<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 and 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 voting stock held by non-affiliates of the
registrant was $1,154,884,075 as of May 12, 1997.
The number of shares outstanding of the Company's Common Stock at May 12, 1997
was 55,064,216.
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 1997 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.
<PAGE>
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART 1
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Power Generation Systems and Equipment
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 4
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services
General 7
Foreign Operations 9
Raw Materials 9
Customers and Competition 10
Backlog 10
Factors Affecting Demand 11
D. Patents and Licenses 11
E. Research and Development Activities 11
F. Insurance 11
G. Employees 13
H. Environmental Regulations and Matters 13
Item 3. LEGAL PROCEEDINGS 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
I
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INDEX - FORM 10-K
PART II
PAGE
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 20
Fiscal Year 1997 vs Fiscal Year 1996 21
Fiscal Year 1996 vs Fiscal Year 1995 23
Effects of Inflation and Changing Prices 25
Liquidity and Capital Resources 25
New Accounting Standards 29
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Company Report on Consolidated Financial Statements 30
Report of Independent Auditors 31
Consolidated Balance Sheet - March 31, 1997 and 1996 32
Consolidated Statement of Income (Loss) for the Three
Fiscal Years ended March 31, 1997 34
Consolidated Statement of Stockholders' Equity for the
Three Fiscal Years ended March 31, 1997 36
Consolidated Statement of Cash Flows for the Three
Fiscal Years ended March 31, 1997 38
Notes to Consolidated Financial Statements 40
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 78
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 79
Item 11. EXECUTIVE COMPENSATION 79
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 79
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 79
II
<PAGE>
INDEX - FORM 10-K
PART IV
PAGE
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 80
Signatures 84
Exhibit 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS) 88
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT 89
Exhibit 23 - CONSENT OF INDEPENDENT AUDITORS 90
Exhibit 27 - FINANCIAL DATA SCHEDULE 91
III
<PAGE>
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("McDermott International") 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. McDermott International's Common Stock, JRM's Common
Stock and 9-3/8% Senior Subordinated Notes due July 2006, and McDermott
Incorporated's Series A $2.20 Cumulative Convertible Preferred Stock and
Series B $2.60 Cumulative Preferred Stock are publicly traded.
Unless the context otherwise requires, hereinafter "McDermott International"
will be used to mean McDermott International, Inc., a Panama corporation; "JRM"
will be used to mean J. Ray McDermott, S.A., a Panama corporation, which is a
majority owned subsidiary of McDermott International, and its consolidated
subsidiaries; the "Delaware Company" will be used to mean McDermott
Incorporated, a Delaware corporation which is a subsidiary of McDermott
International, and its consolidated subsidiaries; and "International" will be
used to mean the consolidated enterprise.
International operates in two business segments:
o Power Generation Systems and Equipment, whose principal businesses are the
supply of fossil-fuel and nuclear steam generating equipment to the electric
power generation industry, and nuclear reactor components and nuclear fuel
assemblies to the U. S. Navy; and
o Marine Construction Services, which supplies worldwide services for the
offshore oil and gas exploration and production and hydrocarbon processing
industries, and to other marine construction companies, primarily through
JRM. 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 onshore construction and maintenance services.
The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company. Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.
International has a continuing program of reviewing joint venture, acquisition
and disposition opportunities.
1
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The following tables show revenues and operating income (loss) of International
for the three fiscal years ended March 31, 1997. See Note 17 to the
consolidated financial statements for additional information with respect to
International's business segments and operations in different geographic areas.
REVENUES
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Power Generation Systems
and Equipment $ 1,514.5 48% $ 1,708.6 52% $ 1,663.2 54%
Marine Construction Services 1,653.7 52% 1,555.5 48% 1,390.9 46%
Intersegment Transfer
Eliminations (17.3) - (19.8) - (10.4) -
- ----------------------------------------------------------------------------------------------------
Total Revenues /(1)/ $ 3,150.9 100% $ 3,244.3 100% $ 3,043.7 100%
====================================================================================================
</TABLE>
OPERATING INCOME (LOSS)
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Segment Operating Income (Loss):/(2)/
Power Generation Systems
and Equipment $ (81.0) 85% $ 24.8 33% $ 13.6 26%
Marine Construction Services (14.7) 15% 51.5 67% 38.4 74%
- ----------------------------------------------------------------------------------------------------
Total Segment Operating
Income (Loss) /(1//)/ (95.7) 100% 76.3 100% 52.0 100%
- ----------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems
and Equipment 2.0 - 36.5 75% 8.4 25%
Marine Construction Services/(3)/ (6.1) - 11.9 25% 25.5 75%
- ----------------------------------------------------------------------------------------------------
Total Equity in Income (Loss)
of Investees (4.1) - 48.4 100% 33.9 100%
- ----------------------------------------------------------------------------------------------------
General Corporate Expenses/(2)/ (47.4) - (37.1) - (38.9) -
- ----------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ (147.2) - $ 87.6 - $ 47.0 -
====================================================================================================
</TABLE>
(1) See Note 2 to the consolidated financial statements regarding acquisitions
during fiscal years 1996 and 1995.
(2) Fiscal years 1996 and 1995 have been restated to conform to the fiscal year
1997 presentation which includes gains and losses on asset disposals and
impairments in Operating Income (Loss). This restatement increased Segment
Operating Income by $17,275,000 and $6,423,000 and General Corporate
Expenses by $3,945,000 and $113,000 in fiscal years 1996 and 1995,
respectively, from amounts previously reported.
(3) See Note 3 to the consolidated financial statements regarding the change to
the cost method of accounting for International's investment in the
HeereMac joint venture in fiscal year 1997.
2
<PAGE>
B. POWER GENERATION SYSTEMS AND EQUIPMENT
GENERAL
The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide. It supplies individually
engineered boilers, complete fossil fuel steam generating systems and related
equipment and facilities, and environmental control systems for electric power
generation and for industrial processes. These facilities use a wide variety of
fuels, including, but not limited to, coal, oil, bitumen, natural gas, solid
municipal waste, agricultural waste and biomass. This segment is also engaged
in the erection of electric power plants and industrial facilities and the
repair and alteration of such existing equipment. It provides replacement parts
and engineered plant enhancements for existing fossil fuel steam generating
systems and specially engineered accessories and components, such as air heaters
and cleaning systems for heat transfer surfaces. This segment also supplies
air-cooled and condensing heat exchangers for the process and power industries.
B&W is also a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators and
supplies field repair and refurbishment services in the Canadian, U. S. and
international markets.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power plants and other independent power producing
plants. It is participating 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 Power Generation Systems and Equipment segment provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program. This activity has made significant contributions to operating
income of International in all three fiscal years and is expected to do so in
the foreseeable future. B&W, in addition to its Naval Reactors Program
business, supplies other equipment and services to the U. S. Government and is
proceeding with new Government projects and exploring new programs which require
the technological capabilities it developed as a Government contractor. B&W has
applied its technological capabilities by supplying new products for power
generation applications. It has diversified into new markets and activities not
related to power generation that require complex engineering and machining.
Examples of these markets include environmental restoration services, computer-
integrated manufacturing products and services and the management of government-
owned facilities, primarily within the Department of Energy's nuclear weapons
complex.
The principal plants of this segment, which are owned by B&W, are located at
West Point, Mississippi; Barberton and Lancaster, Ohio; Beasley and Paris,
Texas; Lynchburg, Virginia; and Cambridge, Ontario, Canada. This segment's
unconsolidated affiliates' (equity investees) foreign plants are located in
Beijing, China; Batam Island, Indonesia; Pune, India; and Cairo, Egypt. All
these plants are well maintained, have suitable equipment and are of adequate
size.
3
<PAGE>
FOREIGN OPERATIONS
The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income (loss) derived from
operations located outside of the United States, and the approximate
percentages to International's total revenues and total segment operating income
(loss), respectively, follow:
REVENUES SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1997 $361,675 11% $(28,699) 30%
1996 652,016 20% 33,250 44%
1995 521,657 17% 34,186 66%
Revenues and segment operating income (loss) presented above do not include the
operating results of this segment's equity investees. Products for
international 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 principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for 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
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
The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power producers),
the U.S. Government (including its contractors), and the pulp and paper and
other process industries such as oil refineries and steel mills; and other
industries and institutions. The electric power generation industry accounted
for approximately 22%, 22% and 30% of International's total revenues
4
<PAGE>
for fiscal years 1997, 1996 and 1995, respectively. For the fiscal years 1997,
1996 and 1995, the U.S. Government, excluding government-owned utilities,
accounted for approximately 11%, 12% and 12% of total revenues, including 10%,
10% and 10% related to nuclear fuel assemblies and reactor components for the
U.S. Navy.
Steam generating system equipment orders are customarily awarded after
competitive bids have been submitted as proposals based on the estimated cost of
each job. Within the United States, a number of domestic and foreign-based
companies, specializing in steam generating systems, equipment and services,
compete with B&W in the fossil fuel steam generating system business. In
international markets, these companies plus additional foreign-based companies
compete with B&W. B&W also manufactures and sells components such as
replacement recirculating steam generators, which are incorporated into nuclear
steam generating systems designed by other firms. In the sale of these nuclear
steam generating systems, B&W competes with a small number of companies. A
number of companies are in competition with B&W in environmental control
equipment, related specialized industrial equipment and the independent power
producing business. Other suppliers of fossil fuel 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.
B&W 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 B&W being the largest based on revenues. B&W is involved along
with other companies in the operation of the Idaho National Engineering and
Environmental Laboratory located near Idaho Falls, Idaho; the Rocky Flats
Environmental Technology Site located near Boulder, Colorado; the Savannah River
Site located in Aiken, South Carolina, and the Hanford Site located in Richland,
Washington.
BACKLOG
Backlog as of March 31, 1997 and 1996 for the Power Generation Systems and
Equipment segment was $2,344,951,000 and $2,261,799,000, or approximately 55%
and 67%, respectively, of International's backlog. Of the March 31, 1997
backlog, it is expected that approximately $1,200,482,000 will be recognized in
revenues in fiscal year 1998, $568,218,000 in fiscal year 1999 and $576,251,000
thereafter, of which approximately 25% will be recognized in fiscal years 2000
through 2002. At March 31, 1997, this segment's backlog with the U.S.
Government was $797,470,000 (of which $26,448,000 had not yet been funded), or
approximately 19% of International's total backlog.
During fiscal year 1997, the Power Generation Systems and Equipment segment
received contract awards valued at $111,000,000 to supply two 350-megawatt coal-
fired boilers to the Huaneng International Power Development Corporation of
China for the Nantong project site, located in the Jiangsu province; a
$90,000,000 contract with Saba Power Company Limited of Pakistan to supply a
125-megawatt oil-fired steam power plant near Farouqabad in Pakistan; and a
$68,000,000 contract from Public Service Company of New Mexico to retrofit
scrubbers on all four units at the utility's San Juan Generation Station in New
Mexico. The remaining value of these three contracts reflected in the March 31,
1997 backlog is $241,597,000. In fiscal year 1997, B&W was awarded
approximately $257,000,000 in new orders for aircraft carrier components and
prototypical steam generation equipment for the newest submarine design.
5
<PAGE>
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
B&W 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.
B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation 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 Asia and the Middle East are active purchasers of large,
new baseload generating units, due to the rapid growth of their economies and to
the small existing stock of electrical generating capacity in most developing
countries. These newly emerging economies need power and steam generating
systems, equipment and services to build their industrial base.
Electrical consumption has grown moderately in the United States in recent
years. Competition within the electric power industry in the United States has
intensified, as the Federal Energy Regulatory Commission has begun to implement
the provisions of the Energy Policy Act of 1992, which deregulated the electric
power generation industry by allowing independent power producers and other
companies access to the electric utilities' transmission and distribution
systems. Several states have recently 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 utilities to defer ordering of large, new baseload
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 they are purchasing electricity from other utilities and non-regulated
sources, such as cogenerators and independent power producers.
Substantially all the customers of B&W are affected by environmental regulations
of the countries in which their facilities are located. In the United States,
the Clean Air Act Amendments of 1990 required many customer industries to
implement systems to limit or remove emissions. These mandated expenditures
have caused some customers to defer repairs and refurbishments on existing
plants. The same requirements have caused other customers to purchase
environmental control equipment from B&W. Future changes in environmental
regulations will continue to affect demand for B&W products and services.
The systems, products and services of B&W are capital intensive. As such,
demand for the company's products is heavily affected by the variations in the
business cycles in the customer industries and in the overall economies of their
countries. Availability of funds for financing, investment and maintenance at
B&W's customers varies with the conditions of their domestic businesses.
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
6
<PAGE>
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 B&W is the sole source provider of these assemblies and nuclear reactor
components.
C. MARINE CONSTRUCTION SERVICES
GENERAL
On January 31, 1995, International 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. (the "Merger"). Prior to the Merger with Offshore
Pipelines, Inc. ("OPI"), JRM was a wholly owned subsidiary of McDermott
International; as a result of the Merger, JRM is a majority owned subsidiary of
McDermott International. The business activities of this segment are conducted
primarily through JRM and to a lesser extent through McDermott Engineers &
Constructors (Canada), Ltd., formerly Delta Catalytic Corporation.
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. This segment also provides
comprehensive project management services, feasibility studies, engineering
services, subsea trenching services, diving services, 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 conducts operations both directly and through its participation in
joint ventures, some of which it manages and others of which are managed by
other marine construction contractors. Some of the joint ventures are
consolidated for financial reporting purposes while others are accounted for
using either the equity or the cost methods. 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 are
in the HeereMac joint venture, which is accounted for by the cost method, and
the McDermott-ETPM West, Inc. joint venture, which is accounted for by the
equity method.
The HeereMac joint venture was formed with Heerema Offshore Construction Group,
Inc. ("Heerema") in January 1989 and utilizes the specialized, heavy-lift marine
construction vessels which were previously owned by the two parties. Each party
has a 50% interest in the joint venture, and Heerema has responsibility for its
day-to-day operations. In March 1996, JRM and Heerema, through their respective
subsidiaries, sold to companies included in the HeereMac joint venture the semi
submersible derrick vessels which they were formerly chartering to the joint
venture (JRM's DB101 and DB102 and Heerema's Hermod and Balder). Effective as of
the beginning of fiscal year 1997, International changed from the equity to the
cost method of accounting for its investment in the HeereMac joint venture as a
result of International's determination that it is unable to exercise
significant influence over HeereMac's operating and financial policies.
7
<PAGE>
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 offshore pipelaying
services in the North Sea. With the addition of two new joint venture operating
companies in March 1995, JRM and ETPM S. A. have expanded their joint venture's
operations to include the Far East and to begin jointly pursuing subsea
contracting work on a worldwide basis. Most of the operating companies in the
McDermott-ETPM joint venture are majority-owned and controlled by JRM. However,
the operations of McDermott-ETPM West, Inc., which conducts operations in the
North Sea, South America and West Africa, are managed and controlled by ETPM
S.A. ETPM S.A. has dedicated all of its marine construction assets to the joint
ventures with JRM, including 3 combination derrick-pipelaying vessels and
fabrication yards in Sharjah, U.A.E. and Tchengue, Gabon. JRM currently charters
4 combination derrick-pipelaying vessels and 1 pipelaying vessel to the ETPM
joint ventures and provides the use of its facilities in Jebel Ali in the
U.A.E., Batam Island, Indonesia and Warri, Nigeria.
JRM participates in other joint ventures (including joint ventures in Mexico and
Malaysia) 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 February 1995 to
combine the operations of JRM's Inverness and Brown & Root's Nigg fabrication
facilities in Scotland.
The Marine Construction Services segment owns or operates 6 fabrication
facilities throughout the world. This segment's principal domestic fabrication
yard and offshore base is located on 1,114 acres of land, under lease, near
Morgan City, Louisiana. This segment also owns or operates fabrication
facilities near Corpus Christi, Texas, near Inverness, Scotland, in Indonesia on
Batam Island, in Jebel Ali, U.A.E. and in Warri, Nigeria. This segment also owns
and operates a shipyard in VeraCruz, Mexico.
The 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 has the capability to 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.
Expiration dates, including renewal options, of leases covering land for the
fabrication yards, follow:
Morgan City, Louisiana Years 2000-2033
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
Warri, Nigeria Year 2065
8
<PAGE>
JRM owns or, through its ownership interests in joint ventures, has interests in
the largest fleet 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. JRM owns or, through ownership
interests in joint ventures, has interests in 9 derrick vessels, 6 pipelaying
vessels, 10 combination derrick-pipelaying vessels and 3 pipe burying vessels.
The lifting capacities of the derrick and combination derrick-pipelaying vessels
range from 250 to 13,200 tons. These vessels range in length from 400 to 660
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. Some of these vessels hold various records for heavy lifts and
installations of deepwater pipelines in different regions of the world. The
largest vessels are the derrick barge DB 102, which is one of the world's
largest semi submersible derrick vessels in both size and lifting capacity and
provides quarters for approximately 750 workers, and the LB 200, a semi
submersible pipelaying vessel capable of laying 60-inch diameter pipe (including
concrete coating) and operating in water depths of up to 2,000 feet.
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. In connection with
its construction and pipelaying activities, this segment conducts diving
operations which, because of the water depths involved, require sophisticated
equipment, including diving bells and an underwater habitat.
FOREIGN OPERATIONS
The amount of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income derived from operations located outside
of the United States, and the approximate percentages to International's total
revenues and total segment operating income, respectively, follow:
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in thousands)
1997 $ 1,036,791 33% $ 5,083 -
1996 1,103,844 34% 49,783 65%
1995 1,021,986 34% 62,026 119%
Revenues and segment operating income presented above do not include the
operating results of this segment's equity investees.
