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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1998
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 Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
The number of shares outstanding of the Company's Common Stock at July 30, 1998
was 59,199,121.
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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
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PAGE
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
June 30, 1998 and March 31, 1998 4
Condensed Consolidated Statement of Income (Loss)
Three Months Ended June 30, 1998 and 1997 6
Condensed Statement of Comprehensive Income
Three Months Ended June 30, 1998 and 1997 7
Condensed Consolidated Statement of Cash Flows
Three Months Ended June 30, 1998 and 1997 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 31
SIGNATURES 32
- ----------
Exhibit 27 - Financial Data Schedule 34
2
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PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
3
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
6/30/98 3/31/98
-------- --------
(Unaudited)
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 256,275 $ 277,876
Short-term investments in debt securities 68,175 135
Accounts receivable - trade 471,945 550,552
Accounts receivable - unconsolidated affiliates 35,876 52,351
Accounts receivable - other 154,310 139,864
Products liabilities recoverable - current 104,500 143,588
Contracts in progress 226,463 239,548
Inventories 62,600 63,342
Deferred income taxes 87,020 84,036
Other current assets 41,177 45,264
---------- ----------
Total Current Assets 1,508,341 1,596,556
---------- ----------
Property, Plant and Equipment, at Cost 1,503,511 1,715,352
Less accumulated depreciation 1,026,122 1,181,658
---------- ----------
Net Property, Plant and Equipment 477,389 533,694
---------- ----------
Investments in Debt Securities:
Government obligations 560,078 519,443
Other investments 614,716 553,913
---------- ----------
Total Investments in Debt Securities 1,174,794 1,073,356
---------- ----------
Environmental and Products Liabilities Recoverable 585,708 604,870
---------- ----------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $100,331,000 at June 30, 1998
and $107,814,000 at March 31, 1998 116,028 127,077
---------- ----------
Prepaid Pension Costs 132,573 328,583
---------- ----------
Other Assets 240,315 236,994
---------- ----------
TOTAL $4,235,148 $4,501,130
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
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LIABILITIES AND STOCKHOLDERS' EQUITY
6/30/98 3/31/98
-------- --------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current maturities of
long-term debt $ 103,780 $ 156,300
Accounts payable 263,255 301,988
Environmental and products liabilities - current 158,351 181,234
Accrued employee benefits 121,223 146,839
Accrued contract costs 71,098 89,321
Advance billings on contracts 282,797 268,764
Other current liabilities 329,432 316,680
---------- ----------
Total Current Liabilities 1,329,936 1,461,126
---------- ----------
Long-Term Debt 595,404 598,182
---------- ----------
Accumulated Postretirement Benefit Obligation 144,655 393,616
---------- ----------
Environmental and Products Liabilities 709,317 751,620
---------- ----------
Other Liabilities 276,498 271,489
---------- ----------
Contingencies
Minority Interest:
Subsidiary's preferred stocks 155,358 155,358
Other minority interest 219,131 189,966
---------- ----------
Total Minority Interest 374,489 345,324
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares;
outstanding 2,875,000 at March 31, 1998
Series C $2.875 cumulative convertible, par
value $1.00 per share - 2,875
Common stock, par value $1.00 per share, authorized
150,000,000 shares; issued 60,809,543 at
June 30, 1998 and 56,607,861 at March 31, 1998 60,810 56,608
Capital in excess of par value 1,018,218 1,012,338
Deficit (223,385) (341,916)
Treasury stock at cost, 585,614 shares at
June 30, 1998 and 100,614 shares at March 31, 1998 (21,535) (3,575)
Accumulated other comprehensive loss (29,259) (46,557)
---------- ----------
Total Stockholders' Equity 804,849 679,773
---------- ----------
TOTAL $4,235,148 $4,501,130
========== ==========
5
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
JUNE 30, 1998
THREE MONTHS ENDED
6/30/98 6/30/97
-------- --------
(Unaudited)
(In thousands)
Revenues $819,809 $928,087
-------- --------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 679,677 786,852
Depreciation and amortization 26,559 38,323
Selling, general and
administrative expenses 54,510 55,569
-------- --------
760,746 880,744
-------- --------
Gain on Asset Disposals and Impairments - Net 42,447 97,381
-------- --------
Operating Income before Income from Investees 101,510 144,724
Income from Investees 16,903 70
-------- --------
Operating Income 118,413 144,794
-------- --------
Other Income (Expense):
Interest income 32,725 12,496
Interest expense (16,617) (25,205)
Minority interest (37,691) (6,693)
Other - net 41,557 1,646
-------- --------
19,974 (17,756)
-------- --------
Income before Provision for Income Taxes 138,387 127,038
Provision for Income Taxes 16,826 17,178
-------- --------
Net Income $121,561 $109,860
======== ========
Net Income Applicable to Common Stock
(after Preferred Stock Dividends) $121,561 $107,794
======== ========
Earnings per Common Share
Basic $ 2.03 $ 1.97
Diluted $ 1.88 $ 1.79
======== ========
Cash Dividends:
Per Common Share $ 0.05 $ 0.05
Per Preferred Share $ - $ 0.72
======== ========
See accompanying notes to condensed consolidated financial statements.
