-----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, CLc1HZqfxXJCtGuSnv0ys8ALR2LRDpmYjw06tDCwvyoYVheEo6DgCrna8SwH5x15 3J2kV22WlIn1800cWgFjdA== 0000899243-97-002234.txt : 19971117 0000899243-97-002234.hdr.sgml : 19971117 ACCESSION NUMBER: 0000899243-97-002234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-08430 FILM NUMBER: 97719616 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 QUARTERLY PERIOD ENDED SEPTEMBER 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 OCTOBER 24, 1997 WAS 56,003,450. 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 September 30, 1997 and March 31, 1997 4 Condensed Consolidated Statement of Income (Loss) Three and Six Months Ended September 30, 1997 and 1996 6 Condensed Consolidated Statement of Cash Flows Six Months Ended September 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 13 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 28 Item 6 - Exhibits and Reports on Form 8-K 29 SIGNATURES 30 Exhibit 11 - Calculation of Earnings (Loss) Per Common and Common Equivalent Share 32 Exhibit 27 - Financial Data Schedule 34 2 PART I McDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 ASSETS 9/30/97 3/31/97 --------- -------- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 442,714 $ 257,783 Short-term investments in debt securities 98 75,946 Accounts receivable - trade 525,979 547,082 Accounts receivable - unconsolidated affiliates 74,455 66,074 Accounts receivable - other 197,324 185,138 Insurance recoverable - current 175,442 183,000 Contracts in progress 307,681 326,512 Inventories 62,328 66,322 Deferred income taxes 66,623 60,866 Other current assets 33,131 65,604 - ------------------------------------------------------------------------- Total Current Assets 1,885,775 1,834,327 - ------------------------------------------------------------------------- Property, Plant and Equipment, at Cost: 1,765,920 1,764,300 Less accumulated depreciation 1,201,851 1,164,555 - ------------------------------------------------------------------------- Net Property, Plant and Equipment 564,069 599,745 - ------------------------------------------------------------------------- Investments in Debt Securities: Government obligations 340,750 291,538 Other investments 89,747 118,057 - ------------------------------------------------------------------------- Total Investments 430,497 409,595 - ------------------------------------------------------------------------- Insurance Recoverable 642,404 720,913 - ------------------------------------------------------------------------- Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $173,964,000 at September 30, 1997 and $158,523,000 at March 31, 1997 399,557 423,095 - ------------------------------------------------------------------------- Prepaid Pension Costs 316,187 303,825 - ------------------------------------------------------------------------- Other Assets 305,011 307,982 - ------------------------------------------------------------------------- TOTAL $4,543,500 $4,599,482 - ------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 4 LIABILITIES AND STOCKHOLDERS' EQUITY 9/30/97 3/31/97 ---------- ---------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 176,036 $ 451,857 Accounts payable 307,677 268,274 Environmental and products liabilities - current 209,401 211,841 Accrued employee benefits 109,192 106,498 Advance billings on contracts 284,952 200,163 Other current liabilities 415,648 370,123 - ------------------------------------------------------------------------------- Total Current Liabilities 1,502,906 1,608,756 - ------------------------------------------------------------------------------- Long-Term Debt 623,754 667,174 - ------------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 395,818 400,445 - ------------------------------------------------------------------------------- Environmental and Products Liabilities 806,599 903,379 - ------------------------------------------------------------------------------- Other Liabilities 251,509 250,885 - ------------------------------------------------------------------------------- Contingencies - ------------------------------------------------------------------------------- Minority Interest: Subsidiary's preferred stocks 166,249 170,983 Other minority interest 182,174 160,859 - ------------------------------------------------------------------------------- Total Minority Interest 348,423 331,842 - ------------------------------------------------------------------------------- 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 55,800,670 at September 30, 1997 and 54,936,956 at March 31, 1997 55,801 54,937 Capital in excess of par value 985,310 962,445 Deficit (399,821) (538,163) Minimum pension liability (2,148) (2,148) Net unrealized loss on investments 26 (4,132) Currency translation adjustments (27,552) (38,813) - ------------------------------------------------------------------------------- Total Stockholders' Equity 614,491 437,001 - ------------------------------------------------------------------------------- TOTAL $4,543,500 $4,599,482 - ------------------------------------------------------------------------------- 5 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) SEPTEMBER 30, 1997
