-----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, MSaCQ4oa/U6S4kSmbLSBJifi/AaNCkhwqc03nRErEvuy3nE5VzCOdmLMzwQsjJQ0 jpgshpu5QbvqpR35fd1OmA== 0000899243-99-001672.txt : 19990812 0000899243-99-001672.hdr.sgml : 19990812 ACCESSION NUMBER: 0000899243-99-001672 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 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: 99683423 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045875400 MAIL ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70161 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 1999 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 IdentificationNo.) 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 July 29, 1999 was 59,349,689. McDERMOTT INTERNATIONAL, INC. INDEX - FORM 10 - Q --------------------- PAGE ---- PART I - FINANCIAL INFORMATION - ------------------------------ Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet June 30, 1999 and March 31, 1999 4 Condensed Consolidated Statement of Income Three Months Ended June 30, 1999 and 1998 6 Condensed Consolidated Statement of Comprehensive Income Three Months Ended June 30, 1999 and 1998 7 Condensed Consolidated Statement of Cash Flows Three Months Ended June 30, 1999 and 1998 8 Notes to Condensed Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 21 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings 32 Item 6 - Exhibits and Reports on Form 8-K 35 SIGNATURES 36 - ---------- Exhibit 27 - Financial Data Schedule 38 2 PART I McDERMOTT INTERNATIONAL, INC. FINANCIAL INFORMATION --------------------- Item 1. Condensed Consolidated Financial Statements 3 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET ASSETS
6/30/99 3/31/99 ------- ------- (Unaudited) (In thousands) Current Assets: Cash and cash equivalents $ 132,635 $ 181,503 Investments 469,252 55,646 Accounts receivable - trade, net 393,429 281,667 Accounts receivable - unconsolidated affiliates 37,673 165,154 Accounts receivable - other 198,264 125,631 Environmental and products liabilities recoverable - current 257,561 228,738 Contracts in progress 180,296 179,310 Inventories 52,925 52,656 Deferred income taxes 76,069 73,364 Other current assets 36,611 31,697 - -------------------------------------------------------------------------------------------------------------- Total Current Assets 1,834,715 1,375,366 - -------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment 1,434,395 1,460,639 Less accumulated depreciation 998,546 1,026,678 - -------------------------------------------------------------------------------------------------------------- Net Property, Plant and Equipment 435,849 433,961 - -------------------------------------------------------------------------------------------------------------- Investments: Government obligations 325,066 473,072 Other investments 34,052 378,181 - -------------------------------------------------------------------------------------------------------------- Total Investments 359,118 851,253 - -------------------------------------------------------------------------------------------------------------- Products Liabilities Recoverable 1,025,274 1,167,113 - -------------------------------------------------------------------------------------------------------------- Excess of Cost over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $107,170,000 at June 30, 1999 and $104,444,000 at March 31, 1999 445,231 125,436 - -------------------------------------------------------------------------------------------------------------- Prepaid Pension Costs 134,841 130,437 - -------------------------------------------------------------------------------------------------------------- Other Assets 213,599 221,954 - -------------------------------------------------------------------------------------------------------------- TOTAL $ 4,448,627 $ 4,305,520 - --------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 4 LIABILITIES AND STOCKHOLDERS' EQUITY
6/30/99 3/31/99 ------- ------- (Unaudited) (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 562,808 $ 31,126 Accounts payable 167,545 198,500 Environmental and products liabilities - current 315,155 259,836 Accrued employee benefits 87,640 132,105 Accrued contract costs 42,235 51,619 Advance billings on contracts 202,608 240,380 Other current liabilities 358,099 352,845 - -------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,736,090 1,266,411 - -------------------------------------------------------------------------------------------------------- Long-Term Debt 323,611 323,774 - -------------------------------------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 127,161 128,188 - -------------------------------------------------------------------------------------------------------- Environmental and Products Liabilities 1,172,297 1,334,096 - -------------------------------------------------------------------------------------------------------- Other Liabilities 276,957 263,950 - -------------------------------------------------------------------------------------------------------- Commitments and Contingencies. Minority Interest 3,875 195,367 - -------------------------------------------------------------------------------------------------------- Stockholders' Equity: Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 61,250,303 at June 30, 1999 and 61,147,775 at March 31, 1999 61,250 61,148 Capital in excess of par value 1,040,420 1,028,393 Accumulated deficit (183,350) (200,432) Treasury stock at cost, 2,000,614 shares at June 30, 1999 and March 31, 1999 (62,731) (62,731) Accumulated other comprehensive loss (46,953) (32,644) - -------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 808,636 793,734 - -------------------------------------------------------------------------------------------------------- TOTAL $ 4,448,627 $ 4,305,520 - --------------------------------------------------------------------------------------------------------
