<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-4095
MCDERMOTT INCORPORATED
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1032246
- --------------------------------------------------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION)
1450 POYDRAS STREET, NEW ORLEANS, LOUISIANA 70112-6050
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (504) 587-4411
--------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES [X] NO [ ]
THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING AS OF
JANUARY 23, 1998 WAS 3,600.
<PAGE>
M C D E R M O T T I N C O R P O R A T E D
I N D E X - F O R M 10 - Q
--------------------------
PAGE
----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND MARCH 31, 1997 4
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 6
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 27
2
<PAGE>
PART I
MCDERMOTT INCORPORATED
FINANCIAL INFORMATION
---------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
MCDERMOTT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
12/31/97 3/31/97
--------- --------
(UNAUDITED)
(IN THOUSANDS)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 101,154 $ 56,782
ACCOUNTS RECEIVABLE-TRADE 248,705 286,011
ACCOUNTS RECEIVABLE-OTHER 136,930 139,949
INSURANCE RECOVERABLE-CURRENT 159,515 183,000
CONTRACTS IN PROGRESS 171,583 244,231
INVENTORIES 61,744 59,894
DEFERRED INCOME TAXES 69,603 56,359
OTHER CURRENT ASSETS 4,718 15,053
- -----------------------------------------------------------------------
TOTAL CURRENT ASSETS 953,952 1,041,279
- -----------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 528,893 533,942
LESS ACCUMULATED DEPRECIATION 328,416 314,600
- -----------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 200,477 219,342
- -----------------------------------------------------------------------
INSURANCE RECOVERABLE 611,780 720,913
- -----------------------------------------------------------------------
INVESTMENT IN MCDERMOTT INTERNATIONAL, INC. 592,567 595,982
- -----------------------------------------------------------------------
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
OF PURCHASED BUSINESSES LESS ACCUMULATED
AMORTIZATION OF $99,496,000 AT DECEMBER 31, 1997
AND $104,960,000 AT MARCH 31, 1997 106,310 119,077
- -----------------------------------------------------------------------
PREPAID PENSION COSTS 278,476 266,837
- -----------------------------------------------------------------------
OTHER ASSETS 135,348 173,740
- -----------------------------------------------------------------------
TOTAL $2,878,910 $3,137,170
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
12/31/97 3/31/97
-------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES:
NOTES PAYABLE AND CURRENT MATURITIES OF LONG-TERM DEBT $ 136,991 $ 313,692
ACCOUNTS PAYABLE 104,972 116,452
ACCOUNTS PAYABLE TO AFFILIATES 25,052 9,182
ENVIRONMENTAL AND PRODUCTS LIABILITIES-CURRENT 194,460 210,352
ACCRUED EMPLOYEE BENEFITS 87,681 79,573
ADVANCE BILLINGS ON CONTRACTS 156,159 109,736
OTHER CURRENT LIABILITIES 154,982 131,008
- --------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 860,297 969,995
- --------------------------------------------------------------------------------------
LONG-TERM DEBT 352,354 379,487
- --------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION 365,695 373,232
- --------------------------------------------------------------------------------------
ENVIRONMENTAL AND PRODUCTS LIABILITIES 767,183 903,379
- --------------------------------------------------------------------------------------
OTHER LIABILITIES 95,969 95,500
- --------------------------------------------------------------------------------------
CONTINGENCIES
- --------------------------------------------------------------------------------------
REDEEMABLE PREFERRED STOCKS:
SERIES A $2.20 CUMULATIVE CONVERTIBLE, $1.00 PAR VALUE;
AT REDEMPTION VALUE 88,084 88,087
SERIES B $2.60 CUMULATIVE, $1.00 PAR VALUE;
AT REDEMPTION VALUE 78,165 82,896
- --------------------------------------------------------------------------------------
TOTAL REDEEMABLE PREFERRED STOCKS 166,249 170,983
- --------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
COMMON STOCK, PAR VALUE $1.00 PER SHARE, 3,700 SHARES
AUTHORIZED AND ISSUED, 3,600 SHARES OUTSTANDING 4 4
CAPITAL IN EXCESS OF PAR VALUE 690,454 691,605
DEFICIT (393,877) (422,123)
MINIMUM PENSION LIABILITY (1,655) (1,655)
CURRENCY TRANSLATION ADJUSTMENTS (23,763) (23,237)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 271,163 244,594
- --------------------------------------------------------------------------------------
TOTAL $2,878,910 $3,137,170
- --------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
MCDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- --------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES $452,324 $424,629 $1,328,372 $1,360,801
- -----------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
COST OF OPERATIONS (EXCLUDING
DEPRECIATION AND AMORTIZATION) 385,890 376,028 1,142,148 1,243,586
DEPRECIATION AND AMORTIZATION 10,400 10,975 31,182 34,215
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,983 33,349 73,743 101,493
- -----------------------------------------------------------------------------------------------------
418,273 420,352 1,247,073 1,379,294
- -----------------------------------------------------------------------------------------------------
GAIN ON ASSET DISPOSALS AND
IMPAIRMENTS-NET 112 1,037 28,089 820
- -----------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) BEFORE
INCOME FROM INVESTEES 34,163 5,314 109,388 (17,673)
INCOME FROM INVESTEES 3,308 485 7,759 6,448
- -----------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 37,471 5,799 117,147 (11,225)
- -----------------------------------------------------------------------------------------------------
OTHER EXPENSE:
INTEREST INCOME 2,135 876 2,895 1,820
INTEREST EXPENSE (11,597) (13,062) (39,917) (39,152)
OTHER-NET (3,801) (1,705) (5,552) (3,859)
- -----------------------------------------------------------------------------------------------------
(13,263) (13,891) (42,574) (41,191)
- -----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES 24,208 (8,092) 74,573 (52,416)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES 11,707 (1,539) 36,781 (11,060)
- -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 12,501 $ (6,553) $ 37,792 $ (41,356)
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
MCDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/97 12/31/96
-------- --------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 37,792 $(41,356)
- ------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 31,182 34,215
PROVISION FOR DEFERRED TAXES 7,526 4,994
EQUITY IN INCOME OF INVESTEES, LESS DIVIDENDS 78 205
GAIN ON ASSET DISPOSALS AND IMPAIRMENTS-NET (28,089) (820)
OTHER 4,985 (1,672)
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 38,543 85,078
NET CONTRACTS IN PROGRESS AND ADVANCE BILLINGS 119,179 (39,917)
ACCOUNTS PAYABLE 7,056 (28,474)
ACCRUED AND OTHER CURRENT LIABILITIES 19,851 (7,307)
OTHER, NET 19,728 (9,289)
PROCEEDS FROM INSURANCE FOR PRODUCTS LIABILITIES CLAIMS 108,107 91,585
PAYMENTS OF PRODUCTS LIABILITIES CLAIMS (145,298) (137,337)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 220,640 (50,095)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS FROM ASSET DISPOSALS 54,298 16,110
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (11,557) (17,001)
PROCEEDS FROM REDEMPTION OF INTERNATIONAL STOCK 2,500 2,500
INVESTMENT IN EQUITY INVESTEES (3,852) (459)
OTHER 298 878
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 41,687 2,028
- ------------------------------------------------------------------------------
7
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/97 12/31/96
-------- --------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE (DECREASE) IN SHORT-TERM BORROWING $(168,540) $ 36,706
DECREASE IN SHORT-TERM BORROWING FROM INTERNATIONAL - (42,313)
PAYMENT OF LONG-TERM DEBT (35,156) (159)
DIVIDENDS PAID (9,645) (9,968)
CAPITAL CONTRIBUTION FROM INTERNATIONAL - 61,000
REDEMPTION OF PREFERRED STOCK (4,515) (1,069)
OTHER (188) (738)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (218,044) 43,459
- ------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 89 325
- ------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 44,372 (4,283)
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 56,782 22,886
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,154 $ 18,603
==============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST (NET OF AMOUNT CAPITALIZED) $ 40,943 $ 35,556
INCOME TAXES (REFUNDS) - NET $ (18,486) (9,176)
==============================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
MCDERMOTT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - BASIS OF PRESENTATION
MCDERMOTT INCORPORATED IS A MAJORITY OWNED SUBSIDIARY OF MCDERMOTT
INTERNATIONAL, INC. ("INTERNATIONAL").