THREE SIX MONTHS ENDED MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 ------- ------- --------- --------- (Unaudited) (In thousands) Revenues $920,051 $800,921 $1,848,138 $1,673,730 - -------------------------------------------------------------------------------------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 771,859 715,093 1,558,711 1,483,508 Depreciation and amortization 39,378 38,259 77,701 72,114 Selling, general and administrative expenses 54,658 61,357 110,227 124,552 - -------------------------------------------------------------------------------------- 865,895 814,709 1,746,639 1,680,174 - -------------------------------------------------------------------------------------- Gain (Loss) on Asset Disposals and Impairments - Net 28,215 (860) 125,596 575 - -------------------------------------------------------------------------------------- Operating Income (Loss) before Equity in Income (Loss) of Investees 82,371 (14,648) 227,095 (5,869) Equity in Income (Loss) of Investees 6,406 (2,524) 6,476 (5,974) - -------------------------------------------------------------------------------------- Operating Income (Loss) 88,777 (17,172) 233,571 (11,843) - -------------------------------------------------------------------------------------- Other Income (Expense): Interest income 12,382 9,522 24,878 19,851 Interest expense (19,188) (23,758) (44,393) (43,486) Minority interest (9,701) 4,555 (16,394) (2,233) Other-net (149) 3,430 1,497 1,005 - -------------------------------------------------------------------------------------- (16,656) (6,251) (34,412) (24,863) - -------------------------------------------------------------------------------------- Income (Loss) before Provision for Income Taxes 72,121 (23,423) 199,159 (36,706) Provision for Income Taxes 33,960 4,377 51,138 3,047 - -------------------------------------------------------------------------------------- Net Income (Loss) $ 38,161 $(27,800) $ 148,021 $ (39,753) - --------------------------------------------------------------------------------------
6
CONTINUED THREE SIX MONTHS ENDED MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 ------- ------- --------- --------- (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) $ 36,094 $ (29,867) $ 143,888 $ (43,886) - ------------------------------------------------------------------------------------------- Earnings (loss) per common and common equivalent share $ 0.64 $ (0.55) $ 2.56 $ (0.80) - ------------------------------------------------------------------------------------------- Weighted average number of common equivalent shares 56,808,206 54,689,791 56,122,767 54,598,738 - ------------------------------------------------------------------------------------------- Fully Diluted Net income (loss) applicable to common stock (after preferred stock dividends) $ 39,711 $ (29,867) $ 151,121 $ (43,886) - ------------------------------------------------------------------------------------------- Earnings (loss) per common and common equivalent share $ 0.62 $ (0.55) $ 2.38 $ (0.80) - ------------------------------------------------------------------------------------------- Weighted average number of common equivalent shares 64,124,059 54,689,791 63,559,152 54,598,738 - ------------------------------------------------------------------------------------------- Cash Dividends: Per common share $ 0.05 $ 0.25 $ 0.10 $ 0.50 Per preferred share $ 0.72 $ 0.72 $ 1.44 $ 1.44 - -------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 7 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS SEPTEMBER 30, 1997 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SIX MONTHS ENDED 9/30/97 9/30/96 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 148,021 $(39,753) - -------------------------------------------------------------------------------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 77,701 72,114 Equity in income or loss of investees, less dividends (914) 12,579 Gain on asset disposals and impairments - net (125,596) (575) Provision for deferred taxes 2,032 7,576 Other 12,458 (2,395) Changes in assets and liabilities: Accounts receivable (10,971) (45,829) Net contracts in progress and advance billings 118,465 (18,651) Accounts payable 46,529 (2,279) Accrued and other current liabilities 34,382 (50,012) Other, net 18,070 21,564 Proceeds from insurance for products liabilities claims 68,944 55,395 Payments of products liabilities claims (94,554) (79,859) - -------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 294,567 (70,125) - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (24,479) (59,158) Purchases of investments (383,284) (255,970) Sales and maturities of investments 444,030 68,486 Proceeds from asset disposals 174,277 20,141 Investment in equity