<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT 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
JANUARY 23, 1998 WAS 56,289,065.
<PAGE>
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
DECEMBER 31, 1997 AND MARCH 31, 1997 4
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 6
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 32
SIGNATURES 33
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 35
2
<PAGE>
PART I
MCDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
---------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
MCDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
12/31/97 3/31/97
-------- -------
(UNAUDITED)
(IN THOUSANDS)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $653,622 $257,783
SHORT-TERM INVESTMENTS IN DEBT SECURITIES 131 75,946
ACCOUNTS RECEIVABLE - TRADE 459,611 547,082
ACCOUNTS RECEIVABLE - UNCONSOLIDATED AFFILIATES 64,837 66,074
ACCOUNTS RECEIVABLE - OTHER 179,257 185,138
INSURANCE RECOVERABLE - CURRENT 159,515 183,000
CONTRACTS IN PROGRESS 275,424 326,512
INVENTORIES 64,682 66,322
DEFERRED INCOME TAXES 75,800 60,866
OTHER CURRENT ASSETS 38,491 65,604
- -------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,971,370 1,834,327
- -------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 1,746,442 1,764,300
LESS ACCUMULATED DEPRECIATION 1,191,007 1,164,555
- -------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 555,435 599,745
- -------------------------------------------------------------------------
INVESTMENTS IN DEBT SECURITIES:
GOVERNMENT OBLIGATIONS 341,591 291,538
OTHER INVESTMENTS 406,264 118,057
- -------------------------------------------------------------------------
TOTAL INVESTMENTS 747,855 409,595
- -------------------------------------------------------------------------
INSURANCE RECOVERABLE 611,780 720,913
- -------------------------------------------------------------------------
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
OF PURCHASED BUSINESSES LESS ACCUMULATED
Amortization of $107,334,000 at December 31, 1997
AND $158,523,000 AT MARCH 31, 1997 129,178 423,095
- -------------------------------------------------------------------------
PREPAID PENSION COSTS 321,726 303,825
- -------------------------------------------------------------------------
OTHER ASSETS 235,086 307,982
- -------------------------------------------------------------------------
TOTAL $4,572,430 $4,599,482
=========================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/97 3/31/97
--------- -------
(UNAUDITED)
(IN THOUSANDS)
CURRENT LIABILITIES:
NOTES PAYABLE AND CURRENT
MATURITIES OF LONG-TERM DEBT $ 161,322 $ 451,857
ACCOUNTS PAYABLE 277,829 268,274
ENVIRONMENTAL AND PRODUCTS LIABILITIES - CURRENT 195,927 211,841
ACCRUED EMPLOYEE BENEFITS 127,690 106,498
ADVANCE BILLINGS ON CONTRACTS 296,724 200,163
OTHER CURRENT LIABILITIES 441,946 370,123
- --------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,501,438 1,608,756
- --------------------------------------------------------------------------
Long-Term Debt 623,152 667,174
- --------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 393,705 400,445
- --------------------------------------------------------------------------
ENVIRONMENTAL AND PRODUCTS LIABILITIES 767,183 903,379
- --------------------------------------------------------------------------
OTHER LIABILITIES 260,563 250,885
- --------------------------------------------------------------------------
CONTINGENCIES
- --------------------------------------------------------------------------
MINORITY INTEREST:
SUBSIDIARY'S PREFERRED STOCKS 166,249 170,983
OTHER MINORITY INTEREST 199,347 160,859
- --------------------------------------------------------------------------
TOTAL MINORITY INTEREST 365,596 331,842
- --------------------------------------------------------------------------
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
56,186,301 AT DECEMBER 31, 1997 AND
54,936,956 AT MARCH 31, 1997 56,186 54,937
CAPITAL IN EXCESS OF PAR VALUE 994,522 962,445
DEFICIT (353,703) (538,163)
MINIMUM PENSION LIABILITY (2,148) (2,148)
NET UNREALIZED LOSS ON INVESTMENTS 508 (4,132)
CURRENCY TRANSLATION ADJUSTMENTS (37,447) (38,813)
- --------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 660,793 437,001
- --------------------------------------------------------------------------
TOTAL $4,572,430 $4,599,482
==========================================================================
5
<PAGE>
MCDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
DECEMBER 31, 1997
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
REVENUES $901,735 $744,700 $2,749,873 $2,418,430
- ------------------------------------------------------------------------------
COSTS AND EXPENSES:
COST OF OPERATIONS (EXCLUDING
DEPRECIATION AND AMORTIZATION) 757,824 639,221 2,316,535 2,122,729
DEPRECIATION AND AMORTIZATION 33,399 37,097 111,100 109,211
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 49,927 59,886 160,154 184,438
- ------------------------------------------------------------------------------
841,150 736,204 2,587,789 2,416,378
- ------------------------------------------------------------------------------
GAIN (LOSS) ON ASSET DISPOSALS
AND IMPAIRMENTS - NET (40,212) 43,125 85,384 43,700
- ------------------------------------------------------------------------------
OPERATING INCOME BEFORE INCOME
(LOSS) FROM INVESTEES 20,373 51,621 247,468 45,752
INCOME (LOSS) FROM INVESTEES 68,993 3,417 75,469 (2,557)
- ------------------------------------------------------------------------------
OPERATING INCOME 89,366 55,038 322,937 43,195
- ------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
INTEREST INCOME 17,512 14,142 42,390 33,993
INTEREST EXPENSE (18,728) (24,514) (63,121) (68,000)
MINORITY INTEREST (23,264) (16,111) (39,658) (18,344)
OTHER-NET 4,167 (307) 5,664 698
- ------------------------------------------------------------------------------
(20,313) (26,790) (54,725) (51,653)
- ------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 69,053 28,248 268,212 (8,458)
PROVISION FOR INCOME TAXES 18,061 4,762 69,199 7,809
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ 50,992 $ 23,486 $199,013 $(16,267)
==============================================================================
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK (AFTER PREFERRED
STOCK DIVIDENDS) $ 48,926 $ 21,420 $192,814 $(22,466)
==============================================================================
6
<PAGE>
CONTINUED
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
(UNAUDITED)
BASIC EARNINGS (LOSS) PER
COMMON SHARE $ 0.87 $ 0.39 $ 3.47 $ (0.41)
==============================================================================
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
ASSUMING DILUTION $ 0.82 $ 0.39 $ 3.21 $ (0.41)
==============================================================================
CASH DIVIDENDS:
PER COMMON SHARE $ 0.05 $ 0.05 $ 0.15 $ 0.55
PER PREFERRED SHARE $ 0.72 $ 0.72 $ 2.16 $ 2.16
