-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FVGBRJnrshKcV5A5muFc9DD0qIkHqsWfKaVsIIwlXUHbkaLgQ1Vgzf6ph9W3q0Vy 32QI7pwYRHnb0blQXmi4qw== 0000899243-97-001488.txt : 19970808 0000899243-97-001488.hdr.sgml : 19970808 ACCESSION NUMBER: 0000899243-97-001488 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970807 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 720593134 STATE OF INCORPORATION: R1 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08430 FILM NUMBER: 97652961 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045875400 MAIL ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70161 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the transition period from ______________to______________ Commission File No. 1-8430 McDERMOTT INTERNATIONAL, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1450 Poydras Street, New Orleans, Louisiana 70112-6050 ------------------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code (504) 587-5400 -------------- 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Common Stock, par value $1 per share, outstanding as of July 25, 1997 was 55,530,141. M c D E R M O T T I N T E R N A T I O N A L , I N C. I N D E X - F O R M 1 0 - Q PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet June 30, 1997 and March 31, 1997 4 Condensed Consolidated Statement of Income (Loss) Three Months Ended June 30, 1997 and 1996 6 Condensed Consolidated Statement of Cash Flows Three Months Ended June 30, 1997 and 1996 8 Notes to Condensed Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION Item 5 - Other Information 22 Item 6 - Exhibits and Reports on Form 8-K 23 SIGNATURES 24 Exhibit 11 - Calculation of Earnings (Loss) Per Common and Common Equivalent Share 26 Exhibit 27 - Financial Data Schedule 28 2 PART I McDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 ASSETS
6/30/97 3/31/97 -------- -------- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 289,330 $ 257,783 Short-term investments in debt securities 76,393 75,946 Accounts receivable - trade 552,872 547,082 Accounts receivable - unconsolidated affiliates 56,446 66,074 Accounts receivable - other 175,607 185,138 Insurance recoverable - current 167,872 183,000 Contracts in progress 324,414 326,512 Inventories 65,457 66,322 Deferred income taxes 60,486 60,866 Other current assets 50,557 65,604 - ---------------------------------------------------------------------------------------------------------- Total Current Assets 1,819,434 1,834,327 - ---------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, at Cost: 1,774,193 1,764,300 Less accumulated depreciation 1,190,500 1,164,555 - ---------------------------------------------------------------------------------------------------------- Net Property, Plant and Equipment 583,693 599,745 - ---------------------------------------------------------------------------------------------------------- Investments in Debt Securities: Government obligations 270,886 291,538 Other investments 128,862 118,057 - ---------------------------------------------------------------------------------------------------------- Total Investments 399,748 409,595 - ---------------------------------------------------------------------------------------------------------- Insurance Recoverable 689,914 720,913 - ---------------------------------------------------------------------------------------------------------- Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $166,332,000 at June 30, 1997 and $158,523,000 at March 31, 1997 410,945 423,095 - ---------------------------------------------------------------------------------------------------------- Prepaid Pension Costs 309,287 303,825 - ---------------------------------------------------------------------------------------------------------- Other Assets 314,701 307,982 - ---------------------------------------------------------------------------------------------------------- TOTAL $ 4,527,722 $ 4,599,482 ========================================================================================================== See accompanying notes to condensed consolidated financial statements.
