<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
For the transition period from ______________to______________
Commission File No. 1-8430
McDERMOTT INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
- --------------------------------------------------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
-------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, par value $1 per share, outstanding as of
July 25, 1997 was 55,530,141.
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M c D E R M O T T I N T E R N A T I O N A L , I N C.
I N D E X - F O R M 1 0 - Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
June 30, 1997 and March 31, 1997 4
Condensed Consolidated Statement of Income (Loss)
Three Months Ended June 30, 1997 and 1996 6
Condensed Consolidated Statement of Cash Flows
Three Months Ended June 30, 1997 and 1996 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURES 24
Exhibit 11 - Calculation of Earnings (Loss) Per
Common and Common Equivalent Share 26
Exhibit 27 - Financial Data Schedule 28
2
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PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
6/30/97 3/31/97
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 289,330 $ 257,783
Short-term investments in debt securities 76,393 75,946
Accounts receivable - trade 552,872 547,082
Accounts receivable - unconsolidated affiliates 56,446 66,074
Accounts receivable - other 175,607 185,138
Insurance recoverable - current 167,872 183,000
Contracts in progress 324,414 326,512
Inventories 65,457 66,322
Deferred income taxes 60,486 60,866
Other current assets 50,557 65,604
- ----------------------------------------------------------------------------------------------------------
Total Current Assets 1,819,434 1,834,327
- ----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost: 1,774,193 1,764,300
Less accumulated depreciation 1,190,500 1,164,555
- ----------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 583,693 599,745
- ----------------------------------------------------------------------------------------------------------
Investments in Debt Securities:
Government obligations 270,886 291,538
Other investments 128,862 118,057
- ----------------------------------------------------------------------------------------------------------
Total Investments 399,748 409,595
- ----------------------------------------------------------------------------------------------------------
Insurance Recoverable 689,914 720,913
- ----------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $166,332,000 at June 30, 1997
and $158,523,000 at March 31, 1997 410,945 423,095
- ----------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 309,287 303,825
- ----------------------------------------------------------------------------------------------------------
Other Assets 314,701 307,982
- ----------------------------------------------------------------------------------------------------------
TOTAL $ 4,527,722 $ 4,599,482
==========================================================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
6/30/97 3/31/97
-------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 288,299 $ 451,857
Accounts payable 282,701 268,274
Environmental and products liabilities - current 199,874 211,841
Accrued employee benefits 102,899 106,498
Advance billings on contracts 242,440 200,163
Other current liabilities 393,004 370,123
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,509,217 1,608,756
- --------------------------------------------------------------------------------------------------------
Long-Term Debt 625,702 667,174
- --------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 400,515 400,445
- --------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 862,565 903,379
- --------------------------------------------------------------------------------------------------------
Other Liabilities 255,377 250,885
- --------------------------------------------------------------------------------------------------------
Contingencies
- --------------------------------------------------------------------------------------------------------
Minority Interest:
Subsidiary's preferred stocks 166,461 170,983
Other minority interest 160,764 160,859
- --------------------------------------------------------------------------------------------------------
Total Minority Interest 327,225 331,842
- --------------------------------------------------------------------------------------------------------
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
55,258,279 at June 30, 1997 and
54,936,956 at March 31, 1997 55,258 54,937
Capital in excess of par value 971,196 962,445
Deficit (433,127) (538,163)
Minimum pension liability (2,148) (2,148)
Net unrealized loss on investments (1,615) (4,132)
Currency translation adjustments (45,318) (38,813)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 547,121 437,001
- --------------------------------------------------------------------------------------------------------
TOTAL $ 4,527,722 $ 4,599,482
========================================================================================================
</TABLE>
5
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
JUNE 30, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/97 6/30/96
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 928,087 $ 872,809
- --------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 786,852 768,415
Depreciation and amortization 38,323 33,855
Selling, general and
administrative expenses 55,569 63,195
- --------------------------------------------------------------------------------------------------------
880,744 865,465
- --------------------------------------------------------------------------------------------------------