6
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McDERMOTT INTERNATIONAL, INC.
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
JUNE 30, 1998
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
Net Income $121,561 $109,860
-------- --------
Other Comprehensive Income:
Currency translation adjustments:
Foreign currency translations adjustments 1,408 (6,505)
Sales of investments in foreign entities 15,596 -
Unrealized gains on investments:
Unrealized gains arising during the period,
net of taxes 399 2,495
Reclassification adjustment for (gains) losses
included in net income (105) 22
-------- --------
Other Comprehensive Income (Loss) 17,298 (3,988)
-------- --------
Comprehensive Income $138,859 $105,872
======== ========
See accompanying notes to condensed consolidated financial statements.
7
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McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
JUNE 30, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 121,561 $ 109,860
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 26,559 38,323
Income from investees, less dividends (14,823) 2,700
Gain on asset disposals and impairments - net (42,447) (97,381)
Provision for (benefit from) deferred taxes (16,966) 4,163
Other 3,640 7,089
Changes in assets and liabilities, net of effects
from divestitures:
Accounts receivable 48,754 13,240
Net contracts in progress and advance billings 28,797 24,865
Accounts payable (37,400) 15,461
Accrued and other current liabilities 21,950 49,613
Other, net 1,749 (41,217)
Proceeds from insurance for products liabilities claims 42,330 39,720
Payments of products liabilities claims (63,838) (50,833)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 119,866 115,603
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (16,796) (9,282)
Purchases of investments (325,151) (244,480)
Sales and maturities of investments 154,919 257,602
Proceeds from asset disposals 114,573 121,653
Other (72) (2,706)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (72,527) 122,787
--------- ---------
8
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CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $(40,906) $ (33,402)
Increase (decrease) in short-term borrowing 1,748 (170,994)
Issuance of common stock 2,857 5,317
Issuance of subsidiary's stock 1,051 1,988
Dividends paid (4,885) (4,812)
Purchases of McDermott International, Inc. stock (17,960) -
Acquisition of subsidiary's common stock (10,573) -
Acquisition of subsidiary's preferred stock - (4,314)
Other (126) (984)
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES (68,794) (207,201)
-------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (146) 358
-------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (21,601) 31,547
-------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 277,876 257,783
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $256,275 $ 289,330
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 8,232 $ 15,674
Income taxes (refunds) - net $ 11,480 $ (13,859)
======== =========
See accompanying notes to condensed consolidated financial statements.
9
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McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated ("MI"). Unless the context otherwise requires, hereinafter,
"McDermott" will be used to mean the consolidated enterprise.
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 on the dissolution of a joint venture of
$37,390,000, a gain on the settlement and curtailment of postretirement benefit
plans of $38,900,000, interest income of $12,207,000 on settlement of Internal
Revenue Service exposure items and a gain of $12,000,000 from the sale of assets
of a joint venture during the three months ended June 30, 1998; and a gain of
$96,059,000 from the sale of McDermott'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, 1998 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in MII's annual report on Form 10-K for the fiscal year ended
March 31, 1998.
NOTE 2 - CHANGE IN ACCOUNTING POLICY
Effective April 1, 1998, McDermott adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," to report and display
comprehensive income and its components. Under this new principle, the
accumulated other comprehensive income or loss is displayed in the Condensed
Consolidated Balance Sheet as a component of Stockholders' Equity. Accumulated
balances for each classification in Accumulated other comprehensive loss is
disclosed in Note 5. Comprehensive Income is displayed in a separate Condensed
Statement of Comprehensive Income included in the financial statements.
10
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NOTE 3 - PRODUCTS LIABILITY
At June 30, 1998, the estimated liability for pending and future non-employee
products liability asbestos claims was $822,853,000 (of which approximately
$268,000,000 had been asserted) and estimated insurance recoveries were
$666,408,000. Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from McDermott's claims history
and constitute management's best estimate of such future 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,
including within the next year, should expected declines in the number of claims
not occur, and the ultimate loss may differ materially from amounts provided in
the consolidated financial statements.
NOTE 4 - INVENTORIES
Inventories at June 30 and March 31, 1998 are summarized below:
June 30, March 31,
1998 1998
-------- ---------
(Unaudited)
(In thousands)
Raw Materials and Supplies $46,008 $47,411
Work in Progress 8,155 6,720
Finished Goods 8,437 9,211
------- -------
$62,600 $63,342
======= =======
NOTE 5 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity at June 30 and March 31, 1998 are as follows:
June 30, March 31,
1998 1998
----------- ----------
(Unaudited)
(In thousands)
Currency Translation Adjustments $(25,498) $(42,502)
Net Unrealized Gain on Investments 969 675
Minimum Pension Liability (4,730) (4,730)
-------- --------
$(29,259) $(46,557)
======== ========
11
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NOTE 6 - DISPOSITIONS
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture. Pursuant to the termination, JRM received cash of approximately
$105,000,000, ETPM S.A.'s derrick/lay barge 1601 and minority ownership in
McDermott-ETPM East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received
JRM's lay barge 200 and ownership in McDermott Subsea Constructors Limited and
McDermott-ETPM West, Inc. The Consolidated Statement of Income for the three
months ended June 30, 1997 includes revenues of $26,870,000 and operating income
of $1,726,000 attributable to operations transferred to ETPM S.A.