4 LIABILITIES AND STOCKHOLDERS' EQUITY
6/30/97 3/31/97 -------- ------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 288,299 $ 451,857 Accounts payable 282,701 268,274 Environmental and products liabilities - current 199,874 211,841 Accrued employee benefits 102,899 106,498 Advance billings on contracts 242,440 200,163 Other current liabilities 393,004 370,123 - -------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,509,217 1,608,756 - -------------------------------------------------------------------------------------------------------- Long-Term Debt 625,702 667,174 - -------------------------------------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 400,515 400,445 - -------------------------------------------------------------------------------------------------------- Environmental and Products Liabilities 862,565 903,379 - -------------------------------------------------------------------------------------------------------- Other Liabilities 255,377 250,885 - -------------------------------------------------------------------------------------------------------- Contingencies - -------------------------------------------------------------------------------------------------------- Minority Interest: Subsidiary's preferred stocks 166,461 170,983 Other minority interest 160,764 160,859 - -------------------------------------------------------------------------------------------------------- Total Minority Interest 327,225 331,842 - -------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, authorized 25,000,000 shares; outstanding 2,875,000 Series C $2.875 cumulative convertible, par value $1.00 per share, (liquidation preference $143,750,000) 2,875 2,875 Common stock, par value $1.00 per share, authorized 150,000,000 shares; outstanding 55,258,279 at June 30, 1997 and 54,936,956 at March 31, 1997 55,258 54,937 Capital in excess of par value 971,196 962,445 Deficit (433,127) (538,163) Minimum pension liability (2,148) (2,148) Net unrealized loss on investments (1,615) (4,132) Currency translation adjustments (45,318) (38,813) - -------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 547,121 437,001 - -------------------------------------------------------------------------------------------------------- TOTAL $ 4,527,722 $ 4,599,482 ========================================================================================================
5 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) JUNE 30, 1997
THREE MONTHS ENDED 6/30/97 6/30/96 -------- -------- (Unaudited) (In thousands) Revenues $ 928,087 $ 872,809 - -------------------------------------------------------------------------------------------------------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 786,852 768,415 Depreciation and amortization 38,323 33,855 Selling, general and administrative expenses 55,569 63,195 - -------------------------------------------------------------------------------------------------------- 880,744 865,465 - -------------------------------------------------------------------------------------------------------- Gain on Asset Disposals and Impairments - Net 97,381 1,435 - -------------------------------------------------------------------------------------------------------- Operating Income before Equity in Income of Investees 144,724 8,779 - -------------------------------------------------------------------------------------------------------- Equity in Income (Loss) of Investees 70 (3,450) - -------------------------------------------------------------------------------------------------------- Operating Income 144,794 5,329 - -------------------------------------------------------------------------------------------------------- Other Income (Expense): Interest income 12,496 10,329 Interest expense (25,205) (19,728) Minority interest (6,693) (6,788) Other-net 1,646 (2,425) - -------------------------------------------------------------------------------------------------------- (17,756) (18,612) Income (Loss) before Provision for Income Taxes 127,038 (13,283) Provision for (Benefit from) Income Taxes 17,178 (1,330) - -------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 109,860 $ (11,953) ========================================================================================================
6 CONTINUED
THREE MONTHS ENDED 6/30/97 6/30/96 ------- ------- (Unaudited) Earnings (Loss) per Common and Common Equivalent Share: (In thousands, except shares and per share amounts) Primary Net income (loss) applicable to common stock (after preferred stock dividends) $ 107,794 $ (14,019) ========================================================================================================== Earnings (loss) per common and common equivalent share $ 1.94 $ (0.26) ========================================================================================================== Weighted average number of common and common equivalent shares 55,437,327 54,507,685 ========================================================================================================== Fully Diluted Net income (loss) applicable to common stock (after preferred stock dividends) $ 111,410 $ (14,019) ========================================================================================================== Earnings (loss) per common and common equivalent share $ 1.77 $ (0.26) ========================================================================================================== Weighted average number of common and common equivalent shares 62,994,244 54,507,685 ==========================================================================================================
