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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) F O R M 1 0 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 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 Number 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
Incorporation or Organization) Identification No.)
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
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Company's Common Stock held by non-affiliates
of the registrant was $1,725,490,308 as of April 29, 1999.
The number of shares outstanding of the Company's Common Stock at April 29, 1999
was 59,248,598.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with the Company's 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART 1
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Marine Construction Services
General 3
Foreign Operations 4
Raw Materials 5
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Power Generation Systems
General 6
Foreign Operations 6
Raw Materials 7
Customers and Competition 7
Backlog 7
Factors Affecting Demand 8
D. Government Operations
General 8
Raw Materials 9
Customers and Competition 9
Backlog 9
Factors Affecting Demand 9
E. Industrial Operations
General 10
Foreign Operations 10
Raw Materials 10
Customers and Competition 10
Backlog 11
Factors Affecting Demand 11
F. Patents and Licenses 11
G. Research and Development Activities 11
H. Insurance 12
I. Employees 13
J. Environmental Regulations and Matters 13
i
INDEX - FORM 10-K
PAGE
Item 3. LEGAL PROCEEDINGS 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 18
Item 6. SELECTED FINANCIAL DATA 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 21
Fiscal Year 1999 vs Fiscal Year 1998 22
Fiscal Year 1998 vs Fiscal Year 1997 24
Effects of Inflation and Changing Prices 26
Liquidity and Capital Resources 27
Impact of the Year 2000 30
New Accounting Standards 32
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 33
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Company Report on Consolidated Financial
Statements 35
Report of PricewaterhouseCoopers LLP 36
Report of Ernst & Young LLP 37
Consolidated Balance Sheet - March 31, 1999
and 1998 38
Consolidated Statement of Income (Loss) for the
Three Fiscal Years ended March 31, 1999 40
Consolidated Statement of Comprehensive Income
(Loss) for the Three Fiscal Years ended
March 31, 1999 41
Consolidated Statement of Stockholders'
Equity for the Three Fiscal Years ended
March 31, 1999 42
Consolidated Statement of Cash Flows for the
Three Fiscal Years ended March 31, 1999 44
Notes to Consolidated Financial Statements 46
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 84
ii
INDEX - FORM 10-K
PAGE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 85
Item 11. EXECUTIVE COMPENSATION 85
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 85
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 85
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 86
Signatures 88
Exhibit 4.1 - AMENDED AND RESTATED RIGHTS AGREEMENT
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
Exhibit 23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP
Exhibit 23.2 - CONSENT OF ERNST & YOUNG LLP
Exhibit 27 - FINANCIAL DATA SCHEDULE
iii
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("MII") was incorporated under the laws of the
Republic of Panama in 1959 and is the parent company of the McDermott group of
companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated. MII's Common Stock and JRM's Common Stock and 9.375% Senior
Subordinated Notes due July 2006 are publicly traded. On May 7, 1999, MII and
JRM jointly announced that they executed a definitive merger agreement pursuant
to which MII will acquire all shares of JRM not already owned by MII for $35.62
per share in cash. Pursuant to the merger agreement, on May 13, 1999, MII
initiated a tender offer for all shares of JRM common stock for $35.62 per share
in cash. The tender offer will expire on June 10, 1999 unless extended. Any
shares not purchased in the tender offer will be acquired for the same price in
cash in a second-step merger . The tender offer is subject to the condition
that the majority of the publicly held shares are validly tendered pursuant to
the tender offer, as well as other customary conditions. JRM currently has
approximately 39,060,000 shares of common stock outstanding, of which 24,668,297
shares, or 63%, are owned by MII, and approximately 14,400,000 are publicly
held.
Hereinafter, unless the context requires otherwise, the following terms shall
mean:
. MII for McDermott International, Inc., a Panama corporation,
. JRM for J. Ray McDermott, S. A., a majority owned Panamanian subsidiary of
MII, and its consolidated subsidiaries,
. MI for McDermott Incorporated, a Delaware subsidiary of MII, and its
consolidated subsidiaries,
. BWICO for Babcock & Wilcox Investment Company, a Delaware subsidiary of MI,
. B&W for the Babcock & Wilcox Company, a Delaware subsidiary of BWICO, and
its consolidated subsidiaries,
. BWXT for BWX Technologies, Inc., a Delaware subsidiary of BWICO, and its
consolidated subsidiaries, and
. McDermott for the consolidated enterprise.
McDermott operates in four business segments:
. Marine Construction Services includes the results of the operations of JRM,
which supplies worldwide services for the offshore oil and gas exploration
and 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 and other specialized structures, modular facilities,
marine pipelines and subsea production systems and procurement activities.
. Power Generation Systems includes the results of the operations of the
Power Generation Group, which is conducted primarily through B&W, and
provides services and equipment and systems to generate steam and electric
power at energy facilities worldwide.
. Government Operations includes the results of the operations of BWXT, which
supplies nuclear reactor components and nuclear fuel assemblies to the U.S.
Navy and various other equipment and services to the U.S. Government and
manages various U.S. Government-owned facilities.
. Industrial Operations includes the results of the operations of McDermott
Engineers & Constructors (Canada) Ltd., Hudson Products Corporation,
McDermott Technologies, Inc. ("MTI") and other smaller businesses.
McDermott has a continuing program of reviewing joint venture, acquisition and
disposition opportunities. The following tables show revenues and operating
income (loss) of McDermott for the three fiscal years ended March 31, 1999. See
Note 17 to the consolidated financial statements for additional information with
respect to McDermott's business segments and operations in different geographic
areas.
1
FOR FISCAL YEARS ENDED MARCH 31,
(Dollars in Millions)
1999 1998 1997
---- ---- ----
REVENUES
Marine Construction Services $1,279.6 40.6% $1,855.5 50.5% $1,408.5 44.7%
Power Generation Systems 1,066.2 33.8% 1,142.7 31.1% 985.4 31.3%
Government Operations 382.7 12.1% 370.5 10.1% 373.1 11.8%
Industrial Operations 427.5 13.5% 337.8 9.2% 458.1 14.5%
Adjustments and Eliminations (6.0) - (31.9) (0.9%) (74.2) (2.3%)
- ---------------------------------------------------------------------------------------------------------
Total Revenues $3,150.0 100.0% $3,674.6 100.0% $3,150.9 100.0%
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Marine Construction Services $ 126.5 46.3% $ 107.1 46.6% $ 10.8 -
Power Generation Systems 90.3 33.1% 82.5 35.8% (34.6) -
Government Operations 39.4 14.4% 35.8 15.6% 32.5 -
Industrial Operations 16.9 6.2% 4.7 2.0% (30.6) -
- ---------------------------------------------------------------------------------------------------------
Total $273.1 100.0% $230.1 100.0% $(21.9) 100.0%
- ---------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals
and Impairments - Net:
Marine Construction Services $ 18.6 80.8% $(40.1) - $ 29.0 -
Power Generation Systems 4.4 19.4% (6.1) - (19.2) -
Government Operations 0.2 0.8% 0.5 - 0.4 -
Industrial Operations (0.2) (1.0%) 128.2 - (11.9) -
- ---------------------------------------------------------------------------------------------------------
Total $ 23.0 100.0% $ 82.5 100.0% $ (1.7) 100.0%
- ---------------------------------------------------------------------------------------------------------
Income (Loss) from Investees:
Marine Construction Services $ 10.7 - $ 70.2 82.2% $ (7.8) -
Power Generation Systems (4.7) - 7.5 8.8% (0.3) -
Government Operations 4.1 - 4.3 5.0% 3.6 -
Industrial Operations (1.7) - 3.4 4.0% 0.7 -
- ---------------------------------------------------------------------------------------------------------
Total $ 8.4 100.0% $ 85.4 100.0% $ (3.8) 100.0%
- ---------------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS):
Marine Construction Services $155.8 51.2% $137.2 34.5% $ 32.0 -
Power Generation Systems 90.0 29.6% 83.9 21.1% (54.1) -
Government Operations 43.7 14.3% 40.6 10.2% 36.5 -
Industrial Operations 15.0 4.9% 136.3 34.2% (41.8) -
- ---------------------------------------------------------------------------------------------------------
Total Segment Income (Loss): 304.5 100.0% 398.0 100.0% (27.4) 100.0%
- ---------------------------------------------------------------------------------------------------------
Other Unallocated Items (51.0) (5.3) (72.4)
General Corporate Expenses-Net (36.1) (37.2) (47.4)
- ---------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $217.4 $355.5 $(147.2)
- ---------------------------------------------------------------------------------------------------------
2
B. MARINE CONSTRUCTION SERVICES
GENERAL
On January 31, 1995, McDermott contributed substantially all of its marine
construction services business to JRM, a new company incorporated under the laws
of the Republic of Panama in 1994. Also, on January 31, 1995, JRM acquired
Offshore Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger
with OPI, JRM was a wholly owned subsidiary of MII; as a result of the merger,
JRM became a majority owned subsidiary of MII. On May 7, 1999, MII and JRM
entered into a merger agreement pursuant to which MII initiated a tender offer
for those shares of JRM that it did not already own for $35.62 per share in
cash. Any such shares not purchased in the offer will be acquired for the same
price in cash in a second-step merger. JRM conducts the business activities of
this segment.
The Marine Construction Services segment consists of the basic and detailed
design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. As a strategic operating
decision, JRM has transitioned away from installation, particularly heavy-lift
technology, into deep water subsea technology. This segment also provides
comprehensive project management services, feasibility studies, procurement
activities, and removal, salvage and refurbishment services for offshore fixed
platforms. This segment operates throughout the world in all major offshore oil
and gas producing regions, including the Gulf of Mexico, the North Sea, West
Africa, South America, the Middle East, India and the Far East.
This segment also participates in joint ventures. The joint ventures are
accounted for using either the equity or the cost method. JRM's joint ventures
are largely financed through their own resources, including, in some cases,
stand-alone borrowing arrangements. JRM's two most significant joint venture
investments were in the HeereMac joint venture and the McDermott-ETPM joint
venture. JRM has terminated its interests in both of these joint ventures.
The HeereMac joint venture was formed in January 1989 and utilized the
specialized, heavy-lift marine construction vessels which were previously owned
by the two parties. Each party had a 50% interest in the joint venture, and
Heerema had responsibility for its day-to-day operations. On December 19, 1997,
JRM and Heerema Offshore Construction Group, Inc. ("Heerema") terminated the
HeereMac joint venture. Heerema acquired and assumed JRM's 50% interest in the
joint venture in exchange for cash of $318,500,000 and title to several pieces
of equipment. The equipment transferred to JRM includes two launch barges and
the derrick barge 101, a 3,500-ton lift capacity, semi-submersible derrick
barge. The HeereMac joint venture was accounted for using the equity method
until March 31, 1997 and the cost method thereafter.
JRM formed its initial joint venture with ETPM S.A., McDermott-ETPM, in April
1989 to provide general marine construction services to the petroleum industry
in West Africa, South America, the Middle East and India and to provide offshore
pipelaying services in the North Sea. In March 1995, JRM and ETPM S.A. expanded
their joint venture's operations to include the Far East and began jointly
pursuing subsea contracting work on a worldwide basis. Most of the operating
companies in the McDermott-ETPM joint venture were majority-owned and controlled
by JRM and were consolidated for financial reporting purposes. However, the
operations of McDermott-ETPM West, Inc., which conducts operations in the North
Sea, South America and West Africa, were managed and controlled by ETPM S.A.
McDermott-ETPM West, Inc. was accounted for using the equity method. On April
3, 1998, JRM and ETPM S.A. terminated the McDermott-ETPM joint venture. Pursuant
to the termination, JRM received net cash of approximately $105,000,000 and the
derrick/lay barge 1601 and assumed 100% ownership of McDermott-ETPM East, Inc.
and McDermott-ETPM Far East, Inc. ETPM S.A. received the lay barge 200 and took
ownership of McDermott Subsea Constructors Limited ("MSCL") and McDermott-ETPM
West, Inc.
JRM participates in other joint ventures involving operations in foreign
countries that require majority-ownership by local interests. Through a
subsidiary, JRM also participates in an equally owned joint venture with the
Brown & Root Energy Services unit of Halliburton Company ("Brown & Root"), which
was formed in
3
February 1995 to combine the operations of JRM's Inverness and Brown & Root's
Nigg fabrication facilities in Scotland.
In May 1998, JRM sold its Aberdeen based engineering business of McDermott
Engineering (Europe) Limited and announced its intention to withdraw from
traditional European engineering markets. See Note 17 to the consolidated
financial statements regarding these events. JRM retains a presence in the
European markets via Mentor Subsea Technology Services, Ltd. to focus on subsea
opportunities. During fiscal year 1999, McDermott announced its intention to
withdraw from substantially all third-party engineering activities.
At March 31, 1999, JRM owned or operated 5 fabrication facilities throughout the
world. JRM's principal domestic fabrication yard and offshore base is located
on 1,114 acres of land, under lease, near Morgan City, Louisiana. JRM also owns
or operates fabrication facilities in the following locations: near Corpus
Christi, Texas; near Inverness, Scotland; in Indonesia on Batam Island; and in
Jebel Ali, U.A.E. JRM also owns and operates a ship repair yard in Veracruz,
Mexico.
JRM's fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM can fabricate a full range of offshore structures, from
conventional jacket-type fixed platforms to deepwater platform configurations
employing compliant-tower, tension leg, floating production platform and spar
technology. JRM also fabricates platform deck structures and modular
components, including complete production processing systems, hydrocarbon
separation and treatment systems, pressure and flow control systems and
personnel quarters.
At March 31, 1999, expiration dates, including renewal options, of leases
covering land for JRM's fabrication yards were as follows:
Morgan City, Louisiana Years 2000-2033
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
JRM owns or, through its ownership interests in joint ventures, has interests in
one of the largest fleets of marine equipment used in major offshore
construction. The nucleus of a "construction spread" is a large derrick barge,
pipelaying barge or combination derrick-pipelaying barge capable of offshore
operations for an extended period of time in remote locations. At March 31,
1999, JRM owned or, through ownership interests in joint ventures, had interests
in 5 derrick vessels, 2 pipelaying vessels and 8 combination derrick-pipelaying
vessels. The lifting capacities of the derrick and combination derrick-
pipelaying vessels range from 800 to 5,000 tons. These vessels range in length
from 400 to 698 feet and are fully equipped with stiff leg or revolving cranes,
auxiliary cranes, welding equipment, pile-driving hammers, anchor winches and a
variety of additional gear. The largest vessel is the semi-submersible derrick
barge 101.
To support the operations of these major marine construction vessels, JRM and
its joint ventures also own or lease a substantial number of other vessels, such
as tugboats, utility boats, launch barges and cargo barges.
FOREIGN OPERATIONS
JRM's revenues, net of intersegment revenues, and segment income derived from
operations located outside of the United States, and the approximate percentages
to McDermott's total revenues and total segment income, respectively, follow:
4
REVENUES SEGMENT INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in thousands)
1999 $ 731,022 23% $129,440 43%
1998 1,112,685 30% 317,482 80%
1997 839,583 27% 14,525 -
RAW MATERIALS
This segment uses raw materials such as carbon and alloy steel in various forms,
welding gases, concrete, fuel oil and gasoline that are available from many
sources. JRM is not dependent upon any single supplier or source. Although
shortages of certain of these raw materials and fuels have existed from time to
time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas companies, including foreign
government-owned companies. Customers generally contract with JRM for the
design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. Contracts are usually awarded
on a competitive bid basis. A number of companies compete effectively with JRM
and its joint ventures in each of the separate marine construction phases in
various parts of the world. Examples are Aker Gulf Marine, Gulf Island
Fabrication, Inc., Hyundai Heavy Industries, Global Industries Ltd., Saipem
S.p.A., Heerema Offshore Construction Group, Inc. and other companies.
BACKLOG
At March 31, 1999 and 1998, Marine Construction Services' backlog amounted to
$406,183,000 and $1,266,310,000, respectively. This represents approximately
16% and 37%, respectively, of McDermott's total backlog. JRM's backlog declined
in all operating areas because of lower oil prices. In addition, backlog
declined because of JRM's withdrawal from traditional engineering markets.
Finally, backlog decreased because of sluggish economic conditions in the Middle
and Far East and the political instability in the Far East. Of the March 31,
1999 backlog, management expects that approximately $386,454,000 will be
recognized in revenues in fiscal year 2000 and $19,729,000 in fiscal year 2001.
JRM has been awarded a contract valued at $20,500,000 from Larsen & Toubro
Limited for the ONGC Pipelines and Platform Modification Project. Under this
contract, JRM is responsible for transportation of coated pipelines and offshore
installation of 12 pipelines, 17 risers, 3 subsea tie-ins, and 19 crossings.
JRM is also responsible for freespan rectification and de-watering and
commissioning of one pipeline with platform gas.
Subsequent to March 31, 1999, JRM was awarded a contract for $335,000,000 from
Conoco Indonesia Inc. and other West Natuna Sea operators to construct a subsea
natural gas pipeline from Indonesia's West Natuna Sea gas fields to Singapore.
This award was not included in backlog at March 31, 1999.
Work has historically been performed on a fixed-price, cost-plus or day-rate
basis or a combination thereof. More recently, certain "partnering-type"
contracts have introduced a risk and reward element wherein a portion of total
compensation is tied to the overall performance of the alliance partners. This
segment attempts to cover increased costs of anticipated changes in labor,
material and service costs of long-term contracts either through an estimate of
such changes, which is reflected in the original price, or through price
escalation clauses. Most long-term contracts have provisions for progress
payments.
5
FACTORS AFFECTING DEMAND
The activity of this segment depends mainly on the capital expenditures of oil
and gas companies and foreign governments for developmental construction.
Several factors influence these expenditures:
. oil and gas prices, along with the cost of production and delivery,
. the terms and conditions of offshore leases,
. the discovery rates of new reserves offshore,
. the ability of the oil and gas industry to raise capital, and
. local and international political and economic conditions.
In some Far East countries, internal consumption of oil and gas products has
decreased due to the current economic crises.
Oil and gas company capital exploration and production budgets for calendar year
1999 have been significantly reduced because of falling oil and gas prices.
These budgets are now set and, therefore, unaffected by the partial recovery in
prices resulting from the recent OPEC production agreements. Economic and
political conditions in Asia have had an adverse effect on exploration and
production spending.
C. POWER GENERATION SYSTEMS
GENERAL
The Power Generation Systems segment:
. supplies engineered-to-order services, products and systems for energy
conversion worldwide and related industrial equipment, such as burners,
pulverizer mills, soot blowers and ash handlers,
. manufactures heavy pressure equipment for energy conversion such as boilers
fueled by coal, oil, bitumen, natural gas, solid municipal waste, biomass,
and other fuels,
. fabricates steam generators for nuclear power plants,
. designs and supplies environmental control systems, including both wet and
dry scrubbers for flue gas desulfurization, modules for selective catalytic
reduction of nitrogen oxides, and electrostatic precipitators and similar
devices,
. supports operating plants with a wide variety of services, including the
installation of new systems and replacement parts, engineering upgrades,
construction, maintenance, and field technical services such as condition
assessment,
. provides inventory services to help customers respond quickly to plant
interruptions and to construction crews to maintain and repair operating
equipment, and
. provides power through cogeneration, refuse-fueled power plants, and other
independent power producing facilities, and participates in this market as
a contractor for engineer-procure-construct services, as an equipment
supplier, as an operations and maintenance contractor and through ownership
interests.
The principal manufacturing plants of this segment, which B&W owns, are located
in West Point, Mississippi; Lancaster, Ohio; and Cambridge, Ontario, Canada. B&W
closed its Paris, Texas plant in fiscal year 1999. This segment's unconsolidated
affiliates' (equity investees) foreign plants are located in Beijing, China;
Batam Island, Indonesia; Pune, India; and Cairo, Egypt. This segment also
operates independent power facilities located in Ebensburg, Pennsylvania and
Sunnyside, Utah. All of these plants are well maintained, have suitable
equipment and are of adequate size.
FOREIGN OPERATIONS
Power Generation Systems' revenues, net of intersegment revenues, and segment
income (loss) derived from operations located outside of the United States, and
the approximate percentages to McDermott's total revenues and total segment
income (loss), respectively, follow:
6
REVENUES SEGMENT INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1999 $189,148 6% $ 8,283 3%
1998 196,831 5% 25,694 6%
1997 296,544 9% (33,701) 123%
Products for McDermott installation are engineered and built in B&W's United
States and Canadian facilities, as well as in the facilities of the segment's
equity investees in China, Indonesia, India and Egypt.
RAW MATERIALS
The Power Generations Systems segment uses raw materials such as carbon and
alloy steels in various forms, such as plates, forgings, structurals, bars,
sheets, strips, heavy wall pipes and tubes to construct power generation systems
and equipment. Significant amounts of components and accessories are also
purchased for assembly into the supplied systems and equipment. These raw
materials and components generally are purchased as needed for individual
contracts. Although shortages of certain of these raw materials have existed
from time to time, no serious shortage exists at the present time. This segment
is not sole source dependent for any significant raw materials.
CUSTOMERS AND COMPETITION
This segment's principal customers are the electric power generation industry
(including government-owned utilities and independent power producers); the pulp
and paper industry; process industries such as petrochemical plants, oil
refineries and steel mills; and other steam-using industries and institutions.
The electric power generation industry accounted for approximately 26%, 24% and
22% of McDermott's total revenues for fiscal years 1999, 1998 and 1997,
respectively.
Customers normally purchase services, equipment or systems from the Power
Generation Systems segment after an extensive evaluation process based on
competitive bids. Proposals are submitted based on the estimated cost of each
job.
Within the United States, the Power Generation Systems segment competes with a
number of domestic and foreign-based companies specializing in steam generating
systems, equipment and services. Examples include ABB Asea Brown Boveri Ltd.,
Ahlstrom Corporation, DB Riley, Inc., Foster Wheeler Corporation, Kvaerner ASA,
and other companies. In international markets, this segment competes against
these companies, plus additional foreign-based companies. A number of
additional companies compete in environmental control equipment, related
specialized industrial equipment and the independent power producing business.
Other suppliers of steam systems, as well as many other businesses, compete for
replacement parts, repair and alteration, and other services required to backfit
and maintain existing systems.
BACKLOG
At March 31, 1999 and 1998, this segment's backlog amounted to $905,283,000 and
$1,070,351,000, or approximately 35% and 31%, respectively, of McDermott's
backlog. Backlog decreased primarily as a result of delays and cancellations of
power projects in Southeast Asia due to that region's current economic crisis
and management's focus on higher margin projects. Backlog includes $65,000,000
of delayed contracts as a result of the Asian economic crisis. Of the March 31,
1999 backlog, it is expected that approximately $552,534,000 will be recognized
in revenues in fiscal year 2000, $173,501,000 in fiscal year 2001 and
$179,248,000 thereafter, of which approximately 77% will be recognized in fiscal
years 2002 through 2004.