THE ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN
PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR INTERIM
FINANCIAL STATEMENT INFORMATION AND WITH INSTRUCTIONS TO FORM 10-Q AND ARTICLE
10 OF REGULATION S-X. ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS. IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS CONSIDERED
NECESSARY FOR A FAIR PRESENTATION HAVE BEEN INCLUDED. SUCH ADJUSTMENTS ARE OF A
NORMAL, RECURRING NATURE EXCEPT FOR A GAIN OF $33,072,000 FROM THE SALE OF
MCDERMOTT INCORPORATED'S INTEREST IN UNIVERSAL FABRICATORS INCORPORATED INCLUDED
IN THE NINE MONTHS ENDED DECEMBER 31, 1997, FAVORABLE WORKERS' COMPENSATIONS
COST ADJUSTMENTS OF $12,088,000 INCLUDED IN THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 1996 AND AN ASSET IMPAIRMENT LOSS OF $7,295,000 INCLUDED IN THE
NINE MONTHS ENDED DECEMBER 31, 1996. OPERATING RESULTS FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 1997 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS
THAT MAY BE EXPECTED FOR THE YEAR ENDED MARCH 31, 1998. FOR FURTHER
INFORMATION, REFER TO THE CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES
THERETO INCLUDED IN MCDERMOTT INCORPORATED'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED MARCH 31, 1997.
NOTE 2 - PRODUCTS LIABILITY
AT DECEMBER 31, 1997, THE ESTIMATED LIABILITY FOR PENDING AND FUTURE NON-
EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS WAS $937,484,000 (OF WHICH
APPROXIMATELY $276,000,000 HAD BEEN ASSERTED) AND ESTIMATED INSURANCE RECOVERIES
WERE $771,295,000. ESTIMATED LIABILITIES FOR PENDING AND FUTURE NON-EMPLOYEE
PRODUCTS LIABILITY ASBESTOS CLAIMS ARE DERIVED FROM MCDERMOTT INCORPORATED'S
CLAIMS HISTORY AND CONSTITUTE MANAGEMENT'S BEST ESTIMATE OF SUCH FUTURE COSTS.
ESTIMATED INSURANCE RECOVERIES ARE BASED UPON AN ANALYSIS OF INSURERS PROVIDING
COVERAGE OF THE ESTIMATED LIABILITIES. INHERENT IN THE ESTIMATE OF SUCH
LIABILITIES AND RECOVERIES
9
<PAGE>
ARE EXPECTED TRENDS IN CLAIM SEVERITY AND FREQUENCY AND OTHER FACTORS, INCLUDING
RECOVERABILITY FROM INSURERS, WHICH MAY VARY SIGNIFICANTLY AS CLAIMS ARE FILED
AND SETTLED. ACCORDINGLY, CHANGES IN ESTIMATES COULD RESULT IN A MATERIAL
ADJUSTMENT TO OPERATING RESULTS FOR ANY FISCAL QUARTER OR YEAR AND THE ULTIMATE
LOSS MAY DIFFER MATERIALLY FROM AMOUNTS PROVIDED IN THE CONSOLIDATED FINANCIAL
STATEMENTS.
NOTE 3 - INVENTORIES
INVENTORIES AT DECEMBER 31 AND MARCH 31, 1997 ARE SUMMARIZED BELOW:
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
(UNAUDITED)
(IN THOUSANDS)
MATERIALS AND SUPPLIES $ 43,994 $ 44,395
WORK IN PROGRESS 10,557 8,498
FINISHED GOODS 7,193 7,001
- ------------------------------------------------------------------
$ 61,744 $ 59,894
==================================================================
NOTE 4 - INVESTIGATIONS
SINCE MARCH 1997, INTERNATIONAL AND ITS MAJORITY OWNED SUBSIDIARY, J. RAY
MCDERMOTT, S.A. ("JRM"), WITH THE HELP OF OUTSIDE COUNSEL, HAVE BEEN
INVESTIGATING ALLEGATIONS OF WRONGDOING BY A LIMITED NUMBER OF FORMER EMPLOYEES
OF INTERNATIONAL AND JRM AND BY OTHERS. UPON RECEIVING THESE ALLEGATIONS,
INTERNATIONAL AND JRM NOTIFIED AUTHORITIES, INCLUDING THE ANTITRUST DIVISION OF
THE DEPARTMENT OF JUSTICE ("ANTITRUST DIVISION") AND THE EUROPEAN COMMISSION OF
THEIR INVESTIGATION.
IN RETURN FOR THEIR PROMPT DISCLOSURE OF THE ALLEGATIONS, INTERNATIONAL AND JRM
AND INDIVIDUALS WHO WERE OFFICERS, DIRECTORS AND EMPLOYEES AT THE TIME OF
DISCLOSURE WERE GRANTED IMMUNITY FROM CRIMINAL PROSECUTION BY THE ANTITRUST
DIVISION FOR ANY ANTI-COMPETITIVE ACTS INVOLVING WORLDWIDE HEAVY-LIFT
ACTIVITIES.
