment recorded an impairment loss totaling $833,000 at our research facility in Alliance, Ohio for fixed assets that will no longer be used.
During the nine-month period ended December 31, 1999, our Marine Construction Services segment recorded an impairment loss of $676,000 to reduce a building near London to its fair value less cost to sell. In the fiscal year ended March 31, 1999, we recognized an impairment loss of $877,000 for this building. Prior to impairment, the building had a net book value of approximately $7,549,000. We decided to sell the building as a result of our withdrawal from traditional European engineering operations. Also during the nine-month period ended December 31, 1999, this segment recognized $90,000 of impairment losses on leasehold improvements.
We sold a Floating Production, Storage and Offloading System during the fiscal year ended March 31, 1999 and recorded a resulting loss on asset disposal of approximately $2,382,000.
Goodwill
In the fiscal year ended March 31, 1999, our Marine Construction Services segment wrote off $4,834,000 associated with the acquisition of a Mexican shipyard we acquired in a prior year. We determined that the goodwill related to the Mexican shipyard had no continuing value as the facility's intended use was as a new-build facility, and the facility had been engaged primarily in ship repair. Also in the fiscal year ended March 31, 1999, our Marine Construction Services segment wrote off $5,627,000 related to an engineering business we acquired in a prior year. We determined that the business had no continuing value, based on our decision to withdraw from the third-party engineering business. Annual amortization of this goodwill totaled $1,524,000.
NOTE 8 - SUBSIDIARIES' STOCKS
JRM
During the nine-month period ended December 31, 1999, MII acquired all of the publicly held shares of JRM common stock (see Note 2).
MI
During the fiscal year ended March 31, 1999, MI redeemed all of its Series A Cumulative Convertible Preferred Stock and Series B Cumulative Preferred Stock. Preferred dividends of $4,400,000 were included as a component of minority interest in other income (expense) in the fiscal year ended March 31, 1999.
NOTE 9 - 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 1996 Officer Long-Term Incentive Plan (and its predecessor programs), our 1997 Director Stock Program, our 1992 Senior Management Stock Option Plan and contributions to our Thrift Plan. At December 31, 2000 and 1999, 10,046,426 and 11,624,584 shares of common stock, respectively, were reserved for issuance in connection with those plans.
MII Preferred Stock
At December 31, 2000 and 1999, 100,000 shares of our non-voting Series A Participating Preferred Stock (the "Participating Preferred Stock") and 10,000 and 20,000 shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred Stock"), respectively, were
issued and owned by MI. The Non-Voting Preferred Stock is currently callable at $275 per share, and we are redeeming 10,000 shares each year at $250 per share under the applicable mandatory redemption provisions. The annual per share dividend rates for the Participating Preferred Stock and the Non-Voting Preferred Stock are $10 and $20, respectively, payable quarterly, and dividends on those shares are cumulative to the extent not paid. The annual per share dividend rate for the Participating Preferred Stock is limited to no more than ten times the amount of the per share dividend on our common stock. In addition, shares of Participating Preferred Stock (1) are entitled to receive additional dividends whenever dividends in excess of $3.00 per share on our common stock are declared (or deemed to have been declared) in any fiscal year and (2) share equally with the shares of our common stock upon liquidation, with each share of Participating Preferred Stock being equivalent to 350 shares of common stock for these purposes. On August 1, 2000, MII's Board of Directors determined to suspend the declaration of dividends on our common stock. Accordingly, under the terms of the Participating Preferred Stock, no dividends were payable in the year ended December 31, 2000. For our consolidated financial reporting purposes, we treat the Participating Preferred Stock and the Non-Voting Preferred Stock as constructively retired, since they are owned by our wholly owned subsidiary. The shares of Participating Preferred Stock are subject to the Intercompany Agreement (see Note 11).
On December 5, 1995, we designated 702,652 shares of our authorized but unissued preferred stock as Series D Participating Preferred Stock in connection with our adoption of a Stockholder Rights Plan. As of December 31, 2000, 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
Under our Stockholder Rights Plan, our stockholders have one right for each outstanding share of common stock held. The rights currently trade with the common stock and each right entitles the holder thereof to purchase one one-hundredth of a share of our Series D Participating Preferred Stock for $50 per share subject to anti-dilution adjustments. The rights become exercisable and detach from the common stock within a specified period of time after a person or a group either becomes the beneficial owner of 15 percent or more of our outstanding common stock, or commences or announces an intention to commence a tender or exchange offer for 15 percent or more of our outstanding common stock (an "Acquiring Person"). Once exercisable, each right entitles the holder thereof (other than an Acquiring Person) to purchase at the $50 exercise price the number of shares of common stock that have a market value equal to twice the exercise price. If our company merges with or transfers 50 percent or more of its assets or earnings to any person after the rights become exercisable, holders of rights may purchase that number of shares of common stock of the acquiring entity that have a market value equal to twice the exercise price. We may redeem the rights at a price of $0.01 per right for a specified period of time after a person or group becomes an Acquiring Person. The Stockholder Rights Plan is currently scheduled to expire on May 3, 2001.