Gain on Asset Disposals and Impairments - Net 97,381 1,435
- --------------------------------------------------------------------------------------------------------
Operating Income before Equity in Income of Investees 144,724 8,779
- --------------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees 70 (3,450)
- --------------------------------------------------------------------------------------------------------
Operating Income 144,794 5,329
- --------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 12,496 10,329
Interest expense (25,205) (19,728)
Minority interest (6,693) (6,788)
Other-net 1,646 (2,425)
- --------------------------------------------------------------------------------------------------------
(17,756) (18,612)
Income (Loss) before Provision for Income Taxes 127,038 (13,283)
Provision for (Benefit from) Income Taxes 17,178 (1,330)
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 109,860 $ (11,953)
========================================================================================================
</TABLE>
6
<PAGE>
CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/97 6/30/96
------- -------
(Unaudited)
<S> <C> <C>
Earnings (Loss) per Common and
Common Equivalent Share:
(In thousands, except shares and per share amounts)
Primary
Net income (loss) applicable to common
stock (after preferred stock dividends) $ 107,794 $ (14,019)
==========================================================================================================
Earnings (loss) per common and common
equivalent share $ 1.94 $ (0.26)
==========================================================================================================
Weighted average number of common
and common equivalent shares 55,437,327 54,507,685
==========================================================================================================
Fully Diluted
Net income (loss) applicable to common
stock (after preferred stock dividends) $ 111,410 $ (14,019)
==========================================================================================================
Earnings (loss) per common and common
equivalent share $ 1.77 $ (0.26)
==========================================================================================================
Weighted average number of common
and common equivalent shares 62,994,244 54,507,685
==========================================================================================================
</TABLE>
7
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
JUNE 30, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
THREE MONTHS ENDED
6/30/97 6/30/96
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 109,860 $ (11,953)
- -------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 38,323 33,855
Equity in income or loss of investees,
less dividends 2,700 4,996
Gain on asset disposals and
impairments - net (97,381) (1,435)
Provision for deferred taxes 4,163 8,326
Other 7,089 (326)
Changes in assets and liabilities:
Accounts receivable 13,240 (75,008)
Net contracts in progress and advance billings 24,865 6,325
Accounts payable 15,461 (9,588)
Accrued and other current liabilities 49,613 (79,466)
Other, net (41,217) 7,937
Proceeds from insurance for products liabilities claims 39,720 34,462
Payments of products liabilities claims (50,833) (37,368)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 115,603 (119,243)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,282) (35,508)
Purchases of investments (244,480) (45,278)
Sales and maturities of investments 257,602 48,069
Proceeds from asset disposals 121,653 5,945
Other (2,706) (6,273)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 122,787 (33,045)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/97 6/30/96
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Payment of long-term debt $ (33,402) $ (12,735)
Increase (decrease) in short-term borrowing (170,994) 132,045
Issuance of common stock 5,317 42
Dividends paid (4,812) (15,669)
Repurchase of subsidiary's preferred stock (4,314) -
Other 1,004 (594)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (207,201) 103,089
- ---------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 358 15
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 31,547 (49,184)
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 257,783 238,663
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 289,330 $189,479
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest (net of amount capitalized) $ 15,674 $ 16,832
Income taxes (refunds)- net $ (13,859) $ 3,003
=========================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - BASIS OF PRESENTATION
McDermott International, Inc. is the parent company of the McDermott group of
companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated. Unless the context otherwise requires, hereinafter,
"International" will be used to mean the consolidated enterprise.
The accompanying unaudited condensed consolidated financial statements are
presented in U. S. Dollars, and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Such
adjustments are of a normal, recurring nature except for a gain of $96,059,000
from the sale of International's interest in Sakhalin Energy Investment
Company, Ltd. during the three months ended June 30, 1997. Operating results
for the three months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1998. Results for
the quarter ended June 30, 1996 have been restated to reflect the change in
fiscal year 1997 from the equity to the cost method of accounting for
International's investment in the HeereMac joint venture. For further
information, refer to the consolidated financial statements and footnotes
thereto included in McDermott International, Inc.'s annual report on Form 10-K
for the fiscal year ended March 31, 1997.