5 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED 6/30/99 6/30/98 ------- ------- (Unaudited) (In thousands) Revenues $ 647,884 $ 819,809 - ------------------------------------------------------------------------------------------------------------------- Costs and Expenses: Cost of operations (excluding depreciation and amortization) 537,642 679,677 Depreciation and amortization 21,439 26,559 Selling, general and administrative expenses 51,998 54,510 - ------------------------------------------------------------------------------------------------------------------- 611,079 760,746 - ------------------------------------------------------------------------------------------------------------------- Gain (Loss) on Asset Disposals and Impairments - Net (2,197) 42,447 - ------------------------------------------------------------------------------------------------------------------- Operating Income before Income (Loss) from Investees 34,608 101,510 Income (Loss) from Investees (354) 16,903 - ------------------------------------------------------------------------------------------------------------------- Operating Income 34,254 118,413 - ------------------------------------------------------------------------------------------------------------------- Other Income (Expense): Interest income 15,042 32,725 Interest expense (12,139) (16,617) Minority interest (4,229) (37,691) Other-net (321) 41,557 - ------------------------------------------------------------------------------------------------------------------- (1,647) 19,974 - ------------------------------------------------------------------------------------------------------------------- Income before Provision for Income Taxes 32,607 138,387 Provision for Income Taxes 12,564 16,826 - ------------------------------------------------------------------------------------------------------------------- Net Income $ 20,043 $ 121,561 - ------------------------------------------------------------------------------------------------------------------- Earnings per Common Share: Basic $ 0.34 $ 2.03 Diluted $ 0.33 $ 1.88 - ------------------------------------------------------------------------------------------------------------------- Cash Dividends: Per Common Share $ 0.05 $ 0.05 - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 6 McDERMOTT INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED 6/30/99 6/30/98 ------- ------- (Unaudited) (In thousands) Net Income $ 20,043 $ 121,561 - ---------------------------------------------------------------------------------------------------------------- Other Comprehensive Income: Currency translation adjustments: Foreign currency translations adjustments (7,782) 1,408 Sales of investments in foreign entities - 15,596 Minimum pension liability adjustment (9) - Unrealized losses (gains) on investments: Unrealized losses (gains) arising during the period, net of taxes of $245,000 at June 30, 1999 and $35,000 at June 30, 1998 (6,660) 399 Reclassification adjustment for losses (gains) included in net income, net of taxes of $3,000 at June 30, 1999 142 (105) - ---------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) (14,309) 17,298 - ---------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 5,734 $ 138,859 - ----------------------------------------------------------------------------------------------------------------
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
THREE MONTHS ENDED 6/30/99 6/30/98 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 20,043 $ 121,561 - ------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 21,439 26,559 Income (loss) from investees, less dividends 4,202 (14,823) Loss (gain) on asset disposals and impairments - net 2,197 (42,447) Provision for (benefit from) deferred taxes 3,784 (16,966) Other 10,113 3,640 Changes in assets and liabilities, net of effects of divestitures: Accounts receivable (57,745) 48,754 Net contracts in progress and advance billings (39,030) 28,797 Accounts payable (30,967) (37,400) Accrued and other current liabilities (14,014) 21,950 Other, net 18,449 1,749 Proceeds from insurance for products liabilities claims 42,962 42,330 Payments of products liabilities claims (104,918) (63,838) - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (123,485) 119,866 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (19,753) (16,796) Acquisition of minority interest in J. Ray McDermott, S. A. (511,271) - Purchases of available-for-sale securities (295,040) (325,151) Sales of available-for-sale securities 283,343 71,572 Maturities of available-for-sale securities 83,756 83,347 Proceeds from asset disposals 395 114,573 Other (721) (72) - ------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (459,291) (72,527) - -------------------------------------------------------------------------------------------------------------------
8 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED 6/30/99 6/30/98 ------- ------- (Unaudited) (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (2,516) $ (40,906) Increase in short-term borrowing 534,176 1,748 Acquisition of subsidiary's common stock - (10,573) Issuance of common stock 764 2,857 Issuance of subsidiary's stock 3,253 1,051 Dividends paid (2,957) (4,885) Purchases of McDermott International, Inc. stock - (17,960) Other 806 (126) - ------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 533,526 (68,794) - ------------------------------------------------------------------------------------------------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 382 (146) - ------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (48,868) (21,601) - ------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 181,503 277,876 - ------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 132,635 $ 256,275 - ------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 7,454 $ 8,232 Income taxes - net $ 13,929 $ 11,480 - -------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 9 McDERMOTT INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. On August 3, 1999, the Board of Directors of MII approved the change of MII's fiscal year from a year ending on March 31, which was the fiscal year end used in its most recent report on Form 10-K filed with the Securities and Exchange Commission, to the new fiscal year end of December 31. MII's report on Form 10-K for the nine-month period ending December 31, 1999 will cover the transition period. 