During fiscal year 1999, this segment was awarded a contract valued at
approximately $100,000,000 to supply four nuclear steam generators to Baltimore
Gas and Electric's Calvert Cliffs nuclear power plant on Chesapeake Bay in
Calvert County, Maryland. This segment also received a $46,000,000 contract for
a Sidi Krir, Egypt
7
build, own, operate and transfer ("BOOT") project for two utility boilers from
Bechtel International Inc. for Intergen; and a contract valued at $40,000,000
for boiler maintenance and precipitator installation at Dominion Energy's
Kincaid Station in Kincaid, Illinois.
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
the Power Generation Systems segment is usually entitled to a financial
settlement related to the individual circumstances of the contract. Operations
and maintenance contracts, which are performed over an extended period, are
included in backlog based upon an estimate of the revenues from these contracts.
The Power Generation Systems segment attempts to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts
either through an estimate of such changes, which is reflected in the original
price, or through price escalation clauses. Most long-term contracts have
provisions for progress payments.
FACTORS AFFECTING DEMAND
Electric utilities in parts of Asia and the Middle East are current purchasers
of new baseload generating units and environmental control systems. This was
due to the growth of their economies and to the small existing stock of
electrical generating capacity in most developing countries. However, a
currency crisis, which began in Southeast Asia in the summer of 1997, has slowed
the number of inquiries and orders. With the international markets in an
unsettled condition, several projects in emerging markets have been delayed,
suspended or cancelled. Management expects this segment to be adversely
affected if the adverse economic and political conditions in Southeast Asia
continue.
Electrical consumption has grown moderately in the United States in recent years
and competition within the electric power industry in the United States has
intensified. The Energy Policy Act of 1992 deregulated the electric power
generation industry by allowing independent power producers access to the
electric utilities' transmission and distribution systems. Several states have
changed their laws to encourage competition among generators of electricity.
The modest growth in demand and the changes associated with this transition from
a regulated to a competitive industry have caused electric power companies to
defer ordering new coal-fired power plants in the United States. When electric
utilities are in need of peaking capacity, many are purchasing combustion
turbines with short lead-times or are purchasing electricity from other
utilities and non-regulated sources, such as cogenerators and independent power
producers.
Substantially all the customers of the Power Generation Systems segment are
affected by environmental regulations of the countries in which their facilities
are located. In the United States, the Clean Air Act requires many customer
industries to implement systems to limit or remove emissions. These mandated
expenditures have caused some customers to defer refurbishments of existing
plants. The same requirements have caused other customers to purchase
environmental control equipment from this segment. Future changes in
environmental regulations will continue to affect demand for this segment's
products and services.
This segment's systems, products and services are capital intensive. As such,
customer demand is heavily affected by the variations in their business cycles
and by the overall economies of their countries. Availability of funds for
project financing, investment and maintenance at this segment's customers varies
with the conditions of their domestic businesses.
D. GOVERNMENT OPERATIONS
GENERAL
The Government Operations segment provides nuclear fuel assemblies and nuclear
reactor components to the U.S. Navy for the Naval Reactors Program. This
activity has made contributions to operating income of McDermott in all three
fiscal years and is expected to do so in the foreseeable future. This segment,
in addition to its Naval Reactors Program business, supplies other equipment and
services to the U.S. Government. It is
8
also proceeding with new Government projects and exploring new programs which
require the technological capabilities it developed as a Government contractor.
Environmental restoration services and the management of government-owned
facilities, primarily within the Department of Energy's ("DOE") nuclear weapons
complex, are examples of these markets.
The principal plants of this segment are located in Lynchburg, Virginia and
Barberton, Ohio.
RAW MATERIALS
This segment is not sole source dependent for any significant raw materials
except for uranium, which is furnished and owned by the U.S. Government and used
in the nuclear fuel assemblies supplied to the U.S. Navy for the Naval Reactors
Program.
CUSTOMERS AND COMPETITION
This segment is the sole supplier to the U.S. Navy of all major nuclear steam
system equipment and all nuclear fuel assemblies and reactor components for the
Naval Reactors Program. There are a small number of suppliers of small nuclear
components, with BWXT being the largest based on revenues. This segment is
involved along with other companies in the operation of the Idaho National
Engineering and Environmental Laboratory near Idaho Falls, Idaho; the Rocky
Flats Environmental Technology Site near Boulder, Colorado; the Savannah River
Site in Aiken, South Carolina; and the Hanford Site in Richland, Washington.
During fiscal year 1998, the Government Operations segment received a contract
from the U.S. DOE as the prime contractor to manage the environmental
remediation and site transition project at the DOE's Mound Site in Miamisburg,
Ohio. A BWXT subsidiary, Babcock & Wilcox of Ohio, Inc., began performance
under the several hundred million dollar multi-year contract in October 1997.
The contract is subject to annual funding. For the fiscal years 1999, 1998 and
1997, the U.S. Government accounted for approximately 12%, 10% and 11%,
respectively, of McDermott's total revenues, including 8%, 7% and 10%,
respectively, related to nuclear fuel assemblies and reactor components for the
U.S. Navy.
BACKLOG
At March 31, 1999 and 1998, Government Operations segment backlog amounted to
$860,981,000 and $810,230,000, or approximately 33% and 24%, respectively, of
McDermott's backlog. Of the March 31, 1999 backlog, management expects that
approximately $330,532,000 will be recognized in revenues in fiscal year 2000,
$194,694,000 in fiscal year 2001 and $335,755,000 thereafter, of which
approximately 89% will be recognized in fiscal years 2002 through 2004. At
March 31, 1999, this segment's backlog with the U.S. Government was $760,202,000
(of which $12,023,000 had not yet been funded), or approximately 30% of
McDermott's total backlog. The March 31, 1999 U.S. Government backlog includes
only the current year funding for the DOE Mound Site in Miamisburg, Ohio.
During fiscal year 1999, this segment was awarded approximately $270,000,000 in
new orders for aircraft carrier components, prototypical steam generation
equipment for the newest submarine design and the downloading of enriched
uranium for the commercial markets.
FACTORS AFFECTING DEMAND
This segment's systems are generally capital intensive. This segment may be
impacted by U.S. Government budget restraints.
Even with the maturing of the U.S. Navy's shipbuilding program and U.S.
Government defense budget reductions, the demand for nuclear fuel assemblies and
reactor components for the U.S. Navy has continued to comprise a substantial
portion of this segment's backlog. Orders for U.S. Navy nuclear fuel assemblies
and nuclear reactor components are expected to continue to be a significant part
of backlog since this segment is the sole source provider of these nuclear fuel
assemblies and nuclear reactor components.
9
E. INDUSTRIAL OPERATIONS
GENERAL
Industrial Operations includes the results of Engineering and Construction
operations, Hudson Products Corporation ("HPC") and MTI, and other businesses.
Engineering and Construction operations are conducted primarily through
McDermott Engineers & Constructors (Canada), Ltd. ("MECL").
MECL provides services, including project management, conceptual and process
design, front-end engineering and design, detailed engineering, procurement,
construction management and contract maintenance. HPC products include air-
cooled heat exchangers, combination water and air-cooled systems, air-cooled
vacuum steam condensers, fiberglass reinforced axial flow fans for air-cooled
heat exchangers and wet cooling towers and fan control systems. MTI performs
research activities for internal operating segments of McDermott and markets,
negotiates and administers contracts that leverage company research and
development technology needs with external funds.
The principal plant of HPC is located in Beasley, Texas. One of Industrial
Operations' unconsolidated affiliates has a plant in Monterrey, Mexico, which
manufactures axial flow fans and structural components for air-cooled heat
exchangers. Both of these plants are well maintained, have suitable equipment
and are of adequate size. MTI's research and development facilities are located
in Alliance, Ohio and Lynchburg, Virginia. MECL is located in Calgary, Alberta,
Canada.
FOREIGN OPERATIONS
Industrial Operations' revenues, net of intersegment revenues, and segment
income (loss) derived from operations located outside of the United States, and
the approximate percentages to McDermott's total revenues and total segment
income (loss), respectively, follow:
REVENUES SEGMENT INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1999 $319,937 10% $ 4,592 2%
1998 195,886 5% 90,516 23%
1997 242,973 8% (29,614) 108%
RAW MATERIALS
Industrial Operations uses raw materials such as carbon and alloy steels in
various forms, such as plates, bars, sheets, and pipes, and aluminum pipes,
aluminum strips, fiberglass cloth and epoxy resins. The majority of raw
materials and components are purchased as needed for individual contracts.
Additional quantities of raw materials are carried as base stock for jobs
requiring quick turnaround. Although extended lead time of certain raw
materials have existed from time to time, no serious shortage exists at the
present time, nor is any shortage expected in the foreseeable future.
Industrial Operations is not sole source dependent for any significant raw
materials.
CUSTOMERS AND COMPETITION
Industrial Operations' principal customers include oil and natural gas
producers, the electric power generation industry, petrochemical and chemical
processing industries, state and federal government agencies and non-profit
utility groups.
Equipment orders for items such as air-cooled heat exchangers are customarily
awarded after competitive bids have been submitted as proposals to customers
based on the estimated cost of each job. In both the U.S. and international
markets, this segment competes with a number of domestic and foreign-based
companies
10
specializing in air-cooled heat exchanger equipment. The majority of
the engineering and construction operations contracts are awarded in a
competitive market in which both price and quality are considerations.
BACKLOG
At March 31, 1999 and 1998, Industrial Operations' backlog amounted to
$400,649,000 and $262,339,000, or approximately 16% and 8%, respectively, of
McDermott's total backlog. Of the March 31, 1999 backlog, management expects
that approximately $352,900,000 will be recognized in revenues in fiscal year
2000, $43,509,000 in fiscal year 2001 and $4,240,000 thereafter.
This segment received a contract award valued at $80,000,000 for the
engineering, procurement and construction management contract for the Impress
Phase 5 Natural Gas Liquids Extraction Plant for Canada Petroleum Company and
its partner TransCanada Pipelines Ltd.
Also, they were awarded a contract for the engineering, procurement and
construction management contract for $60,000,000 cogeneration plant in Fort
Saskatchewan, Alberta by TransAlta Energy Corporation and Air Liquide Canada
Inc.
In addition, they were awarded a $200,000,000 contract to supply engineering and
procurement services for world scale gas liquids extraction facilities and
fractionation facilities to be built near Joliet, Illinois by Aux Sable Liquid
Products LP.
The remaining value of all contracts with the above three customers reflected in
the March 31, 1999 backlog is $262,545,000.
FACTORS AFFECTING DEMAND
The equipment and services provided by Industrial Operations are somewhat
capital intensive, and the demand for its equipment and services is affected by
variations in the business cycles of their customers' industries and in the
overall economies in their regions. Variations in business cycles are affected
by the price of oil. Industrial Operations is also affected by legislative
issues such as environmental regulations and fluctuations in U.S. Government
funding patterns. Seasonal plant outages, business cycles and economic
conditions cause variations in availability of funds for investment and
maintenance at customers' facilities.
F. PATENTS AND LICENSES
McDermott has been issued many U.S. and foreign patents and it has many pending
patent applications. Patents and licenses have been acquired and licenses have
been granted to others when advantageous to McDermott. While McDermott regards
its patents and licenses to be of value, no single patent or license or group of
related patents or licenses is believed to be material in relation to its
business as a whole.
G. RESEARCH AND DEVELOPMENT ACTIVITIES
McDermott conducts its principal research and development activities at MTI's
research centers in Alliance, Ohio and Lynchburg, Virginia. McDermott also
conducts development activities at its various manufacturing plants and
engineering and design offices. McDermott spent approximately $28,064,000,
$37,928,000 and $50,749,000, on research and development activities during the
fiscal years ended March 31, 1999, 1998 and 1997, respectively. Contractual
arrangements for customer-sponsored research and development can vary on a case
by case basis, and includes contracts, cooperative agreements and grants.
Customers of McDermott paid for approximately $15,752,000, $22,803,000 and
$34,170,000, of the total spent on research and development expenses during
fiscal years 1999, 1998 and 1997, respectively. Research and development
activities were related to development and improvement of new and existing
products and equipment and conceptual and engineering evaluation for translation
into practical applications. MTI's multi-million dollar clean environment
development facility in Alliance, Ohio was constructed in response to present
and future emission pollution standards in the
11
U.S. and worldwide. Approximately 125 employees were engaged full time in
research and development activities at March 31, 1999.
H. INSURANCE
McDermott maintains liability and property insurance against such risk and in
such amounts as it considers adequate. However, certain risks are either not
insurable or insurance is available only at rates which McDermott considers
uneconomical. These risks include war and confiscation of property in certain
areas of the world, pollution liability in excess of relatively low limits and,
in recent years, asbestos liability. Depending on competitive conditions and
other factors, McDermott endeavors to obtain contractual protection against
uninsured risks from its customers. However, there is no assurance that
insurance or contractual indemnity protection, when obtained, will be sufficient
or effective under all circumstances or against all hazards to which McDermott
may be subject.
McDermott's insurance policies do not insure against liability and property
damage losses resulting from nuclear accidents at reactor facilities of its
utility customers. To protect against liability for damage to a customer's
property, McDermott obtains waivers of subrogation from the customer and its
insurer and is generally named as an additional insured under the utility
customer's nuclear property policy. To protect against liability from claims
brought by third parties, McDermott is insured under the utility customer's
nuclear liability policies and has the benefit of the indemnity and limitation
of any applicable liability provision of the Price-Anderson Act, as amended (the
"Act"). The Act limits the public liability of manufacturers and operators of
licensed nuclear facilities and other parties who may be liable in respect of,
and indemnifies them against, all claims in excess of a certain amount. This
amount is determined by the sum of commercially available liability insurance
plus certain retrospective premium assessments payable by operators of
commercial nuclear reactors. For those sites where McDermott provides
environmental remediation services, it seeks the same protection from its
customers as it does for its other nuclear activities.
Although McDermott does not own or operate any nuclear reactors, it has coverage
under commercially available nuclear liability and property insurance for three
of its four facilities that are licensed to possess special nuclear materials.
The fourth facility operates primarily as a conventional research center. This
facility is licensed to possess special nuclear material and has a small and
limited amount of special nuclear material on the premises. Two of the four
owned facilities are located at MTI's Lynchburg, Virginia site. These
facilities are insured under a nuclear liability policy that also insures the
facility of Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company,
that was sold during fiscal year 1993. All three licensed facilities share the
same nuclear liability insurance limit, as the commercial insurer would not
allow FCFC to obtain a separate nuclear liability insurance policy. Due to the
type or quantity of nuclear material present under contract with the U.S.
Government, two facilities in Lynchburg have statutory indemnity and limitation
of liability as provided under the Act. In addition, contracts to manufacture
and supply nuclear fuel or nuclear components to the U.S. Government contain
statutory indemnity clauses, whereby the U.S. Government has assumed the risks
of public liability claims related to nuclear incidents.
JRM's offshore construction business is subject to the usual risks of operations
at sea. JRM has additional exposure because it uses expensive construction
equipment, sometimes under extreme weather conditions, often in remote areas of
the world. In many cases, JRM also operates on or in proximity to existing
offshore facilities. These facilities are subject to damage which could result
in the escape of oil and gas into the sea.
McDermott's insurance coverage for products liability and employers' liability
claims is subject to varying insurance limits that are dependent upon the year
involved. B&W has agreements with the majority of its principal insurers
concerning the method of allocation of products liability asbestos claim
payments to the years of coverage. Pursuant to those agreements, B&W negotiates
and settles these claims and bills these amounts to the appropriate insurers.
McDermott has recognized a provision to the extent that recovery of these
amounts from the insurers is not probable. 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
12
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.
MII has two wholly-owned insurance subsidiaries that provide general and
automotive liability, builders' risk within certain limits, marine hull, and
workers' compensation insurance to the McDermott group of companies. These
insurance subsidiaries have not provided significant amounts of insurance to
unrelated parties.
I. EMPLOYEES
At March 31, 1999, McDermott employed, under its direct supervision,
approximately 20,350 persons compared with 24,700 at March 31, 1998.
Approximately 7,000 employees were members of labor unions at March 31, 1999 as
compared with approximately 6,400 at March 31, 1998. After nine months of
negotiations between BWXT and one of its unions, BWXT temporarily discontinued
operations for their union workforce on April 23, 1999 due to the union's
refusal to vote on a new labor contract. Negotiations continued and the union
ratified BWXT's final offer on May 9, 1999 and the union workers returned to
work. The majority of B&W's and BWXT's manufacturing facilities operate under
union contracts which customarily are renewed every two to three years. One
union contract covering 200 hourly workers at one of B&W's Ohio facilities
expired on April 24, 1999. The negotiating groups are operating under a day-to-
day agreement and management expects to renew the contract without incident.
During the next twelve months, three union contracts covering approximately 100
B&W hourly workers will expire. Management expects to renew the contracts
without incident. McDermott considers its relationship with its employees to be
satisfactory.
J. ENVIRONMENTAL REGULATIONS AND MATTERS
McDermott is subject to the existing and evolving legal and regulatory standards
relating to the environment. These standards include the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act, and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"). They also include any similar laws that provide for responses to
and liability for releases of hazardous substances into the environment, and
other federal laws, each as amended. These standards also include similar
foreign, state or local counterparts to these federal laws, which regulate air
emissions, water discharges, hazardous substances and wastes, and require public
disclosure related to the use of various hazardous substances.
McDermott's operations are also governed by laws and regulations relating to
workplace safety and worker health, primarily the Occupational Safety and Health
Act and regulations promulgated thereunder. McDermott believes that its
facilities are in substantial compliance with current regulatory standards.
McDermott's compliance with U.S. federal, state and local environmental control
and protection regulations necessitated capital expenditures of $413,000 in
fiscal year 1999. Management expects to spend another $3,046,000 on such
capital expenditures over the next five years. Management cannot predict all of
the environmental requirements or circumstances that will exist in the future,
but anticipates that environmental control and protection standards will become
increasingly stringent and costly. Complying with existing environmental
regulations resulted in pretax charges of approximately $13,299,000 in fiscal
year 1999.
McDermott has been identified as a potentially responsible party at various
cleanup sites under CERCLA. McDermott has not been determined to be a major
contributor of wastes to these sites. However, each potentially responsible
party or contributor may face assertions of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on its relative contribution of
waste to each site, McDermott's share of the ultimate liability for the various
sites is not expected to have a material adverse effect on McDermott's
consolidated financial position, results of operations or liquidity in any given
year.
13
Remediation projects have been or may be undertaken at certain of McDermott's
current and former plant sites. During fiscal year 1995, B&W completed, subject
to Nuclear Regulatory Commission ("NRC") certification, the decommissioning and
decontamination of its former nuclear fuel processing plant at Apollo,
Pennsylvania. All fabrication and support buildings have been removed, and all
contaminated soil has been shipped to authorized disposal facilities. In fiscal
year 1997, B&W was notified by the NRC that the Apollo plant site had been
released for unrestricted use. The Apollo plant site is the first major nuclear
facility in the U.S. to achieve "green-field" status after remediation, and will
now be removed from the NRC's Site Decommissioning Management Plan. The nuclear
license for the plant was terminated.
During fiscal year 1995, management decided to close B&W's nuclear manufacturing
facilities in Parks Township, Armstrong County, Pennsylvania (the "Parks
Facilities"). Decontamination is proceeding as permitted by the existing NRC
license. A decommissioning plan was submitted to the NRC for review and
approval during January 1996. The facilities were transferred to BWXT in fiscal
year 1998. BWXT's management reached an agreement with the NRC in fiscal year
1999 on a plan that provides for the completion of facilities dismantlement and
soil restoration by 2001 and license termination in 2002. BWXT's management
expects to request approval from the NRC to release the site for unrestricted
use at that time. At March 31, 1999, the remaining provision for the
decontamination, decommissioning and the closing of these facilities was
$15,811,000.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP"), by letter dated March 19, 1994, advised B&W that it would seek
monetary sanctions, and remedial and monitoring relief, related to the Parks
Facilities. The relief sought related to potential groundwater contamination of
the previous operations of the facilities. These facilities are now a part of
BWXT. PADEP has advised BWXT that it does not intend to assess any monetary
sanctions provided that BWXT continues its remediation program of the Parks
Facilities.
At March 31, 1999 and 1998, McDermott had total environmental reserves
(including provisions for the facilities discussed above), of $31,568,000 and
$46,164,000,respectively. Of the total environmental reserves at March 31, 1999
and 1998, $19,835,000 and $9,934,000, respectively, were included in current
liabilities. Estimated recoveries of these costs are included in environmental
and products liability recoverable at March 31, 1999. Inherent in the estimates
of such reserves and recoveries are expected levels of contamination,
decommissioning costs and recoverability from other parties, which may vary
significantly as decommissioning activities progress. Accordingly, changes in
estimates could result in a material adjustment to operating results, and the
ultimate loss may differ materially from amounts provided in the consolidated
financial statements.
McDermott performs significant amounts of work for the U.S. Government under
both prime contracts and subcontracts and operates certain facilities that are
licensed to possess and process special nuclear materials. McDermott is thus
subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
Decommissioning regulations promulgated by the NRC require BWXT and MTI to
provide financial assurance that it will be able to pay the expected cost of
decommissioning its facilities at the end of their service lives. BWXT and MTI
will continue to provide financial assurance of $25,103,000 during fiscal year
2000 by issuing letters of credit for the ultimate decommissioning of all its
licensed facilities, except one. This facility, which represents the largest
portion of BWXT's eventual decommissioning costs, has provisions in its
government contracts pursuant to which all of its decommissioning costs and
financial assurance obligations are covered by the U.S. Government (DOE).
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI/NRC licenses for byproduct and source nuclear material is
anticipated to occur in July 1999. In conjunction with the transfer of this
regulatory authority and upon notification by NRC of the effective date of
agreement, MTI will reissue decommissioning financial assurance instruments
naming the State of Ohio as the beneficiary. No other provisions of the
instruments will be modified at this time.
14
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.
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. 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.
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
15
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 Lawsuit 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 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, both MII and
JRM formed and continue to maintain special committees of their Board of
Directors to monitor and oversee the companies' 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 ("ARCO")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 ARCO liable to
the plaintiffs in the first eight cases brought to trial, awarding $36,700,000
in compensatory damages. B&W believes that adequate insurance is available to
meet any possible liability in this matter. However, the jury verdict is not
final, and a number of post trial lawsuits are pending contesting this
contingency. There is a controversy between B&W and its insurer as to the
amount of insurance coverage under the insurance policies covering these
facilities available for this award, and all other claims. B&W has filed an
action seeking a judicial determination of this matter, which is currently
pending in a Pennsylvania court. 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.