7 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS JUNE 30, 1997 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS THREE MONTHS ENDED 6/30/97 6/30/96 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 109,860 $ (11,953) - ------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 38,323 33,855 Equity in income or loss of investees, less dividends 2,700 4,996 Gain on asset disposals and impairments - net (97,381) (1,435) Provision for deferred taxes 4,163 8,326 Other 7,089 (326) Changes in assets and liabilities: Accounts receivable 13,240 (75,008) Net contracts in progress and advance billings 24,865 6,325 Accounts payable 15,461 (9,588) Accrued and other current liabilities 49,613 (79,466) Other, net (41,217) 7,937 Proceeds from insurance for products liabilities claims 39,720 34,462 Payments of products liabilities claims (50,833) (37,368) - --------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 115,603 (119,243) - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (9,282) (35,508) Purchases of investments (244,480) (45,278) Sales and maturities of investments 257,602 48,069 Proceeds from asset disposals 121,653 5,945 Other (2,706) (6,273) - --------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 122,787 (33,045) - ---------------------------------------------------------------------------------------------------------
8 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED 6/30/97 6/30/96 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (33,402) $ (12,735) Increase (decrease) in short-term borrowing (170,994) 132,045 Issuance of common stock 5,317 42 Dividends paid (4,812) (15,669) Repurchase of subsidiary's preferred stock (4,314) - Other 1,004 (594) - --------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (207,201) 103,089 - --------------------------------------------------------------------------------------------------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 358 15 - --------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,547 (49,184) - --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 257,783 238,663 - --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 289,330 $189,479 - --------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - --------------------------------------------------------------------------------------------------------- Cash paid during the period for: Interest (net of amount capitalized) $ 15,674 $ 16,832 Income taxes (refunds)- net $ (13,859) $ 3,003 =========================================================================================================
See accompanying notes to condensed consolidated financial statements. 9 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 NOTE 1 - BASIS OF PRESENTATION McDermott International, Inc. is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott Incorporated. Unless the context otherwise requires, hereinafter, "International" will be used to mean the consolidated enterprise. The accompanying unaudited condensed consolidated financial statements are presented in U. S. Dollars, and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments are of a normal, recurring nature except for a gain of $96,059,000 from the sale of International's interest in Sakhalin Energy Investment Company, Ltd. during the three months ended June 30, 1997. Operating results for the three months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending March 31, 1998. Results for the quarter ended June 30, 1996 have been restated to reflect the change in fiscal year 1997 from the equity to the cost method of accounting for International's investment in the HeereMac joint venture. For further information, refer to the consolidated financial statements and footnotes thereto included in McDermott International, Inc.'s annual report on Form 10-K for the fiscal year ended March 31, 1997. NOTE 2 - PRODUCTS LIABILITY At June 30, 1997, the estimated liability for pending and future non-employee products liability asbestos claims was $1,031,949,000 (of which less than $283,000,000 had been asserted) and estimated insurance recoveries were $857,786,000. Estimated liabilities for 10 pending and future non-employee products liability asbestos claims are derived from McDermott International's claims history and constitute management's best estimate of such future costs. Estimated insurance recoveries are based upon an analysis of insurers providing coverage of the estimated liabilities. Inherent in the estimate of such liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, changes in estimates could result in a material adjustment to operating results for any fiscal quarter or year and the ultimate loss may differ materially from amounts provided in the consolidated financial statements. NOTE 3 - INVENTORIES Inventories at June 30, 1997 and March 31, 1997 are summarized below: June 30, March 31, 1997 1997 ----------- --------- (Unaudited) (In thousands) Raw Materials