RAW MATERIALS
The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this
9
<PAGE>
segment 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 this segment 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 and onshore construction and
maintenance services. Contracts are usually awarded on a competitive bid basis.
There are a number of companies which compete effectively with International,
the HeereMac joint venture, McDermott-ETPM and International's other joint
ventures in each of the separate marine construction phases in various parts of
the world.
BACKLOG
As of March 31, 1997 and 1996, the Marine Construction Services' backlog
amounted to $1,882,471,000 and $1,137,597,000, or approximately 45% and 33%,
respectively, of International's total backlog. Of the March 31, 1997 backlog,
it is expected that approximately $1,389,705,000 will be recognized in revenues
in fiscal year 1998, $443,305,000 in fiscal year 1999 and $49,461,000
thereafter.
During fiscal year 1997, Marine Construction Services received contract awards
valued at $141,000,000 for the fabrication and installation of the Genesis spar
platform, a deepwater development in the Gulf of Mexico by Chevron U.S.A.
Production Company; a $140,000,000 contract for the design, fabrication, and
installation of a compliant tower to be installed in 1,754 feet of water in the
Gulf of Mexico for Texaco Exploration & Production Inc.; and a contract valued
at $88,000,000 for work awarded by Unocal Thailand, Ltd., a wholly-owned
subsidiary of Union Oil Company of California, in the Gulf of Thailand for the
first phase development of its Pailin Field. In addition, JRM's McDermott-ETPM
East, Inc. joint venture was awarded a $130,000,000 contract by Qatar Liquefied
Gas Company ("Qatargas") for the offshore portion of the third train of its Ras
Laffan Liquified Natural Gas project. The remaining value of all contracts with
the above four customers reflected in the March 31, 1997 backlog is
$683,609,000.
Not included in Marine Construction Services' backlog at March 31, 1997 and 1996
was backlog relating to contracts to be performed by unconsolidated joint
ventures of approximately $1,491,000,000 and $1,407,000,000, respectively.
Work has historically been performed on a fixed price, cost plus or day rate
basis or combination thereof. More recently, certain partnering type contracts
have seen the introduction of 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 estimation
of such changes, which is reflected in the original price, or through price
escalation clauses. Most long-term contracts have provisions for progress
payments.
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FACTORS AFFECTING DEMAND
The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction. These expenditures are influenced by the selling
price of oil and gas 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.
Oil company capital exploration and production budgets for calendar year 1997
are higher than 1996 expenditures. While oil prices remain flat, domestic
natural gas prices have increased as compared to calendar year 1995.
Expenditures in both domestic and international areas are expected to increase;
domestic at a higher rate. Worldwide demand for offshore drilling rigs has
increased and this, historically, has been a leading indicator for an increase
in the need for marine construction services. This segment's markets are
expected to begin to emerge from the competitive environment that has put
pressure on margins in prior periods.
D. PATENTS AND LICENSES
Many U. S. and foreign patents have been issued to International and it has many
pending patent applications. Patents and licenses have been acquired and
licenses have been granted to others when advantageous to International. While
International 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.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
International conducts its principal research and development activities at its
research centers in Alliance, Ohio and Lynchburg, Virginia; and also conducts
development activities at its various manufacturing plants and engineering and
design offices. During the fiscal years ended March 31, 1997, 1996 and 1995,
approximately $50,749,000, $68,106,000 and $64,145,000, respectively, was spent
by International on research and development activities, of which approximately
$34,170,000, $45,106,000 and $44,240,000, respectively, was paid for by
customers of International. 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. International's new multi-million dollar clean environment
development facility in Alliance, Ohio was constructed in response to present
and future emission pollution standards in the U.S. and worldwide. Approximately
200 employees were engaged full time in research and development activities at
March 31, 1997.
F. INSURANCE
International maintains liability and property insurance that it considers
normal in the industry. However, certain risks are either not insurable or
insurance is available only at rates which International considers uneconomical.
Among such risks are 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, International endeavors to obtain contractual protection against
uninsured risks from its customers.
11
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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 International may be subject.
International'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, International 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, International 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 an amount which 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 International provides environmental remediation
services, it seeks the same protection from its customers as it does for its
other nuclear activities.
Although International 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 which 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 International's Lynchburg, Virginia site.
These facilities are insured under a nuclear liability policy which also insures
the facility of B&W Fuel Company ("BWFC") that was sold during fiscal year 1993.
All three facilities share the same nuclear liability insurance limit as the
commercial insurer would not allow BWFC to obtain a separate nuclear liability
insurance policy. Due to the type or quantity of nuclear material present, two
of the four facilities have the benefit of the indemnity and limitation of
liability provisions of the Act, pursuant to Indemnity Agreements entered into
with the U. S. Government. In addition, contracts to manufacture and supply
nuclear fuel or nuclear components to the U. S. Government generally contain
contractual indemnity clauses, which become effective at the time of shipment,
whereby the U. S. Government has assumed the risks of public liability claims.
International's offshore construction business is subject to the usual risks of
operations at sea, with additional exposure due to the utilization of expensive
construction equipment, sometimes under extreme weather conditions, often in
remote areas of the world. In addition, International operates in many cases on
or in proximity to existing offshore facilities which are subject to damage by
International and such damage could result in the escape of oil and gas into the
sea.
The insurance coverage of International for products liability and employers'
liability claims is subject to varying insurance limits which are dependent upon
the year involved. The Babcock & Wilcox Company has an agreement with a
majority of its principal insurers concerning the method of allocation of
products liability asbestos claim payments to the years of coverage. Pursuant
to the agreement, The Babcock & Wilcox Company negotiates and settles these
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<PAGE>
claims and bills these amounts to the appropriate insurers. For financial
reporting purposes, a provision has been recognized to the extent that recovery
of these amounts from International's insurers has not been determined to be
probable. Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from International's claims history and
constitute management's best estimate of such future costs. Estimated insurance
recoveries are based upon 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 (see Note 11 to the consolidated
financial statements), which may vary significantly as claims are filed and
settled. Accordingly, the ultimate loss may differ materially from the amount
provided in the consolidated financial statements.
International has two wholly owned insurance subsidiaries. To date, these
subsidiaries have written policies concerning general and automobile liability,
builders' risk within certain limits, marine hull, and workers' compensation for
International and its subsidiaries. No significant amounts of insurance have
been written for unrelated parties.
G. EMPLOYEES
At March 31, 1997, International employed, under its direct supervision,
approximately 24,600 persons compared with 25,400 at March 31, 1996.
Approximately 4,600 employees were members of labor unions at March 31, 1997 as
compared with approximately 6,400 at March 31, 1996. The majority of B&W's
manufacturing facilities operate under union contracts which customarily are
renewed every two to three years. There are no contracts covering B&W hourly
workers expiring during the next twelve months. International considers its
relationship with its employees to be satisfactory.
H. ENVIRONMENTAL REGULATIONS AND MATTERS
International is subject to the existing and evolving standards relating to the
environment. These laws include the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") of 1980, and similar laws which
provide for responses to and liability for releases of hazardous substances into
the environment; and the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and other federal laws, each as amended, and
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.
International'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. International believes that its
facilities are in substantial compliance with current regulatory standards.
International's compliance with U.S. federal, state and local environmental
control and protection regulations necessitated capital expenditures of
$468,000 in fiscal year 1997, and it expects to spend another $2,827,000 on such
capital expenditures over the next five years. International cannot predict all
of the environmental requirements or circumstances which will exist in the
future, but it anticipates that environmental control and protection standards
will become increasingly stringent and costly. Complying with existing
environmental regulations resulted in pre-tax charges of approximately
$8,821,000 in fiscal year 1997.
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International has been identified as a potentially responsible party at various
cleanup sites under CERCLA. International 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, International's share of the ultimate
liability for the various sites is not expected to have a material effect on
International's consolidated financial position, results of operations or
liquidity in any given year.
Remediation projects have been or may be undertaken at certain of
International's current and former plant sites, and, 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, a decision was made to close B&W's nuclear
manufacturing facilities in Parks Township, Armstrong County, Pennsylvania
("Parks Facilities"), and a provision of $41,724,000 for the decontamination,
decommissioning and the closing of these facilities was recognized. Previously,
decontamination and decommissioning costs were being accrued over the
facilities' remaining expected life. 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. B&W expects to reach an agreement
with the NRC in fiscal year 1998 on a plan that provides for the completion of
facilities dismantlement and soil restoration by 2001. B&W expects to request
approval from the NRC to release the site for unrestricted use at that time.
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 B&W's Parks
Facilities. The relief sought related to potential groundwater contamination
related to the previous operations of the facilities. PADEP has recently advised
B&W that is does not intend to assess any monetary sanctions provided that B&W
continues its remediation program of the Parks Facilities.
International 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 and thus is
subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the Nuclear Regulatory Commission.
Decommissioning regulations promulgated by the U.S. Nuclear Regulatory
Commission require B&W 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. B&W will continue to provide financial assurance of $18,163,000
during fiscal year 1998 by issuing letters of credit for the ultimate
decommissioning of all its licensed facilities, except one. This facility,
which
14
<PAGE>
represents the largest portion of B&W'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.
Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material effect upon the consolidated financial position of
International.
15
<PAGE>
Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, International is, from time to time, involved
in routine litigation related to its business activity. It is management's
opinion that none of this litigation will have a material adverse effect on the
consolidated financial position of International.
In addition to matters of the type referred to in the preceding paragraph,
McDermott International and JRM are conducting an internal investigation, with
the assistance of outside counsel, of allegations of wrongdoing by a limited
number of former employees of McDermott International and JRM and by others.
McDermott International and JRM notified the appropriate authorities of their
investigation in April 1997. In June 1997, McDermott International received a
federal grand jury subpoena for documents relating principally to an
investigation of possible anti-competitive activity in the heavy-lift barge
service business of JRM and HeereMac. In July 1997, McDermott International
received an informal request from the Securities and Exchange Commission for the
voluntary production of documents. McDermott International and JRM are
cooperating with the authorities. The allegations which are the subject of the
internal investigation, if true, and the outcome of the grand jury proceedings,
could result in civil and/or criminal liability. At this time, McDermott
International and JRM do not have sufficient information to predict the ultimate
outcome of this matter.
See Item 1F and Note 11 to the consolidated financial statements regarding
International's potential liability for non-employee products liability asbestos
claims.
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.
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P A R T I I
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
McDermott International'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, 1996 and 1997 follow:
FISCAL YEAR 1996
----------------
CASH
SALES PRICE DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- ---------
June 30, 1995 $ 28 $ 23 - 1/4 $ 0.25
September 30, 1995 25 - 3/8 19 - 5/8 0.25
December 31, 1995 22 - 1/8 15 - 3/8 0.25
March 31, 1996 21 - 3/4 17 - 7/8 0.25
FISCAL YEAR 1997
----------------
CASH
SALES PRICE DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- ---------
June 30, 1996 $23 - 1/4 $ 19 - 1/4 $ 0.25
September 30, 1996 22 - 1/4 17 - 7/8 0.25
December 31, 1996 22 - 1/2 16 0.05
March 31, 1997 22 - 7/8 16 0.05
As of March 31, 1997, the approximate number of record holders of Common Stock
was 5,684.
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<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $3,150,850 $3,244,318 $3,043,680 $3,059,912 $3,172,555
Income (Loss) before Extraordinary
Items and Cumulative Effect of
Accounting Changes $ (206,105) $ 20,625 $ 10,876 $ 89,956 $ 67,323
Net Income (Loss) $ (206,105) $ 20,625 $ 9,111 $ (10,794) $ (188,732)
Primary and Fully Diluted
Earnings (Loss) Per Common Share:
Income (Loss) before Extraordinary
Items and Cumulative Effect of
Accounting Changes $ (3.92) $ 0.23 $ 0.05 $ 1.57 $ 1.29
Net Income (Loss) $ (3.92) $ 0.23 $ 0.02 $ (0.32) $ (3.63)
Total Assets $4,599,482 $4,387,251 $4,751,670 $4,223,569 $3,092,963
Long-Term Debt $ 667,174 $ 576,256 $ 579,101 $ 667,066 $ 583,211
Subsidiary's Redeemable Preferred
Stocks 170,983 173,301 179,251 196,672 204,482
---------- ----------- ---------- ---------- ----------
Total $ 838,157 $ 749,557 $ 758,352 $ 863,738 $ 787,693
Cash Dividends Per Common Share $ 0.60 $ 1.00 $ 1.00 $ 1.00 $ 1.00
</TABLE>
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<PAGE>
See Note 18 to the consolidated financial statements for significant items
included in fiscal year 1997 and 1996 results. 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. Fiscal year 1993 results include a $23,968,000 gain from the sale of
interests in its two commercial nuclear joint ventures.
See Note 3 to the consolidated financial statements regarding the change to the
cost method of accounting for International's investment in the HeereMac joint
venture in fiscal year 1997. Equity in income of HeereMac was $1,083,000,
$6,244,000, $79,386,000, and $44,318,000 in fiscal years 1996, 1995, 1994 and
1993, respectively. Beginning with fiscal year 1997, only distributions of
profits received from HeereMac will be included in income. International
received distributions of profits from HeereMac of $25,741,000 and $42,899,000
in fiscal years 1995 and 1994, respectively. There were no distributions of
profits in fiscal years 1997, 1996 or 1993. See Note 2 regarding acquisitions in
fiscal years 1996 and 1995. See Note 1 regarding the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 112 in fiscal year 1995. Fiscal year
1994 includes the cumulative effect of the adoption of Emerging Issues Task
Force Issue No. 93-5. Fiscal year 1993 includes the cumulative effect of the
adoption of SFAS No. 106 and SFAS No. 109. See Note 11 regarding the uncertainty
as to the ultimate loss relating to products liability asbestos claims and an
internal investigation of allegations of wrongdoing by a limited number of
former employees of McDermott International and JRM, and by others.
19
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
A significant portion of International's revenues and operating results are
derived from its foreign operations. As a result, International's operations
and financial results are affected by international factors, such as changes in
foreign currency exchange rates. International attempts to minimize its exposure
to changes in foreign currency exchange rates by attempting to match foreign
currency contract receipts with like foreign currency disbursements. To the
extent that it is unable to match the foreign currency receipts and
disbursements related to its contracts, its practice of entering into forward
exchange contracts to hedge foreign currency transactions reduces the impact of
foreign exchange rate movements on operating results.
In general, both of International's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
Revenues of the Power Generation Systems and Equipment segment are largely a
function of capital spending by the electric power generation industry and by
the U.S. Government. This segment has recently experienced weak and difficult
markets in nearly all of its product lines. Domestic utility original equipment
markets remain sluggish as growth in demand remains modest and the electric
power industry transitions from a regulated to a competitive environment.
However, demand for services to the domestic utility industry and for nuclear
fuel assemblies and reactor components for the U.S. Navy continue at significant
levels. In addition, foreign markets for industrial and utility boilers remain
strong in Asia and the Middle East.
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. This segment's operating
results have been adversely affected by a substantial decline in significant
development projects in Southeast Asia, and low margins in all of its other
major markets. International expects improvements in its markets, especially in
Southeast Asia and the Gulf of Mexico. Consolidated backlog has increased
significantly and there have been some pricing improvements.
The foregoing statements regarding International's markets and other statements
in this discussion are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties. These include
uncertainties relating to deregulation and the Clean Air Act, as well as
offshore development decisions to be made by oil and gas exploration and
development companies.
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<PAGE>
FISCAL YEAR 1997 VS FISCAL YEAR 1996
Power Generation Systems and Equipment's revenues decreased $194,089,000 to
$1,514,477,000 primarily due to lower revenues from the fabrication and erection
of fossil fuel steam and environmental control systems, replacement nuclear
steam generators, construction of cogeneration plants, nuclear services and
replacement parts. These decreases were partially offset by higher revenues
from commercial nuclear environmental services.
Power Generation Systems and Equipment's segment operating income (loss)
decreased $105,821,000 from income of $24,836,000 to a loss of $80,985,000. A
provision for estimated future non-employee products asbestos claims, the write-
down of an equity investment in a domestic cogeneration joint venture and an
asset impairment loss on a domestic manufacturing facility, net of gains on
asset disposals, resulted in an increase in segment loss of $80,446,000 in the
current year. There were also lower volume and margins on the fabrication and
erection of fossil fuel steam and environmental control systems and on
replacement parts. There were also lower volume on replacement nuclear steam
generators, lower margins on plant enhancement projects, cost overruns on a
contract for a Canadian cogeneration plant and increased severance and
relocation costs. These decreases were partially offset by higher volume and
margins on commercial nuclear environmental services and lower workers'
compensation expense.
Power Generation Systems and Equipment's equity in income of investees, which
represents the results of approximately 15 active joint ventures, decreased
$34,482,000 to $2,007,000. The income in fiscal year 1996 was primarily due to
the gain on the sale of power purchase contracts back to a local utility. There
were also lower operating results in three of the joint ventures in the current
year.
Backlog for this segment at March 31, 1997 and 1996 was $2,344,951,000 and
$2,261,799,000, respectively. At March 31, 1997, this segment's backlog with
the U.S. Government was $797,470,000 (of which $26,448,000 had not been funded)
and includes orders for nuclear fuel assemblies and reactor components for the
U.S. Navy. These orders are expected to continue to comprise a substantial
portion of backlog with the U.S. Government as B&W is the sole source provider
of these nuclear fuel assemblies and reactor components.
