1450 Poydras Street
New Orleans, Louisiana 70112-6050
Telephone: (504) 587-5400
Fax: (504) 587-6153
Incorporated: 1946 as J. Ray McDermott & Company
Sales: $1.89 billion (1999)
Stock Exchanges: New York
Ticker Symbol: MDR
NAIC: 213112 Support Activities for Oil and Gas Operations; 221113 Nuclear Electric Power Generation; 23331 Manufacturing and Industrial Building Construction; 333132 Oil and Gas Field Machinery and Equipment; 48611 Pipeline Transportation of Crude Oil; 48691 Pipeline Transportation of Refined Petroleum Products; 48699 All Other Pipeline Transportation
Today, McDermott companies provide an array of products and services. Some of our customers may be developing hydrocarbons far below the surface of the ocean. Others may be bringing electricity that will bring light and power to new areas of the world. Our customers depend on our products to defend the United States, to clean the environment, to efficiently refine petroleum into other useful products and to complete numerous others tasks that help the world create and use energy. No matter where we work or what we do, whether supplying traditional services in marine construction and power generation or developing future technologies such as fuel cells, McDermott companies are committed to quality, innovation and technological leadership.
1923: R. Thomas McDermott begins building oil rigs for Texas wildcatters.
1939: McDermott buys a dredging operation.
1947: Offshore marine construction business is launched.
1950: McDermott builds the first Gulf of Mexico pipeline.
1954: McDermott goes public.
1978: Babcock & Wilson is acquired.
1988: McDermott begins posting losses as energy business collapses.
1999: McDermott's market valuation is halved after it reveals additional asbestos exposure.
McDermott International, Inc. and its subsidiaries have operations in three main areas: marine oil field construction, power generation construction services, and management of nuclear power plants and other government projects. Its Babcock & Wilcox unit has been hit hard by asbestos-related lawsuits; this and investigations of McDermott's overseas competitive practices helped sour analysts on the company in the late 1990s.
What is now known as McDermott International originated in 1923, when 24-year-old R. Thomas McDermott received a contract to build 50 wooden rigs to drill for oil. The contract came from an east Texas wildcatter, or oil prospector. McDermott asked his father, J. Ray McDermott, to supervise construction of the rigs, and named the business after the elder McDermott.
Over the next two decades the firm expanded, establishing itself in Texas and following exploration to southern Louisiana. In 1923 J. Ray McDermott & Company moved its headquarters from Eastland, Texas, to Luling, Texas, after a boom in oil exploration in the area. McDermott continued to grow during the Depression. In the early 1930s the Houston area enjoyed an oil boom, and in 1932 J. Ray McDermott & Company moved to Houston. McDermott first opened a New Orleans, Louisiana area office in 1937&mdashross the Mississippi River from McDermott's present headquarters. Some years later, McDermott moved its headquarters to Louisiana.
McDermott became associated with the J.G. McMullen Dredging Company in 1938 and bought that company in 1939, branching into dredging. The Olsen Dredging Company was established in 1939 as a result of this purchase. The company remained a small, regional concern during World War II. In April 1946 J. Ray McDermott & Company was reorganized and incorporated in Delaware. By this time, the company was supplying services to support oil and natural gas production in the marshlands.
Offshore After the War
In the late 1940s oil and gas companies became interested in exploiting fields beneath the Gulf of Mexico. McDermott, with its floating equipment for marshland work, formed joint ventures and made acquisitions that enabled it to pioneer the construction and installation of platforms and pipelines to support drilling and development near shore. In August 1947, McDermott set the world's first steel template platform in 20 feet of water in the Gulf of Mexico, for the Superior Oil Company. Prior to this, the few offshore platforms in existence had rested on wooden pilings. Steel was stronger and more durable than wood, and the template design of these new platforms distributed weight better. Soon after, a second platform was installed in 50 feet of water, and the offshore marine construction business was launched. McDermott formed its contracting division--the major operating segment during its early years--in 1947.
With the 1948 purchase of all of the assets of the Harry F. Allsman Company, its joint venture partner for several contracting jobs in the Gulf of Mexico, McDermott boosted its efforts in the offshore construction area. This acquisition included equipment assets that helped McDermott meet the new demand for offshore construction.
