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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) F O R M 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _______
Commission File Number 1-8430
McDERMOTT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70112-6050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [ ]
The aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant was $258,410,985 as of January 31, 2003.
The number of shares of the registrant's common stock outstanding at January 31,
2003 was 64,831,612.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 in connection with the registrant's 2003 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART I
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Marine Construction Services
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Government Operations
General 6
Raw Materials 6
Customers and Competition 6
Backlog 7
Factors Affecting Demand 7
D. Patents and Licenses 7
E. Research and Development Activities 7
F. Insurance 7
G. Employees 9
H. Governmental Regulations and Environmental Matters 9
I. Risk Factors 11
J. Cautionary Statement Concerning Forward-Looking Statements 19
K. Available Information 21
Item 3. LEGAL PROCEEDINGS 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 28
Item 6. SELECTED FINANCIAL DATA 29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
General 30
Critical Accounting Policies and Estimates 32
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 35
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 37
Effects of Inflation and Changing Prices 39
Liquidity and Capital Resources 39
New Accounting Standards 44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
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INDEX - FORM 10-K
PAGE
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants 48
Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 49
Consolidated Statements of Loss for the Years Ended December 31, 2002, 2001 and 2000 51
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2002, 2001 and 2000 52
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 53
2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 54
Notes to Consolidated Financial Statements 55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 102
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 102
Item 11. EXECUTIVE COMPENSATION 102
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS 103
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 103
Item 14. CONTROLS AND PROCEDURES 103
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 103
Signatures 106
Certifications 107
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Statements we make in this Annual Report on Form 10-K which express a belief,
expectation or intention, as well as those that are not historical fact, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various risks, uncertainties and assumptions, including those to which we refer
under the headings "Risk Factors" and "Cautionary Statement Concerning
Forward-Looking Statements" in Items 1 and 2 of Part I of this report.
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("MII") was incorporated under the laws of the
Republic of Panama in 1959 and is the parent company of the McDermott group of
companies, which includes:
- J. Ray McDermott, S.A., a Panamanian subsidiary of MII
("JRM"), and its consolidated subsidiaries;
- McDermott Incorporated, a Delaware subsidiary of MII ("MI"),
and its consolidated subsidiaries;
- Babcock & Wilcox Investment Company, a Delaware subsidiary of
MI ("BWICO");
- BWX Technologies, Inc., a Delaware subsidiary of BWICO
("BWXT"), and its consolidated subsidiaries; and
- The Babcock & Wilcox Company, an unconsolidated Delaware
subsidiary of BWICO ("B&W").
In this Annual Report on Form 10-K, unless the context otherwise indicates,
"we," "us" and "our" mean MII and its consolidated subsidiaries.
On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary
petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. B&W and these subsidiaries took this action as a means to
determine and comprehensively resolve all their asbestos liability. As of
February 22, 2000, B&W's operations have been subject to the jurisdiction of the
Bankruptcy Court and, as a result, our access to cash flows of B&W and its
subsidiaries is restricted. The B&W Chapter 11 proceedings require a significant
amount of management's attention, and they represent an uncertainty in the
financial marketplace. See Section I, Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 and Note 20 to our
consolidated financial statements for further information concerning the effects
of the Chapter 11 filing.
Due to the bankruptcy filing, beginning on February 22, 2000, we stopped
consolidating the results of operations of B&W and its subsidiaries in our
consolidated financial statements and we have been presenting our investment in
B&W on the cost method. The Chapter 11 filing, along with subsequent filings and
negotiations, led to increased uncertainty with respect to the amounts, means
and timing of the ultimate settlement of asbestos claims and the recovery of our
investment in B&W. Due to this increased uncertainty, we wrote off our net
investment in B&W in the quarter ended June 30, 2002. On December 19, 2002,
drafts of a joint plan of reorganization and settlement agreement, together with
a draft of a related disclosure statement, were filed in the Chapter 11
proceedings, and we determined that a liability related to the proposed
settlement is probable and that the value is reasonably estimable. Accordingly,
as of December 31, 2002, we established an estimate for the cost of the
settlement of the B&W bankruptcy proceedings of $110.0 million, including
related tax expense of $23.6 million. See Management's Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 and Note 20 to our
consolidated financial statements for further information on B&W and information
regarding developments in negotiations relating to the B&W Chapter 11
proceedings.
Historically, we have operated in four business segments:
- Marine Construction Services includes the results of
operations of JRM and its subsidiaries, which supply worldwide
services to customers in the offshore oil and gas exploration
and production and hydrocarbon processing industries and to
other marine construction companies. This segment's principal
activities include the front-end and detailed engineering,
fabrication
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and installation of offshore drilling and production platforms
and other specialized structures, modular facilities, marine
pipelines and subsea production systems. This segment also
provides comprehensive project management and procurement
services. This segment operates throughout the world in most
major offshore oil and gas producing regions, including the
Gulf of Mexico, West Africa, South America, the Middle East,
India, the Caspian Sea and Southeast Asia.
- Government Operations includes the results of operations of
BWXT. This segment supplies nuclear components to the U.S.
Navy and provides various services to the U.S. Government,
including uranium processing, environmental site restoration
services and management and operating services for various
U.S. Government-owned facilities, primarily within the nuclear
weapons complex of the U.S. Department of Energy ("DOE").
Government Operations also includes the results of McDermott
Technology, Inc. ("MTI"). Historically, MTI performed research
activities for our other segments and marketed, negotiated and
administered research and development contracts. However, we
have determined to decentralize our research and development
activities and we are in the process of incorporating most of
MTI's other operations into BWXT.
- Industrial Operations included the results of operations of
McDermott Engineers & Constructors (Canada) Ltd. ("MECL"), a
subsidiary that we sold to a unit of Jacobs Engineering Group
Inc. on October 29, 2001.
- Power Generation Systems includes the results of operations of
our Power Generation Group, which is conducted primarily
through B&W and its subsidiaries. This segment provides a
variety of services, equipment and systems to generate steam
and electric power at energy facilities worldwide. Due to
B&W's Chapter 11 filing, effective February 22, 2000, we no
longer consolidate B&W's and its subsidiaries' results of
operations in our consolidated financial statements. Through
February 21, 2000, B&W's and its subsidiaries' results are
reported as Power Generation Systems B&W in the segment
information that follows. See Note 20 to our consolidated
financial statements for information on the condensed
consolidated results of B&W and its subsidiaries.
Currently, excluding B&W and its subsidiaries, our operations consist of Marine
Construction Services and Government Operations.
The following tables summarize our revenues and operating income for the years
ended December 31, 2002, 2001 and 2000. See Note 17 to our consolidated
financial statements for additional information about our business segments and
operations in different geographic areas.
Year Ended
December 31,
2002 2001 2000
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(In Millions)
REVENUES
Marine Construction Services $ 1,148.0 $ 848.5 $ 757.5
Government Operations 553.8 494.0 444.0
Industrial Operations - 507.2 426.3
Power Generation Systems - B&W - - 155.8
Power Generation Systems 46.9 47.8 33.8
Eliminations - (0.6) (3.7)
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$ 1,748.7 $ 1,896.9 $ 1,813.7
===========================================================================
2
Year Ended
December 31,
2002 2001 2000
---- ---- ----
(In Millions)
OPERATING INCOME:
Segment Operating Income (Loss):
Marine Construction Services $ (162.6) $ 14.5 $ (33.6)
Government Operations 34.6 29.3 33.2
Industrial Operations - 9.9 9.8
Power Generation Systems - B&W - - 7.2
Power Generation Systems (2.8) (3.6) (7.8)
-----------------------------------------------------------------------------
$ (130.8) $ 50.1 $ 8.8
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Gain (Loss) on Asset Disposals
and Impairments - Net:
Marine Construction Services $ (320.9) $ (3.6) $ (1.0)
Government Operations - (0.1) (1.1)
Industrial Operations - - (0.1)
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$ (320.9) $ (3.7) $ (2.2)
-----------------------------------------------------------------------------
Equity in Income (Loss) from Investees:
Marine Construction Services $ 5.3 $ 10.4 $ 2.9
Government Operations 24.6 23.0 11.1
Industrial Operations - 0.1 0.1
Power Generation Systems - B&W - - 0.8
Power Generation Systems (2.2) 0.6 (24.6)
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$ 27.7 $ 34.1 $ (9.7)
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Write-off of investment in B&W (224.7) - -
Other unallocated (1.5) - -
Corporate (23.6) (5.1) 8.0
-----------------------------------------------------------------------------
$ (673.8) $ 75.4 $ 4.9
=============================================================================
See Note 17 to our consolidated financial statements for further
information on Corporate.
B. MARINE CONSTRUCTION SERVICES
General
In January 1995, we organized JRM and contributed substantially all of our
marine construction services business to it. JRM then acquired Offshore
Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger with OPI,
JRM was a wholly owned subsidiary of MII. As a result of the merger, JRM became
a majority-owned subsidiary of MII. In June 1999, MII acquired all of the
publicly held shares of JRM common stock.
The Marine Construction Services segment's business involves the front-end and
detailed engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. This segment also provides
comprehensive project management and procurement services. This segment operates
throughout the world in most major offshore oil and gas producing regions,
including the Gulf of Mexico, West Africa, South America, the Middle East,
India, the Caspian Sea and Southeast Asia.