Two purported class actions have been filed 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. 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. There have been no
further proceedings in either of the actions to date. 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 routine litigation will have a material
adverse effect on McDermott's consolidated financial position or results of
operations.
See Item 1H and Note 11 to the consolidated financial statements regarding
McDermott's potential liability for non-employee products liability asbestos
claims.
16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
17
P A R T I
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MII's Common Stock is traded on the New York Stock Exchange. High and low stock
prices and dividends declared for the fiscal years ended March 31, 1998 and 1999
were as follows:
FISCAL YEAR 1998
SALES PRICE CASH
----------------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------------ ----------- --------- ---------
June 30, 1997 $ 29 - 5/8 $18 $0.05
September 30, 1997 36 - 1/2 28 - 1/2 0.05
December 31, 1997 40 - 1/8 28 - 7/8 0.05
March 31, 1998 41 - 15/16 29 - 1/4 0.05
FISCAL YEAR 1999
SALES PRICE CASH
----------------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------------ ----------- --------- ---------
June 30, 1998 $43 - 15/16 $ 34 - 3/8 $0.05
September 30, 1998 35 19 - 1/4 0.05
December 31, 1998 32 - 5/16 21 - 31/32 0.05
March 31, 1999 27 19 - 1/4 0.05
As of March 31, 1999, the approximate number of record holders of Common Stock
was 4,609.
18
ITEM 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED MARCH 31,
1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ----------
(In thousands, except for per share amounts)
Revenues $3,149,985 $3,674,635 $3,150,850 $3,244,318 $3,043,680
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change $ 192,081 $ 215,690 $ (206,105) $ 20,625 $ 10,876
Net Income (Loss) $ 153,362 $ 215,690 $ (206,105) $ 20,625 $ 9,111
Basic Earnings (Loss) per Common Share:
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change $ 3.25 $ 3.74 $ (3.95) $ 0.23 $ 0.05
Net Income (Loss) $ 2.60 $ 3.74 $ (3.95) $ 0.23 $ 0.02
Diluted Earnings (Loss) per Common Share:
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change $ 3.16 $ 3.48 $ (3.95) $ 0.23 $ 0.05
Net Income (Loss) $ 2.53 $ 3.48 $ (3.95) $ 0.23 $ 0.02
Total Assets $4,305,520 $4,501,130 $4,599,482 $4,387,251 $4,751,670
Long-Term Debt $ 323,774 $ 598,182 $ 667,174 $ 576,256 $ 579,101
Subsidiary's Redeemable
Preferred Stocks - 155,358 170,983 173,301 179,251
---------------------------------------------------------------
Total $ 323,774 $ 753,540 $ 838,157 $ 749,557 $ 758,352
Cash Dividends per Common Share $ 0.20 $ 0.20 $ 0.60 $ 1.00 $ 1.00
See Note 18 to the consolidated financial statements for significant items
included in fiscal year 1999 and 1998 results.
Fiscal year 1997 results include:
. asset impairment losses of $54,642,000,
. gains on asset disposals of $72,121,000, including the realization of
$12,271,000 of the deferred gain on the sale of major marine vessels to
HeereMac,
. favorable workers' compensation cost and other insurance adjustments of
$21,441,000,
. a provision of $72,400,000 for estimated future non-employee products
asbestos claims,
. write-downs of equity investments totaling $25,875,000,
. the write-down of certain claims of $12,506,000 for which recovery was not
probable, and
. a $10,285,000 provision related to employee severance costs.
Fiscal year 1996 results include:
. an equity income gain of $30,612,000 resulting from the sale of two power
purchase contracts,
. favorable workers' compensation cost and other insurance adjustments of
$24,640,000,
. a gain of $34,788,000 resulting from the sale of McDermott's interest in
Caspian Sea oil fields, and
. the write-off of an insurance claim of $12,600,000 due to an unfavorable
arbitration ruling related to the recovery of cost incurred for corrective
action in certain utility and industrial installations.
19
Fiscal year 1995 results include:
. a $46,489,000 charge for the decontamination, decommissioning and closing of
certain nuclear manufacturing facilities and the closing of a manufacturing
facility,
. a $14,478,000 charge for the reduction of estimated products liability
asbestos claims recoveries from insurers, and
. a $26,300,000 benefit for a reduction in accrued interest expense due to the
settlement of outstanding tax issues.
See Note 3 to the consolidated financial statements regarding the change to the
cost method of accounting for McDermott's investment in the HeereMac joint
venture in fiscal year 1997. Equity in income of HeereMac was $1,083,000 and
$6,244,000 in fiscal years 1996 and 1995, respectively. See Note 3 regarding
the April 3, 1998 termination of the McDermott-ETPM joint venture. Fiscal year
1995 includes the cumulative effect of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 112. See Note 11 regarding the uncertainty
as to the ultimate loss relating to products liability asbestos claims and the
results of the ongoing investigations into possible anti-competitive practices
by MII and JRM, and related civil lawsuits.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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, and
backlog has declined over $850,000,000 since the beginning of the fiscal year.
At the current backlog level, management expects revenues in fiscal year 2000 to
be as much as forty percent lower than in 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 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 the fiscal year 2000 operating
activity of this segment to be about the same as in 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
assemblies and nuclear reactor components to the U.S. Government. Management
expects the fiscal year 2000 operating activity of this segment to be about the
same as in the current 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 the fiscal year
2000 operating activity of this segment to be about the same as in the current
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.
21
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.
FISCAL YEAR 1999 VS FISCAL YEAR 1998
Marine Construction Services
- ----------------------------
Revenues decreased $575,916,000 to $1,279,570,000, primarily due to lower volume
in Europe as a result of the withdrawal from the traditional European
engineering markets and from lower volume in essentially 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 increased $19,360,000 to $126,482,000, primarily due to
higher volume and margins in all activities in the Far East and a favorable
settlement of contract claims in that area. There were also higher margins in
Middle East fabrication operations and lower general and administrative
expenses. In addition, prior period results include amortization of OPI
goodwill of $16,318,000. These increases were partially offset by lower volume
in essentially all activities in North America and the Middle East and in
worldwide engineering. There were also higher net operating expenses and a
charge to restructure foreign joint ventures.
Gain (loss) on asset disposals and impairments--net was a gain of $18,620,000
compared to a loss of $40,119,000 in the prior period. This 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 and goodwill associated with worldwide engineering and
a Mexican shipyard. 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 $224,472,000 gain recognized from the termination of the
HeereMac joint venture.
Income from investees decreased $59,566,000 to $10,670,000, 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 and a joint venture in Mexico. These
decreases were partially offset by a gain on the sale of assets in a Malaysian
joint venture. In addition, losses were recorded by McDermott-ETPM West, Inc.
in the prior period.
Backlog for the Marine Construction Services segment at March 31, 1999 and 1998
was $406,183,000 and $1,266,310,000, respectively. Backlog decreased primarily
as a result of lower oil prices. In addition, backlog declined as a result of
JRM's withdrawal from traditional engineering markets. Finally, backlog
decreased as a result of sluggish economic conditions in the Middle and Far East
and the political instability in Asia.
Power Generation Systems
- ------------------------
Revenues decreased $76,504,000 to $1,266,310,000, primarily due to lower
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, replacement nuclear steam generators and
22
industrial boilers. 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 increased $7,887,000 to $90,318,000, primarily due to
higher volume and margins from repair and alteration of existing fossil fuel
steam systems and operation and maintenance contracts. There were also higher
margins from industrial boilers, higher volume from plant enhancement projects
and lower net operating expenses. These increases were partially offset by
lower volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems, lower volume from replacement nuclear steam
generators and higher general and administrative expenses.
Gain (loss) on asset disposals and impairments--net increased $10,551,000 to a
gain of $4,465,000 compared to a loss of $6,086,000 in the prior period. The
gain was primarily due to gains recognized from the sale of a domestic
manufacturing facility. The loss in the prior period was primarily due to asset
impairments in this facility.
Income (loss) from investees decreased $12,274,000 from income of $7,541,000 to
a loss of $4,733,000, primarily due to lower operating results from a foreign
joint venture located in Egypt and the write-off of notes and accounts
receivable from a foreign joint venture located in Turkey.
Backlog for the Power Generation Systems segment at March 31, 1999 and 1998 was
$905,283,000 and $1,070,351,000, respectively. Backlog has been adversely
impacted by suspensions of power generation 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 future.
Government Operations
- ---------------------
Revenues increased $12,187,000 to $382,706,000, 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 other government
operations, commercial operations and commercial nuclear environmental services.
Segment operating income increased $3,537,000 to $39,353,000, primarily due to a
settlement relating to environmental restoration costs. In addition, there was
higher volume from management and operation contracts for U.S. Government-owned
facilities and lower general and administrative expenses. These increases were
partially offset by lower margins from commercial nuclear environmental
services and lower volume from commercial operations and other government
operations. In addition, there was an $8,000,000 settlement of punitive damage
claims relating to a civil suit associated with a Pennsylvania facility formerly
operated by B&W.
Backlog for the Government Operations segment at March 31, 1999 and 1998 was
$860,981,000 and $810,230,000, respectively. At March 31, 1999, this segment's
backlog with the U.S. Government was $760,202,000, of which $12,023,000 had not
been funded.
Industrial Operations
- ---------------------
Revenues increased $89,733,000 to $427,520,000, primarily due to higher revenues
from engineering activities in Canadian operations. This increase was partially
offset by lower revenues from domestic engineering and construction activities
and from the disposition of a non-core business.
Segment operating income increased $12,227,000 to $16,906,000, 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 higher general and administrative expenses.
23
Gain (loss) on asset disposals and impairments-net decreased $128,473,000 from
income of $128,239,000 to a loss of $234,000. The prior period gains were
primarily due to the sale of McDermott's interest in Sakhalin Energy Investment
Company Ltd. and Universal Fabricators Incorporated.
Income (loss) from investees decreased by $5,022,000 from income of $3,376,000
to a loss of $1,646,000, 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.
Backlog for Industrial Operations at March 31, 1999 and 1998 was $400,649,000
and $262,339,000, respectively. Backlog increased because of significant new
bookings in Engineering and Construction.
Other Unallocated Items
- -----------------------
Other unallocated items increased $45,719,000 to $51,005,000, primarily due to
provisions for estimated future non-employee products liability asbestos claims,
higher legal expenses and higher general and administrative expenses. These
decreases were partially offset by lower employee benefit expenses.
Other Income Statement Items
- ----------------------------
Interest income increased $35,430,000 to $97,965,000, primarily due to increases
in investments in government obligations and other debt securities and interest
income on domestic tax refunds. These increases were partially offset by a
decrease in interest income due to the collection of the promissory note
received from the sale of the derrick barges 101 and 102.
Interest expense decreased $18,192,000 to $63,262,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Other-net decreased $22,052,000 from income of $3,253,000 to expense of
$18,799,000, primarily due to a loss of $45,535,000 for insolvent insurers
providing coverage for estimated future non-employee products liability asbestos
claims, partially offset by a net gain on the settlement and curtailment of
postretirement benefit plans. (See Note 6 to the consolidated financial
statements.)
The provision for (benefit from) income taxes decreased $80,920,000 from a
provision of $76,117,000 to a benefit of $4,803,000, while income before
provision for (benefit from) income taxes and extraordinary item decreased
$104,529,000 to $187,278,000. The decrease in the provision for income taxes
was primarily the result of a benefit of $25,456,000 recorded as a result of
the decrease in the valuation allowance for deferred taxes, favorable tax
settlements totaling $30,429,000 of prior years' disputed items in various
jurisdictions and a decrease in income. 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.
FISCAL YEAR 1998 VS FISCAL YEAR 1997
Marine Construction Services
- ----------------------------
Revenues increased $447,017,000 to $1,855,486,000, primarily due to higher
volume in virtually all activities in all operating areas, except in offshore
activities in the Far East, engineering activities in the Middle East and
engineering and procurement activities in Europe and West Africa.
Segment operating income increased $96,303,000 to $107,122,000. Virtually all
activities in all operating areas, except the Far East and Engineering,
reflected this increase.
Gain (loss) on asset disposals and impairments - net decreased $69,140,000 from
a gain of $29,021,000 to a loss of $40,119,000, primarily due to the impairment
loss of $262,901,000 relating to goodwill associated with the
24
acquisition of OPI. Also contributing to the decrease were: prior year gains
from the sale of the derrick barges 15 and 21; participation in a gain from the
sale of the derrick barge 100 by the HeereMac joint venture; and the realization
of a portion of the deferred gain resulting from the sale of the derrick barges
101 and 102. These decreases were partially offset by the $224,472,000 gain
recognized from the termination of the HeereMac joint venture.
Income (loss) from investees increased $78,069,000 from a loss of $7,833,000 to
income of $70,236,000, primarily due to a $61,637,000 distribution of earnings
related to the termination of the HeereMac joint venture. In addition, the loss
from the McDermott ETPM-West, Inc. joint venture decreased $9,248,000 to
$7,584,000 in fiscal year 1998.
See Note 3 to the consolidated financial statements regarding the April 3, 1998
termination of the McDermott-ETPM joint venture. See Note 17 to the
consolidated financial statements regarding the sale and intention to exit
certain European operations.
Power Generation Systems
- ------------------------
Revenues increased $157,291,000 to $1,142,721,000, primarily due to higher
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, plant enhancement projects, boiler cleaning equipment, and
engineering, procurement and construction of cogeneration plants. These
increases were partially offset by lower revenues from replacement nuclear steam
generators.
Segment operating income (loss) increased $117,015,000 from a loss of
$34,584,000 to income of $82,431,000, primarily due to higher volume and margins
from fabrication and erection of fossil fuel steam and environmental control
systems, plant enhancement projects, boiler cleaning equipment and engineering,
procurement and construction of cogeneration plants. In addition, there were
higher margins from replacement nuclear steam generators and replacement parts
and lower selling and general and administrative expenses.
Loss on asset disposals and impairments - net decreased $13,119,000 to
$6,086,000, primarily due to the write-down of an equity investment in a
domestic cogeneration joint venture and an asset impairment loss on a domestic
manufacturing facility in the prior year.
Income (loss) from investees increased $7,888,000 from a loss of $347,000 to
income of $7,541,000. This represents the results of approximately twelve joint
ventures. The increase is primarily due to the favorable operating results from
three foreign joint ventures and a provision for a loss on a Canadian joint
venture in the prior year. This increase was partially offset by a favorable
termination agreement of a domestic joint venture in the prior year.
Government Operations
- ---------------------
Revenues decreased $2,532,000 to $370,519,000, primarily due to lower revenues
from nuclear fuel assemblies and reactor components for the U.S. Government,
commercial nuclear environmental services and other government-related
operations. These decreases were partially offset by higher revenues from
management and operation contracts for U.S. Government owned facilities.
Segment operating income increased $3,358,000 to $35,816,000, primarily due to
higher volume from management and operation contracts for U.S. Government-owned
facilities and higher margins from nuclear fuel assemblies and reactor
components for the U.S. Government and other government-related operations.
These increases were partially offset by lower volume and margins from
commercial nuclear environmental services and higher operating expenses.
Industrial Operations
- ---------------------
Revenues decreased $120,329,000 to $337,787,000, primarily due to lower revenues
from engineering and construction activities in Canadian operations and the
disposition of non-core businesses (domestic shipyard
25
and ordnance operations). These decreases were partially offset by higher
revenues from air-cooled heat exchangers and plant maintenance activities in
Canadian operations.
Segment operating income (loss) increased $35,320,000 from a loss of $30,641,000
to income of $4,679,000. This was primarily due to cost overruns on an
engineering and construction contract in the prior period, higher volume on air-
cooled heat exchangers, lower selling and general and administrative expenses
and prior year losses in non-core businesses (domestic shipyard and ordnance
operations).
Gain (loss) on asset disposals and impairments-net increased $140,097,000 from a
loss of $11,858,000 to a gain of $128,239,000, primarily due to the sale of
McDermott's interest in Sakhalin Energy Investment Company Ltd. and Universal
Fabricators Incorporated in the current year and an asset impairment in the
prior year.
Income from investees increased $2,639,000 to $3,376,000, primarily due to
higher operating results from two foreign joint ventures.
Other Unallocated Items
- -----------------------
Other Unallocated Items decreased $67,096,000 to expense of $5,286,000,
primarily due to provisions for estimated future non-employee products liability
asbestos claims and contract claims in the prior year.
General Corporate Expenses - Net
- --------------------------------
General Corporate Expenses - Net decreased $10,205,000 to $37,251,000, primarily
due to staff reductions, other economy measures, and certain one-time costs
incurred in the prior period, which was partially offset by gains on the sale of
certain corporate aircraft in the prior period.
Other Income Statement Items
- ----------------------------
Interest income increased $15,793,000 to $62,535,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $13,646,000 to $81,454,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense increased $42,422,000 to $47,984,000, primarily due to
minority shareholder participation in the improved operating results of JRM and
MSCL.
Other-net increased $22,785,000 from expense of $19,532,000 to income of
$3,253,000. This increase was primarily due to bank fees and discounts on the
sale of certain accounts receivable and a loss of $19,446,000 for insolvent
insurers providing coverage for estimated future non-employee asbestos claims,
both in the prior year. These increases were partially offset by income in the
prior year for certain reimbursed financing costs.
The provision for (benefit from) income taxes increased $90,709,000 from a
benefit of $14,592,000 to a provision of $76,117,000, while income before
provision for income taxes increased $512,504,000 from a loss of $220,697,000 to
income of $291,807,000. The increase in income taxes is primarily due to an
increase in income. In addition, 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 rate.
EFFECT OF INFLATION AND CHANGING PRICES
McDermott's financial statements are prepared in accordance with generally
accepted accounting principles, using historical dollar accounting (historical
cost). Statements based on historical cost, however, do not
26
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.
In order to minimize the negative impact of inflation on its operations,
McDermott attempts to cover the increased cost of anticipated changes in labor,
material and service costs, either through an estimate of such changes, which is
reflected in the original price, or through price escalation clauses in its
contracts.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1999, McDermott's cash and cash equivalents decreased
$96,373,000 to $181,503,000 and total debt decreased $399,582,000 to
$354,900,000, primarily due to a reduction in short-term borrowings of
$30,954,000 and repayment of $326,921,000 in long-term debt. During this
period, McDermott provided cash of $300,285,000 from operating activities, and
received cash proceeds of $176,290,000 from the net sales and maturities of
investments, and $145,161,000 from asset disposals, including $95,546,000 from
the termination of the McDermott-ETPM joint venture. McDermott used cash of
$272,061,000 for the acquisition of preferred and common stock , $78,787,000 for
additions to property, plant and equipment and $13,810,000 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 $7,200 per claim over the last three years)
has continued to rise. Claims paid during the fiscal year ended March 31, 1999
were $227,176,000, of which $175,457,000 has been recovered or is due from
insurers. At March 31, 1999, receivables of $85,409,000 were due from insurers
for reimbursement of settled claims. Of the $85,409,000 due from insurers,
$37,287,000 had 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 March 31, 1999, the estimated liability for pending and future non-employee
products liability asbestos claims was $1,562,363,000 and estimated insurance
recoveries were $1,366,863,000. 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 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 $33,697,000 to
$78,787,000 in fiscal year 1999. The majority of fiscal year 1999 expenditures
were to maintain, replace and upgrade existing facilities and equipment.
McDermott has budgeted capital expenditures of approximately $38,236,000 during
fiscal 2000.
At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase and sale agreement between 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. It also provided for sales treatment as opposed to secured
financing treatment for this arrangement under Financial Accounting Standards
Board ("FASB")
27
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. This amended and
restated agreement was terminated on April 30, 1999.
On May 7, 1999, MII and JRM entered into a merger agreement pursuant to which
MII initiated a tender offer for those shares of JRM that it did not already own
for $35.62 per share in cash. Under the merger agreement, any shares not
purchased in the tender offer will be acquired for the same price in cash in a
second-step merger. MII estimates that it will require approximately
$560,000,000 to consummate the tender offer and second-step merger and to pay
related fees and expenses. MII expects to obtain the funds from cash on hand
and from a new $525,000,000 senior secured term loan facility with Citibank,
N.A. The facility will terminate and all borrowings thereunder will mature upon
the earlier of five business days after the consummation of the second merger or
September 30, 1999. When the facility terminates, JRM will declare and pay a
dividend and/or loan to MII such amounts that, together with MII's available
cash, will be used to repay all outstanding loans under the facility. Citibank,
N.A. may act either as sole lender under the facility or syndicate all or a
portion of the facility to a group of financial institutions. The facility
contains customary representations, warranties, covenants and events of default.
The facility also includes financial covenants that:
. require MII to maintain a minimum consolidated tangible net worth of not
less than $250,000,000,
. limit MII's ability to pay dividends, and,
. require MII, JRM and certain other subsidiaries to maintain cash, cash
equivalents and investments in debt securities of at least $575,000,000 at
all times.
The facility is secured by a first priority pledge of all JRM capital stock and
securities convertible into JRM capital stock held by or acquired by MII or any
of its subsidiaries.
At March 31, 1999, McDermott had total cash, cash equivalents and investments of
$1,088,402,000. 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 March 31, 1999 was $921,070,000. At March
31, 1999, approximately $48,760,000 fair value of these obligations were pledged
to secure a letter of credit in connection with certain reinsurance agreements.
Management anticipates that approximately $560,000,000 of this investment
portfolio will be used to fund the tender offer, second-step merger and related
fees and expenses referred to above.
At March 31, 1999 and 1998, McDermott had available various uncommitted short-
term lines of credit from banks totaling $87,578,000 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 March 31, 1999. 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 BWICO and BWXT, 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 March 31, 1999, there were no borrowings under the BWICO Credit
Agreement.
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 March 31,
1999, 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 2000. Subsequent to year-end, JRM elected to reduce the
commitments on the JRM Credit Agreement from $200,000,000 to $100,000,000.
28
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 March 31, 1999,
substantially all of the net assets of MI were subject to such restrictions. At
March 31, 1999, JRM could make unsecured loans to or investments in MII of
approximately $75,000,000 and pay dividends to MII of approximately
$146,300,000. In connection with the tender offer and merger described above,
an amendment to the JRM Credit Agreement was entered into that permits JRM to
loan to MII such amounts as may be required for MII to repay the amounts
outstanding under the $525,000,000 senior secured term loan facility with
Citibank N.A.