NOTE 10 - STOCK PLANS
1996 Officer Long-Term Incentive Plan
At December 31, 2000, we had a total of 1,834,106 shares of our common stock (including shares that were not awarded under predecessor plans) available for stock option grants and restricted stock awards to officers and key employees under our 1996 Officer Long-Term Incentive Plan. That plan permits grants of nonqualified stock options, incentive stock options and restricted stock. 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. Under the plan, eligible employees may be granted rights to purchase shares of common stock at par value ($1.00 per share), which shares are subject to restrictions on transfer that lapse at such times and circumstances as specified when granted. As of December 31, 2000, we had 340,554 shares of common stock available for award as restricted stock. During the year ended December 31, 2000, the nine-month period ended
December 31, 1999 and the fiscal year ended March 31, 1999, we granted performance-based restricted stock awards under the plan to certain officers and key employees. Under the provisions of the performance-based awards, no shares are issued at the time of the initial award, and the number of shares which will ultimately be issued will be determined based on the change in the market value of our common stock over a specified performance period. The performance-based awards in the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999 were represented by initial notional grants totaling 516,180, 22,190 and 129,510 rights to purchase restricted shares of common stock, respectively. These rights had weighted average fair values of $8.30, $7.22 and $28.52 on their respective dates of grant during the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999. During the year ended December 31, 2000, the performance period for performance-based awards represented by initial notional grants totaling 215,910 rights to purchase restricted shares lapsed with no restricted shares issued. Through December 31, 2000, we issued a total of 1,268,410 shares of restricted stock under the plan (and a predecessor plan). During the year ended December 31, 2000, we issued 40,000 shares of restricted stock with a weighted average fair value of $7.66 per share. During the nine-month period ended December 31, 1999, we issued 106,470 restricted shares in accordance with the terms of the JRM merger. These shares had a weighted average fair value of $27.19 per share. No restricted shares were issued in the fiscal year ended March 31, 1999.
1997 Director Stock Program
At December 31, 2000, we had a total of 73,074 shares of our common stock (including approved shares that were not awarded under a predecessor plan) available for grants of options and rights to purchase restricted shares to non-employee directors under our 1997 Director Stock Program. Under this program, we grant options to purchase 900, 300 and 300 shares on the first, second and third years, respectively, of a director's term at 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 the grant and expire ten years and one day after the date of grant. Under this program, we grant rights to purchase 450, 150, and 150 shares on the first, second and third years, respectively, of a director's term, at par value ($1.00 per share), which shares are subject to restrictions on transfer that lapse at the end of such term. Through December 31, 2000, we issued a total of 24,764 shares of restricted stock under the 1997 Director Stock Plan (and its predecessor plan) including 1,026 shares we issued in connection with the JRM merger.
1992 Senior Management Stock Option Plan
At December 31, 2000, we had a total of 1,587,607 shares of common stock available for stock option grants under our 1992 Senior Management Stock Option Plan. Our Board of Directors determines the total number of shares available for grant from time to time. Under this plan, 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 grant.
In the event of a change in control of our company, all three programs have provisions that may cause restrictions to lapse and accelerate the exercisability of outstanding options.
During the year ended December 31, 2000, the Compensation Committee of the Board of Directors modified our stock plans to provide officers and senior management employees an alternative approach as to the manner in which their outstanding stock options granted prior to February 22, 2000 would be treated. 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.
During the nine-month period ended December 31, 1999, in accordance with the terms of the JRM merger, we issued a total of 696,000 options to senior management employees, officers and directors of JRM who held JRM stock options at the effective time of the merger. These options have the same terms and conditions as the options originally granted by JRM except that they are fully vested and their exercise prices are not equal to the market price on the date of grant. The number of options we issued and their exercise prices were determined in accordance with the merger agreement. These options had a weighted average exercise price of $22.72 and a range of exercise prices from $4.47 to $30.12. The weighted average fair value of these options at the date of grant was $12.17.
The following table summarizes activity for MII's stock option plans (share data in thousands):
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, 2000 (share data in thousands):
As discussed in Note 1, we apply APB 25 and related interpretations in accounting for our stock-based compensation plans. Charges to income related to stock plan awards totaled approximately $6,720,000, $535,000 and $4,276,000 for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, respectively. For the year ended December 31, 2000, these charges include amounts related to approximately 1,053,000 stock options that require variable accounting as a consequence of the DSU program. If we had accounted for our stock plan awards using the alternative fair value method of accounting under SFAS No. 123, "Accounting for Stock-Based Compensation," our net income (loss) and earnings (loss) per share would have been the pro forma amounts indicated as follows:
The above pro forma information is not indicative of future pro forma amounts. SFAS 123 does not apply to awards prior to the fiscal year ended March 31, 1996, and we anticipate additional awards in future years. 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:
The weighted average fair value of the stock options granted in the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999 was $4.61, $11.59 and $10.80, respectively. During the nine-month period ended December 31, 1999, weighted average exercise prices and weighted average fair values of options whose exercise prices were equal to, greater than or less than the market price of the stock on the grant date were as follows:
Thrift Plan
On both November 12, 1991 and June 5, 1995, 5,000,000 of the authorized and unissued shares of each of the MII and JRM 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"). 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 five years of service or upon retirement, death, lay-off or approved disability. During the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, 910,287, 299,506 and 229,245 shares, respectively, of MII's common stock were issued as employer contributions pursuant to the Thrift Plan. During the nine-month period ended December 31, 1999 (prior to the JRM merger) and the fiscal year ended March 31, 1999, 4,336 and 68,104 shares, respectively, of JRM's common stock were issued as employer contributions pursuant to the Thrift Plan. During the nine-month period ended December 31, 1999, MII completed its acquisition of all outstanding shares of JRM, and JRM shares are no longer issued as an employer's matching contribution. At December 31, 2000, 1,686,749 shares of MII's common stock remained available for issuance under the Thrift Plan.
NOTE 11 - 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 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 anti-competitive acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities and affiliates. We have cooperated fully with the investigations of the DOJ and the SEC into these matters.