==============================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
MCDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/97 12/31/96
-------- --------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 199,013 $ (16,267)
- -----------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 111,100 109,211
EQUITY IN INCOME OR LOSS OF INVESTEES,
LESS DIVIDENDS (5,695) 13,603
GAIN ON ASSET DISPOSALS AND
IMPAIRMENTS - NET (85,384) (43,700)
PROVISION FOR DEFERRED TAXES 1,827 7,480
OTHER 5,200 171
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 83,254 29,417
NET CONTRACTS IN PROGRESS AND ADVANCE BILLINGS 151,924 118,244
ACCOUNTS PAYABLE 9,652 (44,606)
ACCRUED AND OTHER CURRENT LIABILITIES 37,775 (56,533)
OTHER, NET 86,868 14,749
PROCEEDS FROM INSURANCE FOR PRODUCTS LIABILITIES CLAIMS 108,107 91,585
PAYMENTS OF PRODUCTS LIABILITIES CLAIMS (145,298) (137,337)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 558,343 86,017
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (32,939) (77,895)
PURCHASES OF INVESTMENTS (687,360) (369,739)
SALES AND MATURITIES OF INVESTMENTS 431,522 237,630
PROCEEDS FROM ASSET DISPOSALS 450,909 43,083
INVESTMENT IN EQUITY INVESTEES (2,441) (14,564)
RETURNS FROM INVESTEES - 24,500
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 159,691 (156,985)
- ------------------------------------------------------------------------------
8
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/97 12/31/96
-------- --------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
PAYMENT OF LONG-TERM DEBT $(140,266) $ (28,379)
ISSUANCE OF LONG-TERM DEBT - 244,375
DECREASE IN SHORT-TERM BORROWING (192,747) (46,503)
ISSUANCE OF COMMON STOCK 23,620 188
DIVIDENDS PAID (14,490) (47,140)
REPURCHASE OF SUBSIDIARY'S PREFERRED STOCK (4,515) (1,069)
OTHER 5,618 (1,342)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (322,780) 120,130
- ------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 585 3,971
- ------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 395,839 53,133
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 257,783 238,663
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 653,622 $ 291,796
==============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST (NET OF AMOUNT CAPITALIZED) $ 61,082 $ 53,693
INCOME TAXES (REFUNDS)- NET $ (6,806) $ 12,900
==============================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
MCDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - BASIS OF PRESENTATION
MCDERMOTT INTERNATIONAL, INC. ("MCDERMOTT INTERNATIONAL") 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 (I) A GAIN OF $223,651,000 AND A $61,637,000
DISTRIBUTION OF EARNINGS FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE AND
IMPAIRMENT LOSSES OF $275,112,000, INCLUDING $262,901,000 OF GOODWILL ASSOCIATED
WITH JRM'S ACQUISITION OF OFFSHORE PIPELINES, INC. ("OPI"), INCLUDED IN THE
THREE AND NINE MONTHS ENDED DECEMBER 31, 1997; (II) A GAIN OF $33,072,000 FROM
THE SALE OF INTERNATIONAL'S INTEREST IN UNIVERSAL FABRICATORS INCORPORATED AND A
GAIN OF $96,059,000 FROM THE SALE OF INTERNATIONAL'S INTEREST IN SAKHALIN ENERGY
INVESTMENT COMPANY, LTD. INCLUDED IN THE NINE MONTHS ENDED DECEMBER 31, 1997;
(III) FAVORABLE WORKERS' COMPENSATION COST ADJUSTMENTS OF $21,441,000 INCLUDED
IN THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND (IV) AN ASSET
IMPAIRMENT LOSS OF $7,295,000 INCLUDED IN THE NINE MONTHS ENDED DECEMBER 31,
1996. OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1997
ARE NOT NECESSARILY INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR
ENDING MARCH 31, 1998. RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,
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
10
<PAGE>
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 DECEMBER 31, 1997, THE ESTIMATED LIABILITY FOR PENDING AND FUTURE NON-
EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS WAS $937,484,000 (OF WHICH LESS THAN
$276,000,000 HAD BEEN ASSERTED) AND ESTIMATED INSURANCE RECOVERIES WERE
$771,295,000. ESTIMATED LIABILITIES FOR PENDING AND FUTURE NON-EMPLOYEE
PRODUCTS LIABILITY ASBESTOS CLAIMS ARE DERIVED FROM 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 DECEMBER 31, 1997 AND MARCH 31, 1997 ARE SUMMARIZED BELOW:
DECEMBER 31, MARCH 31,
1997 1997
---- ----
(UNAUDITED)
(IN THOUSANDS)
RAW MATERIALS AND SUPPLIES $ 46,932 $ 50,823
WORK IN PROGRESS 10,557 8,498
FINISHED GOODS 7,193 7,001
- --------------------------------------------------------------------
$ 64,682 $ 66,322
====================================================================
NOTE 4 - INVESTIGATIONS
SINCE MARCH 1997, MCDERMOTT INTERNATIONAL AND JRM, WITH THE HELP OF OUTSIDE
COUNSEL, HAVE BEEN INVESTIGATING ALLEGATIONS OF WRONGDOING BY A LIMITED NUMBER
OF FORMER EMPLOYEES
11
<PAGE>
OF MCDERMOTT INTERNATIONAL AND JRM AND BY OTHERS. UPON RECEIVING THESE
ALLEGATIONS, MCDERMOTT INTERNATIONAL AND JRM NOTIFIED AUTHORITIES, INCLUDING THE
ANTITRUST DIVISION OF THE U. S. DEPARTMENT OF JUSTICE ("ANTITRUST DIVISION") AND
THE EUROPEAN COMMISSION.
IN RETURN FOR MCDERMOTT INTERNATIONAL AND JRM'S PROMPT DISCLOSURE OF THE
ALLEGATIONS, THE COMPANIES AND INDIVIDUALS WHO WERE OFFICERS, DIRECTORS AND
EMPLOYEES AT THE TIME OF THE DISCLOSURE WERE GRANTED IMMUNITY FROM CRIMINAL
PROSECUTION BY THE ANTITRUST DIVISION FOR ANY ANTI-COMPETITIVE ACTS INVOLVING
WORLDWIDE HEAVY-LIFT ACTIVITIES.
MCDERMOTT INTERNATIONAL AND JRM HAVE RECEIVED SUBPOENAS IN CONNECTION WITH THE
ANTITRUST DIVISION'S INVESTIGATION. THEY ADDRESS PRINCIPALLY THE HEAVY-LIFT
BUSINESS OF JRM'S FORMER HEEREMAC JOINT VENTURE ("HEEREMAC") AND POSSIBLE ANTI-
COMPETITIVE ACTIVITY IN THE MARINE CONSTRUCTION BUSINESS OF MCDERMOTT-ETPM EAST,
INC., A MIDDLE EAST JOINT VENTURE WITH ETPM S.A., A FRENCH COMPANY. MCDERMOTT
INTERNATIONAL AND JRM ARE ALSO COMPLYING WITH THE SECURITIES AND EXCHANGE
COMMISSION'S ("SEC") REQUEST FOR DOCUMENTS.
AFTER RECEIVING THE ALLEGATIONS IN MARCH 1997, JRM INITIATED ACTION TO TERMINATE
ITS INTEREST IN HEEREMAC, AND ON DECEMBER 19, 1997, JRM'S PARTNER IN THE JOINT
VENTURE, HEEREMA OFFSHORE CONSTRUCTION GROUP, INC., ACQUIRED JRM'S INTEREST IN
EXCHANGE FOR $318,500,000 IN CASH AND TITLE TO SEVERAL PIECES OF EQUIPMENT,
INCLUDING LAUNCH BARGES AND THE DB101, A 3,500-TON CAPACITY SEMI-SUBMERSIBLE
DERRICK BARGE. JRM WILL RECEIVE THE EQUIPMENT IN THE SPRING OF 1998, AFTER IT
COMPLETES CONTRACTS IN PROGRESS.
ON DECEMBER 21, 1997, HEEREMAC AND A HEEREMAC EMPLOYEE PLED GUILTY TO CRIMINAL
CHARGES BY THE DEPARTMENT OF JUSTICE THAT THEY AND OTHERS HAD PARTICIPATED IN A
CONSPIRACY TO RIG BIDS IN CONNECTION WITH THE HEAVY-LIFT BUSINESS OF HEEREMAC IN
THE GULF OF MEXICO, NORTH SEA AND FAR EAST. HEEREMAC WAS FINED $49,000,000 AND
THE EMPLOYEE $100,000. AS PART OF THE PLEA, BOTH HEEREMAC AND CERTAIN EMPLOYEES
OF HEEREMAC ARE OBLIGATED TO COOPERATE FULLY WITH THE ANTITRUST DIVISION'S
INVESTIGATION. NEITHER MCDERMOTT INTERNATIONAL, JRM NOR ANY OF THEIR OFFICERS,
DIRECTORS OR EMPLOYEES WAS A PARTY TO THESE PROCEEDINGS.