Marine Construction Services' revenues increased $98,148,000 to $1,653,678,000,
primarily due to higher volume in North America, the Middle East and the Far
East. In addition, there was higher volume from barge construction activities
in domestic shipyard operations and increased ship repair activities in Mexican
operations. These were partially offset by lower volume in the North Sea and in
engineering and construction activities. There was also lower leasing revenues
due to the sale of the DB101 and DB102 to the HeereMac joint venture.
Marine Construction Services' segment operating income (loss) decreased
$66,171,000 from income of $51,465,000 to a loss of $14,706,000. Net gains on
asset disposals, after deduction for certain writedowns of asset valuations,
were $4,410,000 in fiscal year
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<PAGE>
1997 and $40,138,000 in fiscal year 1996. Excluding these net gains, operating
income decreased $30,443,000. The decrease was primarily due to lower volume in
the North Sea, lower leasing activities due to the sale of the DB101 and DB102,
lower margins in the Far East, and the completion of profitable contracts in
West Africa in the prior year as well as cost overruns on domestic barge
operations in the current year. These were partially offset by higher volume in
North America and the Middle East.
Marine Construction Services' equity in income (loss) of investees decreased
$18,054,000 from income of $11,949,000 to a loss of $6,105,000. This decrease
was primarily due to the lower results from the McDermott-ETPM West, Inc. joint
venture. Revenues of the McDermott-ETPM West, Inc. joint venture increased
$97,207,000 to $347,849,000 in fiscal year 1997 primarily due to increased
volume in the North Sea and West Africa. Equity in income of this joint venture
decreased $19,366,000 to a loss of $16,833,000 in fiscal year 1997 primarily
due to lower margins in West Africa. In addition, there were favorable results
from a Mexican joint venture.
Backlog for this segment at March 31, 1997 and 1996 was $1,882,471,000 and
$1,137,597,000, respectively. Not included in backlog at March 31, 1997 and
1996 was backlog relating to contracts to be performed by unconsolidated joint
ventures of approximately $1,491,000,000 and $1,407,000,000, respectively.
Interest income increased $9,504,000 to $46,742,000 primarily due to interest on
the promissory note received as part of the consideration from the sale of the
DB101 and DB102.
Interest expense increased $10,788,000 to $95,100,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense decreased $4,468,000 to $5,562,000 primarily due to
minority shareholder participation in the operating results of JRM.
Other-net expense increased $10,701,000 to $19,532,000 primarily due to a loss
of $19,446,000 in the current year for insolvent insurers providing coverage for
estimated future non-employee asbestos claims, partially offset by foreign
currency transaction gains in the current year compared to foreign currency
transaction losses in the prior year.
The provision for income taxes decreased $15,671,000 from a provision of
$1,079,000 to a benefit of $14,592,000, while income before income taxes
decreased $242,401,000 from income of $21,704,000 to a loss of $220,697,000. The
decrease in income taxes is primarily due to a decrease in income offset, in
part, due to a limitation on the recognition of income tax benefits in the U. S.
In addition, International operates in many different tax jurisdictions. Within
these jurisdictions, tax provisions vary because of nominal rates, allowability
of deductions, credits and other benefits, and even tax basis (for example,
revenues versus income). These variances, along with variances in the mix of
income within jurisdictions, are responsible for shifts in the effective tax
rate. As a result of these factors, the benefit from income taxes was 7% of pre-
tax loss in fiscal year 1997 compared to a provision for income taxes of 5% of
pre-tax income in fiscal year 1996.
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FISCAL YEAR 1996 VS FISCAL YEAR 1995
Power Generation Systems and Equipment's revenues increased $45,331,000 to
$1,708,566,000. This was primarily due to higher revenues from engineering,
procurement and construction of cogeneration plants, from defense and space-
related products (other than nuclear fuel assemblies and reactor components),
replacement nuclear steam generators for domestic customers manufactured at
B&W's Cambridge, Ontario location and fabrication of industrial boilers. These
increases were partially offset by lower revenues from repair and alteration of
existing fossil fuel steam systems, fabrication and erection of fossil fuel
steam and environmental control systems and nuclear fuel assemblies and reactor
components for the U. S. Government.
Power Generation Systems and Equipment's segment operating income increased
$11,189,000 to $24,836,000 due to provisions of $46,489,000 for the
decontamination, decommissioning and closing of certain nuclear manufacturing
facilities and the closing of a manufacturing facility in the prior year. In
addition, there were higher volume and margins from replacement nuclear steam
generators, improved margins from fabrication of fossil fuel steam and
environmental control systems (including a license buyout agreement of
$8,574,000) and higher volume from defense and space-related products (other
than nuclear fuel assemblies and reactor components). There was also a gain on
the sale of a manufacturing facility. These increases were offset by 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. There were also lower margins from
engineering, procurement and construction of cogeneration plants. In addition,
there were lower volume and margins from the repair and alteration of existing
fossil fuel steam systems and industrial boilers, plant enhancement projects and
from operations and maintenance contracts.
Power Generation Systems and Equipment's equity in income of investees increased
$28,125,000 to $36,489,000. This represents the results of approximately 16
active joint ventures, but is primarily due to a nonrecurring equity income gain
of $30,612,000 resulting from the sale of power purchase contracts back to a
local utility.
Marine Construction Services' revenues increased $164,611,000 to $1,555,530,000,
primarily due to higher purchased engineered equipment and subcontract
activities in the North Sea related to the B.P. Exploration Foinaven Development
program west of the Shetlands in the North Atlantic and revenues resulting from
the acquisition of OPI. There were also higher revenues on marine and
engineering activities in North America. These increases were partially offset
by lower revenues in the Far East and domestic shipyard operations.
Marine Construction Services' segment operating income increased $13,060,000 to
$51,465,000. Excluding the gain of $34,788,000 from the sale of an interest in
Caspian Sea oil fields, segment operating income decreased $21,728,000 due to
higher amortization expense relating to goodwill and other intangibles resulting
from the acquisition of OPI on January 31, 1995. There were lower margins due
to the completion of higher profit margin contracts in the Far East and the
Middle East during fiscal 1995, lower volume in the Far East this year, and
lower operating income in North America on
23
<PAGE>
offshore activities because of weather downtime and lower margins on certain
contracts. This decrease was partially offset by a favorable insurance
adjustment of $12,000,000, a net gain on asset disposals, higher volume and
margins in North America on fabrication activities, and higher margins on
shipyard operations. During fiscal year 1995, there were also operating losses
associated with the fabrication yard in Scotland and accelerated depreciation of
$4,314,000 on certain marine equipment in the Far East.
Marine Construction Services' equity in income of investees decreased
$13,539,000 to $11,949,000. This decrease was primarily due to lower results
from both the HeereMac and McDermott-ETPM West, Inc. joint ventures. The
revenues of these two joint ventures declined from $656,490,000 to $542,772,000,
primarily in the Gulf of Mexico, the Far East and the North Sea, partially
offset by increased volume in West Africa. The equity income from these two
joint ventures declined from $24,759,000 to $3,616,000 as a result of reduced
volume and margins in the North Sea. Together these two investees accounted
for 30% of equity in earnings of investees. The decrease was partially offset
by higher operating activity from the Brown and Root McDermott Fabricators
Limited joint venture which was formed in the last quarter of the prior year.
Interest income decreased $15,502,000 to $37,238,000 primarily due to decreases
in investments in government obligations and other investments in the current
year and income recognized in the prior year on a receivable from an equity
investee and settlement of claims for interest relating to foreign tax refunds
and contract claims.
Interest expense increased $27,197,000 to $84,312,000, primarily due to a
reduction in accrued interest of $26,300,000 on proposed tax deficiencies that
was recorded in the prior year.
Minority interest expense decreased $2,137,000 to $10,030,000 primarily due to
minority shareholder participation in the increased losses of the McDermott-ETPM
East joint venture.
Other-net expense decreased $30,770,000 to $8,831,000. This decrease was
primarily due to a loss related to the reduction of estimated products liability
asbestos claim recoveries of $14,478,000 from insurers and a provision for the
settlement of a lawsuit, both in the prior year.
The provision for income taxes increased $21,122,000 from a benefit of
$20,043,000 to a provision of $1,079,000, while income before income taxes and
cumulative effect of accounting change increased $30,871,000 from a loss of
$9,167,000 to income of $21,704,000. The increase in income taxes is primarily
due to an increase in income partially offset by a reappraisal of $5,600,000 of
liabilities in certain foreign tax jurisdictions.
24
<PAGE>
Effect of Inflation and Changing Prices
International'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 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.
The management of International is cognizant of the effects of inflation and, in
order to minimize the negative impact of inflation on its operations, attempts
to cover the increased cost of anticipated changes in labor, material and
service costs, either through an estimation of such changes, which is reflected
in an original price, or through price escalation clauses in its contracts.
Liquidity and Capital Resources
During fiscal year 1997, International's cash and cash equivalents increased
$19,120,000 to $257,783,000 and total debt increased $308,517,000 to
$1,119,031,000 primarily due to the issuance of $250,000,000 principal amount of
JRM's 9.375% Senior Subordinated Notes due 2006 and secured borrowings of
$93,769,000 on transfers of receivables (See Notes 1 and 5 to the consolidated
financial statements). During this period, International provided cash of
$106,647,000 from operating activities and received cash of $106,304,000 from
asset disposals and $24,500,000 from returns from investees. International used
cash of $241,336,000 for net purchases of investments; $91,371,000 for additions
to property, plant and equipment; $51,947,000 for dividends on McDermott
International's common and preferred stocks; $31,687,000 for repayment of long-
term debt; $31,030,000 for investments in equity investees; and $2,250,000 for
the repurchase of a subsidiary's preferred stock to satisfy current and future
sinking fund requirements.
Cash from asset disposals includes proceeds of $38,400,000 from the sale of
International's interest in CCC Fabricaciones y Construcciones, S.A. de C.V. (a
Mexican joint venture), 2 derrick barges, and other assets to Global Industries,
Ltd., proceeds of $19,000,000 from the sale of International's shipyard
facilities in Morgan City, Louisiana and certain work-in-progress and proceeds
of $15,050,000 from the sale of a marine vessel by HeereMac on behalf of
International.
Pursuant to an agreement with the majority of its principal insurers,
International negotiates and settles products liability asbestos claims from
non-employees and bills these amounts to the appropriate insurers. As a result
of collection delays inherent in the process, reimbursement is usually delayed
for three months or more. The average amount of these claims (historical
average of approximately $6,000 per claim over the last three years) has
continued to rise. Claims paid in fiscal year 1997 were $188,205,000, of which
$170,003,000 has been recovered or is due from insurers. At March 31, 1997,
receivables of $80,085,000 were due from insurers for reimbursement of settled
claims. The increase in amounts classified current for products liability
asbestos claims and insurance recoverable at March 31, 1997 reflects
management's intention to reduce the
25
<PAGE>
level of unpaid asserted claims over the next several quarters. The number of
non-employee asbestos claims, which had declined moderately since fiscal year
1990, increased during the second half of fiscal year 1995 and the first half of
fiscal year 1996, but decreased the second half of fiscal year 1996. Based on
information then currently available, management believed that the increase
represented an acceleration in the timing of receipt of claims but did not
represent an increase in the total liability. The number of claims, however,
increased during the first nine months of fiscal year 1997 and during that
period management was investigating and evaluating the basis for the increase.
As a result of this investigation and evaluation, in the fourth quarter of
fiscal year 1997 International recorded an additional estimated liability for
future non-employee asbestos claims of $427,001,000, estimated related insurance
recoveries of $354,601,000 and a loss of $72,400,000 for estimated future claims
for which recovery from insurers was not determined to be probable. Estimated
liabilities for pending and future non-employee products liability asbestos
claims are derived from International's claims history and constitute
management's best estimate of such future costs. Settlement of the liability
is expected to occur over approximately the next 15 years. Estimated insurance
recoveries are based upon analysis of insurers providing coverage of the
estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly as
claims are filed and settled. Accordingly, the ultimate loss may differ
materially from amounts provided in the consolidated financial statements. The
collection delays and the amount of claims paid for which insurance recovery is
not probable have not had a material adverse effect on International's
liquidity, and management believes, based on information currently available,
that they will not have a material adverse effect on liquidity in the future.
Expenditures for property, plant and equipment increased $5,533,000 to
$91,371,000 in fiscal year 1997. The majority of fiscal year 1997 expenditures
were to maintain, replace and upgrade existing facilities and equipment.
International has committed to make capital expenditures of approximately
$25,333,000 during fiscal 1998.
At March 31, 1997 and 1996, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of approximately $93,769,000 and $107,000,000, respectively, under an
agreement with a U.S. bank. During fiscal year 1997, the maximum sales limit
available under the agreement was reduced from $140,000,000 to $125,000,000 and
is subject to annual renewal. Depending on the amount of qualified accounts
receivable available for the pool, the amount sold to the bank can vary (but not
greater than the maximum sales limit available) from time to time. Beginning
January 1, 1997, International accounts for these sales as secured borrowings
(See Notes 1 and 5 to the consolidated financial statements).
At March 31, 1997 and 1996, McDermott International and its subsidiaries had
available various uncommitted short-term lines of credit from banks totaling
$179,137,000 and $439,610,000, respectively. Borrowings against these lines of
credit at March 31, 1997 and 1996 were $53,165,000 and $149,067,000,
respectively. The reduction in borrowings against uncommitted short-term lines
of credit is primarily due to the collection of the Foinaven project receivables
and repayment of the project financing debt during the fiscal year. At March 31,
1997 and 1996, respectively, there were borrowings of
26
<PAGE>
$150,000,000 and $50,000,000 under the $150,000,000 unsecured committed
revolving credit facility of The Babcock & Wilcox Company (the "B&W Revolver").
During May and June 1997, The Babcock & Wilcox Company repaid all amounts
outstanding under the B&W Revolver. As a condition to borrowing under the B&W
Revolver, The Babcock & Wilcox Company must comply with certain requirements. In
July 1997, these requirements of the B&W Revolver were amended so that The
Babcock & Wilcox Company may borrow under this facility in the future. During
fiscal year 1998 borrowings by The Babcock & Wilcox Company through the B&W
Revolver are expected to be minimal as The Babcock & Wilcox Company expects to
be able to fund itself from operating cash flow.
JRM is party to an unsecured and committed revolving credit facility (the "JRM
Revolver") with a group of banks. There were no borrowings outstanding at March
31, 1997 and 1996 under the JRM Revolver. As a condition to borrowing under the
JRM Revolver, JRM must comply with certain requirements. Presently, JRM cannot
satisfy these requirements and cannot borrow under the JRM Revolver. The JRM
Revolver also limits the amount of funds which JRM can borrow from other sources
and JRM is currently at such limits. However, it is not anticipated JRM will
need to borrow funds under the JRM Revolver during fiscal year 1998.
The Delaware Company and JRM are restricted, as a result of covenants in credit
agreements, in their ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At March 31, 1997, substantially all of the net assets of the Delaware Company
and JRM were subject to such restrictions. It is not expected that these
restrictions will have any significant effect on McDermott International's
liquidity.
International maintains an investment portfolio of government obligations and
other investments. The fair value of short and long-term investments in debt
securities at March 31, 1997 was $485,541,000. At March 31, 1997, approximately
$103,315,000 fair value of these obligations were pledged to secure a letter of
credit in connection with a long-term loan and certain reinsurance agreements.
Over the past several years, International has entered into certain investments
in oil and gas projects in the former Soviet Union. In April 1997,
International sold its last Soviet Union oil and gas interest which was in the
Sakhalin Energy Investment Company Ltd., to other members of the consortium.
International received proceeds of approximately $122,000,000.
Working capital decreased $106,415,000 to $225,571,000 at March 31, 1997 due, in
part, to the classification of JRM's 12.875% Guaranteed Senior Notes as a
current liability due to JRM's decision to redeem such Notes on July 15, 1997.
During fiscal year 1997, JRM issued $250,000,000 principal amount of 9.375%
Senior Subordinated Notes due 2006 and received net proceeds of $244,375,000
which were used primarily to repay intercompany indebtedness (including
interest) of approximately $239,000,000 owed to McDermott International.
McDermott International used $50,000,000 of the proceeds to reduce short-term
debt and invested the remainder of the proceeds in its investment portfolio.
During fiscal year 1998, International expects to obtain funds to meet capital
expenditure, working capital and debt maturity requirements from operating
activities, sales of non-strategic assets, cash and cash equivalents,
investments in debt securities
27
<PAGE>
and short-term borrowings. Leasing agreements for equipment, which are short-
term in nature, are not expected to impact International's liquidity or capital
resources.
JRM's joint ventures are largely financed through their own resources,
including, in some cases, stand-alone borrowing arrangements.
As of the Board of Directors meeting held November 7, 1996, McDermott
International's quarterly dividends on its Common Stock were reduced from $0.25
per share to $0.05 per share. Its dividend of $0.71875 per share on its Series C
Cumulative Convertible Preferred Stock remained unchanged. The Delaware
Company's quarterly dividends are $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. McDermott International's quarterly dividends were
$0.05 per share in the last two quarters in fiscal year 1997 and $0.25 per share
in the first two quarters of fiscal year 1997 and in fiscal year 1996. The
Delaware Company's quarterly dividends were at the same rates in 1997 and 1996.
At March 31, 1997, the ratio of long-term debt to total stockholders' equity was
1.53 as compared with 0.84 at March 31, 1996.
International has provided a valuation allowance ($72,328,000 at March 31, 1997)
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, 1997 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.