NOTE 2 - PRODUCTS LIABILITY
At June 30, 1997, the estimated liability for pending and future non-employee
products liability asbestos claims was $1,031,949,000 (of which less than
$283,000,000 had been asserted) and estimated insurance recoveries were
$857,786,000. Estimated liabilities for
10
<PAGE>
pending and future non-employee products liability asbestos claims are derived
from McDermott International's claims history and constitute management's best
estimate of such future costs. Estimated insurance recoveries are based upon
an analysis of insurers providing coverage of the estimated liabilities.
Inherent in the estimate of such liabilities and recoveries are expected
trends in claim severity and frequency and other factors, including
recoverability from insurers, which may vary significantly as claims are filed
and settled. Accordingly, changes in estimates could result in a material
adjustment to operating results for any fiscal quarter or year and the
ultimate loss may differ materially from amounts provided in the consolidated
financial statements.
NOTE 3 - INVENTORIES
Inventories at June 30, 1997 and March 31, 1997 are summarized below:
June 30, March 31,
1997 1997
----------- ---------
(Unaudited)
(In thousands)
Raw Materials and Supplies $48,805 $50,823
Work in Progress 8,904 8,498
Finished Goods 7,748 7,001
- ------------------------------------------------------
$65,457 $66,322
======================================================
NOTE 4 - 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.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
McDermott International, Inc. is the parent company of the McDermott group of
companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated. Unless the context otherwise requires, hereinafter,
"International" will be used to mean the consolidated enterprise. 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, International enters into forward
exchange contracts to hedge foreign currency transactions, which reduces the
impact of foreign exchange rate movements on operating results.
Management's discussion of revenues and operating income is presented on a
business unit basis as follows: Marine Construction Services (includes the
results of operations of JRM); Power Generation Systems (includes the results
of operations of the Babcock & Wilcox Power Generation Group); Government
Operations (includes the results of operations of the Babcock & Wilcox
Government Group) and Other (includes the results of operations of Engineering
and Construction operations, and Shipbuilding operations, other non-core
business operations and certain adjustments, which are not allocated to the
business units). The results of operations for the three months ended June 30,
1996 have been restated to reflect the reclassification of certain operations
from B&W Operations to Power Generation Systems and Government Groups and
Marine Construction Services business unit to Other to conform with the
presentation at June 30, 1997. Results for the quarter ended June 30, 1996
have been restated to reflect the discontinuance of the equity method for
International's investment in the HeereMac joint venture, and to include gains
and losses on asset disposals and impairments in Operating Income.
12
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 VS. THREE
MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/97 6/30/96
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
REVENUES
Marine Construction Services $ 464,582 $ 389,189
Power Generation Systems 285,037 256,250
Government Operations 83,522 88,907
Other 103,261 149,657
Eliminations (8,315) (11,194)
- -------------------------------------------------------------------------------------------
TOTAL REVENUES $ 928,087 $ 872,809
===========================================================================================
OPERATING INCOME
Business Unit Income (Loss):
Marine Construction Services $ 26,284 $ 21,981
Power Generation Systems 19,030 (4,318)
Government Operations 9,935 5,322
Other 1,712 (6,050)
- -------------------------------------------------------------------------------------------
TOTAL 56,961 16,935
===========================================================================================
Gain on Asset Disposals and Impairments - Net:
Marine Construction Services 594 408
Power Generation Systems 3 260
Government Operations - 80
Other 96,476 578
Corporate 308 109
- -------------------------------------------------------------------------------------------
TOTAL 97,381 1,435
===========================================================================================
Equity in Income (Loss) of Investees:
Marine Construction Services (4,146) (6,596)
Power Generation Systems 1,774 2,516
Government Operations 580 612
Other 1,862 18
- -------------------------------------------------------------------------------------------
TOTAL 70 (3,450)
- -------------------------------------------------------------------------------------------
Corporate G&A Expense (9,618) (9,591)
- -------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 144,794 $ 5,329
===========================================================================================
</TABLE>
13
<PAGE>
Marine Construction Services
----------------------------
Revenues increased $75,393,000 to $464,582,000, primarily due to higher volume
in offshore, fabrication, and procurement activities in the Middle East,
engineering activities in the United States, and procurement and engineering
activities in the North Sea and the Far East. These increases were partially
offset by lower volume in offshore activities in the Far East.