In 1949 McDermott commissioned the world's first derrick barge, which was built specifically for offshore use. The barge significantly increased the kind of work that could be performed offshore. By 1953 McDermott had built another derrick barge, with a lifting capacity of 250 tons.
In 1950, to handle numerous customer requests for pipeline construction, J. Ray McDermott & Company established a pipeline department. That same year, McDermott constructed the first Gulf of Mexico pipeline and also created an oil division.
In 1953 DeLong-McDermott--a joint venture formed that year by McDermott and the DeLong Engineering Company--built the first mobile air-jack rig using a jacking, or elevating, device patented by L.B. DeLong. Later in 1953, DeLong-McDermott merged with Southern Natural Gas Company to form The Offshore Company, a drilling contracting firm. McDermott held a one-third interest in The Offshore Company. The Offshore Company became a major competitor of McDermott in the deep-water drilling business, and McDermott gradually sold its interest in Offshore, completing the divestiture in 1971.
J. Ray McDermott & Company went public in 1954. It was listed on the New York Stock Exchange in January 1958. In 1956 Bayou Boeuf Fabricators became McDermott's fourth division, and the world's largest offshore structure fabrication yard. The division's name was changed to McDermott Fabricators in May 1958.
In 1957 McDermott established a subsidiary, J. Ray McDermott (Venezuela), C.A., to fabricate the world's first aluminum platforms for the highly corrosive waters of Venezuela's Lake Maracaibo. In 1958 McDermott acquired Associated Pipeline Contractors, to supplement its domestic pipeline business and provide international expansion opportunities. Associated Pipeline Contractors was involved in the laying of large-diameter, cross-country oil and natural gas transmission lines. In 1959 McDermott sold Associated Pipeline to Reading and Bates in exchange for common stock.
In 1959 McDermott acquired Dupont Fabricators, to supplement the light fabrication capabilities of McDermott Fabricators, which eventually absorbed the new unit. That same year, McDermott Fabricators created a marine department primarily for the repair of the company's heavy construction equipment. The marine department repaired McDermott's own equipment and that of other companies. In 1962 the department became a separate operating division, McDermott Shipyard division.
McDermott continued to move into the international sphere, establishing an office in Beirut in 1960. In 1962 McDermott installed the first platform placed in Cook Inlet, Alaska. In 1963 McDermott Overseas, McDermott Far East, McDermott Enterprises France, and Oceanic Contractors were established as subsidiaries of the company. In March 1964, McDermott had eight direct subsidiaries that operated under five divisions: contracting, oil, McDermott Fabricators, Harvey Lumber and Supply Company, and McDermott Shipyard.
In 1965 the first 500-ton derrick barge was introduced. By 1967, however, new methods were required to install the increasingly large skeletal outer structures--called jackets--that supported the platform decks. Prior to 1967, derricks on barges lifted the jacket from a cargo barge and set it in position. In the summer of 1967 McDermott first executed what is now the common method of launching large jackets. At that time a jacket that McDermott was to install in 340 feet of water was too heavy for the derrick to raise. Therefore, the jacket was fabricated on its side and slid onto a barge. At the installation site, it was slipped off the cargo barge and into the water. As it floated horizontally in the water, the jacket was gradually ballasted until it turned upright and then it was guided into place.
In 1968 the oil and natural gas exploration and production operations handled by the oil division of McDermott were transferred to a newly formed company, TransOcean Oil. In 1969 McDermott acquired the stock and subsidiaries of Hudson Engineering Corporation. Hudson had a background in petrochemical process engineering and in offshore engineering facilities. Another key acquisition during this period was the purchase in November 1971 of Ingram Corporation's foreign marine construction equipment business. This purchase expanded McDermott's operations into three new areas: Australia, Trinidad, and Brazil.
Rapid Change in the 1970s and 1980s
R. Thomas McDermott died in 1970, after serving as chairman for nearly 25 years. Edward J. Hudson succeeded McDermott as chairman, serving from July 1970 until August 1974.
McDermott changed significantly from 1969 to 1979. McDermott's growth and expansion continued with major acquisitions--including The Babcock & Wilcox Company, purchased in 1978. The addition of the established power generation company was McDermott's first diversification outside the marine construction business.
