-----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, VBgXHg318T+urHi/O7vxBGGKWPfPFkTecaGTscQsKxKRaQXRASImrjl2FVeSONU1 1VaVDnSSbjt0xPg2KOV0Aw== 0000899243-99-000182.txt : 19990210 0000899243-99-000182.hdr.sgml : 19990210 ACCESSION NUMBER: 0000899243-99-000182 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] 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: 99525700 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 FOR QUARTER ENDED DECEMBER 31, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 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 Offices) (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 outstanding of the Company's common stock at January 28, 1999 was 59,115,289. 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 31,1998 and March 31, 1998 4 Condensed Consolidated Statement of Income Three and Nine Months Ended December 31,1998 and 1997 6 Condensed Consolidated Statement of Comprehensive Income Three and Nine Months Ended December 31,1998 and 1997 7 Condensed Consolidated Statement of Cash Flows Nine Months Ended December 31,1998 and 1997 8 Notes to Condensed Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 22 PART II - OTHER INFORMATION Item 3 - Legal Proceedings 38 Item 6 - Exhibits and Reports on Form 8-K 40 SIGNATURES 41 Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc. 43 Exhibit 27 - Financial Data Schedule 50 2 PART I McDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET ASSETS
12/31/98 3/31/98 ---------- ---------- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 265,309 $ 277,876 Accounts receivable - trade 296,558 550,552 Accounts receivable - unconsolidated affiliates 172,794 52,351 Accounts receivable - other 90,815 139,864 Environmental and products liabilities recoverable - current 135,200 143,588 Contracts in progress 214,158 239,548 Inventories 58,342 63,342 Deferred income taxes 81,479 84,036 Other current assets 26,820 45,399 ---------- ---------- Total Current Assets 1,341,475 1,596,556 ---------- ---------- Property, Plant and Equipment, at Cost 1,502,886 1,715,352 Less accumulated depreciation 1,045,398 1,181,658 ---------- ---------- Net Property, Plant and Equipment 457,488 533,694 ---------- ---------- Investments in Debt Securities: Government obligations 532,797 519,443 Other investments 587,876 553,913 ---------- ---------- Total Investments in Debt Securities 1,120,673 1,073,356 ---------- ---------- Environmental and Products Liabilities Recoverable 470,826 604,870 ---------- ---------- Excess of Cost over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $105,151,000 at December 31,1998 and $107,814,000 at March 31, 1998 112,464 127,077 ---------- ---------- Prepaid Pension Costs 122,983 328,583 ---------- ---------- Other Assets 227,548 236,994 ---------- ---------- TOTAL $3,853,457 $4,501,130 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/98 3/31/98 ---------- ---------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 35,770 $ 156,300 Accounts payable 214,977 301,988 Environmental and products liabilities - current 157,925 181,234 Accrued employee benefits 104,475 146,839 Accrued contract costs 50,912 89,321 Advance billings on contracts 295,645 268,764 Other current liabilities 348,077 316,680 ---------- ---------- Total Current Liabilities 1,207,781 1,461,126 ---------- ---------- Long-Term Debt 567,802 598,182 ---------- ---------- Accumulated Postretirement Benefit Obligation 147,251 393,616 ---------- ---------- Environmental and Products Liabilities 592,207 751,620 ---------- ---------- Other Liabilities 265,599 271,489 ---------- ---------- Commitments and Contingencies. Minority Interest: Subsidiary's preferred stocks - 155,358 Other minority interest 212,670 189,966 ---------- ---------- Total Minority Interest 212,670 345,324 ---------- ---------- Stockholders' Equity: Preferred stock, authorized 25,000,000 shares; outstanding 2,875,000 at March 31, 1998 Series C $2.875 cumulative convertible, par value $1.00 per share - 2,875 Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 60,996,383 at December 31,1998 and 56,607,861 at March 31, 1998 60,996 56,608 Capital in excess of par value 1,024,244 1,012,338 Accumulated deficit (135,323) (341,916) Treasury stock at cost, 2,000,614 shares at December 31,1998 and 100,614 shares at March 31, 1998 (62,731) (3,575) Accumulated other comprehensive loss (27,039) (46,557) ---------- ---------- Total Stockholders' Equity 860,147 679,773 ---------- ---------- TOTAL $3,853,457 $4,501,130 ========== ==========
5 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/98 12/31/97 12/31/98 12/31/97 --------- --------- ---------- ---------- (Unaudited) (In thousands) Revenues $ 800,825 $ 901,735 $2,400,617 $2,749,873 --------- --------- ---------- ---------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 674,750 757,824 1,984,603 2,316,535 Depreciation and amortization 24,625 33,399 72,922 111,100 Selling, general and administrative expenses 51,917 49,927 163,961 160,154 --------- --------- ---------- ---------- 751,292 841,150 2,221,486 2,587,789 --------- --------- ---------- ---------- Gain (Loss) on Asset Disposals and Impairments - Net (3,754) (40,212) 36,967 85,384 --------- --------- ---------- ---------- Operating Income before Income from Investees 45,779 20,373 216,098 247,468 Income from Investees 531 68,993 14,277 75,469 --------- --------- ---------- ---------- Operating Income 46,310 89,366 230,375 322,937 --------- --------- ---------- ---------- Other Income (Expense): Interest income 20,231 17,512 78,667 42,390 Interest expense (16,901) (18,728) (49,137) (63,121) Minority interest (11,317) (23,264) (61,369) (39,658) Other-net (2,434) 4,167 33,452 5,664 --------- --------- ---------- ---------- (10,421) (20,313) 1,613 (54,725) Income before Provision for (Benefit from) Income Taxes 35,889 69,053 231,988 268,212 Provision for (Benefit from) Income Taxes (6,400) 18,061 16,523 69,199 --------- --------- ---------- ---------- Net Income $ 42,289 $ 50,992 $ 215,465 $ 199,013 ========= ========= ========== ========== Net Income Applicable to Common Stock (after Preferred Stock Dividends) $ 42,289 $ 48,926 $ 215,465 $ 192,814 ========= ========= ========== ========== Earnings per Common Share Basic $ 0.72 $ 0.88 $ 3.65 $ 3.49 Diluted $ 0.71 $ 0.82 $ 3.50 $ 3.21 ========= ========= ========== ========== Cash Dividends: Per Common Share $ 0.05 $ 0.05 $ 0.15 $ 0.15 Per Preferred Share $ - $ 0.72 $ - $ 2.16 ========= ========= ========== ========== See accompanying notes to condensed consolidated financial statements.