Business unit income increased $4,303,000 to $26,284,000, primarily due to the
higher activities in the Middle East and lower overall administrative
expenses. These increases were partially offset by lower margins in the Far
East and lower margins in engineering and offshore activities in the North
Sea.
Equity in loss of investees decreased $2,450,000 to $4,146,000, primarily due
to improved results from the Brown & Root McDermott Fabricators Limited,
McDermott-ETPM West, Inc. and three Mexican joint ventures.
Power Generations Systems
-------------------------
Revenues increased $28,787,000 to $285,037,000, primarily due to higher
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, replacement nuclear steam generators and replacement parts.
These increases were partially offset by lower revenues from plant enhancement
projects and repair and alteration of existing fossil fuel steam systems.
Business unit income increased $23,348,000 from a loss of $4,318,000 to income
of $19,030,000, primarily due to higher volume and margins from fabrication
and erection of fossil fuel steam systems and environmental control systems
and replacement nuclear steam generators, higher margins from plant
enhancement projects and higher volume from replacement parts. In addition,
there were lower operating, selling, and general and administrative expenses.
Equity in income of investees decreased $742,000 to $1,774,000. This
represents the results of approximately twelve active joint ventures. The
decrease is primarily due to a
14
<PAGE>
favorable termination settlement by a domestic joint venture in the prior year
and lower operating results from two domestic joint ventures. This decrease
was partially offset by favorable operating results from three foreign joint
ventures.
Government Operations
---------------------
Revenues decreased $5,385,000 to $83,522,000, primarily due to lower revenues
from commercial nuclear environmental services and nuclear fuel assemblies and
reactor components for the U.S. Government. These decreases were partially
offset by higher revenues from operation and management contracts of U.S.
Government owned facilities.
Business unit income increased $4,613,000 to $9,935,000, primarily due to
higher margins on nuclear fuel assemblies and reactor components for the U.S.
Government and other related operations and higher revenues from operation and
management contracts with U. S. Government facilities. These increases were
partially offset by lower volume and margins from commercial nuclear
environmental services.
Other
-----
Revenues decreased $46,396,000 to $103,261,000, primarily due to lower
revenues from engineering and construction activities in Canadian operations.
In addition, there were lower revenues as a result of the disposition of non-
core businesses (Shipyard Operations and ERI Operations) in the prior year.
These decreases were partially offset by higher revenues from air cooled heat
exchangers and domestic engineering activities.
Business unit income (loss) increased $7,762,000 from a loss of $6,050,000 to
income of $1,712,000, primarily due to cost overruns on cogeneration contracts
in the prior period. In addition, there was higher volume on air cooled heat
exchangers and domestic engineering and lower general and administrative
expenses. There increases were partially offset by lower results due to the
disposition of non-core businesses in the prior year.
15
<PAGE>
Gain on asset disposals and impairments-net increased $95,898,000 to
$96,476,000 primarily due to the sale of International's interest in Sakhalin
Energy Investment Company Ltd.
Equity in income of investees increased $1,844,000 to $1,862,000, primarily
due to higher operating results from two foreign joint ventures.
Other Income Statement Items
----------------------------
Interest income increased $2,167,000 to $12,496,000, primarily due to
increases in investments in government obligations and other investments in
the current period.
Interest expense increased $5,477,000 to $25,205,000, primarily due to changes
in debt obligations, (which includes an increase of approximately $1,556,000
due to transfers of accounts receivable previously accounted for as sales now
accounted for as secured borrowings), and interest rates prevailing thereon.
Other-net increased $4,071,000 from expense of $2,425,000 to income of
$1,646,000. This increase is primarily due to bank fees and discounts on the
sales of certain accounts receivable in the prior period and foreign currency
transaction gains in the current period compared to foreign currency
transaction losses in the prior period.
