-----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, CCig6k7Ks0FgjvupxyyxgzcH5LcYe2KIyCSvMRtt+0nWEGzDs9FKC+E7fYpVGrhY WDsahKU4AtastEvkRCWTVg== 0000899243-98-000174.txt : 19980212 0000899243-98-000174.hdr.sgml : 19980212 ACCESSION NUMBER: 0000899243-98-000174 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980211 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: 98531700 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 DECEMBER 31, 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 JANUARY 23, 1998 WAS 56,289,065. 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 DECEMBER 31, 1997 AND MARCH 31, 1997 4 CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 6 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED DECEMBER 31, 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 16 PART II - OTHER INFORMATION - --------------------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 32 SIGNATURES 33 EXHIBIT 27 - FINANCIAL DATA SCHEDULE 35 2 PART I MCDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION --------------------- ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 MCDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 ASSETS 12/31/97 3/31/97 -------- ------- (UNAUDITED) (IN THOUSANDS) CURRENT ASSETS: CASH AND CASH EQUIVALENTS $653,622 $257,783 SHORT-TERM INVESTMENTS IN DEBT SECURITIES 131 75,946 ACCOUNTS RECEIVABLE - TRADE 459,611 547,082 ACCOUNTS RECEIVABLE - UNCONSOLIDATED AFFILIATES 64,837 66,074 ACCOUNTS RECEIVABLE - OTHER 179,257 185,138 INSURANCE RECOVERABLE - CURRENT 159,515 183,000 CONTRACTS IN PROGRESS 275,424 326,512 INVENTORIES 64,682 66,322 DEFERRED INCOME TAXES 75,800 60,866 OTHER CURRENT ASSETS 38,491 65,604 - ------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,971,370 1,834,327 - ------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, AT COST 1,746,442 1,764,300 LESS ACCUMULATED DEPRECIATION 1,191,007 1,164,555 - ------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 555,435 599,745 - ------------------------------------------------------------------------- INVESTMENTS IN DEBT SECURITIES: GOVERNMENT OBLIGATIONS 341,591 291,538 OTHER INVESTMENTS 406,264 118,057 - ------------------------------------------------------------------------- TOTAL INVESTMENTS 747,855 409,595 - ------------------------------------------------------------------------- INSURANCE RECOVERABLE 611,780 720,913 - ------------------------------------------------------------------------- EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF PURCHASED BUSINESSES LESS ACCUMULATED Amortization of $107,334,000 at December 31, 1997 AND $158,523,000 AT MARCH 31, 1997 129,178 423,095 - ------------------------------------------------------------------------- PREPAID PENSION COSTS 321,726 303,825 - ------------------------------------------------------------------------- OTHER ASSETS 235,086 307,982 - ------------------------------------------------------------------------- TOTAL $4,572,430 $4,599,482 ========================================================================= SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 LIABILITIES AND STOCKHOLDERS' EQUITY 12/31/97 3/31/97 --------- ------- (UNAUDITED) (IN THOUSANDS) CURRENT LIABILITIES: NOTES PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT $ 161,322 $ 451,857 ACCOUNTS PAYABLE 277,829 268,274 ENVIRONMENTAL AND PRODUCTS LIABILITIES - CURRENT 195,927 211,841 ACCRUED EMPLOYEE BENEFITS 127,690 106,498 ADVANCE BILLINGS ON CONTRACTS 296,724 200,163 OTHER CURRENT LIABILITIES 441,946 370,123 - -------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,501,438 1,608,756 - -------------------------------------------------------------------------- Long-Term Debt 623,152 667,174 - -------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 393,705 400,445 - -------------------------------------------------------------------------- ENVIRONMENTAL AND PRODUCTS LIABILITIES 767,183 903,379 - -------------------------------------------------------------------------- OTHER LIABILITIES 260,563 250,885 - -------------------------------------------------------------------------- CONTINGENCIES - -------------------------------------------------------------------------- MINORITY INTEREST: SUBSIDIARY'S PREFERRED STOCKS 166,249 170,983 OTHER MINORITY INTEREST 199,347 160,859 - -------------------------------------------------------------------------- TOTAL MINORITY INTEREST 365,596 331,842 - -------------------------------------------------------------------------- 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 56,186,301 AT DECEMBER 31, 1997 AND 54,936,956 AT MARCH 31, 1997 56,186 54,937 CAPITAL IN EXCESS OF PAR VALUE 994,522 962,445 DEFICIT (353,703) (538,163) MINIMUM PENSION LIABILITY (2,148) (2,148) NET UNREALIZED LOSS ON INVESTMENTS 508 (4,132) CURRENCY TRANSLATION ADJUSTMENTS (37,447) (38,813) - -------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 660,793 437,001 - -------------------------------------------------------------------------- TOTAL $4,572,430 $4,599,482 ========================================================================== 5 MCDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS) DECEMBER 31, 1997 THREE NINE MONTHS ENDED MONTHS ENDED 12/31/97 12/31/96 12/31/97 12/31/96 -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS) REVENUES $901,735 $744,700 $2,749,873 $2,418,430 - ------------------------------------------------------------------------------ COSTS AND EXPENSES: COST OF OPERATIONS (EXCLUDING DEPRECIATION AND AMORTIZATION) 757,824 639,221 2,316,535 2,122,729 DEPRECIATION AND AMORTIZATION 33,399 37,097 111,100 109,211 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 49,927 59,886 160,154 184,438 - ------------------------------------------------------------------------------ 841,150 736,204 2,587,789 2,416,378 - ------------------------------------------------------------------------------ GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS - NET (40,212) 43,125 85,384 43,700 - ------------------------------------------------------------------------------ OPERATING INCOME BEFORE INCOME (LOSS) FROM INVESTEES 20,373 51,621 247,468 45,752 INCOME (LOSS) FROM INVESTEES 68,993 3,417 75,469 (2,557) - ------------------------------------------------------------------------------ OPERATING INCOME 89,366 55,038 322,937 43,195 - ------------------------------------------------------------------------------ OTHER INCOME (EXPENSE): INTEREST INCOME 17,512 14,142 42,390 33,993 INTEREST EXPENSE (18,728) (24,514) (63,121) (68,000) MINORITY INTEREST (23,264) (16,111) (39,658) (18,344) OTHER-NET 4,167 (307) 5,664 698 - ------------------------------------------------------------------------------ (20,313) (26,790) (54,725) (51,653) - ------------------------------------------------------------------------------ INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 69,053 28,248 268,212 (8,458) PROVISION FOR INCOME TAXES 18,061 4,762 69,199 7,809 - ------------------------------------------------------------------------------ NET INCOME (LOSS) $ 50,992 $ 23,486 $199,013 $(16,267) ============================================================================== NET INCOME (LOSS) APPLICABLE TO COMMON STOCK (AFTER PREFERRED STOCK DIVIDENDS) $ 48,926 $ 21,420 $192,814 $(22,466) ============================================================================== 6 CONTINUED THREE NINE MONTHS ENDED MONTHS ENDED 12/31/97 12/31/96 12/31/97 12/31/96 -------- -------- -------- -------- (UNAUDITED) BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.87 $ 0.39 $ 3.47 $ (0.41) ============================================================================== EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE ASSUMING DILUTION $ 0.82 $ 0.39 $ 3.21 $ (0.41) ============================================================================== CASH DIVIDENDS: PER COMMON SHARE $ 0.05 $ 0.05 $ 0.15 $ 0.55 PER PREFERRED SHARE $ 0.72 $ 0.72 $ 2.16 $ 2.16 ============================================================================== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7 MCDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS DECEMBER 31, 1997 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED 12/31/97 12/31/96 -------- -------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $ 199,013 $ (16,267) - ----------------------------------------------------------------------------- ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 111,100 109,211 EQUITY IN INCOME OR LOSS OF INVESTEES, LESS DIVIDENDS (5,695) 13,603 GAIN ON ASSET DISPOSALS AND IMPAIRMENTS - NET (85,384) (43,700) PROVISION FOR DEFERRED TAXES 1,827 7,480 OTHER 5,200 171 CHANGES IN ASSETS AND LIABILITIES: ACCOUNTS RECEIVABLE 83,254 29,417 NET CONTRACTS IN PROGRESS AND ADVANCE BILLINGS 151,924 118,244 ACCOUNTS PAYABLE 9,652 (44,606) ACCRUED AND OTHER CURRENT LIABILITIES 37,775 (56,533) OTHER, NET 86,868 14,749 PROCEEDS FROM INSURANCE FOR PRODUCTS LIABILITIES CLAIMS 108,107 91,585 PAYMENTS OF PRODUCTS LIABILITIES CLAIMS (145,298) (137,337) - ------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 558,343 86,017 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (32,939) (77,895) PURCHASES OF INVESTMENTS (687,360) (369,739) SALES AND MATURITIES OF INVESTMENTS 431,522 237,630 PROCEEDS FROM ASSET DISPOSALS 450,909 43,083 INVESTMENT IN EQUITY INVESTEES (2,441) (14,564) RETURNS FROM INVESTEES - 24,500 - ------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 159,691 (156,985) - ------------------------------------------------------------------------------ 8 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED 12/31/97 12/31/96 -------- -------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: PAYMENT OF LONG-TERM DEBT $(140,266) $ (28,379) ISSUANCE OF LONG-TERM DEBT - 244,375 DECREASE IN SHORT-TERM BORROWING (192,747) (46,503) ISSUANCE OF COMMON STOCK 23,620 188 DIVIDENDS PAID (14,490) (47,140) REPURCHASE OF SUBSIDIARY'S PREFERRED STOCK (4,515) (1,069) OTHER 5,618 (1,342) - ------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (322,780) 120,130 - ------------------------------------------------------------------------------ EFFECTS OF EXCHANGE RATE CHANGES ON CASH 585 3,971 - ------------------------------------------------------------------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 395,839 53,133 - ------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 257,783 238,663 - ------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 653,622 $ 291,796 ============================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: INTEREST (NET OF AMOUNT CAPITALIZED) $ 61,082 $ 53,693 INCOME TAXES (REFUNDS)- NET $ (6,806) $ 12,900 ============================================================================== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 