6 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/98 12/31/97 12/31/98 12/31/97 --------- --------- --------- --------- (Unaudited) (In thousands) Net Income $ 42,289 $ 50,992 $ 215,465 $ 199,013 --------- --------- --------- --------- Other Comprehensive Income (Loss): Currency translation adjustments: Foreign currency translation adjustments (765) (9,895) 1,671 1,366 Sales of investments in foreign entities - - 15,596 - Unrealized gains (losses) on investments: Unrealized gains (losses) arising during the period, net of taxes (3,987) 482 3,679 4,600 Reclassification adjustment for (gains) losses included in net income (453) - (1,428) 40 --------- --------- --------- --------- Other Comprehensive Income (Loss) (5,205) (9,413) 19,518 6,006 --------- --------- --------- --------- Comprehensive Income $ 37,084 $ 41,579 $ 234,983 $ 205,019 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 7 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED 12/31/98 12/31/97 --------- --------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 215,465 $ 199,013 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 72,922 111,100 Income from investees, less dividends 12,891 (5,695) Gain on asset disposals and impairments - net (36,967) (85,384) Provision for (benefit from) deferred taxes (8,556) 1,827 Other 3,454 5,200 Changes in assets and liabilities, net of effects from divestitures: Accounts receivable 92,216 83,254 Net contracts in progress and advance billings 53,760 151,924 Accounts payable (84,861) 9,652 Accrued and other current liabilities 24,670 37,775 Other, net (29,940) 86,868 Proceeds from insurance for products liabilities claims 154,494 108,107 Payments of products liabilities claims (178,270) (145,298) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 291,278 558,343 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (45,294) (32,939) Purchases of investments (680,358) (687,360) Sales and maturities of investments 641,595 431,522 Proceeds from asset disposals 130,131 450,909 Other 5,452 (2,441) --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES 51,526 159,691 --------- ---------
8 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED 12/31/98 12/31/97 --------- --------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (45,910) $(140,266) Decrease in short-term borrowings (30,954) (192,747) Issuance of common stock 3,822 23,620 Issuance of subsidiary's stock 1,317 8,477 Dividends paid (10,861) (14,490) Purchases of McDermott International, Inc. stock (59,156) - Acquisition of subsidiary's common stock (58,272) - Acquisition of subsidiary's preferred stock (154,631) (4,515) Other (999) (2,859) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (355,644) (322,780) --------- --------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 273 585 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,567) 395,839 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 277,876 257,783 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 265,309 $ 653,622 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 40,468 $ 61,082 Income taxes (net of refunds) $ 30,706 $ (6,806) ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES Transfer of accounts receivables sold under a purchase and sale agreement from secured borrowings to sales treatment $ 56,929 $ - ========= =========
See accompanying notes to condensed consolidated financial statements. 9 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,1998 NOTE 1 - BASIS OF PRESENTATION McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott Incorporated ("MI"). Unless the context otherwise requires, hereinafter, "McDermott" 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 the following: In the three and nine months ended December 31, 1998: . a $9,600,000 charge to restructure foreign joint ventures. In the nine months ended December 31, 1998: . a gain on the dissolution of a joint venture of $37,390,000, . a gain on the settlement and curtailment of postretirement benefit plans of $27,642,000, . interest income of $20,163,000 on settlement of outstanding Internal Revenue Service exposure items, . a gain of $12,000,000 from the sale of assets of a joint venture, and . an $8,000,000 settlement of punitive damage claims in a civil suit associated with a Pennsylvania facility formerly operated by McDermott. In the three and nine months ended December 31,1997: . 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. 10 In the nine months ended December 31, 1997: . a gain of $33,072,000 from the sale of McDermott's interest in Universal Fabricators Incorporated, and . a gain of $96,059,000 from the sale of McDermott's interest in Sakhalin Energy Investment Company, Ltd. Operating results for the nine months ended December 31, 1998 are not necessarily indicative of the results that may be expected for the year ending March 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in MII's annual report on Form 10-K for the fiscal year ended March 31, 1998. NOTE - 2 CHANGE IN ACCOUNTING POLICY Effective April 1, 1998, McDermott adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," to report and display comprehensive income and its components. Under this new principle, the accumulated other comprehensive income or loss is displayed in the Condensed Consolidated Balance Sheet as a component of Stockholders' Equity. Accumulated balances for each classification in accumulated other comprehensive loss are disclosed in Note 5. Comprehensive Income is displayed in a separate Condensed Consolidated Statement of Comprehensive Income included in the financial statements. NOTE 3 - PRODUCTS LIABILITY At December 31, 1998, the estimated liability for pending and future non- employee products liability asbestos claims was $708,421,000 (of which approximately $273,000,000 had been asserted) and estimated insurance recoveries were $582,226,000. Settlement of this estimated liability is expected to occur over the next thirteen years. Estimated liabilities for pending and future non- employee products liability asbestos claims are derived from McDermott'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. Such trends include management's expectation that new claims will conclude within the next thirteen years, that there will be a significant decline in new claims asserted within the next twelve months, and that the average cost per claim will continue to increase only moderately. Should management's estimates be incorrect, McDermott's ultimate loss for such claims may exceed the amounts provided in the consolidated financial statements. 11 NOTE 4 - INVENTORIES Inventories at December 31 and March 31, 1998 are summarized below: December 31, March 31, 1998 1998 ---------- --------- (Unaudited) (In thousands) Raw Materials and Supplies $42,346 $47,411 Work in Progress 8,564 6,720 Finished Goods 7,432 9,211 ------- ------- $58,342 $63,342 ======= ======= NOTE 5 - ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss included in stockholders' equity at December 31 and March 31, 1998 are as follows: December 31, March 31, 1998 1998 ----------- --------- (Unaudited) (In thousands) Currency Translation Adjustments $(25,235) $(42,502) Net Unrealized Gain on Investments 2,926 675 Minimum Pension Liability (4,730) (4,730) ------- ------- $(27,039) $(46,557) ======= ======= NOTE 6 - DISPOSITIONS On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM joint venture. Pursuant to the termination, JRM received cash of approximately $105,000,000, ETPM S.A.'s derrick/lay barge 1601 and ETPM S.A.'s interest in McDermott-ETPM East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received JRM's lay barge 200 and JRM's interest in McDermott Subsea Constructors Limited ("MSCL") and McDermott-ETPM West, Inc. The Condensed Consolidated Statement of Income includes revenues of $16,602,000 and $53,958,000 and operating income (loss) of ($3,536,000) and $7,826,000 for the three and nine months, respectively, ended December 31, 1997 attributable to operations transferred to ETPM S.A. Management does not expect the termination of the McDermott-ETPM joint venture to have a material adverse effect on McDermott's consolidated financial position or results of operations. On May 7, 1998, a JRM subsidiary, McDermott Marine Construction Limited ("MMCL"), sold its European brownfield engineering operations and received net cash of approximately $2,210,000. JRM is also in the process of closing MMCL's European greenfield engineering operations. While JRM is withdrawing from traditional European engineering markets, it continues to pursue subsea engineering 12 work in the North Sea. In the three and nine months ended December 31, 1998, these operations had revenues of $11,674,000 and $59,699,000, respectively, and operating income (loss) of $17,000 and ($2,159,000), respectively. In the three and nine months ended December 31, 1997, these operations had revenues of $58,458,000 and $246,857,000, respectively, and operating income of $8,285,000 and $13,359,000, respectively. During the nine months ended December 31, 1998, JRM's Malaysian joint venture sold two combination pipelay and derrick barges. The joint venture, in which JRM holds a 49% interest, received approximately $47,000,000 in cash for the barges. NOTE 7 - SETTLEMENT AND CURTAILMENT OF POSTRETIREMENT BENEFIT PLANS Effective April 1, 1998, McDermott terminated all postretirement health care benefits and substantially all postretirement life insurance benefits for salaried and non-union hourly employees. As a result of the termination, the total accumulated postretirement benefit obligation of McDermott decreased $251,476,000. On the same date, the pension plans for the employees affected by the termination were amended to increase the benefits payable to the participants to offset partially the cost of postretirement health care and life insurance. As a result of the amendments to the plans, the total projected benefit obligation of McDermott increased $228,952,000. On August 1, 1998, the postretirement health care benefits for two union hourly employee plans were terminated and the pension plans for these employees were amended to increase the benefits payable to participants to offset partially the cost of postretirement health care and life insurance. As a result of this termination of postretirement benefits, the total accumulated postretirement benefit obligation of McDermott decreased $20,846,000, and as a result of this amendment to the pension plans, the projected benefit obligation of McDermott increased $15,728,000. The total decrease in the accumulated postretirement benefit obligation was measured against the total increase in the projected benefit obligation of the pension plans and the resulting gain of $27,642,000 was recognized in the nine months ended December 31,1998. NOTE 8 - CONVERSION AND REDEMPTION OF PREFERRED STOCK On April 6, 1998, MII called all of the outstanding shares of its Series C Cumulative Convertible Preferred Stock for redemption on April 21, 1998. At the close of business on the redemption date, all 2,875,000 preferred shares then outstanding were converted into 4,077,890 common shares. On July 17, 1998, MI redeemed all of its 2,152,766 outstanding shares of Series B $2.60 Cumulative Preferred Stock for $31.25, plus $0.1156 in accrued but unpaid dividends, per share. MII made a $68,000,000 capital contribution to MI to cover the cost of the redemption. 