On October 7, 1996, McDermott International, Inc. announced that its Board of
Directors had directed management to implement a series of steps to improve
International's financial and operating performance. Management was directed to
focus International on its core business lines and dispose of non-core
businesses and underperforming assets. Core business lines include the power
generation and government operations of B&W and the marine construction
operations of JRM. Management was also directed to realign the operations of
B&W's Power Generation Group consistent with the current demands of the
worldwide power generation market. This included the rationalization of
manufacturing overcapacity and continued reduction in personnel. Finally,
management was directed to continue efforts to reduce personnel and other costs
at the operating and corporate headquarters of both McDermott International and
JRM. Business and asset disposals associated with this directive have not been
completed.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which is required to be adopted on December 31, 1997. At
that time, International will be required to change the method currently used to
compute
28
<PAGE>
earnings per share and to restate all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options
and stock appreciation rights will be excluded. For the fiscal years 1997, 1996
and 1995, the new standard will have no impact on previously reported amounts.
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities."
The SOP provides guidance with respect to the recognition, measurement, and
disclosure of environmental remediation liabilities. International believes
that its accounting for environmental remediation liabilities is essentially in
compliance with the SOP. International will formally adopt SOP 96-1 in fiscal
year 1998, and does not believe the effect of the adoption will be material.
29
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
International has prepared the consolidated financial statements and related
financial information included in this report. International has the primary
responsibility for the financial statements and other financial information and
for ascertaining that the data fairly reflects the financial position and
results of operations of International. The financial statements were prepared
in accordance with generally accepted accounting principles, and necessarily
reflect informed estimates and judgments by appropriate officers of
International with appropriate consideration given to materiality.
International 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 errors or irregularities may
nevertheless occur. International 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. International believes that its internal control
structure provides reasonable assurance that errors or irregularities that could
be material to the financial statements are prevented or would be detected.
International's accompanying consolidated financial statements have been audited
by its independent auditors, who provide International with expert advice on
the application of U. S. generally accepted accounting principles to
International's business and also provide an objective assessment of the degree
to which International 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 report of the
independent auditors appears elsewhere herein.
The Board of Directors pursues its responsibility for International's
consolidated financial statements through its Audit Committee, which is composed
solely of directors who are not officers or employees of International. The
Audit Committee meets periodically with the independent auditors 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 auditors for International to the Board of Directors, who in turn
submit the engagement to the stockholders for their approval. The independent
auditors have free access to the Audit Committee.
July 10, 1997
30
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of income (loss), stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits and investment
securities in 1995.
ERNST & YOUNG LLP
New Orleans, Louisiana
July 10, 1997
31
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997 and 1996
ASSETS
1997 1996
---------- ----------
(In thousands)
Current Assets:
Cash and cash equivalents $ 257,783 $ 238,663
Short-term investments in debt securities 75,946 -
Accounts receivable - trade 547,082 457,049
Accounts and note receivable - unconsolidated
affiliates 66,074 57,691
Accounts receivable - other 185,138 162,335
Insurance recoverable - current 183,000 116,280
Contracts in progress 326,512 465,876
Inventories 66,322 68,981
Deferred income taxes 60,866 93,104
Other current assets 65,604 64,559
- --------------------------------------------------------------------------------
Total Current Assets 1,834,327 1,724,538
- --------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 29,876 34,097
Buildings 214,142 240,393
Machinery and equipment 1,485,396 1,575,530
Property under construction 34,886 40,083
- --------------------------------------------------------------------------------
1,764,300 1,890,103
Less accumulated depreciation 1,164,555 1,199,416
- --------------------------------------------------------------------------------
Net Property, Plant and Equipment 599,745 690,687
- --------------------------------------------------------------------------------
Investments in Debt Securities:
Government obligations 291,538 132,674
Other investments 118,057 109,352
- --------------------------------------------------------------------------------
Total Investments in Debt Securities 409,595 242,026
- --------------------------------------------------------------------------------
Insurance Recoverable 720,913 606,963
- --------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization
of $158,523,000 at March 31, 1997
and $126,882,000 at March 31, 1996 423,095 460,058
- --------------------------------------------------------------------------------
Prepaid Pension Costs 303,825 283,656
- --------------------------------------------------------------------------------
Other Assets 307,982 379,323
- --------------------------------------------------------------------------------
TOTAL $4,599,482 $4,387,251
================================================================================
See accompanying notes to consolidated financial statements.
32
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
-------- --------
(In thousands)
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 451,857 $ 234,258
Accounts payable 268,274 264,930
Environmental and products liabilities - current 211,841 161,062
Accrued employee benefits 106,498 98,159
Accrued liabilities - other 343,744 410,103
Advance billings on contracts 200,163 187,378
U.S. and foreign income taxes 26,379 36,662
- --------------------------------------------------------------------------------
Total Current Liabilities 1,608,756 1,392,552
- --------------------------------------------------------------------------------
Long-Term Debt 667,174 576,256
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 400,445 401,321
- --------------------------------------------------------------------------------
Environmental and Products Liabilities 903,379 721,740
- --------------------------------------------------------------------------------
Other Liabilities 250,885 268,975
- --------------------------------------------------------------------------------
Contingencies
- --------------------------------------------------------------------------------
Minority Interest:
Subsidiary's redeemable preferred stocks 170,983 173,301
Other minority interest 160,859 168,586
- --------------------------------------------------------------------------------
Total Minority Interest 331,842 341,887
- --------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares;
outstanding 2,875,000 Series C $2.875 cumulative
convertible, par value $1.00 per share,
(liquidation preference $143,750,000) 2,875 2,875
Common stock, par value $1.00 per share,
authorized 150,000,000 shares; outstanding
54,936,956 at March 31, 1997 and
54,435,823 at March 31, 1996 54,937 54,436
Capital in excess of par value 962,445 949,022
Deficit (538,163) (290,968)
Minimum pension liability (2,148) (1,428)
Net unrealized loss on investments (4,132) (1,875)
Currency translation adjustments (38,813) (27,542)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 437,001 684,520
- --------------------------------------------------------------------------------
TOTAL $4,599,482 $4,387,251
================================================================================
33
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
1997 1996 1995
----------- ---------- -----------
(In thousands)
Revenues $3,150,850 $3,244,318 $3,043,680
- --------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 2,878,972 2,834,373 2,636,640
Depreciation and amortization 151,581 139,875 115,558
Selling, general and
administrative expenses 262,918 274,772 276,076
- --------------------------------------------------------------------------------
3,293,471 3,249,020 3,028,274
- --------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and
Impairments - Net (526) 43,903 (2,282)
- --------------------------------------------------------------------------------
Operating Income (Loss) before Equity
in Income of Investees (143,147) 39,201 13,124
Equity in Income (Loss) of Investees (4,098) 48,438 33,852
- --------------------------------------------------------------------------------
Operating Income (Loss) (147,245) 87,639 46,976
- --------------------------------------------------------------------------------
Other Income (Expense):
Interest income 46,742 37,238 52,740
Interest expense (95,100) (84,312) (57,115)
Minority interest (5,562) (10,030) (12,167)
Other-net (19,532) (8,831) (39,601)
- --------------------------------------------------------------------------------
(73,452) (65,935) (56,143)
- --------------------------------------------------------------------------------
Income (Loss) before Provision for
(Benefit from) Income Taxes and
Cumulative Effect of Accounting
Change (220,697) 21,704 (9,167)
Provision for (Benefit from)
Income Taxes (14,592) 1,079 (20,043)
- --------------------------------------------------------------------------------
Income (Loss) before Cumulative
Effect of Accounting Change (206,105) 20,625 10,876
Cumulative Effect of Accounting
Change - - (1,765)
- --------------------------------------------------------------------------------
Net Income (Loss) $(206,105) $ 20,625 $ 9,111
================================================================================
Net Income (Loss) Applicable to
Common Stock (after Preferred
Stock Dividends) $(214,371) $ 12,359 $ 845
================================================================================
34
<PAGE>
CONTINUED
1997 1996 1995
---- ---- ----
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary and Fully Diluted:
Income before cumulative
effect of accounting
change $ (3.92) $ 0.23 $ 0.05
Accounting change - - (0.03)
- --------------------------------------------------------------------------------
Net income (loss) $ (3.92) $ 0.23 $ 0.02
================================================================================
CASH DIVIDENDS:
Per common share $ 0.60 $ 1.00 $ 1.00
Per preferred share $ 2.88 $ 2.88 $ 2.88
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
(In thousands, except for share amounts)
<TABLE>
<CAPTION>
Preferred Stock
Series C Common Stock
------------------------------ ----------------------------
Shares Par Value Shares Par Value
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Balance March 31, 1994 2,875,000 $ 2,875 53,444,467 $ 53,444
- ------------------------------------------------------------------------------------------------------------------------------------
Adoption of SFAS 115 - - - -
Net income - - - -
Minimum pension liability
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
Acquisition of OPI by JRM - - - -
Exercise of JRM stock options - - - -
Exercise of stock options - - 147,217 148
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 55,030 55
Redemption of preferred shares - - - -
Contributions to thrift plan - - 312,883 313
Deferred career executive
stock plan expense - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 2,875,000 2,875 53,959,597 53,960
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - - -
Minimum pension liability - - - -
Gain on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 76,005 76
Restricted stock purchases - net - - 99,270 99
Redemption of preferred shares - - - -
Contributions to thrift plan - - 300,951 301
Deferred career executive
stock plan expense - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
Capital Retained Minimum Unrealized Currency Total
in Excess Earnings Pension Loss on Translation Stockholders'
of Par Value (Deficit) Liability Investments Adjustment Equity
------------ ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 730,987 $ (196,216) $ (931) $ - $ (47,901) $ 542,258
- -------------------------------------------------------------------------------------------------------
- - - (4,095) - (4,095)
- 9,111 - - - 9,111
- - 540 - - 540
- - - (3,955) - (3,955)
- - - - 15,597 15,597
- (53,690) - - - (53,690)
- (8,266) - - - (8,266)
189,793 - - - 7,416 197,209
(151) - - - - (151)
2,991 - - - - 3,139
2,642 - - - - 2,642
- - - - - 55
239 - - - - 239
7,400 - - - - 7,713
2,233 - - - - 2,233
- -------------------------------------------------------------------------------------------------------
936,134 (249,061) (391) (8,050) (24,888) 710,579
- -------------------------------------------------------------------------------------------------------
- 20,625 - - - 20,625
- - (1,037) - - (1,037)
- - - 6,175 - 6,175
- - - - (2,654) (2,654)
- (54,266) - - - (54,266)
- (8,266) - - - (8,266)
2,382 - - - - 2,382
1,935 - - - - 2,011
(308) - - - - (209)
206 - - - - 206
6,046 - - - - 6,347
2,627 - - - - 2,627
- -------------------------------------------------------------------------------------------------------
949,022 (290,968) (1,428) (1,875) (27,542) 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) $ (2,148) $ (4,132) $ (38,813) $ 437,001
- -------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
McDERMOTT INTERNATIONAL, INC. CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (206,105) $ 20,625 $ 9,111
- --------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 151,581 139,875 115,558
Equity in income or (loss) of investees,
less dividends 17,422 (5,963) 42,629
(Gain) loss on asset disposals and
impairments - net 526 (43,903) 2,282
Provision for (benefit from) deferred taxes (211) 9,121 (3,896)
Cumulative effect of accounting change - - 1,765
Other 6,525 (8,786) 1,954
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable 7,978 (16,613) 1,688
Accounts payable 3,443 (43,187) (34,637)
Inventories 123 (3,027) 5,000
Net contracts in progress and advance
billings 139,188 (173,416) (37,891)
Income taxes (6,026) (32,957) (38,277)
Accrued liabilities (26,936) 28,774 (32,243)
Other, net (32,609) (10,126) (82,848)
Products and environmental liabilities 86,812 18,227 58,083
Proceeds from insurance for products liabilities claims 153,141 107,481 105,314
Payments of products liabilities claims (188,205) (151,961) (126,151)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 106,647 (165,836) (12,559)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (23,260) 10,828
Purchases of property, plant and
equipment (91,371) (85,838) (91,179)
Investment in asset held for lease (1,821) (29,620) (6,711)
Purchases of short-term investments,
government obligations and
other investments (617,464) (413,912) (520,007)
Sales and maturities of short-term investments,
government obligations and
other investments 376,128 892,255 512,786
Proceeds from asset disposals 106,304 165,060 22,430
Deposit on equipment sale - 30,000 -
Investments in equity investees (31,030) (23,364) (26,156)
Returns from investees 24,500 46,497 -
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (234,754) 557,818 (98,009)
- --------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (31,687) $ (174,331) $ (35,553)
Issuance of long-term debt 244,375 34,506 3,482
Increase (decrease) in short-term
borrowing (12,371) (31,488) 167,987
Issuance of common stock 565 1,802 3,194
Dividends paid (51,947) (62,411) (61,827)
Repurchase of subsidiary's preferred stock (2,250) (5,743) (17,185)
Other (274) (2,071) 1,747
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 146,411 (239,736) 61,845
- --------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES
ON CASH 816 508 823
- --------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 19,120 152,754 (47,900)
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 238,663 85,909 133,809
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 257,783 $ 238,663 $ 85,909
========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 85,502 $ 88,640 $ 76,519
Income taxes (net of refunds) $ 14,758 $ 36,738 $ 10,664
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
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.
The consolidated financial statements include the accounts of McDermott
International, Inc. and all subsidiaries and controlled joint ventures.
Investments in joint venture and other entities which McDermott International,
Inc. does not control but has significant influence over are accounted for on
the equity method. Differences between the cost of equity method investments
and the amount of underlying equity in net assets of the investees are amortized
systematically to income. All significant intercompany transactions and
accounts have been eliminated. Certain amounts previously reported have been
reclassified to conform with the presentation at March 31, 1997.
Unless the context otherwise requires, hereinafter "McDermott International"
will be used to mean McDermott International, Inc., a Panamanian corporation
which is the parent company of the McDermott group of companies; "JRM" will be
used to mean J. Ray McDermott, S.A., a Panamanian corporation which is a
majority owned subsidiary of McDermott International, and its consolidated
subsidiaries; and the "Delaware Company" will be used to mean McDermott
Incorporated, a Delaware corporation which is a subsidiary of McDermott
International, and its consolidated subsidiaries (including Babcock & Wilcox
Investment Company and its principal subsidiary, The Babcock & Wilcox Company);
and "International" will be used to mean 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.
Accounting Changes
Transfers of Financial Assets - During the year ended March 31, 1997,
International adopted Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, beginning January 1, 1997,
transfers of accounts receivable previously accounted for as sales are accounted
for as secured borrowings. Adoption of the new standard was not material to
results for the three months ended March 31, 1997.
Postemployment Benefits - Effective April 1, 1994, International adopted SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," in accounting for
disability benefits and other types of benefits paid to employees, their
beneficiaries and covered dependents after active employment, but before
retirement. The cumulative effect as of April 1, 1994
40
<PAGE>
of this change in accounting was to reduce net income by $1,765,000 (net of
income taxes of $287,000) or $0.03 per share. Other than the cumulative effect,
the accounting change had no material effect on the results of fiscal year 1995.
Prior to April 1, 1994, International recognized the cost of providing most of
these benefits on a cash basis.
Investments - Effective April 1, 1994, International adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
adoption of SFAS No. 115 resulted in a decrease in the opening balance of
stockholders' equity of $4,095,000 to reflect the net unrealized holding losses
on International's investment securities which were previously carried at cost.
International'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 in a separate
component of shareholders' equity. Investment securities available for current
operations are classified in the balance sheet as current assets while
securities held for long-term investment 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 in a separate component of equity. Foreign
currency transaction adjustments are reported in income. Included in Other
Income (Expense) are transaction gains (losses) of $3,628,000, ($3,840,000), and
($1,057,000) for fiscal years 1997, 1996 and 1995, respectively.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or components thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. 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. There are no unbilled revenues
which will not 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 $39,854,000 and $58,190,000 relating to
commercial and U.S. Government contracts claims whose final settlement is
41
<PAGE>
subject to future determination through negotiations or other procedures which
had not been completed at March 31, 1997 and 1996, respectively.
1997 1996
---- ----
(In thousands)
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized $111,815 $ 86,094
Revenues recognized less billings to customers 214,697 379,782
- --------------------------------------------------------------------------------
Contracts in Progress $326,512 $465,876
================================================================================
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized $255,574 $207,036
Costs incurred less costs of revenue recognized (55,411) (19,658)
- --------------------------------------------------------------------------------
Advance Billings on Contracts $200,163 $187,378
================================================================================
International is usually entitled to financial settlements relative to the
individual circumstances of deferrals or cancellations of Power Generation
Systems and Equipment contracts. International 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:
1997 1996
---- ----
(In thousands)
Retainages $65,316 $67,886
================================================================================
Retainages expected to be collected
after one year $29,159 $17,699
================================================================================
Of its long-term retainages at March 31, 1997, International anticipates
collection of $21,095,000 in fiscal year 1999, $7,525,000 in fiscal year 2000
and $539,000 in fiscal year 2001.
42
<PAGE>
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 11% and 15%
of total inventories was determined using the LIFO method at March 31, 1997 and
1996, respectively. Inventories at March 31, 1997 and 1996 are summarized
below:
1997 1996
---- ----
(In thousands)
Raw Materials and Supplies $50,823 $47,457
Work in Progress 8,498 8,694
Finished Goods 7,001 12,830
- --------------------------------------------------------------------------------
$66,322 $68,981
================================================================================
Warranty Expense
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems and Equipment segment,
is accrued relative to revenue recognition on the respective contracts. In
addition, specific provisions are made where the costs of warranty are expected
to significantly exceed such accruals.