9 MCDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 (I) A GAIN OF $223,651,000 AND A $61,637,000 DISTRIBUTION OF EARNINGS FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE AND IMPAIRMENT LOSSES OF $275,112,000, INCLUDING $262,901,000 OF GOODWILL ASSOCIATED WITH JRM'S ACQUISITION OF OFFSHORE PIPELINES, INC. ("OPI"), INCLUDED IN THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997; (II) A GAIN OF $33,072,000 FROM THE SALE OF INTERNATIONAL'S INTEREST IN UNIVERSAL FABRICATORS INCORPORATED AND A GAIN OF $96,059,000 FROM THE SALE OF INTERNATIONAL'S INTEREST IN SAKHALIN ENERGY INVESTMENT COMPANY, LTD. INCLUDED IN THE NINE MONTHS ENDED DECEMBER 31, 1997; (III) FAVORABLE WORKERS' COMPENSATION COST ADJUSTMENTS OF $21,441,000 INCLUDED IN THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND (IV) AN ASSET IMPAIRMENT LOSS OF $7,295,000 INCLUDED IN THE NINE MONTHS ENDED DECEMBER 31, 1996. OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR ENDING MARCH 31, 1998. RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 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 10 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 DECEMBER 31, 1997, THE ESTIMATED LIABILITY FOR PENDING AND FUTURE NON- EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS WAS $937,484,000 (OF WHICH LESS THAN $276,000,000 HAD BEEN ASSERTED) AND ESTIMATED INSURANCE RECOVERIES WERE $771,295,000. 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 DECEMBER 31, 1997 AND MARCH 31, 1997 ARE SUMMARIZED BELOW: DECEMBER 31, MARCH 31, 1997 1997 ---- ---- (UNAUDITED) (IN THOUSANDS) RAW MATERIALS AND SUPPLIES $ 46,932 $ 50,823 WORK IN PROGRESS 10,557 8,498 FINISHED GOODS 7,193 7,001 - -------------------------------------------------------------------- $ 64,682 $ 66,322 ==================================================================== NOTE 4 - INVESTIGATIONS SINCE MARCH 1997, MCDERMOTT INTERNATIONAL AND JRM, WITH THE HELP OF OUTSIDE COUNSEL, HAVE BEEN INVESTIGATING ALLEGATIONS OF WRONGDOING BY A LIMITED NUMBER OF FORMER EMPLOYEES 11 OF MCDERMOTT INTERNATIONAL AND JRM AND BY OTHERS. UPON RECEIVING THESE ALLEGATIONS, MCDERMOTT INTERNATIONAL AND JRM NOTIFIED AUTHORITIES, INCLUDING THE ANTITRUST DIVISION OF THE U. S. DEPARTMENT OF JUSTICE ("ANTITRUST DIVISION") AND THE EUROPEAN COMMISSION. IN RETURN FOR MCDERMOTT INTERNATIONAL AND JRM'S PROMPT DISCLOSURE OF THE ALLEGATIONS, THE COMPANIES AND INDIVIDUALS WHO WERE OFFICERS, DIRECTORS AND EMPLOYEES AT THE TIME OF THE DISCLOSURE WERE GRANTED IMMUNITY FROM CRIMINAL PROSECUTION BY THE ANTITRUST DIVISION FOR ANY ANTI-COMPETITIVE ACTS INVOLVING WORLDWIDE HEAVY-LIFT ACTIVITIES. MCDERMOTT INTERNATIONAL AND JRM HAVE RECEIVED SUBPOENAS IN CONNECTION WITH THE ANTITRUST DIVISION'S INVESTIGATION. THEY ADDRESS PRINCIPALLY THE HEAVY-LIFT BUSINESS OF JRM'S FORMER HEEREMAC JOINT VENTURE ("HEEREMAC") AND POSSIBLE ANTI- COMPETITIVE ACTIVITY IN THE MARINE CONSTRUCTION BUSINESS OF MCDERMOTT-ETPM EAST, INC., A MIDDLE EAST JOINT VENTURE WITH ETPM S.A., A FRENCH COMPANY. MCDERMOTT INTERNATIONAL AND JRM ARE ALSO COMPLYING WITH THE SECURITIES AND EXCHANGE COMMISSION'S ("SEC") REQUEST FOR DOCUMENTS. AFTER RECEIVING THE ALLEGATIONS IN MARCH 1997, JRM INITIATED ACTION TO TERMINATE ITS INTEREST IN HEEREMAC, AND ON DECEMBER 19, 1997, JRM'S PARTNER IN THE JOINT VENTURE, HEEREMA OFFSHORE CONSTRUCTION GROUP, INC., ACQUIRED JRM'S INTEREST IN EXCHANGE FOR $318,500,000 IN CASH AND TITLE TO SEVERAL PIECES OF EQUIPMENT, INCLUDING LAUNCH BARGES AND THE DB101, A 3,500-TON CAPACITY SEMI-SUBMERSIBLE DERRICK BARGE. JRM WILL RECEIVE THE EQUIPMENT IN THE SPRING OF 1998, AFTER IT COMPLETES CONTRACTS IN PROGRESS. ON DECEMBER 21, 1997, HEEREMAC AND A HEEREMAC EMPLOYEE PLED GUILTY TO CRIMINAL CHARGES BY THE DEPARTMENT OF JUSTICE THAT THEY AND OTHERS HAD PARTICIPATED IN A CONSPIRACY TO RIG BIDS IN CONNECTION WITH THE HEAVY-LIFT BUSINESS OF HEEREMAC IN THE GULF OF MEXICO, NORTH SEA AND FAR EAST. HEEREMAC WAS FINED $49,000,000 AND THE EMPLOYEE $100,000. AS PART OF THE PLEA, BOTH HEEREMAC AND CERTAIN EMPLOYEES OF HEEREMAC ARE OBLIGATED TO COOPERATE FULLY WITH THE ANTITRUST DIVISION'S INVESTIGATION. NEITHER MCDERMOTT INTERNATIONAL, JRM NOR ANY OF THEIR OFFICERS, DIRECTORS OR EMPLOYEES WAS A PARTY TO THESE PROCEEDINGS. IT IS NOT POSSIBLE TO PREDICT THE ULTIMATE OUTCOME OF THE DEPARTMENT OF JUSTICE'S INVESTIGATION, THE GRAND JURY PROCEEDINGS, THE INQUIRY FROM THE SEC OR MCDERMOTT INTERNATIONAL AND JRM'S INTERNAL INVESTIGATIONS, OR ACTIONS THAT MAY BE TAKEN BY OTHERS AS A 12 RESULT OF HEEREMAC'S GUILTY PLEA. HOWEVER, THESE MATTERS COULD RESULT IN CIVIL AND/OR CRIMINAL LIABILITY TO THE COMPANIES AND HAVE A MATERIAL EFFECT ON FUTURE RESULTS OF OPERATIONS. NOTE 5 - EARNINGS (LOSS) PER SHARE IN FEBRUARY 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 128, "EARNINGS PER SHARE." SFAS NO. 128 REPLACED THE PREVIOUSLY REPORTED PRIMARY AND FULLY DILUTED EARNINGS PER SHARE WITH BASIC AND DILUTED EARNINGS PER SHARE. UNLIKE PRIMARY EARNINGS PER SHARE, BASIC EARNINGS PER SHARE EXCLUDES ANY DILUTIVE EFFECTS OF OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES. DILUTED EARNINGS PER SHARE IS VERY SIMILAR TO THE PREVIOUSLY REPORTED FULLY DILUTED EARNINGS PER SHARE. ALL EARNINGS PER SHARE AMOUNTS HAVE BEEN RESTATED TO CONFORM TO THE NEW REQUIREMENTS. THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/97 12/31/96 12/31/97 12/31/96 -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS) BASIC: NET INCOME (LOSS) $ 50,992 $ 23,486 $ 199,013 $ (16,267) LESS DIVIDEND REQUIREMENT OF PREFERRED STOCK, SERIES C (2,066) (2,066) (6,199) (6,199) - ------------------------------------------------------------------------------------------- NET INCOME (LOSS) FOR BASIC COMPUTATION $ 48,926 $ 21,420 $ 192,814 $ (22,466) =========================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE PERIOD 56,042,595 54,770,679 55,535,077 54,656,052 =========================================================================================== EARNINGS (LOSS) PER COMMON SHARE $ 0.87 $ 0.39 $ 3.47 $ (0.41) ===========================================================================================
