<PAGE>
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 December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________to______________
Commission File No. 1-8430
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 January 28,
1999 was 59,115,289.
<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 31,1998 and March 31, 1998 4
Condensed Consolidated Statement of Income
Three and Nine Months Ended December 31,1998 and 1997 6
Condensed Consolidated Statement of Comprehensive Income
Three and Nine Months Ended December 31,1998 and 1997 7
Condensed Consolidated Statement of Cash Flows
Nine Months Ended December 31,1998 and 1997 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
PART II - OTHER INFORMATION
Item 3 - Legal Proceedings 38
Item 6 - Exhibits and Reports on Form 8-K 40
SIGNATURES 41
Exhibit 3.2 - Amended and Restated By-Laws of McDermott International,
Inc. 43
Exhibit 27 - Financial Data Schedule 50
2
<PAGE>
PART I
McDERMOTT INTERNATIONAL, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
12/31/98 3/31/98
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 265,309 $ 277,876
Accounts receivable - trade 296,558 550,552
Accounts receivable - unconsolidated affiliates 172,794 52,351
Accounts receivable - other 90,815 139,864
Environmental and products liabilities recoverable - current 135,200 143,588
Contracts in progress 214,158 239,548
Inventories 58,342 63,342
Deferred income taxes 81,479 84,036
Other current assets 26,820 45,399
---------- ----------
Total Current Assets 1,341,475 1,596,556
---------- ----------
Property, Plant and Equipment, at Cost 1,502,886 1,715,352
Less accumulated depreciation 1,045,398 1,181,658
---------- ----------
Net Property, Plant and Equipment 457,488 533,694
---------- ----------
Investments in Debt Securities:
Government obligations 532,797 519,443
Other investments 587,876 553,913
---------- ----------
Total Investments in Debt Securities 1,120,673 1,073,356
---------- ----------
Environmental and Products Liabilities Recoverable 470,826 604,870
---------- ----------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $105,151,000 at December 31,1998
and $107,814,000 at March 31, 1998 112,464 127,077
---------- ----------
Prepaid Pension Costs 122,983 328,583
---------- ----------
Other Assets 227,548 236,994
---------- ----------
TOTAL $3,853,457 $4,501,130
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
12/31/98 3/31/98
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 35,770 $ 156,300
Accounts payable 214,977 301,988
Environmental and products liabilities - current 157,925 181,234
Accrued employee benefits 104,475 146,839
Accrued contract costs 50,912 89,321
Advance billings on contracts 295,645 268,764
Other current liabilities 348,077 316,680
---------- ----------
Total Current Liabilities 1,207,781 1,461,126
---------- ----------
Long-Term Debt 567,802 598,182
---------- ----------
Accumulated Postretirement Benefit Obligation 147,251 393,616
---------- ----------
Environmental and Products Liabilities 592,207 751,620
---------- ----------
Other Liabilities 265,599 271,489
---------- ----------
Commitments and Contingencies.
Minority Interest:
Subsidiary's preferred stocks - 155,358
Other minority interest 212,670 189,966
---------- ----------
Total Minority Interest 212,670 345,324
---------- ----------
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 60,996,383 at
December 31,1998 and 56,607,861 at March 31, 1998 60,996 56,608
Capital in excess of par value 1,024,244 1,012,338
Accumulated deficit (135,323) (341,916)
Treasury stock at cost, 2,000,614 shares at
December 31,1998 and 100,614 shares
at March 31, 1998 (62,731) (3,575)
Accumulated other comprehensive loss (27,039) (46,557)
---------- ----------
Total Stockholders' Equity 860,147 679,773
---------- ----------
TOTAL $3,853,457 $4,501,130
========== ==========
</TABLE>
5
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/98 12/31/97 12/31/98 12/31/97
--------- --------- ---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 800,825 $ 901,735 $2,400,617 $2,749,873
--------- --------- ---------- ----------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 674,750 757,824 1,984,603 2,316,535
Depreciation and amortization 24,625 33,399 72,922 111,100
Selling, general and administrative expenses 51,917 49,927 163,961 160,154
--------- --------- ---------- ----------
751,292 841,150 2,221,486 2,587,789
--------- --------- ---------- ----------
Gain (Loss) on Asset Disposals and
Impairments - Net (3,754) (40,212) 36,967 85,384
--------- --------- ---------- ----------
Operating Income before Income from
Investees 45,779 20,373 216,098 247,468
Income from Investees 531 68,993 14,277 75,469
--------- --------- ---------- ----------
Operating Income 46,310 89,366 230,375 322,937
--------- --------- ---------- ----------
Other Income (Expense):
Interest income 20,231 17,512 78,667 42,390
Interest expense (16,901) (18,728) (49,137) (63,121)
Minority interest (11,317) (23,264) (61,369) (39,658)
Other-net (2,434) 4,167 33,452 5,664
--------- --------- ---------- ----------
(10,421) (20,313) 1,613 (54,725)
Income before Provision for (Benefit from)
Income Taxes 35,889 69,053 231,988 268,212
Provision for (Benefit from) Income Taxes (6,400) 18,061 16,523 69,199
--------- --------- ---------- ----------
Net Income $ 42,289 $ 50,992 $ 215,465 $ 199,013
========= ========= ========== ==========
Net Income Applicable to Common Stock
(after Preferred Stock Dividends) $ 42,289 $ 48,926 $ 215,465 $ 192,814
========= ========= ========== ==========
Earnings per Common Share
Basic $ 0.72 $ 0.88 $ 3.65 $ 3.49
Diluted $ 0.71 $ 0.82 $ 3.50 $ 3.21
========= ========= ========== ==========
Cash Dividends:
Per Common Share $ 0.05 $ 0.05 $ 0.15 $ 0.15
Per Preferred Share $ - $ 0.72 $ - $ 2.16
========= ========= ========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
6
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/98 12/31/97 12/31/98 12/31/97
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net Income $ 42,289 $ 50,992 $ 215,465 $ 199,013
--------- --------- --------- ---------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (765) (9,895) 1,671 1,366
Sales of investments in foreign entities - - 15,596 -
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the
period, net of taxes (3,987) 482 3,679 4,600
Reclassification adjustment for (gains)
losses included in net income (453) - (1,428) 40
--------- --------- --------- ---------
Other Comprehensive Income (Loss) (5,205) (9,413) 19,518 6,006
--------- --------- --------- ---------
Comprehensive Income $ 37,084 $ 41,579 $ 234,983 $ 205,019
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/98 12/31/97
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 215,465 $ 199,013
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 72,922 111,100
Income from investees,
less dividends 12,891 (5,695)
Gain on asset disposals and
impairments - net (36,967) (85,384)
Provision for (benefit from) deferred taxes (8,556) 1,827
Other 3,454 5,200
Changes in assets and liabilities, net of effects
from divestitures:
Accounts receivable 92,216 83,254
Net contracts in progress and advance billings 53,760 151,924
Accounts payable (84,861) 9,652
Accrued and other current liabilities 24,670 37,775
Other, net (29,940) 86,868
Proceeds from insurance for products liabilities claims 154,494 108,107
Payments of products liabilities claims (178,270) (145,298)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 291,278 558,343
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (45,294) (32,939)
Purchases of investments (680,358) (687,360)
Sales and maturities of investments 641,595 431,522
Proceeds from asset disposals 130,131 450,909
Other 5,452 (2,441)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 51,526 159,691
--------- ---------
</TABLE>
8
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/98 12/31/97
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (45,910) $(140,266)
Decrease in short-term borrowings (30,954) (192,747)
Issuance of common stock 3,822 23,620
Issuance of subsidiary's stock 1,317 8,477
Dividends paid (10,861) (14,490)
Purchases of McDermott International, Inc. stock (59,156) -
Acquisition of subsidiary's common stock (58,272) -
Acquisition of subsidiary's preferred stock (154,631) (4,515)
Other (999) (2,859)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (355,644) (322,780)
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 273 585
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,567) 395,839
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 277,876 257,783
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 265,309 $ 653,622
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 40,468 $ 61,082
Income taxes (net of refunds) $ 30,706 $ (6,806)
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Transfer of accounts receivables sold under a purchase and
sale agreement from secured borrowings to sales treatment $ 56,929 $ -
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1998
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 the following:
In the three and nine months ended December 31, 1998:
. a $9,600,000 charge to restructure foreign joint ventures.