13 On September 11, 1998, MI redeemed 2,795,428 of its outstanding shares of Series A $2.20 Cumulative Convertible Preferred Stock ("Series A Preferred Stock") for $31.25, plus $0.43 in accrued but unpaid dividends, per share. The remaining 23,251 outstanding shares of its Series A Preferred Stock were converted into MII common stock at a conversion ratio of one share of MII common stock, plus $0.10, for each preferred share. MII made a $90,000,000 capital contribution to MI to cover the cost of the redemption and conversion. NOTE 9 - INVESTIGATIONS AND LITIGATION In March 1997, MII and JRM, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, MII and JRM notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of MII's and JRM's prompt disclosure of the allegations, both companies and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. After receiving the allegations, JRM initiated action to terminate its interest in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture, Heerema, acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees 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 and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. MII and JRM have cooperated and are continuing to cooperate with the Department of Justice in its investigation. The Department of Justice also has requested additional information from the companies relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. 14 MII and JRM are also cooperating with the Securities and Exchange Commission ("SEC"), which also requested information and documents from the companies with respect to certain of the matters described above. MII and JRM are subject to a judicial order entered in 1976, with the consent of MI (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint (the "Consent Decree"). The Consent Decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of the Consent Decree could result in substantial civil and/or criminal penalties to the companies. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and certain related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., and certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates, and others alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, North Sea and Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants, filed a similar lawsuit in the same court, which was consolidated with the Phillips Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. This decision is subject to further judicial review. In June 1998, Shell Offshore, Inc. and certain related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, HeereMac, Heerema and others alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC; Burlington Resources Offshore, Inc. and The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C. and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; and Shell U.K. Limited and certain of its affiliates intervened (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) as plaintiffs in the Shell Litigation. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co- venturers, filed similar lawsuits in the same court, 15 which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC inquiry, the companies' internal investigation, the above-referenced lawsuits, or the other actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. However, these matters could result in civil and criminal liability and have a material adverse effect on McDermott's consolidated financial position and results of operations. The Babcock & Wilcox Company ("B&W") and Atlantic Richfield Company are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania involving over 120 separate cases relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"), alleging, among other things, that they suffered personal injury and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and Atlantic Richfield Company liable to the plaintiffs in the first eight cases brought to trial, awarding $36,700,000 in compensatory damages. This jury verdict is being contested. B&W and its insurers have filed seperate actions seeking a judicial determination as to the amount of insurance coverage available. Management believes that the award and all other claims will be resolved within the limits and coverage of such insurance policies; however, no assurance on insurance coverage or financial impact if limits of coverage are exceeded can be given. In connection with the foregoing, B&W settled all pending and future punitive damage claims represented by the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks reimbursement of this amount from other parties. Additionally, McDermott is, from time to time, involved in routine litigation related to its business activity. It is management's opinion that none of this routine litigation will have a material adverse effect on McDermott's consolidated financial position or results of operations. NOTE 10 - SEGMENT REPORTING McDermott's reportable segments are Marine Construction Services, Power Generation Systems and Government Operations. These segments are managed separately and are unique in technology, services and customer class. Marine Construction Services, which includes the results of JRM, supplies worldwide services for the offshore oil and gas exploration and production and hydrocarbon processing industries. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms, specialized structures, modular facilities, marine pipelines and subsea production 16 systems. JRM also provides diving services, procurement activities, and removal, salvage and refurbishment services for offshore fixed platforms. These activities are managed and results are evaluated primarily on a geographic area basis. Engineering operations, which includes project management services and engineering services, is primarily managed and evaluated on a worldwide basis. Power Generation Systems supplies engineered-to-order services, products and systems for energy conversion and fabricates replacement nuclear steam generators and environmental control systems. In addition, this segment provides aftermarket services including replacement parts, engineered upgrades, construction, maintenance and field technical services to electric power plants and industrial facilities. This segment also provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities. Government Operations supplies nuclear reactor components and nuclear fuel assemblies to the U.S. Government. This segment also manages and operates government owned facilities, supplies commercial nuclear environmental services and provides services to other government operations and other commercial operations. Other Operations is comprised of certain small businesses which primarily include the engineering and construction activities and plant outage maintenance of certain Canadian operations and manufacturing of auxiliary equipment such as air cooled heat exchangers and replacement parts. Other Operations also includes contract research activities. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses and other unallocated items. Other reconciling items before provision for income taxes are interest income, interest expense, minority interest and other-net. Assets of the Marine Construction Services segment decreased approximately $263,000,000, primarily as a result of the dispositions of MSCL and MMCL as described in Note 6. 17 Segment Information for the Three and Nine Months Ended December 31, 1998 and 1997:
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/98 12/31/97 12/31/98 12/31/97 --------- --------- ---------- ---------- (Unaudited) (In thousands) REVENUES: Marine Construction Services $ 313,348 $ 458,094 $1,032,999 $1,442,363 Power Generation Systems 292,675 283,337 775,559 827,396 Government Operations 89,333 95,355 290,489 259,427 Other Operations 106,520 74,667 305,598 248,202 Adjustments and Eliminations/(1)/ (1,051) (9,718) (4,028) (27,515) --------- --------- ---------- ---------- Total Revenues $ 800,825 $ 901,735 $2,400,617 $2,749,873 ========= ========= ========== ========== /(1)/ Segment revenues are net of the following intersegment transfers and other adjustments: Marine Construction Services Transfers $ 436 $ 1,703 $ 2,513 $ 13,705 Power Generation Systems Transfers 120 1,942 544 3,835 Government Operations Transfers 205 410 336 3,798 Other Operations Transfers 70 5,180 173 9,301 Adjustments and Eliminations 220 483 462 (3,124) --------- --------- ---------- ---------- Total $ 1,051 $ 9,718 $ 4,028 $ 27,515 ========= ========= ========== ==========
18
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/98 12/31/97 12/31/98 12/31/97 --------- --------- --------- --------- (Unaudited) (In thousands) OPERATING INCOME: Segment Operating Income: - ------------------------- Marine Construction Services $ 21,932 $ 28,834 $ 114,199 $ 97,471 Power Generation Systems 22,361 27,144 57,009 59,380 Government Operations 7,094 7,742 18,871 27,526 Other Operations 4,811 1,610 14,173 3,298 --------- --------- --------- --------- Total Segment Operating Income $ 56,198 $ 65,330 $ 204,252 $ 187,675 --------- --------- --------- --------- Gain (Loss) on Asset Disposals and Impairments - Net: - ----------------------------------------------------- Marine Construction Services $ (4,229) $ (40,330) $ 38,849 $ (40,306) Power Generation Systems 733 82 938 95 Government Operations - (6) 138 (4) Other Operations (259) 1 (184) 125,150 --------- --------- --------- --------- Total Gain (Loss) on Asset Disposals and Impairments - Net $ (3,755) $ (40,253) $ 39,741 $ 84,935 --------- --------- --------- --------- Income (Loss) from Investees: - ----------------------------- Marine Construction Services $ (2,398) $ 63,938 $ 7,335 $ 61,311 Power Generation Systems 2,546 2,711 6,255 6,687 Government Operations 617 2,678 1,824 3,777 Other Operations (234) (334) (1,137) 3,701 --------- --------- --------- --------- Total Income from Investees $ 531 $ 68,993 $ 14,277 $ 75,476 --------- --------- --------- --------- SEGMENT INCOME: - --------------- Marine Construction Services $ 15,305 $ 52,442 $ 160,383 $ 118,476 Power Generation Systems 25,640 29,937 64,202 66,162 Government Operations 7,711 10,414 20,833 31,299 Other Operations 4,318 1,277 12,852 132,149 --------- --------- --------- --------- Total Segment Income 52,974 94,070 258,270 348,086 --------- --------- --------- --------- Other Unallocated Items 655 221 (1,229) 403 General Corporate Expenses - Net (7,319) (4,925) (26,666) (25,552) --------- --------- --------- --------- Total Operating Income $ 46,310 $ 89,366 $ 230,375 $ 322,937 ========= ========= ========= =========
19 NOTE 11 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE NINE MONTHS ENDED MONTHS ENDED 12/31/98 12/31/97 12/31/98 12/31/97 ----------- ----------- ----------- ----------- (Unaudited) (In thousands, except shares and per share amounts) Basic: Net income $ 42,289 $ 50,992 $ 215,465 $ 199,013 Dividends on preferred stock, Series C - (2,066) - (6,199) ----------- ----------- ----------- ----------- Net income for basic computation $ 42,289 $ 48,926 $ 215,465 $ 192,814 =========== =========== =========== =========== Weighted average common shares 58,562,989 55,748,811 59,095,770 55,228,673 =========== =========== =========== =========== Basic earnings per common share $ 0.72 $ 0.88 $ 3.65 $ 3.49 =========== =========== =========== =========== Diluted: Net income $ 42,289 $ 50,992 $ 215,465 $ 199,013 Dividends on Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock - 1,550 2,752 4,650 ----------- ----------- ----------- ----------- Net income for diluted computation $ 42,289 $ 52,542 $ 218,217 $ 203,663 =========== =========== =========== =========== Weighted average common shares (basic) 58,562,989 55,748,811 59,095,770 55,228,673 Effect of dilutive securities: Stock options and restricted stock 1,057,163 1,749,373 1,350,978 1,352,566 Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock - 2,818,679 1,674,867 2,818,690 Series C $2.875 Cumulative Convertible Preferred Stock - 4,078,014 253,942 4,078,014 ----------- ----------- ----------- ----------- Adjusted weighted average common shares and assumed conversions 59,620,152 64,394,877 62,375,557 63,477,943 =========== =========== =========== =========== Diluted earnings per common share $ 0.71 $ 0.82 $ 3.50 $ 3.21 =========== =========== =========== ===========