13 CONTINUED
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/97 12/31/96 12/31/97 12/31/96 -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS) DILUTED: NET INCOME (LOSS) $ 50,992 $ 23,486 $ 199,013 $ (16,267) LESS DIVIDEND REQUIREMENT OF PREFERRED STOCK, SERIES C - (2,066) - (6,199) DIVIDENDS ON SUBSIDIARY'S SERIES A $2.20 CUMULATIVE CONVERTIBLE PREFERRED STOCK ASSUMING CONVERSION TO COMMON STOCK 1,550 - 4,650 - - ------------------------------------------------------------------------------------------ NET INCOME (LOSS) FOR DILUTED COMPUTATION $ 52,542 $ 21,420 $ 203,663 $ (22,466) ========================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING PERIOD 56,042,595 54,770,679 55,535,077 54,656,052 COMMON STOCK EQUIVALENTS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS BASED ON "TREASURY STOCK" METHOD 1,455,589 26,619 1,046,162 - SHARES APPLICABLE TO SUBSIDIARY'S SERIES A $2.20 CUMULATIVE CONVERTIBLE PREFERRED STOCK 2,818,679 - 2,818,690 - 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 DILUTION 64,394,877 54,797,298 63,477,943 54,656,052 ========================================================================================== EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE ASSUMING DILUTION $ 0.82 $ 0.39 $ 3.21 $ (0.41) ==========================================================================================
DILUTED EARNINGS (LOSS) PER SHARE INCLUDES ONLY COMPUTATIONS WHICH CAUSE DILUTION. 14 NOTE 6 - DISPOSITION OF ASSETS ON DECEMBER 19, 1997, JRM AND HEEREMA ENTERED INTO A TRANSACTION PURSUANT TO WHICH THEY TERMINATED THE HEEREMAC JOINT VENTURE (THE "TERMINATION AGREEMENT"). THE HEEREMAC JOINT VENTURE WAS FORMED IN JANUARY 1989 AND UTILIZED THE SPECIALIZED, HEAVY-LIFT MARINE CONSTRUCTION VESSELS WHICH WERE PREVIOUSLY OWNED BY THE TWO PARTIES. EACH PARTY HAD A 50% INTEREST IN THE JOINT VENTURE, AND HEEREMA HAD RESPONSIBILITY FOR ITS DAY-TO-DAY OPERATIONS. UNDER THE TERMS OF THE TERMINATION AGREEMENT, HEEREMA ACQUIRED AND ASSUMED JRM'S 50% INTEREST IN THE JOINT VENTURE IN EXCHANGE FOR CASH OF $318,500,000 AND TITLE TO SEVERAL PIECES OF EQUIPMENT. THE EQUIPMENT TRANSFERRED TO JRM INCLUDES TWO LAUNCH BARGES AND THE DB101, A 3,500-TON LIFT CAPACITY, SEMI-SUBMERSIBLE DERRICK BARGE. THE EQUIPMENT WILL BE CHARTERED TO HEEREMA UNTIL THE SPRING OF 1998. THE CONSIDERATION RECEIVED INCLUDED A DISTRIBUTION OF EARNINGS OF THE HEEREMAC JOINT VENTURE AND PAYMENT OF PRINCIPAL AND INTEREST UNDER A PROMISSORY NOTE PREVIOUSLY DUE TO JRM (APPROXIMATELY $100,000,000). AS A RESULT OF THE TERMINATION OF THE HEEREMAC JOINT VENTURE, A GAIN ON ASSET DISPOSAL OF $223,651,000 AND A DISTRIBUTION OF EARNINGS OF $61,637,000 WERE RECORDED. NOTE 7 - GOODWILL IMPAIRMENT DURING THE DECEMBER 1997 QUARTER, MANAGEMENT CONCLUDED THE GOODWILL ASSOCIATED WITH THE ACQUISITION OF OPI IN 1995 NO LONGER HAD VALUE AND RECORDED A CHARGE FOR THE REMAINING GOODWILL OF $262,901,000. THE DECISION WAS BASED ON THE LACK OF VOLUME RELATED TO OPI, THE DEPARTURE OF KEY OPI EXECUTIVES FROM JRM AND THE DISPOSAL OF SIGNIFICANT OPI JOINT VENTURES AND MAJOR OPI VESSELS. THE CHARGE WILL REDUCE FUTURE ANNUAL AMORTIZATION BY APPROXIMATELY $21,800,000. 15 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 NINE MONTHS ENDED DECEMBER 31, 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 DECEMBER 31, 1997. RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 HAVE ALSO BEEN RESTATED TO REFLECT THE DISCONTINUANCE OF THE EQUITY METHOD OF ACCOUNTING FOR INTERNATIONAL'S INVESTMENT IN THE HEEREMAC JOINT VENTURE. 16 STATEMENTS MADE HEREIN WHICH EXPRESS A BELIEF, EXPECTATION OR INTENTION, AS WELL AS THOSE WHICH ARE NOT HISTORICAL FACT ARE FORWARD LOOKING. THEY INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES WHICH MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO: DECISIONS ABOUT OFFSHORE DEVELOPMENTS TO BE MADE BY OIL AND GAS COMPANIES; THE DEREGULATION OF THE U. S. ENERGY MARKET; GOVERNMENTAL REGULATION AND THE CONTINUED FUNDING OF MCDERMOTT INTERNATIONAL'S CONTRACTS WITH U. S. GOVERNMENTAL AGENCIES; ESTIMATES FOR PENDING AND FUTURE NON-EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS; THE HIGHLY COMPETITIVE NATURE OF MCDERMOTT INTERNATIONAL'S BUSINESSES; OPERATING RISKS ASSOCIATED WITH THE MARINE CONSTRUCTION SERVICES BUSINESS; AND THE RESULTS OF THE ONGOING INVESTIGATION BY THE MCDERMOTT INTERNATIONAL AND THE U. S. DEPARTMENT OF JUSTICE INTO POSSIBLE ANTI-COMPETITIVE PRACTICES BY MCDERMOTT INTERNATIONAL AND ITS MAJORITY-OWNED SUBSIDIARY, JRM. 17