In the nine months ended December 31, 1998:
. 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 $27,642,000,
. interest income of $20,163,000 on settlement of outstanding Internal
Revenue Service exposure items,
. a gain of $12,000,000 from the sale of assets of a joint venture, and
. an $8,000,000 settlement of punitive damage claims in a civil suit
associated with a Pennsylvania facility formerly operated by
McDermott.
In the three and nine months ended December 31,1997:
. 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.
10
<PAGE>
In the nine months ended December 31, 1997:
. a gain of $33,072,000 from the sale of McDermott's interest in
Universal Fabricators Incorporated, and
. a gain of $96,059,000 from the sale of McDermott's interest in
Sakhalin Energy Investment Company, Ltd.
Operating results for the nine months ended December 31, 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 are
disclosed in Note 5. Comprehensive Income is displayed in a separate Condensed
Consolidated Statement of Comprehensive Income included in the financial
statements.
NOTE 3 - PRODUCTS LIABILITY
At December 31, 1998, the estimated liability for pending and future non-
employee products liability asbestos claims was $708,421,000 (of which
approximately $273,000,000 had been asserted) and estimated insurance recoveries
were $582,226,000. Settlement of this estimated liability is expected to occur
over the next thirteen years. 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 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. Such trends include management's
expectation that new claims will conclude within the next thirteen years, that
there will be a significant decline in new claims asserted within the next
twelve months, and that the average cost per claim will continue to increase
only moderately. Should management's estimates be incorrect, McDermott's
ultimate loss for such claims may exceed the amounts provided in the
consolidated financial statements.
11
<PAGE>
NOTE 4 - INVENTORIES
Inventories at December 31 and March 31, 1998 are summarized below:
December 31, March 31,
1998 1998
---------- ---------
(Unaudited)
(In thousands)
Raw Materials and Supplies $42,346 $47,411
Work in Progress 8,564 6,720
Finished Goods 7,432 9,211
------- -------
$58,342 $63,342
======= =======
NOTE 5 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity at December 31 and March 31, 1998 are as follows:
December 31, March 31,
1998 1998
----------- ---------
(Unaudited)
(In thousands)
Currency Translation Adjustments $(25,235) $(42,502)
Net Unrealized Gain on Investments 2,926 675
Minimum Pension Liability (4,730) (4,730)
------- -------
$(27,039) $(46,557)
======= =======
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 ETPM S.A.'s interest in
McDermott-ETPM East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received
JRM's lay barge 200 and JRM's interest in McDermott Subsea Constructors Limited
("MSCL") and McDermott-ETPM West, Inc. The Condensed Consolidated Statement of
Income includes revenues of $16,602,000 and $53,958,000 and operating income
(loss) of ($3,536,000) and $7,826,000 for the three and nine months,
respectively, ended December 31, 1997 attributable to operations transferred to
ETPM S.A. Management does not expect the termination of the McDermott-ETPM joint
venture to have a material adverse effect on McDermott's consolidated financial
position or results of operations.
On May 7, 1998, a JRM subsidiary, McDermott Marine Construction Limited
("MMCL"), sold its European brownfield engineering operations and received net
cash of approximately $2,210,000. JRM is also in the process of closing MMCL's
European greenfield engineering operations. While JRM is withdrawing from
traditional European engineering markets, it continues to pursue subsea
engineering
12
<PAGE>
work in the North Sea. In the three and nine months ended December 31, 1998,
these operations had revenues of $11,674,000 and $59,699,000, respectively, and
operating income (loss) of $17,000 and ($2,159,000), respectively. In the three
and nine months ended December 31, 1997, these operations had revenues of
$58,458,000 and $246,857,000, respectively, and operating income of $8,285,000
and $13,359,000, respectively.
During the nine months ended December 31, 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
$251,476,000. 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 partially 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 $228,952,000. On August 1, 1998, the
postretirement health care benefits for two union hourly employee plans were
terminated and the pension plans for these employees were amended to increase
the benefits payable to participants to offset partially the cost of
postretirement health care and life insurance. As a result of this termination
of postretirement benefits, the total accumulated postretirement benefit
obligation of McDermott decreased $20,846,000, and as a result of this amendment
to the pension plans, the projected benefit obligation of McDermott increased
$15,728,000. The total decrease in the accumulated postretirement benefit
obligation was measured against the total increase in the projected benefit
obligation of the pension plans and the resulting gain of $27,642,000 was
recognized in the nine months ended December 31,1998.
NOTE 8 - CONVERSION AND REDEMPTION 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 the redemption date, all 2,875,000 preferred shares then
outstanding were converted into 4,077,890 common shares.
On July 17, 1998, MI redeemed all of its 2,152,766 outstanding shares of Series
B $2.60 Cumulative Preferred Stock for $31.25, plus $0.1156 in accrued but
unpaid dividends, per share. MII made a $68,000,000 capital contribution to MI
to cover the cost of the redemption.
13
<PAGE>
On September 11, 1998, MI redeemed 2,795,428 of its outstanding shares of Series
A $2.20 Cumulative Convertible Preferred Stock ("Series A Preferred Stock") for
$31.25, plus $0.43 in accrued but unpaid dividends, per share. The remaining
23,251 outstanding shares of its Series A Preferred Stock were converted into
MII common stock at a conversion ratio of one share of MII common stock, plus
$0.10, for each preferred share. MII made a $90,000,000 capital contribution to
MI to cover the cost of the redemption and conversion.
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 their officers,
directors and employees 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. The Department of Justice also has 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.
14
<PAGE>
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
(the "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 (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., and certain JRM subsidiaries,
HeereMac, Heerema, certain Heerema affiliates, and others alleging 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 (the
"Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s.,
individually and on behalf of certain of its ventures and its participants,
filed a similar lawsuit in the same court, which was consolidated with the
Phillips Litigation. In addition to seeking injunctive relief, actual damages
and attorneys' fees, the plaintiffs in the Phillips Litigation have requested
punitive as well as treble damages. In January 1999, the court dismissed
without prejudice, due to the court's lack of subject matter jurisdiction, the
claims of the Phillips Plaintiffs relating to alleged injuries sustained on any
foreign projects. This decision is subject to further judicial review.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
lawsuit 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 (the "Shell Litigation"). Subsequent thereto, Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC; Burlington Resources Offshore, Inc. and The
Louisiana Land & Exploration Company; Marathon Oil Company and certain of its
affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline
Company, L.L.C. and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and
Chevron Overseas Petroleum Inc.; and Shell U.K. Limited and certain of its
affiliates intervened (acting for themselves and, if applicable, on behalf of
their respective co-venturers and for whom they operate) as plaintiffs in the
Shell Litigation. Also, in December 1998, Total Oil Marine p.l.c. and Norsk
Hydro Produksjon a.s., individually and on behalf of their respective co-
venturers, filed similar lawsuits in the same court,
15
<PAGE>
which lawsuits were consolidated with the Shell Litigation. In addition to
seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in
the Shell Litigation request treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC inquiry, the companies' internal investigation, the
above-referenced lawsuits, or the other 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 criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
The Babcock & Wilcox Company ("B&W") and Atlantic Richfield Company are
defendants in lawsuits filed by Donald F. Hall, Mary Ann Hall and others in the
United States District Court for the Western District of Pennsylvania involving
over 120 separate cases relating to the operation of two former nuclear fuel
processing facilities located in Pennsylvania (the "Hall Litigation"), alleging,
among other things, that they suffered personal injury and other damages as a
result of radioactive emissions from these facilities. In September 1998, a
jury found B&W and Atlantic Richfield Company liable to the plaintiffs in the
first eight cases brought to trial, awarding $36,700,000 in compensatory
damages. This jury verdict is being contested. B&W and its insurers have
filed seperate actions seeking a judicial determination as to the amount of
insurance coverage available. Management believes that the award and all other
claims will be resolved within the limits and coverage of such insurance
policies; however, no assurance on insurance coverage or financial impact if
limits of coverage are exceeded can be given. In connection with the foregoing,
B&W settled all pending and future punitive damage claims represented by the
plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks
reimbursement of this amount from other parties.
