UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Date of Report: March 25, 2003
McDERMOTT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 1-8430 72-0593134
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(State or other jurisdiction (Commission) (IRS Employer
of incorporation) File No.) Identification No.)
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
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Item 5. OTHER EVENTS
In a press release dated March 24, 2003,
McDermott International, Inc. (NYSE: MDR) ("McDermott" or the "Company")
today reported a net loss of $184.5 million, or $2.94 loss per diluted share, on
revenues of $448.1 million for the fourth quarter of 2002, compared to a net
loss of $42.9 million, or $0.70 loss per diluted share, on revenues of $436.0
million for the same quarter last year.
"Once again, our quarterly results were dominated by additional costs
associated with the EPIC spar projects, principally due to the requirement to
repaint the Devils Tower topsides. As a result, the Devils Tower completion has
been delayed and additional costs incurred. Fabrication of the Medusa hull was
completed during the quarter and installed in the Gulf of Mexico in February.
The Medusa topsides are substantially complete and are scheduled for
installation during the second quarter of this year," said Bruce W. Wilkinson,
chairman of the board and chief executive officer of McDermott.
"Our operating performance and financial results during 2002 were
unacceptable. We have, however, taken actions that should enable us to transform
the opportunities we have in our major business segments into value for our
shareholders. I truly believe that we have the right people in leadership
positions, and that we have taken the actions necessary to solidify and turn
around our business in 2003 and to create a platform for growth in 2004 and
beyond," Wilkinson said.
The 2002 fourth quarter results include, among other things, the following:
-- Charges totaling $47.2 million, or $0.75 loss per diluted share,
relating to additional costs on the EPIC spar projects ("Spar
Projects") of J. Ray McDermott ("J. Ray");
-- Charges totaling $15 million, or $0.24 loss per diluted share,
relating to restructuring charges for J. Ray's Western
Hemisphere marine operations, including the impairment of
certain assets; $13.0 million of the charge is noncash;
-- Charge of $110 million, or $1.75 loss per diluted share,
resulting from the net estimated costs of settlement of The
Babcock & Wilcox Company ("B&W") bankruptcy proceedings; the
net estimated costs include related income tax expense of
$23.6 million on estimated benefits expected to be received by
the Company as a result of the settlement of the B&W
bankruptcy proceedings; and
-- Income tax expense of $24.5 million, which includes the $23.6
million income tax expense discussed above and income taxes on
the Company's U.S. operations. The Company received little or
no income tax benefit from the majority of the losses it
incurred during the fourth quarter.
For the full year 2002, the Company reported a net loss of $776.4 million,
or $12.55 loss per diluted share, on revenues of $1.7 billion, compared to a net
loss of $20.0 million, or $0.33 loss per diluted share, on revenues of $1.9
billion for the full year of 2001.
The net loss for the full year of 2002 includes, among other things, the
following:
-- Pre-tax charges totaling $149 million ($135 million after tax,
or $2.18 loss per diluted share) relating to additional costs
deterioration on the Spar Projects of J. Ray;
-- Charges totaling $15 million, or $0.24 loss per diluted share,
relating to restructuring charges for J. Ray's Western
Hemisphere marine operations, including the impairment of
certain assets; $13.0 million of the charge is noncash;
-- Noncash charge of $313 million, or $5.06 loss per diluted
share, reflecting an impairment of J. Ray's goodwill, which
was recorded in the third quarter;
-- Charge of $110 million, or $1.78 loss per diluted share,
resulting from the estimated costs of settlement of the B&W
bankruptcy proceedings; the net estimated costs include
related income tax expense of $23.6 million on estimated
benefits expected to be received by the Company as a result of
the settlement of the B&W bankruptcy proceedings;
-- Noncash charge in the amount of $220.9 million, or $3.57 loss
per diluted share, relating to the write-off of the Company's
investment in B&W and other related assets during the second
quarter; and
-- Income tax expense of $15.1 million, which includes the $23.6
million income tax expense discussed above and income taxes on
the Company's U.S. operations, partially offset by tax
benefits on some of the Company's operating losses incurred
during the year. The Company received little or no income tax
benefit on the goodwill impairment charge, the write-off of
its investment in B&W or the net pre-tax provision of $86.4
million for the estimated costs of settlement of the B&W
Chapter 11 proceedings.