James Cunningham, chief executive officer and chairman from 1979 until 1988, was instrumental in the 1978 acquisition of Babcock & Wilcox, for which McDermott paid a total of approximately $748 million. The acquisition was meant to provide balance against the cyclical marine construction business. The two engineering firms shared some common ground. Both were in the energy business and both worked in steel formation. The similarity in basic technologies and engineering and the fact that both firms served the same markets paved the way for the Babcock & Wilcox acquisition. Babcock & Wilcox had interests in the manufacture of equipment such as process controls, boiler-cleaning products, and metal tubing. In the 1950s the firm became a leader in the development of nuclear power and had become a key part of the United States Navy's nuclear program. By the time it was acquired by McDermott in 1978, Babcock & Wilcox was a major supplier of products and services to the electrical power and other industries throughout the world.
In acquiring Babcock & Wilcox, McDermott became a much larger, diversified company. To reflect its growth, J. Ray McDermott & Company became McDermott Inc. in 1980. In 1983, with McDermott's international business growing in stature, the company was reorganized again. McDermott International, McDermott's wholly owned Panamanian subsidiary since 1959, became the parent company of McDermott Inc. and its subsidiaries. McDermott International had been established as the international subsidiary of J. Ray McDermott & Company. McDermott's reorganization as a Panamanian company allowed it to avoid paying income tax on most of its operations.
In the 1970s new technologies in marine construction permitted offshore structures to grow quickly in size. In 1978, McDermott installed Shell Oil's Cognac structure in 1,025 feet of water in the Gulf of Mexico. Cognac was the first jacket installed in more than 1,000 feet of water.
In 1978 a federal grand jury returned indictments alleging conspiracy among some officers of McDermott and of its competitor Brown & Root to restrain or eliminate competition in marine construction. McDermott and Brown & Root each pleaded no contest to the antitrust charges and were fined $1 million each.
Dependent on the oil economy, McDermott's problems were compounded when the bottom fell out of the energy business during the early 1980s. As profits dropped, oil companies cut back on capital spending, and marine construction also took a beating. Starting in the early 1980s, there was less demand for boilers, as a result of power generating overcapacity, and the generating market shrank as well. McDermott did not make a profit in 1988 or in the following two years.
In 1979, James E. Cunningham became chairman. Cunningham, a chemical engineer and 30-year McDermott employee, was credited with keeping the firm afloat when the marine market shrank from more than $2 billion in 1982 to $500 million in 1989. Cunningham implemented a financial restructuring that streamlined the company.
McDermott shrank by 57 percent between 1979 and 1988. Most of the employee reductions were made at Babcock & Wilcox. A number of plants were closed or sold.
Robert Howson took over as chairman of the board and CEO in August 1988. McDermott had grown since Howson, a civil engineer, came to the company in 1957. Although the 1980s were difficult for McDermott, Babcock & Wilcox was a bright spot on the McDermott balance sheet. Babcock & Wilcox, which offered services such as design, construction, and maintenance of steam-generating equipment, had not had a losing year since its sale to McDermott and had, in effect, carried the parent company since the early 1980s. For the fiscal year ending March 31, 1990, McDermott's business overall consisted of about 75 percent power generation work and 25 percent marine construction, compared with about 65 percent and 35 percent, respectively, ten years before.
Struggling Through the 1990s
The oil business began to recover in 1988, and by mid-1988 McDermott's fortunes had begun to improve. Chairman Howson consolidated operations, focusing on McDermott's five core businesses, and reduced the company's debt. Revenues for fiscal 1990 were $2.64 billion, up from $2.16 billion in 1989. Babcock & Wilcox contributed $1.7 billion in revenues.
McDermott still lost $10.2 million in fiscal 1990, less than net losses of $91.7 million in 1989 the year before. The improvement was mainly the result of gains from the sale of McDermott's Bailey Controls operations for $295 million and half of its commercial nuclear services operations for $51 million to form a new commercial nuclear service joint venture. Funds from these sales helped McDermott reduce short-term debt. McDermott's marine backlog--the number of orders received--grew two and a half times, from $650 million to $1.6 billion in fiscal 1990.
McDermott still performed all facets of marine construction. It took about one year to fabricate a large--at least 400 feet high--fixed offshore platform. Although McDermott had competitors in each segment--design, engineering, and fabrication--it was the only worldwide contractor that could handle all phases of the process from beginning to end. McDermott had constructed most of the world's drilling platforms.