INTERNATIONAL AND JRM HAVE RECEIVED SUBPOENAS IN CONNECTION WITH THE ANTITRUST
DIVISION'S INVESTIGATION. THEY ADDRESS PRINCIPALLY THE HEAVY-LIFT BUSINESS OF
JRM'S FORMER HEEREMAC JOINT VENTURE ("HEEREMAC") AND POSSIBLE ANTI-COMPETITIVE
ACTIVITY IN THE MARINE CONSTRUCTION BUSINESS OF MCDERMOTT ETPM-EAST, INC., JRM'S
MIDDLE EAST JOINT VENTURE WITH ETPM S.A., A
10
<PAGE>
FRENCH COMPANY. INTERNATIONAL AND JRM ARE ALSO COMPLYING WITH THE SECURITY AND
EXCHANGE COMMISSION'S ("SEC") REQUEST FOR DOCUMENTS.
AFTER RECEIVING THE ALLEGATIONS IN MARCH 1997, JRM INITIATED ACTION TO TERMINATE
ITS INTEREST IN HEEREMAC, AND ON DECEMBER 19, 1997, JRM'S PARTNER IN THE JOINT
VENTURE, HEEREMA OFFSHORE CONSTRUCTION GROUP, INC., ACQUIRED JRM'S INTEREST IN
EXCHANGE FOR CASH AND TITLE TO SEVERAL PIECES OF EQUIPMENT.
ON DECEMBER 21, 1997, HEEREMAC AND A HEEREMAC EMPLOYEE PLED GUILTY TO CRIMINAL
CHARGES BY THE DEPARTMENT OF JUSTICE THAT THEY AND OTHERS HAD PARTICIPATED IN A
CONSPIRACY TO RIG BIDS IN CONNECTION WITH THE HEAVY-LIFT BUSINESS OF HEEREMAC IN
THE GULF OF MEXICO, NORTH SEA AND FAR EAST. HEEREMAC WAS FINED $49,000,000 AND
THE EMPLOYEE $100,000. AS PART OF THE PLEA, BOTH HEEREMAC AND CERTAIN EMPLOYEES
OF HEEREMAC ARE OBLIGATED TO COOPERATE FULLY WITH THE ANTITRUST DIVISION'S
INVESTIGATION. NEITHER INTERNATIONAL, JRM NOR ANY OF THEIR OFFICERS, DIRECTORS
OR EMPLOYEES WAS A PARTY TO THESE PROCEEDINGS.
IT IS NOT POSSIBLE TO PREDICT THE ULTIMATE OUTCOME OF THE DEPARTMENT OF
JUSTICE'S INVESTIGATION, THE GRAND JURY PROCEEDINGS, THE INQUIRY FROM THE SEC OR
INTERNATIONAL AND JRM'S INTERNAL INVESTIGATIONS, OR ACTIONS THAT MAY BE TAKEN BY
OTHERS AS A RESULT OF HEEREMAC'S GUILTY PLEA. HOWEVER, THESE MATTERS COULD
RESULT IN CIVIL AND/OR CRIMINAL LIABILITY TO INTERNATIONAL AND JRM AND HAVE A
MATERIAL EFFECT ON FUTURE RESULTS OF OPERATIONS. SUBSEQUENT TO THE FORMATION OF
JRM AND ITS ACQUISITION OF OFFSHORE PIPELINES, INC. IN JANUARY 1995, MCDERMOTT
INCORPORATED NO LONGER PARTICIPATES IN THE HEAVY-LIFT BARGE SERVICE BUSINESS NOR
THE MARINE CONSTRUCTION BUSINESS, WHICH IS THE SUBJECT OF THIS INVESTIGATION.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
A SIGNIFICANT PORTION OF MCDERMOTT INCORPORATED'S REVENUES AND OPERATING RESULTS
ARE DERIVED FROM ITS FOREIGN OPERATIONS, WHICH ARE PRIMARILY LOCATED IN CANADA.
AS A RESULT, MCDERMOTT INCORPORATED'S OPERATIONS AND FINANCIAL RESULTS ARE
AFFECTED BY INTERNATIONAL FACTORS, SUCH AS CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES. MCDERMOTT INCORPORATED ATTEMPTS TO MINIMIZE ITS EXPOSURE TO CHANGES IN
FOREIGN CURRENCY EXCHANGE RATES BY ATTEMPTING TO MATCH FOREIGN CURRENCY
CONTRACT RECEIPTS WITH LIKE FOREIGN CURRENCY DISBURSEMENTS. TO THE EXTENT THAT
IT IS UNABLE TO MATCH THE FOREIGN CURRENCY RECEIPTS AND DISBURSEMENTS RELATED TO
ITS CONTRACTS, MCDERMOTT INCORPORATED ENTERS INTO FORWARD EXCHANGE CONTRACTS TO
HEDGE FOREIGN CURRENCY TRANSACTIONS, WHICH REDUCES THE IMPACT OF FOREIGN
EXCHANGE RATE MOVEMENTS ON OPERATING RESULTS.
DURING THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997, MCDERMOTT
INCORPORATED'S CANADIAN OPERATIONS CONTRIBUTED $86,480,000 AND $282,156,000 TO
TOTAL REVENUES AND $11,232,000 AND $17,979,000 TO OPERATING INCOME,
RESPECTIVELY. DURING THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996,
MCDERMOTT INCORPORATED'S CANADIAN OPERATIONS CONTRIBUTED $118,284,000 AND
$442,334,000 TO TOTAL REVENUES AND $1,004,000 AND $4,519,000 TO OPERATING LOSS,
RESPECTIVELY. THESE RESULTS REFLECT ACTIVITY ON CONTRACTS PERFORMED AT THE
BABCOCK & WILCOX COMPANY'S ("B&W") CAMBRIDGE, ONTARIO LOCATION, PRINCIPALLY FOR
THE SUPPLY OF REPLACEMENT RECIRCULATING STEAM GENERATORS TO DOMESTIC UTILITIES
AND WORK FOR GOVERNMENT OWNED UTILITIES LOCATED IN THE MIDDLE AND FAR EAST, AND
CONTRACTS PERFORMED BY MCDERMOTT ENGINEERS & CONSTRUCTORS (CANADA) LTD., WHICH
IS BASED IN CALGARY, ALBERTA, CANADA.