On March 5, 1999, JRM consummated 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. On that date, JRM purchased $248,575,000 in principal amount
of the notes for a total purchase price of $284,564,000, including interest of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchase of the notes, JRM received consents to certain
amendments that amended or eliminated certain restrictive covenants and other
provisions contained in the indenture relating to the notes. Specifically, the
covenants contained in the indenture that restricted JRM's ability to pay
dividends, repurchase or redeem its capital stock, or to transfer funds through
unsecured loans to or investments in MII were eliminated.
Working capital decreased $26,475,000 from $135,430,000 at March 31, 1998 to
$108,955,000 at March 31, 1999. During the next fiscal year, 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.
JRM's joint ventures are largely financed through their own resources,
including, in some cases, stand-alone borrowing arrangements. In some
instances, McDermott provides guarantees on behalf of its joint ventures. (See
Note 11 to the consolidated financial statements.)
At March 31, 1999, the ratio of long-term debt to total stockholders' equity was
0.41 as compared with 0.88 at March 31, 1998.
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.
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.
MII's quarterly dividends are $0.05 per share on its Common Stock. Prior to
redemption, MI's quarterly dividends were $0.55 per share on the Series A $2.20
Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60
Cumulative Preferred Stock.
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. The purpose of the repurchases was to offset dilution
created by the
29
issuance of shares pursuant to MII's stock compensation and thrift plans. MII
completed its two million share repurchase program in August 1998. During the
fiscal year ended March 31, 1999, MII repurchased 1,900,000 shares of its common
stock at an average share price of $31.10.
During fiscal year 1998, JRM'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. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to JRM's stock compensation and
thrift plans. JRM repurchased 362,500 shares at an average share price of
$37.31 during fiscal year 1998. During fiscal year 1999, JRM's Board of
Directors authorized the repurchase of up to an additional one million shares of
its common stock . JRM repurchased another 1,837,700 shares of its common stock
at an average share price of $31.67 through October 8, 1998, at which time JRM
ceased all further share repurchases. At such time, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
At March 31, 1999, MII has provided a valuation allowance for deferred tax
assets of $39,961,000 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 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, and
(5) test and validate solutions.
30
At March 31, 1999, the inventory, prioritization and assessment of the critical
IT Systems' components were complete. The remediation and replacement tasks are
in progress with approximately 90% of the work completed. The Facilities and
Embedded Systems phases of the project were 90% complete and on schedule with
testing and replacement of components showing significant progress during the
quarter. The analysis of Critical Suppliers includes the determination of the
compliance status of the suppliers' businesses as well as the products they
produce. The majority of the company sites have completed this analysis and the
balance are near completion. The Customer Products phase of the project is
essentially complete with minor work outstanding at a few of the company's
smaller business units.
All Year 2000 solutions for the critical IT Systems, Facilities and Embedded
Systems that support McDermott's engineering, manufacturing and construction
operations and the corporate functions are scheduled to be substantially
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 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 $38,000,000 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 $29,000,000 will be expensed as incurred.
Expenditures to date include $7,000,000 of capital and $21,000,000 of expense.
The differences between the cost incurred to date and the project completion
percentage is due to certain project milestones with subcontractors for work
being performed for the corporate office. Excluding the corporate office,
approximately 90% of the total anticipated Year 2000 project cost has been
incurred through March 31, 1999.
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.
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 focus
on the mission critical processes and third party dependencies that could be at
risk with the century date change. Contingency plans are in the early stages of
development and are being prioritized consistent with the requirements of each
operating location. All contingency planning activities are scheduled to be
completed by September 30, 1999.
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:
31
. 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 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's adoption of SOP 98-5 will not have a
material impact on its consolidated financial position or results of operations.
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.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
McDermott's exposure to market risk from changes in interest rates relates
primarily to its investment portfolio, which is primarily comprised of
investments in U.S. government obligations and other highly liquid debt
securities. McDermott is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. All of McDermott's investments in debt securities are
classified as available-for-sale.
McDermott has no material future earnings or cash flow exposures from changes in
interest rates on its long-term debt obligations, as substantially all of these
obligations have fixed interest rates. McDermott has exposure to changes in
interest rates on its short-term uncommitted lines of credit and its unsecured
and committed revolving credit facilities (see Liquidity and Capital Resources).
At March 31, 1999, McDermott had no borrowings against these short-term
facilities.
McDermott has operations in many foreign locations and as a result, its
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in those foreign
markets. In order to manage the risks associated with foreign currency exchange
fluctuations, McDermott regularly hedges such risks with foreign currency
forward exchange contracts (principally to hedge its Canadian dollar exposure).
McDermott does not enter into speculative forward exchange contracts.
The table below provides information about McDermott's market sensitive
financial instruments and constitutes a forward-looking statement.
Principal Amount by Expected Maturity
(In thousands)
Fiscal Years Ending March 31, Fair Value
2000 2001 2002 2003 2004 Thereafter Total at 3/31/99
-------- -------- -------- ------- ------- ---------- -------- ----------
Investments $366,304 $294,400 $118,960 $67,000 $75,540 - $922,204 $921,070
Average Interest Rate 4.91% 5.48% 6.10% 5.47% 5.13% -
Long-term Debt-
Fixed Rate $ 30,640 - $225,000 - $ 9,500 $84,175 $349,315 $360,997
Average Interest Rate 8.22% - 9.375% - 9.00% 8.20%
Long-term Debt-
Variable Rate $ 25 $ 25 $ 25 $ 25 $ 25 $ 4,652 $ 4,777 $ 4,777
Average Interest Rate 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%
33
Contract Amount by Expected Maturity
(In thousands)
Fiscal Years Ending March 31, Fair Value
2000 2001 2002 Total at 3/31/99
------- ------ ------- ------- ----------
Forward Contracts to Purchase Foreign Currencies for U.S. Dollars:
Canadian Dollar $49,955 $9,292 $31,041 $90,288 $86,426
Average Contractual Exchange Rate 1.442 1.421 1.415
Japanese Yen $ 3,260 - - $ 3,260 $ 3,193
Average Contractual Exchange Rate 116.7
Danish Kroner $ 153 - - $ 153 $ 145
Average Contractual Exchange Rate 6.557
Forward Contracts to Sell Foreign Currencies for U.S. Dollars:
Canadian Dollar $14,880 - - $14,880 $13,920
Average Contractual Exchange Rate 1.402
French Franc $ 720 $ 604 $ 2,423 $ 3,747 $ 3,691
Average Contractual Exchange Rate 5.884 5.794 5.745
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
McDermott has prepared the consolidated financial statements and related
financial information included in this report. McDermott has the primary
responsibility for the financial statements and other financial information and
for ascertaining that the data fairly reflect the financial position and results
of operations of McDermott. The financial statements were prepared in
accordance with generally accepted accounting principles, and necessarily
reflect informed estimates and judgments by appropriate officers of McDermott
with appropriate consideration given to materiality.
McDermott believes that it maintains an internal control structure designed to
provide reasonable assurance that assets are safeguarded against loss or
unauthorized use and that the financial records are adequate and can be relied
upon to produce financial statements in accordance with generally accepted
accounting principles. The concept of reasonable assurance is based on the
recognition that the cost of an internal control structure must not exceed the
related benefits. Although internal control procedures are designed to achieve
these objectives, it must be recognized that fraud, errors or illegal acts may
nevertheless occur. McDermott seeks to assure the objectivity and integrity of
its accounts by its selection of qualified personnel, by organizational
arrangements that provide an appropriate division of responsibility and by the
establishment and communication of sound business policies and procedures
throughout the organization. McDermott believes that its internal control
structure provides reasonable assurance that fraud, errors or illegal acts that
could be material to the financial statements are prevented or would be
detected.
McDermott's accompanying consolidated financial statements have been audited by
its independent accountants, who provide McDermott with advice on the
application of U.S. generally accepted accounting principles to McDermott's
business and also provide an objective assessment of the degree to which
McDermott meets its responsibility for the fairness of financial reporting.
They regularly evaluate the internal control structure and perform such tests
and other procedures as they deem necessary to reach and express an opinion on
the fairness of the financial statements. The reports of the independent
accountants appear elsewhere herein.
The Board of Directors pursues its responsibility for McDermott's consolidated
financial statements through its Audit Committee, which is composed solely of
directors who are not officers or employees of McDermott. The Audit Committee
meets periodically with the independent accountants and management to review
matters relating to the quality of financial reporting and internal control
structure and the nature, extent and results of the audit effort. In addition,
the Audit Committee is responsible for recommending the engagement of
independent accountants for McDermott to the Board of Directors, who in turn
submit the engagement to the stockholders for their approval. The independent
accountants have free access to the Audit Committee.
May 14, 1999
35
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
McDermott International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income (loss), comprehensive income (loss),
stockholders' equity, and cash flows present fairly, in all material respects,
the financial position of McDermott International, Inc. and subsidiaries at
March 31, 1999, and the results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform an
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
May 14, 1999
36
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Stockholders
McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott
International, Inc. as of March 31, 1998, and the related consolidated
statements of income (loss), comprehensive income (loss) stockholders' equity
and cash flows for each of the two years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
International, Inc. at March 31, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 19, 1998
37
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 and 1998
ASSETS
1999 1998
---------- ----------
(In thousands)
Current Assets:
Cash and cash equivalents $ 181,503 $ 277,876
Investments 55,646 135
Accounts receivable trade, net 281,667 550,552
Accounts receivable - unconsolidated affiliates 165,154 52,351
Accounts receivable - other 125,631 139,864
Environmental and products liabilities recoverable - current 228,738 143,588
Contracts in progress 179,310 239,548
Inventories 52,656 63,342
Deferred income taxes 73,364 84,036
Other current assets 31,697 45,264
- ------------------------------------------------------------------------------------------
Total Current Assets 1,375,366 1,596,556
- ------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 22,670 29,034
Buildings 197,902 205,284
Machinery and equipment 1,198,381 1,457,630
Property under construction 41,686 23,404
- ------------------------------------------------------------------------------------------
1,460,639 1,715,352
Less accumulated depreciation 1,026,678 1,181,658
- ------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 433,961 533,694
- ------------------------------------------------------------------------------------------
Investments:
Government obligations 473,072 519,443
Other investments 378,181 553,913
- ------------------------------------------------------------------------------------------
Total Investments 851,253 1,073,356
- ------------------------------------------------------------------------------------------
Environmental and Products Liabilities Recoverable 1,167,113 604,870
- ------------------------------------------------------------------------------------------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $104,444,000 at March 31,1999
and $107,814,000 at March 31, 1998 125,436 127,077
- ------------------------------------------------------------------------------------------
Prepaid Pension Costs 130,437 328,583
- ------------------------------------------------------------------------------------------
Other Assets 221,954 236,994
- ------------------------------------------------------------------------------------------
TOTAL $4,305,520 $4,501,130
- ------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
----------- -----------
(In thousands)
Current Liabilities:
Notes payable and current maturities of long-term debt $ 31,126 $ 156,300
Accounts payable 198,500 301,988
Environmental and products liabilities - current 259,836 181,234
Accrued employee benefits 132,105 146,839
Accrued liabilities - other 318,631 285,834
Accrued contract cost 51,619 89,321
Advance billings on contracts 240,380 268,764
U.S. and foreign income taxes payable 34,214 30,846
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 1,266,411 1,461,126
- -----------------------------------------------------------------------------------------------
Long-Term Debt 323,774 598,182
- -----------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 128,188 393,616
- -----------------------------------------------------------------------------------------------
Environmental and Products Liabilities 1,334,096 751,620
- -----------------------------------------------------------------------------------------------
Other Liabilities 263,950 271,489
- -----------------------------------------------------------------------------------------------
Commitments and Contingencies.
Minority Interest:
Subsidiary's redeemable preferred stocks - 155,358
Other minority interest 195,367 189,966
- -----------------------------------------------------------------------------------------------
Total Minority Interest 195,367 345,324
- -----------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares; outstanding
2,875,000 Series C $2.875 cumulative convertible,
par value $1.00 per share - 2,875
Common stock, par value $1.00 per share, authorized 150,000,000
shares; issued 61,147,775 at March 31, 1999 and 56,607,861
at March 31, 1998 61,148 56,608
Capital in excess of par value 1,028,393 1,012,338
Accumulated deficit (200,432) (341,916)
Treasury stock at cost, 2,000,614 shares at March 31, 1999
and 100,614 shares at March 31, 1998 (62,731) (3,575)
Accumulated other comprehensive loss (32,644) (46,557)
- -----------------------------------------------------------------------------------------------
Total Stockholders' Equity 793,734 679,773
- -----------------------------------------------------------------------------------------------
TOTAL $4,305,520 $4,501,130
- -----------------------------------------------------------------------------------------------
39
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
1999 1998 1997
----------- ---------- -----------
(In thousands, except per share data)
Revenues $3,149,985 $3,674,635 $3,150,850
- --------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding depreciation and amortization) 2,635,229 3,117,279 2,878,972
Depreciation and amortization 101,390 142,301 151,581
Selling, general and administrative expenses 222,239 224,045 262,918
- --------------------------------------------------------------------------------------------------------
2,958,858 3,483,625 3,293,471
- --------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and Impairments - Net 17,910 79,065 (526)
- --------------------------------------------------------------------------------------------------------
Operating Income (Loss) before Income (Loss) from Investees 209,037 270,075 (143,147)
- --------------------------------------------------------------------------------------------------------
Income (Loss) from Investees 8,379 85,382 (4,098)
- --------------------------------------------------------------------------------------------------------
Operating Income (Loss) 217,416 355,457 (147,245)
- --------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 97,965 62,535 46,742
Interest expense (63,262) (81,454) (95,100)
Minority interest (46,042) (47,984) (5,562)
Other-net (18,799) 3,253 (19,532)
- --------------------------------------------------------------------------------------------------------
(30,138) (63,650) (73,452)
- --------------------------------------------------------------------------------------------------------
Income (Loss) before Provision for (Benefit from)
Income Taxes and Extraordinary Item 187,278 291,807 (220,697)
Provision for (Benefit from) Income Taxes (4,803) 76,117 (14,592)
- --------------------------------------------------------------------------------------------------------
Income (Loss) before Extraordinary Item 192,081 215,690 (206,105)
Extraordinary Item (38,719) - -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $153,362 $215,690 $(206,105)
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Stockholders
(after Preferred Stock Dividends) $153,362 $207,424 $(214,371)
- --------------------------------------------------------------------------------------------------------
Earnings (Loss) per Common Share:
Basic:
Income (Loss) before Extraordinary Item $ 3.25 $ 3.74 $ (3.95)
Net Income (Loss) $ 2.60 $ 3.74 $ (3.95)
Diluted:
Income (Loss) before Extraordinary Item $ 3.16 $ 3.48 $ (3.95)
Net Income (Loss) $ 2.53 $ 3.48 $ (3.95)
- --------------------------------------------------------------------------------------------------------
Cash Dividends:
Per Common Share $ 0.20 $ 0.20 $ 0.60
Per Preferred Share $ - $ 2.88 $ 2.88
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
1999 1998 1997
---- ---- ----
(In thousands)
Net Income (Loss) $ 153,362 $215,690 $ (206,105)
- ------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (856)
Foreign currency translation adjustments, net of
reclassification adjustments (3,689) (11,271)
Reclassification adjustments for sales of investments
in foreign entities in fiscal year 1999 15,596
Minimum pension liability adjustment,
net of taxes of $791,000, $1,547,000 and $480,000
in fiscal years 1999, 1998 and 1997, respectively (1,058) (2,582) (720)
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period,
net of taxes of $3,000 in fiscal year 1999 1,887
Unrealized gains (losses), net of reclassification adjustments
arising during the period, net of taxes of $360,000 and
$85,000 in fiscal years 1998 and 1997, respectively 4,807 (2,257)
Reclassification adjustment for (gains) losses included in
net income, net of taxes of $11,000 in fiscal year 1999 (1,656)
- -------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 13,913 (1,464) (14,248)
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 167,275 $214,226 $ (220,353)
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
(In thousands, except for share amounts)
Preferred Stock
Series C Common Stock
----------------------------- --------------------------
Shares Par Value Shares Par Value
------ --------- ------ ---------
Balance March 31, 1996 2,875,000 $ 2,875 54,435,823 $ 54,436
- ----------------------------------------------------------------------------------------------------------------
Net loss - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 22,779 23
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 171,290 171
Awards of common stock - - 975 1
Redemption of preferred shares - - - -
Contributions to thrift plan - - 306,089 306
Deferred career executive stock plan expense - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 2,875,000 2,875 54,936,956 54,937
Net income - - - -
Minimum pension liability - - - -
Gain on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 1,450,593 1,451
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 90 -
Redemption of preferred shares - - 100 -
Contributions to thrift plan - - 191,058 191
Purchase of treasury shares - - - -
Deferred career executive stock plan expense - - - -
Termination of directors' retirement plan - - 32,040 32
Cancellation of shares - - (2,976) (3)
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1998 2,875,000 2,875 56,607,861 56,608
Net income - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 188,768 189
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 2,025 2
Directors' stock plan - - 18,735 19
Redemption of preferred shares - - 23,251 23
Conversion of Series C Preferred stock (2,875,000) (2,875) 4,077,890 4,078
Contributions to thrift plan - - 229,245 229
Purchase of treasury shares - - - -
Deferred career executive stock plan expense - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1999 - $ - 61,147,775 $ 61,148
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
42
Accumulated
Capital Other Total
in Excess Accumulated Comprehensive Treasury Stockholders'
of Par Value Deficit Income Stock Equity
------------- ----------- --------------- ----------- -------------
$949,022 $ (290,968) $(30,845) $ - $ 684,520
- -------------------------------------------------------------------------------------
- (206,105) - - (206,105)
- - (720) - (720)
- - (2,257) - (2,257)
- - (11,271) - (11,271)
- (32,824) - - (32,824)
- (8,266) - - (8,266)
1,339 - - - 1,339
371 - - - 394
41 - - - 41
(5) - - - 166
20 - - - 21
68 - - - 68
5,724 - - - 6,030
5,865 - - - 5,865
- -------------------------------------------------------------------------------------
962,445 (538,163) (45,093) - 437,001
- 215,690 - - 215,690
- - (2,582) - (2,582)
- - 4,807 - 4,807
- - (3,689) - (3,689)
- (11,177) - - (11,177)
- (8,266) - - (8,266)
3,431 - - - 3,431
30,005 - - - 31,456
4,916 - - - 4,916
(24) - - - (24)
221 - - - 221
5,795 - - - 5,986
- - - (3,662) (3,662)
4,576 - - - 4,576
1,057 - - - 1,089
(84) - - 87 -
- -------------------------------------------------------------------------------------
1,012,338 (341,916) (46,557) (3,575) 679,773
- 153,362 - - 153,362
- - (1,058) - (1,058)
- - 231 - 231
- - 14,740 - 14,740
- (11,878) - - (11,878)
2,495 - - - 2,495
3,543 - - - 3,732
1,013 - - - 1,013
- - - - 2
421 - - - 440
701 - - - 724
(1,203) - - - -
5,813 - - - 6,042
- - - (59,156) (59,156)
3,272 - - - 3,272
- -------------------------------------------------------------------------------------
$1,028,393 $ (200,432) $(32,644) $ (62,731) $ 793,734
- -------------------------------------------------------------------------------------
43
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998 1997
---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 153,362 $ 215,690 $(206,105)
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 101,390 142,301 151,581
Income or loss of investees, less dividends 20,271 (13,913) 17,422
(Gain) loss on asset disposals and impairments - net (17,910) (79,065) 526
Provision for (benefit from) deferred taxes (29,725) 9,521 (211)
Extraordinary loss 38,719 - -
Other 3,805 15,372 6,525
Changes in assets and liabilities, net of effects
from acquisitions and divestitures:
Accounts receivable 79,553 28,596 7,978
Accounts payable (100,835) 31,712 3,443
Inventories 10,305 1,974 123
Net contracts in progress and advance billings 31,470 152,097 139,188
Income taxes 627 (47,356) (6,026)
Accrued liabilities 41,238 30,746 (26,936)
Products and environmental liabilities 49,133 11,524 86,812
Other, net (45,670) 116,973 (32,609)
Proceeds from insurance for products liability claims 191,728 157,656 153,141
Payments of products liability claims (227,176) (196,091) (188,205)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 300,285 577,737 106,647
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (6,627) -
Purchases of property, plant and equipment (78,787) (45,090) (91,371)
Purchases of available-for-sale securities (827,371) (788,503) (617,464)
Maturities of available-for-sale securities 664,183 112,369 219,301
Sales of available-for-sale securities 339,478 95,430 156,827
Proceeds from asset disposals 145,161 457,337 106,304
Investments in equity investees 88 (4,391) (31,030)
Returns from investees - 2,124 24,500
Other - - (1,821)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 242,752 (177,351) (234,754)
- ------------------------------------------------------------------------------------------------------------
44
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998 1997
---------- ---------- ----------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $(326,921) $(152,116) $(31,687)
Issuance of long-term debt - - 244,375
Decrease in short-term borrowing (30,954) (208,759) (12,371)
Issuance of common stock 4,173 31,431 565
Issuance of subsidiary's stock 2,127 5,599 4,569
Acquisition of subsidiary's common stock (58,272) (13,537) -
Acquisition of subsidiary's preferred stock (154,633) (15,406) (2,250)
Dividends paid (13,810) (19,367) (51,947)
Purchase of McDermott International, Inc. stock (59,156) (3,662) -
Other (3,686) (5,102) (4,843)
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (641,132) (380,919) 146,411
- -----------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 1,722 626 816
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (96,373) 20,093 19,120
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 277,876 257,783 238,663
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $181,503 $277,876 $257,783
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 68,317 $ 87,514 $ 85,502
Income taxes (net of refunds) $ 44,044 $ 15,571 $ 14,758
- -----------------------------------------------------------------------------------------
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 consolidated financial statements.
45
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements are presented in U.S. Dollars in
accordance with accounting principles generally accepted in the United
States("GAAP"). The consolidated financial statements include the accounts of
McDermott International, Inc. and its subsidiaries and controlled joint
ventures. Investments in joint ventures and other entities which McDermott
International, Inc. does not control, but has significant influence over, are
accounted for using the equity method. All significant intercompany transactions
and accounts have been eliminated. Certain amounts previously reported have
been reclassified to conform with the presentation at March 31, 1999.