Additionally, McDermott is, from time to time, involved in routine litigation
related to its business activity. It is management's opinion that none of this
routine litigation will have a material adverse effect on McDermott's
consolidated financial position or results of operations.
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
16
<PAGE>
systems. JRM also provides diving services, procurement activities, and removal,
salvage and refurbishment services for offshore fixed platforms. These
activities are managed and results are evaluated primarily on a geographic area
basis. Engineering operations, which includes project management services and
engineering services, is primarily managed and evaluated on a worldwide basis.
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. This segment also manages and operates
government owned facilities, supplies commercial nuclear environmental services
and provides services to other government operations and other commercial
operations.
Other Operations is comprised of certain small businesses which primarily
include 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 that 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. Assets of the Marine Construction Services segment decreased
approximately $263,000,000, primarily as a result of the dispositions of MSCL
and MMCL as described in Note 6.
17
<PAGE>
Segment Information for the Three and Nine Months Ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/98 12/31/97 12/31/98 12/31/97
--------- --------- ---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Marine Construction Services $ 313,348 $ 458,094 $1,032,999 $1,442,363
Power Generation Systems 292,675 283,337 775,559 827,396
Government Operations 89,333 95,355 290,489 259,427
Other Operations 106,520 74,667 305,598 248,202
Adjustments and Eliminations/(1)/ (1,051) (9,718) (4,028) (27,515)
--------- --------- ---------- ----------
Total Revenues $ 800,825 $ 901,735 $2,400,617 $2,749,873
========= ========= ========== ==========
/(1)/ Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 436 $ 1,703 $ 2,513 $ 13,705
Power Generation Systems Transfers 120 1,942 544 3,835
Government Operations Transfers 205 410 336 3,798
Other Operations Transfers 70 5,180 173 9,301
Adjustments and Eliminations 220 483 462 (3,124)
--------- --------- ---------- ----------
Total $ 1,051 $ 9,718 $ 4,028 $ 27,515
========= ========= ========== ==========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/98 12/31/97 12/31/98 12/31/97
--------- --------- --------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income:
- -------------------------
Marine Construction Services $ 21,932 $ 28,834 $ 114,199 $ 97,471
Power Generation Systems 22,361 27,144 57,009 59,380
Government Operations 7,094 7,742 18,871 27,526
Other Operations 4,811 1,610 14,173 3,298
--------- --------- --------- ---------
Total Segment Operating Income $ 56,198 $ 65,330 $ 204,252 $ 187,675
--------- --------- --------- ---------
Gain (Loss) on Asset Disposals and Impairments - Net:
- -----------------------------------------------------
Marine Construction Services $ (4,229) $ (40,330) $ 38,849 $ (40,306)
Power Generation Systems 733 82 938 95
Government Operations - (6) 138 (4)
Other Operations (259) 1 (184) 125,150
--------- --------- --------- ---------
Total Gain (Loss) on Asset Disposals and
Impairments - Net $ (3,755) $ (40,253) $ 39,741 $ 84,935
--------- --------- --------- ---------
Income (Loss) from Investees:
- -----------------------------
Marine Construction Services $ (2,398) $ 63,938 $ 7,335 $ 61,311
Power Generation Systems 2,546 2,711 6,255 6,687
Government Operations 617 2,678 1,824 3,777
Other Operations (234) (334) (1,137) 3,701
--------- --------- --------- ---------
Total Income from Investees $ 531 $ 68,993 $ 14,277 $ 75,476
--------- --------- --------- ---------
SEGMENT INCOME:
- ---------------
Marine Construction Services $ 15,305 $ 52,442 $ 160,383 $ 118,476
Power Generation Systems 25,640 29,937 64,202 66,162
Government Operations 7,711 10,414 20,833 31,299
Other Operations 4,318 1,277 12,852 132,149
--------- --------- --------- ---------
Total Segment Income 52,974 94,070 258,270 348,086
--------- --------- --------- ---------
Other Unallocated Items 655 221 (1,229) 403
General Corporate Expenses - Net (7,319) (4,925) (26,666) (25,552)
--------- --------- --------- ---------
Total Operating Income $ 46,310 $ 89,366 $ 230,375 $ 322,937
========= ========= ========= =========
</TABLE>
19
<PAGE>
NOTE 11 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/98 12/31/97 12/31/98 12/31/97
----------- ----------- ----------- -----------
(Unaudited)
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C>
Basic:
Net income $ 42,289 $ 50,992 $ 215,465 $ 199,013
Dividends on preferred stock, Series C - (2,066) - (6,199)
----------- ----------- ----------- -----------
Net income for basic computation $ 42,289 $ 48,926 $ 215,465 $ 192,814
=========== =========== =========== ===========
Weighted average common shares 58,562,989 55,748,811 59,095,770 55,228,673
=========== =========== =========== ===========
Basic earnings per common share $ 0.72 $ 0.88 $ 3.65 $ 3.49
=========== =========== =========== ===========
Diluted:
Net income $ 42,289 $ 50,992 $ 215,465 $ 199,013
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock - 1,550 2,752 4,650
----------- ----------- ----------- -----------
Net income for diluted computation $ 42,289 $ 52,542 $ 218,217 $ 203,663
=========== =========== =========== ===========
Weighted average common shares (basic) 58,562,989 55,748,811 59,095,770 55,228,673
Effect of dilutive securities:
Stock options and restricted stock 1,057,163 1,749,373 1,350,978 1,352,566
Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock - 2,818,679 1,674,867 2,818,690
Series C $2.875 Cumulative Convertible
Preferred Stock - 4,078,014 253,942 4,078,014
----------- ----------- ----------- -----------
Adjusted weighted average common
shares and assumed conversions 59,620,152 64,394,877 62,375,557 63,477,943
=========== =========== =========== ===========
Diluted earnings per common share $ 0.71 $ 0.82 $ 3.50 $ 3.21
=========== =========== =========== ===========
</TABLE>
20
<PAGE>
NOTE 12 SUBSEQUENT EVENT
On February 4, 1999, JRM initiated an offer to purchase all of its outstanding
9.375% Senior Subordinated Notes due July 2006 at a purchase price of 113.046%
of their principal amount, plus accrued interest to, but not including, the
payment date. The outstanding principal amount of the notes is $250,000,000.
In connection with the offer, JRM is also soliciting consents to certain
amendments to the indenture for the 9.375% Senior Subordinated Notes to amend or
eliminate certain restrictive covenants. Holders who tender notes for purchase
by JRM pursuant to the tender offer are required to consent to the amendments in
order to have their notes accepted for purchase. The tender offer is
conditioned on, among other things, at least a majority of the aggregate
principal amount of the notes outstanding being validly tendered and not
withdrawn prior to its expiration. The offer will expire on March 5, 1999,
unless extended.
21
<PAGE>
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. As a result of continuing
lower oil prices, Marine Construction Services' customers have significantly
reduced capital expenditures for exploration and production spending. As a
result, Marine Constructions Services' backlog has declined over $700,000,000
since the beginning of the fiscal year. At the current backlog level,
management expects revenues to be as much as one-third lower in fiscal year 2000
compared to the current fiscal year, and profitability to be lower because of
the volume decline. Economic and political instability in Asia have also had an
adverse effect on the timing of exploration and production spending.
Revenues of the Power Generation Systems segment are largely a function of
capital spending by the electric power generation industry. In the electric
power generation industry, persistent economic growth in the United States has
brought the supply of electricity into approximate balance with energy demand,
except at periods of peak demand. However, electric power producers have
generally chosen to meet these peaks with new combustion turbines rather than
with base-load capacity. New emissions requirements have also prompted some
customers to place orders for environmental equipment. Demand for electrical
power generation industry services and replacement nuclear steam generators
continues at strong levels. International markets remain unsettled, and
economic and political instability in Asia have caused projects in emerging
markets to be delayed, suspended or cancelled. In the process industry, demand
for services remains strong, and the pulp and paper industry has begun to issue
inquiries relating to refurbishing or replacement of existing recovery boilers.
In general, management expects the fiscal year 2000 operating activity of this
segment to be about the same as the current fiscal year.