MANAGEMENT'S DISCUSSION OF REVENUES AND OPERATING INCOME IS PRESENTED ON A
BUSINESS UNIT BASIS AS FOLLOWS: POWER GENERATION SYSTEMS (INCLUDES THE
OPERATIONS OF THE BABCOCK & WILCOX POWER GENERATION GROUP), GOVERNMENT
OPERATIONS (INCLUDES THE OPERATIONS OF BWX TECHNOLOGIES, INC., FORMERLY THE
BABCOCK & WILCOX GOVERNMENT GROUP) AND OTHER (INCLUDES MCDERMOTT INCORPORATED'S
ENGINEERING AND CONSTRUCTION OPERATIONS, OTHER NON-CORE BUSINESSES AND CERTAIN
ADJUSTMENTS WHICH ARE NOT ALLOCATED TO THE BUSINESS UNITS). THE RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 HAVE BEEN
RESTATED TO
12
<PAGE>
REFLECT THE RECLASSIFICATION OF CERTAIN OPERATIONS FROM B&W OPERATIONS TO POWER
GENERATIONS SYSTEMS AND GOVERNMENT OPERATIONS AND MARINE CONSTRUCTION SERVICES
TO OTHER TO CONFORM WITH THE PRESENTATION AT DECEMBER 31, 1997.
STATEMENTS MADE HEREIN WHICH EXPRESS A BELIEF, EXPECTATION OR INTENTION, AS WELL
AS THOSE WHICH ARE NOT HISTORICAL FACT ARE FORWARD LOOKING. THEY INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES WHICH MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH FORWARD LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO: THE DEREGULATION OF THE U. S. ENERGY MARKET;
GOVERNMENTAL REGULATION AND THE CONTINUED FUNDING OF MCDERMOTT INCORPORATED'S
CONTRACTS WITH U. S. GOVERNMENTAL AGENCIES; ESTIMATES FOR PENDING AND FUTURE
NON-EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS; THE HIGHLY COMPETITIVE NATURE
OF MCDERMOTT INCORPORATED'S BUSINESSES; AND THE RESULTS OF THE ONGOING
INVESTIGATION BY INTERNATIONAL AND THE U.S. DEPARTMENT OF JUSTICE INTO POSSIBLE
ANTI-COMPETITIVE PRACTICES BY INTERNATIONAL AND JRM.
13
<PAGE>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
--------- -------- -------- --------
(IN THOUSANDS)
REVENUES
POWER GENERATION SYSTEMS $ 283,337 $ 236,955 $ 827,396 $ 748,938
GOVERNMENT OPERATIONS 95,355 89,957 259,427 269,190
OTHER 74,225 101,707 248,873 356,281
ELIMINATIONS (593) (3,990) (7,324) (13,608)
- -----------------------------------------------------------------------------
TOTAL REVENUES $ 452,324 $ 424,629 $1,328,372 $1,360,801
=============================================================================
OPERATING INCOME (LOSS)
BUSINESS UNIT INCOME (LOSS):
POWER GENERATION SYSTEMS $ 27,648 $ 7,514 $ 60,932 $ 2,712
GOVERNMENT OPERATIONS 7,742 10,253 27,526 23,771
OTHER (297) (4,116) 3,445 (21,890)
- -----------------------------------------------------------------------------
TOTAL 35,093 13,651 91,903 4,593
- -----------------------------------------------------------------------------
GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS-NET:
POWER GENERATION SYSTEMS 83 348 103 5,231
GOVERNMENT OPERATIONS (6) 53 (4) 141
OTHER 19 637 27,570 (5,118)
CORPORATE 16 (1) 420 566
- -----------------------------------------------------------------------------
TOTAL 112 1,037 28,089 820
- -----------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTEES:
POWER GENERATION SYSTEMS 533 (1,171) 2,189 2,144
GOVERNMENT OPERATIONS 2,678 694 3,777 1,681
OTHER 97 962 1,793 2,623
- -----------------------------------------------------------------------------
TOTAL 3,308 485 7,759 6,448
- -----------------------------------------------------------------------------
CORPORATE G&A EXPENSE (1,042) (9,374) (10,604) (23,086)
- -----------------------------------------------------------------------------
TOTAL OPERATING
INCOME (LOSS) $37,471 $ 5,799 $117,147 $ (11,225)
=============================================================================
14
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997 VS. THREE MONTHS
ENDED DECEMBER 31, 1996
Power Generation Systems
- ------------------------
REVENUES INCREASED $46,382,000 TO $283,337,000, PRIMARILY DUE TO HIGHER REVENUES
FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND ENVIRONMENTAL CONTROL
SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING EQUIPMENT.
BUSINESS UNIT INCOME INCREASED $20,134,000 TO $27,648,000, PRIMARILY DUE TO
HIGHER VOLUME AND MARGINS FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND
ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING
EQUIPMENT. IN ADDITION, THERE WERE HIGHER MARGINS FROM REPLACEMENT NUCLEAR
STEAM GENERATORS AND LOWER SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES.
THESE INCREASES WERE PARTIALLY OFFSET BY HIGHER OPERATING EXPENSES.
INCOME (LOSS) FROM INVESTEES INCREASED $1,704,000 FROM A LOSS OF $1,171,000 TO
INCOME OF $533,000. THIS REPRESENTS THE RESULTS OF APPROXIMATELY SIX ACTIVE
JOINT VENTURES. THE INCREASE WAS PRIMARILY DUE TO A PROVISION FOR A LOSS ON A
CANADIAN JOINT VENTURE IN THE PRIOR YEAR. THIS INCREASE WAS PARTIALLY OFFSET BY
LOWER OPERATING RESULTS FROM TWO DOMESTIC JOINT VENTURES.
GOVERNMENT OPERATIONS
- ---------------------
REVENUES INCREASED $5,398,000 TO $95,355,000, PRIMARILY DUE TO HIGHER REVENUES
FROM OPERATION AND MANAGEMENT CONTRACTS FOR U.S. GOVERNMENT OWNED FACILITIES.
THIS INCREASE WAS PARTIALLY OFFSET BY LOWER REVENUES FROM NUCLEAR FUEL
ASSEMBLIES AND REACTOR COMPONENTS FOR THE U.S. GOVERNMENT, COMMERCIAL NUCLEAR
ENVIRONMENTAL SERVICES AND OTHER GOVERNMENT RELATED OPERATIONS.
BUSINESS UNIT INCOME DECREASED $2,511,000 TO $7,742,000, PRIMARILY DUE TO LOWER
VOLUME AND MARGINS FROM COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND HIGHER
OPERATING EXPENSES. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER MARGINS FROM
NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U.S. GOVERNMENT AND
HIGHER VOLUME FROM OPERATION AND MANAGEMENT CONTRACTS FOR U.S. GOVERNMENT OWNED
FACILITIES.
15
<PAGE>
INCOME FROM INVESTEES INCREASED $1,984,000 TO $2,678,000, PRIMARILY DUE TO THE
FAVORABLE OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE.