and Supplies $48,805 $50,823 Work in Progress 8,904 8,498 Finished Goods 7,748 7,001 - ------------------------------------------------------ $65,457 $66,322 ====================================================== NOTE 4 - INVESTIGATIONS McDermott International and JRM are conducting an internal investigation, with the assistance of outside counsel, of allegations of wrongdoing by a limited number of former employees of McDermott International and JRM and by others. McDermott International and JRM notified the appropriate authorities of their investigation in April 1997. In June 1997, McDermott International received a federal grand jury subpoena for documents relating principally to an investigation of possible anti-competitive activity in the heavy-lift barge service business of JRM and HeereMac. In July 1997, McDermott International received an informal request from the Securities and Exchange Commission for the voluntary production of documents. McDermott International and JRM are cooperating with the authorities. The allegations which are the subject of the internal investigation, if true, and the outcome of the grand jury proceedings, could result in civil and/or criminal liability. At this time, McDermott International and JRM do not have sufficient information to predict the ultimate outcome of this matter. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL McDermott International, Inc. is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott Incorporated. Unless the context otherwise requires, hereinafter, "International" will be used to mean the consolidated enterprise. A significant portion of International's revenues and operating results are derived from its foreign operations. As a result, International's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. International attempts to minimize its exposure to changes in foreign currency exchange rates by attempting to match foreign currency contract receipts with like foreign currency disbursements. To the extent that it is unable to match the foreign currency receipts and disbursements related to its contracts, International enters into forward exchange contracts to hedge foreign currency transactions, which reduces the impact of foreign exchange rate movements on operating results. Management's discussion of revenues and operating income is presented on a business unit basis as follows: Marine Construction Services (includes the results of operations of JRM); Power Generation Systems (includes the results of operations of the Babcock & Wilcox Power Generation Group); Government Operations (includes the results of operations of the Babcock & Wilcox Government Group) and Other (includes the results of operations of Engineering and Construction operations, and Shipbuilding operations, other non-core business operations and certain adjustments, which are not allocated to the business units). The results of operations for the three months ended June 30, 1996 have been restated to reflect the reclassification of certain operations from B&W Operations to Power Generation Systems and Government Groups and Marine Construction Services business unit to Other to conform with the presentation at June 30, 1997. Results for the quarter ended June 30, 1996 have been restated to reflect the discontinuance of the equity method for International's investment in the HeereMac joint venture, and to include gains and losses on asset disposals and impairments in Operating Income. 12 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 VS. THREE MONTHS ENDED JUNE 30, 1996
THREE MONTHS ENDED 6/30/97 6/30/96 -------- -------- (Unaudited) (In thousands) REVENUES Marine Construction Services $ 464,582 $ 389,189 Power Generation Systems 285,037 256,250 Government Operations 83,522 88,907 Other 103,261 149,657 Eliminations (8,315) (11,194) - ------------------------------------------------------------------------------------------- TOTAL REVENUES $ 928,087 $ 872,809 =========================================================================================== OPERATING INCOME Business Unit Income (Loss): Marine Construction Services $ 26,284 $ 21,981 Power Generation Systems 19,030 (4,318) Government Operations 9,935 5,322 Other 1,712 (6,050) - ------------------------------------------------------------------------------------------- TOTAL 56,961 16,935 =========================================================================================== Gain on Asset Disposals and Impairments - Net: Marine Construction Services 594 408 Power Generation Systems 3 260 Government Operations - 80 Other 96,476 578 Corporate 308 109 - ------------------------------------------------------------------------------------------- TOTAL 97,381 1,435 =========================================================================================== Equity in Income (Loss) of Investees: Marine Construction Services (4,146) (6,596) Power Generation Systems 1,774 2,516 Government Operations 580 612 Other 1,862 18 - ------------------------------------------------------------------------------------------- TOTAL 70 (3,450) - ------------------------------------------------------------------------------------------- Corporate G&A Expense (9,618) (9,591) - ------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 144,794 $ 5,329 ===========================================================================================