IT IS NOT POSSIBLE TO PREDICT THE ULTIMATE OUTCOME OF THE DEPARTMENT OF
JUSTICE'S INVESTIGATION, THE GRAND JURY PROCEEDINGS, THE INQUIRY FROM THE SEC OR
MCDERMOTT INTERNATIONAL AND JRM'S INTERNAL INVESTIGATIONS, OR ACTIONS THAT MAY
BE TAKEN BY OTHERS AS A
12
<PAGE>
RESULT OF HEEREMAC'S GUILTY PLEA. HOWEVER, THESE MATTERS COULD RESULT IN CIVIL
AND/OR CRIMINAL LIABILITY TO THE COMPANIES AND HAVE A MATERIAL EFFECT ON FUTURE
RESULTS OF OPERATIONS.
NOTE 5 - EARNINGS (LOSS) PER SHARE
IN FEBRUARY 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") ISSUED
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 128, "EARNINGS PER
SHARE." SFAS NO. 128 REPLACED THE PREVIOUSLY REPORTED PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE WITH BASIC AND DILUTED EARNINGS PER SHARE. UNLIKE PRIMARY
EARNINGS PER SHARE, BASIC EARNINGS PER SHARE EXCLUDES ANY DILUTIVE EFFECTS OF
OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES. DILUTED EARNINGS PER SHARE IS
VERY SIMILAR TO THE PREVIOUSLY REPORTED FULLY DILUTED EARNINGS PER SHARE. ALL
EARNINGS PER SHARE AMOUNTS HAVE BEEN RESTATED TO CONFORM TO THE NEW
REQUIREMENTS.
THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
BASIC:
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 50,992 $ 23,486 $ 199,013 $ (16,267)
LESS DIVIDEND REQUIREMENT OF
PREFERRED STOCK, SERIES C (2,066) (2,066) (6,199) (6,199)
- -------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR BASIC
COMPUTATION $ 48,926 $ 21,420 $ 192,814 $ (22,466)
===========================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 56,042,595 54,770,679 55,535,077 54,656,052
===========================================================================================
EARNINGS (LOSS) PER COMMON
SHARE $ 0.87 $ 0.39 $ 3.47 $ (0.41)
===========================================================================================
</TABLE>
13
<PAGE>
CONTINUED
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
DILUTED:
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 50,992 $ 23,486 $ 199,013 $ (16,267)
LESS DIVIDEND REQUIREMENT
OF PREFERRED STOCK, SERIES C - (2,066) - (6,199)
DIVIDENDS ON SUBSIDIARY'S
SERIES A $2.20 CUMULATIVE
CONVERTIBLE PREFERRED STOCK
ASSUMING CONVERSION TO
COMMON STOCK 1,550 - 4,650 -
- ------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR
DILUTED COMPUTATION $ 52,542 $ 21,420 $ 203,663 $ (22,466)
==========================================================================================
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING DURING PERIOD 56,042,595 54,770,679 55,535,077 54,656,052
COMMON STOCK EQUIVALENTS
OF STOCK OPTIONS AND STOCK
APPRECIATION RIGHTS BASED
ON "TREASURY STOCK" METHOD 1,455,589 26,619 1,046,162 -
SHARES APPLICABLE TO SUBSIDIARY'S
SERIES A $2.20 CUMULATIVE
CONVERTIBLE PREFERRED STOCK 2,818,679 - 2,818,690 -
SHARES APPLICABLE TO SERIES C
$2.875 CUMULATIVE CONVERTIBLE
PREFERRED STOCK 4,078,014 - 4,078,014 -
- ------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
DURING THE PERIOD, ASSUMING
DILUTION 64,394,877 54,797,298 63,477,943 54,656,052
==========================================================================================
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
ASSUMING DILUTION $ 0.82 $ 0.39 $ 3.21 $ (0.41)
==========================================================================================
</TABLE>
DILUTED EARNINGS (LOSS) PER SHARE INCLUDES ONLY COMPUTATIONS WHICH CAUSE
DILUTION.
14
<PAGE>
NOTE 6 - DISPOSITION OF ASSETS
ON DECEMBER 19, 1997, JRM AND HEEREMA ENTERED INTO A TRANSACTION PURSUANT TO
WHICH THEY TERMINATED THE HEEREMAC JOINT VENTURE (THE "TERMINATION AGREEMENT").
THE HEEREMAC JOINT VENTURE WAS FORMED IN JANUARY 1989 AND UTILIZED THE
SPECIALIZED, HEAVY-LIFT MARINE CONSTRUCTION VESSELS WHICH WERE PREVIOUSLY OWNED
BY THE TWO PARTIES. EACH PARTY HAD A 50% INTEREST IN THE JOINT VENTURE, AND
HEEREMA HAD RESPONSIBILITY FOR ITS DAY-TO-DAY OPERATIONS.
UNDER THE TERMS OF THE TERMINATION AGREEMENT, HEEREMA ACQUIRED AND ASSUMED JRM'S
50% INTEREST IN THE JOINT VENTURE IN EXCHANGE FOR CASH OF $318,500,000 AND TITLE
TO SEVERAL PIECES OF EQUIPMENT. THE EQUIPMENT TRANSFERRED TO JRM INCLUDES TWO
LAUNCH BARGES AND THE DB101, A 3,500-TON LIFT CAPACITY, SEMI-SUBMERSIBLE DERRICK
BARGE. THE EQUIPMENT WILL BE CHARTERED TO HEEREMA UNTIL THE SPRING OF 1998.
THE CONSIDERATION RECEIVED INCLUDED A DISTRIBUTION OF EARNINGS OF THE HEEREMAC
JOINT VENTURE AND PAYMENT OF PRINCIPAL AND INTEREST UNDER A PROMISSORY NOTE
PREVIOUSLY DUE TO JRM (APPROXIMATELY $100,000,000). AS A RESULT OF THE
TERMINATION OF THE HEEREMAC JOINT VENTURE, A GAIN ON ASSET DISPOSAL OF
$223,651,000 AND A DISTRIBUTION OF EARNINGS OF $61,637,000 WERE RECORDED.
NOTE 7 - GOODWILL IMPAIRMENT
DURING THE DECEMBER 1997 QUARTER, MANAGEMENT CONCLUDED THE GOODWILL ASSOCIATED
WITH THE ACQUISITION OF OPI IN 1995 NO LONGER HAD VALUE AND RECORDED A CHARGE
FOR THE REMAINING GOODWILL OF $262,901,000. THE DECISION WAS BASED ON THE LACK
OF VOLUME RELATED TO OPI, THE DEPARTURE OF KEY OPI EXECUTIVES FROM JRM AND THE
DISPOSAL OF SIGNIFICANT OPI JOINT VENTURES AND MAJOR OPI VESSELS. THE CHARGE
WILL REDUCE FUTURE ANNUAL AMORTIZATION BY APPROXIMATELY $21,800,000.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
MCDERMOTT INTERNATIONAL, INC. ("MCDERMOTT INTERNATIONAL") 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 BWX TECHNOLOGIES, INC.,
FORMERLY, 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 AND NINE MONTHS ENDED DECEMBER 31, 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
DECEMBER 31, 1997. RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,
1996 HAVE ALSO BEEN RESTATED TO REFLECT THE DISCONTINUANCE OF THE EQUITY METHOD
OF ACCOUNTING FOR INTERNATIONAL'S INVESTMENT IN THE HEEREMAC JOINT VENTURE.
16
<PAGE>
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 INTERNATIONAL'S
CONTRACTS WITH U. S. GOVERNMENTAL AGENCIES; ESTIMATES FOR PENDING AND FUTURE
NON-EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS; THE HIGHLY COMPETITIVE NATURE
OF MCDERMOTT INTERNATIONAL'S BUSINESSES; OPERATING RISKS ASSOCIATED WITH THE
MARINE CONSTRUCTION SERVICES BUSINESS; AND THE RESULTS OF THE ONGOING
INVESTIGATION BY THE MCDERMOTT INTERNATIONAL AND THE U. S. DEPARTMENT OF JUSTICE
INTO POSSIBLE ANTI-COMPETITIVE PRACTICES BY MCDERMOTT INTERNATIONAL AND ITS
MAJORITY-OWNED SUBSIDIARY, JRM.