20 NOTE 12 SUBSEQUENT EVENT On February 4, 1999, JRM initiated an offer to purchase all of its outstanding 9.375% Senior Subordinated Notes due July 2006 at a purchase price of 113.046% of their principal amount, plus accrued interest to, but not including, the payment date. The outstanding principal amount of the notes is $250,000,000. In connection with the offer, JRM is also soliciting consents to certain amendments to the indenture for the 9.375% Senior Subordinated Notes to amend or eliminate certain restrictive covenants. Holders who tender notes for purchase by JRM pursuant to the tender offer are required to consent to the amendments in order to have their notes accepted for purchase. The tender offer is conditioned on, among other things, at least a majority of the aggregate principal amount of the notes outstanding being validly tendered and not withdrawn prior to its expiration. The offer will expire on March 5, 1999, unless extended. 21 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL McDermott International, Inc. ("MII") is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott Incorporated ("MI"). Unless the context otherwise requires, hereinafter, "McDermott" will be used to mean the consolidated enterprise. Revenues of the Marine Construction Services segment are largely a function of the level of oil and gas development activity in the world's major hydrocarbon producing regions. Consequently, revenues reflect the variability associated with the timing of significant development projects. As a result of continuing lower oil prices, Marine Construction Services' customers have significantly reduced capital expenditures for exploration and production spending. As a result, Marine Constructions Services' backlog has declined over $700,000,000 since the beginning of the fiscal year. At the current backlog level, management expects revenues to be as much as one-third lower in fiscal year 2000 compared to the current fiscal year, and profitability to be lower because of the volume decline. Economic and political instability in Asia have also had an adverse effect on the timing of exploration and production spending. Revenues of the Power Generation Systems segment are largely a function of capital spending by the electric power generation industry. In the electric power generation industry, persistent economic growth in the United States has brought the supply of electricity into approximate balance with energy demand, except at periods of peak demand. However, electric power producers have generally chosen to meet these peaks with new combustion turbines rather than with base-load capacity. New emissions requirements have also prompted some customers to place orders for environmental equipment. Demand for electrical power generation industry services and replacement nuclear steam generators continues at strong levels. International markets remain unsettled, and economic and political instability in Asia have caused projects in emerging markets to be delayed, suspended or cancelled. In the process industry, demand for services remains strong, and the pulp and paper industry has begun to issue inquiries relating to refurbishing or replacement of existing recovery boilers. In general, management expects the fiscal year 2000 operating activity of this segment to be about the same as the current fiscal year. Revenues of the Government Operations segment are largely a function of capital spending by the U.S. Government. Management does not expect this segment to experience any significant growth because of reductions in the defense budget over the past several years; however, management expects the segment to remain relatively constant since it is the sole-source provider of nuclear fuel 22 assemblies and nuclear reactor components to the U.S. Government. Management expects the operating activity of this segment in fiscal year 2000 to be about the same as in the current year. Revenues of Other Operations are affected by variations in the business cycles in the customers' industries and the overall economy. Other Operations is also affected by legislative issues such as environmental regulations and fluctuations in U.S. Government funding patterns. Backlog for Other Operations has improved significantly from a year ago, primarily because of significant new bookings in engineering and construction. Management also expects this segment's operating activity in fiscal year 2000 to be about the same as in the current year. A significant portion of McDermott's revenues and operating results are derived from its foreign operations. As a result, McDermott's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. McDermott 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 McDermott is unable to match the foreign currency receipts and disbursements related to its contracts, it enters into foreign currency forward exchange contracts to reduce the impact of foreign exchange rate movements on operating results. 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's contracts by U.S. governmental agencies; estimates for pending and future non-employee asbestos claims; the highly competitive nature of McDermott's businesses; operating risks associated with the marine construction services business; economic and political instability in Indonesia and on the Indian subcontinent; the results of the ongoing investigation by MII and JRM and the U.S. Department of Justice into possible anti-competitive practices by MII and JRM; and the lawsuits disclosed in Item 3, Legal Proceedings. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 VS. THREE MONTHS ENDED DECEMBER 31, 1997 Marine Construction Services - ---------------------------- Revenues decreased $144,746,000 to $313,348,000, primarily due to lower volume in Europe as a result of JRM's withdrawal from the traditional European engineering markets and from lower volume 23 in all activities in North America, the Middle East and in worldwide engineering. These decreases were partially offset by higher volume in the Far East. Segment operating income decreased $6,902,000 to $21,932,000, primarily due to lower volume in all activities in North America and in European engineering. There were also higher net operating expenses and a charge to restructure foreign joint ventures. These decreases were partially offset by higher volume in the Far East. In addition, the prior period included goodwill amortization of $5,439,000 associated with the acquisition of Offshore Pipelines, Inc. ("OPI"). Loss on asset disposals and impairmentsnet was $4,229,000 compared to $40,330,000 in the prior period. The loss in the current period was primarily due to impairment losses on fabrication facilities. The loss in the prior period was primarily due to the write-off of $262,901,000 of goodwill associated with the acquisition of OPI, partially offset by the $223,651,000 gain recognized from the termination of the HeereMac joint venture. Income (loss) from investees decreased $66,336,000 from income of $63,938,000 to a loss of $2,398,000, primarily due to a $61,637,000 distribution of earnings related to the termination of the HeereMac joint venture in the prior period. There were also lower operating results from a joint venture in Mexico. Power Generations Systems - ------------------------- Revenues increased $9,338,000 to $292,675,000, primarily due to higher revenues from repair and alteration of existing fossil fuel steam systems and plant enhancement projects. These increases were partially offset by lower revenues from fabrication and erection of fossil fuel steam and environmental control systems and replacement nuclear steam generators. Segment operating income decreased $4,783,000 to $22,361,000, primarily due to lower volume and margins from fabrication and erection of fossil fuel steam and environmental control systems and replacement nuclear steam generators. These decreases were partially offset by higher volume and margins from repair and alteration of existing fossil fuel steam systems, higher volume from plant enhancement projects and higher margins from engineer-procure-construct contracts. Government Operations - --------------------- Revenues decreased $6,022,000 to $89,333,000, primarily due to lower revenues from other government operations, commercial nuclear environmental services and from management and operation contracts for U.S. Government-owned facilities. 24 Segment operating income decreased $648,000 to $7,094,000, primarily due to lower margins from commercial nuclear environmental services. This decrease was partially offset by higher margins from management and operation contracts for U.S. Government-owned facilities. Income from investees decreased $2,061,000 to $617,000. The decrease is primarily due to lower operating results from a domestic joint venture in Colorado. Other - ----- Revenues increased $31,853,000 to $106,520,000, primarily due to higher revenues from engineering activities in Canadian operations. These increases were partially offset by lower revenues from domestic engineering and construction activities. Operating income increased $3,201,000 to $4,811,000, primarily due to higher volume from engineering activities in Canadian operations and higher margins from air-cooled heat exchangers. There were also losses in a non-core business disposed of in the prior period. These increases were partially offset by lower volume from domestic engineering and construction activities and higher general and administrative expenses. Other Income Statement Items - ---------------------------- Interest income increased $2,719,000 to $20,231,000, primarily due to increases in investments in government obligations and other debt securities. Interest expense decreased $1,827,000 to $16,901,000, primarily due to changes in debt obligations and interest rates prevailing thereon. Minority interest expense decreased $11,947,000 to $11,317,000, primarily due to minority shareholder participation in the lower operating results of JRM. Other-net decreased $6,601,000 from income of $4,167,000 to expense of $2,434,000, primarily due to higher foreign currency transaction gains in the prior period. The provision for (benefit from) income taxes decreased $24,461,000 from a provision of $18,061,000 to a benefit of $6,400,000, while income before provision for income taxes decreased $33,164,000 to $35,889,000. The decrease in the provision for income taxes was primarily the result of favorable tax settlements totaling $21,367,000 of prior years' disputed items in foreign jurisdictions. McDermott 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 bases (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. 