LIQUIDITY
As previously disclosed, the Company refinanced its credit facilities on
February 10, 2003, resulting in a $180 million single facility for the Company
and its subsidiaries, with sublimits on the amounts available to J. Ray and
BWXT. With the new credit facility, our liquidity situation has improved, but
the Company and J. Ray are still faced with issues that will continue to
negatively affect our liquidity for at least the remainder of 2003.
As of March 19, 2003, the Company's available liquidity under the new
facility was $37 million, with total liquidity of $163 million for the Company.
If the Company were to use the full $37 million as short-term borrowings under
the new credit facility, the Company would have approximately $8.3 million
available as additional letters of credit capacity at March 19, 2003.
Due primarily to the losses incurred on the Spar Projects, the Company
expects J. Ray to experience negative cash flows during 2003. Completion of the
Spar Projects has and will continue to put a strain on J. Ray's liquidity. J.
Ray intends to fund its cash needs through borrowings under the new credit
facility, intercompany loans from McDermott and sales of non-strategic assets
including certain marine vessels. However, if J. Ray experiences additional
significant costs on the Spar Projects or any other projects that are
unanticipated, the Company may be unable to fund all of its anticipated
operating and capital needs and may have to pursue other financing options which
may or may not be available to them.
BUSINESS SEGMENT INFORMATION
Attached to the earnings release is a schedule which reports financial
information by business segment. The Company disposed of its Industrial
Operations segment during 2002. The following is a discussion of the performance
of each of the Company's business segments:
Marine Construction Services Segment
The Marine Construction Services segment consists of J. Ray McDermott and
its subsidiaries. This segment reported a $37.6 million increase in revenues to
$283.5 million in the 2002 fourth quarter, compared to $245.9 million in the
same quarter last year. This 15% increase in revenues resulted primarily from
the Phase 1 contracts for fabrication of an integrated topside and pipeline
installation in the Azerbaijan sector of the Caspian Sea, fabrication of
topsides in Morgan City and the Spar Projects. These activities were partially
offset by reduced marine activity in the Gulf of Mexico.
Although revenues increased, Marine Construction Services reported a
segment operating loss, before equity in income from investees, of $76.4 million
in the 2002 fourth quarter, compared to an operating loss of $1.0 million in the
same quarter last year. J. Ray recorded charges totaling $47.2 million relating
to cost overruns, schedule delays and higher than expected additional future
costs to complete the Spar Projects, all of which continue to be in a loss
position. J. Ray also experienced losses on three pipeline projects in the Gulf
of Mexico, primarily as a result of poor operational performance, and on a South
American project, primarily as a result of fabrication cost overruns at its
Mexican facility. The operating loss for the fourth quarter of 2002 also
included operating costs associated with the underutilization of marine
equipment in, and restructuring charges for, J. Ray's Western Hemisphere marine
operations. Partially offsetting these losses were two fabrication and marine
installation projects in Southeast Asia, a topsides fabrication and pipeline
installation project in the Azerbaijan sector of the Caspian Sea, reduced
general and administrative expenses and a favorable adjustment of a reserve for
potential settlement of certain litigation. The 2001 fourth quarter included
amortization of goodwill of $4.5 million. No amortization of goodwill was
recorded in 2002 due to the adoption of FAS 142 by the Company.
The net loss on asset disposals and impairments in the 2002 fourth quarter
is due primarily to noncash impairment charges for assets used in J. Ray's
Western Hemisphere marine operations.
J. Ray's backlog, which included $345 million relating to uncompleted work
on the Spar Projects, was $2.1 billion at December 31, 2002, compared to $2.0
billion at September 30, 2002 and $1.8 billion at December 31, 2001.