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-source provider of nuclear fuel
22
<PAGE>
assemblies and nuclear reactor components to the U.S. Government. Management
expects the operating activity of this segment in fiscal year 2000 to be about
the same as in the current year.
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. Backlog for Other Operations
has improved significantly from a year ago, primarily because of significant new
bookings in engineering and construction. Management also expects this
segment's operating activity in fiscal year 2000 to be about the same as in the
current year.
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, it enters into foreign currency forward exchange
contracts to reduce 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 by
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 and on the Indian subcontinent;
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 the
lawsuits disclosed in Item 3, Legal Proceedings.
RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 VS. THREE MONTHS
ENDED DECEMBER 31, 1997
Marine Construction Services
- ----------------------------
Revenues decreased $144,746,000 to $313,348,000, primarily due to lower volume
in Europe as a result of JRM's withdrawal from the traditional European
engineering markets and from lower volume
23
<PAGE>
in all activities in North America, the Middle East and in worldwide
engineering. These decreases were partially offset by higher volume in the Far
East.
Segment operating income decreased $6,902,000 to $21,932,000, primarily due to
lower volume in all activities in North America and in European engineering.
There were also higher net operating expenses and a charge to restructure
foreign joint ventures. These decreases were partially offset by higher volume
in the Far East. In addition, the prior period included goodwill amortization
of $5,439,000 associated with the acquisition of Offshore Pipelines, Inc.
("OPI").
Loss on asset disposals and impairmentsnet was $4,229,000 compared to
$40,330,000 in the prior period. The loss in the current period was primarily
due to impairment losses on fabrication facilities. The loss in the prior
period was primarily due to the write-off of $262,901,000 of goodwill associated
with the acquisition of OPI, partially offset by the $223,651,000 gain
recognized from the termination of the HeereMac joint venture.
Income (loss) from investees decreased $66,336,000 from income of $63,938,000 to
a loss of $2,398,000, primarily due to a $61,637,000 distribution of earnings
related to the termination of the HeereMac joint venture in the prior period.
There were also lower operating results from a joint venture in Mexico.
Power Generations Systems
- -------------------------
Revenues increased $9,338,000 to $292,675,000, primarily due to higher revenues
from repair and alteration of existing fossil fuel steam systems and plant
enhancement projects. These increases were partially offset by lower revenues
from fabrication and erection of fossil fuel steam and environmental control
systems and replacement nuclear steam generators.
Segment operating income decreased $4,783,000 to $22,361,000, primarily due to
lower volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems and replacement nuclear steam generators. These
decreases were partially offset by higher volume and margins from repair and
alteration of existing fossil fuel steam systems, higher volume from plant
enhancement projects and higher margins from engineer-procure-construct
contracts.
Government Operations
- ---------------------
Revenues decreased $6,022,000 to $89,333,000, primarily due to lower revenues
from other government operations, commercial nuclear environmental services and
from management and operation contracts for U.S. Government-owned facilities.
24
<PAGE>
Segment operating income decreased $648,000 to $7,094,000, primarily due to
lower margins from commercial nuclear environmental services. This decrease was
partially offset by higher margins from management and operation contracts for
U.S. Government-owned facilities.
Income from investees decreased $2,061,000 to $617,000. The decrease is
primarily due to lower operating results from a domestic joint venture in
Colorado.
Other
- -----
Revenues increased $31,853,000 to $106,520,000, primarily due to higher revenues
from engineering activities in Canadian operations. These increases were
partially offset by lower revenues from domestic engineering and construction
activities.
Operating income increased $3,201,000 to $4,811,000, primarily due to higher
volume from engineering activities in Canadian operations and higher margins
from air-cooled heat exchangers. There were also losses in a non-core business
disposed of in the prior period. These increases were partially offset by lower
volume from domestic engineering and construction activities and higher general
and administrative expenses.
Other Income Statement Items
- ----------------------------
Interest income increased $2,719,000 to $20,231,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $1,827,000 to $16,901,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense decreased $11,947,000 to $11,317,000, primarily due to
minority shareholder participation in the lower operating results of JRM.
Other-net decreased $6,601,000 from income of $4,167,000 to expense of
$2,434,000, primarily due to higher foreign currency transaction gains in the
prior period.
The provision for (benefit from) income taxes decreased $24,461,000 from a
provision of $18,061,000 to a benefit of $6,400,000, while income before
provision for income taxes decreased $33,164,000 to $35,889,000. The decrease
in the provision for income taxes was primarily the result of favorable tax
settlements totaling $21,367,000 of prior years' disputed items in foreign
jurisdictions. 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 bases (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.
25
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31,1998 VS. NINE MONTHS ENDED
DECEMBER 31, 1997
Marine Construction Services
- ----------------------------
Revenues decreased $409,364,000 to $1,032,999,000, primarily due to lower volume
in Europe as a result of JRM's withdrawal from the traditional European
engineering markets and from lower volume in all activities in North America,
the Middle East and in worldwide engineering. These decreases were partially
offset by higher volume in virtually all activities in the Far East.
Segment operating income increased $16,728,000 to $114,199,000, primarily due to
higher volume and margins in all activities and a favorable settlement of
contract claims in the Far East. In addition, prior period results include
amortization of OPI goodwill of $16,318,000. These increases were partially
offset by lower volume in all activities in North America and in worldwide
engineering and higher net operating expenses. In addition, there was a charge
to restructure foreign joint ventures.
Gain (loss) on asset disposals and impairments-net was a gain of $38,849,000
compared to a loss of $40,306,000 in the prior period. The gain in the current
period was primarily due to gains recognized from the termination of the
McDermott-ETPM joint venture and the sale of three Gulf of Mexico vessels,
partially offset by impairment losses on fabrication facilities. The loss in
the prior period was primarily due to the write-off of $262,901,000 of goodwill
associated with the acquisition of OPI, partially offset by the $223,651,000
gain recognized from the termination of the HeereMac joint venture.
Income from investees decreased $53,976,000 to $7,335,000, primarily due to a
$61,637,000 distribution of earnings related to the termination of the HeereMac
joint venture in the prior period. There were also lower operating results from
Brown & Root McDermott Fabricators Limited. These decreases were partially
offset by the gain on the sale of assets in a Malaysian joint venture and losses
recorded by McDermott-ETPM West, Inc. in the prior period.
Power Generations Systems
- -------------------------
Revenues decreased $51,837,000 to $775,559,000, 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 repair and alteration of existing
fossil fuel steam systems and plant enhancement projects.
Segment operating income decreased $2,371,000 to $57,009,000, primarily due to
lower volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems and lower volume from replacement nuclear steam
generators. These decreases were partially offset by
26
<PAGE>
higher volume and margins from repair and alteration of existing fossil fuel
steam systems, higher margins from operation and maintenance contracts and
higher volume from plant enhancement projects.
Government Operations
- ---------------------
Revenues increased $31,062,000 to $290,489,000, primarily due to higher revenues
from management and operation contracts for U.S. Government-owned facilities and
from nuclear fuel assemblies and reactor components for the U.S. Government.
These increases were partially offset by lower revenues from commercial
operations, other government operations and commercial nuclear environmental
services.
Segment operating income decreased $8,655,000 to $18,871,000, primarily due to
an $8,000,000 settlement of punitive damage claims relating to a civil suit
associated with a Pennsylvania facility formerly operated by McDermott. There
were also lower margins from commercial nuclear environmental services. These
decreases were partially offset by higher volume from management and operation
contracts for U.S. Government-owned facilities.
Income from investees decreased $1,953,000 to $1,824,000. The decrease is
primarily due to lower operating results from a domestic joint venture in
Colorado.
Other
- -----
Revenues increased $57,396,000 to $305,598,000, primarily due to higher revenues
from engineering activities in Canadian operations and from air-cooled heat
exchangers. These increases were partially offset by lower revenues from
domestic engineering and construction activities, plant maintenance activities
in Canadian operations and the disposition of a non-core business.
Operating income increased $10,875,000 to $14,173,000, primarily due to higher
volume from engineering activities in Canadian operations and higher volume and
margins from air-cooled heat exchangers. There were also losses in a non-core
business disposed of in the prior period. These increases were partially offset
by lower volume from domestic engineering and construction activities and higher
general and administrative expenses.