On May 7, 1998, JRM sold its interest in its brownfield engineering operations
and received net cash of approximately $2,210,000. Management also intends to
exit its greenfield engineering operations. In the three months ended June 30,
1998 and 1997, these operations had revenues of $34,147,000 and $75,964,000,
respectively, and operating income (loss) of ($2,082,000) and $1,301,000,
respectively.
During the three months ended June 30, 1998, JRM's Malaysian joint venture sold
two combination pipelay and derrick barges. The joint venture, in which JRM
holds a 49% interest, received approximately $47,000,000 in cash for the barges.
NOTE 7 - SETTLEMENT AND CURTAILMENT OF POSTRETIREMENT BENEFIT PLANS
Effective April 1, 1998, McDermott terminated all postretirement health care
benefits and substantially all postretirement life insurance benefits for
salaried and non-union hourly employees. As a result of the termination, the
total accumulated postretirement benefit obligation of McDermott decreased
$251,940,000. On the same date, the pension plans for the employees affected by
the termination were amended to increase the benefits payable to the
participants to offset the cost of postretirement health care and life
insurance. As a result of the amendments to the plans, the total projected
benefit obligation of McDermott increased $213,040,000. The decrease in the
accumulated postretirement benefit obligation was measured against the estimated
increase in the total projected benefit obligation of the pension plans and the
resulting gain of $38,900,000 was recognized in the three months ended June 30,
1998.
NOTE 8 - CONVERSION OF PREFERRED STOCK
On April 6, 1998, MII called all of the outstanding shares of its Series C
Cumulative Convertible Preferred Stock for redemption on April 21, 1998. At the
close of business on
12
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the redemption date, all 2,875,000 preferred shares then outstanding were
converted into 4,077,890 common shares.
NOTE 9 - INVESTIGATIONS AND LITIGATION
In March 1997, MII and JRM, with the help of outside counsel, began an
investigation into allegations of wrongdoing by a limited number of former
employees of MII and JRM and others. The allegations concerned the heavy-lift
business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore
Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations,
MII and JRM notified authorities, including the Antitrust Division of the U. S.
Department of Justice and the European Commission. As a result of MII's and
JRM's prompt disclosure of the allegations, both companies and the individuals
who were officers, directors and employees of MII or JRM at the time of the
disclosure were granted immunity from criminal prosecution by the Department of
Justice for any anti-competitive acts involving worldwide heavy-lift activities.
After receiving the allegations, JRM initiated action to terminate its interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture,
Heerema, acquired JRM's interest in exchange for cash and title to several
pieces of equipment. On December 21, 1997, HeereMac and one of its employees
pled guilty to criminal charges by the Department of Justice that they and
others had participated in a conspiracy to rig bids in connection with the
heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East.
Heeremac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
MII and JRM have cooperated and are continuing to cooperate with the Department
of Justice in its investigation. Near the end of calendar 1997, the Department
of Justice requested additional information from the companies relating to
possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM
assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J.
Ray McDermott Middle East, Inc.
13
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MII and JRM are also cooperating with the Securities and Exchange Commission
("SEC"), which also requested information and documents from the companies with
respect to certain of the matters described above. MII and JRM are subject to a
judicial order entered in 1976, with the consent of MI (which at that time was
the parent of the McDermott group of companies), pursuant to an SEC complaint
("Consent Decree"). The Consent Decree prohibits the companies from making
false entries in their books, maintaining secret or unrecorded funds or using
corporate funds for unlawful purposes. Violations of the Consent Decree could
result in substantial civil and/or criminal penalties to the companies.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities filed a complaint in the United
States District Court for the Southern District of Texas against MII, JRM, MI,
McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain
Heerema affiliates, and others. The complaint alleges that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, North Sea and Far East. In addition to seeking
actual damages and attorneys' fees, the plaintiffs have requested punitive as
well as treble damages. Also in June 1998, Shell Offshore, Inc. and certain
related entities filed a complaint in the United States District Court for the
Southern District of Texas against MII, JRM, HeereMac, Heerema and others
alleging that the defendants engaged in anti-competitive acts in violation of
Sections 1 and 2 of the Sherman Act. In addition to seeking actual damages,
among other things, the complaint also requests treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC inquiry, or the companies' internal investigation, the
above referenced lawsuits, or the actions that may be taken by others as a
result of HeereMac's guilty plea or otherwise. However, these matters could
result in civil and/or criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
14
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NOTE 10 - SEGMENT REPORTING
McDermott's reportable segments are Marine Construction Services, Power
Generation Systems and Government Operations. These segments are managed
separately and are unique in technology, services and customer class.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration and production and
hydrocarbon processing industries. Principal activities include the design,
engineering, fabrication and installation of offshore drilling and production
platforms, specialized structures, modular facilities, marine pipelines and
subsea production systems. JRM also provides project management services,
engineering services, subsea trenching services, diving services, procurement
activities, and removal, salvage and refurbishment services of offshore fixed
platforms.
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment provides
aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also provides power through
cogeneration, refuse-fueled power plants and other independent power producing
facilities.