Hereinafter, unless the context requires otherwise, the following terms shall
mean:
. MII for McDermott International, Inc., a Panama corporation,
. JRM for J. Ray McDermott, S. A., a majority-owned Panamanian subsidiary of
MII, and its consolidated subsidiaries,
. MI for McDermott Incorporated, a Delaware subsidiary of MII, and its
consolidated subsidiaries,
. BWICO for Babcock & Wilcox Investment Company, a Delaware subsidiary of MI,
. B&W for the Babcock & Wilcox Company, a Delaware subsidiary of BWICO, and
its consolidated subsidiaries,
. BWXT for BWX Technologies, Inc., a Delaware subsidiary of BWICO, and its
consolidated subsidiaries, and
. McDermott for the consolidated enterprise.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Earnings Per Share
- ------------------
Earnings (loss) per common share has been computed on the basis of the weighted
average number of common shares and, where dilutive, common share equivalents,
outstanding during the indicated periods.
Investments
- -----------
McDermott's investments, primarily government obligations and other debt
securities, are classified as available-for-sale and are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive loss. Investments available for current
operations are classified in the balance sheet as current assets while
investments held for long-term purposes are classified as non-current assets.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses are included in other income. The
cost of securities sold is based on the specific identification method.
Interest on securities is included in interest income.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U.S. Dollars at current exchange
rates, and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded as a component of accumulated other
comprehensive loss. Foreign currency transaction adjustments are reported
46
in income. Included in other income (expense) are transaction gains of
$3,384,000, $5,200,000, and $3,628,000 for fiscal years 1999, 1998 and 1997,
respectively. In fiscal years 1999 and 1998, a loss of $15,596,000 and a gain of
$1,005,000, respectively, were transferred from currency translation adjustments
and included in gain (loss) on asset disposals and impairments - net due to the
sale of foreign investments.
Contracts and Revenue Recognition
- ---------------------------------
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or combinations thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. Certain partnering contracts contain a risk and reward
element, whereby a portion of total compensation is tied to the overall
performance of the alliance partners. Revenues and related costs so recorded,
plus accumulated contract costs that exceed amounts invoiced to customers under
the terms of the contracts, are included in contracts in progress. Billings
that exceed accumulated contract costs and revenues and costs recognized under
percentage of completion are included in advance billings on contracts. Most
long-term contracts have provisions for progress payments. All unbilled
revenues will be billed. Contract price and cost estimates are reviewed
periodically as the work progresses and adjustments proportionate to the
percentage of completion are reflected in income in the period when such
estimates are revised. Provisions are made currently for all known or
anticipated losses. Variations from estimated contract performance could result
in a material adjustment to operating results for any fiscal quarter or year.
Claims for extra work or changes in scope of work are included in contract
revenues when collection is probable. Included in accounts receivable and
contracts in progress are approximately $15,535,000 and $5,790,000 relating to
commercial and U.S. Government contracts claims whose final settlement is
subject to future determination through negotiations or other procedures which
had not been completed at March 31, 1999 and 1998, respectively.
1999 1998
--------- ---------
(In thousands)
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized $ 46,942 $ 88,519
Revenues recognized less billings to customers 132,368 151,029
--------------------------------------------------------------------------
Contracts in Progress $179,310 $239,548
--------------------------------------------------------------------------
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized $320,523 $311,302
Costs incurred less costs of revenue recognized (80,143) (42,538)
--------------------------------------------------------------------------
Advance Billings on Contracts $240,380 $268,764
--------------------------------------------------------------------------
McDermott is usually entitled to financial settlements relative to the
individual circumstances of deferrals or cancellations of Power Generation
Systems' contracts. McDermott does not recognize such settlements or claims for
additional compensation until final settlement is reached.
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
1999 1998
---- ----
(In thousands)
Retainages $108,605 $70,414
------------------------------------------------------------
Retainages expected to be collected
after one year $ 29,246 $33,567
------------------------------------------------------------
Of its long-term retainages at March 31, 1999, McDermott anticipates collection
of $10,946,000 in fiscal year 2001, $17,167,000 in fiscal year 2002 and
$1,133,000 in fiscal year 2003.
47
Inventories
- -----------
Inventories are carried at the lower of cost or market. Cost is determined on
an average cost basis except for certain materials inventories, for which the
last-in first-out (LIFO) method is used. The cost of approximately 16% and 17%
of total inventories was determined using the LIFO method at March 31, 1999 and
1998, respectively. Inventories at March 31, 1999 and 1998 are summarized
below:
1999 1998
------- -------
(In thousands)
Raw Materials and Supplies $37,481 $47,411
Work in Progress 7,606 6,720
Finished Goods 7,569 9,211
-------------------------------------------------
Total Inventories $52,656 $63,342
-------------------------------------------------
Comprehensive Income (Loss)
- ---------------------------
Effective April 1, 1998, McDermott adopted Statement of Financial Accounting
Standards ("SFAS") 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 consolidated
balance sheet as a component of stockholders' equity. Comprehensive income is
displayed as a separate financial statement.
The components of accumulated other comprehensive loss included in stockholders'
equity at March 31, 1999 and 1998 are as follows:
1999 1998
--------- ---------
(In thousands)
Currency Translation Adjustments $(27,762) $(42,502)
Net Unrealized Gain on Investments 906 675
Minimum Pension Liability (5,788) (4,730)
----------------------------------------------------------------
Accumulated Other Comprehensive Loss $(32,644) $(46,557)
----------------------------------------------------------------
Warranty Expense
- ----------------
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems segment, is accrued
relative to revenue recognition on the respective contracts. JRM includes
warranty costs as a component of their total contract cost estimate to satisfy
contractual requirements. In addition, specific provisions are made where the
costs of warranty are expected to significantly exceed such accruals.
Environmental Clean-up Costs
- ----------------------------
McDermott accrues for future decommissioning of its nuclear facilities that will
permit the release of these facilities to unrestricted use at the end of each
facility's life, which is a condition of its licenses from the Nuclear
Regulatory Commission. Such accruals, based on the estimated cost of those
activities, are over the economic useful life of each facility, which is
estimated at 40 years. Estimated costs are adjusted as further information
develops or circumstances change and, if applicable, are net of cost-sharing
agreements. Costs of future expenditures for environmental clean-up are not
discounted to their present value. However, there is an exception at one
facility that has provisions in its government contracts pursuant to which all
of its decommissioning costs are covered by the U.S. Government. Recoveries of
environmental clean-up costs from other parties are recognized as assets when
their receipt is deemed probable.
48
Research and Development
- ------------------------
Research and development activities are related to development and improvement
of new and existing products and equipment and conceptual and engineering
evaluation for translation into practical applications. The cost of research and
development which is not performed on specific contracts is charged to
operations as incurred. Such expense was approximately $12,312,000, $15,125,000
and $16,579,000 in fiscal years 1999, 1998 and 1997, respectively. In addition,
expenditures on research and development activities of approximately
$15,752,000, $22,803,000 and $34,170,000 in fiscal years 1999, 1998 and 1997,
respectively, were paid for by customers of McDermott.
Minority Interest
- -----------------
Minority interest expense includes dividends on MI preferred stock (see Note 8)
and the recognition of minority shareholder participation in the results of
operations of less than wholly-owned subsidiaries.
Long-Lived Assets
- -----------------
McDermott evaluates the realizability of its long-lived assets, including
property, plant and equipment and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are carried at cost, reduced by provisions to
recognize economic impairment when management determines such impairment has
occurred.
Except for major marine vessels, property, plant and equipment is depreciated
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. Major marine
vessels are depreciated using the units-of-production method based on the
utilization of each vessel. Depreciation expense calculated under the units-of-
production method may be less than, equal to, or greater than depreciation
expense calculated under the straight-line method in any period. The annual
depreciation based on utilization of each vessel will not be less than the
greater of 25% of annual straight-line depreciation, or 50% of cumulative
straight-line depreciation. Depreciation expense was $84,404,000, $106,305,000
and $102,486,000 for fiscal years 1999, 1998 and 1997, respectively.
Maintenance, repairs and renewals which do not materially prolong the useful
life of an asset are expensed as incurred except for drydocking costs for the
marine fleet, which are estimated and accrued over the period of time between
drydockings, generally 3 to 5 years. Such accruals are charged to operations
currently.
Intangible Assets
- -----------------
The majority of goodwill pertains to the acquisition of B&W. McDermott
amortizes goodwill associated with the acquisition of B&W on a straight-line
basis over 40 years and amortizes other goodwill over 10 to 20 years. During
fiscal year 1999, McDermott recorded $27,231,000 of additional goodwill arising
from JRM's purchase of treasury shares (see Note 2) and a reduction of goodwill
of $9,267,000 relating to the sale of McDermott Subsea Constructors Limited (see
Note 3). Impairments of goodwill of $10,461,000 and $272,610,000, respectively,
were recorded in fiscal years 1999 and 1998 (see Note 7).
Goodwill amortization expense was $8,290,000, $25,026,000 and $31,641,000 for
fiscal years 1999, 1998 and 1997, respectively.
Other intangible assets of $22,638,000 and $30,293,000 are included in other
assets at March 31, 1999 and 1998, respectively. These intangible assets
consist primarily of trademarks, rights to use technology, investments in oil
and gas properties and non-competition agreements. Amortization expense for
these intangible assets was $6,909,000, $8,229,000 and $10,187,000,
respectively, for fiscal years 1999, 1998 and 1997.
49
Capitalization of Interest Cost
- -------------------------------
Interest is capitalized in accordance with SFAS No. 34, "Capitalization of
Interest Cost." In fiscal years 1999, 1998 and 1997, total interest cost
incurred was $63,839,000, $82,347,000 and $95,924,000, respectively, of which
$578,000, $893,000 and $824,000, respectively, was capitalized.
Cash Equivalents
- ----------------
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased, which are not held as part of the investment portfolio.
Derivative Financial Instruments
- --------------------------------
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 derivatives, primarily forward exchange contracts, to reduce the impact of
foreign exchange rate movements on operating results. Gains and losses on
forward exchange contracts that qualify as hedges of firm purchase and sale
commitments are deferred and recognized in income or as adjustments of carrying
amounts when the hedged transactions occur. Gains and losses on forward
exchange contracts which hedge foreign currency assets or liabilities are
recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged.
Stock-Based Compensation
- ------------------------
McDermott follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for its employee stock plans. Under APB 25, if the exercise price of the
Company's employee stock options equals or exceeds the fair value of the
underlying stock on the measurement date, no compensation expense is recognized.
If the measurement date is later than the date of grant, compensation expense is
recorded to the measurement date based on the quoted market price of the
underlying stock at the end of each period.
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's adoption of SOP 98-5 will not have a
material impact on its consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board 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.
NOTE 2 - ACQUISITIONS
During fiscal year 1997, an additional interest in Talleres Navales del Golfo, a
Mexican shipyard, was acquired. During fiscal year 1998, McDermott acquired the
minority ownership in Diamond Power Specialty U.K. In fiscal years 1999 and
1998, McDermott acquired a portion of the outstanding minority interest of JRM,
as a
50
result of JRM's purchase of treasury shares. These acquisitions were accounted
for using the purchase method, and operating results have been included in the
Consolidated Statement of Income (Loss) from the acquisition dates. Pro forma
results of operations have not been presented because the effects of these
acquisitions were not significant.
Subsequent Event--On May 13, 1999, MII commenced a tender offer to acquire all
outstanding shares of JRM not already owned by MII for $35.62 per share. JRM
currently has approximately 39,060,000 shares outstanding, of which MII owns
approximately 63%.
NOTE 3 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
Included in other assets are investments in joint ventures and other entities,
which are accounted for using the equity method, of $61,393,000 and $72,389,000
at March 31, 1999 and 1998, respectively. Undistributed earnings of equity
method investees were $38,088,000 and $40,484,000 at March 31, 1999 and 1998,
respectively.
Summarized combined balance sheet and income statement information, based on the
most recent financial information, for investments in entities accounted for
using the equity method are presented below:
1999 1998
------- ---------
(In thousands)
Current Assets $448,558 $ 629,773
Non-Current Assets 205,562 259,694
----------------------------------------------------------------
Total Assets $654,120 $ 889,467
----------------------------------------------------------------
Current Liabilities $361,058 $ 610,694
Non-Current Liabilities 124,521 123,390
Owners' Equity 168,541 155,383
----------------------------------------------------------------
Total Liabilities and Owners' Equity $654,120 $ 889,467
----------------------------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Revenues $1,100,224 $1,535,987 $1,239,071
Gross Profit $ 64,645 $ 172,349 $ 120,600
Income before Provision for Income Taxes $ 37,031 $ 90,564 $ 22,050
Provision for Income Taxes 4,398 27,460 10,767
---------------------------------------------------------------------------------------
Net Income $ 32,633 $ 63,104 $ 11,283
---------------------------------------------------------------------------------------
McDermott's investment in equity method investees was less that McDermott's
underlying equity in net assets of those investees based on stated ownership
percentages by $18,824,000 at March 31, 1999 and greater than McDermott's
underlying equity in net assets by $4,355,000 at March 31, 1998. These
differences are primarily related to the partial liquidation of an investee,
cumulative losses, the timing of distribution of dividends and various GAAP
adjustments.
51
Reconciliation of net income per combined income statement information to income
(loss) from investees per consolidated statement of income (loss) as of
March 31:
1999 1998 1997
-------- -------- --------
(In thousands)
Equity income based on stated
ownership percentages $12,768 $25,192 $ 594
Distribution of earnings from
HeereMac joint venture received
as part of termination - 61,637 -
Impairment of advances to
investee (4,823) - -
Recognition of joint venture
project losses - - (6,508)
All other adjustments due to
amortization of basis
differences, timing of GAAP
adjustments and other
adjustments 434 (1,447) 1,816
--------------------------------------------------------------
Income (loss) from investees $ 8,379 $85,382 $(4,098)
--------------------------------------------------------------
During fiscal year 1998, JRM and its joint venture partner, Heerema Offshore
Construction Group, Inc. ("Heerema"), terminated the HeereMac joint venture.
Each party had a 50% interest in the joint venture. Heerema had responsibility
for its day-to-day operations. During fiscal year 1997, JRM changed from the
equity to the cost method of accounting for its investment in the HeereMac joint
venture because it was no longer able to exercise significant influence over
HeereMac's operating and financial policies.
Pursuant to the termination of the joint venture, Heerema acquired and assumed
JRM's 50% interest in the joint venture. JRM received $318,500,000 in cash and
title to several pieces of equipment. The cash received included a $61,637,000
distribution of earnings and approximately $100,000,000 of principal and
interest owed to JRM under the 7.75% promissory note described in the next
paragraph. The equipment received included two launch barges and the derrick
barge 101, a semi-submersible derrick barge with a 3,500-ton lift capacity. As
a result of the termination, JRM recorded a gain on asset disposal of
$224,472,000 and income from investees of $61,637,000. The $224,472,000 gain on
asset disposal includes recognition of the remaining deferred gain which had
resulted from the 1996 sale of vessels to the HeereMac joint venture described
in the next paragraph.
During fiscal year 1996, JRM sold to the HeereMac joint venture the major marine
vessels that it had been leasing to the joint venture. JRM received cash of
$135,969,000 (including a $30,000,000 advance deposit on the sale of certain
marine equipment which was completed during fiscal year 1997) and a 7.75% note
receivable of $105,000,000. JRM recorded a deferred gain on the sale of
$103,239,000. The note receivable, net of the deferred gain, was included in
investment in unconsolidated affiliates. Prior to the change to the cost method
of accounting for its investment in HeereMac, JRM was amortizing the deferred
gain over the depreciable lives of the vessels that were assigned by HeereMac.
After the change to the cost method, JRM recognized pro rata portions of the
deferred gain as payments were received on the 7.75% note. In fiscal year 1997,
JRM received a $12,500,000 principal payment on the note and recognized
$12,271,000 of the deferred gain . At March 31, 1997, the note receivable and
deferred gain balances were $92,500,000 and $90,803,000, respectively. Also, in
fiscal year 1997, JRM realized a gain of $16,682,000 on the sale of a marine
vessel by HeereMac on behalf of JRM.
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture, and JRM recognized a gain on the termination of $37,353,000.
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 consolidated statement of income (loss) includes
revenues of $74,096,000 and $44,033,000 and operating income (loss) of
$18,751,000 and ($22,956,000) for fiscal years 1998 and 1997 , respectively,
attributable to operations transferred to ETPM S.A.
52
During fiscal year 1999, 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.
McDermott has investments in numerous joint ventures and other entities on a
worldwide basis. No individual investee was significant for the periods
presented.
Transactions with unconsolidated affiliates included the following:
1999 1998 1997
-------- -------- --------
(In thousands)
Sales to $136,737 $164,501 $140,605
Leasing activities
(included in Sales to) $ 42,154 $ 10,491 $ 9,609
Purchases from $ 12,223 $ 33,544 $ 32,103
Dividends received $ 28,650 $ 9,832 $ 13,324
Other assets include $2,819,000 and $4,250,000 at March 31, 1999 and 1998,
respectively, of non-current accounts receivable from unconsolidated affiliates.
Accounts payable includes $28,314,000 and $25,803,000 at March 31, 1999 and
1998, respectively, of payables to unconsolidated affiliates. Property, plant
and equipment includes cost of $63,594,000 and accumulated depreciation of
$29,497,000 at March 31, 1999 of marine equipment that was leased, on an as
needed basis, to an unconsolidated affiliate. Property, plant and equipment
includes cost of $137,513,000 and accumulated depreciation of $113,528,000 at
March 31, 1998 of marine equipment that was leased to the McDermott-ETPM joint
venture. This marine equipment was transferred to ETPM S.A. as part of the
termination of the McDermott-ETPM joint venture on April 3, 1998.
NOTE 4 - INCOME TAXES
Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted. All income has been earned outside
of Panama, and McDermott is not subject to income tax in Panama on income earned
outside of Panama. Therefore, there is no expected relationship between the
provision for, or benefit from, income taxes and income, or loss, before income
taxes. The major reason for the variations in such relationships is that income
is earned within and subject to the taxation laws of various countries, each of
which has a regime of taxation which varies from that of any other country. The
regimes of taxation vary not only with respect to nominal rate, but also with
respect to the allowability of deductions, credits and other benefits. The
variations are also because the proportional extent to which income is earned
in, and subject to tax by, any particular country or countries varies from year
to year. MII and certain of its subsidiaries keep books and file tax returns on
the completed contract method of accounting.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1999 and 1998
were as follows:
53
1999 1998
---------- --------
(In thousands)
Deferred tax assets:
Accrued warranty expense $ 15,848 $ 15,582
Accrued vacation pay 8,234 10,259
Accrued liabilities for self-insurance
(including postretirement health care benefits) 69,025 169,768
Accrued liabilities for executive and employee incentive compensation 30,972 28,517
Investments in joint ventures and affiliated companies 6,419 9,498
Operating loss carryforwards 13,458 25,394
Environmental and products liabilities 620,992 363,598
Other 29,489 34,710
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 794,437 657,326
- ------------------------------------------------------------------------------------------------------------------
Valuation allowance for deferred tax assets (39,961) (69,057)
- ------------------------------------------------------------------------------------------------------------------
Deferred tax assets 754,476 588,269
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 21,644 37,184
Prepaid pension costs 11,493 110,801
Investments in joint ventures and affiliated companies 15,243 13,921
Insurance and other recoverables 544,382 291,899
Other 5,526 11,694
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 598,288 465,499
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $156,188 $122,770
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from) income taxes and extraordinary
item was as follows:
1999 1998 1997
-------- --------- ---------
(In thousands)
U.S. $ 63,361 $(125,441) $(164,771)
Other than U.S. 123,917 417,248 (55,926)
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and extraordinary item $187,278 $ 291,807 $(220,697)
-------------------------------------------------------------------------------------------------------------------------------
The provision for (benefit from) income taxes consists of:
Current:
U.S. - Federal $ 18,582 $54,340 $(13,411)
U.S. - State and local 7,983 8,541 (2,667)
Other than U.S. (1,643) 3,715 1,697
- ------------------------------------------------------------------------------------
Total current 24,922 66,596 (14,381)
- ------------------------------------------------------------------------------------
Deferred
U.S. - Federal (37,152) (147) 7,090
U.S. - State and local 2,823 69 (1,862)
Other than U.S. 4,604 9,599 (5,439)
- ------------------------------------------------------------------------------------
Total deferred (29,725) 9,521 (211)
- ------------------------------------------------------------------------------------
Provision for (benefit from) income taxes $ (4,803) $76,117 $(14,592)
- ------------------------------------------------------------------------------------
54
There is no provision for (benefit from) income taxes associated with the
extraordinary item of $38,719,000 recorded by JRM.
The current provision for other than U.S. income taxes in 1999, 1998 and 1997
includes a reduction of $525,000, $10,427,000 and $2,021,000, respectively, for
the benefit of net operating loss carryforwards. Fiscal 1999 also includes a
benefit totaling approximately $25,456,000 for a reduction in the valuation
allowance for deferred taxes. This reduction is the result of tax planning
strategies, use of operating loss carrybacks and forecasted taxable income.
Included in the reduction of the valuation allowance was an amount that
generated no tax benefit which resulted from the sale of a foreign subsidiary.
In addition, fiscal 1999 also includes favorable tax settlements in U.S. and
foreign jurisdictions totaling approximately $30,429,000. Initial recognition
of OPI pre-acquisition tax benefits in fiscal year 1997 resulted in a reduction
in excess cost over fair value of assets acquired of $3,115,000.
MII and JRM would be subject to withholding taxes on distributions of earnings
from their U.S. subsidiaries and certain foreign subsidiaries. No withholding
taxes have been provided as these earnings are considered indefinitely
reinvested. It is not practicable to estimate the deferred tax liability on
those earnings.
Settlements were reached with the Internal Revenue Service ("IRS") concerning
MI's U.S. income tax liability through the fiscal year ended March 31, 1990,
disposing of all U.S. federal income tax issues. The IRS has issued notices for
fiscal years ended March 31, 1991 and March 31, 1992 asserting deficiencies in
the amount of taxes reported. The deficiencies are based on issues
substantially similar to those of earlier years. MI believes that any income
taxes ultimately assessed will not exceed amounts already provided.
McDermott has provided a valuation allowance ($39,961,000 at March 31, 1999) for
deferred tax assets which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. Management believes that
remaining deferred tax assets at March 31, 1999 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 the 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.
McDermott has foreign net operating loss carryforwards of approximately
$15,000,000 available to offset future taxable income in foreign jurisdictions.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"),
MI has the right to sell to MII and MII has the right to buy from MI, 100,000
units, each unit consisting of one share of MII Common Stock and one share of
MII Series A Participating Preferred Stock. The price is based primarily upon
the stockholders' equity of MII at the close of the fiscal year preceding the
date at which the right to sell or buy, as the case may be, is exercised, and,
to a limited extent, upon the price-to-book value of the Dow Jones Industrial
Average. At April 1, 1999, the current unit value was $2,903 and the aggregate
current unit value for MI's 100,000 units was $290,336,000. The net proceeds to
MI from the exercise of any rights under the Intercompany Agreement would be
subject to U.S. federal, state and other applicable taxes. No tax provisions
have been established, since there is no present intention by either party to
exercise such rights.