investees (3,363) (10,267) - -------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 207,181 (236,768) - -------------------------------------------------------------------------------- 8 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SIX MONTHS ENDED 9/30/97 9/30/96 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $(125,370) $(15,238) Issuance of long-term debt - 244,375 Increase (decrease) in short-term borrowing (192,590) 127,236 Issuance of common stock 15,932 190 Dividends paid (9,637) (31,394) Repurchase of subsidiary's preferred stock (4,513) - Other 3,005 (1,077) - -------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (313,173) 324,092 - -------------------------------------------------------------------------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH (3,644) 65 - -------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 184,931 17,264 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 257,783 238,663 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 442,714 $255,927 - -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 50,098 $ 39,058 Income taxes (refunds)- net $ (16,803) $ 15,084 - -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 9 MCDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1 - BASIS OF PRESENTATION McDermott International, Inc. ("McDermott International") 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 $33,072,000 from the sale of International's interest in Universal Fabricators Incorporated during the three and six months ended September 30, 1997, a gain of $96,059,000 from the sale of International's interest in Sakhalin Energy Investment Company, Ltd. during the six months ended September 30, 1997; and an asset impairment loss of $7,295,000 included in the three and six months ended September 30, 1996. Operating results for the three and six months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending March 31, 1998. Results for the three and six months ended September 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. 10 NOTE 2 - PRODUCTS LIABILITY At September 30, 1997, the estimated liability for pending and future non- employee products liability asbestos claims was $988,228,000 (of which less than $276,000,000 had been asserted) and estimated insurance recoveries were $817,846,000. 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. 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 September 30, 1997 and March 31, 1997 are summarized below: September 30, March 31, 1997 1997 ---- ---- (Unaudited) (In thousands) Raw Materials and Supplies $ 47,523 $ 50,823 Work in Progress 7,727 8,498 Finished Goods 7,078 7,001 - -------------------------------------------------------------------------------- $ 62,328 $ 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 11 barge service business of JRM and the HeereMac joint venture. In October 1997, McDermott International received, from the same grand jury, a subpoena for documents relating principally to an investigation of possible anti-competitive activity in the marine construction service business of the Middle East joint venture between JRM and ETPM. 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. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL McDermott International, Inc. ("McDermott International") 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 BWX Technologies, Inc., formerly, 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 and six months ended September 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 September 30, 1997. Results for the three and six months ended September 30, 1996 have also been restated to reflect the discontinuance of the equity method of accounting for International's investment in the HeereMac joint venture, and to include gains and losses on asset disposals and impairments in Operating Income. 13 THREE SIX MONTHS ENDED MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 -------- -------- -------- -------- (Unaudited) (In thousands) REVENUES Marine Construction Services $494,175 $368,055 $ 958,757 $ 757,244 Power Generation Systems 259,022 255,935 544,059 512,185 Government Operations 80,550 90,326 164,072 179,233 Other 96,196 96,443 199,457 246,100 Eliminations (9,892) (9,838) (18,207) (21,032) - -------------------------------------------------------------------------------- TOTAL REVENUES $920,051 $800,921 $1,848,138 $1,673,730 - -------------------------------------------------------------------------------- OPERATING INCOME Business Unit Income (Loss): Marine Construction Services $ 39,242 $ 7,765 $ 65,526 $ 29,746 Power Generation Systems 13,206 (430) 32,236 (4,748) Government Operations 9,849 8,196 19,784 13,518 Other 3,272 (17,437) 4,984 (23,487) - -------------------------------------------------------------------------------- TOTAL 65,569 (1,906) 122,530 15,029 - -------------------------------------------------------------------------------- Gain (Loss) on Asset Disposals and Impairments - Net: Marine Construction Services (570) 653 24 1,061 Power Generation Systems 10 4,623 13 4,883 Government Operations 2 8 2 88 Other 28,677 (6,602) 125,153 (6,024) Corporate 96 458 404 567 - -------------------------------------------------------------------------------- TOTAL 28,215 (860) 125,596 575 - -------------------------------------------------------------------------------- Equity in Income (Loss) of Investees: Marine Construction Services 2,177 (3,535) (1,969) (10,131) Power Generation Systems 2,202 770 3,976 3,286 Government Operations 519 375 1,099 987 Other 1,508 (134) 3,370 (116) - -------------------------------------------------------------------------------- TOTAL 6,406 (2,524) 6,476 (5,974) - -------------------------------------------------------------------------------- Corporate G&A Expense (11,413) (11,882) (21,031) (21,473) - -------------------------------------------------------------------------------- TOTAL OPERATING INCOME (LOSS) $ 88,777 $(17,172) $ 233,571 $ (11,843) - -------------------------------------------------------------------------------- 14 RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE MONTHS ENDED SEPTEMBER 30, 1996 Marine Construction Services - ---------------------------- Revenues increased $126,120,000 to $494,175,000, primarily due to higher volume in virtually all activities in all geographic areas, except in offshore activities in the Far East and fabrication activities in the United States. Business unit income increased $31,477,000 to $39,242,000, in virtually all activities in all geographic areas, except in the Far East. Equity in income (loss) of investees increased $5,712,000 from a loss of $3,535,000 to income of $2,177,000 primarily due to improved results from McDermott-ETPM West, Inc., and Brown & Root McDermott Fabricators Limited, as well as joint ventures in the Far East and the Gulf of Mexico. Power Generations Systems - ------------------------- Revenues increased $3,087,000 to $259,022,000, primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, boiler cleaning equipment and plant enhancement projects. These increases were partially offset by lower revenues from replacement nuclear steam generators and repair and alteration of existing fossil fuel steam systems. 15 Business unit income (loss) increased $13,636,000 from a loss of $430,000 to income of $13,206,000, primarily due to higher volume and margins from plant enhancement projects and boiler cleaning equipment. In addition, there were lower selling and general and administrative expenses. These increases were partially offset by lower volume from replacement nuclear steam generators. Gain on asset disposals and impairments-net decreased $4,613,000 to $10,000. The prior year included a gain on the sale of a domestic tool rental business. Equity in income of investees increased $1,432,000 to $2,202,000. This represents the results of approximately twelve active joint ventures. This increase is primarily due to the favorable operating results from three foreign joint ventures and a provision for a loss on a domestic joint venture in the prior year. This increase was partially offset by lower operating results from a domestic joint venture. Government Operations - --------------------- Revenues decreased $9,776,000 to $80,550,000, primarily due to lower revenues from nuclear fuel assemblies and reactor components for the U. S. Government and commercial nuclear environmental services. These decreases were partially offset by higher revenues from operation and management contracts for U. S. Government owned facilities. Business unit income increased $1,653,000 to $9,849,000, primarily due to higher volume from operation and management contracts for U. S. Government owned facilities and lower operating and general and administrative expenses. These increases were partially offset by lower volume and margins from commercial nuclear environmental services. Other - ----- Revenues decreased $247,000 to $96,196,000, 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 (domestic shipyard and ordnance operations) in the prior year. These decreases were partially offset by higher 16 revenues from air cooled heat exchangers, domestic engineering activities, Canadian maintenance activities and Mexican shipyard operations. Business unit income (loss) increased $20,709,000 from a loss of $17,437,000 to income of $3,272,000, primarily due to cost overruns on engineering and construction contracts in the prior period. In addition, there was higher volume and margins from Mexican shipyard operations and lower operating and general and administrative expenses. Also, the prior year included losses in non-core businesses (domestic shipyard and ordnance operations). Gain on asset disposals and impairments-net increased $35,279,000 from a loss of $6,602,000 to a gain of $28,677,000 primarily due to the sale of International's interest in Universal Fabricators Incorporated. Equity in income of investees increased $1,642,000 from a loss of $134,000 to income of $1,508,000 primarily due to higher operating results from two foreign joint ventures. Other Income Statement Items - ---------------------------- Interest income increased $2,860,000 to $12,382,000, primarily due to increases in cash equivalents, investments in government obligations and other investments during the current period. Interest expense decreased $4,570,000 to $19,188,000, primarily due to changes in debt obligations and interest rates prevailing thereon. Minority interest expense increased $14,256,000 to expense of $9,701,000 from income of $4,555,000, primarily due to minority shareholder participation in the improved operating results of JRM and McDermott Subsea Constructors Limited. Other-net decreased $3,579,000 to expense of $149,000 from income of $3,430,000, primarily due to a decrease in certain reimbursed financing costs. 17 The provision for income taxes increased $29,583,000 to $33,960,000, while income before provision for income taxes increased $95,544,000 from a loss of $23,423,000 to income of $72,121,000. The increase in income taxes is primarily due to an increase in income. In addition, 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 47% of the pretax income for the three months ended September 30, 1997 compared to a provision for income taxes of 19% of pretax loss for the three months ended September 30, 1996. RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1997 VS. SIX MONTHS ENDED SEPTEMBER 30, 1996 Marine Construction Services - ---------------------------- Revenues increased $201,513,000 to $958,757,000, primarily due to higher volume in virtually all activities in all geographic areas, except in offshore activities in the Far East and fabrication activities in the United States. Business unit income increased $35,780,000 to $65,526,000, in virtually all activities in all geographic areas, except the Far East. Equity in loss of investees decreased $8,162,000 to $1,969,000, primarily due to improved results from the Brown & Root McDermott Fabricators Limited and McDermott-ETPM West, Inc., as well as joint ventures in the Far East and the Gulf of Mexico. 18 Power Generations Systems - ------------------------- Revenues increased $31,874,000 to $544,059,000, primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, boiler cleaning equipment and replacement parts. These increases were partially offset by lower revenues from repair and alteration of existing fossil fuel steam systems, replacement nuclear steam generators, industrial boilers and plant enhancement projects. Business unit income (loss) increased $36,984,000 from a loss of $4,748,000 to income of $32,236,000, primarily due to higher volume and margins from replacement parts and boiler cleaning equipment, higher margins from plant enhancement projects and replacement nuclear steam generators and higher volume from fabrication and erection of fossil fuel steam systems and environmental control systems. In addition, there were lower operating, selling and general and administrative expenses. These increases were partially offset by lower volume and margins from industrial boilers and repair and alteration of existing fossil fuel steam systems. Gain on asset disposals and impairments-net decreased $4,870,000 to $13,000. The prior year included a gain on the sale of a domestic tool rental business. Equity in income of investees increased $690,000 to $3,976,000. This represents the results of approximately twelve active joint ventures. The increase is primarily due to the favorable operating results from three foreign joint ventures and a provision for a loss on a domestic joint venture in the prior year. This increase was partially offset by a favorable termination settlement by a domestic joint venture in the prior year and lower operating results from two domestic joint ventures. Government Operations - --------------------- Revenues decreased $15,161,000 to $164,072,000, 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 for U. S. Government owned facilities. 19 Business unit income increased $6,266,000 to $19,784,000, primarily due to higher volume from operation and management contracts for U. S. Government owned facilities and higher margins on other related operations. In addition, there were lower general and administrative expenses. These increases were partially offset by lower volume and margins from commercial nuclear environmental services. Other - ----- Revenues decreased $46,643,000 to $199,457,000, 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 (domestic shipyard and ordnance operations) in the prior year. These decreases were partially offset by higher revenues from air cooled heat exchangers, domestic engineering activities and Mexican shipyard operations. Business unit income (loss) increased $28,471,000 from a loss of $23,487,000 to income of $4,984,000, primarily due to cost overruns on engineering and construction contracts in the prior period. In addition, there were higher volumes from Mexican shipyard operations, air cooled heat exchangers, domestic engineering activities and lower operating and general and administrative expenses. Also, the prior year included losses in non-core businesses (domestic shipyard and ordnance operations). Gain on asset disposals and impairments-net increased $131,177,000 from a loss of $6,024,000 to income of $125,153,000 primarily due to the sale of International's interest in Sakhalin Energy Investment Company Ltd. and Universal Fabricators Incorporated. Equity in income (loss) of investees increased $3,486,000 from a loss of $116,000 to income of $3,370,000, primarily due to higher operating results from two foreign joint ventures. 