McDermott's real strength in marine construction lay in its fleet of very powerful offshore equipment, which allowed more work to be completed onshore. With 200 vessels, McDermott had the largest fleet of marine equipment used in major offshore construction. Technological advances have paved the way for diversification in marine construction for McDermott, which had long constructed high-horsepower tugboats, pushboats, and offshore supply vessels. It branched into the construction of ships for the U.S. Navy, including prototype small waterplane area twin hull ships and torpedo test craft.
The company vied for additional work in government markets. About one-fifth of McDermott's business in fiscal 1989 was government related. During the early 1990s a continued shortage of equipment propelled a surge in power equipment sales. McDermott expected its boiler business to expand significantly between 1990 and 2000. Babcock & Wilcox was the nation's top boilermaker.
McDermott wanted to grow in core-related areas, but it first had to further reduce debt. McDermott also hoped to expand its overseas operations, including those in the Pacific Rim, where McDermott began doing business in the mid-1960s. McDermott was building boilers in China as part of a joint venture and was also involved in offshore marine construction work there.
The J. Ray McDermott (JRM) unit merged with its main competitor, Offshore Pipelines, in 1995. The combined companies were poised with a dominant market position at the beginning of an oil exploration cycle. The Babcock & Wilson subsidiary, in spite of impressive gains in the Far East, was weathering a serious downturn in the domestic power generation market. The Asian market would wither within a few years as well.
CEO Robert E. Howson resigned in September 1996; James L. Dutt became interim chairman and CEO. In October, after two quarters of losses, McDermott announced a plan to cut noncore businesses--this would be a familiar refrain for the rest of the decade.
Losses mounted through the end of the 1996--97 fiscal year, totaling some $192 million in the last quarter alone. McDermott posted a net loss of $214 million for the year. The J. Ray McDermott subsidiary lost money because of lower barge use in the Gulf of Mexico and unfavorable exchange rates. Asbestos-related lawsuits were taking a toll on the underinsured Babcock & Wilcox subsidiary. McDermott also managed nuclear power plants; eight cancer victims filed a lawsuit, later settled, alleging that McDermott had contaminated them with stray radioactive dust.
In April 1997, McDermott announced that it was probing serious, yet unspecified allegations of employee misconduct in its international units. Share prices fell sharply at the news. Three months later, a federal grand jury was investigating anti-competitive activity at J. Ray McDermott and HeereMac, a JRM joint venture with the Dutch construction company Heerema. A joint venture with ETPM SA of France was added to the probe in December 1997.
By this time, McDermott had sold off its 50 percent interest in HeereMac. Divestment would be another common theme. McDermott sold off its 50 percent stake in offshore construction company Unifab International when the unit went public in September 1997.
McDermott announced earnings of $207 million for 1997--98, up from the previous year's $214 million loss. The promising recovery was slowed by low oil prices in the 1998--99 fiscal year. An unusual setback came in December 1998 when a platform deck worth $70 million sank in the Gulf of Mexico as it was being lifted by a JRM barge.
McDermott's power generation division was showing strong results at the time, though that market would soon flatten in the next two years. McDermott's oil-related backlog, however, steadily shrank in the persistently depressed oil market, leading to layoffs and other cost-cutting measures from 1997 to 1999. The company put more resources into its information technology (IT) infrastructure, awarding AT & T a contract worth $60 million a year to manage it in March 1999.
Roger Tetrault was named CEO in February 1997. He sold off the company's shipyards and focused the company on three core areas: marine oil field construction (particularly deepwater), power generation construction services, and management of nuclear power plants and other government projects. Within two years, a newly profitable McDermott was looking to expand again.
Tetrault also set about simplifying McDermott's corporate structure. A bid for the remaining 37 percent of JRM was tendered in March 1999. This offer, however, seemingly fell through within a few weeks over a price dispute. A few weeks after that, the deal was in fact sealed, at a price of $513 million in cash, a third more value than the stock swap originally offered. The purchase gave McDermott access to $600 million in cash controlled by JRM.
In spite of newfound profits and a recovery in the oil industry, McDermott's stock price continued to trail behind that of its peers. An investigation into bidding practices in Indonesia unsettled some investors, but a new development in a lingering problem would cause the most damage on Wall Street.