The provision for income taxes increased $18,508,000 from a benefit of
$1,330,000 to a provision of $17,178,000, while income before provision for
income taxes increased $140,321,000 from a loss of $13,283,000 to income of
$127,038,000. McDermott 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 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
provision for income taxes was 14% of the pretax income for the three months
ended June 30, 1997 compared to a benefit from income taxes of 10% of pretax
loss for the three months ended June 30, 1996.
16
<PAGE>
<TABLE>
<CAPTION>
Backlog 6/30/97 3/31/97
------- ------- -------
(In thousands)
<S> <C> <C>
Backlog by Business Unit:
Marine Construction Services $ 1,683,318 $ 1,760,226
Power Generation Systems 1,439,509 1,554,125
Government Operations 733,346 797,764
Other 286,345 384,968
Eliminations (204,407) (269,661)
--------------------------------------------------------------------------------------------
TOTAL BACKLOG $ 3,938,111 $ 4,227,422
============================================================================================
</TABLE>
In general, McDermott International's business is capital intensive and relies
on large contracts for a substantial amount of its revenues.
Marine Construction Services' backlog at June 30, 1997 was $1,683,318,000
compared to $1,760,226,000 at March 31, 1997, and backlog relating to
contracts to be performed by unconsolidated joint ventures (not included
above) was $1,971,000,000 at June 30, 1997 compared to $1,439,000,000 at March
31, 1997.
Power Generation Systems' backlog at June 30, 1997 was $1,439,509,000 compared
to $1,554,125,000 at March 31, 1997, and backlog relating to contracts to be
performed by its unconsolidated joint ventures (not included above) was
$205,000,000 at June 30, 1997 compared to $154,000,000 at March 31, 1997.
This business unit's foreign markets for industrial and utility boilers remain
strong and the U. S. market for replacement nuclear steam generators is
expected to make significant contributions to operating income into the
foreseeable future. However, the domestic market for industrial and utility
boilers remains weak.
Government Operations' backlog at June 30, 1997 was $733,346,000 compared to
$797,764,000 at March 31, 1997. At June 30, 1997 this business unit's backlog
with the U.S. Government was $715,968,000 (of which $26,945,000 had not been
funded) and included orders for nuclear fuel assemblies and reactor components
for the U. S. Navy.
17
<PAGE>
Other backlog at June 30, 1997 was $286,345,000 compared to $384,968,000 at
March 31, 1997, and backlog relating to contracts to be performed by
unconsolidated joint ventures (not included above) was $55,000,000 at June 30,
1997 compared to $49,000,000 at March 31, 1997.
Liquidity and Capital Resources
-------------------------------
Unless the context otherwise requires, hereinafter the "Delaware Company"
will be used to mean McDermott Incorporated, a Delaware corporation which is a
subsidiary of International, and the Delaware Company's consolidated
subsidiaries, which include The Babcock & Wilcox Company ("B&W").
During the three months ended June 30, 1997, International's cash and cash
equivalents increased $31,547,000 to $289,330,000 and total debt decreased
$205,030,000 to $914,001,000, primarily due to a reduction in short-term
borrowings of $170,994,000 and repayment of $33,402,000 in long-term debt.
During this period, International provided cash of $115,603,000 from operating
activities and received cash proceeds of $121,653,000 from asset disposals,
including $118,114,000 from the sale of its interest in Sakhalin Energy
Investment Company, Ltd. International used cash of $9,282,000 for additions
to property, plant and equipment; and $4,812,000 for dividends on
International's common and preferred stock.
Pursuant to an agreement with a 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 this 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 during the quarter ended June 30,
1997 were $50,833,000, of which $46,127,000 has been recovered or is due from
insurers. At June 30, 1997, receivables of $86,492,000 were due from
insurers for reimbursement of settled claims. Estimated liabilities for
pending and future non-employee products liability asbestos claims are derived
from International's claims history and constitute management's best estimate
of such future costs. Settlement of the liability is expected to
18
<PAGE>
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 decreased $26,226,000 to
$9,282,000 for the three months ended June 30, 1997, as compared with the same
period last year. The majority of these expenditures were to maintain, replace
and upgrade existing facilities and equipment.