Environmental Clean-up Costs
International 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, except for one facility which has provisions in its
government contracts pursuant to which all of its decommissioning costs are
covered by the U.S. Government. 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.
Research and Development
The cost of research and development which is not performed on specific
contracts is charged to operations as incurred. Such expense was approximately
$16,579,000, $23,000,000 and $19,905,000 in fiscal years 1997, 1996 and 1995,
respectively. In addition, expenditures on research and development activities
of approximately $34,170,000, $45,106,000 and $44,240,000 in fiscal years 1997,
1996 and 1995, respectively, were paid for by customers of International.
43
<PAGE>
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is depreciated on
the straight-line method, using 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 on 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.
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, and such accruals are charged to operations currently.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of the cost over fair value of net assets of purchased businesses
primarily pertains to the acquisition of The Babcock & Wilcox Company, which is
being amortized on a straight-line basis over 40 years, and the acquisition of
Offshore Pipelines, Inc. which is being amortized on a straight-line basis over
15 years. Management periodically reviews goodwill to access recoverability,
and impairments would be recognized in operating results if a permanent
diminution in value were to occur.
Capitalization of Interest Cost
In fiscal years 1997, 1996 and 1995, total interest cost incurred was
$95,924,000, $86,239,000 and $59,715,000, respectively, of which $824,000,
$1,927,000 and $2,600,000, respectively, was capitalized.
Earnings Per Share
Primary earnings per share are based on the weighted average number of common
and dilutive common equivalent shares outstanding during the year. Fully diluted
earnings per share are the same as primary since the computations were
antidilutive.
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
Derivatives, primarily forward exchange contracts, are utilized to minimize
exposure and reduce risk from foreign exchange fluctuations in the regular
course of business. Gains and losses related to qualifying hedges of firm
commitments are deferred and recognized in
44
<PAGE>
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.
NOTE 2 - ACQUISITIONS
During the three years ended March 31, 1997, International made the acquisitions
described below which were accounted for by the purchase method. Operating
results have been included in the Consolidated Statement of Income (Loss) from
the acquisition dates.
During fiscal year 1996, International acquired the minority ownership interest
in McDermott Engineers & Constructors (Canada), Ltd. ("MECL"), formerly Delta
Catalytic Corporation, a controlling interest in Talleres Navales Del Golfo
("TNG"), a Mexican shipyard, and the assets of Joy Environmental Technologies,
Inc., which specialized in technologies used by electric utilities and other
industrial companies to comply with clean air regulations. During fiscal year
1997, an additional interest in TNG was acquired. Pro forma results of
operations have not been presented because the effects of these acquisitions
were not significant.
On January 31, 1995, International contributed substantially all of its marine
construction services business to JRM and JRM acquired Offshore Pipelines, Inc.
("OPI"), a full-range provider of offshore marine construction and other related
services on a worldwide basis to the oil and gas industry. Pursuant to the
Merger Agreement, JRM issued 13,867,946 shares of Common Stock, 897,818 options
to acquire shares of Common Stock and 458,632 shares of Series B $2.25
Cumulative Convertible Exchangeable Preferred Stock valued at $347,599,000 in
exchange for all of the outstanding common stock, stock options and preferred
stock of OPI. As a result of the acquisition of OPI, International's ownership
interest in the common stock of JRM was reduced to approximately 64%. The
purchase price ($369,868,000, including direct costs of acquisition and non-
compete agreements) was allocated to the underlying assets and liabilities based
upon preliminary fair values at the date of acquisition which resulted in excess
cost over fair value of net assets acquired of $235,000,000. During fiscal year
1996, International completed certain asset and liability valuations related
primarily to joint ventures, property, plant and equipment and preacquisition
contingencies resulting in an increase in excess of cost over fair value of net
assets acquired of $95,000,000. Additionally, during fiscal year 1996,
management completed its assessment of the amortization period for excess of
cost over fair value of net assets acquired and determined the amortization
period should be 15 years.
Unaudited pro forma results of operations for fiscal year 1995 assuming the
acquisition of OPI had occurred as of the beginning of fiscal year are: revenues
of $3,359,054,000, loss before cumulative effect of accounting change of
$9,547,000 ($0.33 per share) and net loss of $11,312,000 ($0.36 per share). The
pro forma information is presented for informational purposes only and is not
necessarily indicative of the operating results that would have occurred had the
acquisition been completed as of April 1, 1994.
45
<PAGE>
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
During the fourth quarter of fiscal year 1997, and effective as of the beginning
of the year, International changed from the equity to the cost method of
accounting for its investment in the HeereMac joint venture as a result of
International's determination that it is unable to exercise significant
influence over HeereMac's operating and financial policies. Equity in income of
HeereMac was $1,083,000 and $6,244,000 in fiscal years 1996 and 1995,
respectively.
Investments in joint ventures and other entities, which are accounted for on the
equity method were $61,017,000 and $129,658,000 at March 31, 1997 and 1996,
respectively. Transactions with unconsolidated affiliates included sales to
($140,605,000, $180,198,000 and $152,517,000 in fiscal years 1997, 1996 and
1995, respectively, including approximately $9,609,000, $44,491,000 and
$54,657,000, respectively, attributable to leasing activities) and purchases
from ($32,103,000, $39,915,000, and $12,582,000 in fiscal years 1997, 1996 and
1995, respectively) these entities. Included in non-current Other Assets at
March 31, 1997 and 1996 are $10,463,000 and $23,000,000, respectively of
accounts and notes receivable from unconsolidated investees. Included in
Accounts payable at March 31, 1997 and 1996 are $17,586,000 and $14,260,000,
respectively, of payables to unconsolidated investees.
In fiscal year 1997, International realized a gain of $16,682,000 on the sale of
a marine vessel sold by HeereMac on behalf of International. During fiscal year
1996, International sold to the HeereMac joint venture the major marine vessels
it had been leasing to the joint venture. International 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, and recorded a deferred gain of $103,239,000, which
was being amortized over HeereMac's depreciable lives of the vessels prior to
the change to the cost method of accounting for International's investment in
HeereMac. Subsequent to the change the deferred gain is recognized by
International as the note is repaid. The note receivable ($92,500,000 at March
31, 1997), net of the deferred gain ($90,803,000 at March 31, 1997), is included
in investments in joint ventures. In addition to the vessel sale in fiscal year
1996, JRM received $37,097,000 as a return of capital from the HeereMac joint
venture.
In fiscal year 1995, International contributed various marine construction
barges with a cost of $102,602,000 and accumulated depreciation of $76,763,000
and sold a derrick barge to the HeereMac joint venture for $9,101,000.
At March 31, 1997 and 1996, property, plant and equipment included $141,409,000
and $141,293,000, and accumulated depreciation included $102,242,000 and
$89,312,000, respectively, of marine equipment that is leased to unconsolidated
investees. Dividends received from unconsolidated investees accounted for by
the equity method were $13,324,000, $42,475,000 and $76,481,000 in fiscal years
1997, 1996 and 1995, respectively. Undistributed earnings in unconsolidated
affiliates accounted for by the equity method were $36,021,000 and $50,997,000,
respectively, at March 31, 1997 and 1996.
46
<PAGE>
Summarized combined balance sheet and income statement information based on the
most recent financial information for investments in entities accounted for by
the equity method are presented below:
1997 1996
---------- ----------
in thousands)
Current Assets $427,549 $ 567,376
Non-Current Assets 393,571 939,624
---------------------------------------------------------------------
Total Assets $821,120 $1,507,000
=====================================================================
Current Liabilities $421,967 $ 524,086
Non-Current Liabilities 238,462 692,440
Owners' Equity 160,691 290,474
---------------------------------------------------------------------
Total Liabilities and
Owners' Equity $821,120 $1,507,000
=====================================================================
1997 1996 1995
---------- ---------- ----------
(In thousands)
Revenues $1,239,071 $1,157,713 $1,038,686
Gross Profit $ 120,600 $ 270,869 $ 239,424
Income before Provision for
Income Taxes $ 22,050 $ 118,168 $ 87,717
Provision for Income Taxes 10,767 11,331 9,509
---------------------------------------------------------------------
Net Income $ 11,283 $ 106,837 $ 78,208
=====================================================================
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 International 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 reasons for the variations in such relationships are a
limitation on the recognition of income tax benefits in the U. S. in fiscal year
1997 and 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 (not only with respect to nominal rate but also with
respect to the allowability of deductions, credits and other benefits) and
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. McDermott
International and certain of its subsidiaries keep books and file tax returns on
the completed contract method of accounting.
47
<PAGE>
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, 1997 and 1996
were as follows:
1997 1996
---- ----
(In thousands)
Deferred tax assets:
Accrued warranty expense $ 15,915 $ 13,725
Accrued vacation pay 9,054 9,162
Accrued liabilities for self-insurance
(including postretirement health
care benefits) 169,608 176,369
Accrued liabilities for executive and
employee incentive compensation 17,440 16,541
Investments in joint ventures and affiliated
companies 8,304 8,014
Operating loss carryforwards 37,975 21,635
Environmental and products liabilities 434,852 344,839
Long-term contracts 10,873 5,184
Other 29,951 34,969
- --------------------------------------------------------------------------------
Total deferred tax assets 733,972 630,438
- --------------------------------------------------------------------------------
Valuation allowance for deferred tax assets (72,328) (30,889)
- --------------------------------------------------------------------------------
Deferred tax assets 661,644 599,549
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 50,524 57,725
Long-term contracts 6,044 10,029
Prepaid pension costs 103,470 99,997
Investments in joint ventures and affiliated
companies 10,483 11,261
Insurance recoverable 353,579 282,065
Other 7,769 10,588
- --------------------------------------------------------------------------------
Total deferred tax liabilities 531,869 471,665
- --------------------------------------------------------------------------------
Net deferred tax assets $129,775 $127,884
================================================================================
Income (loss) before provision for (benefit from) income taxes and cumulative
effect of accounting change was as follows:
1997 1996 1995
---- ---- ----
(In thousands)
U.S. $(164,771) $(34,649) $(124,271)
Other than U.S. (55,926) 56,353 115,104
- -------------------------------------------------------------------------------
$(220,697) $ 21,704 $ (9,167)
===============================================================================
48
<PAGE>
The provision for (benefit from) income taxes consists of:
1997 1996 1995
--------- --------- ---------
(In thousands)
Current:
U. S. - Federal $(13,411) $(17,323) $(35,891)
U.S. - State and local (2,667) (3,810) (4,405)
Other than U.S. 1,697 13,091 24,149
- --------------------------------------------------------------------------------
Total current (14,381) (8,042) (16,147)
- --------------------------------------------------------------------------------
Deferred:
U.S. - Federal 7,090 21,358 (826)
U.S. - State and local (1,862) (3,009) 2,778
Other than U.S. (5,439) (9,228) (5,848)
- --------------------------------------------------------------------------------
Total deferred (211) 9,121 (3,896)
- --------------------------------------------------------------------------------
Provision for (Benefit from)
Income Taxes $(14,592) $ 1,079 $(20,043)
================================================================================
The current provision for other than U.S. income taxes in 1997, 1996 and 1995
includes a reduction of $2,021,000, $3,763,000 and $1,323,000, respectively, for
the benefit of net operating loss carryforwards. Initial recognition of OPI
pre-acquisition tax benefits in fiscal year 1997, resulted in a reduction of
excess cost over fair value of assets acquired of $3,115,000.
McDermott International and JRM would be subject to U. S. withholding taxes on
distributions of earnings from their U. S. subsidiaries. No. U. S. withholding
taxes have been provided as these earnings are considered indefinitely
reinvested.
During fiscal year 1995, settlements were reached with the Internal Revenue
Service ("IRS") concerning the Delaware Company's U.S. income tax liability for
the fiscal years ended March 31, 1983 through March 31, 1988 disposing of all
U.S. federal income tax issues for those years. These settlements resulted in
a reduction in accrued interest expense of $26,300,000 during fiscal year 1995.
The IRS has issued notices for fiscal years March 31, 1989 and March 31, 1990
asserting deficiencies in the amount of taxes reported. The deficiencies are
based on issues substantially similar to those of earlier years. The Delaware
Company believes that any income taxes ultimately assessed will not exceed
amounts already provided.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"),
the Delaware Company has the right to sell to McDermott International and
McDermott International has the right to buy from the Delaware Company, 100,000
units, each unit consisting of one share of McDermott International Common Stock
and one share of McDermott International Series A Participating Preferred Stock,
at a price based primarily upon the stockholders' equity of McDermott
International 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,
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<PAGE>
to a limited extent, upon the price-to-book value of the Dow Jones Industrial
Average. At April 1, 1997, the current unit value was $1,602 and the aggregate
current unit value for the Delaware Company's 100,000 units was $160,206,000.
The net proceeds to the Delaware Company 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.
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of: 1997 1996
---- ----
(In thousands)
Unsecured Debt:
Series A Medium Term Notes (maturities
ranging from 1 to 6 years; interest at
various rates ranging from 7.92%
to 9.00%) $ 75,000 $ 75,000
Series B Medium Term Notes (maturities
ranging from 2 to 26 years; interest
at various rates ranging from 6.50% to 8.75%) 101,000 101,000
9.375% Notes due 2002 ($225,000,000 principal
amount) 224,598 224,538
12.875% Guaranteed Senior Notes due 2002
($70,000,000 principal amount - callable
July 15, 1997) 73,958 74,473
9.375% Senior Subordinated Notes due 2006 244,610 -
($250,000,000 principal amount)
Other notes payable through 2009 (interest at
various rates ranging to 10%) 37,075 38,255
Secured Debt:
10.375% Note payable due 1998 34,800 55,300
Other notes payable through 2012 and
capitalized lease obligations 31,056 42,881
- --------------------------------------------------------------------------------
822,097 611,447
Less: Amounts due within one year 154,923 35,191
- --------------------------------------------------------------------------------
$667,174 $576,256
================================================================================
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Notes payable and current maturities of long-term debt consist of:
1997 1996
---- ----
(In thousands)
Short-term lines of credit - unsecured $203,165 $199,067
Secured borrowings 93,769 -
Current maturities of long-term debt 154,923 35,191
- --------------------------------------------------------------------------------
Total $451,857 $234,258
================================================================================
Weighted average interest rate
on short-term borrowings 6.29% 6.35%
================================================================================
The Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term
Notes contain certain covenants which restrict the amount of funded indebtedness
that the Delaware Company may incur, and place limitations on certain restricted
payments, certain transactions between affiliates, the creation of certain liens
and the amendment of the Intercompany Agreement.
The 12.875% Guaranteed Senior Notes ("12.875% Notes") are subject to mandatory
sinking fund requirements beginning on July 15, 2000 calculated to retire 50% of
the original principal amount prior to maturity in 2002. The 12.875% Notes are
redeemable, for cash, at the option of the issuer, at any time on or after July
15, 1997, in whole or in part, at a price of 106.4% of the principal amount, and
thereafter at prices declining annually to 100% of the principal amount on or
after July 15, 2000. The 12.875% Notes are included in current maturities of
long-term debt at March 31, 1997 due to JRM's intention to redeem the 12.875%
Notes in fiscal year 1998.
During fiscal year 1997, JRM issued $250,000,000 principal amount of 9.375%
Senior Subordinated Notes due 2006 ("9.375% Notes"). The 9.375% Notes are
redeemable, for cash, at the option of JRM in whole or in part, at any time on
or after July 15, 2001 at a price of 104.688% of the principal amount, and
thereafter at prices declining annually to 100% of the principal amount on or
after July 15, 2004.
International's 10.375% Note payable due 1998 is secured by a letter of credit
issued by a U. S. bank. The letter of credit was secured by $38,317,000 market
value of International's long-term portfolio at March 31, 1997. The outstanding
principal is repayable in semi-annual payments with the final installment due
June 20, 1998. The letter of credit and collateral amounts decline as the loan
principal is repaid. At March 31, 1997 and 1996, International had an interest
rate swap outstanding on the current notional principal amount of this note
which effectively changes the fixed interest rate of 10.375% to a floating rate
based on LIBOR (See Note 16).
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1997 are as follows: 1998 - $154,923,000, including the 12.875% Notes; 1999
- - $56,022,000; 2000 - $30,710,000; 2001 - $73,000; 2002 - $224,675,000.
The Delaware Company and JRM are restricted, as a result of covenants in certain
credit agreements, in their ability to transfer funds to International and its
subsidiaries through
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<PAGE>
cash dividends or through unsecured loans or investments. At March 31, 1997,
substantially all of the net assets of the Delaware Company and JRM were subject
to such restrictions.
The Babcock & Wilcox Company has an agreement with a U.S. bank, whereby it can
sell with limited recourse, an undivided interest in a designated pool of
qualified accounts receivable. Under the terms of the agreement, new
receivables are added to the pool as collections reduce previously sold accounts
receivable. The maximum sales limit was reduced during fiscal year 1997 from
$140,000,000 to $125,000,000. At March 31, 1997, approximately $93,769,000 of
receivables had been sold under this agreement and are accounted for as secured
borrowings in the accompanying balance sheet. At March 31, 1996, approximately
$107,000,000 had been sold and were accounted for as a reduction of accounts
receivable in the accompanying balance sheet. Included in Other-net expense
were expenses of $4,737,000, $8,518,000 and $9,709,000 in fiscal years 1997,
1996 and 1995, respectively, on receivables accounted for as sales. Discounts
were based on the bank's cost of issuing commercial paper and bank fees were a
fixed amount based on the maximum limit which could be sold.