At December 31, 2002, JRM owned or operated six fabrication facilities
throughout the world. Its principal domestic fabrication yard and offshore base
is located on 1,114 leased acres of land near Morgan City, Louisiana. It also
wholly owns or operates fabrication facilities in the following locations: near
Corpus Christi, Texas; in Indonesia on Batam Island; and in Jebel Ali, U.A.E.
JRM also owns and operates, through a 95% interest in a consolidated subsidiary,
a ship repair yard in Veracruz, Mexico, which is also used as a fabrication
facility. JRM also operates a portion of the Shelfprojectstroy fabrication
facility in Baku, Azerbaijan. This facility is owned by the State Oil Company of
the Azerbaijan Republic.
3
JRM's fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM can fabricate a full range of offshore structures, from
conventional jacket-type fixed platforms to deepwater platform configurations
employing spar, compliant-tower and tension leg technologies, as well as
floating production, storage and offtake ("FPSO") technology. JRM also
fabricates platform deck structures and modular components, including complete
production processing systems, hydrocarbon separation and treatment systems,
pressure and flow control systems and personnel quarters.
Expiration dates, including renewal options, of leases covering land for JRM's
fabrication yards at December 31, 2002, were as follows:
Morgan City, Louisiana Years 2004-2048
Jebel Ali, U.A.E. Year 2015
Batam Island, Indonesia Year 2028
Veracruz, Mexico Year 2024
JRM owns a large fleet of marine equipment used in major offshore construction.
The nucleus of a "construction spread" is a large derrick barge, pipelaying
barge or combination derrick-pipelaying barge capable of offshore operations for
an extended period of time in remote locations. At December 31, 2002, JRM owned
or, through ownership interests in joint ventures, had interests in five derrick
vessels, one pipelaying vessel and eight combination derrick-pipelaying vessels.
The lifting capacities of the derrick and combination derrick-pipelaying vessels
range from 600 to 5,000 tons. These vessels range in length from 350 to 698 feet
and are fully equipped with stiff leg or revolving cranes, auxiliary cranes,
welding equipment, pile-driving hammers, anchor winches and a variety of
additional gear. JRM's largest vessel is the semisubmersible derrick barge 101,
which we plan to sell in 2003. Six of the vessels are self-propelled, with two
also having dynamic positioning systems. JRM also has a substantial inventory of
specialized support equipment for deepwater construction and pipelay. In
addition, JRM owns or leases a substantial number of other vessels, such as
tugboats, utility boats, launch barges and cargo barges, to support the
operations of its major marine construction vessels.
JRM participates in joint ventures involving operations in foreign countries
that require majority ownership by local interests. Through a subsidiary, JRM
also participated in an equally owned joint venture with the Brown & Root Energy
Services unit of Halliburton Company ("Brown & Root"), which was formed in
February 1995 to combine the operations of JRM's Inverness and Brown & Root's
Nigg fabrication facilities in Scotland. This joint venture was terminated
effective June 30, 2001. In addition, JRM owns a 49% interest in Construcciones
Maritimas Mexicanas, S.A. de C.V., a Mexican joint venture, which provides
marine installation services in the Gulf of Mexico.
Foreign Operations
JRM's revenues, net of intersegment revenues, segment income derived from
operations located outside of the United States, and the approximate percentages
to our total consolidated revenues and total consolidated segment income (loss),
respectively, follow:
Revenues Segment Income (Loss)
Amount Percent Amount Percent
(Dollars in thousands)
Year ended December 31, 2002 $ 528,792 30% $ (5,128)(1) 1%
Year ended December 31, 2001 $ 327,604 17% $ 8,801 11%
Year ended December 31, 2000 $ 494,689 27% $ 5,865 -
(1)Excludes $313.0 million goodwill impairment charge.
Raw Materials
Our Marine Construction Services segment uses raw materials, such as carbon and
alloy steels in various forms, welding gases, concrete, fuel oil and gasoline,
which are available from many sources. JRM is not dependent upon any single
supplier or source for any
4
of these materials. Although shortages of some of these materials and fuels have
existed from time to time, no serious shortage exists at the present time.
Customers and Competition
Our Marine Construction Services segment's principal customers are oil and gas
companies, including several foreign government-owned companies. These customers
contract with JRM for project management, engineering, procurement, fabrication
and installation of offshore drilling and production platforms and other
specialized structures, modular facilities, marine pipelines and subsea
production systems. Contracts are usually awarded on a competitive-bid basis. A
number of companies compete effectively with JRM and its joint ventures in each
of the separate marine construction phases in various parts of the world. These
competitors include Global Industries, Ltd., Gulf Island Fabrication, Inc.,
Heerema Offshore Construction Group, Inc., Hyundai Heavy Industries, Nippon
Steel Corporation, Saipem S.p.A., Stolt Offshore S.A., Technip Offshore and
Horizon Offshore, Inc.
Our Marine Construction Services segment performs a substantial number of
projects on a fixed-price basis. This segment attempts to cover increased costs
of anticipated changes in labor, material and service costs of our long-term
contracts, either through an estimation of such changes, which is reflected in
the original price, or through price escalation clauses. However, for
first-of-a-kind projects we have undertaken in recent periods, we have been
unable to forecast accurately total cost to complete until we have performed all
major phases of the project. As demonstrated by our experience on these
contracts, revenue, cost and gross profit realized on fixed-price contracts will
often vary from the estimated amounts because of changes in job conditions and
variations in labor and equipment productivity over the term of the contract.
Our Marine Construction Services segment may experience reduced profitability or
losses on projects as a result of these variations and the risks inherent in the
marine construction industry.
Backlog
At December 31, 2002 and 2001, our Marine Construction Services segment's
backlog amounted to $2.1 billion and $1.8 billion, respectively. This represents
approximately 56% and 62% of our total consolidated backlog at December 31, 2002
and 2001, respectively. Of the December 31, 2002 backlog, we expect to recognize
approximately $1.5 billion in revenues in 2003, $0.4 billion in 2004 and $0.2
billion thereafter.
JRM has historically performed work on a fixed-price, cost-plus or day-rate
basis or a combination thereof. More recently, certain contracts have introduced
a risk-and-reward element wherein a portion of total compensation is tied to the
overall performance of the partners in an alliance. Most of JRM's long-term
contracts have provisions for progress payments.
During the year ended December 31, 2002, our Marine Construction Services
segment was awarded the following contracts, among others:
- a contract for approximately $340 million for Azerbaijan
International Operating Company in Baku for the fabrication of
two integrated topside facilities;
- a fixed-price contract for approximately $250 million for
Murphy Exploration & Production Company to engineer, procure,
fabricate and install a spar offshore production facility for
the "Front Runner" development project in the deepwater Gulf
of Mexico;
- a fixed-price contract for approximately $80 million for Oil &
Natural Gas Corporation Ltd., through Engineers India Limited,
the prime contractor, to fabricate and install two platforms,
pipelines and platform modifications in the Mumbai North
Field, offshore India;
- a contract for approximately $65 million for BP Trinidad and
Tobago LLC to fabricate, construct and load out two offshore
platforms; and
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- a fixed-price contract for approximately $55 million for Al
Khafi Joint Operations to procure, fabricate and install a
utility platform and install submarine cable onshore to
offshore Saudi Arabia in the Persian Gulf.
Factors Affecting Demand
Our Marine Construction Services segment's activity depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
construction of development projects. Numerous factors influence these
expenditures, including:
- oil and gas prices, along with expectations about future
prices;
- the cost of exploring for, producing and delivering oil and
gas;
- the terms and conditions of offshore leases;
- the discovery rates of new oil and gas reserves in offshore
areas;
- the ability of businesses in the oil and gas industry to raise
capital; and
- local and international political and economic conditions.
See Section I for further information on factors affecting demand.
C. GOVERNMENT OPERATIONS
General
Our Government Operations segment provides nuclear components and various
services to the U.S. Government. Examples of this segment's activities include
environmental restoration services and the management of government-owned
facilities, primarily within the nuclear weapons complex of the DOE.
This segment's principal plants are located in Lynchburg, Virginia; Barberton,
Ohio; and Mount Vernon, Indiana. BWXT conducts all the operations of our
Government Operations segment.
Raw Materials
Our Government Operations segment relies on certain sole source suppliers for
materials used in its products. We believe these suppliers are viable, and we
and the U.S. Government expend significant effort to maintain the supplier base.
Customers and Competition
Our Government Operations' segment supplies nuclear components for the U.S.
Navy. There are a limited number of suppliers of specialty nuclear components,
with BWXT being the largest based on revenues. Through the operations of this
segment, we are also involved along with other companies in the operation of:
- the Idaho National Engineering and Environmental Laboratory
near Idaho Falls, Idaho;
- the Rocky Flats Environmental Technology Site near Boulder,
Colorado;
- the Savannah River Site in Aiken, South Carolina;
- the Strategic Petroleum Reserve in and around New Orleans,
Louisiana;
- the Pantex Site in Amarillo, Texas;
- the Oak Ridge National Lab Site (the "Y-12" facility) in Oak
Ridge, Tennessee; and
- the Miamisburg Closure Project in Miamisburg, Ohio.
All of these contracts are subject to annual funding determinations by the U.S.
Government.
The U.S. Government accounted for approximately 29%, 24% and 23% of our total
consolidated revenues for the years ended December 31, 2002, 2001 and 2000,
respectively, including 22%, 18% and 17%, respectively, related to nuclear
components.