OTHER
- -----
REVENUES DECREASED $27,482,000 TO $74,225,000, PRIMARILY DUE TO THE DISPOSITION
OF NON-CORE BUSINESSES (SHIPYARD AND ORDNANCE OPERATIONS) AND LOWER REVENUES
FROM ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS. THESE
DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM AIR COOLED HEAT
EXCHANGERS.
BUSINESS UNIT LOSS DECREASED $3,819,000 TO $297,000, PRIMARILY DUE TO PRIOR YEAR
LOSSES IN NON-CORE BUSINESSES (SHIPYARD AND ORDNANCE OPERATIONS). IN ADDITION,
THERE WERE HIGHER REVENUES FROM AIR COOLED HEAT EXCHANGERS, HIGHER MARGINS FROM
ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND LOWER GENERAL
AND ADMINISTRATIVE EXPENSES. THESE INCREASES WERE PARTIALLY OFFSET BY HIGHER
OPERATING EXPENSES.
CORPORATE G&A EXPENSE
- ---------------------
CORPORATE G&A EXPENSE DECREASED $8,332,000 TO $1,042,000, PRIMARILY DUE TO STAFF
REDUCTIONS, OTHER ECONOMIC MEASURES, INCREASED BILLING OF COSTS TO INTERNATIONAL
AND ITS OTHER SUBSIDIARIES, AND CERTAIN ONE-TIME COSTS INCURRED IN THE PRIOR
PERIOD.
OTHER INCOME STATEMENT ITEMS
- ----------------------------
INTEREST INCOME INCREASED $1,259,000 TO $2,135,000, PRIMARILY DUE TO INCOME IN
THE CURRENT PERIOD FOR DELINQUENT PAYMENT OF AMOUNTS DUE FROM A JOINT VENTURE.
INTEREST EXPENSE DECREASED $1,465,000 TO $11,597,000, PRIMARILY DUE TO CHANGES
IN DEBT OBLIGATIONS AND INTEREST RATES PREVAILING THEREON.
THE PROVISION FOR (BENEFIT FROM) INCOME TAXES INCREASED $13,246,000 TO A
PROVISION OF $11,707,000 FROM A BENEFIT OF $1,539,000, WHILE INCOME (LOSS)
BEFORE THE PROVISION FOR (BENEFIT FROM) INCOME TAXES INCREASED $32,300,000 TO
INCOME OF $24,208,000 FROM A LOSS OF $8,092,000. THE INCREASE IN THE PROVISION
FOR INCOME TAXES IS PRIMARILY DUE TO THE INCREASE IN INCOME.
16
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1997 VS. NINE MONTHS
ENDED DECEMBER 31, 1996
POWER GENERATION SYSTEMS
- ------------------------
REVENUES INCREASED $78,458,000 TO $827,396,000, PRIMARILY DUE TO HIGHER REVENUES
FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND ENVIRONMENTAL CONTROL
SYSTEMS, BOILER CLEANING EQUIPMENT AND PLANT ENHANCEMENT PROJECTS. THESE
INCREASES WERE PARTIALLY OFFSET BY LOWER REVENUES FROM REPAIR AND ALTERATION OF
EXISTING FOSSIL FUEL STEAM SYSTEMS AND REPLACEMENT NUCLEAR STEAM GENERATORS.
BUSINESS UNIT INCOME INCREASED $58,220,000 TO $60,932,000, PRIMARILY DUE TO
HIGHER VOLUME AND MARGINS FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND
ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING
EQUIPMENT. IN ADDITION, THERE WERE HIGHER MARGINS FROM REPLACEMENT NUCLEAR
STEAM GENERATORS AND LOWER SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES.
GAIN ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $5,128,000 TO $103,000.
THE PRIOR YEAR INCLUDED THE SALE OF A TOOL RENTAL BUSINESS.
GOVERNMENT OPERATIONS
- ---------------------
REVENUES DECREASED $9,763,000 TO $259,427,000, PRIMARILY DUE TO LOWER REVENUES
FROM NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U.S. GOVERNMENT,
COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND OTHER GOVERNMENT RELATED
OPERATIONS. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM
OPERATION AND MANAGEMENT CONTRACTS FOR U.S. GOVERNMENT OWNED FACILITIES.
BUSINESS UNIT INCOME INCREASED $3,755,000 TO $27,526,000, PRIMARILY DUE TO
HIGHER VOLUME FROM OPERATION AND MANAGEMENT CONTRACTS FOR U.S. GOVERNMENT OWNED
FACILITIES AND HIGHER MARGINS ON NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS
FOR THE U.S. GOVERNMENT AND OTHER GOVERNMENT RELATED OPERATIONS. THESE INCREASES
WERE PARTIALLY OFFSET BY LOWER VOLUME AND MARGINS FROM COMMERCIAL NUCLEAR
ENVIRONMENTAL SERVICES.
INCOME FROM INVESTEES INCREASED $2,096,000 TO $3,777,000, PRIMARILY DUE TO THE
FAVORABLE OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE.
17
<PAGE>
OTHER
- -----
REVENUES DECREASED $107,408,000 TO $248,873,000, PRIMARILY DUE TO LOWER REVENUES
FROM ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND AS A
RESULT OF THE DISPOSITION OF NON-CORE BUSINESSES (SHIPYARD AND ORDNANCE
OPERATIONS). THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM AIR
COOLED HEAT EXCHANGERS.
BUSINESS UNIT INCOME (LOSS) INCREASED $25,335,000 FROM A LOSS OF $21,890,000 TO
INCOME OF $3,445,000, PRIMARILY DUE TO COST OVERRUNS ON ENGINEERING AND
CONSTRUCTION CONTRACTS IN THE PRIOR YEAR. IN ADDITION, THERE WAS HIGHER VOLUME
ON AIR COOLED HEAT EXCHANGERS AND LOWER OPERATING AND GENERAL AND ADMINISTRATIVE
EXPENSES. ALSO, THE PRIOR YEAR INCLUDED LOSSES IN NON-CORE BUSINESSES (SHIPYARD
AND ORDNANCE OPERATIONS). THESE INCREASES WERE PARTIALLY OFFSET BY HIGHER
OPERATING EXPENSES.
GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS-NET INCREASED $32,688,000 FROM A
LOSS OF $5,118,000 TO A GAIN OF $27,570,000, PRIMARILY DUE TO THE SALE OF THE
COMPANY'S INTEREST IN UNIVERSAL FABRICATORS INCORPORATED.
INCOME FROM INVESTEES DECREASED $830,000 TO $1,793,000, PRIMARILY DUE TO LOWER
OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE.