20 Other Income Statement Items - ---------------------------- Interest income increased $5,027,000 to $24,878,000, primarily due to increases in cash equivalents, investments in government obligations and other investments during the current period. Interest expense increased $907,000 to $44,393,000, primarily due to changes in debt obligations and interest rates prevailing thereon. Minority interest expense increased $14,161,000 to $16,394,000, primarily due to minority shareholder participation in the improved operating results of JRM and McDermott Subsea Constructors Limited. The provision for income taxes increased $48,091,000 to $51,138,000, while income before provision for income taxes increased $235,865,000 from a loss of $36,706,000 to income of $199,159,000. The provision for income taxes was 26% of the pretax income for the six months ended September 30, 1997 compared to a provision for income taxes of 8% of pretax loss for the six months ended September 30, 1996. 21 Backlog 9/30/97 3/31/97 - ------- ------- ------- (Unaudited) (In thousands) Backlog by Business Unit: Marine Construction Services $1,393,434 $1,760,226 Power Generation Systems 1,399,452 1,554,125 Government Operations 766,838 797,764 Other 385,054 384,968 Eliminations (193,979) (269,661) - -------------------------------------------------------------------------------- TOTAL BACKLOG $3,750,799 $4,227,422 - -------------------------------------------------------------------------------- In general, International's business is capital intensive and relies on large contracts for a substantial amount of its revenues. Marine Construction Services' Domestic, Middle East and North Sea marine markets remain steady. The North Sea engineering market is beginning to weaken, while the Far East market is beginning to show significant improvement. Contracts to be performed by this business unit's unconsolidated joint ventures (not included above) was $1,890,000,000 at September 30, 1997 compared to $1,439,000,000 at March 31, 1997. Power Generation Systems' markets (excluding Southeast Asia) 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. Contracts to be performed by this business unit's unconsolidated joint ventures (not included above) was $188,000,000 at September 30, 1997 compared to $154,000,000 at March 31, 1997. At September 30, 1997 the Government Operations' backlog with the U.S. Government was $670,992,000 (of which $23,791,000 had not been funded). This business unit's backlog is not expected to experience any significant growth as a result of reductions in the defense budget over the past several years. It is expected to remain relatively constant since B&W is the sole source provider of nuclear fuel assemblies and nuclear reactor components for the U. S. Government. 22 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 McDermott International, and the Delaware Company's consolidated subsidiaries, which include The Babcock & Wilcox Company ("B&W"). During the six months ended September 30, 1997, International's cash and cash equivalents increased $184,931,000 to $442,714,000 and total debt decreased $319,241,000 to $799,790,000, primarily due to a reduction in short-term borrowings of $192,590,000 and repayment of $125,370,000 in long-term debt. During this period, International provided cash of $294,567,000 from operating activities, and received cash proceeds of $174,277,000 from asset disposals (including $118,114,000 from the sale of its interest in Sakhalin Energy Investment Company, Ltd and $35,009,000 from the sale of Universal Fabricators Incorporated), $60,746,000 from net sales and maturities of investments, and $15,932,000 from the issuance of stock upon exercise of stock options. International used cash of $24,479,000 for additions to property, plant and equipment; and $9,637,000 for dividends on McDermott International's common and preferred stock. Decreases in net contracts in progress and advance billings were primarily due to the timing of billings on Power Generations Systems' contracts. 