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 during the three months ended June 30, 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 $38,900,000, . interest income of $12,207,000 on settlement of Internal Revenue Service exposure items, and . a gain of $12,000,000 from the sale of assets of a joint venture. Operating results for the three months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the nine months ending December 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, 1999. NOTE 2 - PRODUCTS LIABILITY McDermott has personal injury claims related to previously sold asbestos- containing products, and expects that it will continue to receive claims in the future. The personal injury claims are similar in nature, the primary difference being the type of alleged injury or illness suffered by the plaintiff. 10 McDermott has insurance coverage for asbestos products liability claims, which is subject to varying insurance limits that are dependent upon the year involved. McDermott has agreements with the majority of its principal insurers concerning the method of allocation of claim payments to the years of coverage. Pursuant to those agreements, McDermott negotiates and settles these claims and bills the appropriate amounts to the insurers. An analysis of insurance coverage and solvency is used to estimate insurance recoveries. McDermott has recognized a provision to the extent that recovery of these amounts from the insurers is not probable. 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 cost, including recoverability from insurers. Inherent in the estimate of such liabilities are expected trend claim severity and frequency and other factors, which may vary significantly as claims are filed and settled. McDermott had recorded the following with respect to asbestos products liability claims and related insurance recoveries at June 30 and March 31, 1999:
June 30, March 31, 1999 1999 ----------- ---------- (Unaudited) (In thousands) Asbestos products liability: Current $ 300,000 $ 240,000 Non-current 1,157,445 1,322,363 ------------------------------------------------------------------------- Total $1,457,445 $1,562,363 ------------------------------------------------------------------------- Asbestos products liability insurance recoverable: Current $ 257,000 $ 199,750 Non-current 1,025,274 1,167,113 ------------------------------------------------------------------------- Total $1,282,274 $1,366,863 -------------------------------------------------------------------------
Future costs to settle claims, as well as the number of claims, could be adversely affected by changes in judicial rulings and influences beyond McDermott's control. Accordingly, changes in the estimates of future asbestos products liability and insurance recoverables and differences between the proportion of any additional asbestos products liabilities covered by insurance, and that experienced in the past could result in material adjustments to the results of operations for any fiscal quarter or year, and the ultimate loss may differ materially from amounts provided in the consolidated financial statements. 11 NOTE 3 - INVENTORIES Inventories at June 30 and March 31, 1999 are summarized below:
June 30, March 31, 1999 1999 ----------- --------- (Unaudited) (In thousands) Raw Materials and Supplies $ 39,381 $ 37,481 Work in Progress 5,567 7,606 Finished Goods 7,977 7,569 - ------------------------------------------------------------------------------ $ 52,925 $ 52,656 ==============================================================================
NOTE 4 - ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss included in stockholders' equity at June 30 and March 31, 1999 are as follows:
June 30, March 31, 1999 1999 ----------- --------- (Unaudited) (In thousands) Currency Translation Adjustments $(35,544) $(27,762) Net Unrealized Gain (Loss) on Investments (5,612) 906 Minimum Pension Liability (5,797) (5,788) - ------------------------------------------------------------------------------ $(46,953) $(32,644) ==============================================================================
NOTE 5 - ACQUISITIONS On June 10, 1999, MII purchased 14,353,490 shares in the tender offer of the remaining shares of JRM for $35.62 per share. The shares tendered represent approximately 99% of the shares of JRM not already owned by MII. Together with the 24,668,297 shares held by MII, the tendered shares represent approximately 99.5% of the shares of JRM common stock outstanding at the expiration of the tender offer. On July 30, 1999, the remaining shares of JRM common stock were acquired for the same price in cash in a second-step merger. For financial statement purposes, the acquisition was accounted for using the purchase method of accounting. The aggregate purchase price was approximately $520,000,000, which includes management's estimate of direct acquisition costs of approximately $8,000,000. The financial statements reflect the preliminary allocation of purchase price, as the purchase price allocation has not been finalized. The excess of the purchase price over net asset acquired approximated $322,000,000 and is being amortized over twenty years. 12 NOTE 6 - 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. In June 1999, the Department of Justice agreed to MII's and JRM's request to expand the scope of the immunity to include a broader range of the companies' marine construction 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. In July 1999, a former JRM officer was indicted by the Department of Justice for participating in an international rig-bidding conspiracy for the sale of marine construction services and pled guilty. 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. 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 13 District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., 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 (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil 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. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. 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, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, 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 and Elf Norge a.s.; 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.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A. 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. MII and JRM are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether the companies may have violated U.S. securities laws in connection with, but not limited to, 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 14 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. As a result of the initial allegations of wrongdoing in March 1997, MII formed and continues to maintain a special committee of its Board of Directors to monitor and oversee the company's investigation into all of these matters. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC investigation, the companies' internal investigation, the above-referenced lawsuits, or any 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. In June 1999, the court set aside the judgement and ordered a new trial on all issues. B&W believes that adequate insurance is available to meet any possible liability in this matter. However, there is a controversy between B&W and its insurers as to the amount of insurance coverage under the insurance policies covering these facilities. B&W has filed an action seeking a judicial determination of this matter, which is currently pending in a Pennsylvania court. Management believes that any 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. Two purported class actions were filed in March and April 1999 in the Civil District Court for the Parish of Orleans, State of Louisiana, by alleged public shareholders of JRM, challenging MII's initial proposal to acquire the publicly traded shares of JRM Common Stock in a stock for stock merger. No agreement was 15 reached on such proposal and on May 7, 1999, MII and JRM announced that they had entered into a merger agreement pursuant to which MII will acquire all of such publicly traded shares of JRM Common Stock for $35.62 per share pursuant to a cash tender offer followed by a second step merger. On the same day, the Court entered an order consolidating the two actions under the caption In re J. Ray McDermott Shareholder Litigation. JRM and MII have filed exceptions and responses and objections to discovery in these actions. JRM and MII believe that the actions are without merit and intend to contest these suits vigorously. Additionally, due to the nature of its business, McDermott is, from time to time, involved in routine litigation related to its business activities. It is management's opinion that none of this litigation will have a material adverse effect on McDermott's consolidated financial position or results of operations. NOTE 7 - SEGMENT REPORTING McDermott's reportable segments are Marine Construction Services, Power Generation Systems, Government Operations and Industrial 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, production and hydrocarbon processing industries and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms, specialized structures, modular facilities, marine pipelines and subsea production systems. JRM also provides project management services, engineering services, procurement activities, and removal, salvage and refurbishment services of offshore fixed platforms. 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, manages and operates government-owned facilities and supplies commercial nuclear environmental services and other government and commercial nuclear services. 16 Industrial Operations is comprised of 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. Industrial Operations also includes contract research activities. Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, non-employee products liability asbestos claims provisions, contract and insurance claims provisions, legal expenses and gains on sales of corporate assets. Other reconciling items to income before provision for income taxes are interest income, interest expense, minority interest and other-net. Assets excluded from segment assets are primarily insurance recoverables for products liability claims, excess cost over fair value of net assets purchased, investments and prepaid pension costs. Amortization of the excess of cost over fair value of net assets purchased was allocated to the reportable segments for all periods presented. Segment Information for the Three Months ended June 30, 1999 and 1998.
THREE MONTHS ENDED 6/30/99 6/30/98 -------- -------- (Unaudited) (In thousands) REVENUES: Marine Construction Services $158,805 $370,552 Power Generation Systems 267,454 259,129 Government Operations 92,890 100,416 Industrial Operations 132,126 90,181 Adjustments and Eliminations /(1)/ (3,391) (469) - ----------------------------------------------------------------------------- Total Revenues $647,884 $819,809 - -----------------------------------------------------------------------------
/(1)/ Segment revenues are net of the following intersegment transfers and other adjustments: Marine Construction Services Transfers $ 424 $ 1,322 Power Generation Systems Transfers 1,141 437 Government Operations Transfers 313 58 Industrial Operations Transfers 39 11 Adjustments and Eliminations 1,474 (1,359) --------------------------------------------------------------------------- Total $ 3,391 $ 469 ---------------------------------------------------------------------------
17
THREE MONTHS ENDED 6/30/99 6/30/98 -------- -------- (Unaudited) (In thousands) OPERATING INCOME: Segment Operating Income: - ------------------------- Marine Construction Services $ 17,308 $ 37,239 Power Generation Systems 16,371 19,487 Government Operations 9,910 5,455 Industrial Operations 4,372 3,862 - ----------------------------------------------------------------------------- Total Segment Operating Income $ 47,961 $ 66,043 - ----------------------------------------------------------------------------- Gain (Loss) on Asset Disposals and Impairments - Net: - ----------------------------------------------------- Marine Construction Services $ (1,850) $ 45,047 Power Generation Systems 1,003 124 Government Operations - 6 Industrial Operations 1 65 - ----------------------------------------------------------------------------- Total Gain (Loss) on Asset Disposals and Impairments - Net $ (846) $ 45,242 - ----------------------------------------------------------------------------- Income (Loss) from Investees: - ----------------------------- Marine Construction Services $ (1,089) $ 13,515 Power Generation Systems 488 2,977 Government Operations 639 646 Industrial Operations (392) (235) - ----------------------------------------------------------------------------- Total Income (Loss) from Investees $ (354) $ 16,903 - ----------------------------------------------------------------------------- SEGMENT INCOME: - --------------- Marine Construction Services $ 14,369 $ 95,801 Power Generation Systems 17,862 22,588 Government Operations 10,549 6,107 Industrial Operations 3,981 3,692 - ----------------------------------------------------------------------------- Total Segment Income 46,761 128,188 - ----------------------------------------------------------------------------- Other Unallocated Items (1,995) 1,264 General Corporate Expenses - Net (10,512) (11,039) - ----------------------------------------------------------------------------- Total Operating Income $ 34,254 $118,413 - -----------------------------------------------------------------------------