At March 31, 1997 and 1996, McDermott International and its subsidiaries had
available various uncommitted short-term lines of credit from banks totaling
$179,137,000 and $439,610,000, respectively. Borrowings against these lines of
credit at March 31, 1997 and 1996 were $53,165,000 and $149,067,000,
respectively.
JRM is party to an unsecured and committed revolving credit facility (the "JRM
Revolver") with a group of banks. There were no borrowings outstanding at March
31, 1997 and 1996 under the JRM Revolver. As a condition to borrowing under
the JRM Revolver, JRM must comply with certain requirements. Presently, JRM
cannot satisfy these requirements and cannot borrow under the JRM Revolver. The
JRM Revolver also limits the amount of funds which JRM can borrow from other
sources and JRM is currently at such limits.
At March 31, 1997 and 1996, respectively, there were borrowings of $150,000,000
and $50,000,000 under the $150,000,000 unsecured committed revolving credit
facility of The Babcock & Wilcox Company (the "B&W Revolver"). During May and
June 1997, The Babcock & Wilcox Company repaid all amounts outstanding under the
B&W Revolver. As a condition to borrowing under the B&W Revolver, The Babcock &
Wilcox Company must comply with certain requirements. In July 1997, these
requirements of the B&W Revolver were amended so that The Babcock & Wilcox
Company may borrow under this facility in the future.
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<PAGE>
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - International provides retirement benefits, primarily through
non-contributory pension plans, for substantially all of its regular full-time
employees, except 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. International'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. At January 1, 1997 and 1996,
approximately one-half of total plan assets were invested in listed stocks and
bonds. The remaining assets were held in foreign equity funds, U.S. Government
securities and investments of a short-term nature.
U.S. Pension Plans:
The net periodic pension benefit for fiscal years 1997, 1996 and 1995 included
the following components:
1997 1996 1995
---- ---- ----
(In thousands)
Service cost - benefits earned
during the period $ 25,316 $ 21,599 $ 22,917
Interest cost on projected
benefit obligation 73,825 69,911 62,690
Actual return on plan assets (153,825) (218,895) 16,701
Net amortization and deferral 54,239 122,281 (114,343)
- --------------------------------------------------------------------------------
Net periodic pension benefit $ (445) $ (5,104) $ (12,035)
================================================================================
Due to the sale of a domestic entity, loss before cumulative effect of
accounting change in fiscal year 1995, includes a net after-tax gain of $732,000
resulting from the recognition of a curtailment of a related plan.
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<PAGE>
The following table sets forth the U.S. plans' funded status and amounts
recognized in the consolidated financial statements:
Plans for Which Plans for Which
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
----------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit
obligation $ 806,533 $ 763,561 $ 67,425 $ 62,752
================================================================================
Accumulated benefit
obligation $ 870,713 $ 824,121 $ 76,110 $ 72,980
================================================================================
Projected benefit
obligation $ 977,594 $ 930,558 $ 99,636 $ 94,733
Plan assets at fair value 1,254,944 1,156,121 52,582 46,904
- --------------------------------------------------------------------------------
Projected benefit obliga-
tion (in excess of) or
less than plan assets 277,350 225,563 (47,054) (47,829)
Unrecognized net (gain) loss (22,276) 32,286 16,390 21,629
Unrecognized prior service cost 21,738 13,936 (5,736) (6,118)
Unrecognized transition asset (25,873) (32,342) (1,293) (1,533)
Adjustment required torecognize
minimum liability - - (6,696) (5,952)
- --------------------------------------------------------------------------------
Prepaid pension cost
(pension liability) $ 250,939 $ 239,443 $(44,389) $(39,803)
================================================================================
The assumptions used in determining the funded status of the U. S. plans were:
1996 1997 1996
---- ---- ----
Actuarial assumptions:
Discount rate 7.5% 7.25% 8.25%
- --------------------------------------------------------------------------------
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
- --------------------------------------------------------------------------------
Expected long-term rate of
return on assets 8.5% 8.5% 8.5%
- --------------------------------------------------------------------------------
54
<PAGE>
The change in the discount rate for 1997 decreased the projected benefit
obligation at March 31, 1997 by $26,247,000.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," International recorded, at March 31, 1997 and 1996, an additional
minimum liability of $6,696,000 and $5,952,000, respectively, resulting in
recognition of intangible assets of $3,657,000 and $4,114,000, respectively, and
reductions in stockholders' equity of $3,039,000 and $1,839,000, respectively.
The three principal U.S. ERISA pension plans provide that, subject to certain
limitations, any excess assets in such plans would be used to increase pension
benefits if certain events occurred within a 60-month period following a change
in control of McDermott International.
Non-U.S. Pension Plans:
The net periodic pension benefit for fiscal years 1997, 1996 and 1995 included
the following components:
1997 1996 1995
---- ---- ----
Service cost - benefits earned
during the period $ 5,273 $ 4,602 $ 4,832
Interest cost on projected
benefit obligation 12,286 11,446 11,103
Actual return on plan assets (21,216) (35,281) (5,702)
Net amortization and deferral (2,990) 14,814 (16,174)
- --------------------------------------------------------------------------------
Net periodic pension benefit $ (6,647) $ (4,419) $ (5,941)
================================================================================
Due to a curtailment of a foreign pension plan, net loss includes a loss of
$1,584,000 for fiscal year 1997. Due to a plan settlement, net income includes
a net gain of $1,104,000 for fiscal year 1996.
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<PAGE>
The following table sets forth the non-U.S. plans' funded status (assets exceed
accumulated benefits) and amounts recognized in the consolidated financial
statements:
1997 1996
---- ----
(In thousands)
Actuarial present value of
benefit obligations:
Vested benefit obligation $151,431 $138,227
================================================================================
Accumulated benefit obligation $153,373 $140,554
================================================================================
Projected benefit obligation $166,904 $155,774
Plan assets at fair value 253,842 226,338
- --------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 86,938 70,564
Unrecognized net gain (23,001) (10,843)
Unrecognized prior service cost 6,903 5,154
Unrecognized transition asset (18,339) (21,270)
- --------------------------------------------------------------------------------
Net prepaid pension cost $ 52,501 $ 43,605
================================================================================
The assumptions used in determining the funded status of the non-U.S. plans
were:
1997 1996 1995
---- ---- ----
Actuarial assumptions:
Discount rate 7.25-7.75% 7.25-8.25% 8.0-8.25%
- --------------------------------------------------------------------------------
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
- --------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 8.5% 8.5% 8.5-9.0%
- --------------------------------------------------------------------------------
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<PAGE>
Multiemployer Plans - One of McDermott International'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 $4,552,000, $4,441,000 and
$9,838,000 in fiscal years 1997, 1996 and 1995, respectively.
Postretirement Health Care and Life Insurance Benefits - International offers
postretirement health care and life insurance benefits to substantially all of
its retired regular full-time employees, including those associated with
discontinued operations, except certain non-resident alien retired employees who
are not citizens of a European Community country or who, while employed, did not
earn income in the United States, Canada or the United Kingdom. International
shares the cost of providing these benefits with all affected retirees, except
for certain life insurance plans. Postretirement health care and life insurance
benefits are offered under separate defined benefit postretirement plans to
union and non-union employees. The health care plans are contributory and
contain cost-sharing provisions such as deductibles and coinsurance; the life
insurance plans are contributory and non-contributory. International does not
fund any of its plans.
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
1997 1996
-------- --------
(In thousands)
Accumulated Postretirement Benefit Obligation:
Retirees $291,443 $343,469
Fully eligible active participants 22,889 17,284
Other active plan participants 56,534 79,183
- --------------------------------------------------------------------------------
370,866 439,936
Unrecognized net gain (loss) 61,843 (10,516)
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $432,709 $429,420
================================================================================
Weighted-average discount rate 7.50% 7.25%
================================================================================
The accumulated postretirement benefit obligation includes $328,749,000 and
$395,808,000 for health care plans and $42,117,000 and $44,128,000 for life
insurance plans at March 31, 1997 and 1996, respectively. The changes in the
accumulated postretirement benefit obligation and the unrecognized net gain
(loss) at March 31, 1997 were primarily attributable to a decrease in the health
care cost trend rate and an increase in the discount rate.
57
<PAGE>
Net periodic postretirement benefit cost for fiscal years 1997, 1996 and 1995
included the following components:
1997 1996 1995
---- ---- ----
(In thousands)
Service cost $ 4,737 $ 3,902 $ 4,686
Interest cost 30,551 31,494 32,494
Net amortization and deferral 751 (1,581) 3,004
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $36,039 $33,815 $40,184
================================================================================
For measurement purposes, a weighted-average annual assumed rate of increase in
the per capita cost of covered health care claims of 7-1/2% was assumed for
1997, 10-3/4% for 1996 and 11-1/2% in 1995. For 1998, a rate of 6-1/2% was
assumed. The rate was assumed to decrease gradually to 4% in 2005 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of March 31, 1997 by
$23,262,000 and the aggregate of the service cost and interest cost components
of net periodic postretirement benefit cost for fiscal year 1997 by $2,830,000.
NOTE 7 - IMPAIRMENT OF LONG-LIVED ASSETS
During the quarter ended March 31, 1997, management identified certain long-
lived assets that are no longer expected to recover their entire carrying value
through future cash flows. The assets include non-core, surplus and obsolete
property and equipment in the marine construction segment and a manufacturing
facility and related equipment and goodwill of $5,631,000 in the power
generation segment. Fair value was generally determined based on sales prices
of comparable assets. Impairment losses to write the property, plant and
equipment down to estimated fair values and to write off related goodwill were
as follows:
Marine Construction Services $19,228,000
Power Generation Systems and Equipment 15,957,000
- -------------------------------------------------------------------------------
Total $35,185,000
===============================================================================
During the quarter ended September 30, 1996, management began marketing a
building and land which is currently used as office space. As a result, an
impairment loss of $7,295,000 was recognized to reduce the property to its
estimated fair value less the cost to sell. Prior to recognition of the
impairment loss, the carrying value of the land and building was approximately
$15,795,000. Management expects to sell the land and building within the next
year.
58
<PAGE>
During the quarter ended March 31, 1997, management also decided to sell a
certain vessel and related equipment of a non-core business and to sell or
otherwise dispose of certain other assets in its marine construction segment.
As a result, impairment losses totaling $12,162,000 were recognized to reduce
the property and equipment to estimated fair values less the costs to sell.
Prior to recognition of the impairment losses, the carrying value of these
assets totaled approximately $18,950,000. Excluding the impairment losses,
results of operations for fiscal year 1997 for these assets were not material.
Management expects to sell or dispose of these assets within the next year.
NOTE 8 - SUBSIDIARIES' STOCKS
At March 31, 1997 and 1996, 13,000,000 shares of Delaware Company Preferred
Stock, with a par value of $1 per share, were authorized. Of the authorized
shares, 2,818,780 shares of Series A Preferred Stock, and 2,652,660 and
2,726,860 shares of Series B Preferred Stock, respectively, were outstanding (in
each case, exclusive of shares owned by the Delaware Company) at March 31, 1997
and 1996. The outstanding shares are entitled to $31.25 per share in
liquidation. Preferred dividends of $13,243,000, $13,539,000, and $14,142,000
are classified as minority interest in Other Income (Expense) in fiscal years
1997, 1996 and 1995, respectively. Both series of Preferred Stock are entitled
to general voting rights of one-half vote for each share. The Board of
Directors of the Delaware Company may authorize additional series of Preferred
Stock, and may set terms of each new series except that the Delaware Company
cannot create any series of stock senior to the existing Series A and Series B
Preferred Stock without the consent of the holders of at least 50% of the shares
of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one
share of McDermott International's Common Stock plus $0.10 cash. Series A and
Series B Preferred Stock are redeemable at the option of the Delaware Company at
$31.25 per share plus accrued dividends. On March 31, 1997 and each subsequent
year through March 31, 2008, the Delaware Company is obligated to redeem, at a
redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A
Preferred Stock. On March 31 of fiscal years 1998 through 2006, and March 31 of
fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 252,702
and 189,526 shares, respectively, of Series B Preferred Stock. For each of the
five fiscal years subsequent to March 31, 1997, the obligation to redeem the
Series A and Series B Preferred Stock is $17,706,000. The Delaware Company may
apply to the mandatory sinking fund obligations any share of Series A or Series
B Preferred Stock reacquired, redeemed or surrendered for conversion which have
not been previously credited against the mandatory sinking fund obligations.
The Delaware Company applied 313,878 shares of Series A Preferred Stock and
252,702 shares of Series B Preferred Stock that it owned to satisfy the March
31, 1997 mandatory sinking fund obligations and 711 shares of Series B Preferred
Stock that it owned to satisfy a portion of the March 31, 1998 mandatory sinking
fund obligations. During fiscal years 1997 and 1996, 74,200 and 190,376
shares, respectively, of Series B Preferred Stock were purchased on the open
market. At March 31, 1997, 49,637 shares of Series A Preferred Stock have been
converted to date and the Delaware Company owned 633,871 shares of Series A
Preferred Stock.
At March 31, 1997, JRM had outstanding 3,200,000 shares of Series A $2.25
Cumulative Convertible Preferred Stock ("JRM Series A Preferred Stock" -
aggregate liquidation preference of $160,000,000), all of which were owned by
McDermott International. Each
59
<PAGE>
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, 1997, 15,172,402 shares of JRM Common Stock were reserved for
issuance in connection with the conversion of JRM Series A Preferred Stock, and
the exercise of stock options, awards of restricted stock under JRM's stock
incentive plans and contributions to the Thrift Plan. At March 31, 1997,
1,038,551 options were outstanding at an average exercise price of $17.31 per
share (490,066 options exercisable at an average price of $13.15 per share).
NOTE 9 - CAPITAL STOCK
The Panamanian regulations relating to acquisitions of securities of companies
registered with the National Securities Commission, such as McDermott
International, require, among other matters, that detailed disclosure concerning
the offeror, which is subject to review by either the Panamanian National
Securities Commission or the Board of Directors of the subject company, 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. Transfers
of securities in violation of these regulations are invalid and cannot be
registered for transfer.
At March 31, 1997 and 1996, 92,480,868 and 85,880,211 shares of McDermott
International Common Stock, respectively, were reserved for issuance in
connection with the conversion and redemption of the Delaware Company's Series A
Preferred Stock, the conversion of McDermott International's Series C Preferred
Stock, the exercise of McDermott International Rights, the 1996 Officer Stock
Program (and its predecessor programs), the 1992 Director Stock Program, the
1992 Senior Management Stock Program and contributions to the Thrift Plan.
McDermott International Preferred Stock - The Series C Cumulative Convertible
Preferred Stock shares are non-voting and have a liquidation preference of
$50.00 per share, plus an amount equal to accrued and unpaid dividends.
Dividends on Series C shares are cumulative at the annual rate of 5.75% per
share on the liquidation preference, equal to $2.875 per annum. McDermott
International may not redeem Series C shares prior to July 1, 1997. On or after
July 1, 1997, the Series C shares are redeemable, in whole or in part, at the
option of McDermott International, either in cash, shares of McDermott
International Common Stock, or a combination thereof. Holders of Series C
shares may convert them, in whole or in part, at any time, into McDermott
International Common Stock at a conversion price of $35.25 per share of Common
Stock (equivalent to a conversion rate of 1.4184 shares of Common Stock for each
share of Series C Preferred Stock), subject to adjustment.
At March 31, 1997 and 1996, 100,000 shares of non-voting Series A Participating
Preferred Stock (the "Participating Preferred Stock") and 50,000 and 60,000
shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred
Stock"), respectively, were issued and owned by the Delaware Company. The Non-
Voting Preferred Stock is currently callable by McDermott International at $275
per share and 10,000 shares are to be redeemed each year by McDermott
International at $250 per share. The annual per share dividend rates for the
Participating Preferred Stock and the Non-Voting Preferred Stock are $10 (but no
more than ten times the amount of the per share dividend on McDermott
60
<PAGE>
International Common Stock) and $20, respectively, payable quarterly, and
dividends on such shares are cumulative to the extent not paid. In addition,
shares of Participating Preferred Stock are entitled to receive additional
dividends whenever dividends in excess of $3.00 per share on McDermott
International Common Stock are declared (or deemed to have been declared) in any
fiscal year.
The issuance of additional McDermott International 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 McDermott International without stockholder approval,
except 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 McDermott International
Common Stock as to dividends and upon liquidation.
McDermott International Rights - On December 30, 1995, the then existing
Stockholder Rights Plan expired and was replaced by a new Stockholder Rights
Plan. Under the new Plan, on January 2, 1996, each holder of Common Stock
received a dividend distribution of one Right for each outstanding share of
Common Stock. The Rights currently trade with the Common Stock and at March 31,
1997 and 1996, McDermott International had outstanding Rights to purchase
55,036,956 and 54,535,823 shares (including Rights to purchase 100,000 shares
held by the Delaware Company at March 31, 1997 and 1996), respectively, of its
Common Stock at a price of $50 per share subject to anti-dilution adjustments.
The Rights will become exercisable and will detach from the Common Stock 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 30 percent or
more of the outstanding Common Stock. If thereafter the acquiring person or
group engages in certain self-dealing transactions, holders of Rights may
purchase at the exercise price that number of shares of Common Stock having a
market value equal to twice the exercise price. In the event McDermott
International 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 at the exercise price 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 McDermott International and expire on January 2, 2006.
NOTE 10 - STOCK PLANS
A total of 2,069,382 shares of Common Stock (including approved shares that were
not awarded under predecessor plans) are available for grants to officers and
key employees of options, and rights to purchase shares, under the 1996 Officer
Long-Term Incentive Plan at March 31, 1997. Options to purchase shares are
granted at not less than 100% of the fair market value at 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. The Plan permits the grant of
Nonqualified Stock Options, Incentive Stock Options and Restricted Stock.