17
<PAGE>
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/97 12/31/96 12/31/97 12/31/96
--------- --------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
REVENUES
<S> <C> <C> <C> <C>
MARINE CONSTRUCTION SERVICES $ 452,659 $ 316,899 $1,411,416 $1,074,143
POWER GENERATION SYSTEMS 283,337 237,015 827,396 749,200
GOVERNMENT OPERATIONS 95,355 89,957 259,427 269,190
OTHER 82,877 108,273 282,334 354,373
ELIMINATIONS (12,493) (7,444) (30,700) (28,476)
- -------------------------------------------------------------------------------------------
TOTAL REVENUES $ 901,735 $ 744,700 $2,749,873 $2,418,430
===========================================================================================
OPERATING INCOME (LOSS)
BUSINESS UNIT INCOME (LOSS):
MARINE CONSTRUCTION SERVICES $ 30,690 $ 5,430 $ 96,216 $ 35,176
POWER GENERATION SYSTEMS 27,144 7,032 59,380 2,284
GOVERNMENT OPERATIONS 7,742 10,253 27,526 23,771
OTHER (50) (1,260) 4,934 (24,747)
- -------------------------------------------------------------------------------------------
TOTAL 65,526 21,455 188,056 36,484
===========================================================================================
GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS - NET:
MARINE CONSTRUCTION SERVICES (40,330) 42,128 (40,306) 43,189
POWER GENERATION SYSTEMS 82 308 95 5,191
GOVERNMENT OPERATIONS (6) 53 (4) 141
OTHER 26 637 125,179 (5,387)
CORPORATE 16 (1) 420 566
- -------------------------------------------------------------------------------------------
TOTAL (40,212) 43,125 85,384 43,700
===========================================================================================
INCOME (LOSS) FROM INVESTEES:
MARINE CONSTRUCTION SERVICES 63,845 4,011 61,876 (6,120)
POWER GENERATION SYSTEMS 2,711 (2,052) 6,687 1,234
GOVERNMENT OPERATIONS 2,678 694 3,777 1,681
OTHER (241) 764 3,129 648
- -------------------------------------------------------------------------------------------
TOTAL 68,993 3,417 75,469 (2,557)
===========================================================================================
CORPORATE G&A EXPENSE (4,941) (12,959) (25,972) (34,432)
- -------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 89,366 $ 55,038 $ 322,937 $ 43,195
===========================================================================================
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997 VS. THREE MONTHS
ENDED DECEMBER 31, 1996
MARINE CONSTRUCTION SERVICES
- ----------------------------
REVENUES INCREASED $135,760,000 TO $452,659,000, PRIMARILY DUE TO HIGHER VOLUME
IN VIRTUALLY ALL ACTIVITIES IN THE UNITED STATES, THE MIDDLE EAST AND THE FAR
EAST. THESE INCREASES WERE PARTIALLY OFFSET BY LOWER VOLUME IN OFFSHORE AND
ENGINEERING ACTIVITIES IN EUROPE AND WEST AFRICA AND LOWER ENGINEERING
ACTIVITIES IN THE MIDDLE EAST.
BUSINESS UNIT INCOME INCREASED $25,260,000 TO $30,690,000, PRIMARILY DUE TO
HIGHER VOLUME IN OFFSHORE AND ENGINEERING ACTIVITIES AND HIGHER VOLUME AND
MARGINS IN FABRICATION IN THE UNITED STATES, HIGHER MARGINS IN ENGINEERING IN
EUROPE AND WEST AFRICA AND THE MIDDLE EAST, AND HIGHER VOLUME AND LOWER MARGINS
IN ALL ACTIVITIES IN THE FAR EAST. IN ADDITION, THERE WERE LOWER OVERALL NET
OPERATING EXPENSES IN ALL OF THE GEOGRAPHIC AREAS.
GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $82,458,000 FROM A
GAIN OF $42,128,000 TO A LOSS OF $40,330,000 PRIMARILY DUE TO THE IMPAIRMENT
LOSS OF $262,901,000 RELATING TO GOODWILL ASSOCIATED WITH THE ACQUISITION OF
OFFSHORE PIPELINES, INC. ("OPI"). PRIOR YEAR GAINS FROM THE SALE OF THE DB21,
PARTICIPATION IN A GAIN FROM THE SALE OF THE DB100 BY THE HEEREMAC JOINT VENTURE
AND THE AMORTIZATION OF THE DEFERRED GAIN RESULTING FROM THE SALE OF THE DB101
AND DB102 ALSO CONTRIBUTED TO THE DECREASE. THESE DECREASES WERE PARTIALLY
OFFSET BY THE $223,651,000 GAIN RECOGNIZED FROM THE TERMINATION OF THE HEEREMAC
JOINT VENTURE.
INCOME FROM INVESTEES INCREASED $59,834,000 TO $63,845,000, PRIMARILY DUE TO A
$61,637,000 DISTRIBUTION OF EARNINGS RELATED TO THE TERMINATION OF THE HEEREMAC
JOINT VENTURE.
POWER GENERATIONS SYSTEMS
- -------------------------
REVENUES INCREASED $46,322,000 TO $283,337,000, PRIMARILY DUE TO HIGHER REVENUES
FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND ENVIRONMENTAL CONTROL
SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING EQUIPMENT.
19
<PAGE>
BUSINESS UNIT INCOME INCREASED $20,112,000 TO $27,144,000, PRIMARILY DUE TO
HIGHER VOLUME AND MARGINS FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND
ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER CLEANING
EQUIPMENT. IN ADDITION, THERE WERE HIGHER MARGINS FROM REPLACEMENT NUCLEAR
STEAM GENERATORS AND LOWER SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES.
THESE INCREASES WERE PARTIALLY OFFSET BY HIGHER OPERATING EXPENSES.
INCOME (LOSS) FROM INVESTEES INCREASED $4,763,000 FROM A LOSS OF $2,052,000 TO
INCOME OF $2,711,000. THIS REPRESENTS THE RESULTS OF APPROXIMATELY TWELVE
ACTIVE JOINT VENTURES. THE INCREASE IS PRIMARILY DUE TO THE FAVORABLE OPERATING
RESULTS FROM TWO FOREIGN JOINT VENTURES AND A PROVISION FOR A LOSS ON A CANADIAN
JOINT VENTURE IN THE PRIOR YEAR. THIS INCREASE WAS PARTIALLY OFFSET BY LOWER
OPERATING RESULTS FROM TWO DOMESTIC JOINT VENTURES.
GOVERNMENT OPERATIONS
- ---------------------
REVENUES INCREASED $5,398,000 TO $95,355,000, PRIMARILY DUE TO HIGHER REVENUES
FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED FACILITIES.
THIS INCREASE WAS PARTIALLY OFFSET BY LOWER REVENUES FROM NUCLEAR FUEL
ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT, COMMERCIAL NUCLEAR
ENVIRONMENTAL SERVICES AND OTHER GOVERNMENT RELATED OPERATIONS.
BUSINESS UNIT INCOME DECREASED $2,511,000 TO $7,742,000, PRIMARILY DUE TO LOWER
VOLUME AND MARGINS FROM COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND HIGHER
OPERATING EXPENSES. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER MARGINS
FROM NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT AND
HIGHER VOLUME FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED
FACILITIES.
INCOME FROM INVESTEES INCREASED $1,984,000 TO $2,678,000, PRIMARILY DUE TO THE
FAVORABLE OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE.