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/97 12/31/96 12/31/97 12/31/96 --------- --------- ---------- ---------- (UNAUDITED) (IN THOUSANDS) REVENUES MARINE CONSTRUCTION SERVICES $ 452,659 $ 316,899 $1,411,416 $1,074,143 POWER GENERATION SYSTEMS 283,337 237,015 827,396 749,200 GOVERNMENT OPERATIONS 95,355 89,957 259,427 269,190 OTHER 82,877 108,273 282,334 354,373 ELIMINATIONS (12,493) (7,444) (30,700) (28,476) - ------------------------------------------------------------------------------------------- TOTAL REVENUES $ 901,735 $ 744,700 $2,749,873 $2,418,430 =========================================================================================== OPERATING INCOME (LOSS) BUSINESS UNIT INCOME (LOSS): MARINE CONSTRUCTION SERVICES $ 30,690 $ 5,430 $ 96,216 $ 35,176 POWER GENERATION SYSTEMS 27,144 7,032 59,380 2,284 GOVERNMENT OPERATIONS 7,742 10,253 27,526 23,771 OTHER (50) (1,260) 4,934 (24,747) - ------------------------------------------------------------------------------------------- TOTAL 65,526 21,455 188,056 36,484 =========================================================================================== GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS - NET: MARINE CONSTRUCTION SERVICES (40,330) 42,128 (40,306) 43,189 POWER GENERATION SYSTEMS 82 308 95 5,191 GOVERNMENT OPERATIONS (6) 53 (4) 141 OTHER 26 637 125,179 (5,387) CORPORATE 16 (1) 420 566 - ------------------------------------------------------------------------------------------- TOTAL (40,212) 43,125 85,384 43,700 =========================================================================================== INCOME (LOSS) FROM INVESTEES: MARINE CONSTRUCTION SERVICES 63,845 4,011 61,876 (6,120) POWER GENERATION SYSTEMS 2,711 (2,052) 6,687 1,234 GOVERNMENT OPERATIONS 2,678 694 3,777 1,681 OTHER (241) 764 3,129 648 - ------------------------------------------------------------------------------------------- TOTAL 68,993 3,417 75,469 (2,557) =========================================================================================== CORPORATE G&A EXPENSE (4,941) (12,959) (25,972) (34,432) - ------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 89,366 $ 55,038 $ 322,937 $ 43,195 ===========================================================================================
18 RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997 VS. THREE MONTHS ENDED DECEMBER 31, 1996 MARINE CONSTRUCTION SERVICES - ---------------------------- REVENUES INCREASED $135,760,000 TO $452,659,000, PRIMARILY DUE TO HIGHER VOLUME IN VIRTUALLY ALL ACTIVITIES IN THE UNITED STATES, THE MIDDLE EAST AND THE FAR EAST. THESE INCREASES WERE PARTIALLY OFFSET BY LOWER VOLUME IN OFFSHORE AND ENGINEERING ACTIVITIES IN EUROPE AND WEST AFRICA AND LOWER ENGINEERING ACTIVITIES IN THE MIDDLE EAST. BUSINESS UNIT INCOME INCREASED $25,260,000 TO $30,690,000, PRIMARILY DUE TO HIGHER VOLUME IN OFFSHORE AND ENGINEERING ACTIVITIES AND HIGHER VOLUME AND MARGINS IN FABRICATION IN THE UNITED STATES, HIGHER MARGINS IN ENGINEERING IN EUROPE AND WEST AFRICA AND THE MIDDLE EAST, AND HIGHER VOLUME AND LOWER MARGINS IN ALL ACTIVITIES IN THE FAR EAST. IN ADDITION, THERE WERE LOWER OVERALL NET OPERATING EXPENSES IN ALL OF THE GEOGRAPHIC AREAS. GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $82,458,000 FROM A GAIN OF $42,128,000 TO A LOSS OF $40,330,000 PRIMARILY DUE TO THE IMPAIRMENT LOSS OF $262,901,000 RELATING TO GOODWILL ASSOCIATED WITH THE ACQUISITION OF OFFSHORE PIPELINES, INC. ("OPI"). PRIOR YEAR GAINS FROM THE SALE OF THE DB21, PARTICIPATION IN A GAIN FROM THE SALE OF THE DB100 BY THE HEEREMAC JOINT VENTURE AND THE AMORTIZATION OF THE DEFERRED GAIN RESULTING FROM THE SALE OF THE DB101 AND DB102 ALSO CONTRIBUTED TO THE DECREASE. THESE DECREASES WERE PARTIALLY OFFSET BY THE $223,651,000 GAIN RECOGNIZED FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE. INCOME FROM INVESTEES INCREASED $59,834,000 TO $63,845,000, PRIMARILY DUE TO A $61,637,000 DISTRIBUTION OF EARNINGS RELATED TO THE TERMINATION OF THE HEEREMAC JOINT VENTURE. POWER GENERATIONS SYSTEMS - ------------------------- REVENUES INCREASED $46,322,000 TO $283,337,000, PRIMARILY DUE TO HIGHER REVENUES FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING EQUIPMENT. 19 BUSINESS UNIT INCOME INCREASED $20,112,000 TO $27,144,000, PRIMARILY DUE TO HIGHER VOLUME AND MARGINS FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING EQUIPMENT. IN ADDITION, THERE WERE HIGHER MARGINS FROM REPLACEMENT NUCLEAR STEAM GENERATORS AND LOWER SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES. THESE INCREASES WERE PARTIALLY OFFSET BY HIGHER OPERATING EXPENSES. INCOME (LOSS) FROM INVESTEES INCREASED $4,763,000 FROM A LOSS OF $2,052,000 TO INCOME OF $2,711,000. THIS REPRESENTS THE RESULTS OF APPROXIMATELY TWELVE ACTIVE JOINT VENTURES. THE INCREASE IS PRIMARILY DUE TO THE FAVORABLE OPERATING RESULTS FROM TWO FOREIGN JOINT VENTURES AND A PROVISION FOR A LOSS ON A CANADIAN JOINT VENTURE IN THE PRIOR YEAR. THIS INCREASE WAS PARTIALLY OFFSET BY LOWER OPERATING RESULTS FROM TWO DOMESTIC JOINT VENTURES. GOVERNMENT OPERATIONS - --------------------- REVENUES INCREASED $5,398,000 TO $95,355,000, PRIMARILY DUE TO HIGHER REVENUES FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED FACILITIES. THIS INCREASE WAS PARTIALLY OFFSET BY LOWER REVENUES FROM NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT, COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND OTHER GOVERNMENT RELATED OPERATIONS. BUSINESS UNIT INCOME DECREASED $2,511,000 TO $7,742,000, PRIMARILY DUE TO LOWER VOLUME AND MARGINS FROM COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND HIGHER OPERATING EXPENSES. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER MARGINS FROM NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT AND HIGHER VOLUME FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED FACILITIES. INCOME FROM INVESTEES INCREASED $1,984,000 TO $2,678,000, PRIMARILY DUE TO THE FAVORABLE OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE. OTHER - ----- REVENUES DECREASED $25,396,000 TO $82,877,000, PRIMARILY DUE TO THE DISPOSITION OF NON-CORE BUSINESSES (DOMESTIC SHIPYARD AND ORDNANCE OPERATIONS), AND LOWER REVENUES FROM 20 ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND MEXICAN SHIPYARD OPERATIONS. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM AIR COOLED HEAT EXCHANGERS. BUSINESS UNIT LOSS DECREASED $1,210,000 TO $50,000, PRIMARILY DUE TO PRIOR YEAR LOSSES IN NON-CORE BUSINESSES (DOMESTIC SHIPYARD AND ORDNANCE OPERATIONS). IN ADDITION, THERE WERE HIGHER REVENUES FROM AIR COOLED HEAT EXCHANGERS, HIGHER MARGINS FROM ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND LOWER GENERAL AND ADMINISTRATIVE EXPENSES. THESE INCREASES WERE PARTIALLY OFFSET BY LOWER VOLUME FROM MEXICAN SHIPYARD OPERATIONS AND HIGHER OPERATING EXPENSES. CORPORATE GENERAL & ADMINISTRATIVE ("G&A") EXPENSES - ---------------------------------------------------- CORPORATE G&A EXPENSE DECREASED $8,018,000 TO $4,941,000 PRIMARILY DUE TO STAFF REDUCTIONS, OTHER ECONOMY MEASURES AND CERTAIN ONE-TIME COSTS INCURRED IN THE PRIOR PERIOD. OTHER INCOME STATEMENT ITEMS - ---------------------------- INTEREST INCOME INCREASED $3,370,000 TO $17,512,000, PRIMARILY DUE TO INCREASES IN INVESTMENTS IN GOVERNMENT OBLIGATIONS, OTHER INVESTMENTS AND CASH EQUIVALENTS IN THE CURRENT PERIOD. INTEREST EXPENSE DECREASED $5,786,000 TO $18,728,000, PRIMARILY DUE TO CHANGES IN DEBT OBLIGATIONS AND INTEREST RATES PREVAILING THEREON. MINORITY INTEREST EXPENSE INCREASED $7,153,000 TO $23,264,000, PRIMARILY DUE TO MINORITY SHAREHOLDER PARTICIPATION IN THE IMPROVED OPERATING RESULTS OF JRM. OTHER-NET INCREASED $4,474,000 TO INCOME OF $4,167,000 FROM EXPENSE OF $307,000, PRIMARILY DUE TO HIGHER FOREIGN CURRENCY TRANSACTION GAINS IN THE CURRENT PERIOD. THE PROVISION FOR INCOME TAXES INCREASED $13,299,000 TO $18,061,000, WHILE INCOME BEFORE PROVISION FOR INCOME TAXES INCREASED $40,805,000 TO $69,053,000. THE INCREASE IN INCOME TAXES IS PRIMARILY DUE TO AN INCREASE IN INCOME. IN ADDITION, MCDERMOTT INTERNATIONAL OPERATES 21 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 26% OF THE PRETAX INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO A PROVISION FOR INCOME TAXES OF 17% OF PRETAX INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1996. RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1997 VS. NINE MONTHS ENDED DECEMBER 31, 1996 MARINE CONSTRUCTION SERVICES - ---------------------------- REVENUES INCREASED $337,273,000 TO $1,411,416,000, PRIMARILY DUE TO HIGHER VOLUME IN VIRTUALLY ALL ACTIVITIES IN ALL GEOGRAPHIC AREAS, EXCEPT IN OFFSHORE ACTIVITIES IN THE FAR EAST AND ENGINEERING ACTIVITIES IN THE MIDDLE EAST AND EUROPE AND WEST AFRICA. BUSINESS UNIT INCOME INCREASED $61,040,000 TO $96,216,000. VIRTUALLY ALL ACTIVITIES IN ALL GEOGRAPHIC AREAS, EXCEPT THE FAR EAST, REFLECTED THIS INCREASE. GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $83,495,000 FROM A GAIN OF $43,189,000 TO A LOSS OF $40,306,000, PRIMARILY DUE TO THE IMPAIRMENT LOSS OF $262,901,000 RELATING TO GOODWILL ASSOCIATED WITH THE ACQUISITION OF OPI. PRIOR YEAR GAINS FROM THE SALE OF THE DB21, PARTICIPATION IN A GAIN FROM THE SALE OF THE DB100 BY THE HEEREMAC JOINT VENTURE AND THE AMORTIZATION OF THE DEFERRED GAIN RESULTING FROM THE SALE OF THE DB101 AND DB102 ALSO CONTRIBUTED TO THE DECREASE. THESE DECREASES WERE PARTIALLY OFFSET BY THE $223,651,000 GAIN RECOGNIZED FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE. INCOME (LOSS) FROM INVESTEES INCREASED $67,996,000 FROM A LOSS OF $6,120,000 TO INCOME OF $61,876,000, PRIMARILY DUE TO A $61,637,000 DISTRIBUTION OF EARNINGS RELATED TO THE TERMINATION OF THE HEEREMAC JOINT VENTURE. 22 POWER GENERATIONS SYSTEMS - ------------------------- REVENUES INCREASED $78,196,000 TO $827,396,000, 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 REPAIR AND ALTERATION OF EXISTING FOSSIL FUEL STEAM SYSTEMS AND REPLACEMENT NUCLEAR STEAM GENERATORS. BUSINESS UNIT INCOME INCREASED $57,096,000 TO $59,380,000, PRIMARILY DUE TO HIGHER VOLUME AND MARGINS FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM SYSTEMS AND ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING EQUIPMENT. IN ADDITION, THERE WERE HIGHER MARGINS FROM REPLACEMENT NUCLEAR STEAM GENERATORS AND LOWER SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES. GAIN ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $5,096,000 TO $95,000. THE PRIOR YEAR INCLUDED A GAIN ON THE SALE OF A DOMESTIC TOOL RENTAL BUSINESS. INCOME FROM INVESTEES INCREASED $5,453,000 TO $6,687,000. 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 CANADIAN JOINT VENTURE IN THE PRIOR YEAR. THIS INCREASE WAS PARTIALLY OFFSET BY A FAVORABLE TERMINATION SETTLEMENT OF A DOMESTIC JOINT VENTURE IN THE PRIOR YEAR AND LOWER OPERATING RESULTS FROM TWO DOMESTIC JOINT VENTURES. GOVERNMENT OPERATIONS - --------------------- REVENUES DECREASED $9,763,000 TO $259,427,000, PRIMARILY DUE TO LOWER REVENUES FROM NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT, COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND OTHER GOVERNMENT RELATED OPERATIONS. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED FACILITIES. BUSINESS UNIT INCOME INCREASED $3,755,000 TO $27,526,000, PRIMARILY DUE TO HIGHER VOLUME FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED FACILITIES AND HIGHER 23 MARGINS ON NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT AND OTHER GOVERNMENT RELATED OPERATIONS. THESE INCREASES WERE PARTIALLY OFFSET BY LOWER VOLUME AND MARGINS FROM COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES. INCOME FROM INVESTEES INCREASED $2,096,000 TO $3,777,000, PRIMARILY DUE TO THE FAVORABLE OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE. OTHER - ----- REVENUES DECREASED $72,039,000 TO $282,334,000, PRIMARILY DUE TO LOWER REVENUES FROM ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND LOWER REVENUES AS A RESULT OF THE DISPOSITION OF NON-CORE BUSINESSES (DOMESTIC SHIPYARD AND ORDNANCE OPERATIONS). THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM AIR COOLED HEAT EXCHANGERS. BUSINESS UNIT INCOME (LOSS) INCREASED $29,681,000 FROM A LOSS OF $24,747,000 TO INCOME OF $4,934,000, PRIMARILY DUE TO COST OVERRUNS ON ENGINEERING AND CONSTRUCTION CONTRACTS IN THE PRIOR PERIOD. IN ADDITION, THERE WAS HIGHER VOLUME FROM AIR COOLED HEAT EXCHANGERS AND LOWER 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 $130,566,000 FROM A LOSS OF $5,387,000 TO INCOME OF $125,179,000 PRIMARILY DUE TO THE SALE OF INTERNATIONAL'S INTEREST IN SAKHALIN ENERGY INVESTMENT COMPANY LTD. AND UNIVERSAL FABRICATORS INCORPORATED. INCOME FROM INVESTEES INCREASED $2,481,000 TO $3,129,000, PRIMARILY DUE TO HIGHER OPERATING RESULTS FORM TWO FOREIGN JOINT VENTURES PARTIALLY OFFSET BY LOWER OPERATING RESULTS FROM ONE DOMESTIC JOINT VENTURE. GENERAL & ADMINISTRATIVE EXPENSES - --------------------------------- CORPORATE G&A EXPENSE DECREASED $8,460,000 TO $25,972,000 PRIMARILY DUE TO STAFF REDUCTIONS, OTHER ECONOMY MEASURES, AND CERTAIN ONE-TIME COSTS INCURRED IN THE PRIOR PERIOD. 24 OTHER INCOME STATEMENT ITEMS - ---------------------------- INTEREST INCOME INCREASED $8,397,000 TO $42,390,000, PRIMARILY DUE TO INCREASES IN INVESTMENTS IN GOVERNMENT OBLIGATIONS, OTHER INVESTMENTS AND CASH EQUIVALENTS IN THE CURRENT PERIOD. INTEREST EXPENSE DECREASED $4,879,000 TO $63,121,000, PRIMARILY DUE TO CHANGES IN DEBT OBLIGATIONS AND INTEREST RATES PREVAILING THEREON. MINORITY INTEREST EXPENSE INCREASED $21,314,000 TO $39,658,000, PRIMARILY DUE TO MINORITY SHAREHOLDER PARTICIPATION IN THE IMPROVED OPERATING RESULTS OF JRM. OTHER-NET INCOME INCREASED $4,966,000 TO $5,664,000, PRIMARILY DUE TO HIGHER FOREIGN CURRENCY TRANSACTION GAINS IN THE CURRENT PERIOD. THE PROVISION FOR INCOME TAXES INCREASED $61,390,000 TO $69,199,000, WHILE INCOME BEFORE PROVISION FOR INCOME TAXES INCREASED $276,670,000 FROM A LOSS OF $8,458,000 TO INCOME OF $268,212,000. THE PROVISION FOR INCOME TAXES WAS 26% OF THE PRETAX INCOME FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO A PROVISION FOR INCOME TAXES OF 92% OF PRETAX LOSS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996. 25 Backlog 12/31/97 3/31/97 - ------- -------- ------- (UNAUDITED) (IN THOUSANDS) BACKLOG BY BUSINESS UNIT: MARINE CONSTRUCTION SERVICES $ 1,305,527 $ 1,760,226 POWER GENERATION SYSTEMS 1,270,451 1,554,125 GOVERNMENT OPERATIONS 841,454 797,764 OTHER 376,990 384,968 ELIMINATIONS (170,313) (269,661) - --------------------------------------------------------------------- TOTAL BACKLOG $ 3,624,109 $ 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' U. S., FAR EAST AND NORTH SEA MARKETS REMAIN STEADY. THE NORTH SEA ENGINEERING AND MIDDLE EAST MARKETS ARE BEGINNING TO WEAKEN. BACKLOG RELATING TO CONTRACTS TO BE PERFORMED BY THIS BUSINESS UNIT'S UNCONSOLIDATED JOINT VENTURES (NOT INCLUDED ABOVE) WAS $1,127,000,000 AT DECEMBER 31, 1997 COMPARED TO $1,439,000,000 (OF WHICH $645,000,000 WAS RELATED TO THE HEEREMAC JOINT VENTURE) AT MARCH 31, 1997. POWER GENERATION SYSTEMS' FOREIGN MARKETS (EXCLUDING SOUTHEAST ASIA) FOR INDUSTRIAL AND UTILITY BOILERS REMAIN STRONG. THE U. S. MARKET FOR SERVICES AND REPLACEMENT NUCLEAR STEAM GENERATORS ARE EXPECTED TO REMAIN STRONG AND TO MAKE SIGNIFICANT CONTRIBUTIONS TO OPERATING INCOME INTO THE FORESEEABLE FUTURE. HOWEVER, THE U. S. MARKET FOR INDUSTRIAL AND UTILITY BOILERS REMAINS WEAK. CONTRACTS TO BE PERFORMED BY THIS BUSINESS UNIT'S UNCONSOLIDATED JOINT VENTURES (NOT INCLUDED ABOVE) WAS $173,000,000 AT DECEMBER 31, 1997 COMPARED TO $154,000,000 AT MARCH 31, 1997. AT DECEMBER 31, 1997 THE GOVERNMENT OPERATIONS' BACKLOG WITH THE U.S. GOVERNMENT WAS $825,843,000 (OF WHICH $40,082,000 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. 