Government Operations supplies nuclear reactor components and nuclear fuel
assemblies to the U. S. Government, manages and operates government owned
facilities, supplies commercial nuclear environmental services and other
government and commercial nuclear services.
Other Operations is comprised of certain small businesses which primarily
includes the engineering and construction activities and plant outage
maintenance of certain Canadian operations and manufacturing of auxiliary
equipment such as air cooled heat exchangers and replacement parts. Other
Operations also includes contract research activities.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses and other unallocated items. Other reconciling items before provision
for income taxes are interest income, interest expense, minority interest and
other-net.
15
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Segment Information for the Three Months ended June 30, 1998 and 1997.
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
REVENUES:
Marine Construction Services $370,552 $478,223
Power Generation Systems 259,129 285,037
Government Operations 100,416 83,522
Other Operations 90,181 86,911
Adjustments and Eliminations /(1)/ (469) (5,606)
-------- --------
Total Revenues $819,809 $928,087
======== ========
/(1)/ Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 1,322 $ 4,015
Power Generation Systems Transfers 437 1,097
Government Operations Transfers 58 1,628
Other Operations Transfers 11 2,686
Adjustments and Eliminations (1,359) (3,820)
------- -------
Total $ 469 $ 5,606
======= =======
16
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THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
OPERATING INCOME:
Segment Operating Income:
Marine Construction Services $ 37,239 $ 27,599
Power Generation Systems 19,487 19,030
Government Operations 5,455 9,935
Other Operations 3,862 1,455
-------- --------
Total Segment Operating Income $ 66,043 $ 58,019
-------- --------
Gain on Asset Disposals and Impairments - Net:
Marine Construction Services $ 45,047 $ 594
Power Generation Systems 124 3
Government Operations 6 -
Other Operations 65 96,476
-------- --------
Total Gain on Asset Disposals and
Impairments - Net $ 45,242 $ 97,073
-------- --------
Income (Loss) from Investees:
Marine Construction Services $ 13,515 $ (4,399)
Power Generation Systems 2,977 1,774
Government Operations 646 580
Other Operations (235) 2,122
-------- --------
Total Income from Investees $ 16,903 $ 77
-------- --------
SEGMENT INCOME:
Marine Construction Services $ 95,801 $ 23,794
Power Generation Systems 22,588 20,807
Government Operations 6,107 10,515
Other Operations 3,692 100,053
-------- --------
Total Segment Income 128,188 155,169
-------- --------
Other Unallocated Items 1,264 (1,065)
General Corporate Expenses - Net (11,039) (9,310)
-------- --------
Total Operating Income $118,413 $144,794
======== ========
17
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NOTE 11 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
For the Three Months Ended June 30,
1998 1997
---- ----
(Unaudited)
(In thousands, except shares
and per share amounts)
Basic:
Net income $ 121,561 $ 109,860
Dividends on preferred stock, Series C - (2,066)
---------- ----------
Net income for basic computation $ 121,561 $ 107,794
========== ==========
Weighted average common shares 59,888,941 54,691,931
---------- ----------
Basic earnings per common share $ 2.03 $ 1.97
========== ==========
Diluted:
Net income $ 121,561 $ 109,860
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock 1,550 1,550
---------- ----------
Net income for diluted computation $ 123,111 $ 111,410
========== ==========
Weighted average common shares (basic) 59,888,941 54,691,931
Effect of dilutive securities:
Stock options and restricted stock 2,063,272 745,396
Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock 2,818,679 2,818,713
Series C $2.875 Cumulative Convertible
Preferred Stock 761,827 4,078,014
---------- ----------
Adjusted weighted average common
shares and assumed conversions 65,532,719 62,334,054
---------- ----------
Diluted earnings per common share $ 1.88 $ 1.79
========== ==========
18
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
McDermott International, Inc. ("MII") is the parent company of the McDermott
group of companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated ("MI"). Unless the context otherwise requires, hereinafter,
"McDermott" will be used to mean the consolidated enterprise.
Revenues of the Marine Construction Services segment are largely a function of
the level of oil and gas development activity in the world's major hydrocarbon
producing regions. Consequently, revenues reflect the variability associated
with the timing of significant development projects. Marine Construction
Services activities are managed and results are evaluated primarily on a
geographic area basis. Marine Construction Services engineering activities,
which include project management services and engineering services, are
primarily managed and evaluated on a worldwide basis. During fiscal year 1998,
U. S. and North Sea markets remained steady while Far East and Middle East
markets started to weaken. Economic and political instability in Indonesia and
political turmoil on the Indian subcontinent will have an adverse effect on
exploration and production spending.
Revenues of the Power Generation Systems segment are largely a function of
capital spending by the electric power generation industry. 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 and
replacement nuclear steam generators to the domestic utility industry continue
at significant levels. In addition, most foreign markets for industrial and
utility boilers remain strong. However, the currency crisis, which began in
Southeast Asia in the summer of 1997, has slowed the number of inquiries and
orders from the level of the previous year. This segment will be adversely
affected by the economic and political instability in Indonesia and political
turmoil on the Indian subcontinent.