OTHER
- -----
REVENUES DECREASED $25,396,000 TO $82,877,000, PRIMARILY DUE TO THE DISPOSITION
OF NON-CORE BUSINESSES (DOMESTIC SHIPYARD AND ORDNANCE OPERATIONS), AND LOWER
REVENUES FROM
20
<PAGE>
ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND MEXICAN
SHIPYARD OPERATIONS. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES
FROM AIR COOLED HEAT EXCHANGERS.
BUSINESS UNIT LOSS DECREASED $1,210,000 TO $50,000, PRIMARILY DUE TO PRIOR YEAR
LOSSES IN NON-CORE BUSINESSES (DOMESTIC SHIPYARD AND ORDNANCE OPERATIONS). IN
ADDITION, THERE WERE HIGHER REVENUES FROM AIR COOLED HEAT EXCHANGERS, HIGHER
MARGINS FROM ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND
LOWER GENERAL AND ADMINISTRATIVE EXPENSES. THESE INCREASES WERE PARTIALLY
OFFSET BY LOWER VOLUME FROM MEXICAN SHIPYARD OPERATIONS AND HIGHER OPERATING
EXPENSES.
CORPORATE GENERAL & ADMINISTRATIVE ("G&A") EXPENSES
- ----------------------------------------------------
CORPORATE G&A EXPENSE DECREASED $8,018,000 TO $4,941,000 PRIMARILY DUE TO STAFF
REDUCTIONS, OTHER ECONOMY MEASURES AND CERTAIN ONE-TIME COSTS INCURRED IN THE
PRIOR PERIOD.
OTHER INCOME STATEMENT ITEMS
- ----------------------------
INTEREST INCOME INCREASED $3,370,000 TO $17,512,000, PRIMARILY DUE TO INCREASES
IN INVESTMENTS IN GOVERNMENT OBLIGATIONS, OTHER INVESTMENTS AND CASH EQUIVALENTS
IN THE CURRENT PERIOD.
INTEREST EXPENSE DECREASED $5,786,000 TO $18,728,000, PRIMARILY DUE TO CHANGES
IN DEBT OBLIGATIONS AND INTEREST RATES PREVAILING THEREON.
MINORITY INTEREST EXPENSE INCREASED $7,153,000 TO $23,264,000, PRIMARILY DUE TO
MINORITY SHAREHOLDER PARTICIPATION IN THE IMPROVED OPERATING RESULTS OF JRM.
OTHER-NET INCREASED $4,474,000 TO INCOME OF $4,167,000 FROM EXPENSE OF $307,000,
PRIMARILY DUE TO HIGHER FOREIGN CURRENCY TRANSACTION GAINS IN THE CURRENT
PERIOD.
THE PROVISION FOR INCOME TAXES INCREASED $13,299,000 TO $18,061,000, WHILE
INCOME BEFORE PROVISION FOR INCOME TAXES INCREASED $40,805,000 TO $69,053,000.
THE INCREASE IN INCOME TAXES IS PRIMARILY DUE TO AN INCREASE IN INCOME. IN
ADDITION, MCDERMOTT INTERNATIONAL OPERATES
21
<PAGE>
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 26% OF THE PRETAX INCOME FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 COMPARED TO A PROVISION FOR INCOME TAXES OF 17% OF
PRETAX INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1996.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1997 VS. NINE MONTHS
ENDED DECEMBER 31, 1996
MARINE CONSTRUCTION SERVICES
- ----------------------------
REVENUES INCREASED $337,273,000 TO $1,411,416,000, PRIMARILY DUE TO HIGHER
VOLUME IN VIRTUALLY ALL ACTIVITIES IN ALL GEOGRAPHIC AREAS, EXCEPT IN OFFSHORE
ACTIVITIES IN THE FAR EAST AND ENGINEERING ACTIVITIES IN THE MIDDLE EAST AND
EUROPE AND WEST AFRICA.
BUSINESS UNIT INCOME INCREASED $61,040,000 TO $96,216,000. VIRTUALLY ALL
ACTIVITIES IN ALL GEOGRAPHIC AREAS, EXCEPT THE FAR EAST, REFLECTED THIS
INCREASE.
GAIN (LOSS) ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $83,495,000 FROM A
GAIN OF $43,189,000 TO A LOSS OF $40,306,000, PRIMARILY DUE TO THE IMPAIRMENT
LOSS OF $262,901,000 RELATING TO GOODWILL ASSOCIATED WITH THE ACQUISITION OF
OPI. PRIOR YEAR GAINS FROM THE SALE OF THE DB21, PARTICIPATION IN A GAIN FROM
THE SALE OF THE DB100 BY THE HEEREMAC JOINT VENTURE AND THE AMORTIZATION OF THE
DEFERRED GAIN RESULTING FROM THE SALE OF THE DB101 AND DB102 ALSO CONTRIBUTED TO
THE DECREASE. THESE DECREASES WERE PARTIALLY OFFSET BY THE $223,651,000 GAIN
RECOGNIZED FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE.
INCOME (LOSS) FROM INVESTEES INCREASED $67,996,000 FROM A LOSS OF $6,120,000 TO
INCOME OF $61,876,000, PRIMARILY DUE TO A $61,637,000 DISTRIBUTION OF EARNINGS
RELATED TO THE TERMINATION OF THE HEEREMAC JOINT VENTURE.
22
<PAGE>
POWER GENERATIONS SYSTEMS
- -------------------------
REVENUES INCREASED $78,196,000 TO $827,396,000, PRIMARILY DUE TO HIGHER REVENUES
FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM AND ENVIRONMENTAL CONTROL
SYSTEMS, BOILER CLEANING EQUIPMENT AND PLANT ENHANCEMENT PROJECTS. THESE
INCREASES WERE PARTIALLY OFFSET BY LOWER REVENUES FROM REPAIR AND ALTERATION OF
EXISTING FOSSIL FUEL STEAM SYSTEMS AND REPLACEMENT NUCLEAR STEAM GENERATORS.
BUSINESS UNIT INCOME INCREASED $57,096,000 TO $59,380,000, PRIMARILY DUE TO
HIGHER VOLUME AND MARGINS FROM FABRICATION AND ERECTION OF FOSSIL FUEL STEAM
SYSTEMS AND ENVIRONMENTAL CONTROL SYSTEMS, PLANT ENHANCEMENT PROJECTS AND BOILER
CLEANING EQUIPMENT. IN ADDITION, THERE WERE HIGHER MARGINS FROM REPLACEMENT
NUCLEAR STEAM GENERATORS AND LOWER SELLING AND GENERAL AND ADMINISTRATIVE
EXPENSES.
GAIN ON ASSET DISPOSALS AND IMPAIRMENTS-NET DECREASED $5,096,000 TO $95,000.
THE PRIOR YEAR INCLUDED A GAIN ON THE SALE OF A DOMESTIC TOOL RENTAL BUSINESS.
INCOME FROM INVESTEES INCREASED $5,453,000 TO $6,687,000. THIS REPRESENTS THE
RESULTS OF APPROXIMATELY TWELVE ACTIVE JOINT VENTURES. THE INCREASE IS
PRIMARILY DUE TO THE FAVORABLE OPERATING RESULTS FROM THREE FOREIGN JOINT
VENTURES AND A PROVISION FOR A LOSS ON A CANADIAN JOINT VENTURE IN THE PRIOR
YEAR. THIS INCREASE WAS PARTIALLY OFFSET BY A FAVORABLE TERMINATION SETTLEMENT
OF A DOMESTIC JOINT VENTURE IN THE PRIOR YEAR AND LOWER OPERATING RESULTS FROM
TWO DOMESTIC JOINT VENTURES.
GOVERNMENT OPERATIONS
- ---------------------
REVENUES DECREASED $9,763,000 TO $259,427,000, PRIMARILY DUE TO LOWER REVENUES
FROM NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S. GOVERNMENT,
COMMERCIAL NUCLEAR ENVIRONMENTAL SERVICES AND OTHER GOVERNMENT RELATED
OPERATIONS. THESE DECREASES WERE PARTIALLY OFFSET BY HIGHER REVENUES FROM
OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED FACILITIES.