55
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
1999 1998
-------- --------
(In thousands)
Long-term debt consists of:
Unsecured Debt:
Series A Medium Term Notes (maturities ranging from 1 to 5
years; interest at various rates ranging from 8.20% to 9.00%) $ 40,000 $ 40,000
Series B Medium Term Notes (maturities ranging from 1 to 25
years; interest at various rates ranging from 6.50% to 8.75%) 64,000 91,000
9.375% Notes due 2002 ($225,000,000 principal amount) 224,739 224,665
9.375% Senior Subordinated Notes due 2006
($250,000,000 principal amount) 1,397 244,986
Other notes payable through 2009 (interest at
various rates ranging to 10%) 23,667 35,484
Secured Debt:
10.375% Note payable due 1998 - 12,200
Other notes payable through 2012 and capitalized
lease obligations 1,097 18,264
- ---------------------------------------------------------------------------------------------
354,900 666,599
Less: Amounts due within one year 31,126 68,417
- ---------------------------------------------------------------------------------------------
Long-term debt $323,774 $598,182
- ---------------------------------------------------------------------------------------------
Notes payable and current maturities of long-term debt consist of:
Short-term lines of credit - unsecured $ - $ 5,100
Secured borrowings - 82,783
Current maturities of long-term debt 31,126 68,417
- ---------------------------------------------------------------------------------------------
Total $31,126 $156,300
- ---------------------------------------------------------------------------------------------
Weighted average interest rate on short-term borrowings 8.20% 5.87%
- ---------------------------------------------------------------------------------------------
The Indentures for the 9.375% Notes due 2002 and the Series A and B Medium Term
Notes contain certain restrictive covenants, including limitations on
indebtedness, liens securing indebtedness and dividends and loans.
On March 5, 1999, JRM consummated 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. On that date, JRM purchased $248,575,000 in principal amount
of the notes for a total purchase price of $284,564,000, including interest of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchase of the notes, JRM received consents to certain
amendments that amended or eliminated certain restrictive covenants and other
provisions contained in the indenture relating to the notes. Specifically, the
covenants contained in the indenture that restricted JRM's ability to pay
dividends, repurchase or redeem its capital stock, or to transfer funds through
unsecured loans to or investments in MII were eliminated.
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1999 are as follows: 2000 - $31,126,000; 2001 - $452,000; 2002 -
$224,949,000; 2003 -$25,000; 2004 - $9,525,000.
56
At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase and sale agreement between 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. It also provided for sales treatment as opposed to secured
financing treatment for this arrangement under 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. This amended agreement was terminated
on April 30, 1999.
At March 31, 1999 and 1998, McDermott had available various uncommitted short-
term lines of credit from banks totaling $87,578,000 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 March 31, 1999. 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 BWICO and BWXT, 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 March 31, 1999, there were no borrowings under the BWICO Credit
Agreement. Under the BWICO Credit Agreement, there are certain restrictive
covenants, including limitations on indebtedness, sales and leaseback
transactions, investments, loans and advances and the maintenance of certain
financial ratios. Commitment fees are on .40% of the unused portion of BWICO
Credit Agreement's $200,000,000 commitment. Commitment fees totaled
approximately $733,000, $412,000 and $160,000 for fiscal years 1999, 1998 and
1997, respectively.
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 March 31,
1999, 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 2000. Subsequent to year-end, JRM elected to reduce the
commitments on the JRM Credit Agreement from $200,000,000 to $100,000,000.
Under the JRM Credit Agreement, there are certain restrictive covenants,
including limitations on additional indebtedness, liens securing indebtedness,
sales and leaseback transactions, investments, loans and advances and the
maintenance of certain financial ratios. Commitment fees were on .35% of the
unused portion of JRM Credit Agreement's $200,000,000 commitment. Commitment
fees totaled approximately $610,000, $380,000 and $380,000 for fiscal years
1999, 1998 and 1997, respectively.
Subsequent Event - On May 7, 1999, MII and JRM entered into a merger agreement
pursuant to which MII initiated a tender offer for those shares of JRM that it
did not already own for $35.62 per share in cash. Under the merger agreement,
any shares not purchased in the tender offer will be acquired for the same price
in cash in a second-step merger. MII estimates that it will require
approximately $560,000,000 to consummate the tender offer and second-step merger
and to pay related fees and expenses. MII expects to obtain the funds from cash
on hand and from a new $525,000,000 senior secured term loan facility with
Citibank, N.A. The facility will terminate and all borrowings thereunder will
mature upon the earlier of five business days after the consummation of the
second merger or September 30, 1999. When the facility terminates, JRM will
declare and pay a dividend and/or loan to MII such amounts that, together with
MII's available cash, will be used to repay all outstanding loans under the
facility. Citibank, N.A. may act either as sole lender under the facility or
syndicate all or a portion of the facility to a group of financial institutions.
The facility contains customary representations, warranties, covenants and
events of default. The facility also includes financial covenants that:
57
. require MII to maintain a minimum consolidated tangible net worth of not
less than $250,000,000,
. limit MII's ability to pay dividends, and,
. require MII, JRM and certain other subsidiaries to maintain cash, cash
equivalents and investments in debt securities of at least $575,000,000 at
all times.
The facility is secured by a first priority pledge of all JRM capital stock and
securities convertible into capital stock held by or acquired by MII or any of
its subsidiaries. Commitment fees will be approximately $3,300,000 in the next
fiscal year.
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
McDermott provides retirement benefits, primarily through non-contributory
pension plans, for substantially all of its regular full-time employees.
McDermott does not provide retirement benefits to certain non-resident alien
employees of foreign subsidiaries who are not citizens of a European Community
country or who do not earn income in the United States, Canada, or the United
Kingdom. Salaried plan benefits are based on final average compensation and
years of service, while hourly plan benefits are based on a flat benefit rate
and years of service. McDermott's funding policy is to fund applicable pension
plans to meet the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and, generally, to fund other pension plans as
recommended by the respective plan actuary and in accordance with applicable
law.
Postretirement health care and life insurance benefits are supplied to union
employees based on union contracts. Effective April 1, 1998, McDermott
terminated all other postretirement benefits. On the same date, the pension
plans for the employees affected by the termination were amended to increase the
benefits payable to offset the cost of postretirement health care and life
insurance to the participants. The decrease in the postretirement benefit
obligation was measured against the increase in the projected benefit obligation
of the pension plans, and a resulting curtailment gain of $21,940,000 was
recognized in fiscal year 1999.
In February 1998, McDermott terminated its Retirement Plan for Non-Management
Directors and issued 32,040 shares of McDermott Common Stock to the directors at
that time, in full satisfaction of their accrued benefits under the terminated
plan.
Effective April 1, 1998, McDermott adopted SFAS No. 132 "Employers' Disclosure
about Pensions and Other Postretirement Benefits." SFAS No. 132 establishes new
disclosure requirements for pension and postretirement benefits. Fiscal year
1998 balances have been restated to comply with the new requirements.
58
Pension Benefits Other Benefits
1999 1998 1999 1998
----------- ----------- ---------- ----------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of fiscal year $1,411,512 $1,244,134 $ 349,288 $ 370,866
Service cost 33,341 29,002 203 3,487
Interest cost 112,822 94,182 9,478 26,480
Plan participants' contributions 136 127 - -
Curtailments 1,452 3,011 (215,751) -
Amendments 245,306 291 - -
Change in assumptions 101,387 111,592 3,012 -
Actuarial (gain) loss 9,210 (3,386) 29,049 (10,880)
Foreign currency exchange rate changes (7,014) 772 - -
Benefits paid (108,709) (68,213) (21,332) (40,665)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,799,443 1,411,512 153,947 349,288
- ---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 1,822,166 1,561,368 - -
Actual return on plan assets 190,586 320,797 - -
Company contributions 14,602 8,033 21,332 40,665
Plan participants' contributions 136 127 - -
Foreign currency exchange rate changes (12,898) 54 - -
Benefits paid (101,346) (68,213) (21,332) (40,665)
---------------------------------------------------------------------------------------------------------
Fair value of plan assets at the end of year 1,913,246 1,822,166 - -
- ---------------------------------------------------------------------------------------------------------
Funded status 113,803 410,654 (153,947) (349,288)
Unrecognized net obligation (25,456) (36,006) 2,712 -
Unrecognized prior service cost 14,689 16,035 - -
Unrecognized actuarial (gain) loss (42,866) (107,657) 1,879 (77,159)
---------------------------------------------------------------------------------------------------------
Net amount recognized $ 60,170 $ 283,026 $(149,356) $(426,447)
---------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial
position consist of:
Prepaid benefit cost $ 130,437 $ 328,583 $ - $ -
Accrued benefit liability (81,727) (55,694) (149,356) (426,447)
Intangible asset 2,435 2,969 - -
Accumulated other comprehensive income 9,025 7,168 - -
- ---------------------------------------------------------------------------------------------------------
Net amount recognized $ 60,170 $ 283,026 $(149,356) $(426,447)
- ---------------------------------------------------------------------------------------------------------
Weighted average assumptions as of March 31:
Discount rate 7.01% 7.52% 6.60% 7.00%
Expected return on plan assets 8.13% 8.47% - -
Rate of compensation increase 4.50% 4.97% - -
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal year 2000. The rate
was assumed to decrease gradually to 4 percent in 2005 and remain at that level
thereafter.
59
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
----------- ---------- ---------- -------- -------- -------
(In thousands)
Components of net periodic benefit
income (cost):
Service cost $ 33,341 $ 29,002 $ 30,589 $ 203 $ 3,487 $ 4,737
Interest cost 112,822 94,182 86,111 9,478 26,480 30,551
Expected return on plan assets (146,990) (130,317) (175,041) - - -
Amortization of prior service cost 2,522 2,430 2,170 - - -
Recognized net actuarial (gain) loss (11,792) (7,493) 49,079 (1,109) (4,416) 751
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit income (cost) $(10,097) $(12,196) $(7,092) $ 8,572 $25,551 $36,039
- -----------------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $253,434,000, $207,549,000 and $152,700,000,
respectively, for fiscal year ended March 31, 1999 and $122,277,000, $92,724,000
and $64,231,000, respectively, for fiscal year ended March 31, 1998.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
-------------- --------------
(In thousands)
Effect on total of service and interest
cost components $ 300 $ (288)
Effect on postretirement benefit obligation $4,286 $(4,238)
Multiemployer Plans - One of MII's subsidiaries contributes to various
multiemployer plans. The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $11,295,000, $5,151,000 and
$4,552,000 in fiscal years 1999, 1998 and 1997, respectively.
NOTE 7 IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Impairment losses to write-down property, plant and equipment to estimated fair
values and to write-off goodwill are summarized by segment as follows:
1999 1998 1997
------- -------- -------
(In thousands)
Property, plant and equipment:
Assets to be held and used:
Marine Construction Services $16,458 $ 2,891 $19,228
Power Generation Systems - 8,704 11,098
Assets to be disposed of:
Marine Construction Services 877 7,000 12,162
Industrial Operations 261 - 7,295
Goodwill:
Marine Construction Services 10,461 262,901 -
Power Generation Systems - 1,611 4,859
Industrial Operations - 8,098 -
- ---------------------------------------------------------------------
Total $28,057 $291,205 $54,642
- ---------------------------------------------------------------------
60
Property, plant and equipment assets to be held and used
- ---------------------------------------------------------
During fiscal years 1999, 1998 and 1997, management identified certain long-
lived assets that were no longer expected to recover their entire carrying
value through future cash flows. Fair values were generally determined based on
sales prices of comparable assets. The assets include non-core, surplus and
obsolete property and equipment and fabrication facilities in the Marine
Construction Services segment, and manufacturing facilities and related
equipment in the Power Generation Systems segment.
Property, plant and equipment assets to be disposed of
- -------------------------------------------------------
In fiscal year 1999, the Marine Construction Services segment recorded a loss of
$877,000 to reduce a building located near London to its fair value less cost to
sell. Prior to recognition of the impairment loss, the building had a net book
value of approximately $7,549,000. Management decided to sell the building as a
result of its withdrawal from traditional European engineering operations. The
building is expected to be sold during the next year.
In fiscal year 1998, the Marine Construction Services segment recorded a loss of
$7,000,000 to reduce a Floating Production, Storage and Offloading System
("FPSO") to its estimated fair value less cost to sell. Prior to recognition of
the impairment loss, the FPSO had a net book value of approximately $21,500,000.
The estimated fair value was determined based upon management's best estimate,
as these types of vessels are somewhat unique in nature. Management decided to
sell the FPSO as a result of a strategic decision to exit this market.
Excluding the impairment loss, net income for fiscal year 1998 for the FPSO was
$2,774,000. The FPSO was sold during fiscal year 1999 resulting in a loss on
asset disposal of approximately $2,382,000.
In fiscal year 1997, the Marine Construction Services segment recorded losses of
$12,162,000 to reduce certain property and equipment to estimated fair values
less cost to sell. Prior to recognition of the impairment loss, the carrying
value of these assets was approximately $18,950,000. Also in fiscal year 1997,
the Industrial Operations segment recorded a loss of $7,295,000, which was
adjusted in fiscal year 1998, to reduce a building and land to its estimated
fair value less cost to sell. Prior to recognition of the impairment loss, the
property had a book value of approximately $15,795,000. The estimated fair
value was based upon prices of similar real estate. Management had begun
marketing the property that had been used as office space. Excluding the
impairment losses, results of operations for fiscal year 1997, were not
material. Substantially all of these assets were disposed of in fiscal year
1998, with no significant gain or loss recognized.
Goodwill
- ---------
In fiscal year 1999, the Marine Construction Services segment wrote off
$4,834,000 associated with the acquisition of a Mexican shipyard acquired in a
prior year. Management determined that the goodwill related to the Mexican
shipyard had no value as the facility's intended use was as a new-build
facility, and the facility had been engaged primarily in ship repair. Also in
fiscal year 1999, the Marine Construction Services segment wrote off $5,627,000
related to an engineering business acquired in a prior year. Management
determined that the business had no value as management has decided to withdraw
from the third-party engineering business. Annual amortization of this goodwill
totaled $1,524,000.
In fiscal year 1998, the Marine Construction Services segment wrote off
$262,901,000 associated with the acquisition of OPI. In December 1997,
management decided to exit the traditional shallow water business, and abandoned
OPI-type work. The decision was based upon the industry outlook, the departure
of key OPI executives, the disposal of significant OPI joint ventures and the
disposal of major OPI vessels. Annual amortization of the OPI goodwill was
approximately $21,800,000. In addition, in fiscal year 1998, the Industrial
Operations segment wrote off $8,098,000 associated with the acquisition of
McDermott Engineers and Constructors (Canada) Limited in a prior year.
Management concluded that the goodwill no longer had value due to reduced future
asset utilization and deteriorating market conditions
61
Also in fiscal years 1998 and 1997, $1,611,000 and $4,859,000, respectively, of
goodwill related to Power Generation Systems segment manufacturing facilities
and related equipment classified as assets to be held and used referred to above
was written off.
NOTE 8 - SUBSIDIARIES' STOCKS
At March 31, 1998, 13,000,000 shares of MI Preferred Stock, with a par value of
$1 per share, were authorized. Of the authorized shares, 2,818,679 shares of
Series A Cumulative Convertible Preferred Stock ("Series A"), and 2,152,766
shares of Series B Cumulative Preferred Stock ("Series B"), respectively, were
outstanding (in each case, exclusive of treasury shares owned by MI) at March
31, 1998. During fiscal year 1999, the Series A and Series B stocks were
redeemed. Preferred dividends of $4,400,000, $12,722,000 and $13,243,000 were
included as a component of minority interest in other income (expense) in fiscal
years 1999, 1998 and 1997, respectively.
During fiscal year 1998, JRM'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. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to JRM's stock compensation and
thrift plans. JRM repurchased 362,500 shares at an average share price of
$37.31 during fiscal year 1998. During fiscal year 1999, JRM's Board of
Directors authorized the repurchase of up to an additional one million shares of
its common stock . JRM repurchased another 1,837,700 shares of its common stock
at an average share price of $31.67 through October 8, 1998, at which time JRM
ceased all further share repurchases. At such time, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
At March 31, 1999 and 1998, JRM had outstanding 3,200,000 shares of Series A
$2.25 Cumulative Convertible Preferred Stock ("JRM Series A Preferred Stock" -
with an aggregate liquidation preference of $160,000,000), all of which were
owned by MII. Each share of JRM Series A Preferred Stock is convertible into
1.794 shares of JRM Common Stock at any time after either (i) a call by JRM for
redemption of any or all of the outstanding JRM Series A Preferred Stock or (ii)
January 31, 2000. At March 31, 1999, 14,538,270 shares of JRM Common Stock were
reserved for issuance in connection with the conversion of JRM Series A
Preferred Stock, the exercise of stock options and awards of restricted stock
under JRM's stock incentive plans and contributions to the Thrift Plan described
in Note 10. At March 31, 1999, 839,471 options were outstanding at a weighted
average exercise price of $26.80 per share (407,107 options exercisable at a
weighted average exercise price of $23.75 per share).
Subsequent Event On May 13, 1999, MII commenced a tender offer to acquire all
outstanding shares of JRM not already owned by MII for $35.62 per share. JRM
currently has approximately 39,060,000 shares outstanding, of which MII owns
approximately 63%.
NOTE 9 - CAPITAL STOCK
The Panamanian regulations that relate to acquisitions of securities of
companies registered with the National Securities Commission, such as MII, have
certain requirements. They require, among other matters, that detailed
disclosure concerning the offeror be finalized prior to the beneficial
acquisition of more than 5 percent of the outstanding shares of any class of
stock pursuant to a tender offer. The detailed disclosure is subject to review
by either the Panamanian National Securities Commission or the Board of
Directors of the subject company. Transfers of securities in violation of these
regulations are invalid and cannot be registered for transfer.
Common stock is issued in connection with the conversion and redemption of MI's
Series A Preferred Stock (for fiscal year 1998 only), the conversion of MII's
Series C Preferred Stock (for fiscal year 1998 only), the 1996 Officer Stock
Program (and its predecessor programs), the 1992 Director Stock Plan, the 1992
Senior Management Stock Program and contributions to the Thrift Plan. At March
31, 1999 and 1998, 10,465,688 and 18,091,414 shares of MII Common Stock,
respectively, were reserved for issuance in connection with the above.
62
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. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to MII's stock compensation and
thrift plans. MII completed its two million share repurchase program in August
1998. During the fiscal year ended March 31, 1999, MII repurchased 1,900,000
shares of its common stock at an average share price of $31.10.
MII Preferred Stock - On April 6, 1998, MII called for redemption its non-voting
Series C Cumulative Convertible Preferred Stock. On April 21, 1998, all
2,875,000 shares of Series C Preferred Stock were converted into shares of MII
Common Stock at a rate of 1.4184 shares of MII Common Stock for each share of
Series C Preferred Stock, resulting in 4,077,890 shares of MII Common Stock
being issued.
At March 31, 1999 and 1998, 100,000 shares of non-voting Series A Participating
Preferred Stock (the "Participating Preferred Stock") and 30,000 and 40,000
shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred
Stock"), respectively, were issued and owned by MI. The Non-Voting Preferred
Stock is currently callable by MII at $275 per share, and 10,000 shares are
being redeemed each year by MII at $250 per share. The annual per share
dividend rates for the Participating Preferred Stock and the Non-Voting
Preferred Stock are $10 and $20, respectively, payable quarterly, and dividends
on such shares are cumulative to the extent not paid. The annual per share
dividend rate for the Participating Preferred Stock is limited to no more than
ten times the amount of the per share dividend on MII Common Stock. In
addition, shares of Participating Preferred Stock are entitled to receive
additional dividends whenever dividends in excess of $3.00 per share on MII
Common Stock are declared (or deemed to have been declared) in any fiscal year.
For McDermott financial reporting purposes the Participating Preferred Stock and
the Non-Voting Preferred Stock are considered constructively retired.
On December 5, 1995, MII designated 702,652 shares of its authorized but
unissued Preferred Stock as Series D Participating Preferred Stock in connection
with its adoption of a new Stockholders Rights Plan on December 30, 1995. As of
March 31, 1999, there were no shares of Series D Participating Preferred Stock
outstanding.
The issuance of additional MII Preferred Stock in the future and the specific
terms thereof, such as the dividend rights, conversion rights, voting rights,
redemption prices and similar matters, may be authorized by the Board of
Directors of MII without stockholder approval. The issuance is limited to the
extent such approval may be required by applicable rules of the New York Stock
Exchange or applicable law. If additional Preferred Stock is issued, such
additional shares will rank senior to MII Common Stock as to dividends and upon
liquidation.
MII Rights MII has a Stockholder Rights Plan pursuant to which each holder of
Common Stock has one Right for each outstanding share of Common Stock held. The
Rights currently trade with the Common Stock and each Right entitles the holder
thereof to purchase one one-hundredth of a share of MII Series D Participating
Preferred Stock for $50 per share subject to anti-dilution adjustments. The
Rights become exercisable and detach from the Common Stock within a specified
period of time after a person or a group either becomes the beneficial owner of
15 percent or more of the outstanding Common Stock, or commences or announces an
intention to commence a tender or exchange offer for 15 percent or more of the
outstanding Common Stock (an "Acquiring Person"). Once exercisable, each Right
entitles the holder thereof (other than an Acquiring Person) to purchase at the
$50 exercise price that number of shares of Common Stock having a market value
equal to twice the exercise price. If MII merges with or transfers 50 percent
or more of its assets or earnings to any person after the Rights become
exercisable, holders of Rights may purchase that number of shares of common
stock of the acquiring entity having a market value equal to twice the exercise
price. The Rights are redeemable by MII at a price of $0.01 per Right for a
specified period of time after a person or group becomes an Acquiring Person.
The Stockholder Rights Plan, which was amended and restated on April 15, 1999,
will expire on January 2, 2001.
63
NOTE 10 - STOCK PLANS
1996 Officer Long-Term Incentive Plan - A total of 1,508,164 shares of Common
Stock (including shares that were not awarded under predecessor plans) are
available for stock option grants and restricted stock awards to officers and
key employees under this plan at March 31, 1999. The plan permits the grant of
nonqualified stock options, incentive stock options and restricted stock.