On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees pled guilty to criminal charges by the DOJ that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the DOJ investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ that he participated in 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. Also in February 2001, we were advised that the SEC has terminated its investigation and no enforcement action has been recommended.
We have cooperated with the DOJ in its investigation. The DOJ also has requested additional information from us relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed J. Ray McDermott Middle East, Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court also dismissed the Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed this dismissal to the Fifth Circuit Court of Appeal. The Fifth Circuit affirmed the district court decision in February 2000 and Statoil has 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. A court hearing to set a trial schedule has been set in the Phillips Litigation.
In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, in certain cases, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign project claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. Subsequently, the Shell Litigation plaintiffs were allowed to amend their complaint to include non-heavy lift marine construction activity claims against the defendants. Currently, we are awaiting the court's decision on our motion to dismiss the foreign claims.
As a result of the initial allegations of wrongdoing in March 1997, we formed and have continued to maintain a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters.
It is not possible to predict the ultimate outcome of the DOJ investigation, our internal investigation, the above-referenced lawsuits or any actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. These matters could result in civil and criminal liability and have a material adverse effect on our consolidated financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania. The suit involves approximately 300 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36,700,000 in compensatory damages. In June 1999, the district court set aside the $36,700,000 judgment and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. The plaintiffs' claims against B&W in the Hall Litigation have been automatically stayed as a result of the B&W bankruptcy filing. B&W has also filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied in October 2000. B&W has appealed this decision.
In 1998, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8,000,000 for which it seeks reimbursement from other parties. There is a controversy between B&W and its insurers as to the amount of coverage available under the liability insurance policies covering the facilities. B&W filed a declaratory judgment action in a Pennsylvania State Court seeking a judicial
determination as to the amount of coverage available under the policies. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies; but our insurance coverage may not be adequate and we may be materially adversely impacted if our liabilities exceed our coverage. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1999 and early 2000, several persons who allegedly purchased shares of our common stock during the period from May 21, 1999 through November 11, 1999 filed four purported class action complaints against MII and two of its executive officers, Roger E. Tetrault and Daniel R. Gaubert, in the United States District Court for the Eastern District of Louisiana. Each of the complaints alleged that the defendants violated federal securities laws by disseminating materially false and misleading information and/or concealing material adverse information relating to our estimated liability for asbestos-related claims. Each complaint sought relief, including unspecified compensatory damages and an award for costs and expenses. The four cases were subsequently consolidated. In June 2000, the plaintiffs filed a consolidated amended complaint, and in July 2000, we filed a motion to dismiss all claims asserted in that complaint. In September 2000, the District Court dismissed with prejudice the plaintiffs' consolidated amended complaint for failure to state a claim upon which relief can be granted, which dismissal the plaintiffs appealed to the U.S. Fifth Circuit Court of Appeal in October 2000. We believe the substantive allegations contained in the consolidated amended complaint are without merit and intend to continue defending against these claims vigorously.
In December 1998, JRM was in the process of installing a deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. As a result, Texaco has withheld payment to JRM of $23,000,000 due under the installation contract, and, in January 2000, JRM instituted an arbitration proceeding against Texaco seeking the amount owed. Texaco has countered in the arbitration, claiming consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor. Texaco has also filed a lawsuit against a number of other parties, claiming that they are responsible for the incident. It is our position that the contract between the parties prohibits Texaco's claims against JRM and JRM is entitled to the amount withheld.
Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance or warranty related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position or results of operations.
See Note 20 to the consolidated financial statements regarding B&W's potential liability for non-employee asbestos claims and the Chapter 11 reorganization proceedings commenced by B&W and certain of its subsidiaries on February 22, 2000.
Potential Tax Liability
MI has a financial asset pursuant to a stock purchase and sale agreement with MII (the "Intercompany Agreement"), under which MI has the right to sell to MII and MII has the right to buy from MI, 100,000 units, each of which consists of one share of MII common stock and one share of MII Series A Participating Preferred Stock held by MI since prior to the 1982 reorganization transaction under which MII became the parent of MI. The price is based on (1) the stockholders' equity of MII at the close of the fiscal year preceding the date on which the right to sell or buy, as the case may be, is exercised and (2) the price-to-book value of the Dow Jones Industrial Average. At January 1, 2001, the aggregate unit value if MI exercised its right to sell all of its 100,000 units to MII was $249,637,000. The net proceeds to MI from the exercise of any rights under the Intercompany Agreement would be subject to U.S. federal, state and other applicable taxes. We estimate those taxes would aggregate approximately $87,338,000. As a result, the net proceeds to MI on exercise in full of its right to sell under the Intercompany Agreement would be approximately $162,299,000. MI does not currently intend to exercise its rights to sell under the Intercompany Agreement (although it may in the future elect to do so).
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. We have not been determined to be a major contributor of waste to these sites. However, each potentially responsible party or contributor may face assertions of joint and several liability. Generally, however, a final allocation of costs is made based on relative contribution of wastes to each site. Based on 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 or results of operations.
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"). B&W is proceeding with decontamination as the existing NRC license permits. B&W submitted a decommissioning plan to the NRC for review and approval in January 1996. B&W transferred the facilities to BWXT in the fiscal year ended March 31, 1998. BWXT reached agreement with the NRC in the fiscal year ended March 31, 1999 on a plan that provides for the completion of facilities dismantlement and soil restoration by 2001 and license termination in 2002. BWXT expects to request approval from the NRC to release the site for unrestricted use at that time. At December 31, 2000, the remaining provision for the decontamination, decommissioning and closing of these facilities was $1,889,000.