BUSINESS UNIT INCOME INCREASED $3,755,000 TO $27,526,000, PRIMARILY DUE TO
HIGHER VOLUME FROM OPERATION AND MANAGEMENT CONTRACTS FOR U. S. GOVERNMENT OWNED
FACILITIES AND HIGHER
23
<PAGE>
MARGINS ON NUCLEAR FUEL ASSEMBLIES AND REACTOR COMPONENTS FOR THE U. S.
GOVERNMENT AND OTHER GOVERNMENT RELATED OPERATIONS. THESE INCREASES WERE
PARTIALLY OFFSET BY LOWER VOLUME AND MARGINS FROM COMMERCIAL NUCLEAR
ENVIRONMENTAL SERVICES.
INCOME FROM INVESTEES INCREASED $2,096,000 TO $3,777,000, PRIMARILY DUE TO THE
FAVORABLE OPERATING RESULTS FROM A DOMESTIC JOINT VENTURE.
OTHER
- -----
REVENUES DECREASED $72,039,000 TO $282,334,000, PRIMARILY DUE TO LOWER REVENUES
FROM ENGINEERING AND CONSTRUCTION ACTIVITIES IN CANADIAN OPERATIONS AND LOWER
REVENUES AS A RESULT OF THE DISPOSITION OF NON-CORE BUSINESSES (DOMESTIC
SHIPYARD AND ORDNANCE OPERATIONS). THESE DECREASES WERE PARTIALLY OFFSET BY
HIGHER REVENUES FROM AIR COOLED HEAT EXCHANGERS.
BUSINESS UNIT INCOME (LOSS) INCREASED $29,681,000 FROM A LOSS OF $24,747,000 TO
INCOME OF $4,934,000, PRIMARILY DUE TO COST OVERRUNS ON ENGINEERING AND
CONSTRUCTION CONTRACTS IN THE PRIOR PERIOD. IN ADDITION, THERE WAS HIGHER
VOLUME FROM AIR COOLED HEAT EXCHANGERS AND LOWER GENERAL AND ADMINISTRATIVE
EXPENSES. ALSO, THE PRIOR YEAR INCLUDED LOSSES IN NON-CORE BUSINESSES (DOMESTIC
SHIPYARD AND ORDNANCE OPERATIONS).
GAIN ON ASSET DISPOSALS AND IMPAIRMENTS-NET INCREASED $130,566,000 FROM A LOSS
OF $5,387,000 TO INCOME OF $125,179,000 PRIMARILY DUE TO THE SALE OF
INTERNATIONAL'S INTEREST IN SAKHALIN ENERGY INVESTMENT COMPANY LTD. AND
UNIVERSAL FABRICATORS INCORPORATED.
INCOME FROM INVESTEES INCREASED $2,481,000 TO $3,129,000, PRIMARILY DUE TO
HIGHER OPERATING RESULTS FORM TWO FOREIGN JOINT VENTURES PARTIALLY OFFSET BY
LOWER OPERATING RESULTS FROM ONE DOMESTIC JOINT VENTURE.
GENERAL & ADMINISTRATIVE EXPENSES
- ---------------------------------
CORPORATE G&A EXPENSE DECREASED $8,460,000 TO $25,972,000 PRIMARILY DUE TO STAFF
REDUCTIONS, OTHER ECONOMY MEASURES, AND CERTAIN ONE-TIME COSTS INCURRED IN THE
PRIOR PERIOD.
24
<PAGE>
OTHER INCOME STATEMENT ITEMS
- ----------------------------
INTEREST INCOME INCREASED $8,397,000 TO $42,390,000, PRIMARILY DUE TO INCREASES
IN INVESTMENTS IN GOVERNMENT OBLIGATIONS, OTHER INVESTMENTS AND CASH EQUIVALENTS
IN THE CURRENT PERIOD.
INTEREST EXPENSE DECREASED $4,879,000 TO $63,121,000, PRIMARILY DUE TO CHANGES
IN DEBT OBLIGATIONS AND INTEREST RATES PREVAILING THEREON.
MINORITY INTEREST EXPENSE INCREASED $21,314,000 TO $39,658,000, PRIMARILY DUE TO
MINORITY SHAREHOLDER PARTICIPATION IN THE IMPROVED OPERATING RESULTS OF JRM.
OTHER-NET INCOME INCREASED $4,966,000 TO $5,664,000, PRIMARILY DUE TO HIGHER
FOREIGN CURRENCY TRANSACTION GAINS IN THE CURRENT PERIOD.
THE PROVISION FOR INCOME TAXES INCREASED $61,390,000 TO $69,199,000, WHILE
INCOME BEFORE PROVISION FOR INCOME TAXES INCREASED $276,670,000 FROM A LOSS OF
$8,458,000 TO INCOME OF $268,212,000. THE PROVISION FOR INCOME TAXES WAS 26% OF
THE PRETAX INCOME FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO A
PROVISION FOR INCOME TAXES OF 92% OF PRETAX LOSS FOR THE NINE MONTHS ENDED
DECEMBER 31, 1996.
25
<PAGE>
Backlog 12/31/97 3/31/97
- ------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
BACKLOG BY BUSINESS UNIT:
MARINE CONSTRUCTION SERVICES $ 1,305,527 $ 1,760,226
POWER GENERATION SYSTEMS 1,270,451 1,554,125
GOVERNMENT OPERATIONS 841,454 797,764
OTHER 376,990 384,968
ELIMINATIONS (170,313) (269,661)
- ---------------------------------------------------------------------
TOTAL BACKLOG $ 3,624,109 $ 4,227,422
=====================================================================
IN GENERAL, INTERNATIONAL'S BUSINESS IS CAPITAL INTENSIVE AND RELIES ON LARGE
CONTRACTS FOR A SUBSTANTIAL AMOUNT OF ITS REVENUES.
MARINE CONSTRUCTION SERVICES' U. S., FAR EAST AND NORTH SEA MARKETS REMAIN
STEADY. THE NORTH SEA ENGINEERING AND MIDDLE EAST MARKETS ARE BEGINNING TO
WEAKEN. BACKLOG RELATING TO CONTRACTS TO BE PERFORMED BY THIS BUSINESS UNIT'S
UNCONSOLIDATED JOINT VENTURES (NOT INCLUDED ABOVE) WAS $1,127,000,000 AT
DECEMBER 31, 1997 COMPARED TO $1,439,000,000 (OF WHICH $645,000,000 WAS RELATED
TO THE HEEREMAC JOINT VENTURE) AT MARCH 31, 1997.
POWER GENERATION SYSTEMS' FOREIGN MARKETS (EXCLUDING SOUTHEAST ASIA) FOR
INDUSTRIAL AND UTILITY BOILERS REMAIN STRONG. 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.
CONTRACTS TO BE PERFORMED BY THIS BUSINESS UNIT'S UNCONSOLIDATED JOINT VENTURES
(NOT INCLUDED ABOVE) WAS $173,000,000 AT DECEMBER 31, 1997 COMPARED TO
$154,000,000 AT MARCH 31, 1997.
AT DECEMBER 31, 1997 THE GOVERNMENT OPERATIONS' BACKLOG WITH THE U.S. GOVERNMENT
WAS $825,843,000 (OF WHICH $40,082,000 HAD NOT BEEN FUNDED). THIS BUSINESS
UNIT'S BACKLOG IS NOT EXPECTED TO EXPERIENCE ANY SIGNIFICANT GROWTH AS A RESULT
OF REDUCTIONS IN THE DEFENSE BUDGET OVER THE PAST SEVERAL YEARS. IT IS EXPECTED
TO REMAIN RELATIVELY CONSTANT SINCE B&W IS THE SOLE SOURCE PROVIDER OF NUCLEAR
FUEL ASSEMBLIES AND NUCLEAR REACTOR COMPONENTS FOR THE U. S. GOVERNMENT.