18 NOTE 8 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED 6/30/99 6/30/98 ------- ------- (Unaudited) (In thousands except shares and per share amounts) Basic: Net income $ 20,043 $ 121,561 - ------------------------------------------------------------------------------ Weighted average common shares 58,942,070 59,888,941 - ------------------------------------------------------------------------------ Basic earnings per common share $ 0.34 $ 2.03 - ------------------------------------------------------------------------------ Diluted: Net income $ 20,043 $ 121,561 Dividends on Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock - 1,550 - ------------------------------------------------------------------------------ Net income for diluted computation $ 20,043 $ 123,111 - ------------------------------------------------------------------------------ Weighted average common shares (basic) 58,942,070 59,888,941 Effect of dilutive securities: Stock options and restricted stock 992,818 2,063,272 Subsidiary's Series A $2.20 Cumulative Convertible Preferred Stock - 2,818,679 Series C $2.875 Cumulative Convertible Preferred Stock - 761,827 - ------------------------------------------------------------------------------ Adjusted weighted average common shares and assumed conversions 59,934,888 65,532,719 - ------------------------------------------------------------------------------ Diluted earnings per common share $ 0.33 $ 1.88 - ------------------------------------------------------------------------------
NOTE 9 - NEW ACCOUNTING STANDARDS During the three months ended June 30, 1999, McDermott adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," for 19 accounting for the costs of start-up activities. SOP 98-5 requires that entities expense start-up costs and organization costs as they are incurred. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. In June 1999, the FASB issued SFAS No. 137, " Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years after June 15, 2000. McDermott has not yet determined what the effect of SFAS No. 133 will have on its consolidated financial position or results of operations. 20 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. At the current backlog level, management expects revenues to be as much as forty percent lower than in the previous 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 these 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 the refurbishment or replacement of existing recovery boilers. Management expects operating activity of this segment to be about the same as in the previous 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 as a result of reductions in the defense budgets. However, management expects this segment's backlog to remain relatively constant since this segment is the sole-source provider of nuclear fuel assemblies and nuclear reactor 21 components to the U.S. Government. Management expects operating activity of this segment to be about the same as in the previous fiscal year. Revenues of Industrial Operations are affected by variations in the business cycles in the customers' industries and the overall economy. Legislative issues such as environmental regulations and fluctuations in U.S. Government funding patterns also affect Industrial Operations. Backlog for Industrial Operations has improved significantly from a year ago, primarily because of significant new contracts in engineering and construction. Management expects operating activity of this segment to be about the same as in the previous fiscal year. In general, all of McDermott's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues. 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 matching foreign currency contract receipts with like foreign currency disbursements. To the extent that it is unable to match the foreign currency receipts and disbursements related to its contracts, McDermott enters into 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 that are not historical fact, are forward looking. They involve a number of risks and uncertainties that may cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include: . 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 with U.S. government 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 conditions in Asia, . 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 related civil lawsuits, and . the results of the ongoing SEC investigation into whether McDermott may have violated U.S. securities laws in connection with such anti- competitive practices and other matters. 22 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998 Marine Construction Services - ---------------------------- Revenues decreased $211,747,000 to $158,805,000 due to lower volume in essentially all activities in all geographic areas. Segment operating income decreased $19,931,000 to $17,308,000, primarily due to lower volumes. This decrease was partially offset by higher margins in procurement activities in the Middle East and lower general and administrative expenses. Gain (loss) on asset disposals and impairments-net decreased $46,897,000 from a gain of $45,047,000 to a loss of $1,850,000. The gain in the prior period was primarily due to the termination of the McDermott-ETPM joint venture and the sale of three Gulf of Mexico vessels. Income (loss) from investees decreased $14,604,000 from income of $13,515,000 to a loss of $1,089,000, primarily due to lower results from Brown & Root McDermott Fabricators Limited and a gain on the sale of assets in a Malaysian joint venture in the prior period. Power Generations Systems - ------------------------- Revenues increased $8,325,000 to $267,454,000, primarily due to higher volume from the fabrication, repair and retrofit of existing facilities and replacement parts. These increases were partially offset by lower volume from fabrication and erection of fossil fuel steam and environmental control systems, industrial boilers and boiler cleaning equipment. Segment operating income decreased $3,116,000 to $16,371,000, primarily due to lower margins from replacement nuclear steam generators and lower volume from industrial boilers and boiler cleaning equipment. In addition, there were higher sales and marketing expenses. These decreases were partially offset by higher margins from fabrication and erection of fossil fuel steam and environmental control systems. In addition, there was higher volume from replacement parts. Gain on asset disposals and impairments-net increased $879,000 to $1,003,000. This was primarily due to the sale of McDermott's interest in a domestic cogeneration facility. Income from investees decreased $2,489,000 to $488,000, primarily due to lower operating results in four foreign joint ventures. 