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. PADEP has advised BWXT that it does not intend to assess any monetary sanctions provided that BWXT continues its remediation program of the Parks Facilities.
At December 31, 2000 and 1999, we had total environmental reserves (including provision for the facilities discussed above) of $16,456,000 and $23,391,000, of which $6,162,000 and $11,787,000, respectively, were included in current liabilities. Our estimated recoveries of these costs are included in environmental and products liabilities recoverable at December 31, 2000. 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 may differ from the amounts we have provided for in our consolidated financial statements, however, we do not believe that these differences will have a material effect on our operating results.
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, 2000 are as follows:
Total rental expense for the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999 was $44,063,000, $34,850,000 and $96,816,000, respectively. These expense amounts include contingent rentals and are net of sublease income, neither of which is material.
Other
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 are contingently liable under standby letters of credit totaling $274,629,000 at December 31, 2000, all of which were issued in the normal course of business. We have guaranteed $753,000 of loans to a certain unconsolidated foreign joint venture at December 31, 2000. In addition, we have a limited guarantee of approximately $16,290,000 of debt incurred by another unconsolidated foreign joint venture. At December 31, 2000, we had pledged approximately $283,724,000 fair value of our investment portfolio of $361,195,000 as follows: $205,876,000 to secure the MII Credit Facility; $43,408,000 to secure payments under and in connection with certain reinsurance agreements; and $34,440,000 to secure borrowings of $33,838,000 incurred under repurchase agreements.
NOTE 12 - 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 $10,000 per month, a marketing service fee based on production, a minimum accounting and property supervision fee of $5,000 per month, and certain other costs incurred in connection with the agreement. JRM paid approximately $943,000 and $464,000 in fees and costs under the agreement during the year ended December 31, 2000 and the nine-month period ended December 31, 1999, respectively. JRM has also periodically entered into agreements to design, fabricate and install offshore pipelines for the same company. JRM received approximately $4,992,000 and $1,900,000 for work performed on those agreements in the year ended December 31, 2000 and the nine-month period ended December 31, 1999, respectively. At December 31, 2000, JRM had receivables from and payables to this company of approximately $285,000 and $63,000, respectively.
Under a non-competition agreement JRM entered into in connection with its acquisition of OPI, a former director of JRM, who resigned in April 1996, received $1,500,000 in the nine-month period ended December 31, 1999 and in the fiscal year ended March 31, 1999.
See Note 3 for transactions with unconsolidated affiliates.
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 principal customers of our Power Generation Systems segment are mainly businesses and utilities in the electric power generation industry (including government-owned utilities and independent power producers) and the pulp and paper industry and other process industries, such as oil refineries and steel mills. The primary customer of our Government Operations segment is the U.S. Government (including its contractors). The principal customers of our Industrial Operations segment are oil and natural gas producers, and businesses in the electric power generation industry and the petrochemical and chemical processing industries. 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 56% 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, 2000 and 1999, the allowance for possible losses we deducted from accounts receivable-trade on the accompanying balance sheet was $898,000 and $3,657,000, respectively.
NOTE 14 - INVESTMENTS
The following is a summary of our available-for-sale securities at December 31, 2000:
The following is a summary of our available-for-sale securities at December 31,1999:
Proceeds, gross realized gains and gross realized losses on sales of available-for-sale securities were as follows:
The amortized cost and estimated fair value of available-for-sale debt securities at December 31, 2000, by contractual maturity, are as follows:
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 those risks. We do not hold or issue financial instruments for trading purposes.
We enter into forward contracts primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. At December 31, 2000, we had forward contracts to purchase $24,697,000 in foreign currencies (primarily Australian Dollar and Euro),
and to sell $3,955,000 in foreign currencies (primarily Pound Sterling), at varying maturities from 2001 through 2002. At December 31, 1999, we had forward contracts to purchase $193,693,000 in foreign currencies (primarily Canadian Dollars), and to sell $48,523,000 in foreign currencies (primarily Canadian Dollars), at varying maturities from 2000 through 2004.
We have included deferred realized and unrealized gains and losses from hedging firm purchase and sale commitments on a net basis in the accompanying balance sheet as a component of either contracts in progress or advance billings on contracts or as a component of either other current assets or accrued liabilities. We recognize these gains and losses as part of the purchase or sale transaction when it is recognized, or as other gains or losses when we no longer expect a hedged transaction to occur. At December 31, 2000 and 1999, we had deferred gains of $296,000 and $1,818,000, respectively, and deferred losses of $280,000 and $2,082,000, respectively, related to forward contracts, most of which we will recognize in accordance with the percentage-of-completion method of accounting.
We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but we do not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in these contracts.
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, 2000 and 1999, we had net forward contracts outstanding to purchase foreign currencies with notional values of $20,742,000 and $145,170,000, respectively, and fair values of $122,000 and $2,730,000, respectively.
The estimated fair values of our financial instruments are as follows:
NOTE 17 - SEGMENT REPORTING
Our reportable segments are Marine Construction Services, Power Generation Systems, Government Operations and Industrial Operations. These segments are managed separately and are unique in technology, services and customer class.
Marine Construction Services, which includes the results of JRM, supplies worldwide services for the offshore oil and gas exploration, production and hydrocarbon processing industries and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms, specialized structures, modular facilities, marine pipelines and subsea production systems. JRM also provides project management services, engineering services, procurement activities, and removal, salvage and refurbishment services of offshore fixed platforms.
Government Operations supplies nuclear reactor components and nuclear fuel assemblies to the U.S. Government, manages and operates government-owned facilities and supplies commercial nuclear environmental services and other government and commercial nuclear services.