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Backlog
At December 31, 2002 and 2001, our Government Operations segment's backlog
amounted to $1.7 billion and $1.0 billion, or approximately 44% and 36%,
respectively, of our total consolidated backlog. Of the December 31, 2002
backlog in this segment, we expect to recognize revenues of approximately $0.5
billion in 2003, $0.4 billion in 2004 and $0.8 billion thereafter, of which we
expect to recognize approximately 90% in 2005 through 2007. At December 31,
2002, this segment's backlog with the U.S. Government was $1.6 billion (of which
$266.5 million had not yet been funded), or approximately 43% of our total
consolidated backlog. During the year ended December 31, 2002, the U.S.
Government awarded this segment new orders of approximately $1.1 billion.
Factors Affecting Demand
This segment's operations are generally capital-intensive on the manufacturing
side. This segment may be impacted by U.S. Government budget restraints and
delays.
The demand for nuclear components for the U.S. Navy comprises a substantial
portion of this segment's backlog. We expect that orders for nuclear components
will continue to be an increasing part of backlog for the foreseeable future.
See Section I for further information on factors affecting demand.
D. PATENTS AND LICENSES
We currently hold a large number of U.S. and foreign patents and have numerous
pending patent applications. We have acquired patents and licenses and granted
licenses to others when we have considered it advantageous for us to do so.
Although in the aggregate our patents and licenses are important to us, we do
not regard any single patent or license or group of related patents or licenses
as critical or essential to our business as a whole. In general, we depend on
our technological capabilities and the application of know-how rather than
patents and licenses in the conduct of our various businesses.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
We have decentralized our research and development activities and now conduct
our principal research and development activities through individual business
units at our various manufacturing plants and engineering and design offices.
Our research and development activities cost approximately $61.6 million, $58.3
million and $50.2 million in the years ended December 31, 2002, 2001 and 2000,
respectively. Contractual arrangements for customer-sponsored research and
development can vary on a case-by-case basis and include contracts, cooperative
agreements and grants. Of our total research and development expenses, our
customers paid for approximately $47.8 million, $46.6 million and $34.8 million
in the years ended December 31, 2002, 2001 and 2000, respectively.
F. INSURANCE
We maintain liability and property insurance in amounts we consider adequate for
those risks we consider necessary. Some risks are not insurable or insurance to
cover them is available only at rates that we consider uneconomical. These risks
include war and confiscation of property in some areas of the world, pollution
liability in excess of relatively low limits and asbestos liability. Depending
on competitive conditions and other factors, we endeavor to obtain contractual
protection against uninsured risks from our customers. Insurance or contractual
indemnity protection, when obtained, may not be sufficient or effective under
all circumstances or against all hazards to which we may be subject.
Our insurance policies do not insure against liability and property damage
losses resulting from nuclear accidents at reactor facilities of our utility
customers. To protect against liability for damage to a customer's property, we
endeavor to obtain waivers of subrogation from the customer and its insurer and
are usually named as an additional insured under the utility customer's nuclear
property policy.
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To protect against liability from claims brought by third parties, we are
insured under the utility customer's nuclear liability policies and have the
benefit of the indemnity and limitation of any applicable liability provision of
the Price-Anderson Act. The Price-Anderson Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of a certain amount. This amount is determined by the sum of commercially
available liability insurance plus certain retrospective premium assessments
payable by operators of commercial nuclear reactors. For those sites where we
provide environmental remediation services, we seek the same protection from our
customers as we do for our other nuclear activities. The Price-Anderson Act, as
amended, includes a sunset provision and requires renewal each time that it
expires. Contracts that were entered into during a period of time that
Price-Anderson was in full force and effect continue to receive the benefit of
the Price-Anderson Act nuclear indemnity. The Price-Anderson Act last expired on
August 1, 2002, and was subsequently extended through December 31, 2004. BWXT
currently has no contracts involving nuclear materials covered by the
Price-Anderson Act that are not covered by and subject to the nuclear indemnity
of the Price-Anderson Act.
Although we do not own or operate any nuclear reactors, we have coverage under
commercially available nuclear liability and property insurance for three of our
four locations that are licensed to possess special nuclear materials. The
fourth location operates primarily as a conventional research center. This
facility is licensed to possess special nuclear material and has a small and
limited amount of special nuclear material on the premises. Two of the four
facilities are located at our Lynchburg, Virginia site. These facilities are
insured under a nuclear liability policy that also insures the facility of
Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company, which we sold
during the fiscal year ended March 31, 1993. All three licensed facilities share
the same nuclear liability insurance limit, as the commercial insurer would not
allow FCFC to obtain a separate nuclear liability insurance policy. Due to the
type or quantity of nuclear material present under contract with the U.S.
Government, the two facilities in Lynchburg have statutory indemnity and
limitation of liability under the Price-Anderson Act. In addition, our contracts
to manufacture and supply nuclear components to the U.S. Government contain
statutory indemnity clauses under which the U.S. Government has assumed the
risks of public liability claims related to nuclear incidents.
JRM's offshore construction business is subject to the usual risks of operations
at sea. JRM has additional exposure because it uses expensive construction
equipment, sometimes under extreme weather conditions, often in remote areas of
the world. In many cases, JRM also operates on or in proximity to existing
offshore facilities. These facilities are subject to damage that could result in
the escape of oil and gas into the sea. Certain contractual protections
historically provided by JRM's customers have eroded and are not available in
all cases.
As a result of the asbestos contained in commercial boilers and other products
B&W and certain of its subsidiaries sold, installed or serviced in prior
decades, B&W is subject to a substantial volume of nonemployee liability claims
asserting asbestos-related injuries. The vast majority of these claims relate to
exposure to asbestos occurring prior to 1977, the year in which the U.S.
Occupational Safety and Health Administration adopted new regulations that
impose liability on employers for, among other things, job-site exposure to
asbestos.
B&W received its first asbestos claims in 1983. Initially, B&W's primary
insurance carrier, a unit of Travelers Group, handled the claims. B&W exhausted
the limits of its primary products liability insurance coverage in 1989. Prior
to its Chapter 11 filing, B&W had been handling the claims under a
claims-handling program funded primarily by reimbursements from its
excess-coverage insurance carriers. B&W's excess coverage available for
asbestos-related products liability claims runs from 1949 through March 1986.
This coverage has been provided by a total of 136 insurance companies. B&W
obtained varying amounts of excess-coverage insurance for each year within that
period, and within each year there are typically several increments of coverage.
For each of those increments, a syndicate of insurance companies has provided
the coverage.
8
B&W had agreements with the majority of its excess-coverage insurers concerning
the method of allocating products liability asbestos claim payments to the years
of coverage under the applicable policies. See Note 20 to our consolidated
financial statements for information regarding B&W's Chapter 11 filing and
liability for nonemployee asbestos claims.
We have several wholly owned insurance subsidiaries that provide general and
automotive liability insurance and, from time-to-time, builder's risk within
certain limits, marine hull and workers' compensation insurance to our
companies. These insurance subsidiaries have not provided significant amounts of
insurance to unrelated parties. These captive insurers provide certain coverages
for our subsidiary entities and related coverages. Claims as a result of our
operations, or arising in the B&W Chapter 11 proceedings, could adversely impact
the ability of these captive insurers to respond to all claims presented,
although we believe such a result is unlikely.
BWXT, through two of its dedicated limited liability companies, has long-term
management and operating agreements with the U.S. Government for the Pantex and
Y-12 facilities. Most insurable liabilities arising from these sites are not
protected in our corporate insurance program but rely on government contractual
agreements and certain specialized self-insurance programs funded by the U.S.
Government. The U.S. Government has historically fulfilled its contractual
agreement to reimburse for insurable claims, and we expect it to continue this
process during our administration of these two facilities. However, it should be
noted that, in most situations, the U. S. Government is contractually obligated
to pay, subject to the availability of authorized government funds.
As a result of the impact of the September 11, 2001 terrorist attacks, we have
experienced higher costs, higher deductibles and more restrictive terms and
conditions as we have renewed our insurance coverage. Specifically, several of
our insurance programs, including property, onshore builder's risk and others,
now contain exclusions that were not previously applicable, including war and
acts of terrorism. This issue has been impacted by the Terrorism Risk Insurance
Act, although at this point insurers are quite divergent in the prices and
coverage they are offering. We expect to continue to maintain coverage that we
consider adequate at rates that we consider economical. However, some previously
insured risks may no longer be insurable or insurance to cover them will be
available only at rates that we consider uneconomical.
G. EMPLOYEES
At December 31, 2002, we employed approximately 18,200 persons compared with
13,300 at December 31, 2001. Approximately 7,100 of our employees were members
of labor unions at December 31, 2002, compared with approximately 4,700 at
December 31, 2001. Many of our operations are subject to union contracts, which
we customarily renew periodically.
Currently, we consider our relationship with our employees to be satisfactory.
H. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A wide range of federal, state, local and foreign laws, ordinances and
regulations apply to our operations, including those relating to:
- constructing and equipping electric power and other industrial
facilities;
- possessing and processing special nuclear materials;
- workplace health and safety; and
- protecting the environment.
We cannot determine the extent to which new legislation, new regulations or
changes in existing laws or regulations may affect our future operations.