26 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 NINE MONTHS ENDED DECEMBER 31, 1997, INTERNATIONAL'S CASH AND CASH EQUIVALENTS INCREASED $395,839,000 TO $653,622,000 AND TOTAL DEBT DECREASED $334,557,000 TO $784,474,000, PRIMARILY DUE TO A REDUCTION IN SHORT-TERM BORROWINGS OF $192,747,000 AND REPAYMENT OF $140,266,000 IN LONG-TERM DEBT. DURING THIS PERIOD, INTERNATIONAL PROVIDED CASH OF $558,343,000 FROM OPERATING ACTIVITIES, AND RECEIVED CASH PROCEEDS OF $450,909,000 FROM ASSET DISPOSALS (INCLUDING (I) $256,863,000 FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE; (II) $118,114,000 FROM THE SALE OF ITS INTEREST IN SAKHALIN ENERGY INVESTMENT COMPANY, LTD; AND (III) $35,009,000 FROM THE SALE OF UNIVERSAL FABRICATORS INCORPORATED), AND $23,620,000 FROM THE ISSUANCE OF STOCK UPON EXERCISE OF STOCK OPTIONS. INTERNATIONAL USED CASH OF $255,838,000 FOR NET PURCHASES OF INVESTMENTS, $32,939,000 FOR ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT; AND $14,490,000 FOR DIVIDENDS ON MCDERMOTT INTERNATIONAL'S COMMON AND PREFERRED STOCK. ON DECEMBER 19, 1997, JRM AND HEEREMA OFFSHORE CONSTRUCTION GROUP, INC. ("HEEREMA") ENTERED INTO A TRANSACTION PURSUANT TO WHICH THEY TERMINATED THE HEEREMAC JOINT VENTURE (THE "TERMINATION AGREEMENT"). UNDER THE TERMS OF THE TERMINATION AGREEMENT, HEEREMA ACQUIRED AND ASSUMED JRM'S 50% INTEREST IN THE JOINT VENTURE IN EXCHANGE FOR CASH OF $318,500,000 AND TITLE TO SEVERAL PIECES OF EQUIPMENT, INCLUDING TWO LAUNCH BARGES AND THE DB101, A 3,500-TON LIFT CAPACITY, SEMI-SUBMERSIBLE DERRICK BARGE. THE CONSIDERATION RECEIVED BY JRM INCLUDED A $61,637,000 DISTRIBUTION OF EARNINGS OF THE HEEREMAC JOINT VENTURE AND PAYMENT OF PRINCIPAL AND INTEREST UNDER A PROMISSORY NOTE PREVIOUSLY DUE TO JRM (APPROXIMATELY $100,000,000). AS A RESULT OF THE TERMINATION AGREEMENT, JRM RECORDED A GAIN ON ASSET DISPOSAL OF $223,651,000 AND A DISTRIBUTION OF EARNINGS OF $61,637,000. JRM INVESTED THE CASH PROCEEDS IT RECEIVED IN DEBT SECURITIES. 27 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 $6,300 PER CLAIM OVER THE LAST THREE YEARS) HAS CONTINUED TO RISE. CLAIMS PAID DURING THE NINE MONTHS ENDED DECEMBER 31, 1997 WERE $145,298,000, OF WHICH $132,614,000 HAS BEEN RECOVERED OR IS DUE FROM INSURERS. AT DECEMBER 31, 1997, RECEIVABLES OF $104,591,000 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 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 $44,956,000 TO $32,939,000 FOR THE NINE MONTHS ENDED DECEMBER 31, 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 DECEMBER 31 AND MARCH 31, 1997, B&W HAD SOLD, WITH LIMITED RECOURSE, AN UNDIVIDED INTEREST IN A DESIGNATED POOL OF QUALIFIED ACCOUNTS RECEIVABLE OF APPROXIMATELY $99,783,000 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 28 MAXIMUM SALES LIMIT AVAILABLE) FROM TIME TO TIME. THE EXISTING AGREEMENT WILL EXPIRE ON FEBRUARY 28, 1998; HOWEVER, B&W EXPECTS TO NEGOTIATE RENEWAL OF THE AGREEMENT. INTERNATIONAL ACCOUNTS FOR THESE SALES AS SECURED BORROWINGS. AT DECEMBER 31 AND MARCH 31, 1997, MCDERMOTT INTERNATIONAL AND ITS SUBSIDIARIES, HAD AVAILABLE TO THEM VARIOUS UNCOMMITTED SHORT-TERM LINES OF CREDIT FROM BANKS TOTALING $110,027,000 AND $179,137,000, RESPECTIVELY. BORROWINGS AGAINST THESE LINES OF CREDIT AT DECEMBER 31 AND MARCH 31, 1997 WERE $4,123,000 AND $53,165,000, RESPECTIVELY. AT DECEMBER 31, 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. JRM IS PARTY TO AN UNSECURED AND COMMITTED REVOLVING CREDIT FACILITY (THE "JRM REVOLVER"). THERE WERE NO BORROWINGS OUTSTANDING AT DECEMBER 31 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. DUE TO THE UNCERTAINTY ASSOCIATED WITH THE ONGOING INVESTIGATION BY MCDERMOTT INTERNATIONAL AND JRM, AND THE JUSTICE DEPARTMENT INTO POSSIBLE ANTI-COMPETITIVE PRACTICES BY THE COMPANIES AND OTHERS (SEE NOTE 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS), JRM CANNOT PRESENTLY SATISFY THESE LEGAL REPRESENTATIONS, AND THEREFORE, 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 DECEMBER 31, 1997, SUBSTANTIALLY ALL OF THE NET ASSETS OF THE DELAWARE COMPANY WERE SUBJECT TO SUCH RESTRICTIONS. JRM IS RESTRICTED BY ITS PUBLIC DEBT COVENANTS IN PAYING DIVIDENDS OR BUYING BACK ITS COMMON OR PREFERRED STOCK. AT DECEMBER 31, 1997, JRM WAS LIMITED TO $49,468,000 FOR SUCH TRANSACTIONS. IT IS NOT EXPECTED THAT THESE RESTRICTIONS WILL HAVE ANY SIGNIFICANT EFFECT ON MCDERMOTT INTERNATIONAL'S LIQUIDITY. 29 INTERNATIONAL MAINTAINS AN INVESTMENT PORTFOLIO OF GOVERNMENT OBLIGATIONS AND OTHER INVESTMENTS. THE FAIR VALUE OF SHORT-TERM INVESTMENTS AND THE LONG-TERM PORTFOLIO AT DECEMBER 31, 1997 WAS $747,986,000. AT DECEMBER 31, 1997, APPROXIMATELY $89,950,000 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 THE REDEMPTION DATE OF $4,506,250. WORKING CAPITAL INCREASED $244,361,000 FROM $225,571,000 AT MARCH 31, 1997 TO $469,932,000 AT DECEMBER 31, 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 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. 30 NEW ACCOUNTING STANDARDS - ------------------------ 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. 31 PART II MCDERMOTT INTERNATIONAL, INC. OTHER INFORMATION ----------------- NO INFORMATION IS APPLICABLE TO PART II FOR THE CURRENT QUARTER, EXCEPT AS NOTED BELOW: ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBIT 27 - FINANCIAL DATA SCHEDULE (B) REPORTS ON FORM 8-K THERE WERE NO CURRENT REPORTS ON FORM 8-K WERE FILED DURING THE THREE MONTHS ENDED DECEMBER 31, 1997. 32 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) FEBRUARY 10, 1998 33 EXHIBIT INDEX EXHIBIT DESCRIPTION 27 FINANCIAL DATA SCHEDULE 34 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1998 DEC-31-1997 653,622 131 566,902 107,292 340,106 1,971,370 1,746,442 1,191,007 4,572,430 1,501,438 623,152 0 2,875 56,186 601,732 4,572,430 2,749,873 2,749,873 2,587,789 2,587,789 0 0 63,121 268,212 69,199 199,013 0 0 0 199,013 3.47 3.21
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