Industrial Operations is comprised of the engineering and construction activities and plant outage maintenance of certain Canadian operations and manufacturing of auxiliary equipment such as air-cooled heat exchangers and replacement parts. Industrial Operations also includes contract research activities.
Power Generation Systems supplies engineered-to-order services, products and systems for energy conversion, and fabricates replacement nuclear steam generators and environmental control systems. In addition, this segment provides aftermarket services including replacement parts, engineered upgrades, construction, maintenance and field technical services to electric power plants and industrial facilities. This segment also provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities. Included in the year ended December 31, 2000 are charges of $23,449,000 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 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 for the 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, non-employee products liability asbestos claims provisions, 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. We exclude the following assets from segment assets: insurance recoverables for products liability claims, investments in debt securities, prepaid pension costs and our investment in B&W. Segment assets also exclude goodwill of $331,015,000, $349,022,000 and $26,070,000 at December 31, 2000, December 31, 1999 and March 31, 1999, respectively. We have allocated amortization of goodwill to the reportable segments for all periods presented. Segment assets decreased approximately $550,000,000 in the year ended December 31, 2000, primarily in the Power Generation Systems segment, as a result of the deconsolidation of B&W as described in Note 1.
On May 7, 1998, JRM sold its interest in McDermott Engineering (Europe) Limited. Management also intends to exit other European engineering operations. In the fiscal year ended March 31, 1999, these operations generated revenues of $89,347,000 and an operating loss of $7,138,000. Operating income for the fiscal year ended March 31, 1999 includes closure costs and other disposition losses of $2,818,000.
In the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, the U.S. Government accounted for approximately 22%, 16% and 12%, respectively, of our total revenues. We have included most of these revenues in our Government Operations segment.
During the fiscal year ended March 31, 1999, JRM recorded a $2,400,000 severance accrual related to our decision to exit the third-party engineering business. However, due to engineering performed on other types of contracts, the downsizing did not occur and a substantial portion of the accrual was reversed in the nine-month period ended December 31, 1999.
In the fiscal year ended March 31, 1999, we recognized a gain of $37,353,000 from the termination of the McDermott-ETPM joint venture, which increased Marine Construction Services' segment income. This increase was partially offset by a net decrease to segment income of $17,749,000, primarily pertaining to impairment losses on fabrication facilities and goodwill. A $5,214,000 gain we recognized from the sale of a manufacturing facility resulted in an increase in Power Generation Systems' segment income in the fiscal year ended March 31, 1999.
SEGMENT INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000, THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 AND THE FISCAL YEAR ENDED MARCH 31, 1999.
1. Information about Operations in our Different Industry Segments
(1) Segment revenues are net of the following intersegment transfers and other adjustments:
(1) Other unallocated expenses include the following:
(1) Includes property, plant and equipment of $33,000,000 in the fiscal year ended March 31, 1999 acquired through termination of the McDermott-ETPM joint venture.
(2) Includes property, plant and equipment of $6,944,000 acquired in the acquisition of B&W Volund.
2. Information about our Product and Service Lines:
3. Information about our Operations in Different Geographic Areas.
(1) We allocate geographic revenues based on the location of the customer.
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the year ended December 31, 2000 and the nine-month period ended December 31, 1999:
Pre-tax results for the quarters ended June 30, September 30 and December 31, 2000 include losses of $20,302,000, $2,340,000, and $807,000, respectively, to exit certain foreign joint ventures.
Pretax results for the three months ended December 31, 1999 include a loss on the curtailment of a foreign pension plan of $37,810,000.
NOTE 19 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
Incremental shares of 1,050,242 related to stock options and restricted stock were excluded from the diluted share calculation as their effect would have been anti-dilutive.
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 non-employee liability claims asserting asbestos-related injuries. All of these claims are similar in nature, the primary difference being the type of alleged injury or illness suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes).
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the Bankruptcy Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve all pending and future asbestos liability claims against them. As a result of the filing, the Bankruptcy Court issued a temporary restraining order prohibiting asbestos liability lawsuits and other actions for which there is shared insurance from being brought against non-filing affiliates of B&W, including MI, JRM and MII. The temporary restraining order was converted to a preliminary injunction, which is subject to periodic hearings before the Bankruptcy Court for extension. Currently, the preliminary injunction runs through April 17, 2001. On February 20, 2001, the Bankruptcy Court appointed a mediator to facilitate negotiations among the debtors and the committee representing the asbestos claimants to reach a final determination of the debtors' ultimate liability for asbestos related claims. The mediator has been appointed for a sixty-day period, and will be reporting progress to the court about forty-five days after his appointment.
On February 22, 2001, B&W and its debtors filed a plan of reorganization and a disclosure statement. The plan of reorganization contemplates a resolution under either the settlement process or the litigation strategy. Under the settlement process, there would be a consensual agreement of 75% of the asbestos personal injury claimants. A trust would be formed and assigned all of B&W's and its filing subsidiaries' insurance rights with an aggregate products liability value of approximately $1,150,000,000. In addition, $50,000,000 cash and a $100,000,000 subordinated 10-year note payable would be transferred into the trust. The debtors will consent to the assignment of the insurance and will release and void any right that they have to the insurance. The trust's rights to the insurance would be protected and could be dedicated solely to the resolution of the asbestos claims. As a result of the creation of the trust, B&W and all affiliates would be released and discharged from all present and future liability for asbestos claims arising out of exposure to B&W's products.