At June 30 and March 31, 1997, B&W had sold, with limited recourse, an
undivided interest in a designated pool of qualified accounts receivable of
approximately $77,569,000 and $93,769,000, respectively, under the terms of an
agreement with a U.S. bank. The maximum sales limit available under the
agreement, which expires October 31, 1997, is $125,000,000. B&W expects to
renew the agreement. 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. International
accounts for these sales as secured borrowings.
At June 30 and March 31, 1997, McDermott International and its subsidiaries,
had available to them various uncommitted short-term lines of credit from
banks totaling $148,785,000 and $179,137,000, respectively. Borrowings
against these lines of credit at June 30 and March 31, 1997 were $48,266,000
and $53,165,000, respectively. At June 30, 1997 there were no borrowings
outstanding under the $150,000,000 unsecured committed revolving credit
facility of B&W (the "B&W Revolver"), while at March 31, 1997, $150,000,000
was outstanding. Effective June 30, 1997, the conditions to
19
<PAGE>
B&W's borrowings under the B&W Revolver were amended to facilitate future
borrowings under this facility.
JRM is party to an unsecured and committed revolving credit facility (the "JRM
Revolver"). There were no borrowings outstanding at June 30 or March 31, 1997
under the JRM Revolver. As a condition to borrowing under the facility, 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. At June
30, 1997, JRM could borrow $14,000,000 under such limits. 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
certain credit agreements, in their ability to transfer funds to International
and its subsidiaries through cash dividends or through unsecured loans or
investments. At June 30, 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-term investments and the long-term
portfolio at June 30, 1997 was $476,141,000. At June 30, 1997, approximately
$105,128,000 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. During the
June quarter, 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 $118,114,000.
On July 15, 1997, JRM called its $70,000,000 12.875% Guaranteed Senior Notes
due 2002 at a premium of $4,480,000.
20
<PAGE>
Working capital increased $84,646,000 from $225,571,000 at March 31, 1997 to
$310,217,000 at June 30, 1997. During the remainder of 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 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.
McDermott International has provided a valuation allowance for deferred tax
assets which cannot be realized through carrybacks and future reversals of
existing taxable temporary differences. Management believes that remaining
deferred tax assets are realizable through carrybacks and future reversals of
existing taxable temporary differences, future taxable income and, if
necessary, the implementation of tax planning strategies involving sales of
appreciated assets. Uncertainties that affect the ultimate realization of
deferred tax assets are the risk of incurring losses in the future and the
possibility of declines in value of appreciated assets involved in identified
tax planning strategies. These factors have been considered in determining the
valuation allowance. Management will continue to assess the adequacy of the
valuation allowance on a quarterly basis.
New Accounting Standards
------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 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. Basic earnings per share under
the new standard would have been $1.96 per share for the quarter ended June
30, 1997. Diluted earnings per share for the quarter ended June 30, 1997 and
basic and diluted earnings per share for the quarter ended June 30, 1996 would
have been the same as primary and fully diluted amounts reported.
21
<PAGE>
PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
------------------
No information is applicable to Part II for the current quarter, except as
noted below:
Item 5. OTHER INFORMATION
Effective July 31, 1997, McDermott International's Stockholders Rights Plan
(the "Plan") was amended to reduce the term thereof by five years. Under the
Plan, which was adopted on December 5, 1995, holders of McDermott
International's Common Stock on January 2, 1996 received a dividend of one
stock purchase right (a "Right") for each share of Common Stock held.
Thereafter, each share of Common Stock issued was also issued with such a
Right. The Rights, which currently trade with the Common Stock, detach and
trade separately from the Common Stock a specified period of time after a
person or a group (an "Acquiring Person") either becomes the beneficial owner
of 15% or more of the outstanding shares of Common Stock , or commences or
announces an intention to commence a tender or exchange offer for 15% or more
of the outstanding shares of Common Stock. If an Acquiring Person becomes the
beneficial owner of 15% or more of the outstanding shares of Common Stock,
then the Rights will also allow each holder thereof (other than an Acquiring
Person) to purchase for $50 (the "Purchase Price") that number of shares of
common Stock having a market value of twice the Purchase Price. If after any
person or group has become an Acquiring Person, McDermott International merges
with, or transfers 50% or more of its assets or earnings to, another entity,
holders of Rights may purchase at the Purchase Price that number of shares of
common stock of the acquiring entity having a market value equal to twice the
Purchase Price. The Rights are redeemable by McDermott International at any
time prior to exercise for $0.01 per Right.