25 RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31,1998 VS. NINE MONTHS ENDED DECEMBER 31, 1997 Marine Construction Services - ---------------------------- Revenues decreased $409,364,000 to $1,032,999,000, primarily due to lower volume in Europe as a result of JRM's withdrawal from the traditional European engineering markets and from lower volume in all activities in North America, the Middle East and in worldwide engineering. These decreases were partially offset by higher volume in virtually all activities in the Far East. Segment operating income increased $16,728,000 to $114,199,000, primarily due to higher volume and margins in all activities and a favorable settlement of contract claims in the Far East. In addition, prior period results include amortization of OPI goodwill of $16,318,000. These increases were partially offset by lower volume in all activities in North America and in worldwide engineering and higher net operating expenses. In addition, there was a charge to restructure foreign joint ventures. Gain (loss) on asset disposals and impairments-net was a gain of $38,849,000 compared to a loss of $40,306,000 in the prior period. The gain in the current period was primarily due to gains recognized from the termination of the McDermott-ETPM joint venture and the sale of three Gulf of Mexico vessels, partially offset by impairment losses on fabrication facilities. The loss in the prior period was primarily due to the write-off of $262,901,000 of goodwill associated with the acquisition of OPI, partially offset by the $223,651,000 gain recognized from the termination of the HeereMac joint venture. Income from investees decreased $53,976,000 to $7,335,000, primarily due to a $61,637,000 distribution of earnings related to the termination of the HeereMac joint venture in the prior period. There were also lower operating results from Brown & Root McDermott Fabricators Limited. These decreases were partially offset by the gain on the sale of assets in a Malaysian joint venture and losses recorded by McDermott-ETPM West, Inc. in the prior period. Power Generations Systems - ------------------------- Revenues decreased $51,837,000 to $775,559,000, primarily due to lower revenues from fabrication and erection of fossil fuel steam and environmental control systems and replacement nuclear steam generators. These decreases were partially offset by higher revenues from repair and alteration of existing fossil fuel steam systems and plant enhancement projects. Segment operating income decreased $2,371,000 to $57,009,000, primarily due to lower volume and margins from fabrication and erection of fossil fuel steam and environmental control systems and lower volume from replacement nuclear steam generators. These decreases were partially offset by 26 higher volume and margins from repair and alteration of existing fossil fuel steam systems, higher margins from operation and maintenance contracts and higher volume from plant enhancement projects. Government Operations - --------------------- Revenues increased $31,062,000 to $290,489,000, primarily due to higher revenues from management and operation contracts for U.S. Government-owned facilities and from nuclear fuel assemblies and reactor components for the U.S. Government. These increases were partially offset by lower revenues from commercial operations, other government operations and commercial nuclear environmental services. Segment operating income decreased $8,655,000 to $18,871,000, primarily due to an $8,000,000 settlement of punitive damage claims relating to a civil suit associated with a Pennsylvania facility formerly operated by McDermott. There were also lower margins from commercial nuclear environmental services. These decreases were partially offset by higher volume from management and operation contracts for U.S. Government-owned facilities. Income from investees decreased $1,953,000 to $1,824,000. The decrease is primarily due to lower operating results from a domestic joint venture in Colorado. Other - ----- Revenues increased $57,396,000 to $305,598,000, primarily due to higher revenues from engineering activities in Canadian operations and from air-cooled heat exchangers. These increases were partially offset by lower revenues from domestic engineering and construction activities, plant maintenance activities in Canadian operations and the disposition of a non-core business. Operating income increased $10,875,000 to $14,173,000, primarily due to higher volume from engineering activities in Canadian operations and higher volume and margins from air-cooled heat exchangers. There were also losses in a non-core business disposed of in the prior period. These increases were partially offset by lower volume from domestic engineering and construction activities and higher general and administrative expenses. Gain on asset disposals and impairments-net decreased $125,334,000 from income of $125,150,000 to a loss of $184,000. The prior period gains were primarily due to the sale of McDermott's interest in Sakhalin Energy Investment Company Ltd. and Universal Fabricators Incorporated. 27 Income (loss) from investees decreased $4,838,000 from income of $3,701,000 to a loss of $1,137,000, primarily due to lower operating results from a domestic joint venture in Colorado and the shutdown of two foreign joint ventures in the former Soviet Union. Other Unallocated Items - ----------------------- Other Unallocated Items decreased $1,632,000 from income of $403,000 to expense of $1,229,000, primarily due to higher general and administrative and employee benefit expenses. These decreases were partially offset by favorable claim reserve adjustments and lower legal expenses related to claims. Other Income Statement Items - ---------------------------- Interest income increased $36,277,000 to $78,667,000, primarily due to increases in investments in government obligations and other debt securities and interest income on the settlement of Internal Revenue Service exposure items. Interest expense decreased $13,984,000 to $49,137,000, primarily due to changes in debt obligations and interest rates prevailing thereon. Minority interest expense increased $21,711,000 to $61,369,000, primarily due to minority shareholder participation in the improved operating results of JRM, partially offset by minority shareholder participation in the increased losses of a consolidated foreign joint venture. Other-net income increased $27,788,000 to $33,452,000, primarily due to a net gain on the settlement and curtailment of postretirement benefit plans. (See Note 7 to the condensed consolidated financial statements.) The provision for income taxes decreased $52,676,000 to $16,523,000, while income before provision for income taxes decreased $36,224,000 to $231,988,000. The decrease in the provision for income taxes was primarily the result of a benefit of $17,925,000 recorded as a result of the decrease in the valuation allowance for deferred tax assets, an increase in the proportion of income earned in non-taxable jurisdictions and favorable tax settlements totaling $21,367,000 of prior years' disputed items in foreign jurisdictions. McDermott 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 bases (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. 28 Backlog 12/31/98 3/31/98 - ------- ---------- ---------- (In thousands) Marine Construction Services $ 555,961 $1,267,148 Power Generation Systems 1,009,806 1,071,121 Government Operations 941,908 810,749 Other 436,719 262,455 Eliminations (1,883) (2,243) ---------- ---------- TOTAL BACKLOG $2,942,511 $3,409,230 ========== ========== In general, all of McDermott's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues. Marine Construction Services' backlog declined in all operating areas as a result of lower oil prices. In addition, backlog in Europe and West Africa declined as a result of JRM's withdrawal from traditional European engineering markets. Finally, backlog decreased as a result of sluggish economic conditions in the Middle and Far East and the political instability in the Far East. Power Generation Systems' foreign markets have been adversely impacted by suspensions of power projects in Southeast Asia and Pakistan. Also, the U.S. market for industrial and utility boilers remains weak. However, the U.S. market for services and replacement nuclear steam generators is expected to remain strong and to make significant contributions to operating income into the foreseeable future. At December 31, 1998, Government Operations' backlog with the U.S. Government was $842,569,000 (of which $39,460,000 had not been funded). The backlog of this segment is not expected to experience any significant growth as a result of reductions in the defense budget over the past several years. However, management expects this segment's backlog to remain relatively constant since it is the sole-source provider of nuclear fuel assemblies and nuclear reactor components for the U.S. Government. Liquidity and Capital Resources - ------------------------------- During the nine months ended December 31, 1998, McDermott's cash and cash equivalents decreased $12,567,000 to $265,309,000 and total debt decreased $150,910,000 to $603,572,000, primarily due to the attainment of sales treatment for $56,929,000 of secured borrowings (see below), repayment of $45,910,000 in long-term debt, the decrease in short-term borrowings of $30,954,000 and the settlement of a note payable of $14,565,000 pursuant to the termination of the McDermott-ETPM joint venture. During this period, McDermott provided cash of $291,278,000 from operating activities and received cash proceeds of $130,131,000 from asset disposals, including $95,546,000 from the termination of the McDermott-ETPM joint venture. 29 McDermott used cash of $117,428,000 for stock repurchases, $154,631,000 for the redemption of a subsidiary's preferred stocks, $38,763,000 for net purchases of investments, $45,294,000 for additions to property, plant and equipment, and $10,861,000 for dividends on MII's common and preferred stock. Pursuant to agreements with the majority of its principal insurers, McDermott negotiates and settles products liability asbestos claims from non-employees and bills these amounts to the appropriate insurers. Reimbursement of such claims is subject to varying insurance limits based upon the year involved. Moreover, as a result of collection delays inherent in this process and the effect of agreed payment schedules with specific insurers, reimbursement is usually delayed for three months or more. The average amount of these claims (historical average of approximately $6,900 per claim over the last three years) has continued to rise. Claims paid during the nine months ended December 31, 1998 were $178,270,000, of which $142,432,000 has been recovered or is due from insurers. At December 31, 1998, receivables of $89,618,000 were due from insurers for reimbursement of settled claims. Of the $89,618,000 due from insurers, $44,922,000 has been included in the pool of qualified receivables sold pursuant to a receivables purchase and sale agreement (see below). The collection delays, and the amount of claims paid for which insurance recovery is not probable, have not had a material adverse effect upon McDermott's liquidity. At December 31, 1998, the estimated liability for pending and future non- employee products liability asbestos claims was $708,421,000 (of which approximately $273,000,000 had been asserted) and estimated insurance recoveries were $582,226,000. Settlement of this estimated liability is expected to occur over the next thirteen years. Estimated liabilities for pending and future non- employee products liability asbestos claims are derived from McDermott'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. Such trends include management's expectation that new claims will conclude within the next thirteen years, that there will be a significant decline in new claims asserted within the next twelve months, and that the average cost per claim will continue to increase only moderately. Should management's estimates be incorrect, McDermott's ultimate loss for such claims may exceed the amounts provided in the consolidated financial statements. Expenditures for property, plant and equipment increased $12,355,000 to $45,294,000. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. 