Under the litigation strategy, if we are not able to reach a consensual agreement with the plaintiffs, a cram-down option is available. The claims would still be channeled through a trust with $50,000,000 cash and a $100,000,000 subordinated 10-year note payable, but the debtors would not transfer their insurance rights. The debtors would manage the insurance rights and claims would be handled through the litigation process by the trust. Funding of the trust would be from the insurance, the cash, the note payable, and equity of the debtor, if necessary.
Prior to its bankruptcy filing, B&W and its subsidiaries had engaged in a strategy of negotiating and settling asbestos products liability claims brought against them and billing the settled amounts to insurers for reimbursement. The average amount per settled claim over the three calendar years prior to the Chapter 11 filing was approximately $7,900. Reimbursed amounts are subject to varying insurance limits based upon the year of coverage, insurer solvency and collection delays (due primarily to agreed payment schedules with specific insurers delaying reimbursement for three months or more). No claims have been paid since the bankruptcy filing. Claims paid during the year ended December 31, 2000, prior to the bankruptcy filing, were $23,640,000 of which $20,121,000 has been recovered or is due from insurers. At December 31, 2000, receivables of $29,091,000 were due from insurers for reimbursement of settled claims. Currently, certain insurers are refusing to reimburse B&W for settled claims until B&W's assumption, in bankruptcy, of its pre-bankruptcy filing contractual reimbursement arrangements with such insurers. To date, this has not had a material adverse impact on B&W's liquidity or the conduct of its business and we do not expect it to in the future. We anticipate that B&W will eventually recover these insurance reimbursements.
Personal injury claim activity for the year ended December 31, 2000, due to the Chapter 11 filing, is not comparable to prior periods and is therefore not presented. For the periods ended December 31 and March 31, 1999, personal injury claim activity was as follows:
We have insurance coverage for these asbestos products liability claims against B&W, which coverage is subject to varying insurance limits that are dependent upon the year involved. Pursuant to agreements with the majority of our principal insurers concerning the method of allocation of claim payments to the years of coverage, B&W historically negotiated and settled these claims and billed the appropriate amounts to the insurers. Ever since these claims began in the early 1980's, B&W has adopted a strategy of grouping claims that met certain basic criteria and settling them at the lowest possible average cost per claim. We have recognized provisions in our consolidated financial statements to the extent that settled claim payments are not deemed recoverable from insurers.
At February 21, 2000, the day prior to the bankruptcy filing, B&W had recorded an asbestos products liability of $1,307,583,000 and an asbestos products liability insurance recoverable of $1,153,619,000. Historically, B&W's estimated liabilities for pending and future non-employee products liability asbestos claims have been derived from its prior claims history. Inherent in the estimate of such liabilities were expected trend claim severity, frequency, and other factors. B&W's estimated liabilities were based on the assumption that B&W would continue to settle claims rather than litigate them, that new claims would conclude by 2012, that there would be a significant decline in new claims received after 2003, and that the average cost per claim would continue to increase only moderately. During the fiscal year ended March 31, 1999, we revised our estimate of the liability for pending and future non-employee asbestos claims and recorded an additional liability of $817,662,000, additional estimated insurance recoveries of $732,477,000 and a loss of $85,185,000 for future claims for which recovery from insurance carriers was not considered probable.
Beginning in the third quarter of calendar 1999, B&W experienced a significant increase in the amount demanded by several plaintiffs' attorneys to settle certain types of asbestos products liability claims. These increased demands significantly impaired B&W's ability to continue to resolve its asbestos products liability through out-of-court settlements. As a result, B&W undertook the bankruptcy filing because it believes that a Chapter 11 proceeding offers the only viable legal process through which it and its subsidiaries can seek a comprehensive resolution of their asbestos liability. The filing increases the uncertainty with respect to the manner in which such liabilities will ultimately be settled.
In October 2000, the Bankruptcy Court set a March 29, 2001 bar date for the submission of allegedly settled asbestos claims and a July 30, 2001 bar date for all other personal injury claims including unsettled asbestos claims against B&W and its filing subsidiaries. While the B&W Chapter 11 reorganization proceedings continue to progress, there are a number of issues and matters to be resolved prior to its emergence from the proceedings. Remaining issues and matters to be resolved include, but are not limited:
- the ultimate asbestos liability of B&W and its subsidiaries;
- the outcome of negotiations with the asbestos claimants committee, the future claimants representative and other participants in the Chapter 11, concerning, among other things, the size and structure of a trust to satisfy the asbestos liability and the means for funding that trust;
- the outcome of negotiations with our insurers as to additional amounts of coverage of B&W and its subsidiaries and their participation in a plan to fund the settlement trust;
- the Bankruptcy Court's decisions relating to numerous substantive and procedural aspects of the Chapter 11 proceedings, including the Court's periodic determinations as to whether to extend the existing preliminary injunction that prohibits asbestos liability lawsuits and other actions for which there is shared insurance from being brought against non-filing affiliates of B&W, including MI, JRM and MII;
- the resolution of an existing event of default under the DIP Credit Facility to permit future borrowings and the issuance of new letters of credit under that facility; and
- the possible need for an extension of the three-year term of the DIP Credit Facility, which is scheduled to expire in February 2003, to accommodate the issuance of letters of credit expiring after that date in connection with new construction and other contracts on which B&W intends to bid.