Pursuant to the program, eligible employees may be granted rights to purchase
shares of Common Stock at par value ($1.00 per share) subject to restrictions on
transfer which lapse at such times and circumstances as specified when granted.
As of March 31, 1997,
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<PAGE>
800,020 shares of Common Stock available for award may be granted as rights.
Through March 31, 1997, a total of 1,121,940 rights (including 171,290 rights
granted in fiscal year 1997 with a weighted average fair value of $19.92 per
right) have been granted to purchase shares under the 1996 Officer Long-Term
Incentive Plan (and its predecessor plans).
A total of 2,825 shares of Common Stock are available for grants of options, and
rights to purchase shares, to non-employee directors under the 1992 Director
Stock Program at March 31, 1997. 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)
subject to restrictions on transfer, which lapse at the end of such term.
Through March 31, 1997, a total of 15,875 rights have been granted to purchase
shares under the 1992 Director Stock Plan.
Under the 1992 Senior Management Stock Option 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 ten years after the date of grant.
In the event of a change in control of International, all three programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of options outstanding.
International has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations
in accounting for its employee stock options, and not the fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation."
Proforma results assuming application of the fair value method of SFAS No. 123
to International's stock-based awards (including JRM stock plans - See Note 8)
would not be materially different from those reported.
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The following table summarizes activity for McDermott International's stock
option plans (share data in thousands):
1997 1996 1995
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- --------------------------------------------------------------------------------
Outstanding, April 1 4,449 $22.72 3,934 $23.23 3,334 $22.60
Granted 909 $21.64 706 $19.35 813 $25.34
Exercised (23) $17.27 (76) $18.75 (147) $20.20
Cancelled/forfeited (75) $23.06 (115) $22.32 (66) $24.04
- ------------------------------------------------------------------------------
Outstanding, March 31 5,260 $22.55 4,449 $22.72 3,934 $23.23
==============================================================================
Exercisable, March 31 3,430 $22.88 2,925 $22.88 2,654 $22.26
==============================================================================
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, 1997 (share data in
thousands):
Options Outstanding
- ------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted-
Range of Contractual Average
Exercise Prices Outstanding Life Exercise Price
- --------------------------------------------------------------------------------
$16.06 - $18.19 325 1.9 $ 16.64
$19.31 - $24.00 2,807 7.5 $ 21.22
$24.13 - $25.50 1,887 6.3 $ 24.83
$26.50 - $31.50 241 0.9 $ 28.33
-----
$16.06 - $31.50 5,260 6.4 $ 22.55
=====
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<PAGE>
Options Exercisable
- --------------------------------------------------------------------------------
Weighted
Range of Average
Exercise Prices Exercisable Exercise Price
- --------------------------------------------------------------------------------
$16.06 - $18.19 325 $16.64
$19.31 - $24.00 1,429 $21.57
$24.13 - $25.50 1,435 $24.69
$26.50 - $31.50 241 $28.33
-----
$16.06 - $31.50 3,430 $22.88
=====
Thrift Plan - On November 12, 1991 and June 5, 1995, respectively, a maximum of
5,000,000 of the authorized and unissued shares of the Common Stock of each
McDermott International and JRM were reserved for issuance as the employer match
for employee contributions to the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated Companies. Such
employer contributions equal 50% of the first 6% of compensation, as defined in
the 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 1997, 1996 and 1995, 306,089, 300,951 and
312,883 shares, respectively, of McDermott International's Common Stock were
issued as employer contributions pursuant to the Plan. During fiscal years 1997
and 1996, 77,112 and 80,356 shares, respectively, of JRM's Common Stock were
issued as employer contributions pursuant to the Plan. At March 31, 1997,
3,316,845 shares of McDermott International's Common Stock and 4,842,532 shares
of JRM Common Stock remained available for issuance.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Investigations - McDermott International and JRM are conducting an internal
investigation, with the assistance of outside counsel, of allegations of
wrongdoing by a limited number of former employees of McDermott International
and JRM and by others. McDermott International and JRM notified the appropriate
authorities of their investigation in April 1997. In June 1997, McDermott
International received a federal grand jury subpoena for documents relating
principally to an investigation of possible anti-competitive activity in the
heavy-lift barge service business of JRM and HeereMac. In July 1997, McDermott
International received an informal request from the Securities and Exchange
Commission for the voluntary production of documents. McDermott International
and JRM are cooperating with the authorities. The allegations which are the
subject of the internal investigation, if true, and the outcome of the grand
jury proceedings, could result in civil and/or criminal liability. At this
time, McDermott International and JRM do not have sufficient information to
predict the ultimate outcome of this matter.
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Litigation - McDermott International and certain of its officers, directors and
subsidiaries are defendants in numerous legal proceedings. Management believes
that the outcome of these proceedings will not have a material adverse effect
upon the consolidated financial position of International.
Products Liability - At March 31, 1997 and 1996, the estimated liability for
pending and future non-employee products liability asbestos claims was
$1,082,782,000 (of which approximately $274,000,000 had been asserted) and
$843,986,000 and estimated insurance recoveries were $903,913,000 and
$723,243,000, respectively. The number of non-employee asbestos claims, which
had declined moderately since fiscal year 1990, increased during the second
half of fiscal year 1995 and the first half of fiscal year 1996, but decreased
the second half of fiscal year 1996. Based on information then currently
available, management believed that the increase represented an acceleration in
the timing of receipt of claims but did not represent an increase in the total
liability. The number of claims, however, increased during the first nine
months of fiscal year 1997 and during that period management was investigating
and evaluating the basis for the increase. As a result of this investigation
and evaluation, in the fourth quarter of fiscal year 1997 International recorded
an additional estimated liability for future non-employee asbestos claims of
$427,001,000, estimated related insurance recoveries of $354,601,000 and a loss
of $72,400,000 for estimated future claims for which recovery from insurers was
not determined to be probable. During fiscal year 1995, International received
notice that provisional liquidators had been appointed to a London-based
products liability asbestos insurer and as a result, a loss of $14,478,000
related to the reduction of estimated insurance recoveries was recognized.
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from International's claims history and constitute
management's best estimate of such future costs. Estimated insurance recoveries
are based upon analysis of insurers providing coverage of the estimated
liabilities. Inherent in the estimate of such liabilities and recoveries are
expected trends in claim severity and frequency and other factors, including
recoverability from insurers, which may vary significantly as claims are filed
and settled. Accordingly, changes in estimates could result in a material
adjustment to operating results for any fiscal quarter or year and the ultimate
loss may differ materially from amounts provided in the consolidated financial
statements.
Environmental Matters - During fiscal year 1995, a decision was made to close
certain nuclear manufacturing facilities, and a provision of $41,724,000 for the
decontamination, decommissioning and closing of these facilities was recognized.
Previously, decontamination and decommissioning costs were being accrued over
the facilities' remaining expected life. Decontamination is proceeding as
permitted by the existing Nuclear Regulatory Commission ("NRC") license. A
decommissioning plan was submitted to the NRC for review and approval during
January 1996. The Babcock & Wilcox Company (B&W) expects to reach an agreement
with the NRC in fiscal year 1998 on a plan that provides for the completion of
facilities dismantlement and soil restoration by 2001. B&W expects to request
approval from the NRC to release the site for unrestricted use at that time.
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<PAGE>
At March 31, 1997 and 1996, International had total environmental reserves
(including provision for the facilities discussed above), of $32,438,000 and
$38,816,000 respectively, of which $11,841,000 and $11,062,000 were included in
current liabilities.
International has been identified as a potentially responsible party at various
cleanup sites under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. International 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, International's share of the ultimate liability for the
various sites is not expected to have a material 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 B&W that it would seek
monetary sanctions, and remedial and monitoring relief, related to B&W's nuclear
manufacturing facilities in Parks Township, Armstrong County, Pennsylvania
("Parks Facilities"). The relief sought related to potential groundwater
contamination related to the previous operations of the facilities. PADEP has
recently advised B&W that it does not intend to assess any monetary sanctions
provided that B&W 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, 1997 are as follows: 1998 -$13,356,000; 1999 - $10,073,000; 2000 -
$7,805,000; 2001 -$6,594,000; 2002 - $4,781,000; and thereafter - $50,034,000.
Total rental expense for fiscal years 1997, 1996 and 1995 was $92,534,000,
$90,434,000, and $109,655,000, respectively. These expense figures include
contingent rentals and are net of sublease income, both of which are not
material.
Other - International 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.
International maintains liability and property insurance that it considers
normal in the industry. However, certain risks are either not insurable or
insurance is available only at rates which McDermott International considers
uneconomical.
Commitments for capital expenditures amounted to approximately $25,333,000 at
March 31, 1997, all of which relates to fiscal year 1998.
International is contingently liable under standby letters of credit totaling
$572,630,000 (including $56,283,000 issued on behalf of unconsolidated joint
ventures) at March 31, 1997, issued in the normal course of business.
International has guaranteed $35,341,000 of loans to and $18,439,000 of standby
letters of credit issued by unconsolidated foreign joint ventures of
International at March 31, 1997. At March 31, 1997, International had pledged
approximately $64,998,000 fair value of government
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<PAGE>
obligations and corporate bonds to secure payments under and in connection with
certain reinsurance agreements.
NOTE 12 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of OPI, two directors and two officers of JRM
entered into noncompetition agreements. As consideration, such directors and
officers received a total of approximately $10,131,000 (including 50,000 shares
of JRM's common stock valued at $1,131,000) during fiscal year 1995. In
addition, one such director (who resigned in April 1996) received $1,500,000 in
fiscal year 1996 and will receive additional payments of $1,500,000 per year
over the next three years.
In fiscal year 1995, JRM entered into an office sublease with an affiliate of a
director (who resigned in April 1996) of JRM which expired March 1997. During
fiscal years 1997 and 1996, the affiliate paid $216,000 and $185,000,
respectively, under the sublease. Under another agreement, JRM paid $576,000 to
the affiliate in each of fiscal years 1997 and 1996 and reimbursed the affiliate
for out-of-pocket expenses for the management and operation of JRM's offshore
producing oil and gas property. Also, during fiscal year 1996, JRM fabricated a
caisson for the affiliate for $84,000. In addition, JRM sold an offshore
jacket and deck to the affiliate for $1,100,000 during fiscal year 1995 and
received approximately $2,000,000 from the affiliate during fiscal year 1996
pursuant to a contract to refurbish, transport and install the jacket and deck.
JRM entered into agreements with an affiliate of another director of JRM
pursuant to which JRM acquired interests in certain offshore oil and gas
property. During fiscal years 1996 and 1995, JRM paid $2,036,000 and
$3,000,000, respectively, to the affiliate under the agreements in connection
with the acquisition of its interests and the development of such 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. Pursuant to the terms of the agreements entered into in connection
with such sale, JRM 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 on production and JRM earned
approximately $1,093,000 and $179,000 in fiscal years 1997 and 1996,
respectively, as a result of this production payment. In addition, JRM owns
140,000 shares of this affiliate and 40,000 units in a limited partnership which
is also an affiliate of this director.
JRM has also entered into agreements with two affiliates of a director of JRM 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 of which $432,000
remained unpaid and is expected to be paid in the ordinary course of business.
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<PAGE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
International's Power Generation Systems and Equipment customers are principally
the electric power generation industry (including government-owned utilities and
independent power producers), the U.S. Government (including its contractors),
and the pulp and paper and other process industries, such as oil refineries and
steel mills. The principal customers of the Marine Construction Services
segment are the offshore oil, natural gas and hydrocarbon processing industries
and other marine construction companies. These concentrations of customers may
impact International'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. However, International's management believes that
the portfolio of receivables is well diversified and that such diversification
minimizes any potential credit risk. Receivables are generally not
collateralized.
International believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure. At March 31, 1997
and 1996, the allowance for possible losses deducted from Accounts receivable-
trade on the balance sheet was $17,225,000 and $14,028,000, respectively.
NOTE 14 - INVESTMENTS
The following is a summary of available-for-sale securities at March 31, 1997:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Debt securities:
U.S. Treasury securities
and obligations of U.S.
government agencies $350,266 $ 30 $3,242 $347,054
Corporate notes and bonds 89,969 96 458 89,607
Other debt securities 141,904 46 220 141,730
- --------------------------------------------------------------------------------
Total debt securities 582,139 172 3,920 578,391
- --------------------------------------------------------------------------------
Equity securities 2,009 - 1,015 994
- --------------------------------------------------------------------------------
Total $584,148 $172 $4,935 $579,385
================================================================================
The amortized cost and estimated fair value amounts of debt securities above
include $92,850,000 in other debt securities which are reported as cash
equivalents.
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<PAGE>
The following is a summary of available-for-sale securities at March 31, 1996:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Debt securities:
U.S. Treasury securities
and obligations of U.S.
government agencies $134,481 $ 148 $1,955 $132,674
Corporate notes and bonds 72,802 781 573 73,010
Other debt securities 48,160 263 31 48,392
- -------------------------------------------------------------------------------
Total debt securities 255,443 1,192 2,559 254,076
- -------------------------------------------------------------------------------
Equity securities 2,009 - 1,272 737
- -------------------------------------------------------------------------------
Total $257,452 $1,192 $3,831 $254,813
===============================================================================
The amortized cost and estimated fair value amounts of debt securities above
include $12,050,000 in other debt securities which are reported as cash
equivalents.
Proceeds, gross realized gains and gross realized losses on sales of available-
for-sale securities were approximately $156,827,000, $290,000 and $96,000,
respectively, for fiscal year 1997, $586,917,000, $1,562,000 and $1,008,000,
respectively, for fiscal year 1996 and $251,565,000, $88,000 and $2,666,000,
respectively, for fiscal year 1995. The amortized cost and estimated fair value
of available-for-sale debt and equity securities at March 31, 1997, by
contractual maturity, are shown below:
Estimated
Amortized Fair
Cost Value
--------- ---------
(In thousands)
Debt securities:
Due in one year or less $256,854 $256,912
Due after one through three years 273,839 271,028
Due after three years 51,446 50,451
- -------------------------------------------------------------------------------
Total debt securities 582,139 578,391
- -------------------------------------------------------------------------------
Equity securities 2,009 994
- -------------------------------------------------------------------------------
Total $584,148 $579,385
===============================================================================
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NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
International operates internationally 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.
International 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,
1997 International had forward exchange contracts to purchase $157,655,000 in
foreign currencies (primarily Canadian Dollars and Pound Sterling), and to sell
$48,803,000 in foreign currencies (primarily Canadian Dollars), at varying
maturities from fiscal year 1998 through 2000. At March 31, 1996, International
had forward exchange contracts to purchase $179,365,000 in foreign currencies
(primarily Canadian Dollars and Pound Sterling), and to sell $133,626,000 in
foreign currencies (primarily Canadian Dollars, Dutch Guilders, Saudi Riyals
and Pound Sterling), at varying maturities from fiscal year 1997 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, 1997 and 1996, International had deferred gains of
$3,405,000 and $4,306,000, respectively, and deferred losses of $409,000 and
$1,081,000, respectively, related to forward exchange contracts which will
principally be recognized in accordance with the percentage of completion method
of accounting.
In management of its net interest costs (expense on debt and income on
investments), International entered into interest rate swap agreements with
certain banks which effectively change the fixed interest rates on certain long-
term notes payable. Net amounts to be paid or received as a result of these
agreements are accrued as adjustments to interest expense over the terms of
these contracts. Interest rate swaps resulted in an increase in interest
expense of $211,000, $96,000 and $1,202,000 in fiscal years 1997, 1996 and 1995,
respectively.
International 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 International 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.
Investment securities: 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.
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Note receivable from an unconsolidated affiliate: It was not practicable to
estimate the fair value of International's 7.75% Note Receivable from the
HeereMac joint venture because there are no quoted market prices and the time of
its settlement cannot yet be determined.
Long and short-term debt: The fair values of debt instruments are based on
quoted market prices or where quoted prices are not available, on the present
value of 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 the Delaware Company 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, 1997 and 1996, International had net forward exchange contracts
outstanding to purchase foreign currencies with notional values of $108,852,000
and $45,739,000 and fair values of $115,205,000 and $51,146,000, 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, 1997 and 1996, International had an interest rate
swap outstanding on current notional principal of $34,800,000 and $55,300,000,
respectively, with a fair value of ($395,000) and ($470,000), respectively,
which represents the estimated amount International would have to pay to
terminate the agreement.
The estimated fair values of International's financial instruments are as
follows:
March 31, 1997 March 31, 1996
----------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In thousands)
Balance Sheet Instruments
Cash and cash equivalents $ 257,783 $ 257,783 $283,663 $283,663
Investment securities 486,535 486,535 242,763 242,763
Debt excluding capital leases 1,105,496 1,139,914 793,622 847,510
Subsidiary's redeemable
preferred stocks 170,983 161,698 173,301 166,362
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NOTE 17 - SEGMENT REPORTING
International operates in two industry segments - Power Generation Systems and
Equipment and Marine Construction Services.
Power Generation Systems and Equipment's principal businesses supply fossil-fuel
and nuclear steam generating equipment to the electric power generation
industry, and nuclear reactor components and nuclear fuel assemblies to the U.
S. Navy.
Marine Construction Services supplies worldwide services for the offshore oil
and gas exploration and production and hydrocarbon processing industries, and to
other marine construction companies, primarily through JRM. 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 onshore
construction and maintenance services.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Identifiable
assets by industry segment are those assets that are used in International's
operations in each segment. Corporate assets are principally cash and cash
equivalents, investments in securities and prepaid pension costs.