30 At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a receivables purchase and sale agreement between The Babcock & Wilcox Company ("B&W") and certain of its affiliates and subsidiaries and a U.S. Bank. Through July 31, 1998, $25,854,000 was repaid under the agreement. Effective July 31, 1998, the receivables purchase and sale agreement was amended and restated to provide for, among other things, the inclusion of certain insurance recoverables in the pool of qualified accounts receivable as well as the attainment of sales treatment as opposed to secured financing treatment for this arrangement under Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." As a result, $56,929,000 was removed from notes payable and current maturities of long-term debt on the balance sheet. The amended and restated agreement, with a maximum sales limit available of $100,000,000, expires on July 31, 1999. At December 31 and March 31, 1998, McDermott had available various uncommitted short-term lines of credit from banks totaling $103,020,000 and $127,061,000, respectively. Borrowings against these lines of credit at March 31, 1998 were $5,100,000. There were no borrowings against these lines at December 31, 1998. At March 31, 1998, B&W was a party to a revolving credit facility under which there were no borrowings. In July 1998, B&W terminated its existing credit facility and, jointly and severally with Babcock & Wilcox Investment Company ("BWICO") and BWX Technologies, Inc., entered into a new $200,000,000 three- year, unsecured credit agreement (the "BWICO Credit Agreement") with a group of banks. Borrowings by the three companies against the BWICO Credit Agreement cannot exceed an aggregate amount of $50,000,000. The remaining $150,000,000 is reserved for the issuance of letters of credit. In connection with satisfying a condition to borrowing or issuing letters of credit under the BWICO Credit Agreement, MI made a $15,000,000 capital contribution to BWICO in August 1998. At December 31, 1998, there were no borrowings under the BWICO Credit Agreement. Management does not anticipate BWICO will need to borrow funds under the BWICO Credit Agreement during fiscal year 1999. At March 31, 1998, JRM and certain of its subsidiaries were parties to a revolving credit facility under which there were no borrowings. In June 1998, JRM and such subsidiaries entered into a new $200,000,000 three-year, unsecured credit agreement (the "JRM Credit Agreement") with a group of banks. Borrowings against the JRM Credit Agreement cannot exceed $50,000,000. The remaining $150,000,000 is reserved for the issuance of letters of credit. At December 31, 1998, there were no borrowings under the JRM Credit Agreement. Management does not anticipate JRM will need to borrow funds under the JRM Credit Agreement during fiscal year 1999. 31 MI and JRM are restricted, as a result of covenants in certain credit agreements, in their ability to transfer funds to MII and certain of its subsidiaries through cash dividends or through unsecured loans or investments. At December 31, 1998, substantially all of the net assets of MI are subject to such restrictions. JRM is restricted, as a result of covenants in its indenture relating to its $250,000,000 9.375% Senior Subordinated Notes due July 2006, from paying cash dividends on, or repurchasing or redeeming, its capital stock (including the shares of its common stock and Series A $2.25 Cumulative Preferred Stock held by MII), or in transferring funds through unsecured loans to or investments in MII. At December 31,1998, JRM could pay cash dividends on, or repurchase shares of, its capital stock (including shares held by MII) in the amount of $28,588,000, could pay up to an additional $9,600,000 of cash dividends on its Series A Preferred Stock held by MII and could make unsecured loans to or investments in MII of approximately $30,000,000. Additionally under such indenture, JRM is required to offer to purchase its outstanding 9.375% Senior Subordinated Notes at 100% of their principal amount, plus accrued and unpaid interest, to the extent that it has proceeds from certain asset sales and dispositions equal to or exceeding $25,000,000 that it has not used to permanently reduce certain senior or other indebtedness or reinvested in its business within a specified time period, generally 18 months, following each such asset sale or disposition. Currently, JRM has approximately $222,000,000 in proceeds from such asset sales and dispositions, which, if not used for repayment of debt or reinvested as described above, would be subject to this obligation commencing June 1999. On February 4, 1999, JRM initiated an offer to purchase all of its outstanding 9.375% Senior Subordinated Notes at a purchase price of 113.046% of their principal amount ($1,130.46 per $1,000 principal amount), plus accrued and unpaid interest to, but not including, the payment date. The offer will expire on March 5, 1999, unless extended. In connection with the offer, JRM is also soliciting consents to certain amendments that would amend or eliminate certain restrictive covenants and other provisions contained in the indenture relating to the notes. Holders who tender notes for purchase by JRM pursuant to the offer are required to consent to the amendments in order to have their notes accepted for purchase. The tender offer is conditioned on, among other things, there being validly tendered and not withdrawn prior to its expiration at least a majority of the aggregate principal amount of the notes outstanding, with consents to the amendments. If this condition is met and the offer is consummated, the covenants described in the preceding paragraph that restrict JRM's ability to pay dividends, repurchase or redeem its capital stock, or to transfer funds through unsecured loans to or investments in MII will be eliminated. McDermott 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, 1998 was $1,120,673,000. Management anticipates using a portion of this portfolio to fund the offer 32 described above. At December 31, 1998, approximately $63,733,000 fair value of obligations in the portfolio was pledged as collateral in connection with certain reinsurance agreements. Working capital decreased $1,736,000 from $135,430,000 at March 31, 1998 to $133,694,000 at December 31, 1998. During the remainder of fiscal year 1999, McDermott expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, sales of non-strategic assets, cash and cash equivalents and short-term borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact McDermott's liquidity or capital resources. During fiscal year 1998, MII's Board of Directors approved the repurchase of up to two million shares of its common stock from time to time on the open market or through negotiated transactions, depending on the availability of cash and market conditions. MII completed its two million share repurchase program in August 1998; therefore, no shares were repurchased during the three months ended December 31, 1998. During the nine months ended December 31, 1998, MII repurchased 1,900,000 shares of its common stock at an average share price of $31.10. JRM's Board of Directors has also approved the repurchase of up to three million shares of its common stock from time to time on the open market or through negotiated transactions, depending on the availability of cash and market conditions. Share repurchases by JRM are also dependent on its ability to satisfy its debt covenants. During the three months ended December 31, 1998, JRM purchased 100,000 shares of its common stock. During the nine months ended December 31, 1998, JRM purchased 1,837,700 shares of its common stock at an average share price of $31.67. At December 31, 1998, JRM had repurchased 2,200,200 of the three million shares of its common stock authorized to be repurchased. On July 17, 1998, MI redeemed all of its 2,152,766 outstanding shares of Series B $2.60 Cumulative Preferred Stock for $31.25, plus $0.1156 in accrued but unpaid dividends, per share. MII made a $68,000,000 capital contribution to MI to cover the cost of the redemption. On September 11, 1998, MI redeemed 2,795,428 of its outstanding shares of Series A $2.20 Cumulative Convertible Preferred Stock ("Series A Preferred Stock") for $31.25, plus $0.43 in accrued but unpaid dividends, per share. The remaining 23,251 outstanding shares of its Series A Preferred Stock were converted into MII common stock at a conversion ratio of one share of MII common stock, plus $0.10, for each preferred share. MII made a $90,000,000 capital contribution to MI to cover the cost of the redemption and conversion. 33 At December 31, 1998, MII has provided a valuation allowance for deferred tax assets of $51,132,000 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, 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. Impact of the Year 2000 - ----------------------- The McDermott company-wide Year 2000 Project is proceeding on schedule. The project addresses information technology components (hardware and software) in internal business systems and infrastructure and the embedded systems in offices, plants and products delivered to customers. In addition, an analysis of critical suppliers is being performed to ensure the supply of materials and services that are strategic to business continuity. The Year 2000 Project began company-wide with a planning phase during the latter part of 1996 followed by a company-wide assessment, which was completed in early 1997. Based upon the results of the assessment and the diverse nature of McDermott's product lines, strategies for business systems were developed that fit requirements of each of the McDermott business units. Some entities are replacing legacy systems with commercial enterprise systems, others are employing a combination of proprietary and third-party client/server systems, while a third strategy is based primarily upon remediation of legacy applications. Embedded systems and the critical supplier analysis are being addressed with a common methodology across McDermott. A consistent work breakdown structure for the project is being employed throughout McDermott: . Business Applications and IT Infrastructure ("IT Systems") . Facilities (office buildings) . Embedded Systems (in plants and construction equipment) . Customer Products (embedded systems in customer products) . Critical Suppliers The general phases of the project common to all of the above functions are: (1) inventory items with potential Year 2000 impact, (2) establish priorities, (3) assess and create a solution strategy for those items determined to be material to McDermott, (4) implement solutions defined for those items assessed to have Year 2000 impact, and (5) test and validate solutions. 34 At December 31, 1998, the inventory, prioritization and assessment of the IT Systems and Facilities were complete. The implementation is in progress with approximately 80% of the work completed. The inventory of internal Embedded Systems is complete and the testing and replacement of components is in progress. The Customer Products phase of the project achieved significant progress during the quarter and is currently 85% complete and on schedule. The tasks of inventory, prioritization and assessment of Critical Suppliers are complete at most company locations. Alternative sourcing and contingency plans are under development. Through this process, business units will mitigate the risk of material impact to continuing operations from potential supplier failure. All Year 2000 solutions for the IT Systems, Facilities and Embedded Systems that support McDermott's engineering, manufacturing and construction operations and the corporate functions are scheduled to be completed by June 30, 1999. The analysis and the compliance tasks for Customer Products and Critical Suppliers are on schedule and are forecast to be completed by June 30, 1999. As an alternative to the remediation of the legacy payroll systems, McDermott has elected to outsource its payroll function. The transition to the payroll service provider will be completed September 30, 1999. McDermott does not expect that the cost associated with the modifications to critical systems and other compliance activities will have a material impact on its consolidated financial condition, cash flows or results of operations. The cost of the Year 2000 Project is estimated at $39,000,000 and is being funded through operating cash flows. Of the total project cost, $9,000,000 is attributable to the purchase of hardware and software, which will be capitalized, and the remaining $30,000,000 will be expensed as incurred. Expenditures to date include $6,000,000 of capital and $14,000,000 of expense. McDermott's Year 2000 compliance is also dependent upon Year 2000 readiness of external agents and third-party suppliers on a timely basis. The failure of McDermott or its agents or suppliers to achieve Year 2000 compliance could result in, among other things, plant production interruptions, delays in the delivery of products, delays in construction completions, delays in the receipt of supplies, invoice and collection errors, and inaccurate inventories. These consequences could have a material adverse impact on McDermott's results of operations, financial condition and cash flow if it is unable to conduct its businesses in the ordinary course. Contingency plans are being defined and, in some cases, already initiated where there is high risk associated with the implementation of the primary compliance strategy. Examples of contingency projects are: (i) remediation of legacy systems concurrent with the implementation of third-party 35 replacement software where there is little margin for delay in the vendor's delivery of the software; and (ii) outsourcing of certain functions where the remediation of a major legacy system has subsequently evolved to be a high-risk project. Contingency plans are being developed consistent with the priorities and requirements of each business unit and will be continually refined as additional information becomes available. Although McDermott is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its results of operations, McDermott believes that its Year 2000 Project, including contingency plans, should significantly reduce the adverse effect that any such disruptions may have. 