Gain on asset disposals and impairments-net decreased $125,334,000 from income
of $125,150,000 to a loss of $184,000. The prior period gains were primarily
due to the sale of McDermott's interest in Sakhalin Energy Investment Company
Ltd. and Universal Fabricators Incorporated.
27
<PAGE>
Income (loss) from investees decreased $4,838,000 from income of $3,701,000 to a
loss of $1,137,000, primarily due to lower operating results from a domestic
joint venture in Colorado and the shutdown of two foreign joint ventures in the
former Soviet Union.
Other Unallocated Items
- -----------------------
Other Unallocated Items decreased $1,632,000 from income of $403,000 to expense
of $1,229,000, primarily due to higher general and administrative and employee
benefit expenses. These decreases were partially offset by favorable claim
reserve adjustments and lower legal expenses related to claims.
Other Income Statement Items
- ----------------------------
Interest income increased $36,277,000 to $78,667,000, primarily due to increases
in investments in government obligations and other debt securities and interest
income on the settlement of Internal Revenue Service exposure items.
Interest expense decreased $13,984,000 to $49,137,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense increased $21,711,000 to $61,369,000, primarily due to
minority shareholder participation in the improved operating results of JRM,
partially offset by minority shareholder participation in the increased losses
of a consolidated foreign joint venture.
Other-net income increased $27,788,000 to $33,452,000, 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 $52,676,000 to $16,523,000, while
income before provision for income taxes decreased $36,224,000 to $231,988,000.
The decrease in the provision for income taxes was primarily the result of a
benefit of $17,925,000 recorded as a result of the decrease in the valuation
allowance for deferred tax assets, an increase in the proportion of income
earned in non-taxable jurisdictions and favorable tax settlements totaling
$21,367,000 of prior years' disputed items in foreign jurisdictions. 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 bases (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.
28
<PAGE>
Backlog 12/31/98 3/31/98
- ------- ---------- ----------
(In thousands)
Marine Construction Services $ 555,961 $1,267,148
Power Generation Systems 1,009,806 1,071,121
Government Operations 941,908 810,749
Other 436,719 262,455
Eliminations (1,883) (2,243)
---------- ----------
TOTAL BACKLOG $2,942,511 $3,409,230
========== ==========
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 JRM's withdrawal from traditional European engineering
markets. Finally, backlog decreased as a result of sluggish economic conditions
in the Middle and Far East and the political instability in the Far East.
Power Generation Systems' foreign markets have been adversely impacted by
suspensions of power projects in Southeast Asia and Pakistan. Also, the U.S.
market for industrial and utility boilers remains weak. However, the U.S.
market for services and replacement nuclear steam generators is expected to
remain strong and to make significant contributions to operating income into the
foreseeable future.
At December 31, 1998, Government Operations' backlog with the U.S. Government
was $842,569,000 (of which $39,460,000 had not been funded). The backlog of
this segment is not expected to experience any significant growth as a result of
reductions in the defense budget over the past several years. However,
management expects this segment's backlog to remain relatively constant since it
is the sole-source provider of nuclear fuel assemblies and nuclear reactor
components for the U.S. Government.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended December 31, 1998, McDermott's cash and cash
equivalents decreased $12,567,000 to $265,309,000 and total debt decreased
$150,910,000 to $603,572,000, primarily due to the attainment of sales treatment
for $56,929,000 of secured borrowings (see below), repayment of $45,910,000 in
long-term debt, the decrease in short-term borrowings of $30,954,000 and the
settlement of a note payable of $14,565,000 pursuant to the termination of the
McDermott-ETPM joint venture. During this period, McDermott provided cash of
$291,278,000 from operating activities and received cash proceeds of
$130,131,000 from asset disposals, including $95,546,000 from the termination of
the McDermott-ETPM joint venture.
29
<PAGE>
McDermott used cash of $117,428,000 for stock repurchases, $154,631,000 for the
redemption of a subsidiary's preferred stocks, $38,763,000 for net purchases of
investments, $45,294,000 for additions to property, plant and equipment, and
$10,861,000 for dividends on MII's common and preferred stock.
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. Reimbursement of such claims
is subject to varying insurance limits based upon the year involved. Moreover,
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 $6,900 per claim over the last three years)
has continued to rise. Claims paid during the nine months ended December 31,
1998 were $178,270,000, of which $142,432,000 has been recovered or is due from
insurers. At December 31, 1998, receivables of $89,618,000 were due from
insurers for reimbursement of settled claims. Of the $89,618,000 due from
insurers, $44,922,000 has been included in the pool of qualified receivables
sold pursuant to a receivables purchase and sale agreement (see below). 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.
At December 31, 1998, the estimated liability for pending and future non-
employee products liability asbestos claims was $708,421,000 (of which
approximately $273,000,000 had been asserted) and estimated insurance recoveries
were $582,226,000. Settlement of this estimated liability is expected to occur
over the next thirteen years. 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 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. Such trends include management's
expectation that new claims will conclude within the next thirteen years, that
there will be a significant decline in new claims asserted within the next
twelve months, and that the average cost per claim will continue to increase
only moderately. Should management's estimates be incorrect, McDermott's
ultimate loss for such claims may exceed the amounts provided in the
consolidated financial statements.
Expenditures for property, plant and equipment increased $12,355,000 to
$45,294,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
30
<PAGE>
At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase and sale agreement between The Babcock & Wilcox Company
("B&W") and certain of its affiliates and subsidiaries and a U.S. Bank. Through
July 31, 1998, $25,854,000 was repaid under the agreement. Effective July 31,
1998, the receivables purchase and sale agreement was amended and restated to
provide for, among other things, the inclusion of 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." As a result, $56,929,000 was
removed from notes payable and current maturities of long-term debt on the
balance sheet. The amended and restated agreement, with a maximum sales limit
available of $100,000,000, expires on July 31, 1999.
At December 31 and March 31, 1998, McDermott had available various uncommitted
short-term lines of credit from banks totaling $103,020,000 and $127,061,000,
respectively. Borrowings against these lines of credit at March 31, 1998 were
$5,100,000. There were no borrowings against these lines at December 31, 1998.
At 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 (the "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 December 31, 1998, there were no borrowings under the BWICO Credit Agreement.
Management does not anticipate BWICO will need to borrow funds under the BWICO
Credit Agreement during fiscal year 1999.
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 (the "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. At December 31,
1998, there were no borrowings under the JRM Credit Agreement. Management does
not anticipate JRM will need to borrow funds under the JRM Credit Agreement
during fiscal year 1999.
31
<PAGE>
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 December 31, 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 funds through unsecured loans
to or investments in MII. At December 31,1998, JRM could pay cash dividends on,
or repurchase shares of, its capital stock (including shares held by MII) in the
amount of $28,588,000, 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 $222,000,000
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.
On February 4, 1999, JRM initiated an offer to purchase all of its outstanding
9.375% Senior Subordinated Notes at a purchase price of 113.046% of their
principal amount ($1,130.46 per $1,000 principal amount), plus accrued and
unpaid interest to, but not including, the payment date. The offer will expire
on March 5, 1999, unless extended. In connection with the offer, JRM is also
soliciting consents to certain amendments that would amend or eliminate certain
restrictive covenants and other provisions contained in the indenture relating
to the notes. Holders who tender notes for purchase by JRM pursuant to the offer
are required to consent to the amendments in order to have their notes accepted
for purchase. The tender offer is conditioned on, among other things, there
being validly tendered and not withdrawn prior to its expiration at least a
majority of the aggregate principal amount of the notes outstanding, with
consents to the amendments. If this condition is met and the offer is
consummated, the covenants described in the preceding paragraph that restrict
JRM's ability to pay dividends, repurchase or redeem its capital stock, or to
transfer funds through unsecured loans to or investments in MII will be
eliminated.
McDermott 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, 1998 was $1,120,673,000. Management anticipates using
a portion of this portfolio to fund the offer
32
<PAGE>
described above. At December 31, 1998, approximately $63,733,000 fair value of
obligations in the portfolio was pledged as collateral in connection with
certain reinsurance agreements.