23 Government Operations - --------------------- Revenues decreased $7,526,000 to $92,890,000, primarily due to lower volume from management and operation contracts for U. S. Government-owned facilities and from nuclear fuel assemblies and reactor components for the U.S. Government. Segment operating income increased $4,455,000 to $9,910,000, primarily due to higher margins from commercial nuclear environmental services and nuclear fuel assemblies and reactor components for the U. S. Government. These increases were partially offset by lower volume from management and operation contracts for U. S. Government-owned facilities and higher general and administrative expenses. Industrial Operations - --------------------- Revenues increased $41,945,000 to $132,126,000, primarily due to higher volume from engineering and plant maintenance activities in Canadian operations. These were partially offset by lower volume from air-cooled heat exchangers. Segment operating income increased $510,000 to $4,372,000, primarily due to higher volume from engineering activities and higher volume and margins from plant maintenance activities in Canadian operations. These increases were partially offset by lower volume from air-cooled heat exchangers and higher general and administrative expenses. Other Unallocated Items - ----------------------- Other unallocated items decreased $3,259,000 from income of $1,264,000 to expense of $1,995,000, primarily due to higher research and development and employee benefit expenses. Other Income Statement Items - ---------------------------- Interest income decreased $17,683,000 to $15,042,000, primarily due to interest income on settlement of Internal Revenue Service exposure items in the prior year and decreases in investments. Interest expense decreased $4,478,000 to $12,139,000, primarily due to changes in debt obligations and prevailing interest rates. Minority interest expense decreased $33,462,000 to $4,229,000, primarily due to the lower operating results of JRM. 24 Other-net decreased $41,878,000 from income of $41,557,000 to expense of $321,000. This decrease was primarily due to a net gain on the settlement and curtailment of postretirement benefit plans recorded in the prior year. The provision for income taxes decreased $4,262,000 to $12,564,000, while income before provision for income taxes decreased $105,780,000 to $32,607,000. The change in the relationship of pretax income to the provision for income taxes was primarily the result of a decrease in income during the current period along with a decrease in tax expense for the prior period due to a change in the valuation allowance for deferred tax assets. 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 basis (for example, revenues versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate.
Backlog - ------- 6/30/99 3/31/99 ------- ------- (Unaudited) (In thousands) Marine Construction Services $ 702,015 $ 407,223 Power Generation Systems 972,902 905,042 Government Operations 742,177 860,981 Industrial Operations 352,615 400,649 Adjustments and Other Eliminations 1,145 (799) - ------------------------------------------------------------------------ TOTAL BACKLOG $ 2,770,854 $ 2,573,096 ========================================================================
In general, all of McDermott's business segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues. Backlog for the Marine Construction Services segment increased primarily as a result of Conoco's West Natuna Pipeline Transportation System award. 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 June 30, 1999, Government Operations' backlog with the U. S. Government was $644,883,000 (of which $2,969,000 had not been funded). This segment's backlog is not expected to experience significant growth as 25 a result of reductions in defense budgets. 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 three months ended June 30, 1999, McDermott's cash and cash equivalents decreased $48,868,000 to $132,635,000 and total debt increased $531,519,000 to $886,419,000, primarily due to an increase in short-term borrowing of $534,176,000. During this period, McDermott received cash of $72,059,000 from net sales and maturities of investments. McDermott used cash of $511,271,000 for the acquisition of substantially all of JRM's minority interest, $123,485,000 in operating activities, $19,753,000 for additions to property, plant and equipment, and $2,957,000 for dividends on MII's common stock. Pursuant to agreements with the majority of its principal insurers, McDermott negotiates and settles product 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 $7,400 per claim over the last three years) has continued to rise. Claims paid during the three months ended June 30, 1999 were $104,918,000, of which $84,609,000 has been recovered or is due from insurers. At June 30, 1999, receivables of $127,037,000 were due from insurers for reimbursement of settled claims. 