Revenues of the Government Operations segment are largely a function of capital
spending by the U. S. Government. Management does not expect this segment to
experience any significant growth because of reductions in the defense budget
over the past several years; however, management expects the segment to remain
relatively constant since it is the sole
19
<PAGE>
source provider of nuclear fuel assemblies and nuclear reactor components to the
U. S. Government.
Revenues of Other Operations are affected by variations in the business cycles
in the customers' industries and the overall economy. Other Operations is also
affected by legislative issues such as environmental regulations and
fluctuations in U. S. Government funding patterns.
A significant portion of McDermott's revenues and operating results are derived
from its foreign operations. As a result, McDermott's operations and financial
results are affected by international factors, such as changes in foreign
currency exchange rates. McDermott attempts to minimize its exposure to changes
in foreign currency exchange rates by attempting to match foreign currency
contract receipts with like foreign currency disbursements. To the extent that
McDermott 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.
Statements made herein which express a belief, expectation or intention, as well
as those which are not historical fact, are forward looking. They involve a
number of risks and uncertainties which may cause actual results to differ
materially from such forward looking statements. These risks and uncertainties
include, but are not limited to: decisions about offshore developments to be
made by oil and gas companies; the deregulation of the U. S. energy market;
governmental regulation and the continued funding of McDermott's contracts with
U. S. governmental agencies; estimates for pending and future non-employee
asbestos claims; the highly competitive nature of McDermott's businesses;
operating risks associated with the marine construction services business;
economic and political instability in Indonesia; political turmoil on the Indian
subcontinent; and the results of the ongoing investigation by MII and JRM and
the U. S. Department of Justice into possible anti-competitive practices by MII
and JRM, and related lawsuits filed in federal court in June 1998.
20
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED
JUNE 30, 1997
Marine Construction Services
- ----------------------------
Revenues decreased $107,671,000 to $370,552,000, primarily due to lower volume
in Europe and West Africa as a result of the withdrawal from the European
engineering markets and from lower volume in all activities in the Middle East
and in worldwide engineering. These decreases were partially offset by higher
volume in offshore and fabrication activities in North America and virtually
all activities in the Far East.
Segment operating income increased $9,640,000 to $37,239,000, primarily due to
higher volume and margins in virtually all activities in the Far East and North
America. These increases were partially offset by lower volume in worldwide
engineering and higher net operating expenses.
Gain on asset disposals and impairments-net increased $44,453,000 to
$45,047,000, primarily due to the gain recognized from the termination of the
McDermott-ETPM joint venture and the sale of three Gulf of Mexico vessels.
Income (loss) from investees increased $17,914,000 from a loss of $4,399,000 to
income of $13,515,000, primarily due to the gain on the sale of assets in a
Malaysian joint venture and losses recorded by McDermott-ETPM West, Inc. in the
prior year.
Power Generations Systems
- -------------------------
Revenues decreased $25,908,000 to $259,129,000, primarily due to lower revenues
from fabrication and erection of fossil fuel steam and environmental control
systems and replacement nuclear steam generators. These decreases were
partially offset by higher revenues from plant enhancement projects, repair and
alteration of existing fossil fuel steam systems and boiler cleaning equipment.
Segment operating income increased $457,000 to $19,487,000, primarily due to
higher volume and margins from plant enhancement projects, repair and
alteration of existing fossil fuel steam systems and boiler cleaning equipment.
These increases were partially offset by lower volume and margins from
fabrication and erection of fossil fuel steam and environmental control systems.
21
<PAGE>
Income from investees increased $1,203,000 to $2,977,000. This represents the
results of approximately seven joint ventures. The increase is primarily due to
the favorable operating results from one domestic joint venture.
Government Operations
- ---------------------
Revenues increased $16,894,000 to $100,416,000, primarily due to higher revenues
from management and operation contracts for U. S. Government owned facilities.
This increase was partially offset by lower revenues from other government
related operations and commercial nuclear environmental services.
Segment operating income decreased $4,480,000 to $5,455,000, primarily due to
lower margins from commercial nuclear environmental services. This decrease
was partially offset by higher margins from nuclear fuel assemblies and reactor
components for the U. S. Government and higher volume from management and
operation contracts for U. S. Government owned facilities.
Other
- -----
Revenues increased $3,270,000 to $90,181,000, primarily due to higher revenues
from engineering activities in Canadian operations and from air cooled heat
exchangers. These were partially offset by lower revenues from plant
maintenance activities in Canadian operations, domestic engineering and
construction activities and the disposition of a non-core business in the prior
year.
Operating income increased $2,407,000 to $3,862,000, primarily due to higher
volume from engineering activities in Canadian operations, higher volume and
margins from air cooled heat exchangers and the disposition of a non-core
business in the prior year. These increases were partially offset by lower
volume and margins from plant maintenance activities in Canadian operations.
Gain on asset disposals and impairments-net decreased $96,411,000 to $65,000,
primarily due to the sale of McDermott's interest in Sakhalin Energy Investment
Company Ltd. in the prior year.
Income (loss) from investees decreased $2,357,000 from income of $2,122,000 to a
loss of $235,000, primarily due to lower operating results from two foreign and
one domestic joint venture and the sale of a domestic joint venture in the prior
year.