Working capital decreased $1,736,000 from $135,430,000 at March 31, 1998 to
$133,694,000 at December 31, 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 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 the repurchase of 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. MII completed its two million share repurchase program in
August 1998; therefore, no shares were repurchased during the three months ended
December 31, 1998. During the nine months ended December 31, 1998, MII
repurchased 1,900,000 shares of its common stock at an average share price of
$31.10.
JRM's Board of Directors has also approved the repurchase of up to three 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. Share repurchases by JRM are also dependent on its ability to
satisfy its debt covenants. During the three months ended December 31, 1998,
JRM purchased 100,000 shares of its common stock. During the nine months ended
December 31, 1998, JRM purchased 1,837,700 shares of its common stock at an
average share price of $31.67. At December 31, 1998, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
On July 17, 1998, MI redeemed all of its 2,152,766 outstanding shares of Series
B $2.60 Cumulative Preferred Stock for $31.25, plus $0.1156 in accrued but
unpaid dividends, per share. MII made a $68,000,000 capital contribution to MI
to cover the cost of the redemption.
On September 11, 1998, MI redeemed 2,795,428 of its outstanding shares of Series
A $2.20 Cumulative Convertible Preferred Stock ("Series A Preferred Stock") for
$31.25, plus $0.43 in accrued but unpaid dividends, per share. The remaining
23,251 outstanding shares of its Series A Preferred Stock were converted into
MII common stock at a conversion ratio of one share of MII common stock, plus
$0.10, for each preferred share. MII made a $90,000,000 capital contribution to
MI to cover the cost of the redemption and conversion.
33
<PAGE>
At December 31, 1998, MII has provided a valuation allowance for deferred tax
assets of $51,132,000 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, 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 McDermott company-wide Year 2000 Project is proceeding on schedule. The
project addresses information technology components (hardware and software) in
internal business systems and infrastructure and the embedded systems in
offices, plants and products delivered to customers. In addition, an analysis
of critical suppliers is being performed to ensure the supply of materials and
services that are strategic to business continuity. The Year 2000 Project began
company-wide with a planning phase during the latter part of 1996 followed by a
company-wide assessment, which was completed in early 1997. Based upon the
results of the assessment and the diverse nature of McDermott's product lines,
strategies for business systems were developed that fit requirements of each of
the McDermott business units. Some entities are replacing legacy systems with
commercial enterprise systems, others are employing a combination of proprietary
and third-party client/server systems, while a third strategy is based primarily
upon remediation of legacy applications. Embedded systems and the critical
supplier analysis are being addressed with a common methodology across
McDermott.
A consistent work breakdown structure for the project is being employed
throughout McDermott:
. Business Applications and IT Infrastructure ("IT Systems")
. Facilities (office buildings)
. Embedded Systems (in plants and construction equipment)
. Customer Products (embedded systems in customer products)
. Critical Suppliers
The general phases of the project common to all of the above functions are: (1)
inventory items with potential Year 2000 impact, (2) establish priorities, (3)
assess and create a solution strategy for those items determined to be material
to McDermott, (4) implement solutions defined for those items assessed to have
Year 2000 impact, and (5) test and validate solutions.
34
<PAGE>
At December 31, 1998, the inventory, prioritization and assessment of the IT
Systems and Facilities were complete. The implementation is in progress with
approximately 80% of the work completed. The inventory of internal Embedded
Systems is complete and the testing and replacement of components is in
progress. The Customer Products phase of the project achieved significant
progress during the quarter and is currently 85% complete and on schedule. The
tasks of inventory, prioritization and assessment of Critical Suppliers are
complete at most company locations. Alternative sourcing and contingency plans
are under development. Through this process, business units will mitigate the
risk of material impact to continuing operations from potential supplier
failure.
All Year 2000 solutions for the IT Systems, Facilities and Embedded Systems that
support McDermott's engineering, manufacturing and construction operations and
the corporate functions are scheduled to be completed by June 30, 1999. The
analysis and the compliance tasks for Customer Products and Critical Suppliers
are on schedule and are forecast to be completed by June 30, 1999.
As an alternative to the remediation of the legacy payroll systems, McDermott
has elected to outsource its payroll function. The transition to the payroll
service provider will be completed September 30, 1999.
McDermott does not expect that the cost associated with the modifications to
critical systems and other compliance activities will have a material impact on
its consolidated financial condition, cash flows or results of operations. The
cost of the Year 2000 Project is estimated at $39,000,000 and is being funded
through operating cash flows. Of the total project cost, $9,000,000 is
attributable to the purchase of hardware and software, which will be
capitalized, and the remaining $30,000,000 will be expensed as incurred.
Expenditures to date include $6,000,000 of capital and $14,000,000 of expense.
McDermott's Year 2000 compliance is also dependent upon Year 2000 readiness of
external agents and third-party suppliers on a timely basis. The failure of
McDermott or its agents or suppliers to achieve Year 2000 compliance could
result in, among other things, plant production interruptions, delays in the
delivery of products, delays in construction completions, delays in the receipt
of supplies, invoice and collection errors, and inaccurate inventories. These
consequences could have a material adverse impact on McDermott's results of
operations, financial condition and cash flow if it is unable to conduct its
businesses in the ordinary course.
Contingency plans are being defined and, in some cases, already initiated where
there is high risk associated with the implementation of the primary compliance
strategy. Examples of contingency projects are: (i) remediation of legacy
systems concurrent with the implementation of third-party
35
<PAGE>
replacement software where there is little margin for delay in the vendor's
delivery of the software; and (ii) outsourcing of certain functions where the
remediation of a major legacy system has subsequently evolved to be a high-risk
project. Contingency plans are being developed consistent with the priorities
and requirements of each business unit and will be continually refined as
additional information becomes available.
Although McDermott is unable to determine at this time whether the consequences
of Year 2000 failures will have a material impact on its results of operations,
McDermott believes that its Year 2000 Project, including contingency plans,
should significantly reduce the adverse effect that any such disruptions may
have.
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. The dates on which McDermott
believes the Year 2000 Project will be completed are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved or that there will not be a delay in, or
increased costs associated with, the implementation of the Year 2000 Project.
Specific factors that might cause differences between the estimates and actual
results include, but are not limited to, the availability and cost of personnel
trained in these areas, the ability to locate and correct all relevant computer
code, timely responses to and corrections by third parties and suppliers, the
ability to implement interfaces between the new systems and the systems not
being replaced, and similar uncertainties. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third parties and the interconnection of global
businesses, McDermott cannot ensure its ability to timely and cost-effectively
resolve problems associated with the Year 2000 issue that may affect its
operations and business, or expose it to third-party liability.
New Accounting Standards
- ------------------------
In April 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.
36
<PAGE>
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 effect the
adoption of SFAS No. 133 will have on its consolidated financial position or
results of operations.
37
<PAGE>
PART II
McDERMOTT INTERNATIONAL, INC.
OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
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 their officers,
directors and employees 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. The Department of Justice also has 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.
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
38
<PAGE>
(which at that time was the parent of the McDermott group of companies),
pursuant to an SEC complaint (the "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 (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., and certain JRM subsidiaries,
HeereMac, Heerema, certain Heerema affiliates, and others alleging 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 (the
"Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s.,
individually and on behalf of certain of its ventures and its participants,
filed a similar lawsuit in the same court, which was consolidated with the
Phillips Litigation. In addition to seeking injunctive relief, actual damages
and attorneys' fees, the plaintiffs in the Phillips Litigation have requested
punitive as well as treble damages. In January 1999, the court dismissed
without prejudice, due to the court's lack of subject matter jurisdiction, the
claims of the Phillips Plaintiffs relating to alleged injuries sustained on any
foreign projects. This decision is subject to further judicial review.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
lawsuit 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 (the "Shell Litigation"). Subsequent thereto, Amoco Production Company and
B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain
of its affiliates; Texaco Exploration and Production Inc. and certain of its
affiliates; Elf Exploration UK PLC; Burlington Resources Offshore, Inc. and The
Louisiana Land & Exploration Company; Marathon Oil Company and certain of its
affiliates; VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline
Company, L.L.C. and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and
Chevron Overseas Petroleum Inc.; and Shell U.K. Limited and certain of its
affiliates intervened (acting for themselves and, if applicable, on behalf of
their respective co-venturers and for whom they operate) as plaintiffs in the
Shell Litigation. Also, in December 1998, Total Oil Marine p.l.c. and Norsk
Hydro Produksjon a.s., individually and on behalf of their respective co-
venturers, filed similar lawsuits in the same court, which lawsuits were
consolidated with the Shell Litigation. In addition to seeking injunctive
relief, actual damages and attorneys' fees, the plaintiffs in the Shell
Litigation request treble damages.