13 Marine Construction Services ---------------------------- Revenues increased $75,393,000 to $464,582,000, primarily due to higher volume in offshore, fabrication, and procurement activities in the Middle East, engineering activities in the United States, and procurement and engineering activities in the North Sea and the Far East. These increases were partially offset by lower volume in offshore activities in the Far East. Business unit income increased $4,303,000 to $26,284,000, primarily due to the higher activities in the Middle East and lower overall administrative expenses. These increases were partially offset by lower margins in the Far East and lower margins in engineering and offshore activities in the North Sea. Equity in loss of investees decreased $2,450,000 to $4,146,000, primarily due to improved results from the Brown & Root McDermott Fabricators Limited, McDermott-ETPM West, Inc. and three Mexican joint ventures. Power Generations Systems ------------------------- Revenues increased $28,787,000 to $285,037,000, primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, replacement nuclear steam generators and replacement parts. These increases were partially offset by lower revenues from plant enhancement projects and repair and alteration of existing fossil fuel steam systems. Business unit income increased $23,348,000 from a loss of $4,318,000 to income of $19,030,000, primarily due to higher volume and margins from fabrication and erection of fossil fuel steam systems and environmental control systems and replacement nuclear steam generators, higher margins from plant enhancement projects and higher volume from replacement parts. In addition, there were lower operating, selling, and general and administrative expenses. Equity in income of investees decreased $742,000 to $1,774,000. This represents the results of approximately twelve active joint ventures. The decrease is primarily due to a 14 favorable termination settlement by a domestic joint venture in the prior year and lower operating results from two domestic joint ventures. This decrease was partially offset by favorable operating results from three foreign joint ventures. Government Operations --------------------- Revenues decreased $5,385,000 to $83,522,000, primarily due to lower revenues from commercial nuclear environmental services and nuclear fuel assemblies and reactor components for the U.S. Government. These decreases were partially offset by higher revenues from operation and management contracts of U.S. Government owned facilities. Business unit income increased $4,613,000 to $9,935,000, primarily due to higher margins on nuclear fuel assemblies and reactor components for the U.S. Government and other related operations and higher revenues from operation and management contracts with U. S. Government facilities. These increases were partially offset by lower volume and margins from commercial nuclear environmental services. Other ----- Revenues decreased $46,396,000 to $103,261,000, primarily due to lower revenues from engineering and construction activities in Canadian operations. In addition, there were lower revenues as a result of the disposition of non- core businesses (Shipyard Operations and ERI Operations) in the prior year. These decreases were partially offset by higher revenues from air cooled heat exchangers and domestic engineering activities. Business unit income (loss) increased $7,762,000 from a loss of $6,050,000 to income of $1,712,000, primarily due to cost overruns on cogeneration contracts in the prior period. In addition, there was higher volume on air cooled heat exchangers and domestic engineering and lower general and administrative expenses. There increases were partially offset by lower results due to the disposition of non-core businesses in the prior year. 15 Gain on asset disposals and impairments-net increased $95,898,000 to $96,476,000 primarily due to the sale of International's interest in Sakhalin Energy Investment Company Ltd. Equity in income of investees increased $1,844,000 to $1,862,000, primarily due to higher operating results from two foreign joint ventures. Other Income Statement Items ---------------------------- Interest income increased $2,167,000 to $12,496,000, primarily due to increases in investments in government obligations and other investments in the current period. Interest expense increased $5,477,000 to $25,205,000, primarily due to changes in debt obligations, (which includes an increase of approximately $1,556,000 due to transfers of accounts receivable previously accounted for as sales now accounted for as secured borrowings), and interest rates prevailing thereon. Other-net increased $4,071,000 from expense of $2,425,000 to income of $1,646,000. This increase is primarily due to bank fees and discounts on the sales of certain accounts receivable in the prior period and foreign currency transaction gains in the current period compared to foreign currency transaction losses in the prior period. The provision for income taxes increased $18,508,000 from a benefit of $1,330,000 to a provision of $17,178,000, while income before provision for income taxes increased $140,321,000 from a loss of $13,283,000 to income of $127,038,000. McDermott International operates in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits, and tax basis (for example, revenues versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate. As a result of these factors, the provision for income taxes was 14% of the pretax income for the three months ended June 30, 1997 compared to a benefit from income taxes of 10% of pretax loss for the three months ended June 30, 1996. 16