CORPORATE G&A EXPENSE
- ---------------------
CORPORATE G&A EXPENSE DECREASED $12,482,000 TO $10,604,000, PRIMARILY DUE TO
STAFF REDUCTIONS, OTHER ECONOMIC MEASURES, INCREASED BILLING OF COSTS TO
INTERNATIONAL AND ITS OTHER SUBSIDIARIES, AND CERTAIN ONE-TIME COSTS INCURRED IN
THE PRIOR PERIOD.
OTHER INCOME STATEMENT ITEMS
- ----------------------------
INTEREST INCOME INCREASED $1,075,000 TO $2,895,000, PRIMARILY DUE TO INCOME IN
THE CURRENT YEAR FOR DELINQUENT PAYMENT OF AMOUNTS DUE FROM A JOINT VENTURE.
OTHER-NET EXPENSE INCREASED $1,693,000 TO $5,552,000, PRIMARILY DUE TO EXPENSE
IN THE CURRENT YEAR FOR CURTAILMENT OF A FOREIGN PENSION PLAN AND MINORITY
SHAREHOLDER PARTICIPATION IN THE IMPROVED RESULTS OF MCDERMOTT ENGINEERS AND
CONSTRUCTORS (CANADA) LTD. THESE
18
<PAGE>
INCREASES WERE PARTIALLY OFFSET BY BANK FEES AND DISCOUNTS ON THE SALE OF
ACCOUNTS RECEIVABLES IN THE PRIOR YEAR.
THE PROVISION FOR (BENEFIT FROM) INCOME TAXES INCREASED $47,841,000 TO A
PROVISION OF $36,781,000 FROM A BENEFIT OF $11,060,000, WHILE INCOME (LOSS)
BEFORE THE PROVISION FOR (BENEFIT FROM) INCOME TAXES INCREASED $126,989,000 TO
INCOME OF $74,573,000 FROM A LOSS OF $52,416,000. THE INCREASE IN THE PROVISION
FOR INCOME TAXES IS PRIMARILY DUE TO THE INCREASE IN INCOME.
BACKLOG
- -------
12/31/97 3/31/97
---------- ----------
(Unaudited)
(In thousands)
POWER GENERATION SYSTEMS $ 1,270,451 $ 1,554,125
GOVERNMENT OPERATIONS 841,454 797,764
OTHER 375,654 364,722
ELIMINATIONS (165,255) (264,158)
- --------------------------------------------------------------------------
TOTAL BACKLOG $ 2,322,304 $ 2,452,453
==========================================================================
IN GENERAL, MCDERMOTT INCORPORATED IS CAPITAL INTENSIVE AND RELIES ON LARGE
CONTRACTS FOR A SUBSTANTIAL AMOUNT OF ITS REVENUES.
POWER GENERATION SYSTEMS' FOREIGN MARKETS (EXCLUDING SOUTHEAST ASIA) FOR
INDUSTRIAL AND UTILITY BOILERS REMAIN STRONG. THE U.S. MARKETS FOR SERVICE AND
REPLACEMENT NUCLEAR STEAM GENERATORS ARE EXPECTED TO REMAIN STRONG AND TO MAKE
SIGNIFICANT CONTRIBUTIONS TO OPERATING INCOME INTO THE FORESEEABLE FUTURE.
HOWEVER, THE U.S. MARKET FOR INDUSTRIAL AND UTILITY BOILERS REMAINS WEAK.
AT DECEMBER 31, 1997, GOVERNMENT OPERATIONS' BACKLOG WITH THE U.S. GOVERNMENT
WAS $825,843,000 (OF WHICH $40,082,000 HAD NOT BEEN FUNDED). THIS BUSINESS
UNIT'S BACKLOG IS NOT EXPECTED TO EXPERIENCE ANY SIGNIFICANT GROWTH AS A RESULT
OF REDUCTIONS IN THE DEFENSE BUDGET OVER THE PAST SEVERAL YEARS. IT IS EXPECTED
TO REMAIN RELATIVELY CONSTANT SINCE B&W IS THE SOLE SOURCE PROVIDER OF NUCLEAR
FUEL ASSEMBLIES AND NUCLEAR REACTOR COMPONENTS FOR THE U. S. GOVERNMENT.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
DURING THE NINE MONTHS ENDED DECEMBER 31, 1997, MCDERMOTT INCORPORATED'S CASH
AND CASH EQUIVALENTS INCREASED $44,372,000 TO $101,154,000 AND TOTAL DEBT
DECREASED $203,834,000 TO $489,345,000 PRIMARILY DUE TO A NET DECREASE IN SHORT-
TERM BORROWINGS OF $168,540,000 AND PAYMENT OF LONG-TERM DEBT OF $35,156,000.
DURING THIS PERIOD, MCDERMOTT INCORPORATED PROVIDED CASH OF $220,640,000 FROM
OPERATING ACTIVITIES; RECEIVED CASH OF $54,298,000 FROM ASSET DISPOSALS AND
$2,500,000 FROM THE REDEMPTION OF INTERNATIONAL STOCK; AND USED CASH OF
$11,557,000 FOR PURCHASES OF PROPERTY, PLANT AND EQUIPMENT, $9,645,000 FOR CASH
DIVIDENDS ON MCDERMOTT INCORPORATED'S PREFERRED STOCKS, AND $4,515,000 FOR THE
REDEMPTION OF PREFERRED STOCK.
PURSUANT TO AN AGREEMENT WITH A MAJORITY OF ITS PRINCIPAL INSURERS, MCDERMOTT
INCORPORATED NEGOTIATES AND SETTLES PRODUCTS LIABILITY ASBESTOS CLAIMS FROM NON-
EMPLOYEES AND BILLS THESE AMOUNTS TO THE APPROPRIATE INSURERS. AS A RESULT OF
COLLECTION DELAYS INHERENT IN THIS PROCESS, REIMBURSEMENT IS USUALLY DELAYED FOR
THREE MONTHS OR MORE. THE AVERAGE AMOUNT OF THESE CLAIMS (HISTORICAL AVERAGE OF
APPROXIMATELY $6,300 PER CLAIM OVER THE LAST THREE YEARS) HAS CONTINUED TO RISE.
CLAIMS PAID DURING THE NINE MONTHS ENDED DECEMBER 31, 1997 WERE $145,298,000, OF
WHICH $132,614,000 HAS BEEN RECOVERED OR IS DUE FROM INSURERS. AT DECEMBER 31,
1997, RECEIVABLES OF $104,591,000 WERE DUE FROM INSURERS FOR REIMBURSEMENT OF
SETTLED CLAIMS. ESTIMATED LIABILITIES FOR PENDING AND FUTURE NON-EMPLOYEE
PRODUCTS LIABILITY ASBESTOS CLAIMS ARE DERIVED FROM MCDERMOTT INCORPORATED'S
CLAIMS HISTORY AND CONSTITUTE MANAGEMENT'S BEST ESTIMATE OF SUCH FUTURE COSTS.