Options to purchase shares are granted at not less than 100% of the fair market
value on the date of grant, become exercisable at such time or times as
determined when granted, and expire not more than ten years after the date of
the grant. Under the plan, eligible employees may be granted rights to purchase
shares of Common Stock at par value ($1.00 per share), which shares are subject
to restrictions on transfer that lapse at such times and circumstances as
specified when granted. As of March 31, 1999, 801,705 shares of Common Stock
available for award may be granted as restricted stock. During fiscal years
1999 and 1998, performance-based restricted stock awards were granted to certain
officers and key employees under the plan. Under the provisions of the
performance-based awards, no shares are issued at the time of the initial award,
and the number of shares which will ultimately be issued shall be determined
based on the change in the market value of the Common Stock over a specified
performance period. The performance-based awards in fiscal years 1999 and 1998
were represented by initial notional grants totaling 129,510 and 86,400 rights
to purchase restricted shares of Common Stock, respectively. These rights had
weighted average fair values of $28.52 and $33.00 on their respective dates of
grant during fiscal years 1999 and 1998. Through March 31, 1999, a total of
1,121,940 shares of restricted stock (including 171,930 shares issued in fiscal
year 1997 with a weighted average fair value of $19.92 per share) have been
issued under the Plan (and a predecessor plan). No restricted shares were
issued in fiscal years 1999 or 1998.
1997 Director Stock Program - A total of 91,200 shares of Common Stock
(including approved shares that were not awarded under a predecessor plan) are
available for grants of options, and rights to purchase restricted shares, to
non-employee directors under this program at March 31, 1999. Options to
purchase 900, 300 and 300 shares will be granted on the first, second, and third
years, respectively, of a Director's term at not less than 100% of the fair
market value on the date of grant. Options become exercisable, in full, six
months after the date of the grant, and expire ten years and one day after the
date of grant. Rights to purchase 450, 150, and 150 shares are granted on the
first, second, and third years, respectively, of a Director's term, at par
value, ($1.00 per share), which shares are subject to restrictions on transfer
that lapse at the end of such term. Through March 31, 1999, a total of 19,750
shares of restricted stock have been issued under the 1997 Director Stock Plan
(and its predecessor plan).
1992 Senior Management Stock Option Plan - Under this plan, senior management
employees may be granted options to purchase shares of Common Stock. The total
number of shares available for grant is determined by the Board of Directors
from time to time. Options to purchase shares are granted at not less than 100%
of the fair market value on the date of grant, become exercisable at such time
or times as determined when granted, and expire not more than ten years after
the date of grant.
In the event of a change in control of McDermott, all three programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of options outstanding.
64
The following table summarizes activity for MII's stock option plans (share data
in thousands):
1999 1998 1997
--------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- -------------------------------------------------------------------------------------------------
Outstanding, April 1 3,904 $23.66 5,260 $22.55 4,449 $22.72
Granted 651 $29.40 363 $33.99 909 $21.64
Exercised (187) $19.76 (1,451) $21.68 (23) $17.27
Cancelled/forfeited (123) $21.83 (268) $26.67 (75) $23.06
- -------------------------------------------------------------------------------------------------
Outstanding, March 31 4,245 $24.76 3,904 $23.66 5,260 $22.55
- -------------------------------------------------------------------------------------------------
Exercisable, March 31 3,101 $23.82 2,358 $22.95 3,430 $22.88
- -------------------------------------------------------------------------------------------------
The following tables summarize the range of exercise prices and the weighted
average remaining contractual life of the options outstanding and the range of
exercise prices for the options exercisable at March 31, 1999 (share data in
thousands):
Options Outstanding
- ----------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted-
Range of Contractual Average
Exercise Prices Outstanding Life in Years Exercise Price
- ----------------------------------------------------------------------------------
$ 19.31 - $ 24.00 1,857 6.0 $21.26
$ 24.13 - $ 29.06 1,383 4.4 $24.90
$ 29.38 - $ 38.25 1,005 4.4 $31.05
-----
$ 19.31 - $ 38.25 4,245 5.1 $24.76
=====
Options Exercisable
- ----------------------------------------------------------------------------------
Weighted-
Range of Average
Exercise Prices Exercisable Exercise Price
- ----------------------------------------------------------------------------------
$ 19.31 - $ 24.00 1,492 $21.37
$ 24.13 - $ 29.06 1,383 $24.90
$ 29.38 - $ 34.00 226 $33.31
-----
$ 19.31 - $ 34.00 3,101 $23.82
=====
As discussed in Note 1, McDermott applies APB 25 and related interpretations in
accounting for its stock-based compensation plans. Charges to income related to
stock plan awards totaled approximately $4,276,000, $6,288,000 and $7,273,000
for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. If
McDermott had accounted for its stock plan awards using the alternative fair
value method of accounting under SFAS 123, "Accounting for Stock-Based
Compensation," its net income (loss) and earnings (loss) per share would have
been the pro forma amounts indicated as follows:
65
1999 1998 1997
---------- ---------- ------------
(In thousands, except per share data)
Net income (loss)
As reported $153,362 $215,690 $(206,105)
Pro forma $148,629 $214,991 $(207,206)
Basic earnings (loss) per share:
As reported $ 2.60 $ 3.74 $ (3.95)
Pro forma $ 2.52 $ 3.73 $ (3.97)
Diluted earnings (loss) per share:
As reported $ 2.54 $ 3.48 $ (3.95)
Pro forma $ 2.46 $ 3.48 $ (3.97)
The above pro forma information is not indicative of future pro forma amounts.
SFAS 123 does not apply to awards prior to fiscal year 1996 and additional
awards in future years are anticipated. The fair value of each option grant was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
1999 1998 1997
----- ----- -----
Risk-free interest rate 4.67% 5.48% 6.27%
Volatility factor of the expected market
price of MII's common stock .46 .36 .36
Expected life of the option in years 3.5 3.6 5.0
Expected dividend yield of MII's common stock 0.8% 0.6% 1.0%
The weighted average fair value of the stock options granted in fiscal years
1999, 1998 and 1997 was $10.80, $10.85 and $8.23, respectively.
Thrift Plan - On November 12, 1991 and June 5, 1995, respectively, a maximum of
5,000,000 of the authorized and unissued shares of each of the MII and JRM
Common Stock were reserved for issuance. The stock was reserved for the
employer match for employee contributions to the Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and Affiliated Companies
(the "Thrift Plan"). Such employer contributions equal 50% of the first 6% of
compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are non-forfeitable after five years of service or upon
retirement, death, lay-off or approved disability. During fiscal years 1999,
1998 and 1997, 229,245, 191,058 and 306,089 shares, respectively, of MII's
Common Stock were issued as employer contributions pursuant to the Thrift Plan.
During fiscal years 1999, 1998 and 1997, 68,104, 65,727 and 77,112 shares,
respectively, of JRM's Common Stock were issued as employer contributions
pursuant to the Thrift Plan. At March 31, 1999, 2,896,542 shares of MII's
Common Stock and 4,708,701 shares of JRM Common Stock remained available for
issuance.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
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
66
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.
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. 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.
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 Lawsuit 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 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.
67
As a result of the initial allegations of wrongdoing in March 1997, both MII and
JRM formed and continue to maintain special committees of their Board of
Directors to monitor and oversee the companies' 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. B&W believes that adequate
insurance is available to meet possible liability in this matter. However, the
jury verdict is not final, and a number of post trial motions are pending
contesting this contigency. Both B&W and its insurers have filed actions
seeking a judicial determination as to the amount of insurance coverage under
the insurance policies covering these facilities, available for this award and
all other claims. B&W has filed an action seeking a judicial determination of
this matter, which is currently pending in a Pennsylvania court. 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.
Two purported class actions have been filed 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. 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. There have been no
further proceedings in either of the actions to date. 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.
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.
68
Personal injury claim activity for the years ended March 31, 1999 and 1998 was
as follows:
1999 1998
-------- --------
Claims outstanding, beginning of fiscal year 43,826 45,253
New claims 24,278 30,004
Settlements (26,383) (31,431)
--------------------------------------------------------------------
Claims outstanding, end of fiscal year 41,721 43,826
--------------------------------------------------------------------
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 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. McDermott has recognized a provision to
the extent that recovery of these amounts from the insurers is not probable. An
analysis of insurers providing coverage of the estimated liabilities is used to
estimate insurance recoveries.
McDermott is currently in litigation with certain excess insurance carriers
disputing specific conditions of the policies' available coverage. McDermott
believes that recovery of amounts under the policies is probable based upon
McDermott's history of negotiating settlements with other insurance carriers.
By the end of fiscal year 1999, McDermott concluded that its forecast decline in
claims in the next fiscal year was not likely. As a result, during fiscal year
1999, McDermott revised its estimate of liability for pending and future non-
employee products liability asbestos claims and recorded an additional liability
of $817,662,000, additional estimated insurance recoveries of $732,477,000 and a
loss of $85,185,000 for estimated future claims in which recovery from insurance
carriers was not determined to be probable. The revised forecast includes
management's expectation 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.
In fiscal year 1997, based on an increasing number of claims and management's
evaluation of the increase, McDermott recorded an additional estimated liability
and estimated related insurance recoveries for future non-employee products
asbestos claims and recorded a loss of $72,400,000 for estimated future claims
for which recovery from insurers was not determined to be probable.
McDermott had recorded the following with respect to asbestos products liability
claims and related insurance recoveries at March 31, 1999 and 1998:
1999 1998
---------- --------
(In thousands)
Asbestos products liability:
Current $ 240,000 $171,300
Non-current 1,322,363 715,391
-------------------------------------------------------------------------
Total $1,562,363 $886,691
-------------------------------------------------------------------------
69
Asbestos products liability insurance recoverable:
Current $ 199,750 $143,588
Non-current 1,167,113 581,070
-------------------------------------------------------------------------
Total $1,366,863 $724,658
-------------------------------------------------------------------------
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.
Environmental Matters - During fiscal year 1995, management decided to close
B&W's nuclear manufacturing facilities in Parks Township, Armstrong County,
Pennsylvania (the "Parks Facilities"). Decontamination is proceeding as
permitted by the existing NRC license. A decommissioning plan was submitted to
the NRC for review and approval during January 1996. The facilities were
transferred to BWXT in fiscal year 1998. BWXT's management reached an agreement
with the NRC in fiscal year 1999 on a plan that provides for the completion of
facilities dismantlement and soil restoration by 2001 and license termination in
2002. BWXT's management expects to request approval from the NRC to release the
site for unrestricted use at that time. At March 31, 1999, the remaining
provision for the decontamination, decommissioning and the closing of these
facilities was $15,811,000.
At March 31, 1999 and 1998, McDermott had total environmental reserves
(including provision for the facilities discussed above), of $31,568,000 and
$46,164,000, of which $19,835,000 and $9,934,000, respectively, were included in
current liabilities. Estimated recoveries of these costs are included in
environmental and products liabilities recoverable at March 31, 1999. Inherent
in the estimates of such reserves and recoveries are expected levels of
contamination, decommissioning costs and recoverability from other parties,
which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in a material adjustment to
operating results, and the ultimate loss may differ materially from amounts
provided in the consolidated financial statements.
McDermott has been identified as a potentially responsible party at various
cleanup sites under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. McDermott has not been determined to be a major
contributor of waste to these sites. However, each potentially responsible
party or contributor may face assertions of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on its relative contribution of
waste to each site, McDermott's share of the ultimate liability for the various
sites is not expected to have a material adverse effect on its consolidated
financial position or results of operations.
The Department of Environmental Protection of the Commonwealth of Pennsylvania,
("PADEP"), by letter dated March 19, 1994, advised The Babcock & Wilcox Company
that it would seek monetary sanctions, and remedial and monitoring relief,
related to the Parks Facilities. The relief sought related to potential
groundwater contamination of the previous operations of the facilities. PADEP
has advised BWXT that it does not intend to assess any monetary sanctions
provided that BWXT continues its remediation program of the Parks Facilities.
Operating Leases - Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
March 31, 1999 are as follows:
70
Fiscal year Amount
----------- ------------
2000 $12,688,000
2001 $ 9,721,000
2002 $ 5,418,000
2003 $ 4,914,000
2004 $ 2,649,000
thereafter $36,975,000.
Total rental expense for fiscal years 1999, 1998 and 1997 was $96,816,000,
$93,057,000 and $92,534,000, respectively. These expense amounts include
contingent rentals and are net of sublease income, neither of which are
material.
Other - McDermott performs significant amounts of work for the U.S. Government
under both prime contracts and subcontracts and thus is subject to continuing
reviews by governmental agencies.
McDermott maintains liability and property insurance against such risk and in
such amounts as it considers adequate. However, certain risks are either not
insurable or insurance is available only at rates which MII considers
uneconomical.
McDermott is contingently liable under standby letters of credit totaling
$402,771,000 at March 31, 1999, all of which were issued in the normal course of
business. These standby letters of credit include $16,434,000 issued on behalf
of a former unconsolidated joint venture. McDermott has guaranteed $9,243,000
of loans to and $1,168,000 of standby letters of credit issued by unconsolidated
foreign joint ventures of McDermott at March 31, 1999. In addition, McDermott
has a limited guarantee of approximately $51,000,000 of debt incurred by an
unconsolidated foreign joint venture. At March 31, 1999, McDermott had pledged
approximately $48,760,000 fair value of government obligations and corporate
bonds to secure payments under and in connection with certain reinsurance
agreements.
NOTE 12 - RELATED PARTY TRANSACTIONS
Under a non-competition agreement in connection with the acquisition of OPI, a
director of JRM, who resigned in April 1996, received $1,500,000 in each of
fiscal years 1999, 1998 and 1997 and will receive an additional payment of
$1,500,000 in the next fiscal year.
In fiscal year 1995, JRM entered into an office sublease with an affiliate of
one of its directors (who resigned in April 1996). Such sublease expired in
March 1997. During fiscal year 1997, the affiliate paid $216,000 under the
sublease. Under another agreement, JRM paid $576,000 to the affiliate in fiscal
year 1997and reimbursed the affiliate for out-of-pocket expenses for the
management and operation of JRM's offshore producing oil and gas property.
JRM entered into agreements with an affiliate of another director (whose term as
director ended in August 1997) pursuant to which JRM acquired interests in
certain offshore oil and gas property. During fiscal year 1996, JRM sold its
interest in the property to the affiliate in exchange for an $8,000,000
convertible production payment relating to such property. JRM also received a
right to a production payment that allows it to share in up to $8,000,000 of the
net proceeds on any production from the property based upon a percentage of its
original interest in such property. In December 1995, this property was placed
in production, and JRM earned approximately $174,000, $1,262,000 and $1,093,000
in fiscal years 1999, 1998 and 1997, respectively. In addition, during fiscal
year 1998, JRM sold its investment in common stock of this affiliate and its
interest in a limited partnership, which is also an affiliate of this director.
JRM also entered into agreements with two affiliates of the same former director
to design, fabricate and install several offshore pipelines and structures. The
value of these agreements was approximately $82,000,000. At March 31, 1997, all
work under these agreements had been completed and invoiced.
See Note 3 for transactions with unconsolidated affiliates.
71
NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott's Marine Construction Services segment's principal customers are the
offshore oil, natural gas and hydrocarbon processing industries and other marine
construction companies. The principal customers of the Power Generation Systems
segment are principally the electric power generation industry (including
government-owned utilities and independent power producers), and the pulp and
paper and other process industries, such as oil refineries and steel mills. The
primary customer of the Government Operations segment is the U.S. Government
(including its contractors). The principal customers of Industrial Operations
are oil and natural gas producers, electric power generation industry and
petrochemical and chemical processing industries. These concentrations of
customers may impact McDermott's overall exposure to credit risk, either
positively or negatively, in that the customers may be similarly affected by
changes in economic or other conditions. In addition, McDermott and its
customers operated worldwide giving rise to exposure to risks associated with
the economic and political forces of various countries and geographic areas.
(See Note 17 for information about McDermott's operations in different
geographic areas.) However, McDermott's management believes that the portfolio
of receivables is well diversified and that this diversification minimizes any
potential credit risk. Receivables are generally not collateralized.
McDermott believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure. At March 31, 1999
and 1998, the allowance for possible losses deducted from Accounts receivable-
trade on the accompanying balance sheet was $5,544,000 and $12,140,000,
respectively.
NOTE 14 - INVESTMENTS
The following is a summary of available-for-sale debt securities at March 31,
1999:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
U.S. Treasury securities and obligations
of U.S. Government agencies $472,217 $2,326 $1,471 $473,072
Corporate notes and bonds 228,642 679 202 229,119
Other debt securities 136,259 104 63 136,300
--------------------------------------------------------------------------------------------
Total $837,118 $3,109 $1,736 $838,491
--------------------------------------------------------------------------------------------
The amortized cost and estimated fair value amounts of debt securities at March
31, 1999 include $14,171,000 in other debt securities which are reported as cash
equivalents. At March 31, 1999, McDermott's investments also included
$82,579,000 in time deposits.
The following is a summary of available-for-sale debt securities at March 31,
1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
U.S. Treasury securities and obligations
of U.S. Government agencies $519,114 $1,355 $1,026 $519,443
Corporate notes and bonds 136,329 252 91 136,490
Other debt securities 123,457 102 41 123,518
----------------------------------------------------------------------------------------------
Total $778,900 $1,709 $1,158 $779,451
----------------------------------------------------------------------------------------------
At March 31, 1998, McDermott's investments also included $294,040,000 in time
deposits.
72
Proceeds, gross realized gains and gross realized losses on sales of available-
for-sale debt securities were as follows:
Gross Gross
Fiscal year Proceeds Realized Gains Realized Losses
------------- ---------- -------------- ---------------
1999 $339,478,000 $1,792,000 $125,000
1998 $ 95,430,000 $ 118,000 $766,000
1997 $156,827,000 $ 290,000 $ 96,000
The amortized cost and estimated fair value of available-for-sale debt
securities at March 31, 1999, by contractual maturity, are as follows:
Amortized Estimated
Cost Fair Value
-------------- ---------------
(In thousands)
Due in one year or less $ 281,701 $282,008
Due after one through three years 480,808 482,478
Due after three years 74,609 74,005
-------------------------------------------------------------------------------------------------------------------------
Total $ 837,118 $838,491
-------------------------------------------------------------------------------------------------------------------------
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
McDermott operates worldwide giving rise to exposure to market risks from
changes in foreign exchange rates. Derivative financial instruments, primarily
forward exchange contracts, are utilized to reduce those risks. McDermott does
not hold or issue financial instruments for trading purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. At March 31,
1999, McDermott had forward exchange contracts to purchase $93,700,000 in
foreign currencies (primarily Canadian Dollars) and to sell $18,626,000 in
foreign currencies (primarily Canadian Dollars), at varying maturities from
fiscal year 2000 through 2002. At March 31, 1998, McDermott had forward
exchange contracts to purchase $145,923,000 in foreign currencies (primarily
Canadian Dollars and Pound Sterling), and to sell $50,702,000 in foreign
currencies (primarily Canadian Dollars and Singapore Dollars), at varying
maturities from fiscal year 1999 through 2000.
Deferred realized and unrealized gains and losses from hedging firm purchase and
sale commitments are included on a net basis in the balance sheet as a component
of either contracts in progress or advance billings on contracts or as a
component of either other current assets or accrued liabilities. They are
recognized as part of the purchase or sale transaction when it is recognized, or
as other gains or losses when a hedged transaction is no longer expected to
occur. At March 31, 1999 and 1998, McDermott had deferred gains of $137,000 and
$958,000, respectively, and deferred losses of $5,377,000 and $374,000,
respectively, related to forward exchange contracts which will principally be
recognized in accordance with the percentage of completion method of accounting.
McDermott is exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments, but it does not anticipate
nonperformance by any of these counterparties. The amount of such exposure is
generally the unrealized gains in such contracts.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by McDermott in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
73
Investments: The fair values of investments are estimated based on quoted market
prices. For investments for which there are no quoted market prices, fair
values are derived from available yield curves for investments of similar
quality and terms.
Long and short-term debt: The fair values of debt instruments are based on
quoted market prices. Where quoted prices are not available, the fair values
are based on the present value of future cash flows discounted at estimated
borrowing rates for similar debt instruments or on estimated prices based on
current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks
of MI are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward
exchange contracts are estimated by obtaining quotes from brokers. At March 31,
1999 and 1998, McDermott had net forward exchange contracts outstanding to
purchase foreign currencies with notional values of $75,074,000 and $95,221,000
and fair values of $72,153,000 and $97,181,000, respectively.
Interest rate swap agreements: The fair values of interest rate swaps are the
amounts at which they could be settled and are estimated by obtaining quotes
from brokers. At March 31, 1999, McDermott had no interest rate swaps
outstanding. At March 31, 1998, McDermott had an interest rate swap outstanding
on current notional principal of $12,200,000 with a fair value of ($25,000),
which represented the estimated amount McDermott would have had to pay to
terminate the agreement.
The estimated fair values of McDermott's financial instruments are as follows:
March 31, 1999 March 31, 1998
------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------- -------------- ----------
(In thousands)
Balance Sheet Instruments
Cash and cash equivalents $181,503 $181,503 $ 277,876 $ 277,876
Investments 906,899 906,899 1,073,491 1,073,491
Debt excluding capital leases 353,803 365,774 745,524 794,296
Subsidiary's redeemable preferred stocks - - 155,358 184,191
NOTE 17 - 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
74
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.
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 (loss) 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 in debt securities 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 years presented.
On May 7, 1998, JRM sold its interest in McDermott Engineering (Europe) Limited.
Management also intends to exit other European engineering operations. In
fiscal years 1999, 1998 and 1997, these operations had revenues of $89,347,000,
$288,687,000 and $294,780,000, respectively, and operating income (loss) of
($7,138,000), $6,177,000, and $9,739,000, respectively. Operating income (loss)
for fiscal years 1999 and 1998 include closure costs and other disposition
losses of $2,818,000 and $4,200,000, respectively.
In fiscal years 1999, 1998 and 1997, the U.S. Government accounted for
approximately 12%, 10% and 11%, respectively, of McDermott's total revenues.
These revenues are principally included in the Government Operations segment.
In fiscal year 1999, a gain of $37,353,000 recognized from the termination of
the McDermott-ETPM joint venture increased Marine Construction Services' segment
income. This increase was partially offset by a net decrease to segment income
of $17,749,000, primarily pertaining to impairment losses on fabrication
facilities and goodwill. A gain of $5,214,000 recognized from the sale of a
manufacturing facility resulted in an increase in Power Generation Systems'
segment income in fiscal 1999.