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. The dates on which McDermott believes the Year 2000 Project will be completed are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved or that there will not be a delay in, or increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer code, timely responses to and corrections by third parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties and the interconnection of global businesses, McDermott cannot ensure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability. New Accounting Standards - ------------------------ In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 provides guidance on accounting for the costs of start-up activities and requires that entities expense start-up costs and organization costs as they are incurred. McDermott has not yet finalized its review of SOP 98-5, but it is not expected to have a material impact on its consolidated financial position or results of operations. 36 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 will require McDermott to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. McDermott has not yet determined what effect the adoption of SFAS No. 133 will have on its consolidated financial position or results of operations. 37 PART II McDERMOTT INTERNATIONAL, INC. OTHER INFORMATION Item 3. LEGAL PROCEEDINGS In March 1997, MII and JRM, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations, MII and JRM notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of MII's and JRM's prompt disclosure of the allegations, both companies and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities. After receiving the allegations, JRM initiated action to terminate its interest in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture, Heerema, acquired JRM's interest in exchange for cash and title to several pieces of equipment. On December 21, 1997, HeereMac and one of its employees 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 and the HeereMac employee were fined $49,000,000 and $100,000, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither MII, JRM nor any of their officers, directors or employees was a party to those proceedings. MII and JRM have cooperated and are continuing to cooperate with the Department of Justice in its investigation. The Department of Justice also has requested additional information from the companies relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. In connection with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. MII and JRM are also cooperating with the Securities and Exchange Commission ("SEC"), which also requested information and documents from the companies with respect to certain of the matters described above. MII and JRM are subject to a judicial order entered in 1976, with the consent of MI 38 (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint (the "Consent Decree"). The Consent Decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of the Consent Decree could result in substantial civil and/or criminal penalties to the companies. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and certain related entities (the "Phillips Plaintiffs") filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., and certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates, and others alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, North Sea and Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants, filed a similar lawsuit in the same court, which was consolidated with the Phillips Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation have requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. This decision is subject to further judicial review. In June 1998, Shell Offshore, Inc. and certain related entities also filed a lawsuit in the United States District Court for the Southern District of Texas against MII, JRM, HeereMac, Heerema and others alleging that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC; Burlington Resources Offshore, Inc. and The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C. and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; and Shell U.K. Limited and certain of its affiliates intervened (acting for themselves and, if applicable, on behalf of their respective co-venturers and for whom they operate) as plaintiffs in the Shell Litigation. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co- venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. 39 It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC inquiry, or the companies' internal investigation, the above-referenced lawsuits, or the actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. However, these matters could result in civil and criminal liability and have a material adverse effect on McDermott's consolidated financial position and results of operations. B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the United States District Court for the Western District of Pennsylvania involving over 120 separate cases relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"), alleging, among other things, that they suffered personal injury and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and Atlantic Richfield Company liable to the plaintiffs in the first eight cases brought to trial, awarding $36,700,000 in compensatory damages. This jury verdict is being contested. B&W and its insurers have filed seperate actions seeking a judicial determination as to the amount of insurance coverage available. Management believes that the award and all other claims will be resolved within the limits and coverage of such insurance policies; however, no assurance on insurance coverage or financial impact if limits of coverage are exceeded can be given. In connection with the foregoing, B&W settled all pending and future punitive damage claims represented by the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks reimbursement of this amount from other parties. Additionally, McDermott is, from time to time, involved in routine litigation related to its business activity. It is management's opinion that none of this routine litigation will have a material adverse effect on McDermott's consolidated financial position or results of operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 3.2 - Amended and Restated By-Laws of McDermott International, Inc. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended December 31, 1998. 40 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. ----------------------------- /s/ Daniel R. Gaubert ---------------------- By: Daniel R. Gaubert Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) February 8, 1999 41 EXHIBIT INDEX Exhibit Description - ------- ----------- 3.2 Amended and Restated By-Laws of McDermott International, Inc. 27 Financial Data Schedule 42 EX-3.2 2 BYLAWS Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF McDERMOTT INTERNATIONAL, INC. (as amended to November 13, 1998) ARTICLE I Meetings of Stockholders Section 1. The annual and any special meetings of the stockholders shall be held on the date and at the time and place designated in the notice of such meetings or in a duly executed waiver of notice thereof. Section 2. A special meeting of the stockholders may be held at any time upon the call of the Chief Executive Officer or by order of the Board of Directors. Section 3. Whether or not a quorum is present at any stockholders' meeting, the meeting may be adjourned from time to time by the vote of the holders of a majority of the voting power of the shares of the outstanding capital stock of the Company present in person or represented by proxy at the meeting, as they shall determine. Section 4. Holders of a majority of the voting power of the shares of the outstanding capital stock of the Company entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of all business at any meeting of the stockholders. Section 5. In all matters arising at stockholders' meetings, a majority of the voting power of the shares of the outstanding capital stock of the Company present in person or represented by proxy at the meeting shall be necessary and sufficient for the transaction of any business, except where some larger percentage is affirmatively required by law or by the certificate of incorporation. Section 6. At any meeting of stockholders, the chairman of the meeting may appoint two inspectors who shall subscribe an oath or affirmation to execute faithfully the duties of inspectors with strict impartiality and according to the best of their ability, to canvass the votes on any matter and make and sign a certificate of the result thereof. No candidate for the office of director shall be appointed as such inspector with respect to the election of directors. Such inspectors shall be appointed upon the request of the holders of ten percent (10%) or more of the voting power of the shares of the outstanding capital stock of the Company present and entitled to vote on such matter. Section 7. All elections of directors shall be by ballot. The chairman of the meeting may cause a vote by ballot to be taken upon any other matter, and such vote by ballot shall be taken 43 upon the request of the holders of ten percent (10%) or more of the voting power of the shares of the outstanding capital stock of the Company present and entitled to vote on such matter. Section 8. The meetings of the stockholders shall be presided over by the Chief Executive Officer, or if he is absent or unable to preside, by the Chairman and if neither the Chief Executive Officer nor the Chairman is present or able to preside, then by a Vice Chairman; if more than one Vice Chairman is present and able to preside the Vice Chairman who shall have held such office for the longest period of time shall preside; if neither the Chief Executive Officer nor the Chairman nor a Vice Chairman is present and able to preside, then the President shall preside; if none of the above is present and able to preside, then a person shall be elected at the meeting to preside over same. The Secretary of the Company, if present, shall act as secretary of such meetings or, if he is not present, an Assistant Secretary shall so act; if neither the Secretary nor an Assistant Secretary is present, then a secretary shall be appointed by the person presiding over the meeting. The order of business shall be as follows: (a) Calling of meeting to order (b) Election of chairman and the appointment of a secretary, if necessary (c) Presentation of proof of the due calling of the meeting (d) Presentation and examination of proxies (e) Settlement of the minutes of the previous meeting (f) Reports of officers and committees (g) The election of directors, if an annual meeting, or a meeting called for that purpose (h) Unfinished business (i) New business (j) Adjournment. Section 9. At every meeting of the stockholders, all proxies shall be received and taken in charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions touching the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless inspectors shall have been appointed, in which event such inspectors shall perform such duties and decide such questions with respect to the matter for which they have been appointed. ARTICLE II Directors Section 1. The business and affairs of the Company shall be managed by its Board of Directors in accordance with the provisions of the Articles of Incorporation. The number of Directors shall be as provided in the Articles of Incorporation. Section 2. Meetings of the Board of Directors may be called by the Chairman or by the Chief Executive Officer or by a majority of the directors by giving notice to each director. 