SETTLEMENT OF THE LIABILITY IS EXPECTED TO OCCUR OVER APPROXIMATELY THE NEXT 15
YEARS. ESTIMATED INSURANCE RECOVERIES ARE BASED UPON ANALYSIS OF INSURERS
PROVIDING COVERAGE OF THE ESTIMATED LIABILITIES. INHERENT IN THE ESTIMATE OF
SUCH LIABILITIES AND RECOVERIES ARE EXPECTED TRENDS IN CLAIM SEVERITY AND
FREQUENCY AND OTHER FACTORS, INCLUDING RECOVERABILITY FROM INSURERS, WHICH MAY
VARY SIGNIFICANTLY AS CLAIMS ARE FILED AND SETTLED. ACCORDINGLY, THE ULTIMATE
LOSS MAY DIFFER MATERIALLY FROM AMOUNTS PROVIDED IN THE CONSOLIDATED FINANCIAL
STATEMENTS. THE COLLECTION DELAYS, AND THE AMOUNT OF CLAIMS PAID FOR WHICH
INSURANCE RECOVERY IS NOT PROBABLE, HAVE NOT HAD A MATERIAL ADVERSE EFFECT UPON
MCDERMOTT INCORPORATED'S LIQUIDITY, AND MANAGEMENT BELIEVES, BASED ON
INFORMATION CURRENTLY AVAILABLE, THAT THEY WILL NOT HAVE A MATERIAL ADVERSE
EFFECT ON LIQUIDITY IN THE FUTURE.
20
<PAGE>
EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT DECREASED $5,444,000 TO
$11,557,000 FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AS COMPARED WITH THE
SAME PERIOD IN THE PRIOR YEAR. THE MAJORITY OF EXPENDITURES WERE INCURRED TO
MAINTAIN EXISTING FACILITIES.
AT DECEMBER 30 AND MARCH 31, 1997, B&W HAD SOLD, WITH LIMITED RECOURSE, AN
UNDIVIDED INTEREST IN A DESIGNATED POOL OF QUALIFIED ACCOUNTS RECEIVABLE OF
APPROXIMATELY $99,783,000 AND $93,769,000, RESPECTIVELY, UNDER THE TERMS OF AN
AGREEMENT WITH A U.S. BANK. THE MAXIMUM SALES LIMIT AVAILABLE UNDER THE
AGREEMENT WAS REDUCED DURING OCTOBER 1997 FROM $125,000,000 TO $100,000,000.
DEPENDING ON THE AMOUNT OF QUALIFIED ACCOUNTS RECEIVABLE AVAILABLE FOR THE POOL,
THE AMOUNT SOLD TO THE BANK CAN VARY (BUT NOT TO GREATER THAN THE MAXIMUM SALES
LIMIT AVAILABLE) FROM TIME TO TIME. THE EXISTING AGREEMENT WILL EXPIRE ON
FEBRUARY 28, 1998; HOWEVER, B&W EXPECTS TO NEGOTIATE RENEWAL OF THE AGREEMENT.
MCDERMOTT INCORPORATED ACCOUNTS FOR THESE SALES AS SECURED BORROWINGS.
MCDERMOTT INCORPORATED AND A SUBSIDIARY OF INTERNATIONAL, MCDERMOTT
INTERNATIONAL INVESTMENTS CO., INC. ("MIICO"), ARE PARTIES TO AN AGREEMENT
PURSUANT TO WHICH MCDERMOTT INCORPORATED MAY BORROW UP TO $150,000,000 FROM
MIICO AT INTEREST RATES COMPUTED AT THE APPLICABLE FEDERAL RATE DETERMINED BY
THE IRS. THERE WERE NO BORROWINGS AGAINST THIS AGREEMENT AT DECEMBER 31 OR
MARCH 31, 1997.
AT DECEMBER 31 AND MARCH 31, 1997, MCDERMOTT INCORPORATED HAD AVAILABLE TO IT
VARIOUS UNCOMMITTED SHORT-TERM LINES OF CREDIT FROM BANKS TOTALLING $80,564,000
AND $134,695,000, RESPECTIVELY. BORROWINGS BY MCDERMOTT INCORPORATED AGAINST
THESE LINES OF CREDIT AT MARCH 31, 1997 WERE $24,555,000. THERE WERE NO
BORROWINGS AGAINST THESE LINES AT DECEMBER 31, 1997. IN ADDITION, AT MARCH 31,
1997, THERE WERE BORROWINGS OF $150,000,000 UNDER THE $150,000,000 UNSECURED AND
COMMITTED REVOLVING CREDIT FACILITY OF B&W (THE "B&W REVOLVER"). DURING MAY AND
JUNE 1997, B&W REPAID ALL AMOUNTS OUTSTANDING UNDER THE B&W REVOLVER PRIMARILY
WITH THE PROCEEDS OF A LOAN OF $115,000,000 FROM MIICO TO MCDERMOTT INCORPORATED
DURING MAY 1997. THERE WERE NO BORROWINGS AGAINST THIS FACILITY AT DECEMBER 31,
1997.
MCDERMOTT INCORPORATED IS RESTRICTED, AS A RESULT OF COVENANTS IN CERTAIN
AGREEMENTS, IN ITS ABILITY TO TRANSFER FUNDS TO INTERNATIONAL AND ITS
SUBSIDIARIES THROUGH CASH DIVIDENDS OR THROUGH
21
<PAGE>
UNSECURED LOANS OR INVESTMENTS. AT DECEMBER 31, 1997, SUBSTANTIALLY ALL OF THE
NET ASSETS OF MCDERMOTT INCORPORATED WERE SUBJECT TO SUCH RESTRICTIONS. THE MOST
RESTRICTIVE OF THESE COVENANTS WITH RESPECT TO THE PAYMENT OF DIVIDENDS BY
MCDERMOTT INCORPORATED WOULD PROHIBIT THE PAYMENT OF DIVIDENDS OTHER THAN
CURRENT DIVIDENDS ON EXISTING PREFERRED STOCK.
WORKING CAPITAL INCREASED $22,371,000 TO $93,655,000 AT DECEMBER 31, 1997.