Government Operations Segment
The Government Operations segment, which consists primarily of BWX
Technologies, Inc. ("BWXT"), reported a $44.0 million increase in revenues to
$164.7 million for the 2002 fourth quarter, compared to $120.7 million in the
same quarter last year. This 36% increase was primarily attributable to higher
volumes from the manufacture of nuclear components for certain U.S. government
programs and higher revenues from a facilities management services contract with
the U.S. Department of Energy ("DOE") that is not operated through a joint
venture. Partially offsetting the increased revenues were lower volumes from
commercial nuclear environmental services.
Segment operating income, before equity in income from investees, decreased
$1.6 million to $5.6 million in the 2002 fourth quarter. The decrease is
primarily due to lower margins from the manufacture of nuclear components for
certain U.S. government programs resulting from contract rate adjustments and
higher facility management oversight costs. Additionally, this segment
experienced higher costs resulting from the decentralization of research and
development to McDermott's other business units and increased spending on
certain research and development projects being performed by BWXT in conjunction
with the DOE. The lower margins and higher costs were partially offset by higher
volumes from the manufacture of nuclear components for certain U.S. government
programs.
Equity in income from investees includes joint ventures through which BWXT
performs facilities management services for certain DOE sites. Equity in income
from investees increased $2.7 million to $8.8 million in the 2002 fourth
quarter, compared to $6.1 million in the same quarter last year. The increase
was primarily due to the timing of performance-based earnings from a facilities
management services contract with the DOE.
Backlog in the Government Operations segment increased to $1.7 billion at
December 31, 2002, compared to $949 million at September 30, 2002 and $1.0
billion at December 31, 2001. The increase in backlog at the end of 2002 was due
primarily to bookings of manufacturing contracts that were originally forecasted
in 2003.
Power Generation Systems Segment
The Power Generation Systems segment consists primarily of Babcock & Wilcox
Volund ApS ("Volund"). On October 11, 2002, the Company sold Volund to B&W for
consideration including the funding of the repayment of approximately $14.5
million of principal and interest on a loan owed by Volund to McDermott. The
purchase price is subject to adjustment depending on the final resolution of an
ongoing project. The gain or loss on the sale will not be recognized until final
resolution of the B&W Chapter 11 proceedings.
Corporate
Corporate expenses increased $8.4 million to $3.3 million for the 2002
fourth quarter, compared to $5.1 million of income in the same quarter last
year. The increase was due primarily to the recognition of pension expense in
the 2002 fourth quarter compared to pension income in the 2001 fourth quarter.
Lower legal and professional service expenses related to the B&W Chapter 11
proceedings partially offset these increases.
OTHER FINANCIAL INFORMATION
Other Income and Expense
Interest income decreased $2.2 million to $1.7 million in the 2002 fourth
quarter, compared to the same quarter last year. Interest expense decreased by
$5.4 million to $2.6 million in the 2002 fourth quarter compared to the same
quarter last year. The decrease in interest income is due primarily to a
decrease in investments that were used to repay certain debt obligations in the
first quarter of 2002, including the related tax payments, and to prevailing
interest rates. The decrease in interest expense is due primarily to a reduction
in prevailing interest rates and the repayment of debt.
Other-net decreased by $6.5 million to an expense of $2.9 million in the
2002 fourth quarter, compared to income of $3.6 million in the same quarter last
year. The decrease was due primarily to miscellaneous income recorded in the
2001 fourth quarter totaling approximately $3.5 million for an accrual reversal
for rent expense on one of the Company's facilities. In addition, the 2002
fourth quarter included $2.4 million of expense relating to the write-off of
certain assets of the Company.