26
<PAGE>
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 MCDERMOTT INTERNATIONAL, AND THE DELAWARE COMPANY'S CONSOLIDATED
SUBSIDIARIES, WHICH INCLUDE THE BABCOCK & WILCOX COMPANY ("B&W").
DURING THE NINE MONTHS ENDED DECEMBER 31, 1997, INTERNATIONAL'S CASH AND CASH
EQUIVALENTS INCREASED $395,839,000 TO $653,622,000 AND TOTAL DEBT DECREASED
$334,557,000 TO $784,474,000, PRIMARILY DUE TO A REDUCTION IN SHORT-TERM
BORROWINGS OF $192,747,000 AND REPAYMENT OF $140,266,000 IN LONG-TERM DEBT.
DURING THIS PERIOD, INTERNATIONAL PROVIDED CASH OF $558,343,000 FROM OPERATING
ACTIVITIES, AND RECEIVED CASH PROCEEDS OF $450,909,000 FROM ASSET DISPOSALS
(INCLUDING (I) $256,863,000 FROM THE TERMINATION OF THE HEEREMAC JOINT VENTURE;
(II) $118,114,000 FROM THE SALE OF ITS INTEREST IN SAKHALIN ENERGY INVESTMENT
COMPANY, LTD; AND (III) $35,009,000 FROM THE SALE OF UNIVERSAL FABRICATORS
INCORPORATED), AND $23,620,000 FROM THE ISSUANCE OF STOCK UPON EXERCISE OF STOCK
OPTIONS. INTERNATIONAL USED CASH OF $255,838,000 FOR NET PURCHASES OF
INVESTMENTS, $32,939,000 FOR ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT; AND
$14,490,000 FOR DIVIDENDS ON MCDERMOTT INTERNATIONAL'S COMMON AND PREFERRED
STOCK.
ON DECEMBER 19, 1997, JRM AND HEEREMA OFFSHORE CONSTRUCTION GROUP, INC.
("HEEREMA") ENTERED INTO A TRANSACTION PURSUANT TO WHICH THEY TERMINATED THE
HEEREMAC JOINT VENTURE (THE "TERMINATION AGREEMENT"). UNDER THE TERMS OF THE
TERMINATION AGREEMENT, HEEREMA ACQUIRED AND ASSUMED JRM'S 50% INTEREST IN THE
JOINT VENTURE IN EXCHANGE FOR CASH OF $318,500,000 AND TITLE TO SEVERAL PIECES
OF EQUIPMENT, INCLUDING TWO LAUNCH BARGES AND THE DB101, A 3,500-TON LIFT
CAPACITY, SEMI-SUBMERSIBLE DERRICK BARGE. THE CONSIDERATION RECEIVED BY JRM
INCLUDED A $61,637,000 DISTRIBUTION OF EARNINGS OF THE HEEREMAC JOINT VENTURE
AND PAYMENT OF PRINCIPAL AND INTEREST UNDER A PROMISSORY NOTE PREVIOUSLY DUE TO
JRM (APPROXIMATELY $100,000,000). AS A RESULT OF THE TERMINATION AGREEMENT, JRM
RECORDED A GAIN ON ASSET DISPOSAL OF $223,651,000 AND A DISTRIBUTION OF EARNINGS
OF $61,637,000. JRM INVESTED THE CASH PROCEEDS IT RECEIVED IN DEBT SECURITIES.
27
<PAGE>
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 $6,300 PER CLAIM OVER THE LAST THREE YEARS) HAS CONTINUED TO
RISE. CLAIMS PAID DURING THE NINE MONTHS ENDED DECEMBER 31, 1997 WERE
$145,298,000, OF WHICH $132,614,000 HAS BEEN RECOVERED OR IS DUE FROM INSURERS.
AT DECEMBER 31, 1997, RECEIVABLES OF $104,591,000 WERE DUE FROM INSURERS FOR
REIMBURSEMENT OF SETTLED CLAIMS. ESTIMATED LIABILITIES FOR PENDING AND FUTURE
NON-EMPLOYEE PRODUCTS LIABILITY ASBESTOS CLAIMS ARE DERIVED FROM INTERNATIONAL'S
CLAIMS HISTORY AND CONSTITUTE MANAGEMENT'S BEST ESTIMATE OF SUCH FUTURE COSTS.
SETTLEMENT OF THE LIABILITY IS EXPECTED TO OCCUR OVER APPROXIMATELY THE NEXT 15
YEARS. ESTIMATED INSURANCE RECOVERIES ARE BASED UPON ANALYSIS OF INSURERS
PROVIDING COVERAGE OF THE ESTIMATED LIABILITIES. INHERENT IN THE ESTIMATE OF
SUCH LIABILITIES AND RECOVERIES ARE EXPECTED TRENDS IN CLAIM SEVERITY AND
FREQUENCY AND OTHER FACTORS, INCLUDING RECOVERABILITY FROM INSURERS, WHICH MAY
VARY SIGNIFICANTLY AS CLAIMS ARE FILED AND SETTLED. ACCORDINGLY, THE ULTIMATE
LOSS MAY DIFFER MATERIALLY FROM AMOUNTS PROVIDED IN THE CONSOLIDATED FINANCIAL
STATEMENTS. THE COLLECTION DELAYS AND THE AMOUNT OF CLAIMS PAID FOR WHICH
INSURANCE RECOVERY IS NOT PROBABLE HAVE NOT HAD A MATERIAL ADVERSE EFFECT ON
INTERNATIONAL'S LIQUIDITY, AND MANAGEMENT BELIEVES, BASED ON INFORMATION
CURRENTLY AVAILABLE, THAT THEY WILL NOT HAVE A MATERIAL ADVERSE EFFECT ON
LIQUIDITY IN THE FUTURE.
EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT DECREASED $44,956,000 TO
$32,939,000 FOR THE NINE MONTHS ENDED DECEMBER 31, 1997, COMPARED WITH THE SAME
PERIOD IN THE PRIOR YEAR. THE MAJORITY OF THESE EXPENDITURES WERE TO MAINTAIN,
REPLACE AND UPGRADE EXISTING FACILITIES AND EQUIPMENT.
AT DECEMBER 31 AND MARCH 31, 1997, B&W HAD SOLD, WITH LIMITED RECOURSE, AN
UNDIVIDED INTEREST IN A DESIGNATED POOL OF QUALIFIED ACCOUNTS RECEIVABLE OF
APPROXIMATELY $99,783,000 AND $93,769,000, RESPECTIVELY, UNDER THE TERMS OF AN
AGREEMENT WITH A U.S. BANK. THE MAXIMUM SALES LIMIT AVAILABLE UNDER THE
AGREEMENT WAS REDUCED DURING OCTOBER 1997 FROM $125,000,000 TO $100,000,000.
DEPENDING ON THE AMOUNT OF QUALIFIED ACCOUNTS RECEIVABLE AVAILABLE FOR THE POOL,
THE AMOUNT SOLD TO THE BANK CAN VARY (BUT NOT GREATER THAN THE
28
<PAGE>
MAXIMUM SALES LIMIT AVAILABLE) FROM TIME TO TIME. THE EXISTING AGREEMENT WILL
EXPIRE ON FEBRUARY 28, 1998; HOWEVER, B&W EXPECTS TO NEGOTIATE RENEWAL OF THE
AGREEMENT. INTERNATIONAL ACCOUNTS FOR THESE SALES AS SECURED BORROWINGS.