39
<PAGE>
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 criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F.
Hall, Mary Ann Hall and others in the United States District Court for the
Western District of Pennsylvania involving over 120 separate cases relating to
the operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"), alleging, among other things, that they
suffered personal injury and other damages as a result of radioactive emissions
from these facilities. In September 1998, a jury found B&W and Atlantic
Richfield Company liable to the plaintiffs in the first eight cases brought to
trial, awarding $36,700,000 in compensatory damages. This jury verdict is being
contested. B&W and its insurers have filed seperate actions seeking a judicial
determination as to the amount of insurance coverage available. Management
believes that the award and all other claims will be resolved within the limits
and coverage of such insurance policies; however, no assurance on insurance
coverage or financial impact if limits of coverage are exceeded can be given. In
connection with the foregoing, B&W settled all pending and future punitive
damage claims represented by the plaintiffs' lawyers in the Hall Litigation for
$8,000,000 and seeks reimbursement of this amount from other parties.
Additionally, McDermott is, from time to time, involved in routine litigation
related to its business activity. It is management's opinion that none of this
routine litigation will have a material adverse effect on McDermott's
consolidated financial position or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.2 - Amended and Restated By-Laws of McDermott International,
Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
December 31, 1998.
40
<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)
February 8, 1999
41
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.2 Amended and Restated By-Laws of McDermott International, Inc.
27 Financial Data Schedule
42
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
McDERMOTT INTERNATIONAL, INC.
(as amended to November 13, 1998)
ARTICLE I
Meetings of Stockholders
Section 1. The annual and any special meetings of the stockholders shall
be held on the date and at the time and place designated in the notice of such
meetings or in a duly executed waiver of notice thereof.
Section 2. A special meeting of the stockholders may be held at any time
upon the call of the Chief Executive Officer or by order of the Board of
Directors.
Section 3. Whether or not a quorum is present at any stockholders'
meeting, the meeting may be adjourned from time to time by the vote of the
holders of a majority of the voting power of the shares of the outstanding
capital stock of the Company present in person or represented by proxy at the
meeting, as they shall determine.
Section 4. Holders of a majority of the voting power of the shares of the
outstanding capital stock of the Company entitled to vote, present in person or
represented by proxy, shall constitute a quorum for the transaction of all
business at any meeting of the stockholders.
Section 5. In all matters arising at stockholders' meetings, a majority of
the voting power of the shares of the outstanding capital stock of the Company
present in person or represented by proxy at the meeting shall be necessary and
sufficient for the transaction of any business, except where some larger
percentage is affirmatively required by law or by the certificate of
incorporation.
Section 6. At any meeting of stockholders, the chairman of the meeting may
appoint two inspectors who shall subscribe an oath or affirmation to execute
faithfully the duties of inspectors with strict impartiality and according to
the best of their ability, to canvass the votes on any matter and make and sign
a certificate of the result thereof. No candidate for the office of director
shall be appointed as such inspector with respect to the election of directors.
Such inspectors shall be appointed upon the request of the holders of ten
percent (10%) or more of the voting power of the shares of the outstanding
capital stock of the Company present and entitled to vote on such matter.
Section 7. All elections of directors shall be by ballot. The chairman of
the meeting may cause a vote by ballot to be taken upon any other matter, and
such vote by ballot shall be taken
43
<PAGE>
upon the request of the holders of ten percent (10%) or more of the voting power
of the shares of the outstanding capital stock of the Company present and
entitled to vote on such matter.
Section 8. The meetings of the stockholders shall be presided over by the
Chief Executive Officer, or if he is absent or unable to preside, by the
Chairman and if neither the Chief Executive Officer nor the Chairman is present
or able to preside, then by a Vice Chairman; if more than one Vice Chairman is
present and able to preside the Vice Chairman who shall have held such office
for the longest period of time shall preside; if neither the Chief Executive
Officer nor the Chairman nor a Vice Chairman is present and able to preside,
then the President shall preside; if none of the above is present and able to
preside, then a person shall be elected at the meeting to preside over same.
The Secretary of the Company, if present, shall act as secretary of such
meetings or, if he is not present, an Assistant Secretary shall so act; if
neither the Secretary nor an Assistant Secretary is present, then a secretary
shall be appointed by the person presiding over the meeting.
The order of business shall be as follows:
(a) Calling of meeting to order
(b) Election of chairman and the appointment of a secretary, if necessary
(c) Presentation of proof of the due calling of the meeting
(d) Presentation and examination of proxies
(e) Settlement of the minutes of the previous meeting
(f) Reports of officers and committees
(g) The election of directors, if an annual meeting, or a meeting called
for that purpose
(h) Unfinished business
(i) New business
(j) Adjournment.
Section 9. At every meeting of the stockholders, all proxies shall be
received and taken in charge of and all ballots shall be received and canvassed
by the secretary of the meeting who shall decide all questions touching the
qualification of voters, the validity of the proxies, and the acceptance or
rejection of votes, unless inspectors shall have been appointed, in which event
such inspectors shall perform such duties and decide such questions with respect
to the matter for which they have been appointed.
ARTICLE II
Directors
Section 1. The business and affairs of the Company shall be managed by its
Board of Directors in accordance with the provisions of the Articles of
Incorporation. The number of Directors shall be as provided in the Articles of
Incorporation.
Section 2. Meetings of the Board of Directors may be called by the
Chairman or by the Chief Executive Officer or by a majority of the directors by
giving notice to each director.
44
<PAGE>
Section 3. Meetings of the Board of Directors shall be presided over by
the Chairman, or if the Chairman so requests or is absent or unable to preside,
by the Chief Executive Officer; if neither the Chairman nor the Chief Executive
Officer is present and able to preside, then by a Vice Chairman; if more than
one Vice Chairman is present and able to preside, the Vice Chairman who shall
have held such office for the longest period of time shall preside; if neither
the Chairman nor the Chief Executive Officer nor a Vice Chairman is present and
able to preside, then the President shall preside; if none of the above is
present and able to preside, then one of the Directors shall be elected at the
meeting to preside over same.
Section 4. Whether or not a quorum is present at any meeting of the Board
of Directors, a majority of the directors present may adjourn the meeting from
time to time as they may determine. Notice need not be given of any such
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken. Any business may be transacted at the adjourned
meeting which might have been transacted at the original meeting.
Section 5. Any committee of the Board of Directors shall have and may
exercise the powers of the Board of Directors in the management of the business
and affairs of the Company to the extent provided in the resolution by which
such committee is designated, except that no such committee shall have authority
to alter or amend the By-Laws, or to fill vacancies in either the Board of
Directors or its own membership. In the absence or disqualification of any
member of such a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Each such
committee shall meet at stated times or on notice to all by any of its own
number. It shall fix its own rules of procedure. A majority shall constitute a
quorum and the affirmative vote of a majority of those present at a meeting at
which a quorum is present shall be the act of such committee. Each such
committee shall keep minutes of its proceedings.
Section 6. Directors shall receive as compensation for their services an
amount in addition to actual expenses incident to the attending of meetings to
be fixed by resolution of the Board of Directors. Nothing in this section shall
be construed to preclude a Director from serving the Company in any other
capacity and receiving compensation therefor.
Section 7. In no event shall a Director serve past his attaining the age
of 70, and any such Director who attains age 70 during a term to which he was
elected shall immediately resign and retire from the Board of Directors;
provided, however, that any Director of the Company as of November 13, 1998 who
is, or will attain during his current term, the age of 70 may continue to serve
as a Director for the remainder of such Director's current term.
No person shall be nominated for election or serve as a Director who has
served as a Director of the Company, together with its parent and subsidiary
companies, for a cumulative period
45
<PAGE>
of twenty (20) years and any such person whose service as a Director totals
twenty (20) years during a term to which he is elected shall resign and retire
from the Board of Directors as of the next annual meeting of the stockholders.