44 Section 3. Meetings of the Board of Directors shall be presided over by the Chairman, or if the Chairman so requests or is absent or unable to preside, by the Chief Executive Officer; if neither the Chairman nor the Chief Executive Officer is present and able to preside, then by a Vice Chairman; if more than one Vice Chairman is present and able to preside, the Vice Chairman who shall have held such office for the longest period of time shall preside; if neither the Chairman nor the Chief Executive Officer nor a Vice Chairman is present and able to preside, then the President shall preside; if none of the above is present and able to preside, then one of the Directors shall be elected at the meeting to preside over same. Section 4. Whether or not a quorum is present at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting from time to time as they may determine. Notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. Any business may be transacted at the adjourned meeting which might have been transacted at the original meeting. Section 5. Any committee of the Board of Directors shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Company to the extent provided in the resolution by which such committee is designated, except that no such committee shall have authority to alter or amend the By-Laws, or to fill vacancies in either the Board of Directors or its own membership. In the absence or disqualification of any member of such a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Each such committee shall meet at stated times or on notice to all by any of its own number. It shall fix its own rules of procedure. A majority shall constitute a quorum and the affirmative vote of a majority of those present at a meeting at which a quorum is present shall be the act of such committee. Each such committee shall keep minutes of its proceedings. Section 6. Directors shall receive as compensation for their services an amount in addition to actual expenses incident to the attending of meetings to be fixed by resolution of the Board of Directors. Nothing in this section shall be construed to preclude a Director from serving the Company in any other capacity and receiving compensation therefor. Section 7. In no event shall a Director serve past his attaining the age of 70, and any such Director who attains age 70 during a term to which he was elected shall immediately resign and retire from the Board of Directors; provided, however, that any Director of the Company as of November 13, 1998 who is, or will attain during his current term, the age of 70 may continue to serve as a Director for the remainder of such Director's current term. No person shall be nominated for election or serve as a Director who has served as a Director of the Company, together with its parent and subsidiary companies, for a cumulative period 45 of twenty (20) years and any such person whose service as a Director totals twenty (20) years during a term to which he is elected shall resign and retire from the Board of Directors as of the next annual meeting of the stockholders. Section 8. A Director of this Corporation who is, under Section 411(a) of the Employee Retirement Income Security Act of 1974 of the United States of America, under a disability to serve as a fiduciary of an employee benefit plan, as that term is defined in Section 3(3) of said Act shall not serve as a fiduciary of any such employee benefit plan with respect to which the Company or any of its subsidiaries is an employer as defined in Section 3(5) of said Act; and, during the period of such disability, such Director shall be precluded from acting in any manner with respect to any such plan. Any Director who is disabled from serving as a fiduciary of an employee benefit plan under Section 411(a) of said Act shall be requested to consent, in writing, to the applicability of this By-Law to him. ARTICLE III Officers Section 1. The officers of this Company shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders or from time to time and shall hold office until their successors are elected and qualify, or until their earlier death, resignation or removal. Such officers shall consist of a Chairman of the Board of Directors, a Chief Executive Officer, one or more Vice Chairmen of the Board of Directors, a President, one or more Vice Presidents, a Secretary, a Treasurer and one or more Controllers. In these By-Laws, the Chairman of the Board of Directors is sometimes referred to as "Chairman", and the Vice Chairman or Vice Chairmen of the Board of Directors are sometimes referred to as "Vice Chairman" or "Vice Chairmen", respectively. The Board of Directors may in addition elect at such meeting or from time to time one or more Assistant Secretaries and one or more Assistant Treasurers and one or more Assistant Controllers. Any number of offices may be held by the same person. Section 2. The officers shall have such powers and duties as may be provided in these By-Laws and as may be conferred upon or assigned to them by the Board of Directors from time to time. Section 3. The Chairman shall preside over meetings of the Board of Directors, as stated elsewhere in these By-Laws. Section 4. The Chief Executive Officer shall preside over meetings of the shareholders, as stated elsewhere in these By-Laws; subject to the direction of the Board of Directors, he shall have and exercise direct charge of and general supervision over all business and affairs of the Company and shall perform all duties incident to the office of the Chief Executive Officer of a corporation, and such other duties as may be assigned to him by the Board of Directors. 46 Section 5. Each Vice Chairman of the Board of Directors shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 6. The President shall be the Chief Operating Officer of the Company and shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 7. Each Vice President shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 8. Each Controller shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 9. The Secretary shall give proper notice of meetings of stockholders and directors, shall be custodian of the book in which the minutes of such meetings are kept, and shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chief Executive Officer. Section 10. The Treasurer shall keep or cause to be kept accounts of all monies of the company received or disbursed, shall deposit or cause to be deposited all monies and other valuables in the name of and to the credit of the Company in such banks and depositories as the Board of Directors shall designate, and shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chief Executive Officer. All checks or other instruments for the payment of money shall be signed in such a manner as the Board of Directors may from time to time determine. Section 11. Any officers of the Company may be removed, with or without cause, by resolution adopted by the Board of Directors at a meeting called for that purpose. ARTICLE IV Seal The corporate seal of this Company shall be a circular seal with the name of the Company around the border and the word "SEAL" in the center. ARTICLE V Any of these By-Laws may be amended, altered or repealed and additional By- Laws may be adopted by the Board of Directors by the affirmative vote of a majority of the whole Board cast at a meeting duly held, except that the vote of two-thirds of the outstanding shares of the Company 47 entitled to vote shall be required to amend, alter or repeal Section 1 or Section 9 of Article II or this Article V (as it applies to said Section 1 and 9 of Article II) of these By-Laws. ARTICLE VI Indemnification Section 1. Each person (and the heirs, executors and administrators of such person) who is or was a director or officer of the Company shall in accordance with Section 2 of this Article VI be indemnified by the Company against any and all liability and reasonable expense that may be paid or incurred by him in connection with or resulting from any actual or threatened claim, action, suit or proceeding (whether brought by or in the right of the Company or otherwise), civil, criminal, administrative or investigative, or in connection with an appeal relating thereto, in which he may become involved, as a party or otherwise, by reason of his being or having been a director or officer of the Company or, if he shall be serving or shall have served in such capacity at the request of the Company, a director, officer, employee or agent of another corporation or any partnership, joint venture, trust or other entity whether or not he continues to be such at the time such liability or expense shall have been paid or incurred, provided such person acted, in good faith, in a manner he reasonably believed to be in or not opposed to the best interest of the Company and in addition, in criminal actions or proceedings, had no reasonable cause to believe that his conduct was unlawful. As used in this ARTICLE VI, the terms, "liability" and "expense" shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against, and amounts paid in settlement by, such director or officer. The termination of any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, or investigative, by judgment, settlement (whether with or without court approval), conviction or upon a plea of guilty or nolo contendere, or its equivalent, shall not create a presumption that such director or officer did not meet the standards of conduct set forth in this Section 1. Section 2. Every such director and officer shall be entitled to indemnification under Section 1 of this ARTICLE VI with respect to any claim, action, suit or proceeding of the character described in such Section 1 in which he may become in any way involved as set forth in such Section 1, if (i) he has been wholly successful on the merits or otherwise in respect thereof, or (ii) the Board of Directors acting by a majority vote of a quorum consisting of directors who are not parties to (or who have been wholly successful with respect to) such claim, action, suit or proceeding, finds that such director or officer has met the standards of conduct set forth in such Section 1 with respect thereto, or (iii) a court determines that he has met such standards with respect thereto, or (iv) independent legal counsel (who may be the regular counsel of the Company) deliver to the Company their written advice that, in their opinion, he has met such standards with respect thereto. 48 Section 3. Expenses incurred with respect to any claim, action, suit or proceeding of the character described in Section 1 of this ARTICLE VI may be advanced by the Company prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount unless it is ultimately determined that he is entitled to indemnification under this ARTICLE VI. Section 4. The rights of indemnification under this ARTICLE VI shall be in addition to any rights to which any such director or officer or any other person may otherwise be entitled by contract or as a matter of law. 49 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL'S DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 9-MOS MAR-31-1999 DEC-31-1998 265,309 55 534,534 65,182 272,500 1,341,475 1,502,886 1,045,398 3,853,457 1,207,781 567,802 0 0 60,996 799,151 3,853,457 2,400,617 2,400,617 2,221,486 2,221,486 0 0 49,137 231,988 16,523 215,465 0 0 0 215,465 3.65 3.50
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