Goodwill Impairment
Due to the deterioration in J. Ray's financial performance during the third
quarter of 2002 and revised expectations concerning J. Ray's future earnings and
cash flow, the Company tested J. Ray's goodwill for impairment as of September
30, 2002. With the assistance of an independent consultant, the Company
determined that it was probable that a goodwill impairment loss had occurred,
and in the third quarter of 2002, recorded an estimated impairment charge of
$313 million, representing the total amount of goodwill on J. Ray's books.
During the 2002 fourth quarter, the Company completed its measurement of the
potential loss and concluded that no adjustment to the estimated loss was
required.
The Babcock & Wilcox Company
The Company wrote off its investment in B&W during the second quarter of
2002 and has not consolidated B&W with its financial results since the Chapter
11 bankruptcy filing in the first quarter of 2000. Based on the filing of a
joint plan of reorganization with the bankruptcy court on December 19, 2002 and
on recent positive developments in the settlement negotiations, the Company
determined that a liability related to the proposed settlement is probable and
that the value is reasonably estimable. Accordingly, at December 31, 2002, the
Company established an estimate for the cost of the settlement of the B&W
bankruptcy proceedings of $110.0 million, including related income taxes of
$23.6 million.
B&W's revenues decreased $9.2 million to $396.4 million in the 2002 fourth
quarter, compared to $405.6 million in the same quarter last year. The net loss
increased to $250.8 million in the 2002 fourth quarter, compared to $4.2 million
in the same quarter last year. The net loss for the 2002 fourth quarter included
a $286.5 million increase in B&W's asbestos liability as a result of the
settlement negotiations and the determination that the settlement now appears
probable.
Pension Plans
As a result of the downturn in the stock market and the decline in interest
rates, the Company was required to record an additional minimum pension
liability, which resulted in a decrease to stockholders' equity of $451.8
million as of December 31, 2002. The Company has met its total minimum funding
requirement of $21.1 million for 2002, of which approximately $11.2 million
relates to the 2002 pension plan year.
Pension expense for 2003 for the Company's defined benefit plans is
expected to be approximately $86.8 million with an approximate $8.6 million
minimum funding requirement in 2003 for one of the Company's defined benefit
plans.
Earnings Guidance
For the full year of 2003, the Company reaffirms its earnings guidance to
be in the range of breakeven to a loss of $0.05 per diluted share. The 2003
guidance includes the $86.8 million pension expense described above.
OTHER INFORMATION
About the Company
McDermott International, Inc. is a leading worldwide energy services
company. The Company's subsidiaries provide engineering, fabrication,
installation, procurement, research, manufacturing, environmental systems,
project management and facility management services to a variety of customers in
the energy and power industries, including the U.S. Department of Energy.
In accordance with the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995, McDermott International, Inc. cautions that
statements in this press release which are forward-looking and which provide
other than historical information, involve risks and uncertainties that may
impact the Company's actual results of operations. The forward-looking
statements in this press release include, among other things, statements about
the Company's and J. Ray's liquidity, earnings guidance for the full year 2003,
the estimated costs and timing to complete the Spar Projects, the estimated
charges for the proposed settlement of the B&W Chapter 11 based on current
negotiations, the probability of that proposed settlement, the projected pension
expense for 2003 and the steps taken to solidify and turn around the Company's
business in 2003 and provide a platform for growth in 2004 and beyond. Although
McDermott's management believes that the expectations reflected in those
forward-looking statements are reasonable, McDermott can give no assurance that
those expectations will prove to have been correct. Those statements are made by
using various underlying assumptions and are subject to numerous uncertainties
and risks. If one or more of these risks materialize, or if underlying
assumptions prove incorrect, actual results may vary materially from those
expected. For a more complete discussion of these risk factors, please see
McDermott's annual and quarterly reports filed with the Securities and Exchange
Commission.
Conference Call to Discuss Press Release
Date: Tuesday, March 25, 2003 at 10:00 a.m. EST (9:00 a.m. CST)
Webcast: Investor Relations' section of website at www.mcdermott.com
Dial-in: (USA) (888) 428-4479 or (International) (651) 291-0344
Replay: March 25, 2003 beginning at 5:00 p.m. EST (4:00 p.m. CST)
(USA) (800) 475-6701 or (International) (320) 365-3844
Access code 675828
McDERMOTT INTERNATIONAL, INC.