22
<PAGE>
Other Income Statement Items
- ----------------------------
Interest income increased $20,229,000 to $32,725,000, primarily due to increases
in investments in government obligations and other debt securities and interest
income on settlement of Internal Revenue Service exposure items.
Interest expense decreased $8,588,000 to $16,617,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense increased $30,998,000 to $37,691,000, primarily due to
minority shareholder participation in the improved operating results of JRM.
Other-net increased $39,911,000 to $41,557,000, primarily due to a net gain on
the settlement and curtailment of postretirement benefit plans. (See Note 7 to
the condensed consolidated financial statements.)
The provision for income taxes decreased $352,000 to $16,826,000, while income
before provision for income taxes increased $11,349,000 to $138,387,000. The
change in the relationship of pretax income to the provision for income taxes
was primarily the result of an increase in the proportion of income earned in
taxable jurisdictions offset by a benefit of $22,679,000 recorded as a result of
the decrease in the valuation allowance for deferred tax assets. McDermott
operates in many different tax jurisdictions. Within these jurisdictions, tax
provisions vary because of nominal rates, allowability of deductions, credits
and other benefits, and tax basis (for example, revenues versus income). These
variances, along with variances in the mix of income within jurisdictions, are
responsible for shifts in the effective tax rate. As a result of these
factors, the provision for income taxes was 12% of the pretax income for the
three months ended June 30, 1998 compared to 14% for the three months ended June
30, 1997.
Backlog
- -------
6/30/98 3/31/98
---------- ----------
(Unaudited)
(In thousands)
Marine Construction Services $1,106,976 $1,267,148
Power Generation Systems 1,148,877 1,124,427
Government Operations 720,005 814,378
Other 312,215 352,066
Eliminations (125,707) (148,789)
---------- ----------
TOTAL BACKLOG $3,162,366 $3,409,230
========== ==========
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<PAGE>
In general, all of McDermott's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
Marine Construction Services' backlog declined in all operating areas as a
result of lower oil prices. In addition, backlog in Europe and West Africa
declined as a result of the withdrawal from the European engineering markets.
Finally, backlog decreased as a result of sluggish economic environments in the
Middle and Far East and the political instability in the Far East. Backlog
relating to contracts to be performed by this segment's joint ventures (not
included above) was $578,000,000 at June 30, 1998 compared to $587,000,000 at
March 31, 1998.
Power Generation Systems' foreign markets have been adversely impacted by
suspensions of power projects in Southeast Asia and Pakistan. The U. S. market
for services and replacement nuclear steam generators are expected to remain
strong and to make significant contributions to operating income into the
foreseeable future. However, the U. S. market for industrial and utility
boilers remains weak. Backlog relating to contracts to be performed by this
segment's unconsolidated joint ventures (not included above) was $115,000,000 at
June 30, 1998 compared to $128,000,000 at March 31, 1998.
At June 30, 1998, Government Operations' backlog with the U. S. Government was
$708,838,000 (of which $44,430,000 had not been funded). This segment's backlog
is not expected to experience any significant growth as a result of reductions
in the defense budget over the past several years. It is expected to remain
relatively constant since The Babcock & Wilcox Company ("B&W") is the sole
source provider of nuclear fuel assemblies and nuclear reactor components for
the U. S. Government.
Liquidity and Capital Resources
- -------------------------------
During the three months ended June 30, 1998, McDermott's cash and cash
equivalents decreased $21,601,000 to $256,275,000 and total debt decreased
$55,298,000 to $699,184,000, primarily due to repayment of $40,906,000 in long-
term debt and the settlement of a note payable of $14,565,000 pursuant to the
dissolution of the ETPM joint venture. During this period, McDermott provided
cash of $119,866,000 from operating activities and received cash proceeds of
$114,573,000 from asset disposals, including $95,546,000 from the sale of its
ETPM joint venture. McDermott used cash of $170,232,000 for net purchases of
investments, $28,533,000 for stock repurchases, $16,796,000 for additions to
property, plant and equipment; and $4,885,000 for dividends on MII's common and
preferred stock.
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<PAGE>
Pursuant to agreements with the majority of its principal insurers, McDermott
negotiates and settles products liability asbestos claims from non-employees and
bills these amounts to the appropriate insurers. As a result of collection
delays inherent in this process and the effect of agreed payment schedules with
specific insurers, reimbursement is usually delayed for three months or more.
The average amount of these claims (historical average of approximately $6,500
per claim over the last three years) has continued to rise. Claims paid during
the three months ended June 30, 1998 were $63,838,000, of which $58,250,000 has
been recovered or is due from insurers. At June 30, 1998, receivables of
$117,600,000 were due from insurers for reimbursement of settled claims,
including $20,988,000 classified as long-term receivables. Estimated
liabilities for pending and future non-employee products liability asbestos
claims are derived from McDermott's claims history and constitute management's
best estimate of such future costs. Settlement of the liability is expected to
occur over approximately the next 15 years. 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, the ultimate loss may differ materially from amounts
provided in the consolidated financial statements. The collection delays, and
the amount of claims paid for which insurance recovery is not probable, have not
had a material adverse effect upon McDermott'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 $7,514,000 to
$16,796,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
At June 30 and March 31, 1998, B&W and certain of its affiliates and
subsidiaries had sold, with limited recourse, an undivided interest in a
designated pool of qualified accounts receivable of approximately $68,179,000
and $82,783,000, respectively, pursuant to a receivables purchase and sale
agreement with, among others, a U. S. Bank. Depending on the amount of
qualified accounts receivable available for the pool, the amount sold can vary
(but not exceed the maximum sales limit of $100,000,000) from time to time. At
June 30 and March 31, 1998, McDermott accounted for sales of accounts
receivables under the agreement as secured borrowings. Effective July 31, 1998,
the receivables purchase and sale agreement was amended and restated to provide
for, among other things, the inclusion of
25
<PAGE>
certain insurance recoverables in the pool of qualified accounts receivable as
well as the attainment of sales treatment as opposed to secured financing
treatment for this arrangement under Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The amended and restated agreement, with a maximum sales limit
available of $100,000,000 expires on July 31, 1999.