In fiscal year 1997, export sales accounted for approximately 14% of
International's total revenues. In fiscal years 1997, 1996 and 1995, the U.S.
Government accounted for approximately 11%, 12% and 12%, respectively, of
International's total revenues. These revenues are principally included in the
Power Generation Systems and Equipment segment.
At March 31, 1997 and 1996 receivables of $4,388,000 and $6,824,000,
respectively, were due from minority shareholders, primarily ETPM S.A.,
participating in International's consolidated joint ventures. In fiscal years
1997, 1996 and 1995 equipment charters and overhead expenses of $3,995,000,
$4,118,000 and $4,938,000, respectively, were charged by ETPM S.A. to the
McDermott-ETPM joint venture.
In fiscal year 1997, a provision for estimated future non-employee products
liability asbestos claims, the write-down of an equity investment and asset
impairment losses, net of gains on asset disposals, resulted in an increase in
Power Generation and Equipment segment operating loss of $80,446,000. Gains on
asset disposals, net of asset impairment losses and write-downs of equity
investments and claims for which recovery is no longer probable, resulted in a
decrease in Marine Construction Services segment operating loss of $4,410,000 in
fiscal year 1997. In fiscal year 1996, the write-off of an insurance claim due
to an unfavorable arbitration ruling resulted in a decrease in Power Generation
Systems and Equipment segment operating income of $12,600,000. The gain
resulting from the sale of International's interest in Caspian Sea oil fields
and a favorable insurance adjustment resulted in an increase in Marine
Construction Services segment operating income of $34,788,000 and $12,000,000,
respectively. The provisions for the closing of certain facilities in fiscal
year 1995 resulted in a decrease in Power Generation Systems and Equipment
segment operating income of $46,489,000.
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Segment Information for the Three Fiscal Years Ended March 31, 1997.
1. Information about International's Operations in Different Industry Segments.
REVENUES /(1)/ 1997 1996 1995
------ ------ ------
(In thousands)
Power Generation Systems and Equipment $1,514,477 $1,708,566 $1,663,235
Marine Construction Services/(2)// (4)/ 1,653,678 1,555,530 1,390,919
Intersegment Transfer Eliminations (17,305) (19,778) (10,474)
- --------------------------------------------------------------------------------
Total Revenues $3,150,850 $3,244,318 $3,043,680
================================================================================
OPERATING INCOME (LOSS)
Segment Operating Income (Loss): /(3)/
Power Generation Systems and Equipment $ (80,985) $ 24,836 $ 13,647
Marine Construction Services/(2)/ /(4)/ (14,706) 51,465 38,405
- --------------------------------------------------------------------------------
Total Segment Operating Income (Loss) (95,691) 76,301 52,052
- --------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems and Equipment 2,007 36,489 8,364
Marine Construction Services (6,105) 11,949 25,488
- --------------------------------------------------------------------------------
Total Equity in Income (Loss) of Investees (4,098) 48,438 33,852
- --------------------------------------------------------------------------------
General Corporate Expenses/(3)/ (47,456) (37,100) (38,928)
- --------------------------------------------------------------------------------
Total Operating Income (Loss) $ (147,245) $ 87,639 $ 46,976
================================================================================
/(1)/ Segment revenues include intersegment transfers as follows:
Power Generation Systems
and Equipment $ 4,051 $ 11,928 $ 9,669
Marine Construction Services 13,254 7,850 805
- --------------------------------------------------------------------------------
Total $ 17,305 $ 19,778 $ 10,474
================================================================================
(2) See Note 2 regarding the acquisition of OPI during fiscal year 1995.
(3) Fiscal years 1996 and 1995 have been restated to conform to the fiscal year
1997 presentation which includes gains and losses on asset disposals and
impairments in Operating Income (Loss). This restatement increased Segment
Operating Income by $17,275,000 and $6,423,000 and General Corporate
Expenses by $3,945,000 and $113,000, in fiscal years 1996 and 1995,
respectively, from amounts previously reported.
(4) In March 1997, this segment's U.S. shipyard facility was sold. Revenues
of $47,987,000, $23,386,000 and $64,354,000 and Operating Losses of
$7,785,000, $2,875,000 and $14,034,000, respectively, in fiscal years 1997,
1996 and 1995, relating to the shipyard facilities are included in this
segment's results.
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1997 1996 1995
------ ------ ------
(In thousands)
CAPITAL EXPENDITURES
Power Generation Systems and Equipment $ 23,817 $ 27,322 $ 45,306
Marine Construction Services/(1)/ 68,672 98,102 224,251
Corporate 703 1,232 1,467
- --------------------------------------------------------------------------------
Total Capital Expenditures $ 93,192 $ 126,656 $ 271,024
================================================================================
DEPRECIATION AND AMORTIZATION
Power Generation Systems and Equipment $ 40,318 $ 41,835 $ 34,828
Marine Construction Services 103,889 93,224 76,563
Corporate 7,374 4,816 4,167
- --------------------------------------------------------------------------------
Total Depreciation and Amortization $ 151,581 $ 139,875 $ 115,558
================================================================================
IDENTIFIABLE ASSETS
Power Generation Systems and Equipment $2,260,146 $ 2,105,880 $2,099,223
Marine Construction Services 1,428,686 1,637,033 1,716,912
Corporate 910,650 644,338 935,535
- --------------------------------------------------------------------------------
Total Identifiable Assets $4,599,482 $ 4,387,251 $4,751,670
================================================================================
(1) Includes property, plant and equipment of $11,198,000 and $173,134,000 of
acquired companies in fiscal years 1996 and 1995, respectively, and
expenditures on an asset held for lease of $1,821,000, $29,620,000 and
$6,711,000 in fiscal years 1997, 1996 and 1995, respectively.
74
<PAGE>
2. Information about McDermott International's Operations in Different
Geographic Areas.
1997 1996 1995
------ ------ ------
(In thousands)
Revenues/(1)/ - United States $1,752,384 $1,488,458 $1,500,037
- Canada 512,713 883,883 739,663
- Europe and
West Africa 439,575 517,190 348,486
- Far East 222,735 206,913 326,523
- Middle East 196,285 143,026 128,860
- Other Foreign 27,158 4,848 111
- -------------------------------------------------------------------------------
Total $3,150,850 $3,244,318 $3,043,680
===============================================================================
Segment Operating
Income (Loss) by
Geographic Area /(2)/ - United States $ (72,075) $ (6,732) $ (44,160)
- Canada (31,173) 18,934 27,440
- Europe and
West Africa 8,669 27,132 27,200
- Far East (6,253) 630 35,181
- Middle East (29,147) 35,899 10,488
- Other Foreign/(3)/ 34,288 438 (4,097)
- -------------------------------------------------------------------------------
Total $ (95,691) $ 76,301 $ 52,052
===============================================================================
Identifiable
Assets - United States $2,588,164 $2,305,069 $2,267,800
- Canada 186,886 344,984 348,200
- Europe and
West Africa 474,538 578,561 736,442
- Far East 230,920 286,678 208,655
- Middle East 153,635 174,737 209,221
- Other Foreign 54,689 52,884 45,817
- Corporate 910,650 644,338 935,535
- -------------------------------------------------------------------------------
Total $4,599,482 $4,387,251 $4,751,670
===============================================================================
/(1)/ Net of inter-geographic area revenues in fiscal years 1997, 1996 and
1995 as follows: United States- $33,524,000, $69,872,000 and
$69,432,000; Canada -$50,033,000, $22,389,000 and $11,538,000; Europe
and West Africa - $5,391,000, $6,036,000 and $13,200,000; Far East -
$738,000, $486,000 and $18,414,000; Middle East -$1,265,000, $15,152,000
and $37,303,000; and Other Foreign -$16,742,000, $13,519,000 and
$26,259,000, respectively.
/(2)/ Fiscal years 1996 and 1995 have been restated to conform to the fiscal
year 1997 presentation which includes gains and losses on asset
disposals and impairments in Operating Income (Loss). This restatement
increased Segment Operating Income by $17,275,000 and $6,423,000,
respectively, in fiscal years 1996 and 1995, from amounts previously
reported.
/(3)/ Includes a gain on the sale of two derrick barges of $30,232,000
in fiscal year 1997.
75
<PAGE>
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1997 and 1996. Operating
income (loss) includes gains and losses on asset disposals and impairments to
conform with the presentation in the Consolidated Statement of Income (Loss).
<TABLE>
<CAPTION>
1997
-----
QUARTER ENDED
------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997
-------- --------- -------- ---------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues $872,809 $800,921 $744,700 $ 732,420
Operating income (loss) 5,329 (17,172) 55,038 (190,440)
Net income (loss) (11,953) (27,800) 23,486 (189,838)
Primary and Fully Diluted
Earnings (Loss) per Share: (0.26) (0.55) 0.39 (3.50)
</TABLE>
Quarterly results have been restated to reflect the discontinuance of the
equity method for International's investment in HeereMac. This restatement
reduced operating income by $7,894,000 and $26,388,000 and increased net loss by
$4,129,000 ($0.08 per share) and $15,370,000 ($0.28 per share) for the quarters
ended June 30 and September 30, respectively, and increased operating income by
$10,052,000 and net income by $6,867,000 ($0.12 per share) for the quarter ended
December 31.
Pre-tax results for the quarter ended September 30, 1996 include an asset
impairment loss of $7,295,000. Pre-tax results for the quarter ended December
31, 1996, include gains on asset disposals of $43,124,000, including realization
of $12,271,000 of the deferred gain on the sale of major marine vessels to
HeereMac, and favorable workers' compensation cost and other insurance
adjustments of $21,441,000. Pre-tax results for the quarter ended March 31, 1997
include gains on asset disposals of $28,997,000, a provision of $72,400,000 for
estimated future non-employee products liability asbestos claims, asset
impairment losses of $47,347,000, write-downs of equity investments totaling
$25,875,000, the write-down of certain claims of $12,506,000 for which recovery
is no longer probable, and a $10,285,000 provision related to employee severance
costs.
76
<PAGE>
<TABLE>
<CAPTION>
1996
-----
QUARTER ENDED
------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1996
-------- --------- -------- ---------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues $816,474 $806,756 $766,538 $854,550
Operating income (loss) 40,450 22,917 36,166 (11,894)
Net income (loss) 8,832 9,054 6,606 (3,867)
Primary and Fully Diluted
Earnings (Loss) per Share: 0.12 0.13 0.08 (0.11)
</TABLE>
Pre-tax results for the quarter ended June 30, 1995 include an equity income
gain of $30,612,000 resulting from the sale of two power purchase contracts.
Pre-tax results for the quarter ended September 30, 1995 include a favorable
insurance adjustment of $12,000,000. Pre-tax results for the quarter ended
December 31, 1995 include favorable worker's compensation cost and other
insurance adjustments of $12,640,000. Pre-tax results for the quarter ended
March 31, 1996 include a gain of $34,788,000 resulting from the sale of
International'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.
77
<PAGE>
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
78
<PAGE>
PART III
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 McDermott International's 1997 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 McDermott International's 1997 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 McDermott
International's Proxy Statement for the 1997 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
79
<PAGE>
PART IV
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
Report of Independent Auditors
Consolidated Balance Sheet
March 31, 1997 and 1996
Consolidated Statement of Income (Loss)
For the Three Fiscal Years Ended March 31, 1997
Consolidated Statement of Stockholders' Equity
For the Three Fiscal Years Ended March 31, 1997
Consolidated Statement of Cash Flows
For the Three Fiscal Years Ended March 31, 1997
Notes to Consolidated Financial Statements
For the Three Fiscal Years Ended March 31, 1997
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required schedules will be filed by amendment to this
Form 10-K on Form 10-K/A.
3. EXHIBITS
Exhibit
Number Description
------ -----------
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).
80
<PAGE>
4.1 Rights Agreement (incorporated by reference to Exhibit
1 to McDermott International Inc.'s registration
statement on Form 8-A, dated December 15, 1995).
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).
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).
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* Retirement Plan for Non-Management Directors of
McDermott International, Inc. (incorporated by
reference to Exhibit 11 to McDermott International,
Inc.'s current report on Form 8-K filed with the
Commission December 10, 1991).
10.7* 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).
10.8* 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).
81
<PAGE>
10.9* 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).
10.10* 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).
11 Statement Re Computation of Per Share Earnings (Loss)
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
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.
82
<PAGE>
FORM 8-K REPORTS
There were no reports on Form 8-K filed during the three months ended March 31,
1997.
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 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
---------------------------
July 10, 1997 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
Roger E. Tetrault Officer)
/s/ Daniel R. Gaubert Senior Vice President and Chief Financial
- ---------------------------- Officer (Principal Financial and Accounting
Daniel R. Gaubert Officer)
/s/ Theodore H. Black * Director
- ----------------------------
Theodore H. Black
/s/ Phillip J. Burguieres * Director
- ----------------------------
Phillip J. Burguieres
/s/ John W. Johnstone, Jr. * Director
- ----------------------------
John W. Johnstone, Jr.
84
<PAGE>
Signature Title
--------- -----
/s/ William McCollam, Jr. * Director
- -----------------------------
William McCollam, Jr.
/s/ John N. Turner * Director
- -----------------------------
John N. Turner
/s/ Richard E. Woolbert * Director
- -----------------------------
Richard E. Woolbert
* Constitutes a majority of the Board of Directors of McDermott International,
Inc.
July 10, 1997
85
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- -----
3.1 McDermott International Inc.'s Articles of Incorporation,
as amended.
3.2 McDermott International Inc.'s amended and restated By-Laws.
4.1 Rights Agreement (incorporated by reference to Exhibit 1
to McDermott International Inc.'s registration statement
on Form 8-A, dated December 15, 1995.
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).
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* Retirement Plan for Non-Management Directors of McDermott
International, Inc. (incorporated by reference to Exhibit 11
to McDermott International, Inc.'s current report on Form 8-K
filed with the Commission December 10, 1991).
10.7* 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).
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- -----
10.8* 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).
10.9* 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).
10.10* 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).
11 Statement Re Computation of Per Share Earnings (Loss)
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
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.
<PAGE>
<TABLE>
EXHIBIT 11
McDERMOTT INTERNATIONAL, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
(In thousands, except shares and per share amounts)
PRIMARY AND FULLY DILUTED
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before cumulative
effect of accounting change $ (206,105) $ 20,625 $ 10,876
Less dividend requirements of preferred stock,
Series C (8,266) (8,266) (8,266)
- ----------------------------------------------------------------------------------------------
Income (loss) applicable to common stock (214,371) 12,359 2,610
Cumulative effect of accounting change - - (1,765)
- ----------------------------------------------------------------------------------------------
Net income (loss) for primary computation $ (214,371) $ 12,359 $ 845
==============================================================================================
Weighted average number of common
shares outstanding during the year 54,706,394 54,223,051 53,645,256
Common stock equivalents of stock
options and stock appreciation
rights based on "treasury stock"
method - 149,033 103,133
- ----------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding
during the year for primary computation 54,706,394 54,372,084 53,748,389
==============================================================================================
Earnings (loss) per common and
common equivalent share: (1)
Income before cumulative effect
of accounting change $ (3.92) $ 0.23 $ 0.05
Accounting change - - (0.03)
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (3.92) $ 0.23 $ 0.02
==============================================================================================
</TABLE>
(1) Earnings (loss) per common and common equivalent share assuming full
dilution are the same for the fiscal years presented.
<PAGE>
EXHIBIT 21
McDERMOTT INTERNATIONAL, INC.
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1997
ORGANIZED PERCENTAGE
UNDER THE OF OWNERSHIP
NAME OF COMPANY LAWS OF INTEREST
McDermott International Investments Co., Inc. Panama 100
J. Ray McDermott, S.A. Panama 61
Hydro Marine Services, Inc. Panama 100
J. Ray McDermott Holdings, Inc. Delaware 100
McDermott Incorporated Delaware 93
Babcock & Wilcox Investment Company Delaware 100
The Babcock & Wilcox Company Delaware 100
Babcock & Wilcox Industries Ltd. Canada 100
The subsidiaries omitted from the foregoing list do not, considered in the
aggregated, constitute a significant subsidiary.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894, No. 33-63832,
No. 33-55341, No. 33-60499 and No. 333-12531) of McDermott International, Inc.
and the Registration Statement (Form S-3 No. 33-54940) of McDermott Incorporated
and in the related Prospectuses of our report dated July 10, 1997 with respect
to the consolidated financial statements of McDermott International, Inc.
included in this Annual Report (Form 10-K) for the year ended March 31, 1997.
ERNST & YOUNG LLP
New Orleans, Louisiana
July 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S MARCH 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 257,783
<SECURITIES> 75,946
<RECEIVABLES> 654,065
<ALLOWANCES> 106,983
<INVENTORY> 392,834
<CURRENT-ASSETS> 1,834,327
<PP&E> 1,764,300
<DEPRECIATION> 1,164,555
<TOTAL-ASSETS> 4,599,482
<CURRENT-LIABILITIES> 1,608,756
<BONDS> 667,174
0
2,875
<COMMON> 54,937
<OTHER-SE> 379,189
<TOTAL-LIABILITY-AND-EQUITY> 4,599,482
<SALES> 3,150,850
<TOTAL-REVENUES> 3,150,850
<CGS> 3,293,471
<TOTAL-COSTS> 3,293,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,100
<INCOME-PRETAX> (220,697)
<INCOME-TAX> (14,592)
<INCOME-CONTINUING> (206,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (206,105)
<EPS-PRIMARY> (3.92)
<EPS-DILUTED> (3.92)
</TABLE>