Our operations are subject to the existing and evolving legal and regulatory
standards relating to the environment. These standards include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act and similar laws that provide for responses to and liability
for
9
releases of hazardous substances into the environment. These standards also
include similar foreign, state or local counterparts to these federal laws,
which regulate air emissions, water discharges, hazardous substances and waste,
and require public disclosure related to the use of various hazardous
substances. Our operations are also governed by laws and regulations relating to
workplace safety and worker health, primarily the Occupational Safety and Health
Act and regulations promulgated thereunder. We believe that our facilities are
in substantial compliance with current regulatory standards.
Our compliance with U.S. federal, state and local environmental control and
protection regulations necessitated capital expenditures of $0.3 million in the
year ended December 31, 2002. We expect to spend another $1.4 million on such
capital expenditures over the next five years. Complying with existing
environmental regulations resulted in pretax charges of approximately $11.0
million in the year ended December 31, 2002. We cannot predict all of the
environmental requirements or circumstances that will exist in the future but
anticipate that environmental control and protection standards will become
increasingly stringent and costly.
We have been identified as a potentially responsible party at various cleanup
sites under CERCLA. CERCLA and other environmental laws can impose liability for
the entire cost of cleanup on any of the potentially responsible parties,
regardless of fault or the lawfulness of the original conduct. Generally,
however, where there are multiple responsible parties, a final allocation of
costs is made based on the amount and type of wastes disposed of by each party
and the number of financially viable parties, although this may not be the case
with respect to any particular site. We have not been determined to be a major
contributor of wastes to any of these sites. On the basis of our relative
contribution of waste to each site, we expect our share of the ultimate
liability for the various sites will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity in any given
year.
Environmental remediation projects have been and continue to be undertaken at
certain of our current and former plant sites. During the fiscal year ended
March 31, 1995, we decided to close B&W's nuclear manufacturing facilities in
Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"), and B&W
proceeded to decommission the facilities in accordance with its existing license
from the Nuclear Regulatory Commission (the"NRC"). B&W subsequently transferred
the facilities to BWXT in the fiscal year ended March 31, 1998. During the
fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC on a
plan that provides for the completion of facilities dismantlement and soil
restoration by 2001 and license termination in 2003. BWXT expects to request
approval from the NRC to release the site for unrestricted use at that time. At
December 31, 2002, the remaining provision for the decontamination,
decommissioning and closing of these facilities was $0.4 million. By December
31, 2002, only a portion of the operation and maintenance aspect of the
decommissioning and decontamination work at the Parks facility remained to be
completed in order to receive NRC approval to terminate the NRC license. For a
discussion of certain civil litigation we are involved in concerning the Parks
Facilities, see Item 3.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and
remedial and monitoring relief related to the Parks Facilities. The relief
sought related to potential groundwater contamination resulting from previous
operations at the facilities. BWXT now owns these facilities. PADEP has advised
BWXT that it does not intend to assess any monetary sanctions, provided that
BWXT continues its remediation program for the Parks Facilities. Whether
additional nonradiation contamination remediation will be required at the Parks
facility remains unclear. Results from recent sampling completed by PADEP have
indicated that such remediation may not be necessary.
We perform significant amounts of work for the U.S. Government under both prime
contracts and subcontracts and operate certain facilities that are licensed to
possess and process special nuclear materials. As a result of these activities,
we are subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
The NRC's decommissioning regulations require BWXT and MTI to provide financial
assurance that they will be able to pay the expected cost of decommissioning
their facilities at the end of their service lives. BWXT and MTI will continue
to provide financial assurance
10
aggregating $29.9 million during the year ending December 31, 2003 by issuing
letters of credit for the ultimate decommissioning of all their licensed
facilities, except one. This facility, which represents the largest portion of
BWXT's eventual decommissioning costs, has provisions in its government
contracts pursuant to which all of its decommissioning costs and financial
assurance obligations are covered by the DOE.
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI's NRC licenses for byproduct and source nuclear material was
finalized in December 1999. In conjunction with the transfer of this regulatory
authority and upon notification by the NRC, MTI issued decommissioning financial
assurance instruments naming the State of Ohio as the beneficiary.
At December 31, 2002 and 2001, we had total environmental reserves (including
provisions for the facilities discussed above) of $20.6 million and $21.2
million, respectively. Of our total environmental reserves at December 31, 2002
and 2001, $8.3 million and $6.1 million, respectively, were included in current
liabilities. Our estimated recoveries of these costs totaling $0.2 million and
$3.2 million, respectively, are included in accounts receivable - other in our
consolidated balance sheet at December 31, 2002 and 2001. Inherent in the
estimates of those reserves and recoveries are our expectations regarding the
levels of contamination, decommissioning costs and recoverability from other
parties, which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in material adjustments to our
operating results, and the ultimate loss may differ materially from the amounts
we have provided for in our consolidated financial statements.
I. RISK FACTORS
We have significant liquidity issues currently facing our company, including
significant losses on our EPIC spar projects in the current year which require
funding in 2003, as well as the need to refinance our new credit facility, which
is scheduled to expire in April 2004.
Due primarily to the losses incurred on the three EPIC spar projects, we expect
JRM to experience negative cash flows during 2003. Completion of the EPIC spar
projects has and will continue to put a strain on JRM's liquidity. JRM intends
to fund its cash needs through borrowings on our new credit facility,
intercompany loans from MII and sales of nonstrategic assets, including certain
marine vessels. In addition, under the terms of our new credit facility, JRM's
letter of credit capacity was reduced from $200 million to $100 million. This
reduction does not negatively impact our ability to execute the contracts in our
current backlog. However, it will likely limit JRM's ability to pursue projects
from certain customers who require letters of credit as a condition of award. We
are exploring other opportunities to improve our liquidity position, including
better management of working capital through process improvements, negotiations
with customers to relieve tight schedule requirements and to accelerate certain
portions of cash collections, and alternative financing sources for letters of
credit for JRM. If JRM experiences additional significant contract costs on the
EPIC spar projects as a result of unforeseen events, we may be unable to fund
all our budgeted capital expenditures and meet all of our funding requirements
for contractual commitments. In this instance, we would be required to defer
certain capital expenditures, which in turn could result in curtailment of
certain of our operating activities or, alternatively, require us to obtain
additional sources of financing which may not be available to us or may be cost
prohibitive.
MI experienced negative cash flows in 2002, primarily due to payments of taxes
resulting from the exercise of MI's rights under the intercompany agreement we
describe in Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources in Item 7 of this
report. MI expects to meet its cash needs in 2003 through intercompany
borrowings from BWXT, which BWXT may fund through borrowings under our new
credit facility. MI is restricted, as a result of covenants in its debt
instruments, in its ability to transfer funds to MII and MII's other
subsidiaries through cash dividends or through unsecured loans or investments.
On a consolidated basis, we expect to incur negative cash flows in the first
three quarters of 2003. In addition, in March 2003, Moody's Investor Service
lowered MI's credit rating from B2 to B3. These factors may further impact our
access to capital and our ability to
11
refinance our new credit facility, which is scheduled to expire in April 2004.
Given our current credit rating and operating results, there can be no assurance
that we can obtain additional access to third party funds, if required.
If we are unable to finalize a settlement in the B&W Chapter 11 proceedings,
including obtaining the requisite approvals and Bankruptcy Court confirmation,
with substantially the same terms as contained in the agreement in principle,
our financial condition and results of operations may be materially and
adversely affected.
During the year ended December 31, 2002, we reached an agreement in principle
with the Asbestos Claimants Committee (the "ACC") and the Future Claimants
Representative (the "FCR") in the B&W Chapter 11 proceedings, which includes the
following key terms, among others:
- MII would effectively assign all its equity in B&W to a trust
to be created for the benefit of the asbestos personal injury
claimants.
- MII and all its subsidiaries would assign, transfer or
otherwise make available their rights to all applicable
insurance proceeds to the trust.
- MII would issue 4.75 million shares of restricted common stock
and cause those shares to be transferred to the trust, and MII
would effectively guarantee that those shares would have a
value of $19.00 per share on the third anniversary of the date
of their issuance.
- MI would issue promissory notes to the trust in an aggregate
principal amount of $92.0 million, with principal payments of
$8.4 million per year payable over 11 years, with interest
payable on the outstanding balance at the rate of 7.5% per
year. The payment obligations under those notes would be
guaranteed by MII.
- In exchange for those contributions, MII and its subsidiaries
(other than B&W and its subsidiaries) would be released and
indemnified from and against claims arising from B&W's use of
asbestos and would receive other protections from claims
arising from B&W activities.
The terms of the agreement in principle are reflected in a proposed consensual
plan of reorganization that is on file with the Bankruptcy Court. At December
31, 2002, we established an estimate for the cost of the proposed settlement.
However, there are continuing risks and uncertainties that will remain with us
until the requisite approvals are obtained and the final settlement is reflected
in a plan of reorganization that is confirmed by the Bankruptcy Court pursuant
to a final, nonappealable order of confirmation. An agreed or litigated
settlement, or the final decision by the Bankruptcy Court, could result in the
ultimate liability exceeding amounts recorded as of December 31, 2002.
The asbestos claims and the B&W Chapter 11 proceedings require a significant
amount of management's attention, and they represent an uncertainty in the
financial marketplace. Until the uncertainty is resolved, we may be unable to
deliver to our shareholders the maximum value potentially available to them
through our operations and businesses, taken as a whole. There is no assurance
that the proposed joint plan of reorganization, or any amendment thereto, will
be approved by the Bankruptcy Court.