The timing and ultimate outcome of the Chapter 11 proceedings are uncertain. Any changes in the estimate of B&W's non-employee asbestos products liability and insurance recoverables, and differences between the proportion of such liabilities covered by insurance and that experienced in the past, could result in material adjustments to the B&W financial statements and could negatively impact our ability to realize our net investment in B&W totaling $186,966,000. In addition, if the asbestos liability of B&W and its subsidiaries is ultimately determined to be substantially in excess of the amount we have estimated and reflected in our net investment in B&W, B&W, the asbestos claimants and/or other creditors in the B&W Chapter 11 proceedings may pursue claims against other entities within MI based on allegations relating to various pre-petition transfers by B&W to BWICO and other entities within MI. Although no formal claims of this nature have been made in the B&W Chapter 11 proceedings, representatives of the asbestos claimants committee have asserted that the corporate reorganization that we completed in the fiscal year ended March 31, 1999, which involved B&W's cancellation of a $313,000,000 note receivable and B&W's transfer of all the capital stock of HPC, Tracy Power, BWXT and MTI to BWICO, included transfers which may be voided under applicable federal bankruptcy and/or state law. We believe that B&W was solvent at the time of that reorganization and the transfers are not voidable. However, these claims would, if formally asserted in the bankruptcy proceedings, ultimately be decided by a court, and if adversely decided could have a material adverse effect on our consolidated financial position and results of operations.
DEBTOR-IN-POSSESSION FINANCING
In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into the DIP Credit facility with Citibank, N.A. and Salomon Smith Barney Inc. with a three-year term. The Bankruptcy Court approved the full amount of this facility, giving all amounts owed under the facility a super-priority administrative expense status in bankruptcy. B&W's and its filing subsidiaries' obligations under the facility are (1) guaranteed by substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by a security interest on B&W Canada Ltd.'s assets. Additionally, B&W and substantially all of its domestic subsidiaries executed a pledge and security agreement pursuant to which they have granted a security interest in their assets to the lenders under the DIP Credit Facility upon the defeasance or refinancing of MI's public debt. The DIP Credit Facility generally provides for borrowings by B&W and its filing subsidiaries for working capital and other general corporate purposes and the issuance of letters of credit, except that the total of all borrowings and non-performance letters of credit issued under the facility cannot exceed $100,000,000 in the aggregate. The DIP Credit Facility also imposes certain financial and non-financial covenants on B&W and its subsidiaries. B&W is not currently in compliance with these requirements. B&W is currently negotiating with its banks to obtain a waiver and/or an amendment to this facility to permit it to borrow and/or obtain letters of credit even though it is currently not able to comply with some of these financial covenants.
We anticipate that these negotiations will be successful. There were no borrowings under this facility at December 31, 2000. A permitted use of the DIP Credit Facility is the issuance of new letters of credit to backstop or replace pre-existing letters of credit issued in connection with B&W's and its subsidiaries' business operations, but for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000, the aggregate amount of all such pre-existing letters of credit totaled approximately $172,000,000 (the "Pre-existing LCs"). MII, MI and BWICO have agreed to indemnify and reimburse B&W and its filing subsidiaries for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any Pre-existing LC for which it already has exposure and for the associated letter of credit fees paid under the facility. As of December 31, 2000, approximately $81,895,000 in letters of credit have been issued under the DIP Credit Facility of which approximately $60,039,000 were to replace or backstop Pre-existing LCs.
FINANCIAL RESULTS AND REORGANIZATION ITEMS
The B&W condensed consolidated financial statements set forth below have been prepared in conformity with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued November 19, 1990 ("SOP 90-7"). SOP 90-7 requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date and identification of all transactions and events that are directly associated with the reorganization. Liabilities subject to compromise include prepetition unsecured claims, which may be settled at amounts which differ from those recorded in the B&W condensed consolidated financial statements.
THE BABCOCK & WILCOX COMPANY DEBTOR-IN-POSSESSION CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(1) Reorganization charges consist of:
THE BABCOCK & WILCOX COMPANY DEBTOR-IN-POSSESSION CONDENSED CONSOLIDATED BALANCE SHEET
B&W and its subsidiaries routinely engage in intercompany transactions with other entities within the McDermott group of companies in the ordinary course of business. These transactions include services received by B&W and its subsidiaries from MII and MI under a support services agreement. These services include the following: accounting, treasury, tax administration, and other financial services; human relations; public relations; corporate secretarial; and corporate officer services. In addition, B&W is responsible for its share of federal income taxes included in MI's federal tax return under a tax-sharing arrangement. As a result of its bankruptcy filing, B&W and its filing subsidiaries are precluded from paying dividends to shareholders and making payments on any pre-bankruptcy filing accounts or notes payable that are due and owing to any other entity within the McDermott group of companies (the "Pre-Petition Inter-company Payables") and other creditors during the pendency of the bankruptcy case, without the Bankruptcy Court's approval. Moreover, no assurances can be given that any of the Pre-Petition Inter-company Payables will be paid or otherwise satisfied in connection with the confirmation of a B&W plan of reorganization. As of February 21, 2000, the day prior to the bankruptcy filing, B&W and its filing subsidiaries had Pre-Petition Inter-company Payables of approximately $51,350,000 and pre-petition inter-company receivables from other entities within the McDermott group of companies (other than subsidiaries of B&W) of approximately $58,143,000. In the course of the conduct of B&W's and its subsidiaries' business, MII and MI have agreed to indemnify two surety companies for B&W's and its subsidiaries' obligations under surety bonds issued in connection with their customer contracts. In addition to this indemnity, these two surety companies requested and, in June 2000, obtained from the Bankruptcy Court, subject to DIP Credit Facility and certain professional fees, super-priority administrative expense status in bankruptcy for their claims against B&W and its filing subsidiaries resulting from their exposure under any bond issued post-bankruptcy filing for B&W's and its
subsidiaries' businesses. At December 31, 2000, the total value of B&W's and its subsidiaries' customer contracts yet to be completed covered by such indemnity arrangements was approximately $262,406,000 of which approximately $163,373,000 relates to bonds issued after February 21, 2000.