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 $6,100 per claim over the last three years) has continued to rise. Claims paid during the six months ended September 30, 1997 were $94,554,000, of which $86,063,000 has been recovered or is due from insurers. At September 30, 1997, receivables of $97,204,000 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 occur over approximately the next 15 years. Estimated insurance recoveries are based upon analysis of insurers providing 23 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 $34,679,000 to $24,479,000 for the six months ended September 30, 1997, compared with the same period in the prior year. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. At September 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 $88,969,000 and $93,769,000, respectively, under the terms of an agreement with a U.S. bank. The maximum sales limit available under the agreement was reduced during October 1997 from $125,000,000 to $100,000,000. 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. The existing agreement will expire on January 31, 1998; however, B&W expects to negotiate renewal of the agreement. International accounts for these sales as secured borrowings. On October 24, 1997, B&W reduced the amount of receivables sold by $43,186,000 to $45,783,000. At September 30 and March 31, 1997, McDermott International and its subsidiaries, had available to them various uncommitted short-term lines of credit from banks totaling $132,332,000 and $179,137,000, respectively. Borrowings against these lines of credit at September 30 and March 31, 1997 were $15,186,000 and $53,165,000, respectively. At September 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. 24 JRM is party to an unsecured and committed revolving credit facility (the "JRM Revolver"). There were no borrowings outstanding at September 30 or March 31, 1997 under the JRM Revolver. As a condition to borrowing under the facility, JRM must comply with certain requirements, including legal representations. Presently, JRM cannot satisfy the legal representations due to the allegations of wrongdoing (see Note 4 to the condensed consolidated financial statements) and cannot borrow under the JRM Revolver. The JRM Revolver also limits the amount of funds which JRM can borrow from other sources. 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 McDermott International and its subsidiaries through cash dividends or through unsecured loans or investments. At September 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 September 30, 1997 was $430,595,000. At September 30, 1997, approximately $79,725,000 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 redeemed the $70,000,000 outstanding principal amount of its 12.875% Guaranteed Senior Notes due 2002 for an aggregate redemption price of $78,986,250 including a premium of $4,480,000 and accrued interest to date of $4,506,250. 25 Working capital increased $157,298,000 from $225,571,000 at March 31, 1997 to $382,869,000 at September 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, 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. 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 ("FASB") 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 $0.65 and $2.60 per share for the three and six months ended September 30, 1997. Diluted earnings per share for the three and six months ended September 30, 1997 and basic and diluted earnings per share for the three and six months ended September 30, 1996 would have been the same as primary and fully diluted amounts reported. 26 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. International has not yet finalized its review of the impact of this statement, but it is not expected to have a material impact on the consolidated financial statements. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that certain financial information be reported on the basis that it is reported internally for evaluating segment performance and deciding how to allocate resources to segments. International anticipates adopting this standard during the last quarter of fiscal year 1998. Because this Statement addresses how supplemental financial information is disclosed in annual and interim reports, the adoption will have no material impact on the consolidated financial statements. At its July 1997 meeting, the Emerging Issues Task Force reached a final consensus on Issue 96-16, "Investor's Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights." This issue addresses whether to consolidate a majority owned investee when the rights of the minority make it unclear if the majority owner actually has control, and establishes criteria for making this decision. For existing investment agreements, the guidance is effective for fiscal years ending after December 15, 1998. International has not yet finalized its review of the impact of this guidance. 