There are a number of issues and matters to be resolved before the ultimate
outcome of the B&W Chapter 11 proceedings can be determined, including, among
others, the following:
- the ultimate asbestos liability of B&W and its subsidiaries;
- the outcome of negotiations with the ACC, the FCR and other
participants in the Chapter 11 proceedings, concerning, among
other things, the size and structure of the settlement trusts
to satisfy the asbestos liability and the means for funding
those trusts;
- the outcome of negotiations with our insurers as to additional
amounts of coverage available to B&W and its subsidiaries and
as to the participation of those insurers in a plan to fund
the settlement trusts;
12
- the Bankruptcy Court's decisions relating to numerous
substantive and procedural aspects of the Chapter 11
proceedings, including the Court's periodic determinations as
to whether to extend the existing preliminary injunction that
prohibits asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against
nonfiling affiliates of B&W, including MI, JRM and MII;
- the continued ability of our insurers to reimburse B&W and its
subsidiaries for payments made to asbestos claimants and the
resolution of claims filed by insurers for recovery of
insurance amounts previously paid for asbestos personal injury
claims;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999, and the related ruling
issued on April 17, 2002. See Item 3 and Note 10 to our
consolidated financial statements for further information;
- the outcome of objections and potential appeals involving
approval of the disclosure statement and confirmation of the
plan of reorganization;
- final agreement regarding the proposed spin-off of the MI/B&W
pension plan; and
- final agreement on a tax sharing and tax separation
arrangement between MI and B&W.
We have significant guarantee obligations, other contingent claim exposures and
collateral agreements with creditors and customers of our subsidiaries,
including B&W, that may impact our flexibility in addressing the liquidity
issues currently facing our company or other needs for capital that may arise in
the future, including the need to refinance our new credit facility which
expires in April 2004.
In recent periods, MII has entered into credit arrangements to support its
operating subsidiaries and, in some cases, guaranteed or otherwise become
contingently liable for the credit arrangements and customer contractual
obligations of its subsidiaries. These exposures include the following:
- Parent guarantor exposure under our new credit facility. MII
is the parent guarantor under a new $180 million credit
facility for JRM and BWXT (the "New Credit Facility").
Accordingly, to the extent either JRM or BWXT borrows under
that facility or obtains letters of credit under that
facility, MII is liable for the obligations owing to the
lenders under the facility. In addition, MII has
collateralized its guaranty obligations under the New Credit
Facility with 100% of the capital stock of MI and JRM. As of
March 24, 2003, we had $10.1 million in cash advances and
$111.7 million in letters of credit outstanding under the New
Credit Facility.
- B&W letter of credit exposure. At the time of the B&W
bankruptcy filing, MII was a maker or a guarantor of
outstanding letters of credit aggregating approximately $146.5
million ($9.4 million at December 31, 2002) that were issued
in connection with the business operations of B&W and its
subsidiaries. At that time, MI and BWICO were similarly
obligated with respect to additional letters of credit
aggregating approximately $24.9 million that were issued in
connection with the business operations of B&W and its
subsidiaries. Although a permitted use of B&W's $300 million
debtor-in-possession revolving credit facility (the "DIP
Credit Facility") is the issuance of new letters of credit to
backstop or replace these preexisting letters of credit, each
of MII, MI and BWICO has agreed to indemnify and reimburse B&W
and its filing subsidiaries for any customer draw on any
letter of credit issued under the DIP Credit Facility to
backstop or replace any such preexisting letter of credit for
which it has exposure and for the associated letter of credit
fees paid under the facility. As of December 31, 2002,
approximately $51.4 million in letters of credit have been
issued under the DIP Credit Facility to replace or backstop
these preexisting letters of credit.
- Indemnification obligations under surety arrangements. MII has
agreed to indemnify our two surety companies for obligations
of various subsidiaries of MII, including B&W and several of
its subsidiaries, under surety bonds issued to meet bid bond
and performance bond requirements imposed by their customers.
As of December 31, 2002, the aggregate outstanding amount of
surety bonds that were guaranteed by MII and issued in
connection with the business operations of its subsidiaries
was approximately $121.0 million, of which $107.7 million
related to the business operations of B&W and its
subsidiaries.
13
As to the guarantee and indemnity obligations related to B&W, the proposed B&W
Chapter 11 settlement contemplates indemnification and other protections for
MII, MI and BWICO.
The existence of these arrangements may adversely impact our flexibility in
accessing new capital resources to address liquidity issues or other needs for
capital that may arise in the future.
We are subject to loss and other contingencies relating to allegations of
wrongdoing and anticompetitive acts made against MI, JRM, MII and others
involving worldwide heavy-lift activities in the marine construction services
industry.
In March 1997, we began an investigation into allegations of wrongdoing by a
limited number of our former employees and former employees of JRM and others.
The allegations concerned the heavy-lift business of one of JRM's joint
ventures, which owned and operated a fleet of large derrick vessels with lifting
capacities ranging from 3,500 to 13,200 tons, and JRM. On becoming aware of
these allegations, we notified authorities, including the Antitrust Division of
the U.S. Department of Justice ("DOJ"), the Securities and Exchange Commission
("SEC") and the European Commission. As a result of that prompt notification,
the DOJ has granted immunity to MII, JRM and certain affiliates, and our
officers, directors and employees at the time of disclosure, from criminal
prosecution for any anticompetitive acts involving worldwide heavy-lift
activities. We cooperated with the DOJ in its investigation into this and
related matters. In February 2001, we were advised that the SEC had terminated
its investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, a number of major and independent oil and gas exploration and
development companies filed lawsuits in the United States District Court for the
Southern District of Texas against, among others, MI, JRM and MII. These
lawsuits allege, among other things, that the defendants engaged in
anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects. In addition to seeking injunctions to enjoin us and the other
defendants from engaging in future anticompetitive acts, actual damages and
attorneys' fees, the plaintiffs are requesting treble damages. In December 2000,
a number of Norwegian oil companies, including Norwegian affiliates of several
of the plaintiffs in the cases pending in the Southern District of Texas, filed
lawsuits against us and others for alleged violations of the Norwegian Pricing
Act of 1953, in connection with projects completed offshore Norway. The
plaintiffs in these lawsuits are seeking recovery of alleged actual damages in
unspecified amounts. Under applicable Norwegian law, any recovery by these
plaintiffs would be limited to their actual damages, and those damages would be
recoverable only to the extent the plaintiffs have not received cost
reimbursements or other related recoveries from their customers or other third
parties. We understand that the conduct alleged by the Norwegian plaintiffs is
generally the same as the conduct alleged by the plaintiffs in the cases pending
in the Southern District of Texas.
Although we have executed agreements to settle the heavy-lift antitrust claims
filed by several of the plaintiffs in the Southern District of Texas, the
litigation continues with the other plaintiffs. The ultimate outcome of this
litigation or any actions that others may take in connection with the
allegations we describe above could have a material adverse effect on our
consolidated financial position, results of operations and cash flows. See Item
3 for additional information.
Our Marine Construction Services segment derives substantially all its revenues
from companies in the oil and gas exploration and production industry, a
historically cyclical industry with levels of activity that are significantly
affected by the levels and volatility of oil and gas prices.
The demand for marine construction services has traditionally been cyclical,
depending primarily on the capital expenditures of oil and gas companies for
construction of development projects. These capital expenditures are influenced
by such factors as:
- prevailing oil and gas prices;
- expectations about future prices;
14
- the cost of exploring for, producing and delivering oil and
gas;
- the sale and expiration dates of available offshore leases;
- the discovery rate of new oil and gas reserves in offshore
areas;
- domestic and international political, military, regulatory and
economic conditions;
- technological advances; and
- the ability of oil and gas companies to generate funds for
capital expenditures.
Prices for oil and gas historically have been extremely volatile and have
reacted to changes in the supply of and demand for oil and natural gas
(including changes resulting from the ability of the Organization of Petroleum
Exporting Countries to establish and maintain production quotas), domestic and
worldwide economic conditions and political instability in oil producing
countries. We anticipate prices for oil and natural gas will continue to be
volatile and affect the demand for and pricing of our services. A material
decline in oil or natural gas prices or activities over a sustained period of
time could materially adversely affect the demand for our services and,
therefore, our results of operations and financial condition.
War, other armed conflicts or terrorist attacks could have a material adverse
effect on our business.
Events leading to the war in Iraq, increasing military tension involving North
Korea, as well as the terrorist attacks of September 11, 2001 and subsequent
terrorist attacks and unrest, have caused instability in the world's financial
and commercial markets, have significantly increased political and economic
instability in some of the geographic areas in which we operate and have
contributed to high levels of volatility in prices for oil and gas in recent
months. The war in Iraq, as well as threats of war or other armed conflict
elsewhere, may cause further disruption to financial and commercial markets and
contribute to even higher levels of volatility in prices for oil and gas than
those experienced in recent months. In addition, the war with Iraq could lead to
acts of terrorism in the United States or elsewhere, and acts of terrorism could
be directed against companies such as ours. In addition, acts of terrorism and
threats of armed conflicts in or around various areas in which we operate, such
as the Middle East and Indonesia, could limit or disrupt our markets and
operations, including disruptions from evacuation of personnel, cancellation of
contracts or the loss of personnel or assets. Although we have not experienced
any material adverse effects on our results of operations as a result of armed
conflicts and terrorist acts to date, we can provide no assurance that armed
conflicts, terrorism and their effects on us or our markets will not
significantly affect our business and results of operations in the future.