Backlog 6/30/97 3/31/97 ------- ------- ------- (In thousands) Backlog by Business Unit: Marine Construction Services $ 1,683,318 $ 1,760,226 Power Generation Systems 1,439,509 1,554,125 Government Operations 733,346 797,764 Other 286,345 384,968 Eliminations (204,407) (269,661) -------------------------------------------------------------------------------------------- TOTAL BACKLOG $ 3,938,111 $ 4,227,422 ============================================================================================
In general, McDermott International's business is capital intensive and relies on large contracts for a substantial amount of its revenues. Marine Construction Services' backlog at June 30, 1997 was $1,683,318,000 compared to $1,760,226,000 at March 31, 1997, and backlog relating to contracts to be performed by unconsolidated joint ventures (not included above) was $1,971,000,000 at June 30, 1997 compared to $1,439,000,000 at March 31, 1997. Power Generation Systems' backlog at June 30, 1997 was $1,439,509,000 compared to $1,554,125,000 at March 31, 1997, and backlog relating to contracts to be performed by its unconsolidated joint ventures (not included above) was $205,000,000 at June 30, 1997 compared to $154,000,000 at March 31, 1997. This business unit's foreign markets for industrial and utility boilers remain strong and the U. S. market for replacement nuclear steam generators is expected to make significant contributions to operating income into the foreseeable future. However, the domestic market for industrial and utility boilers remains weak. Government Operations' backlog at June 30, 1997 was $733,346,000 compared to $797,764,000 at March 31, 1997. At June 30, 1997 this business unit's backlog with the U.S. Government was $715,968,000 (of which $26,945,000 had not been funded) and included orders for nuclear fuel assemblies and reactor components for the U. S. Navy. 17 Other backlog at June 30, 1997 was $286,345,000 compared to $384,968,000 at March 31, 1997, and backlog relating to contracts to be performed by unconsolidated joint ventures (not included above) was $55,000,000 at June 30, 1997 compared to $49,000,000 at March 31, 1997. Liquidity and Capital Resources ------------------------------- Unless the context otherwise requires, hereinafter the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and the Delaware Company's consolidated subsidiaries, which include The Babcock & Wilcox Company ("B&W"). During the three months ended June 30, 1997, International's cash and cash equivalents increased $31,547,000 to $289,330,000 and total debt decreased $205,030,000 to $914,001,000, primarily due to a reduction in short-term borrowings of $170,994,000 and repayment of $33,402,000 in long-term debt. During this period, International provided cash of $115,603,000 from operating activities and received cash proceeds of $121,653,000 from asset disposals, including $118,114,000 from the sale of its interest in Sakhalin Energy Investment Company, Ltd. International used cash of $9,282,000 for additions to property, plant and equipment; and $4,812,000 for dividends on International's common and preferred stock. Pursuant to an agreement with a majority of its principal insurers, International negotiates and settles products liability asbestos claims from non-employees and bills these amounts to the appropriate insurers. As a result of collection delays inherent in this process, reimbursement is usually delayed for three months or more. The average amount of these claims (historical average of approximately $6,000 per claim over the last three years) has continued to rise. Claims paid during the quarter ended June 30, 1997 were $50,833,000, of which $46,127,000 has been recovered or is due from insurers. At June 30, 1997, receivables of $86,492,000 were due from insurers for reimbursement of settled claims. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from International's claims history and constitute management's best estimate of such future costs. Settlement of the liability is expected to 18 occur over approximately the next 15 years. Estimated insurance recoveries are based upon analysis of insurers providing coverage of the estimated liabilities. Inherent in the estimate of such liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, the ultimate loss may differ materially from amounts provided in the consolidated financial statements. The collection delays and the amount of claims paid for which insurance recovery is not probable have not had a material adverse effect on International's liquidity, and management believes, based on information currently available, that they will not have a material adverse effect on liquidity in the future. Expenditures for property, plant and equipment decreased $26,226,000 to $9,282,000 for the three months ended June 30, 1997, as compared with the same period last year. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. At June 30 and March 31, 1997, B&W had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $77,569,000 and $93,769,000, respectively, under the terms of an agreement with a U.S. bank. The maximum sales limit available under the agreement, which expires October 31, 1997, is $125,000,000. B&W expects to renew the agreement. Depending on the amount of qualified accounts receivable available for the pool, the amount sold to the bank can vary (but not greater than the maximum sales limit available) from time to time. International accounts for these sales as secured borrowings. At June 30 and March 31, 1997, McDermott International and its subsidiaries, had available to them various uncommitted short-term lines of credit from banks totaling $148,785,000 and $179,137,000, respectively. Borrowings against these lines of credit at June 30 and March 31, 1997 were $48,266,000 and $53,165,000, respectively. At June 30, 1997 there were no borrowings outstanding under the $150,000,000 unsecured committed revolving credit facility of B&W (the "B&W Revolver"), while at March 31, 1997, $150,000,000 was outstanding. Effective June 30, 1997, the conditions to 19 B&W's borrowings under the B&W Revolver were amended to facilitate future borrowings under this facility. JRM is party to an unsecured and committed revolving credit facility (the "JRM Revolver"). There were no borrowings outstanding at June 30 or March 31, 1997 under the JRM Revolver. As a condition to borrowing under the facility, JRM must comply with certain requirements. Presently, JRM cannot satisfy these requirements and cannot borrow under the JRM Revolver. The JRM Revolver also limits the amount of funds which JRM can borrow from other sources. At June 30, 1997, JRM could borrow $14,000,000 under such limits. It is not anticipated JRM will need to borrow funds under the JRM Revolver during fiscal year 1998. The Delaware Company and JRM are restricted, as a result of covenants in certain credit agreements, in their ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. At June 30, 1997, substantially all of the net assets of the Delaware Company and JRM were subject to such restrictions. It is not expected that these restrictions will have any significant effect on McDermott International's liquidity. International maintains an investment portfolio of government obligations and other investments. The fair value of short-term investments and the long-term portfolio at June 30, 1997 was $476,141,000. At June 30, 1997, approximately $105,128,000 fair value of these obligations were pledged to secure a letter of credit in connection with a long-term loan and certain reinsurance agreements. Over the past several years, International has entered into certain investments in oil and gas projects in the former Soviet Union. During the June quarter, International sold its last Soviet Union oil and gas interest which was in the Sakhalin Energy Investment Company Ltd., to other members of the consortium. International received proceeds of $118,114,000. On July 15, 1997, JRM called its $70,000,000 12.875% Guaranteed Senior Notes due 2002 at a premium of $4,480,000. 20 Working capital increased $84,646,000 from $225,571,000 at March 31, 1997 to $310,217,000 at June 30, 1997. During the remainder of fiscal year 1998, International expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, sales of non-strategic assets, cash and cash equivalents, investments in debt securities and short-term borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact International's liquidity or capital resources. McDermott International has provided a valuation allowance for deferred tax assets which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. Management believes that remaining deferred tax assets are realizable through carrybacks and future reversals of existing taxable temporary differences, future taxable income and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. Uncertainties that affect the ultimate realization of deferred tax assets are the risk of incurring losses in the future and the possibility of declines in value of appreciated assets involved in identified tax planning strategies. These factors have been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis. New Accounting Standards ------------------------ In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which is required to be adopted on December 31, 1997. At that time, International will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options and stock appreciation rights will be excluded. Basic earnings per share under the new standard would have been $1.96 per share for the quarter ended June 30, 1997. Diluted earnings per share for the quarter ended June 30, 1997 and basic and diluted earnings per share for the quarter ended June 30, 1996 would have been the same as primary and fully diluted amounts reported. 