27 PART II MCDERMOTT INTERNATIONAL, INC. OTHER INFORMATION ------------------ No information is applicable to Part II for the current quarter, except as noted below: ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on September 2, 1997, the following matters were submitted to McDermott International, Inc.'s ("McDermott International") stockholders with voting as follows: (a) The election of four directors: Class III - For a three year term: ---------------------------------- Nominee Votes For Votes Withheld ------- --------- -------------- Robert L. Howard 48,786,911 919,262 Roger E. Tetrault 49,016,432 689,741 John N. Turner 49,010,734 695,439 Class II - For a two year term: ------------------------------- Nominee Votes For Votes Withheld ------- --------- -------------- Richard E. Woolbert 49,009,793 696,380 Messrs. Theodore H. Black, Philip J. Burguieres, Bruce DeMars, John W. Johnstone, Jr. and William McCollam, Jr. also continued as directors immediately after the meeting. (b) A proposal to approve McDermott International's 1997 Directors Stock Plan: 44,980,661 votes for, 4,587,593 votes against and 137,919 abstentions, with broker non-votes not applicable. (c) A proposal to approve Amendments to McDermott International's 1996 Officer Long-Term Incentive Plan: 48,334,931 votes for, 1,229,921 votes against and 141,321 abstentions, with broker non-votes not applicable. (d) A proposal to retain Ernst & Young LLP as McDermott International's independent auditors for the fiscal year ending March 31, 1998: 49,575,244 votes for, 39,079 votes against and 91,850 abstentions, with broker non-votes not applicable. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Calculation of Earnings (Loss) Per Common and Common Equivalent Share Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K There were no current reports on Form 8-K filed during the three months ended September 30, 1997. 29 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) November 10, 1997 30 EXHIBIT INDEX Exhibit Description 11 Calculation of Earnings (Loss) per Common and Common Equivalent Share 27 Financial Data Schedule 31 EX-11 2 CALCULATION OF EARNINGS EXHIBIT 11 MCDERMOTT INTERNATIONAL, INC. CALCULATION OF EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except shares and per share amounts) THREE SIX MONTHS ENDED MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 -------- -------- -------- -------- (Unaudited) Primary: Net income (loss) $ 38,161 $(27,800) $ 148,021 $ (39,753) Less dividend requirement of preferred stock, Series C (2,067) (2,067) (4,133) (4,133) ------------------------------------------------------------------------------- Net income (loss) for primary computation $ 36,094 $ (29,867) $ 143,888 $ (43,886) - -------------------------------------------------------------------------------- Weighted average number of common shares outstanding during the period 55,542,576 54,689,791 55,281,318 54,598,738 Common stock equivalents of stock options and stock appreciation rights based on "treasury stock" method 1,265,630 - 841,449 - - -------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding during the period 56,808,206 54,689,791 56,122,767 54,598,738 - -------------------------------------------------------------------------------- Earnings (loss) per common and common equivalent share $ 0.64 $ (0.55) $ 2.56 $ (0.80) - -------------------------------------------------------------------------------- 32 EXHIBIT 11 (CONTINUED) THREE SIX MONTHS ENDED MONTHS ENDED 9/30/97 9/30/96 9/30/97 9/30/96 ------- ------- ------- ------- (Unaudited) Fully Diluted: Net income (loss) $ 38,161 $ (27,800) $ 148,021 $ (39,753) Less dividend requirement of preferred stock, Series C - (2,067) - (4,133) Dividends on Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock assuming conversion to Common Stock 1,550 - 3,100 - - -------------------------------------------------------------------------------- Net income (loss) for fully diluted computation $ 39,711 $ (29,867) $ 151,121 $ (43,886) - -------------------------------------------------------------------------------- Weighted average number of common shares outstanding during period 55,542,576 54,689,791 55,281,318 54,598,738 Common stock equivalents of stock options and stock appreciation rights based on "treasury stock" method 1,684,790 - 1,381,124 - Shares applicable to Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock 2,818,679 - 2,818,696 - Shares applicable to Series C $2.875 Cumulative Convertible Preferred Stock 4,078,014 - 4,078,014 - - -------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding during the period, assuming full dilution 64,124,059 54,689,791 63,559,152 54,598,738 - -------------------------------------------------------------------------------- Earnings (loss) per common and common equivalent share assuming full dilution $ 0.62 $ (0.55) $ 2.38 $ (0.80) - -------------------------------------------------------------------------------- Fully diluted earnings (loss) per share includes only computations which cause dilution. 33 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1998 SEP-30-1997 442,714 98 623,892 97,914 370,009 1,885,775 1,765,920 1,201,851 4,543,500 1,502,906 623,754 0 2,875 55,801 555,815 4,543,500 1,848,138 1,848,138 1,746,639 1,746,639 0 0 44,393 199,159 51,138 148,021 0 0 0 148,021 2.56 2.38
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