At June 30 and March 31, 1998, McDermott had available various uncommitted
short-term lines of credit from banks totaling $111,235,000 and $127,061,000,
respectively. Borrowings against these lines of credit at June 30 and March 31,
1998 were $637,000 and $5,100,000, respectively. At June 30 and March 31, 1998,
B&W was a party to a revolving credit facility under which there were no
borrowings. In July 1998, B&W terminated its existing credit facility and,
jointly and severally with Babcock & Wilcox Investment Company ("BWICO") and BWX
Technologies, Inc., entered into a new $200,000,000 three year, unsecured credit
agreement ("BWICO Credit Agreement") with a group of banks. Borrowings by the
three companies against the BWICO Credit Agreement cannot exceed an aggregate
amount of $50,000,000. The remaining $150,000,000 is reserved for the issuance
of letters of credit. In connection with satisfying a condition to borrowing or
issuing letters of credit under the BWICO Credit Agreement, MI made a
$15,000,000 capital contribution to BWICO in August 1998.
At March 31, 1998, JRM and certain of its subsidiaries were parties to a
revolving credit facility under which there were no borrowings. In June 1998,
JRM and such subsidiaries entered into a new $200,000,000 three year, unsecured
credit agreement ("JRM Credit Agreement") with a group of banks. Borrowings
against the JRM Credit Agreement cannot exceed $50,000,000. The remaining
$150,000,000 is reserved for the issuance of letters of credit. Management does
not anticipate JRM will need to borrow funds under the JRM Credit Agreement
during fiscal year 1999.
MI and JRM are restricted, as a result of covenants in certain credit
agreements, in their ability to transfer funds to MII and certain of its
subsidiaries through cash dividends or through unsecured loans or investments.
At June 30, 1998, substantially all of the net assets of MI are subject to such
restrictions. JRM is restricted, as a result of covenants in its indenture
relating to its $250,000,000 9.375% Senior Subordinated Notes due July 2006,
from paying cash dividends on, or repurchasing or redeeming, its capital stock
(including the shares of its Common Stock and Series A $2.25 Cumulative
Preferred Stock held by MII), or in transferring
26
<PAGE>
funds through unsecured loans to or investments in MII. At June 30, 1998, JRM
could pay cash dividends on, or repurchase shares of, its capital stock
(including shares held by MII) in the amount of $45,175,000, could pay up to an
additional $9,600,000 of cash dividends on its Series A Preferred Stock held by
MII and could make unsecured loans to or investments in MII of approximately
$30,000,000. Additionally under such indenture, JRM is required to offer to
purchase its outstanding 9.375% Senior Subordinated Notes at 100% of their
principal amount, plus accrued and unpaid interest, to the extent that it has
proceeds from certain asset sales and dispositions equal to or exceeding
$25,000,000 that it has not used to permanently reduce certain senior or other
indebtedness or reinvested in its business within a specified time period,
generally 18 months, following each such asset sale or disposition. Currently,
JRM has approximately $237,000,000 in proceeds from such asset sales and
dispositions, which, if not used for repayment of debt or reinvested as
described above, would be subject to this obligation commencing June 1999.
McDermott 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, 1998 was $1,242,969,000. At June 30, 1998, approximately
$63,412,000 fair value of these obligations were pledged to secure a letter of
credit in connection with certain reinsurance agreements.
Working capital increased $42,975,000 from $135,430,000 at March 31, 1998 to
$178,405,000 at June 30, 1998. During the remainder of fiscal year 1999,
McDermott 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 McDermott's liquidity or capital resources.
During fiscal year 1998, MII's Board of Directors approved a limited stock buy-
back program. Under the program, MII can purchase up to two million shares of
its Common Stock from time to time on the open market or through negotiated
transactions, depending on the availability of cash and market conditions.
During the quarter ended June 30, 1998, MII purchased 485,000 shares of its
Common Stock at an average share price of $36.99.
Also during fiscal year 1998, JRM's Board of Directors approved a limited stock
buy back program. Under the program, JRM can purchase up to two million shares
of its Common
27
<PAGE>
Stock from time to time on the open market or through negotiated transactions,
depending on the availability of cash and market conditions. JRM's plan is also
dependent on its ability to satisfy its debt covenants. During the quarter
ended June 30, 1998, JRM purchased 275,200 shares of its Common Stock at an
average share price of $38.38.