In fiscal year 1998, asset impairment losses of $280,171,000, primarily due to
the write-off of $262,901,000 of goodwill associated with the acquisition of OPI
and the write-down of marine vessels included in property, plant and equipment
in the amount of $9,891,000, decreased Marine Construction Services' segment
income. These decreases were offset by increases in segment income pertaining
to the termination of the HeereMac joint venture, a gain of $224,472,000
recognized from the termination and $61,637,000 from the distribution of
earnings. Asset impairment losses, primarily associated with manufacturing
facilities, resulted in a decrease in Power Generation Systems' segment income
of $6,395,000 in fiscal 1998. A net increase in Industrial Operations' income
of $124,816,000 was a result of gains on the sale of McDermott's interest in
Sakhalin Energy Investment Company Ltd. and Universal Fabricators Incorporated,
offset by impairment losses, primarily the write-off of goodwill associated with
the acquisition of MECL.
In fiscal year 1997, asset gains net of impairment losses resulted in a decrease
in Marine Construction Services' segment operating loss of $29,021,000. Also in
fiscal year 1997, the write-down of an equity investment and asset impairment
losses, partially offset by a gain from the sale of certain assets, resulted in
an increase in Power Generation Systems' segment loss of $20,251,000. An asset
impairment loss resulted in an increase in Industrial Operations loss of
$11,575,000 in fiscal year 1997.
75
Segment Information for the Three Fiscal Years Ended March 31, 1999.
1. Information about McDermott's Operations in Different Industry Segments.
1999 1998 1997
----------- ----------- -----------
(In thousands)
REVENUES /(1)/
Marine Construction Services $1,279,570 $1,855,486 $1,408,469
Power Generation Systems 1,066,217 1,142,721 985,430
Government Operations 382,706 370,519 373,051
Industrial Operations 427,520 337,787 458,116
Adjustments and Eliminations (6,028) (31,878) (74,216)
-------------------------------------------------------------------------------------------
Total Revenues $3,149,985 $3,674,635 $3,150,850
-------------------------------------------------------------------------------------------
/(1)/ Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 3,233 $ 20,743 $ 24,530
Power Generation Systems Transfers 731 5,027 5,057
Government Operations Transfers 506 4,070 7,032
Industrial Operations Transfers 236 5,925 18,324
Adjustments and Eliminations 1,322 (3,887) 19,273
-------------------------------------------------------------------------------------
Total $6,028 $31,878 $74,216
-------------------------------------------------------------------------------------
76
OPERATING INCOME (LOSS):
1999 1998 1997
---------- ---------- ----------
(In thousands)
Segment Operating Income (Loss):
Marine Construction Services $126,482 $107,122 $ 10,819
Power Generation Systems 90,318 82,431 (34,584)
Government Operations 39,353 35,816 32,458
Industrial Operations 16,906 4,679 (30,641)
- -----------------------------------------------------------------------------------------------------------------
Total Segment Operating Income (Loss) $273,059 $230,048 $ (21,948)
- -----------------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposal and Impairments - Net:
Marine Construction Services $ 18,620 $(40,119) $ 29,021
Power Generation Systems 4,465 (6,086) (19,205)
Government Operations 183 523 396
Industrial Operations (234) 128,239 (11,858)
Total Gain (Loss) on Asset Disposal
and Impairments - Net $ 23,034 $ 82,557 $ (1,646)
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investees: /(1)/
Marine Construction Services $ 10,670 $ 70,236 $ (7,833)
Power Generation Systems (4,733) 7,541 (347)
Government Operations 4,088 4,236 3,630
Industrial Operations (1,646) 3,376 737
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investees $ 8,379 $ 85,389 $ (3,813)
- ------------------------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS): /(2)/
Marine Construction Services $155,772 $137,239 $ 32,007
Power Generation Systems 90,050 83,886 (54,136)
Government Operations 43,624 40,575 36,484
Industrial Operations 15,026 136,294 (41,762)
- ------------------------------------------------------------------------------------------------------------------
Total Segment Income (Loss) 304,472 397,994 (27,407)
- ------------------------------------------------------------------------------------------------------------------
Other Unallocated Items (51,005) (5,286) (72,382)
General Corporate Expenses-Net (36,051) (37,251) (47,456)
- ------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $217,416 $355,457 $(147,245)
- ------------------------------------------------------------------------------------------------------------------
/(1)/ Other unallocated items includes loss from investees of $7,000 and $285,000 for fiscal years
1998 and 1997, respectively.
/(2)/ Other unallocated items include the following:
Non-Employee Products Asbestos
Claim Provisions $(39,650) $ - $ (55,692)
Contract and Insurance Claim Provisions - - (12,506)
Employee Benefits & Insurance Income (Expense) 18,519 7,303 2,538
Legal Expenses (13,133) (4,729) (4,354)
General and Administrative Expenses (9,623) (2,422) -
Other (7,118) (5,438) (2,368)
---------------------------------------------------------------------------------------------------------
Total $(51,005) $ (5,286) $ (72,382)
---------------------------------------------------------------------------------------------------------
77
1999 1998 1997
---------- ---------- ----------
(In thousands)
SEGMENT ASSETS
Marine Construction Services $ 586,003 $ 874,143 $1,313,802
Power Generation Systems 558,951 559,162 537,937
Government Operations 211,683 178,958 187,031
Industrial Operations 114,656 124,547 228,280
------------------------------------------------------------------------------------------------
Total Segment Assets 1,471,293 1,736,810 2,267,050
------------------------------------------------------------------------------------------------
Other Assets 1,570,374 1,280,975 1,396,955
Corporate Assets 1,263,853 1,483,345 935,477
------------------------------------------------------------------------------------------------
Total Assets $4,305,520 $4,501,130 $4,599,482
------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Marine Construction Services /(1)/ $ 84,416 $ 57,704 $ 66,082
Power Generation Systems 11,847 9,315 14,886
Government Operations 11,095 4,312 4,128
Industrial Operations 4,093 3,278 7,329
------------------------------------------------------------------------------------------------
Segment Capital Expenditures 111,451 74,609 92,425
------------------------------------------------------------------------------------------------
Corporate and Other Capital Expenditures 336 1,040 767
------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 111,787 $ 75,649 $ 93,192
------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Marine Construction Services $ 56,761 $ 93,843 $ 99,675
Power Generation Systems 21,899 19,569 14,842
Government Operations 13,265 12,481 13,609
Industrial Operations 4,885 6,712 10,017
------------------------------------------------------------------------------------------------
Segment Depreciation and Amortization 96,810 132,605 138,143
------------------------------------------------------------------------------------------------
Corporate and Other Depreciation and
Amortization 4,580 9,696 13,438
------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 101,390 $ 142,301 $ 151,581
------------------------------------------------------------------------------------------------
INVESTMENT IN UNCONSOLIDATED AFFILIATES
Marine Construction Services $ 13,648 $ 29,069 $ 72,712
Power Generation Systems 44,248 40,159 34,600
Government Operations 2,282 2,090 2,017
Industrial Operations 2,308 4,965 29,778
------------------------------------------------------------------------------------------------
Total Investment in Unconsolidated
Affiliates $ 62,486 $ 76,283 $ 139,107
------------------------------------------------------------------------------------------------
/(1)/ Includes property, plant and equipment of $33,000,000 in fiscal year 1999
acquired through termination of the McDermott-ETPM joint venture and of
$30,559,000 in fiscal year 1998 acquired through termination of the
HeereMac joint venture.
78
2. Information about McDermott's Product and Service Lines:
1999 1998 1997
---------- ---------- ----------
(In thousands)
Revenues:
Marine Construction Services:
Offshore Operations $ 605,024 $ 743,114 $ 591,021
Fabrication Operations 376,450 455,306 376,257
Engineering Operations 115,594 276,422 235,672
Procurement Activities 273,308 425,440 240,108
Adjustments and Eliminations (90,806) (44,796) (34,589)
------------------------------------------------------------------------------
Total 1,279,570 1,855,486 1,408,469
------------------------------------------------------------------------------
Power Generation Systems:
Original Equipment Manufacturers'
Operations 212,999 471,363 385,000
Nuclear Equipment Operations 78,023 89,816 108,498
Aftermarket Goods and Services 791,619 508,895 477,756
Operations and Maintenance 41,602 37,988 29,260
Boiler Auxiliary Equipment 85,969 86,355 54,013
Adjustments and Eliminations (143,995) (51,696) (69,097)
------------------------------------------------------------------------------
Total 1,066,217 1,142,721 985,430
------------------------------------------------------------------------------
Government Operations:
Naval Reactor Program 209,079 202,126 222,697
Nuclear Environmental Services 19,932 26,177 42,709
Management & Operation Contracts
of U.S. Government Facilities 99,053 64,226 13,603
Other Government Operations 62,104 78,530 93,725
Other Commercial Operations 3,517 10,951 9,001
Adjustments and Eliminations (10,979) (11,491) (8,684)
------------------------------------------------------------------------------
Total 382,706 370,519 373,051
------------------------------------------------------------------------------
Industrial Operations:
Engineering & Construction 174,894 62,448 146,025
Plant Outage Maintenance 150,263 151,050 144,207
Shipbuilding Operations - 10,746 80,152
Contract Research 9,172 17,180 23,592
Auxiliary Equipment 93,065 97,640 68,028
All Others 362 31 9,468
Adjustments and Eliminations (236) (1,308) (13,356)
------------------------------------------------------------------------------
Total 427,520 337,787 458,116
------------------------------------------------------------------------------
Adjustments and Eliminations (6,028) (31,878) (74,216)
------------------------------------------------------------------------------
Total Revenues $3,149,985 $3,674,635 $3,150,850
------------------------------------------------------------------------------
79
3. Information about McDermott's Operations in Different Geographic Areas.
1999 1998 1997
---------- ---------- ----------
(In thousands)
Revenues /(1)/
United States $1,573,896 $1,688,388 $1,431,868
Canada 437,363 264,846 257,285
Indonesia 220,124 230,825 95,127
United Kingdom 133,403 364,894 322,760
Qatar 132,509 264,397 99,617
Myanmar 80,130 110,692 51,014
Mexico 78,496 35,836 36,870
China 72,217 139,403 103,064
Trinidad 57,905 66,460 7,812
India 46,972 32,905 86,398
Thailand 31,674 73,223 43,498
Other Countries 285,296 402,766 615,537
-------------------------------------------------------------------------------
Total $3,149,985 $3,674,635 $3,150,850
-------------------------------------------------------------------------------
Property, Plant and Equipment, net
United States $ 259,549 $ 280,472 $ 315,682
Mexico 48,246 23,803 24,303
Indonesia 37,309 13,091 20,853
Canada 31,456 36,275 39,008
Singapore 22,787 20,012 20,974
United Kingdom 8,202 75,956 84,830
Netherlands - 45,347 33,868
Other Countries 26,412 38,738 60,227
-------------------------------------------------------------------------------
Total $ 433,961 $ 533,694 $ 599,745
-------------------------------------------------------------------------------
/(1)/ Geographic revenues are allocated based on the location of the customer.
80
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1999 and 1998:
1999
Q U A R T E R E N D E D
------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1999
------------------------------------------------
(In thousands, except for per share amounts)
Revenues $819,809 $779,983 $800,825 $749,368
Operating income (loss) 118,413 65,652 46,310 (12,959)
Income (loss) before
extraordinary item 121,561 51,615 42,289 (23,384)
Net income (loss) 121,561 51,615 42,289 (62,103)
Earnings (loss) per common share:
Basic
Income (loss) before
extraordinary item $ 2.03 $ 0.88 $ 0.72 $ (0.40)
Net income (loss) $ 2.03 $ 0.88 $ 0.72 $ (1.06)
Diluted
Income (loss) before
extraordinary item $ 1.88 $ 0.85 $ 0.71 $ (0.40)
Net income (loss) $ 1.88 $ 0.85 $ 0.71 $ (1.06)
Pretax results for the quarter ended June 30, 1998 include:
. 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 domestic tax refunds, and
. a gain of $12,000,000 from the sale of assets of a joint venture.
Pretax results for the quarter ended September 30, 1998 include:
. a loss on the settlement and curtailment of postretirement benefit plans of
$11,258,000,
. interest income of $6,423,000 on domestic tax refunds, and
. an $8,000,000 settlement of punitive damage claims in a civil suit
associated with a Pennsylvania facility formerly operated by McDermott.
Pretax results for the quarter ended December 31, 1998 include:
. a $9,600,000 charge to restructure foreign joint ventures.
Pretax results for the quarter ended March 31, 1999 include:
. an extraordinary loss on the retirement of debt of $38,719,000,
. a loss of $85,185,000 for estimated costs relating to estimated future non-
employee asbestos claims,
. losses of $21,897,000 related to impairment of assets and goodwill,
. various provisions of $20,327,000 related to potential settlements of
litigation and contract disputes, and
. the write-off of $12,600,000 of receivables from a joint venture.
81
1998
Q U A R T E R E N D E D
------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1998
------------------------------------------------
(In thousands, except for per share amounts)
Revenues $928,087 $920,051 $901,735 $924,762
Operating income (loss) 144,794 88,777 89,366 32,520
Net income (loss) 109,860 38,161 50,992 16,677
Earnings (loss) per common share:
Basic $ 1.97 $ 0.65 $ 0.88 $ 0.26
Diluted $ 1.79 $ 0.62 $ 0.82 $ 0.25
Pretax results for the quarter ended June 30, 1997 include:
. a gain of $96,059,000 from the sale of McDermott's interest in Sakhalin
Energy Investment Company, Ltd.
Pretax results for the quarter ended September 30, 1997 include:
. a gain of $33,072,000 from the sale of McDermott's interest in Universal
Fabricators Incorporated.
Pretax results for the quarter ended December 31, 1997 include:
. a gain $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 a write-off of goodwill
associated with the acquisition of OPI of $262,901,000.
Pretax results for the quarter ended March 31, 1998 include:
. losses of $10,315,000 related to the impairment of assets and related
goodwill, and
. a $5,419,000 provision for employee severance costs.
82
NOTE 19 EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
For the Three Fiscal Years Ended
1999 1998 1997
---------------- ---------------- ----------------
(In thousands, except shares and per share amounts)
Basic:
Income (loss) before extraordinary item $ 192,081 $ 215,690 $ (206,105)
Dividends on preferred stock, Series C - (8,266) (8,266)
----------------------------------------------------------------------------------------------------
Income (loss) for basic computation 192,081 207,424 (214,371)
Extraordinary item (38,719) - -
----------------------------------------------------------------------------------------------------
Net income (loss) for basic computation $ 153,362 $ 207,424 $ (214,371)
----------------------------------------------------------------------------------------------------
Weighted average common shares 59,015,091 55,432,949 54,322,804
----------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Income (loss) before extraordinary item $ 3.25 $ 3.74 $ (3.95)
Extraordinary item (0.65) - -
----------------------------------------------------------------------------------------------------
Net Income (loss) $ 2.60 $ 3.74 $ (3.95)
----------------------------------------------------------------------------------------------------
Diluted:
Income (loss) before extraordinary item $ 192,081 $ 215,690 $ (206,105)
Dividends on preferred stock, Series C - - (8,266)
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock 2,752 6,200 -
----------------------------------------------------------------------------------------------------
Income (loss) for diluted computation 194,833 221,890 (214,371)
Extraordinary item (38,719) - -
----------------------------------------------------------------------------------------------------
Net income (loss) for diluted computation $ 156,114 $ 221,890 $ (214,371)
----------------------------------------------------------------------------------------------------
Weighted average common shares (basic) 59,015,091 55,432,949 54,322,804
Effect of dilutive securities:
Stock options and restricted stock 1,172,496 1,446,585 -
Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock 1,256,151 2,818,679 -
Series C $2.875 Cumulative Convertible
Preferred Stock 190,457 4,078,014 -
----------------------------------------------------------------------------------------------------
Adjusted weighted average common shares
and assumed conversions 61,634,195 63,776,227 54,322,804
----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ 3.16 $ 3.48 $ (3.95)
Extraordinary item (0.63) - -
----------------------------------------------------------------------------------------------------
Net income (loss) $ 2.53 $ 3.48 $ (3.95)
----------------------------------------------------------------------------------------------------
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Ernst & Young LLP ("E&Y") were previously the principal auditors for McDermott
International, Inc. ("MII"). On July 24, 1998, the Board of Directors selected
PricewaterhouseCoopers LLP as E&Y's replacement.
For the two fiscal years ended March 31, 1998 and 1997, there were no
disagreements with E&Y on any matters of accounting principles or practice,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of E&Y, would have caused it to make a reference to
the subject matter of the disagreement in connection with this report. E&Y has
not advised MII of any reportable events. E&Y's reports on MII's financial
statements for the two fiscal years ended March 31, 1998 and 1997 did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles.
For the fiscal year ended March 31, 1999, there were no disagreements with
PricewaterhouseCoopers LLP on accounting and financial disclosure.
84
P A R T I I I
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers" in the Proxy Statement
for MII's 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" in the Proxy
Statement for MII's 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in MII's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
85
P A R T I V
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheet March 31, 1999 and 1998
Consolidated Statement of Income (Loss) For the Three Fiscal
Years Ended March 31, 1999
Consolidated Statement of Comprehensive Income (Loss) For the
Three Fiscal Years Ended March 31, 1999
Consolidated Statement of Stockholders' Equity For the Three
Fiscal Years Ended March 31, 1999
Consolidated Statement of Cash Flows For the Three Fiscal
Years Ended March 31, 1999
Notes to Consolidated Financial Statements For the Three
Fiscal Years Ended March 31, 1999
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required financial statement schedules will be filed by
amendment to this Form 10-K on Form 10-K/A.
3. EXHIBITS
Exhibit
Number Description
2.1 Agreement and Plan of Merger dated as of May 7, 1999
between McDermott International, Inc. and J. Ray
McDermott, S.A. (incorporated by reference to Annex A of
Exhibit (a)(1) to the Schedule 14D-1 filed by McDermott
International, Inc. with the Commission on May 13, 1999).
3.1 McDermott International, Inc.'s Articles of Incorporation,
as amended (incorporated by reference to Exhibit 3.1 of
McDermott International, Inc.'s Form 10-K for the fiscal
year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated By-
Laws (incorporated by reference to Exhibit 3.2 of
McDermott International, Inc.'s Form 10-Q for the
quarter ended December 31, 1998).
4.1 Amended and Restated Rights Agreement
10.1* McDermott International, Inc.'s Supplemental Executive
Retirement Plan, as amended (incorporated by reference
to Exhibit 10 of McDermott International Inc.'s 10-K/A
for fiscal year end March 31, 1994 filed with the
Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year
ended March 31, 1983).
86
Exhibit
Number Description
10.3* Trust for Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1990).
10.4* McDermott International, Inc.'s 1994 Variable
Supplemental Compensation Plan (incorporated by
reference to Exhibit A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the
Commission under a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term
Performance Incentive Compensation Program (incorporated
by reference to Exhibit 10 to McDermott International,
Inc.'s annual report of Form 10-K, as amended, for the
fiscal year ended March 31, 1988).
10.6* McDermott International, Inc.'s 1992 Senior Management
Stock Option Plan (incorporated by reference to Exhibit
10 of McDermott International, Inc.'s 10-K/A for fiscal
year ended March 31, 1994 filed with the Commission on
June 27, 1994).
10.7* McDermott International, Inc.'s 1992 Officer Stock
Incentive Program (incorporated by reference to Exhibit
10 to McDermott International, Inc.'s annual report on
Form 10-K, as amended for the fiscal year ended March 31,
1992).
10.8* McDermott International, Inc.'s 1992 Director Stock
Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form
10-K, as amended, for the fiscal year ended March 31,
1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer
Long-Term Incentive Plan (incorporated by reference to
Appendix A to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on
August 6, 1996 as filed with the Commission under a
Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock
Program (incorporated by reference to Appendix A to
McDermott International, Inc.'s Proxy Statement for its
Annual Meeting of Stockholders held on September 2, 1997
as filed with the Commission under a Schedule 14A).
21 Significant Subsidiaries of the Registrant
23 Consents of Independent Accountants
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to the requirements of Item 14(c)
of Form 10-K.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by MII during the three months
ended March 31, 1999.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/Roger E. Tetrault
----------------------------------
June 9, 1999 By: Roger E. Tetrault
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
Signature Title
--------- -----
/s/ Roger E. Tetrault Chairman of the Board, Chief Executive Officer
- ------------------------------- and Director (Principal Executive Officer)
Roger E. Tetrault
/s/ Daniel R. Gaubert Senior Vice President and Chief Financial Officer
- ------------------------------- (Principal Financial and Accounting Officer)
Daniel R. Gaubert
- ------------------------------- Director
Theodore H. Black
/s/ Phillip J. Burguieres Director
- -------------------------------
Phillip J. Burguieres
/s/ Bruce Demars Director
- -------------------------------
Bruce Demars
/s/ Robert L. Howard Director
- -------------------------------
Robert L. Howard
/s/ John William Johnstone, Jr. Director
- -------------------------------
John William Johnstone, Jr.
/s/ William McCollam, Jr. Director
- -------------------------------
William McCollam, Jr.
/s/ Kathryn D. Sullivan Director
- -------------------------------
Kathryn D. Sullivan
/s/ John N. Turner Director
- -------------------------------
John N. Turner
/s/ Richard E. Woolbert Director
- -------------------------------
Richard E. Woolbert
June 9, 1999
88
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- ------
2.1 Agreement and Plan of Merger dated as of May 7, 1999 between McDermott
International, Inc. and J. Ray McDermott, S.A. (incorporated by reference to
Annex A of Exhibit (a)(1) to the Schedule 14D-1 filed by McDermott
International, Inc. with the Commission on May 13, 1999).
3.1 McDermott International, Inc.'s Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 of McDermott International,
Inc.'s Form 10-K for the fiscal year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated By-Laws (incorporated
by reference to Exhibit 3.2 of McDermott International, Inc.'s Form
10-Q for the quarter ended December 31, 1996).
4.1 Amended and Restated Rights Agreement
10.1* McDermott International, Inc.'s Supplemental Executive Retirement Plan,
as amended (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s 10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1983).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year ended March 31,
1990).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental Compensation
Plan (incorporated by reference to Exhibit A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the Commission
under a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive
Compensation Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1988).
10.6* McDermott International Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 of McDermott International,
Inc.'s 10-K/A for fiscal year ended March 31, 1994 filed with the
Commission on June 27, 1994).
89
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- ------
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended for the fiscal year
ended March 31, 1992).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(Incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term Incentive
Plan, as amended (incorporated by reference to Appendix B to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on July 28, 1997 as filed with the Commission under
a Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on
September 2, 1997 as filed with the Commission under a Schedule 14A).
21 Significant Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
90