AT DECEMBER 31 AND MARCH 31, 1997, MCDERMOTT INTERNATIONAL AND ITS SUBSIDIARIES,
HAD AVAILABLE TO THEM VARIOUS UNCOMMITTED SHORT-TERM LINES OF CREDIT FROM BANKS
TOTALING $110,027,000 AND $179,137,000, RESPECTIVELY. BORROWINGS AGAINST THESE
LINES OF CREDIT AT DECEMBER 31 AND MARCH 31, 1997 WERE $4,123,000 AND
$53,165,000, RESPECTIVELY. AT DECEMBER 31, 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.
JRM IS PARTY TO AN UNSECURED AND COMMITTED REVOLVING CREDIT FACILITY (THE "JRM
REVOLVER"). THERE WERE NO BORROWINGS OUTSTANDING AT DECEMBER 31 OR MARCH 31,
1997 UNDER THE JRM REVOLVER. AS A CONDITION TO BORROWING UNDER THE FACILITY, JRM
MUST COMPLY WITH CERTAIN REQUIREMENTS, INCLUDING LEGAL REPRESENTATIONS. DUE TO
THE UNCERTAINTY ASSOCIATED WITH THE ONGOING INVESTIGATION BY MCDERMOTT
INTERNATIONAL AND JRM, AND THE JUSTICE DEPARTMENT INTO POSSIBLE ANTI-COMPETITIVE
PRACTICES BY THE COMPANIES AND OTHERS (SEE NOTE 4 TO THE CONSOLIDATED FINANCIAL
STATEMENTS), JRM CANNOT PRESENTLY SATISFY THESE LEGAL REPRESENTATIONS, AND
THEREFORE, CANNOT BORROW UNDER THE JRM REVOLVER. THE JRM REVOLVER ALSO LIMITS
THE AMOUNT OF FUNDS WHICH JRM CAN BORROW FROM OTHER SOURCES. 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 MCDERMOTT INTERNATIONAL
AND ITS SUBSIDIARIES THROUGH CASH DIVIDENDS OR THROUGH UNSECURED LOANS OR
INVESTMENTS. AT DECEMBER 31, 1997, SUBSTANTIALLY ALL OF THE NET ASSETS OF THE
DELAWARE COMPANY WERE SUBJECT TO SUCH RESTRICTIONS. JRM IS RESTRICTED BY ITS
PUBLIC DEBT COVENANTS IN PAYING DIVIDENDS OR BUYING BACK ITS COMMON OR PREFERRED
STOCK. AT DECEMBER 31, 1997, JRM WAS LIMITED TO $49,468,000 FOR SUCH
TRANSACTIONS. IT IS NOT EXPECTED THAT THESE RESTRICTIONS WILL HAVE ANY
SIGNIFICANT EFFECT ON MCDERMOTT INTERNATIONAL'S LIQUIDITY.
29
<PAGE>
INTERNATIONAL MAINTAINS AN INVESTMENT PORTFOLIO OF GOVERNMENT OBLIGATIONS AND
OTHER INVESTMENTS. THE FAIR VALUE OF SHORT-TERM INVESTMENTS AND THE LONG-TERM
PORTFOLIO AT DECEMBER 31, 1997 WAS $747,986,000. AT DECEMBER 31, 1997,
APPROXIMATELY $89,950,000 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 REDEEMED THE $70,000,000 OUTSTANDING PRINCIPAL AMOUNT OF
ITS 12.875% GUARANTEED SENIOR NOTES DUE 2002 FOR AN AGGREGATE REDEMPTION PRICE
OF $78,986,250 INCLUDING A PREMIUM OF $4,480,000 AND ACCRUED INTEREST TO THE
REDEMPTION DATE OF $4,506,250.
WORKING CAPITAL INCREASED $244,361,000 FROM $225,571,000 AT MARCH 31, 1997 TO
$469,932,000 AT DECEMBER 31, 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, CASH AND CASH
EQUIVALENTS 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.
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.
30
<PAGE>
NEW ACCOUNTING STANDARDS
- ------------------------
IN JUNE 1997, THE FASB ISSUED SFAS NO. 130, "REPORTING COMPREHENSIVE INCOME,"
WHICH IS EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997. SFAS NO.
130 ESTABLISHES STANDARDS FOR REPORTING AND DISPLAY OF COMPREHENSIVE INCOME AND
ITS COMPONENTS IN A FULL SET OF GENERAL-PURPOSE FINANCIAL STATEMENTS.
INTERNATIONAL HAS NOT YET FINALIZED ITS REVIEW OF THE IMPACT OF THIS STATEMENT,
BUT IT IS NOT EXPECTED TO HAVE A MATERIAL IMPACT ON THE CONSOLIDATED FINANCIAL
STATEMENTS.
ALSO IN JUNE 1997, THE FASB ISSUED SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION," WHICH IS EFFECTIVE FOR FISCAL YEARS
BEGINNING AFTER DECEMBER 15, 1997. SFAS NO. 131 REQUIRES THAT CERTAIN FINANCIAL
INFORMATION BE REPORTED ON THE BASIS THAT IT IS REPORTED INTERNALLY FOR
EVALUATING SEGMENT PERFORMANCE AND DECIDING HOW TO ALLOCATE RESOURCES TO
SEGMENTS. INTERNATIONAL ANTICIPATES ADOPTING THIS STANDARD DURING THE LAST
QUARTER OF FISCAL YEAR 1998. BECAUSE THIS STATEMENT ADDRESSES HOW SUPPLEMENTAL
FINANCIAL INFORMATION IS DISCLOSED IN ANNUAL AND INTERIM REPORTS, THE ADOPTION
WILL HAVE NO MATERIAL IMPACT ON THE CONSOLIDATED FINANCIAL STATEMENTS.
AT ITS JULY 1997 MEETING, THE EMERGING ISSUES TASK FORCE REACHED A FINAL
CONSENSUS ON ISSUE 96-16, "INVESTOR'S ACCOUNTING FOR AN INVESTEE WHEN THE
INVESTOR HAS A MAJORITY OF THE VOTING INTEREST BUT THE MINORITY SHAREHOLDER OR
SHAREHOLDERS HAVE CERTAIN APPROVAL OR VETO RIGHTS." THIS ISSUE ADDRESSES WHETHER
TO CONSOLIDATE A MAJORITY OWNED INVESTEE WHEN THE RIGHTS OF THE MINORITY MAKE IT
UNCLEAR IF THE MAJORITY OWNER ACTUALLY HAS CONTROL, AND ESTABLISHES CRITERIA FOR
MAKING THIS DECISION. FOR EXISTING INVESTMENT AGREEMENTS, THE GUIDANCE IS
EFFECTIVE FOR FISCAL YEARS ENDING AFTER DECEMBER 15, 1998. INTERNATIONAL HAS NOT
YET FINALIZED ITS REVIEW OF THE IMPACT OF THIS GUIDANCE.
31
<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
THERE WERE NO CURRENT REPORTS ON FORM 8-K WERE FILED DURING THE
THREE MONTHS ENDED DECEMBER 31, 1997.
32
<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)
FEBRUARY 10, 1998
33
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 FINANCIAL DATA SCHEDULE
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 653,622
<SECURITIES> 131
<RECEIVABLES> 566,902
<ALLOWANCES> 107,292
<INVENTORY> 340,106
<CURRENT-ASSETS> 1,971,370
<PP&E> 1,746,442
<DEPRECIATION> 1,191,007
<TOTAL-ASSETS> 4,572,430
<CURRENT-LIABILITIES> 1,501,438
<BONDS> 623,152
0
2,875
<COMMON> 56,186
<OTHER-SE> 601,732
<TOTAL-LIABILITY-AND-EQUITY> 4,572,430
<SALES> 2,749,873
<TOTAL-REVENUES> 2,749,873
<CGS> 2,587,789
<TOTAL-COSTS> 2,587,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,121
<INCOME-PRETAX> 268,212
<INCOME-TAX> 69,199
<INCOME-CONTINUING> 199,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,013
<EPS-PRIMARY> 3.47
<EPS-DILUTED> 3.21
</TABLE>