B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $166,234,000, as of February 21, 2000, increased to $186,966,000 due to post-bankruptcy filing adjustments to the net assets of B&W and is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable circumstances and facts at such time, including the terms of any plan of reorganization.
We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries' operating activities and meet its debt and capital requirements for the foreseeable future. However, the ability of B&W to continue as a going concern is dependent upon its ability to settle its ultimate asbestos liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. The B&W condensed consolidated financial information set forth above has been prepared on a going concern basis which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a rejection of our plan of reorganization, could change the amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment. The independent accountant's report on the separate consolidated financial statements of B&W for the periods ended December 31, 2000 and 1999 includes an explanatory paragraph indicating that these issues raise substantial doubt about B&W's ability to continue as a going concern.
Following are our condensed Pro Forma consolidated Statements of Income (Loss) and Balance Sheet data, assuming the deconsolidation of B&W for all periods presented.
Assumes deconsolidation as of the beginning of the period presented, all data unaudited:
Assumes deconsolidation as of the balance sheet date:
As a result of the B&W bankruptcy filing, our access to the cash flows of B&W and its subsidiaries has been restricted. We believe that the bankruptcy filing and the weak Marine Construction Services markets have contributed to the reduction in our credit rating from BA1 to BA3 by Moody's Investor Service and BB to B by Standard & Poors and, consequently, could adversely impact our access to capital. In addition, MI and JRM and their respective subsidiaries are limited, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. As a result, we have assessed our ability to continue as a going concern and have concluded that we can continue to fund our operating activities and capital requirements for the foreseeable future. In this regard, management will be required to address several significant issues:
- Negative cash flows. We expect to incur negative cash flows in the first two quarters of 2001, with a return to a positive cash flow position in the third and fourth quarters of the year. We expect to satisfy our working capital needs and fund negative cash flows in the first two quarters of 2001 through increased borrowings on our existing credit facilities. We expect to return to positive cash flows through a combination of improved market conditions, as well as a reduction in general and administrative costs.
- Reduction in surety bond capacity. We have been notified by our two surety companies that they are no longer willing to issue bonds on our behalf. We obtain surety bonds in the ordinary course of business of several of our operations to secure contract bids and to meet the bonding requirements of various construction and other contracts with customers. We expect to obtain the coverage we require through other surety companies as well as using our existing credit facilities for contract-related performance guarantees. We do not expect this situation to impact MII's liquidity negatively for the foreseeable future.
- Upcoming maturity of MI's 9.375% notes. MI's 9.375% notes, which have an aggregate outstanding principal amount of $225,000,000, are scheduled to mature on March 15, 2002. MI currently has insufficient cash and other liquid resources on hand to fund the repayment of its 9.375% notes. We are currently exploring various alternatives relative to extending the maturity of these notes, as well as other potential refinancing alternatives. We expect these efforts will be successful. In addition, for the 2001 year, MI would be entitled to $249,637,000 on the exercise of all of its rights under the Intercompany Agreement, which would generate tax of $87,338,000 ( See Note 11). MI does not currently intend to exercise its right to sell under the Intercompany Agreement (although it may in the future elect to do so). There is no assurance, however, that MI's efforts to extend the maturity of or refinance these notes will be successful. In that case MI will have to consider exercising its rights under the Intercompany Agreement, selling all or a part of one or more of its operating subsidiaries, or some combination of these and other alternatives. MI's level of indebtedness and its lack of liquidity pose substantial risks to MI and the holders of its debt securities. The inability to refinance the notes successfully could have a material adverse impact on the MII's liquidity, financial position and results of operations.
- Existing event of default under the DIP Credit Facility. 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 is not currently in compliance with these requirements. We expect to receive a waiver and/ or amendment of default under the DIP Credit Facility. Therefore, we do not expect the default under the facility to increase MII's exposure to letters of credit outstanding as of December 31, 2000 or to impact MII's liquidity negatively in the in the foreseeable future.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
For the year ended December 31, 2000, the nine-month period ended December 31, 1999 and the fiscal year ended March 31, 1999, we had no disagreements with PricewaterhouseCoopers LLP on any accounting or financial disclosure issues.
PART III
Item 10.
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 2001 Annual Meeting of Stockholders.
Item 11.
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 2001 Annual Meeting of Stockholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 2001 Annual Meeting of Stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in Note 12 to our consolidated financial statements included in this report is incorporated by reference.
PART IV
Item 14.
Item 14. 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 December 31, 2000 and 1999
Consolidated Statements of Income For the Years Ended December 31, 2000 and 1999, the Nine-Month Period Ended December 31, 1999 and the Fiscal Year Ended March 31, 1999
Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2000 and 1999 , the Nine-Month Period Ended December 31, 1999 and the Fiscal Year Ended March 31, 1999
Consolidated Statements of Stockholders' Equity For the Year Ended December 31, 2000, the Nine-Month Period Ended December 31, 1999 and the Fiscal Year Ended March 31, 1999
Consolidated Statements of Cash Flows For the Years Ended December 31, 2000 and 1999, the Nine-Month Period Ended December 31, 1999 and the Fiscal Year Ended March 31, 1999
Notes to Consolidated Financial Statements For the Year Ended December 31, 2000, the Nine-Month Period Ended December 31, 1999 and the Fiscal Year Ended March 31, 1999
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
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during the three months ended December 31, 2000.
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 8, 2001 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.
March 8, 2000
INDEX TO EXHIBITS