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 June 30, 1999, the estimated liability for pending and future non-employee products liability asbestos claims was $1,457,445,000 and estimated insurance recoveries were $1,282,274,000. Management's expectation is that new claims will conclude within the next thirteen years, that there will be a significant decline in new claims received after four years, and that the average cost per claim will continue to increase only moderately. McDermott's estimates of future asbestos products liability and probable insurance recoveries are based on prior history and management's best estimate of cost based on all available information. However, future costs to settle claims, as well as the number of claims, could be adversely affected by changes in judicial rulings and influences beyond McDermott's control. Accordingly, changes in the estimates of future asbestos products liability and insurance recoverables and differences between the proportion of any additional asbestos products liabilities covered by insurance, and that experienced in the 26 past could result in material adjustments to the results of operations for any fiscal quarter or year, and the ultimate loss may differ materially from amounts provided in the consolidated financial statements. Expenditures for property, plant and equipment increased $2,957,000 to $19,753,000. The majority of these expenditures were to maintain, replace and upgrade existing facilities and equipment. On May 7, 1999, MII and JRM entered into a merger agreement pursuant to which MII initiated a tender offer for all non-owned shares of JRM for $35.62 per share in cash. MII obtained the funds from cash on hand and from a $525,000,000 senior secured term loan facility with Citibank, N.A. At June 30, 1999, borrowings against this facility were $504,000,000. On August 4, 1999, the borrowings against the facility were repaid and the facility was terminated. At June 30, 1999, McDermott had total cash, cash equivalents and investments of $961,005,000. McDermott's investment portfolio consists primarily of government obligations and other investments in debt securities. The fair value of short and long-term investments at June 30, 1999 was $828,370,000. At June 30, 1999, approximately $48,384,000 fair value of these obligations were pledged to secure a letter of credit in connection with certain reinsurance agreements. At June 30 and March 31, 1999, McDermott had available various uncommitted short-term lines of credit from banks totaling $88,086,000 and $87,578,000, respectively. At June 30, 1999, borrowings against these lines of credit were $5,177,000. There were no borrowings against these lines at March 31, 1999. The Babcock & Wilcox Company, jointly and severally with Babcock & Wilcox Investment Company and BWX Technologies, Inc., is party to a $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. At June 30, 1999, borrowings under the BWICO Credit Agreement were $25,000,000. There were no borrowings under the agreement at March 31, 1999. At March 31, 1999, JRM and certain of its subsidiaries were parties to a $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 was reserved for the issuance of letters of credit. During the three months ended June 30, 1999, JRM elected to reduce the commitments on the JRM Credit Agreement from $200,000,000 to $100,000,000. There were no borrowings under the JRM Credit Agreement at June 30 or March 31, 1999. Management does not anticipate JRM will need to borrow funds under the JRM Credit Agreement in the nine months ending December 31, 1999. 27 MI and JRM are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and certain of its subsidiaries through cash dividends or through unsecured loans or investments. At June 30, 1999, substantially all of the net assets of MI were subject to such restrictions. At June 30, 1999, JRM could make unsecured loans to or investments in MII of approximately $69,000,000 and pay dividends to MII of approximately $485,000,000. In connection with the tender offer and merger described above, an amendment to the JRM Credit Agreement permits JRM to loan to MII such amounts as may be required for MII to repay the $504,000,000 outstanding under the $525,000,000 senior secured term loan facility with Citibank N.A. Working capital decreased $10,330,000 from $108,955,000 at March 31, 1999 to $98,625,000 at June 30, 1999. During the remainder of 1999, McDermott's management expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, cash and cash equivalents, and short-term borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact McDermott's liquidity or capital resources. At June 30, 1999, MII has provided a valuation allowance for deferred tax assets of $40,281,000 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, future taxable income, and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. Uncertainties that affect the ultimate realization of deferred tax assets are the risk of incurring losses in the future and the possibility of declines in value of appreciated assets involved in identified tax planning strategies. These factors have been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis. 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 final phase of Year 2000 preparation includes the development of contingency plans to further minimize the risk and mitigate the impact of the century date change. 28 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 the 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) establish priorities, (2) inventory items with potential Year 2000 impact, (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, (5) test and validate solutions, and (6) develop contingency plans. The status as of June 30, 1999 is as follows: IT Systems - Inventory prioritization and assessment of all critical systems - ---------- were completed. The remediation and replacement tasks are substantially complete with a few third-party software upgrades outstanding. These upgrades, primarily delayed by the availability of vendor software, will be completed by October 31, 1999. Facilities and Embedded Systems - The critical components at all of McDermott's - ------------------------------- major operating locations have been made Year 2000 ready. Embedded Systems replacements are pending on a few pieces of marine equipment where construction schedules have rendered the vessels unavailable for component upgrades. The outstanding compliance work will be performed by September 30, 1999. 