Section 8. A Director of this Corporation who is, under Section 411(a) of
the Employee Retirement Income Security Act of 1974 of the United States of
America, under a disability to serve as a fiduciary of an employee benefit plan,
as that term is defined in Section 3(3) of said Act shall not serve as a
fiduciary of any such employee benefit plan with respect to which the Company or
any of its subsidiaries is an employer as defined in Section 3(5) of said Act;
and, during the period of such disability, such Director shall be precluded from
acting in any manner with respect to any such plan. Any Director who is
disabled from serving as a fiduciary of an employee benefit plan under Section
411(a) of said Act shall be requested to consent, in writing, to the
applicability of this By-Law to him.
ARTICLE III
Officers
Section 1. The officers of this Company shall be elected annually by the
Board of Directors at its first meeting following the annual meeting of
stockholders or from time to time and shall hold office until their successors
are elected and qualify, or until their earlier death, resignation or removal.
Such officers shall consist of a Chairman of the Board of Directors, a Chief
Executive Officer, one or more Vice Chairmen of the Board of Directors, a
President, one or more Vice Presidents, a Secretary, a Treasurer and one or more
Controllers. In these By-Laws, the Chairman of the Board of Directors is
sometimes referred to as "Chairman", and the Vice Chairman or Vice Chairmen of
the Board of Directors are sometimes referred to as "Vice Chairman" or "Vice
Chairmen", respectively. The Board of Directors may in addition elect at such
meeting or from time to time one or more Assistant Secretaries and one or more
Assistant Treasurers and one or more Assistant Controllers. Any number of
offices may be held by the same person.
Section 2. The officers shall have such powers and duties as may be
provided in these By-Laws and as may be conferred upon or assigned to them by
the Board of Directors from time to time.
Section 3. The Chairman shall preside over meetings of the Board of
Directors, as stated elsewhere in these By-Laws.
Section 4. The Chief Executive Officer shall preside over meetings of the
shareholders, as stated elsewhere in these By-Laws; subject to the direction of
the Board of Directors, he shall have and exercise direct charge of and general
supervision over all business and affairs of the Company and shall perform all
duties incident to the office of the Chief Executive Officer of a corporation,
and such other duties as may be assigned to him by the Board of Directors.
46
<PAGE>
Section 5. Each Vice Chairman of the Board of Directors shall have and
exercise such powers and perform such duties as may be conferred upon or
assigned to him by the Board of Directors or by the Chief Executive Officer.
Section 6. The President shall be the Chief Operating Officer of the
Company and shall have and exercise such powers and perform such duties as may
be conferred upon or assigned to him by the Board of Directors or by the Chief
Executive Officer.
Section 7. Each Vice President shall have and exercise such powers and
perform such duties as may be conferred upon or assigned to him by the Board of
Directors or by the Chief Executive Officer.
Section 8. Each Controller shall have and exercise such powers and perform
such duties as may be conferred upon or assigned to him by the Board of
Directors or by the Chief Executive Officer.
Section 9. The Secretary shall give proper notice of meetings of
stockholders and directors, shall be custodian of the book in which the minutes
of such meetings are kept, and shall perform such other duties as shall be
assigned to him by the Board of Directors or by the Chief Executive Officer.
Section 10. The Treasurer shall keep or cause to be kept accounts of all
monies of the company received or disbursed, shall deposit or cause to be
deposited all monies and other valuables in the name of and to the credit of the
Company in such banks and depositories as the Board of Directors shall
designate, and shall perform such other duties as shall be assigned to him by
the Board of Directors or by the Chief Executive Officer. All checks or other
instruments for the payment of money shall be signed in such a manner as the
Board of Directors may from time to time determine.
Section 11. Any officers of the Company may be removed, with or without
cause, by resolution adopted by the Board of Directors at a meeting called for
that purpose.
ARTICLE IV
Seal
The corporate seal of this Company shall be a circular seal with the name
of the Company around the border and the word "SEAL" in the center.
ARTICLE V
Any of these By-Laws may be amended, altered or repealed and additional By-
Laws may be adopted by the Board of Directors by the affirmative vote of a
majority of the whole Board cast at a meeting duly held, except that the vote of
two-thirds of the outstanding shares of the Company
47
<PAGE>
entitled to vote shall be required to amend, alter or repeal Section 1 or
Section 9 of Article II or this Article V (as it applies to said Section 1 and 9
of Article II) of these By-Laws.
ARTICLE VI
Indemnification
Section 1. Each person (and the heirs, executors and administrators of
such person) who is or was a director or officer of the Company shall in
accordance with Section 2 of this Article VI be indemnified by the Company
against any and all liability and reasonable expense that may be paid or
incurred by him in connection with or resulting from any actual or threatened
claim, action, suit or proceeding (whether brought by or in the right of the
Company or otherwise), civil, criminal, administrative or investigative, or in
connection with an appeal relating thereto, in which he may become involved, as
a party or otherwise, by reason of his being or having been a director or
officer of the Company or, if he shall be serving or shall have served in such
capacity at the request of the Company, a director, officer, employee or agent
of another corporation or any partnership, joint venture, trust or other entity
whether or not he continues to be such at the time such liability or expense
shall have been paid or incurred, provided such person acted, in good faith, in
a manner he reasonably believed to be in or not opposed to the best interest of
the Company and in addition, in criminal actions or proceedings, had no
reasonable cause to believe that his conduct was unlawful. As used in this
ARTICLE VI, the terms, "liability" and "expense" shall include, but shall not be
limited to, counsel fees and disbursements and amounts of judgments, fines or
penalties against, and amounts paid in settlement by, such director or officer.
The termination of any actual or threatened claim, action, suit or proceeding,
civil, criminal, administrative, or investigative, by judgment, settlement
(whether with or without court approval), conviction or upon a plea of guilty or
nolo contendere, or its equivalent, shall not create a presumption that such
director or officer did not meet the standards of conduct set forth in this
Section 1.
Section 2. Every such director and officer shall be entitled to
indemnification under Section 1 of this ARTICLE VI with respect to any claim,
action, suit or proceeding of the character described in such Section 1 in which
he may become in any way involved as set forth in such Section 1, if (i) he has
been wholly successful on the merits or otherwise in respect thereof, or (ii)
the Board of Directors acting by a majority vote of a quorum consisting of
directors who are not parties to (or who have been wholly successful with
respect to) such claim, action, suit or proceeding, finds that such director or
officer has met the standards of conduct set forth in such Section 1 with
respect thereto, or (iii) a court determines that he has met such standards with
respect thereto, or (iv) independent legal counsel (who may be the regular
counsel of the Company) deliver to the Company their written advice that, in
their opinion, he has met such standards with respect thereto.
48
<PAGE>
Section 3. Expenses incurred with respect to any claim, action, suit or
proceeding of the character described in Section 1 of this ARTICLE VI may be
advanced by the Company prior to the final disposition thereof upon receipt of
an undertaking by or on behalf of the recipient to repay such amount unless it
is ultimately determined that he is entitled to indemnification under this
ARTICLE VI.
Section 4. The rights of indemnification under this ARTICLE VI shall be in
addition to any rights to which any such director or officer or any other person
may otherwise be entitled by contract or as a matter of law.
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 265,309
<SECURITIES> 55
<RECEIVABLES> 534,534
<ALLOWANCES> 65,182
<INVENTORY> 272,500
<CURRENT-ASSETS> 1,341,475
<PP&E> 1,502,886
<DEPRECIATION> 1,045,398
<TOTAL-ASSETS> 3,853,457
<CURRENT-LIABILITIES> 1,207,781
<BONDS> 567,802
0
0
<COMMON> 60,996
<OTHER-SE> 799,151
<TOTAL-LIABILITY-AND-EQUITY> 3,853,457
<SALES> 2,400,617
<TOTAL-REVENUES> 2,400,617
<CGS> 2,221,486
<TOTAL-COSTS> 2,221,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,137
<INCOME-PRETAX> 231,988
<INCOME-TAX> 16,523
<INCOME-CONTINUING> 215,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215,465
<EPS-PRIMARY> 3.65
<EPS-DILUTED> 3.50
</TABLE>