DURING THE REMAINDER OF FISCAL YEAR 1998, MCDERMOTT INCORPORATED EXPECTS TO
OBTAIN FUNDS TO MEET CAPITAL EXPENDITURE, WORKING CAPITAL AND DEBT MATURITY
REQUIREMENTS FROM OPERATING ACTIVITIES AND ADDITIONAL BORROWINGS. LEASING
AGREEMENTS FOR EQUIPMENT, WHICH ARE SHORT-TERM IN NATURE, ARE NOT EXPECTED TO
IMPACT MCDERMOTT INCORPORATED'S LIQUIDITY NOR CAPITAL RESOURCES.
MCDERMOTT INCORPORATED'S QUARTERLY DIVIDENDS OF $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 WERE THE SAME IN DECEMBER 1997 AND 1996.
MCDERMOTT INCORPORATED HAS PROVIDED A VALUATION ALLOWANCE FOR DEFERRED TAX
ASSETS WHICH CANNOT BE REALIZED THROUGH CARRYBACKS AND FUTURE REVERSALS OF
EXISTING TAXABLE TEMPORARY DIFFERENCES. MANAGEMENT BELIEVES THAT REMAINING
DEFERRED TAX ASSETS ARE REALIZABLE THROUGH CARRYBACKS AND FUTURE REVERSALS OF
EXISTING TAXABLE TEMPORARY DIFFERENCES AND, IF NECESSARY, THE IMPLEMENTATION OF
TAX PLANNING STRATEGIES INVOLVING SALES OF APPRECIATED ASSETS. AN UNCERTAINTY
THAT AFFECTS THE ULTIMATE REALIZATION OF DEFERRED TAX ASSETS IS THE POSSIBILITY
OF DECLINES IN VALUE OF APPRECIATED ASSETS INVOLVED IN IDENTIFIED TAX PLANNING
STRATEGIES. THIS FACTOR HAS BEEN CONSIDERED IN DETERMINING THE VALUATION
ALLOWANCE. MANAGEMENT WILL CONTINUE TO ASSESS THE ADEQUACY OF THE VALUATION
ALLOWANCE ON A QUARTERLY BASIS.
NEW ACCOUNTING STANDARDS
- ------------------------
IN JUNE 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED STATEMENT
OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130, "REPORTING COMPREHENSIVE
INCOME," WHICH IS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997.
SFAS NO. 130 ESTABLISHES STANDARDS FOR REPORTING AND DISPLAY OF COMPREHENSIVE
INCOME AND ITS COMPONENTS IN A FULL SET OF GENERAL-PURPOSE FINANCIAL STATEMENTS.
MCDERMOTT INCORPORATED HAS NOT YET FINALIZED ITS REVIEW OF THE IMPACT OF THIS
STATEMENT, BUT IT IS NOT EXPECTED TO HAVE A MATERIAL IMPACT ON THE CONSOLIDATED
FINANCIAL STATEMENTS.
22
<PAGE>
ALSO IN JUNE 1997, THE FASB ISSUED SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION," WHICH IS EFFECTIVE FOR FISCAL YEARS
BEGINNING AFTER DECEMBER 15, 1997. SFAS NO. 131 REQUIRES THAT CERTAIN FINANCIAL
INFORMATION BE REPORTED ON THE BASIS THAT IT IS REPORTED INTERNALLY FOR
EVALUATING SEGMENT PERFORMANCE AND DECIDING HOW TO ALLOCATE RESOURCES TO
SEGMENTS. MCDERMOTT INCORPORATED ANTICIPATES ADOPTING THIS STANDARD DURING THE
LAST QUARTER OF FISCAL YEAR 1998. BECAUSE THIS STATEMENT ADDRESSES HOW
SUPPLEMENTAL FINANCIAL INFORMATION IS DISCLOSED IN ANNUAL AND INTERIM REPORTS,
THE ADOPTION WILL HAVE NO MATERIAL IMPACT ON THE CONSOLIDATED FINANCIAL
STATEMENTS.
AT ITS JULY 1997 MEETING, THE EMERGING ISSUES TASK FORCE REACHED A FINAL
CONSENSUS ON ISSUE 96-16, "INVESTOR'S ACCOUNTING FOR AN INVESTEE WHEN THE
INVESTOR HAS A MAJORITY OF THE VOTING INTEREST BUT THE MINORITY SHAREHOLDER OR
SHAREHOLDERS HAVE CERTAIN APPROVAL OR VETO RIGHTS." THIS ISSUE ADDRESSES
WHETHER TO CONSOLIDATE A MAJORITY OWNED INVESTEE WHEN THE RIGHTS OF THE MINORITY
MAKE IT UNCLEAR IF THE MAJORITY OWNER ACTUALLY HAS CONTROL, AND ESTABLISHES
CRITERIA FOR MAKING THIS DECISION. FOR EXISTING INVESTMENT AGREEMENTS, THE
GUIDANCE IS EFFECTIVE FOR FISCAL YEARS ENDING AFTER DECEMBER 15, 1998.
MCDERMOTT INCORPORATED HAS NOT YET FINALIZED ITS REVIEW OF THE IMPACT OF THIS
GUIDANCE.
23
<PAGE>
PART II
MCDERMOTT INCORPORATED
OTHER INFORMATION
-------------------
NO INFORMATION IS APPLICABLE TO PART II FOR THE CURRENT QUARTER, EXCEPT AS NOTED
BELOW:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) REPORTS ON FORM 8-K
THERE WERE NO CURRENT REPORTS ON FORM 8-K FILED DURING THE THREE
MONTHS ENDED DECEMBER 31, 1997.
SIGNATURES
24
<PAGE>
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
MCDERMOTT INCORPORATED
FEBRUARY 10, 1998 BY:/S/DANIEL R. GAUBERT
----------------------------
DANIEL R. GAUBERT
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
AND DULY AUTHORIZED REPRESENTATIVE)
25
<PAGE>
EXHIBIT INDEX
Exhibit DESCRIPTION
- ------- -----------
27 FINANCIAL DATA SCHEDULE
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INCORPORATED'S DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 101,154
<SECURITIES> 131
<RECEIVABLES> 291,119
<ALLOWANCES> 42,413
<INVENTORY> 233,327
<CURRENT-ASSETS> 953,952
<PP&E> 528,893
<DEPRECIATION> 328,416
<TOTAL-ASSETS> 2,878,910
<CURRENT-LIABILITIES> 860,297
<BONDS> 352,354
4
166,249
<COMMON> 0
<OTHER-SE> 271,159
<TOTAL-LIABILITY-AND-EQUITY> 2,878,910
<SALES> 1,328,372
<TOTAL-REVENUES> 1,328,372
<CGS> 1,247,073
<TOTAL-COSTS> 1,247,073
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,917
<INCOME-PRETAX> 74,573
<INCOME-TAX> 36,781
<INCOME-CONTINUING> 37,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,792
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