29 Customer Products - This phase of the project has been completed at all of - ----------------- McDermott's locations. Critical Suppliers - This analysis includes the determination of the compliance - ------------------ status of the suppliers' businesses as well as the products they produce. All of McDermott's major sites except two have completed this analysis, and the remaining sites are scheduled for completion by August 31, 1999. McDermott is taking steps to mitigate the risk of a material impact of Year 2000 on its operations with the development of contingency plans. These plans, prepared using a common methodology across the corporation, focus on the mission critical processes and third-party dependencies that could be at risk with the century date change. All contingency planning activities are in progress and are scheduled to be complete by September 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 by October 31, 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 $36,000,000 and is being funded through operating cash flows. Of the total project cost, $8,000,000 is attributable to the purchase of hardware and software, which will be capitalized, and the remaining $28,000,000 will be expensed as incurred. Expenditures to date include $7,000,000 of capital and $24,000,000 of expense. McDermott's Year 2000 compliance is also dependent upon the 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. 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 30 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. The general uncertainty inherent in the Year 2000 problem results in part from the uncertainty of the Year 2000 readiness of third parties and the interconnection of global businesses. Due to this general uncertainty, 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 June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. In June 1999, the FASB issued SFAS No. 137, " Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years after June 15, 2000. McDermott has not yet determined what the effect of SFAS No. 133 will have on its consolidated financial position or results of operations. 31 PART II McDERMOTT INTERNATIONAL, INC. OTHER INFORMATION Item 1. 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. In June 1999, the Department of Justice agreed to MII's and JRM's request to expand the scope of the immunity to include a broader range of the companies' marine construction 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. In July 1999, a former JRM officer was indicted by the Department of Justice for participating in an international rig-bidding conspiracy for the sale of marine construction services and pled guilty. 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, 32 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. 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., 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 (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil 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. In July 1999, the court dismissed the Statoil Litigation for lack of subject matter jurisdiction. 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, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, 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 and Elf Norge a.s.; 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.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A. 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. 33 MII and JRM are also cooperating with a Securities and Exchange Commission ("SEC") investigation into whether the companies may have violated U.S. securities laws in connection with, but not limited to, 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. As a result of the initial allegations of wrongdoing in March 1997, MII formed and continues to maintain a special committee of its Board of Directors to monitor and oversee the company's investigation into all of these matters. It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC investigation, the companies' internal investigation, the above-referenced lawsuits, or any 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. In June 1999, the court set aside the judgement and ordered a new trial on all issues. B&W believes that adequate insurance is available to meet any possible liability in this matter. However, there is a controversy between B&W and its insurers as to the amount of insurance coverage under the insurance policies covering these facilities. B&W has filed an action seeking a judicial determination of this matter, which is currently pending in a Pennsylvania court. Management believes that any 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 34 represented by the plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks reimbursement of this amount from other parties. Two purported class actions were filed in March and April 1999 in the Civil District Court for the Parish of Orleans, State of Louisiana, by alleged public shareholders of JRM, challenging MII's initial proposal to acquire the publicly traded shares of JRM Common Stock in a stock for stock merger. No agreement was reached on such proposal and on May 7, 1999, MII and JRM announced that they had entered into a merger agreement pursuant to which MII will acquire all of such publicly traded shares of JRM Common Stock for $35.62 per share pursuant to a cash tender offer followed by a second step merger. On the same day, the Court entered an order consolidating the two actions under the caption In re J. Ray McDermott Shareholder Litigation. JRM and MII have filed exceptions and responses and objections to discovery in these actions. JRM and MII believe that the actions are without merit and intend to contest these suits vigorously. Additionally, due to the nature of its business, McDermott is, from time to time, involved in routine litigation related to its business activities. It is management's opinion that none of this 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 27 - Financial Data Schedule (b) Reports on Form 8-K A current report on Form 8-K, Item 2, dated June 11, 1999, was filed with the Securities and Exchange Commission on June 21, 1999. 35 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) August 6, 1999 36 EXHIBIT INDEX Exhibit Description 27 Financial Data Schedule 37 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT INTERNATIONAL JUNE 30, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 3-MOS DEC-31-1999 APR-01-1999 JUN-30-1999 132,635 469,252 504,205 73,103 233,221 1,834,715 1,434,395 998,546 4,448,627 1,736,090 323,611 0 0 61,250 747,386 4,448,627 647,884 647,884 611,079 611,079 0 0 12,139 32,607 12,564 20,043 0 0 0 20,043 0.34 0.33
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