BUSINESS SEGMENT INFORMATION
(In thousands)
THREE MONTHS ENDED TWELVE MONTHS ENDED
REVENUES: 12/31/02 12/31/01 12/31/02 12/31/01
--------------------- ----------- --------- ---------- ----------
(Unaudited)
Marine Construction
Services $ 283,494 $ 245,923 $1,148,041 $ 848,528
Government Operations 164,666 120,715 553,827 494,018
Industrial Operations 0 55,172 0 507,262
Power Generation
Systems 0 14,292 46,881 47,778
Adjustments and
Eliminations (12) (125) (68) (638)
--------------------- ----------- --------- ---------- ----------
Total Revenues $ 448,148 $ 435,977 $1,748,681 $1,896,948
===================== =========== ========= ========== ==========
OPERATING INCOME (LOSS):
------------------------
Segment Operating
Income (Loss):
Marine Construction
Services (76,392) (1,020) (162,626) 14,506
Government Operations 5,641 7,209 34,600 29,320
Industrial Operations 0 2,782 0 9,928
Power Generation
Systems (228) (869) (2,825) (3,656)
--------------------- ----------- --------- ---------- ----------
Segment Operating
Income (Loss) (70,979) 8,102 (130,851) 50,098
--------------------- ----------- --------- ---------- ----------
Gain (Loss) on Asset
Disposal and
Impairments-Net:
Marine Construction
Services (8,149) (4,296) (320,945) (3,624)
Government Operations 87 (904) 88 (128)
Industrial Operations 0 (1) 0 13
Power Generation
Systems 0 0 0 0
--------------------- ----------- --------- ---------- ----------
Segment Loss on
Disp/Impairments (8,062) (5,201) (320,857) (3,739)
--------------------- ----------- --------- ---------- ----------
Income from Investees:
Marine Construction
Services 4,065 4,394 5,311 10,442
Government Operations 8,819 6,136 24,645 23,004
Industrial Operations 0 1 0 43
Power Generation
Systems 387 (477) (2,264) 604
--------------------- ----------- --------- ---------- ----------
Income from
Investees 13,271 10,054 27,692 34,093
--------------------- ----------- --------- ---------- ----------
Segment Income (Loss):
Marine Construction
Services (80,476) (922) (478,260) 21,324
Government Operations 14,547 12,441 59,333 52,196
Industrial Operations 0 2,782 0 9,984
Power Generation
Systems 159 (1,346) (5,089) (3,052)
--------------------- ----------- --------- ---------- ----------
SEGMENT INCOME
(LOSS) (65,770) 12,955 (424,016) 80,452
--------------------- ----------- --------- ---------- ----------
Write-off of
investment in B&W 0 0 (224,664) 0
Other unallocated 0 0 (1,452) 0
Corporate (3,325) 5,110 (23,628) (5,080)
--------------------- ----------- --------- ---------- ----------
OPERATING INCOME
(LOSS) $ (69,095) $ 18,065 $ (673,760) $ 75,372
===================== =========== ========= ========== ==========
MCDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF LOSS
(Unaudited; in thousands)
THREE MONTHS ENDED
12/31/02 12/31/01
Revenues $ 448,148 $ 435,977
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Costs and Expenses:
Cost of operations 481,018 375,449
Losses on Asset Disposals
and Impairments - net 8,062 5,201
Selling, general and
administrative expenses 41,434 47,316
-------------------------------------------- ------------ ------------
Total Cost and Expenses 530,514 427,966
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Equity in income (loss) of investees 13,271 10,054
-------------------------------------------- ------------ ------------
Operating Income (69,095) 18,065
-------------------------------------------- ------------ ------------
Other Income (Expense):
Interest income 1,680 3,874
Interest expense (2,607) (8,011)
Minority interest (806) -
Loss on B&W settlement (86,377) -
Gain on sale of MECCL - 27,996
Other-net (2,866) 3,645
-------------------------------------------- ------------ ------------
Total Other Income (Expense) (90,976) 27,504
-------------------------------------------- ------------ ------------
Income (Loss) from Continuing Operations