We are subject to risks associated with contractual pricing in the offshore
marine construction industry, including the risk that, if our actual costs
exceed the costs we estimate on our fixed-price contracts, our gross margins and
profitability will decline.
Because of the highly competitive nature of the offshore marine construction
industry, our Marine Construction Services segment performs a substantial number
of its projects on a fixed-price basis. We attempt to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts,
either through estimates of cost increases, which are reflected in the original
contract price, or through price escalation clauses. Despite these attempts,
however, the revenue, cost and gross profit we realize on a fixed-price contract
will often vary from the estimated amounts because of changes in job conditions
and variations in labor and equipment productivity over the term of the
contract. These variations and the risks generally inherent in the marine
construction industry may result in the gross profits we realize being different
from those we originally estimated and may result in reduced profitability or
losses on projects. Specifically, during 2002, our Marine Construction Services
segment has experienced material losses on its three Engineer, Procure, Install
and Construct ("EPIC") spar projects: Medusa, Devils Tower and Front Runner.
These contracts are first-of-a-kind as well as long-term in nature. We have
experienced schedule delays and cost overruns on these contracts that have
adversely impacted our financial results. These projects continue to face
significant risks.
In addition, we recognize revenues under our long-term contracts in the Marine
Construction Services segment on a percentage-of-completion basis. Accordingly,
we review contract price and cost estimates periodically as the work progresses
and reflect adjustments
15
proportionate to the percentage of completion in income in the period when we
revise those estimates. To the extent these adjustments result in a reduction or
an elimination of previously reported profits with respect to a project, we
would recognize a charge against current earnings, which could be material. At
December 31, 2002, we have provided for our estimated losses on the three EPIC
spar projects and other contracts which are in a loss position. Although we
continually strive to improve our ability to estimate our contract costs and
profitability associated with our long-term projects, it is reasonably possible
that current estimates could change and adjustments to overall contract costs
may continue to be significant in future periods.
We face risks associated with recent legislative proposals that could change
laws applicable to corporations that have completed inversion transactions.
As a result of our reorganization in 1982, which we completed through a
transaction commonly referred to as an "inversion," our company is a corporation
organized under the laws of the Republic of Panama. Recently, the U.S. House and
Senate have considered legislation that would change the tax law applicable to
corporations that have completed inversion transactions. Some of the legislative
proposals have contemplated retroactive application and, in certain cases,
treatment of such corporations as United States corporations for United States
federal income tax purposes. Some of the legislative proposals have also
contemplated additional limitations on the deductibility for United States
federal income tax purposes of certain intercompany transactions, including
intercompany interest expense. It is possible the legislation enacted in this
area could substantially increase our corporate income taxes and, consequently,
decrease our future net income and increase our future cash outlays for taxes.
Other legislative proposals, if enacted, could limit or even prohibit our
eligibility to be awarded contracts with the U.S. Government in the future. We
are unable to predict with any level of certainty the likelihood or final form
in which any proposed legislation might become law or the nature of regulations
that may be promulgated under any such future legislative enactments. As a
result of these uncertainties, we are unable to assess the impact on us of any
proposed legislation in this area.
We face risks associated with investing in foreign subsidiaries and joint
ventures, including the risk that we may be restricted in our ability to access
the cash flows or assets of these entities.
We conduct some operations through foreign subsidiaries and joint ventures. We
do not manage all of these entities. Even in those joint ventures that we
manage, we are often required to consider the interests of our joint venture
partners in connection with decisions concerning the operations of the joint
ventures. Arrangements involving these subsidiaries and joint ventures may
restrict us from gaining access to the cash flows or assets of these entities.
In addition, these foreign subsidiaries and joint ventures sometimes face
governmentally imposed restrictions on their abilities to transfer funds to us.
Our international operations are subject to political, economic and other
uncertainties not encountered in our domestic operations.
We derive a significant portion of our revenues from international operations,
including customers in the Middle East. Our international operations are subject
to political, economic and other uncertainties not encountered in domestic
operations. These include:
- risks of war, particularly the risks associated with the war
involving the United States and Iraq, and civil unrest;
- expropriation, confiscation or nationalization of our assets;
- renegotiation or nullification of our existing contracts;
- changing political conditions and changing laws and policies
affecting trade and investment;
- the overlap of different tax structures; and
- the risks associated with the assertion of foreign sovereignty
over areas in which our operations are conducted.
Our Marine Construction Services segment may be particularly susceptible to
regional conditions that may adversely affect its operations. Its major marine
vessels typically require relatively long periods of time to mobilize over long
distances, which could affect our ability to withdraw them from areas of
conflict. Additionally, various foreign jurisdictions have laws limiting the
right and ability of foreign subsidiaries and joint ventures to pay dividends
and remit earnings to affiliated companies.
16
Our international operations sometimes face the additional risks of fluctuating
currency values, hard currency shortages and controls of foreign currency
exchange. We attempt to minimize our exposure to foreign currency fluctuations
by attempting to match anticipated foreign currency contract receipts with
anticipated like foreign currency disbursements. To the extent we are unable to
match the anticipated foreign currency receipts and disbursements related to our
contracts, we attempt to enter into forward contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with our committed
exposures.
Our operations are subject to operating risks and limits on insurance coverage,
which could expose us to potentially significant liability costs.
We are subject to a number of risks inherent in our operations, including:
- accidents resulting in the loss of life or property;
- pollution or other environmental mishaps;
- adverse weather conditions;
- mechanical failures;
- collisions;
- property losses;
- business interruption due to political action in foreign
countries; and
- labor stoppages.
We have been, and in the future we may be, named as defendants in lawsuits
asserting large claims as a result of litigation arising from events such as
these. Some of the risks inherent in our operations are either not insurable or
insurance is available only at rates that we consider uneconomical. This has
particularly been the case following the September 11, 2001 terrorist attacks in
New York City and Washington, D.C., which led to significant changes in various
insurance markets, including decreased coverage limits, more limited coverage,
additional exclusions in coverage, increased premium costs, and increased
deductibles and self insured retentions. These changes were in addition to
similar changes we had seen in certain markets prior to September 11, 2001.
Risks which are difficult to insure include, among others, the risk of war and
confiscation of property in certain areas of the world, losses or liability
resulting from acts of terrorism, certain risks relating to construction, and
pollution liability. Depending on competitive conditions and other factors, we
endeavor to obtain contractual protection against uninsured risks from our
customers. When obtained, such contractual indemnification protection may not in
all cases be supported by adequate insurance maintained by the customer. Such
insurance or contractual indemnity protection may not be sufficient or effective
under all circumstances or against all hazards to which we may be subject. A
successful claim for which we are not fully insured could have a material
adverse effect on us.
BWXT, through two of its dedicated limited liability companies, has long-term
management and operating agreements with the U.S. Government for the Y-12 and
the Pantex facilities. Most insurable liabilities arising from these sites are
not protected in our corporate insurance program but rely on government
contractual agreements and certain specialized self-insurance programs funded by
the U.S. Government. The U.S. Government has historically fulfilled its
contractual agreement to reimburse for insurable claims and we expect it to
continue this process during our administration of these two facilities.
However, it should be noted that, in most situations, the U. S. Government is
contractually obligated to pay, subject to the availability of authorized
government funds.
We have captive insurers which provide certain coverages for our subsidiary
entities and related coverages. Claims as a result of our operations, or arising
in the B&W Chapter 11 proceedings, could adversely impact the ability of these
captive insurers to respond to all claims presented, although we believe such a
result is unlikely.
17
We depend on significant customers.
Some of our industry segments derive a significant amount of their revenues and
profits from a small number of customers. The inability of these segments to
continue to perform services for a number of their large existing customers, if
not offset by contracts with new or other existing customers, could have a
material adverse effect on our business and operations.
Our significant customers include state and federal government agencies and
utilities. In particular, our Government Operations segment derives
substantially all its revenue from the U.S. Government. Some of our large
multiyear contracts with the U.S. Government are subject to annual funding
determinations. State and U.S. Government budget restraints and other factors
affecting these governments may adversely affect our business.
We may not be able to compete successfully against current and future
competitors.
Most industry segments in which we operate are highly competitive. Some of our
competitors or potential competitors have greater financial or other resources
than we have. Our operations may be adversely affected if our current
competitors or new market entrants introduce new products or services with
better features, performance, prices or other characteristics than those of our
products and services. This is significant to our offshore business in JRM,
where capital investment is becoming critical to our ability to compete.
The loss of the services of one or more of our key personnel, or our failure to
attract, assimilate and retain trained personnel in the future, could disrupt
our operations and result in loss of revenues.
Our success depends on the continued active participation of our executive
officers and key operating personnel. The loss of the services of any one of
these persons could adversely affect our operations.
Our operations require the services of employees having the technical training
and experience necessary to obtain the proper operational results. As a result,
our operations depend, to a considerable extent, on the continuing availability
of such personnel. If we should suffer any material loss of personnel to
competitors or be unable to employ additional or replacement personnel with the
requisite level of training and experience to adequately operate our equipment,
our operations could be adversely affected. While we believe our wage rates are
competitive and our relationships with our employees are satisfactory, a
significant increase in the wages paid by other employers could result in a
reduction in our workforce, increases in wage rates, or both. If either of these
events occurred for a significant period of time, our financial condition and
results of operations could be adversely impacted.