Asbestos claims continued to burden Babcock & Wilson, which settled 26,000 asbestos-related claims from former employees or subcontractors in the 1998--99 fiscal year alone. In November 1999, McDermott's market valuation was cut in half in one 48-hour period after it increased its estimate of its asbestos-related exposure.
Babcock & Wilcox filed for bankruptcy protection in February 2000, with 45,000 asbestos claims pending. Executives blamed a wave of increases in the damages sought by plaintiffs' attorneys. McDermott had bought Babcock & Wilcox in 1978 and had spent $1.6 billion since 1982 to settle more than 340,000 claims.
Although Tetrault was credited with getting the company in shape operationally, his handling of the investment community during times of trouble was roundly criticized. Bruce Wilkinson, a specialist in corporate turnarounds, was hired as president and chief operating officer in April 2000 and replaced Roger Tetrault as CEO four months later. The company announced that it would stop paying dividends on its stock and planned to cut costs at its headquarters further.
Principal Subsidiaries: BWX Technologies, Inc.; The Babcock & Wilcox Company; J. Ray McDermott, S.A.; McDermott Technology, Inc.; Hudson Products; Delta Catalytic; Delta Hudson.
Principal Operating Units: BWX Technologies; Babcock & Wilcox; J. Ray McDermott; Industrial Operations.
Principal Competitors: Global Industries; Gulf Island Fabrication; Hyundai Heavy Industries.
Biers, John M., 'Asbestos News Jolts Stock by 25 Percent; McDermott Could Face More Claims,' Times-Picayune, November 12, 1999, p. C1.
------, 'McDermott Earnings Take Dip; Weak Oil Market Means Job Cuts,' Times-Picayune, January 28, 1999, p. C1.
------, 'McDermott Has Tough Job Ahead, Analysts Say,' Times-Picayune, February 24, 2000, p. C1.
------, 'McDermott Merger Falls Through; Parent, Subsidiary Stocks Fall on News,' Times-Picayune, April 21, 1999, p. C1.
------, 'McDermott Moves to Simplify; CEO Seeks Respect on Wall Street,' Times-Picayune, May 16, 1999, p. K19.
------, 'McDermott Reports Strong Profit, But Low Oil Prices Slowing Business,' Times-Picayune, October 31, 1998, p. C1.
------, 'McDermott Stock Decline Prompts Major Changes,' Times-Picayune, August 3, 2000, p. C1.
------, 'McDermott Stock Takes a Plunge; Asbestos Scare Hurts Market Confidence,' Times-Picayune, November 13, 1999, p. C1.
------, 'McDermott Subsidiary Declares Bankruptcy; Babcock & Wilcox Cites Asbestos Litigation,' Times-Picayune, February 23, 2000, p. C1.
------, 'Oil Stock Gushing, But N.O. Firm Lags; McDermott Execs Still Confident,' Times-Picayune, October 17, 1999, p. F1.
Deepwater: Marine Construction's Frontier Technology, New Orleans, La.: McDermott International, 1985.
Ewing, Terzah, 'McDermott Inquiries by Grand Jury, SEC Are Expanded to a Joint Venture,' Wall Street Journal, December 22, 1997.
------, 'McDermott Says It Will Post Loss, Probe Wrongdoing,' Wall Street Journal, April 29, 1997, p. C21.
------, 'McDermott Says Unit, Joint Venture Are Under Inquiry,' Wall Street Journal, July 16, 1997, p. B9.
------, 'McDermott Shares, Units Take Plunge in Wake of Probe,' Wall Street Journal, April 30, 1997, p. B7.
Judice, Mary, 'Merger of N.O. Firms Likely; McDermott Deal Awaiting OK,' Times-Picayune, May 8, 1999, p. C1.
Mishra, Arnab, 'McDermott International: Ready to Recover,' Financial World, July 18, 1995, p. 22.
'Pipeline Contract Gets Heat; N.O. Firm Is Caught Up in Indonesian Dispute,' Times-Picayune, June 22, 1999, p. C1.
The Story of Oil and Gas Offshore, New Orleans, La.: McDermott International, n.d.
Waxler, Caroline, 'Up from the Depths,' Forbes, December 2, 1996, p. 258.
Source: International Directory of Company Histories, Vol. 37. St. James Press, 2001.