21 PART II McDERMOTT INTERNATIONAL, INC. OTHER INFORMATION ------------------ No information is applicable to Part II for the current quarter, except as noted below: Item 5. OTHER INFORMATION Effective July 31, 1997, McDermott International's Stockholders Rights Plan (the "Plan") was amended to reduce the term thereof by five years. Under the Plan, which was adopted on December 5, 1995, holders of McDermott International's Common Stock on January 2, 1996 received a dividend of one stock purchase right (a "Right") for each share of Common Stock held. Thereafter, each share of Common Stock issued was also issued with such a Right. The Rights, which currently trade with the Common Stock, detach and trade separately from the Common Stock a specified period of time after a person or a group (an "Acquiring Person") either becomes the beneficial owner of 15% or more of the outstanding shares of Common Stock , or commences or announces an intention to commence a tender or exchange offer for 15% or more of the outstanding shares of Common Stock. If an Acquiring Person becomes the beneficial owner of 15% or more of the outstanding shares of Common Stock, then the Rights will also allow each holder thereof (other than an Acquiring Person) to purchase for $50 (the "Purchase Price") that number of shares of common Stock having a market value of twice the Purchase Price. If after any person or group has become an Acquiring Person, McDermott International merges with, or transfers 50% or more of its assets or earnings to, another entity, holders of Rights may purchase at the Purchase Price that number of shares of common stock of the acquiring entity having a market value equal to twice the Purchase Price. The Rights are redeemable by McDermott International at any time prior to exercise for $0.01 per Right. As a result of the amendment, the Plan's term was shortened from January 2, 2006 to January 2, 2001, at which time the Rights will expire, if not earlier exercised, exchanged or redeemed. 22 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Calculation of Earnings (Loss) Per Common and Common Equivalent Share (b) Reports on Form 8-K There were no current reports on Form 8-K filed during the three months ended June 30, 1997. 23 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. ----------------------------- (REGISTRANT) By: /s/ Daniel R. Gaubert ----------------------------------------- (SIGNATURE) Daniel R. Gaubert Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) August 7, 1997 24 EXHIBIT INDEX Exhibit Description 11 Calculation of Earnings per Common and Common Equivalent Share 27 Financial Data Schedule 25 EX-11 2 CALCULATION OF EARNINGS (LOSS) EXHIBIT 11 McDERMOTT INTERNATIONAL, INC. CALCULATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share amounts) THREE MONTHS ENDED 6/30/97 6/30/96 -------- -------- (Unaudited) ---------- Primary: Net income (loss) $109,860 $(11,953) Less dividend requirement of preferred stock, Series C (2,066) (2,066) - --------------------------------------------------------------------------- Net income (loss) for primary computation $107,794 $(14,019) =========================================================================== Weighted average number of common shares outstanding during the period 55,020,060 54,507,685 Common stock equivalents of stock options and stock appreciation rights based on "treasury stock" method 417,267 - - --------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding during the period 55,437,327 54,507,685 =========================================================================== Earnings (loss) per common and common equivalent share $1.94 $(0.26) =========================================================================== EXHIBIT 11 (CONTINUED)
THREE MONTHS ENDED 6/30/97 6/30/96 -------- ------- (Unaudited) Fully Diluted: Net income (loss) $ 109,860 $ (11,953) Less dividend requirement of preferred stock, Series C - (2,066) Dividends on Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock assuming conversion to Common Stock 1,550 - - ----------------------------------------------------------------------------------------- Net income (loss) for fully diluted computation $ 111,410 $ (14,019) ========================================================================================= Weighted average number of common shares outstanding during period 55,020,060 54,507,685 Common stock equivalents of stock options and stock appreciation rights based on "treasury stock" method 1,077,457 - Shares applicable to Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock 2,818,713 - Shares applicable to Series C $2.875 Cumulative Convertible Preferred Stock 4,078,014 - - ----------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding during the period, assuming full dilution 62,994,244 54,507,685 ========================================================================================= Earnings (loss) per common and common equivalent share assuming full dilution $ 1.77 $ (0.26) ========================================================================================= Fully diluted earnings (loss) per share includes only computations which cause dilution.
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S JUNE 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-1998 JUN-30-1997 289,330 76,393 652,523 99,650 389,871 1,819,434 1,774,193 1,190,500 4,527,722 1,509,217 625,702 0 2,875 55,258 488,988 4,527,722 928,087 928,087 880,744 880,744 0 0 25,205 127,038 17,178 109,860 0 0 0 109,860 1.94 1.77
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