before Provision for
Income Taxes and Extraordinary Item (160,071) 45,569
Provision for Income Taxes 24,458 90,495
-------------------------------------------- ------------ ------------
Loss from Continuing Operations
before Extraordinary Item (184,529) (44,926)
Income from Discontinued Operations - 1,199
-------------------------------------------- ------------ ------------
Loss before Extraordinary Item (184,529) (43,727)
Extraordinary Item - 835
-------------------------------------------- ------------ ------------
Net Loss $ (184,529) $ (42,892)
============================================ ============ ============
Loss per share:
Basic
Loss from Continuing Operations
before Extraordinary Item $ (2.94) $ (0.73)
Net Loss (2.94) (0.70)
Diluted:
Loss from Continuing Operations
before Extraordinary Item (2.94) (0.73)
Net Loss $ (2.94) $ (0.70)
============================================ ============ ============
Weighted Average Shares
Basic 62,682,376 61,157,046
Diluted 62,682,376 61,157,046
============================================ ============ ============
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF LOSS
Year Ended December 31,
2002 2001
(In thousands, except per share amounts)
Revenues $1,748,681 $1,896,948
---------------------------------------------- ----------- -----------
Costs and Expenses:
Cost of operations 1,744,138 1,657,889
Loss on write-off of investment in The
Babcock & Wilcox Company 224,664 -
Impairment of J. Ray McDermott, S.A.
goodwill 313,008 -
Losses (gains) on asset disposals and
impairments - net 7,849 3,739
Selling, general and administrative expenses 160,474 194,041
---------------------------------------------- ----------- -----------
2,450,133 1,855,669
---------------------------------------------- ----------- -----------
Equity in Income (Loss) from Investees 27,692 34,093
---------------------------------------------- ----------- -----------
Operating Income (Loss) (673,760) 75,372
---------------------------------------------- ----------- -----------
Other Income (Expense):
Interest income 8,560 19,561
Interest expense (15,124) (39,663)
Estimated loss on The Babcock & Wilcox
Company bankruptcy settlement (86,377) -
Gain on sale of McDermott Engineers &
Constructors (Canada) Ltd. - 27,996
Curtailments and settlements of
employee benefit plans - (4,000)
Other-net (4,440) 6,641
---------------------------------------------- ----------- -----------
(97,381) 10,535
---------------------------------------------- ----------- -----------
Income (Loss) from Continuing Operations
before Provision for Income Taxes
and Extraordinary Item (771,141) 85,907
Provision for Income Taxes 15,063 110,329
---------------------------------------------- ----------- -----------
Loss from Continuing Operations
before Extraordinary Item (786,204) (24,422)
Income from Discontinued Operations 9,469 3,565
---------------------------------------------- ----------- -----------
Loss before Extraordinary Item (776,735) (20,857)
Extraordinary Gain on Debt Extinguishment 341 835
---------------------------------------------- ----------- -----------
Net Loss $ (776,394) $ (20,022)
---------------------------------------------- ----------- -----------
Loss per Common Share:
Basic:
Loss from Continuing Operations
before Extraordinary Item $ (12.71) $ (0.40)
Net Loss $ (12.55) $ (0.33)
Diluted:
Loss from Continuing Operations
before Extraordinary Item $ (12.71) $ (0.40)
Net Loss $ (12.55) $ (0.33)
---------------------------------------------- ----------- -----------
Cash Dividends:
Per Common Share $ - $ -
---------------------------------------------- ----------- -----------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INTERNATIONAL INC.
By: /s/Thomas A. Henzler
-----------------------------
Thomas A. Henzler
Vice President
and Corporate Controller
March 25, 2003