A substantial number of our employees are members of labor unions. Although we
expect to renew our union contracts without incident, if we are unable to
negotiate acceptable new contracts with our unions in the future, we could
experience strikes or other work stoppages by the affected employees, and new
contracts could result in increased operating costs attributable to both union
and non-union employees. If any such strikes or other work stoppages were to
occur, or if our other employees were to become represented by unions, we could
experience a significant disruption of our operations and higher ongoing labor
costs.
We are subject to government regulations that may adversely affect our future
operations.
Many aspects of our operations and properties are affected by political
developments and are subject to both domestic and foreign governmental
regulations, including those relating to:
- construction and equipping of production platforms and other
marine facilities;
- marine vessel safety;
- currency conversions and repatriation;
- oil exploration and development;
- taxation of foreign earnings and earnings of expatriate
personnel; and
- use of local employees and suppliers by foreign contractors.
18
In addition, our Marine Construction Services segment depends on the demand for
its services from the oil and gas industry and, therefore, is affected by
changing taxes, price controls and other laws and regulations relating to the
oil and gas industry generally. The adoption of laws and regulations curtailing
exploration and development drilling for oil and gas for economic and other
policy reasons would adversely affect the operations of our Marine Construction
Services segment by limiting the demand for its services. We cannot determine
the extent to which our future operations and earnings may be affected by new
legislation, new regulations or changes in existing regulations.
Environmental laws and regulations and civil liability for contamination of the
environment or related personal injuries may result in increases in our
operating costs and capital expenditures and decreases in our earnings and cash
flow.
Governmental requirements relating to the protection of the environment,
including solid waste management, air quality, water quality, the
decontamination and decommissioning of former nuclear manufacturing and
processing facilities and cleanup of contaminated sites, have had a substantial
impact on our operations. These requirements are complex and subject to frequent
change. In some cases, they can impose liability for the entire cost of cleanup
on any responsible party without regard to negligence or fault and impose
liability on us for the conduct of others or conditions others have caused, or
for our acts that complied with all applicable requirements when we performed
them. Our compliance with amended, new or more stringent requirements, stricter
interpretations of existing requirements or the future discovery of
contamination may require us to make material expenditures or subject us to
liabilities that we currently do not anticipate. See Section H for further
information. In addition, some of our operations and the operations of
predecessor owners of some of our properties have exposed us to civil claims by
third parties for liability resulting from contamination of the environment or
personal injuries caused by releases of hazardous substances into the
environment. For a discussion of civil proceedings of this nature in which we
are currently involved, see Item 3.
We are subject to other risks that we discuss in other sections of this annual
report.
For discussions of various factors that affect the demand for our products and
services in our segments, see the discussions under the heading "Factors
Affecting Demand" in each of Sections B and C. For a discussion of our insurance
coverages and uninsured exposures, see Section F. For discussions of various
legal proceedings in which we are involved, in addition to those we refer to
above, see Item 3. In addition to the risks we describe or refer to above, we
are subject to other risks, contingencies and uncertainties, including those we
have referred to under the heading "Cautionary Statement Concerning
Forward-Looking Statements" in Section J.
J. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future backlog,
revenues, income and capital spending. Forward-looking statements are generally
accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "plan," "goal" or other words that convey the
uncertainty of future events or outcomes. In addition, sometimes we will
specifically describe a statement as being a forward-looking statement and refer
to this cautionary statement.
In addition, various statements this Annual Report on Form 10-K contains,
including those that express a belief, expectation or intention, as well as
those that are not statements of historical fact, are forward-looking
statements. Those forward-looking statements appear in Items 1 and 2-"Business
and Properties" and Item 3-"Legal Proceedings" in Part I of this report and in
19
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the notes to our consolidated financial statements
in Item 8 of Part II of this report and elsewhere in this report. These
forward-looking statements speak only as of the date of this report; we disclaim
any obligation to update these statements unless required by securities law, and
we caution you not to rely on them unduly. We have based these forward-looking
statements on our current expectations and assumptions about future events.
While our management considers these expectations and assumptions to be
reasonable, they are inherently subject to significant business, economic,
competitive, regulatory and other risks, contingencies and uncertainties, most
of which are difficult to predict and many of which are beyond our control.
These risks, contingencies and uncertainties relate to, among other matters, the
following:
- general economic and business conditions and industry trends;
- the continued strength of the industries in which we are
involved;
- decisions about offshore developments to be made by oil and
gas companies;
- the deregulation of the U.S. electric power market;
- the highly competitive nature of our businesses;
- our future financial performance, including compliance with
covenants in our credit facilities, availability, terms and
deployment of capital;
- the continued availability of qualified personnel;
- operating risks normally incident to offshore exploration,
development and production operations;
- our ability to replace or extend our current credit facility
on or before April 30, 2004, given our results of operations
in 2002 and our current credit rating;
- the ability of JRM to maintain its forecasted financial
performance, including its ability to manage costs associated
with its EPIC spar projects;
- changes in, or our failure or inability to comply with,
government regulations and adverse outcomes from legal and
regulatory proceedings, including the results of ongoing civil
lawsuits involving alleged anticompetitive practices in our
marine construction business;
- estimates for pending and future nonemployee asbestos claims
against B&W and potential adverse developments that may occur
in the Chapter 11 reorganization proceedings and related
settlement discussions involving B&W and certain of its
subsidiaries and MII;
- the ultimate resolution of the appeals from the ruling issued
by the Bankruptcy Court on February 8, 2002, which found B&W
solvent at the time of a corporate reorganization completed in
the fiscal year ended March 31, 1999 and the related ruling
issued on April 17, 2002;
- the potential impact on available insurance due to the recent
increases in bankruptcy filings by asbestos-troubled
companies;
- the potential impact on our insurance subsidiaries of B&W
asbestos-related claims under policies issued by those
subsidiaries;
- legislation recently proposed by members of the U.S. Congress
that, if enacted, could reduce or eliminate the tax advantages
we derive from being organized under the laws of the Republic
of Panama;
- recently proposed legislation that, if enacted, could limit or
prohibit us from entering into contracts with the U.S.
Government;
- changes in existing environmental regulatory matters;
- rapid technological changes;
- realization of deferred tax assets;
20
- consequences of significant changes in interest rates and
currency exchange rates;
- difficulties we may encounter in obtaining regulatory or other
necessary approvals of any strategic transactions;
- social, political and economic situations in foreign countries
where we do business, including, among others, countries in
the Middle East and Southeast Asia;
- the possibilities of war, other armed conflicts or terrorist
attacks;
- effects of asserted and unasserted claims;
- our ability to obtain surety bonds and letters of credit;
- the continued ability of our insurers to reimburse us for
payments made to asbestos claimants; and
- our ability to maintain builder's risk, liability and property
insurance in amounts we consider adequate at rates that we
consider economical, particularly after the impact on the
insurance industry of the September 11, 2001 terrorist
attacks.
We believe the items we have outlined above are important factors that could
cause estimates in our financial statements to differ materially from actual
results and those expressed in a forward-looking statement made in this report
or elsewhere by us or on our behalf. We have discussed many of these factors in
more detail elsewhere in this report. These factors are not necessarily all the
important factors that could affect us. Unpredictable or unknown factors we have
not discussed in this report could also have material adverse effects on actual
results of matters that are the subject of our forward-looking statements. We do
not intend to update our description of important factors each time a potential
important factor arises, except as required by applicable securities laws and
regulations. We advise our security holders that they should (1) be aware that
important factors not referred to above could affect the accuracy of our
forward-looking statements and (2) use caution and common sense when considering
our forward-looking statements.
K. AVAILABLE INFORMATION
Our website address is www.mcdermott.com. We make available through this website
under "SEC Filing," free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after we electronically file those
materials with, or furnish those materials to, the SEC.
Item 3. LEGAL PROCEEDINGS
In March 1997, we, with the help of outside counsel, began an investigation into
allegations of wrongdoing by a limited number of former employees of MII and JRM
and others. The allegations concerned the heavy-lift business of JRM's HeereMac
joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc.
("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these
allegations, we notified authorities, including the Antitrust Division of the
DOJ, the SEC and the European Commission. As a result of our prompt disclosure
of the allegations, JRM, certain other affiliates and their officers, directors
and employees at the time of the disclosure were granted immunity from criminal
prosecution by the DOJ for any anticompetitive acts involving worldwide
heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the
scope of the immunity to include a broader range of our marine construction
activities and affiliates. The DOJ had also requested additional information
from us relating to possible anticompetitive activity in the marine construction
business of McDermott-ETPM East, Inc., one of the operating companies within
JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company.
On becoming aware of the allegations involving HeereMac, we initiated action to
terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema
acquired JRM's interest in exchange for cash and title to several pieces of
equipment. We also terminated the McDermott-ETPM joint venture, and on April 3,
1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed
J. Ray McDermott Middle East, Inc.
21
On December 22, 1997, HeereMac and one of its employees pled guilty to criminal
charges by the DOJ that they and others had participated in a conspiracy to rig
bids in connection with the heavy-lift business of HeereMac in the Gulf of
Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were
fined $49.0 million and $0.1 million, respectively. As part of the plea, both
HeereMac and certain employees of HeereMac agreed to cooperate fully with the
DOJ investigation. Neither MII, JRM nor any of their officers, directors or
employees were a party to those proceedings.