At June 30, 1998, MI was restricted under its public debt indentures in its
ability to repurchase or redeem its capital stock, subject to certain
exceptions, including to satisfy the annual mandatory sinking fund obligations
on its Series A $2.20 Cumulative Convertible Preferred Stock and Series B $2.60
Cumulative Preferred Stock and for redemption of its preferred stock provided
that any cash outlay is funded by a capital infusion from MII. During the three
months ended June 30, 1998, MI's public debt indentures were amended to permit
the call for redemption of its preferred stock provided that any cash outlay is
funded by a capital infusion from MII. On July 17, 1998, MI redeemed all
2,152,766 shares of its Series B $2.60 Cumulative Preferred Stock for $31.25,
plus $0.1156 in accrued but unpaid dividends, per share. In connection
therewith, MII made a $68,000,000 capital contribution to MI. Management is
also considering calling for redemption all of MI's outstanding Series A $2.20
Cumulative Convertible Preferred Stock.
MII has provided a valuation allowance for deferred tax assets of $46,378,000
which cannot be realized through carrybacks and future reversals of existing
taxable temporary differences. Management believes that remaining deferred tax
assets are realizable through carrybacks and future reversals of existing
taxable temporary differences, future taxable income and, if necessary, the
implementation of tax planning strategies involving sales of appreciated assets.
Uncertainties that affect the ultimate realization of deferred tax assets are
the risk of incurring losses in the future and the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
These factors have been considered in determining the valuation allowance.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.
Impact of the Year 2000
- -----------------------
The Year 2000 issue is the result of computer systems being written using two
digits rather than four to define the applicable year. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, an inability to process transactions, send invoices, or
engage in similar normal business activities. McDermott has established a Year
2000 risk management program to identify and correct problems associated with
the Year 2000 issue. The scope of McDermott's Year 2000 risk management program
28
<PAGE>
covers internal computer systems and process control systems, embedded systems
in products delivered to customers and the analysis of critical supplier
dependencies.
Based on assessments, McDermott has determined that it will be required to
modify or replace significant portions of its business systems software so that
those systems will function properly with respect to dates in the Year 2000 and
thereafter. McDermott presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. McDermott has
several hardware and operating system software environments. The mainframe
computing environment is provided by a third party. Operating system upgrades,
applicable remediation and application replacement projects are in progress. If
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of McDermott.
McDermott has initiated a program to determine the nature of potential exposure
related to the Year 2000 issue for products it has sold, to develop a
communication program for customers potentially impacted, and to assess process
control systems. McDermott does not expect this exposure to have a material
adverse effect on its results of operations.
McDermott will use both internal and external resources to reprogram, replace,
and test the software for Year 2000 modifications. McDermott's business units
and its Corporate Office are anticipating having all critical systems Year 2000
compliant no later than June 30, 1999, which is prior to any anticipated impact
on their business. The cost of the Year 2000 remediation projects is estimated
at $36,000,000 and is being funded through operating cash flows. Of the total
project cost, $8,000,000 is attributable to the purchase of software which will
be capitalized and the remaining $28,000,000 will be expensed as incurred.
Costs to date include $3,000,000 capital and $8,000,000 expense.
The costs of the project and the dates on which McDermott believes it will
complete its Year 2000 project are based on management's best estimates. These
estimates were derived using numerous assumptions of future events, including
continued availability of resources, third party modification plans, and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel, the ability to identify and
correct all Year 2000 impacted areas, and other similar uncertainties.
29
<PAGE>
New Accounting Standards
- ------------------------
In May 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for fiscal years beginning after December
15,1998. SOP 98-5 provides guidance on accounting for the costs of start-up
activities and requires that entities expense start-up costs and organization
costs as they are incurred. McDermott has not yet finalized its review of
SOP 98-5, but it is not expected to have a material impact on its consolidated
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 will require McDermott to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. McDermott has not yet determined what the effect of
SFAS No. 133 will have on the its consolidated financial position or results of
operations.
30
<PAGE>
PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
-----------------
No information is applicable to Part II for the current quarter, except as noted
below:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K, Item 4, dated July 29, 1998 was filed on
July 30, 1998.
31
<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.
/s/ Daniel R. Gaubert
--------------------------------------------
By: Daniel R. Gaubert
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer and Duly Authorized Representative)
August 7, 1998
32
<PAGE>
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S JUNE 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 256,275
<SECURITIES> 68,175
<RECEIVABLES> 587,015
<ALLOWANCES> 79,194
<INVENTORY> 289,063
<CURRENT-ASSETS> 1,508,341
<PP&E> 1,503,511
<DEPRECIATION> 1,026,122
<TOTAL-ASSETS> 4,235,148
<CURRENT-LIABILITIES> 1,329,936
<BONDS> 595,404
60,810
0
<COMMON> 0
<OTHER-SE> 744,039
<TOTAL-LIABILITY-AND-EQUITY> 4,235,148
<SALES> 819,809
<TOTAL-REVENUES> 819,809
<CGS> 760,746
<TOTAL-COSTS> 760,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,617
<INCOME-PRETAX> 138,387
<INCOME-TAX> 16,826
<INCOME-CONTINUING> 121,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,561
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 1.88
</TABLE>