As a result of the amendment, the Plan's term was shortened from January 2,
2006 to January 2, 2001, at which time the Rights will expire, if not earlier
exercised, exchanged or redeemed.
22
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Calculation of Earnings (Loss) Per Common and Common
Equivalent Share
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the three
months ended June 30, 1997.
23
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
-----------------------------
(REGISTRANT)
By: /s/ Daniel R. Gaubert
-----------------------------------------
(SIGNATURE)
Daniel R. Gaubert
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
August 7, 1997
24
<PAGE>
EXHIBIT INDEX
Exhibit Description
11 Calculation of Earnings per Common and Common Equivalent Share
27 Financial Data Schedule
25
<PAGE>
EXHIBIT 11
McDERMOTT INTERNATIONAL, INC.
CALCULATION OF EARNINGS (LOSS)
PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
THREE MONTHS ENDED
6/30/97 6/30/96
-------- --------
(Unaudited)
----------
Primary:
Net income (loss) $109,860 $(11,953)
Less dividend requirement of preferred stock,
Series C (2,066) (2,066)
- ---------------------------------------------------------------------------
Net income (loss) for primary computation $107,794 $(14,019)
===========================================================================
Weighted average number of common shares
outstanding during the period 55,020,060 54,507,685
Common stock equivalents of stock options
and stock appreciation rights based on
"treasury stock" method 417,267 -
- ---------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding during
the period 55,437,327 54,507,685
===========================================================================
Earnings (loss) per common and common
equivalent share $1.94 $(0.26)
===========================================================================
<PAGE>
EXHIBIT 11
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/97 6/30/96
-------- -------
(Unaudited)
<S> <C> <C>
Fully Diluted:
Net income (loss) $ 109,860 $ (11,953)
Less dividend requirement of preferred stock,
Series C - (2,066)
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock
assuming conversion to Common Stock 1,550 -
- -----------------------------------------------------------------------------------------
Net income (loss) for fully diluted computation $ 111,410 $ (14,019)
=========================================================================================
Weighted average number of common shares
outstanding during period 55,020,060 54,507,685
Common stock equivalents of stock options and
stock appreciation rights based on "treasury
stock" method 1,077,457 -
Shares applicable to Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock 2,818,713 -
Shares applicable to Series C $2.875 Cumulative
Convertible Preferred Stock 4,078,014 -
- -----------------------------------------------------------------------------------------
Weighted average number of common and common
equivalent shares outstanding during the period,
assuming full dilution 62,994,244 54,507,685
=========================================================================================
Earnings (loss) per common and common equivalent
share assuming full dilution $ 1.77 $ (0.26)
=========================================================================================
Fully diluted earnings (loss) per share includes only computations which cause
dilution.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S JUNE 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 289,330
<SECURITIES> 76,393
<RECEIVABLES> 652,523
<ALLOWANCES> 99,650
<INVENTORY> 389,871
<CURRENT-ASSETS> 1,819,434
<PP&E> 1,774,193
<DEPRECIATION> 1,190,500
<TOTAL-ASSETS> 4,527,722
<CURRENT-LIABILITIES> 1,509,217
<BONDS> 625,702
0
2,875
<COMMON> 55,258
<OTHER-SE> 488,988
<TOTAL-LIABILITY-AND-EQUITY> 4,527,722
<SALES> 928,087
<TOTAL-REVENUES> 928,087
<CGS> 880,744
<TOTAL-COSTS> 880,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,205
<INCOME-PRETAX> 127,038
<INCOME-TAX> 17,178
<INCOME-CONTINUING> 109,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,860
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.77
</TABLE>