In July 1999, a former JRM officer pled guilty to charges brought by the DOJ
that he participated in an international bid-rigging conspiracy for the sale of
marine construction services. In May 2000, another former JRM officer was
indicted by the DOJ for participating in a bid-rigging conspiracy for the sale
of marine construction services in the Gulf of Mexico. His trial was held in
February 2001 and, at the conclusion of the Government's case, the presiding
judge directed a judgment of acquittal.
We cooperated fully with the investigations of the DOJ and the SEC into these
matters. In February 2001, we were advised that the SEC had terminated its
investigation and no enforcement action was recommended. The DOJ has also
terminated its investigation.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and several related entities (the "Phillips Plaintiffs") filed a
lawsuit in the U.S District Court for the Southern District of Texas against
MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema,
certain Heerema affiliates and others, alleging that the defendants engaged in
anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and
Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in
fraudulent activity and tortiously interfered with the plaintiffs' businesses in
connection with certain offshore transportation and installation projects in the
Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In
December 1998, Den norske stats oljeselskap a.s., individually and on behalf of
certain of its ventures and its participants (collectively, "Statoil"), filed a
similar lawsuit in the same court (the "Statoil Litigation"). In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Phillips Litigation and Statoil Litigation requested punitive as well as
treble damages. In January 1999, the court dismissed without prejudice, due to
the court's lack of subject matter jurisdiction, the claims of the Phillips
Plaintiffs relating to alleged injuries sustained on any foreign projects. In
July 1999, the court also dismissed the Statoil Litigation for lack of subject
matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of
Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed
the district court decision in February 2000 and Statoil filed a motion for
rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of
their request to dismiss their remaining domestic claims in the lawsuit in order
to seek an appeal of the dismissal of their claims on foreign projects, which
request was subsequently denied. On March 12, 2001, the plaintiffs' motion for
rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The
plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On
February 20, 2002, the U.S. Supreme Court denied the petition for certiorari.
The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April
15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the
year ended December 31, 2002, Heerema and MII executed agreements to settle the
heavy-lift antitrust claims against Heerema and MII with British Gas and
Phillips, and the Court has entered an order of dismissal.
In June 1998, Shell Offshore, Inc. and several related entities also filed a
lawsuit in the U.S. District Court for the Southern District of Texas against
MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema
and others, alleging that the defendants engaged in anticompetitive acts in
violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequently, the following parties (acting for themselves and, in certain
cases, on behalf of their respective co-venturers and for whom they operate)
intervened as plaintiffs in the Shell Litigation: Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources
Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company
and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.; Green
Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.;
22
Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and
certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also,
in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s.,
individually and on behalf of their respective co-venturers, filed similar
lawsuits in the same court, which lawsuits were consolidated with the Shell
Litigation. In addition to seeking injunctive relief, actual damages and
attorneys' fees, the plaintiffs in the Shell Litigation request treble damages.
In February 1999, we filed a motion to dismiss the foreign project claims of the
plaintiffs in the Shell Litigation due to the Texas district court's lack of
subject matter jurisdiction, which motion is pending before the court.
Subsequently, the Shell Litigation plaintiffs were allowed to amend their
complaint to include non heavy-lift marine construction activity claims against
the defendants. Currently, we are awaiting the court's decision on our motion to
dismiss the foreign claims. During the year ended December 31, 2002, Heerema and
MII executed agreements to settle heavy-lift antitrust claims against Heerema
and MII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf
Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington
Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass
Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering
Company L.L.C., and the Court has entered an order of dismissal. In addition,
Woodside Energy, Ltd. filed a motion of dismissal with prejudice, which was
granted. Recently, we entered into a settlement agreement with Conoco, Inc. and
the Court entered an order of dismissal.
On December 15, 2000, a number of Norwegian oil companies filed lawsuits against
MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing
Act of 1953 in connection with projects in Norway. Plaintiffs include Norwegian
affiliates of various of the plaintiffs in the Shell Litigation pending in
Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates,
with some by Heerema/HeereMac and none by JRM. We understand that the conduct
alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S.
civil cases. The cases were heard by the Conciliation Boards in Norway during
the first week of October 2001. The Conciliation Boards referred the cases to
the court of first instance for further proceedings. The plaintiffs have one
year from the date of referral to proceed with the cases. Several of the
plaintiffs who filed cases before the Conciliation Boards have filed writs with
the courts of first instance in order to commence the court proceedings.
Settlement discussions are underway with these plaintiffs.
As a result of the initial allegations of wrongdoing in March 1997, we formed a
special committee of our Board of Directors to monitor and oversee our
investigation into all of these matters. Our Board of Directors concluded that
the special committee was no longer necessary, and it was dissolved in 2002.
Because we have reached settlement agreements with the vast majority of the oil
company claimants, we have adjusted our reserve to more appropriately reflect
the risks and exposures of the remaining claims.
B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed on
June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District
Court for the Western District of Pennsylvania. The suit involves approximately
500 separate claims for compensatory and punitive damages relating to the
operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation
allege, among other things, that they suffered personal injury, property damage
and other damages as a result of radioactive emissions from these facilities. In
September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the
first cases brought to trial, awarding $36.7 million in compensatory damages. In
June 1999, the district court set aside the $36.7 million judgment and ordered a
new trial on all issues. In November 1999, the district court allowed an
interlocutory appeal by the plaintiffs of certain issues, including the granting
of the new trial and the court's rulings on certain evidentiary matters, which,
following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined
to accept for review.
In 1998, B&W settled all pending and future punitive damage claims in the Hall
Litigation for $8.0 million for which B&W seeks reimbursement from other
parties. There is a controversy between B&W and its insurers as to the amount of
coverage available under
23
the liability insurance policies covering the facilities. B&W filed a
declaratory judgment action in a Pennsylvania State Court seeking a judicial
determination as to the amount of coverage available under the policies. On
April 28, 2001, in response to cross-motions for partial summary judgment, the
Pennsylvania State Court issued its ruling regarding: (1) the applicable trigger
of coverage under the Nuclear Energy Liability Policies issued by B&W's
insurers; and (2) the scope of the insurers' defense obligations to B&W under
these policies. With respect to the trigger of coverage, the Pennsylvania State
Court held that "manifestation" is an applicable trigger with respect to the
underlying claims at issue. Although the Court did not make any determination of
coverage with respect to any of the underlying claims, we believe the effect of
its ruling is to increase the amount of coverage potentially available to B&W
under the policies at issue to $320.0 million. With respect to the insurers'
duty to defend B&W, the Court held that B&W is entitled to separate and
independent counsel funded by the insurers. On May 21, 2001, the Court granted
the insurers' motion for reconsideration of the April 25, 2001 order. On October
1, 2001, the Court entered its order reaffirming its original substantive
insurance coverage rulings and further certified the order for immediate appeal
by any party. B&W's insurers filed an appeal in November 2001. On November 25,
2002, the Pennsylvania Superior Court affirmed the rulings in favor of B&W on
the trigger of coverage and duty to defend issues. On December 24, 2002, B&W's
insurers filed a petition for the allowance of an appeal in the Pennsylvania
Supreme Court. The Pennsylvania Supreme Court has not yet made any determination
regarding whether to accept discretionary review of the insurers' appeal.
The plaintiffs' remaining claims against B&W in the Hall Litigation have been
automatically stayed as a result of the B&W bankruptcy filing. B&W filed a
complaint for declaratory and injunctive relief with the Bankruptcy Court
seeking to stay the pursuit of the Hall Litigation against ARCO during the
pendency of B&W's bankruptcy proceeding due to common insurance coverage and the
risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied
in October 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001,
the U.S. District Court for the Eastern District of Louisiana, which has
jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the
Bankruptcy Court's Order. We believe that all claims under the Hall Litigation
will be resolved within the limits of coverage of our insurance policies;
moreover, the proposed settlement agreement and plan of reorganization in the
B&W Chapter 11 proceedings include an overall settlement of this dispute.
However, should the B&W Chapter 11 settlement fail, or should the settlement
particular to the Hall Litigation and the Apollo-Parks issue not be consummated,
there may be an issue as to whether our insurance coverage is adequate and we
may be materially adversely impacted if our liabilities exceed our coverage. B&W
transferred the two facilities subject to the Hall Litigation to BWXT in June
1997 in connection with BWXT's formation and an overall corporate restructuring.
In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the
process of installing the south deck module on a compliant tower in the Gulf of
Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main
hoist load line failed, resulting in the loss of the module. In December 1999,
Texaco filed a lawsuit seeking consequential damages for delays resulting from
the incident, as well as costs incurred to complete the project with another
contractor and uninsured losses. This lawsuit was filed in the U. S. District
Court for the Eastern District of Louisiana against a number of parties, some of
which brought third-party claims against the Operator Subsidiary and another
subsidiary of JRM, the owner of the vessel that attempted the lift of the deck
module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator
Subsidiary were subsequently tendered as direct defendants to Texaco. In
addition to Texaco's claims in the federal court action, damages for the loss of
the south deck module have been sought by Texaco's builder's risk insurers in
claims against the Owner Subsidiary and the other defendants, excluding the
Operator Subsidiary, which was an additional insured under the policy. Total
damages sought by Texaco and its builder's risk insur