<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 June 30, 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. 1-13570
J. RAY McDERMOTT, S.A.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-1278896
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5300
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share, outstanding as
of July 30, 1998 was 39,893,367.
<PAGE>
J. RAY McDERMOTT, S.A.
I N D E X - F O R M 10 - Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
June 30, 1998 and March 31, 1998 4
Condensed Consolidated Statement of Income
Three Months Ended June 30, 1998 and 1997 6
Condensed Consolidated Statement of Comprehensive Income (Loss)
Three Months Ended June 30, 1998 and 1997 7
Condensed Consolidated Statement of Cash Flows
Three Months Ended June 30, 1998 and 1997 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 26
SIGNATURES 27
Exhibit 27 - Financial Data Schedule 29
2
<PAGE>
PART I
J. RAY McDERMOTT, S.A.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
6/30/98 3/31/98
------- -------
(Unaudited)
(In thousands)
Current Assets:
Cash and cash equivalents $ 148,040 $ 152,011
Accounts receivable-trade 185,009 227,538
Accounts receivable-unconsolidated
affiliates 30,311 45,072
Accounts receivable-other 28,228 26,327
Contracts in progress 62,184 71,084
Other current assets 42,637 45,634
- -----------------------------------------------------------------------
Total Current Assets 496,409 567,666
- -----------------------------------------------------------------------
Property, Plant and Equipment, at Cost 972,169 1,182,448
Less accumulated depreciation 680,117 839,298
- -----------------------------------------------------------------------
Net Property, Plant and Equipment 292,052 343,150
- -----------------------------------------------------------------------
Investments in Debt Securities 721,339 543,658
- -----------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $2,541,000 at June 30, 1998
and $8,542,000 at March 31, 1998 12,494 22,153
- -----------------------------------------------------------------------
Investment in Unconsolidated Affiliates 36,691 29,069
- -----------------------------------------------------------------------
Other Assets 42,423 43,024
- -----------------------------------------------------------------------
TOTAL $1,601,408 $1,548,720
=======================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
6/30/98 3/31/98
------- -------
(Unaudited)
(In thousands)
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 32,919 $ 31,272
Accounts payable 170,310 171,180
Accrued contract costs 69,828 88,518
Accrued liabilities - other 102,764 110,345
Advance billings on contracts 86,810 91,549
Accrued employee benefits 41,655 44,572
U.S. and foreign income taxes 40,286 23,057
- -------------------------------------------------------------------------------
Total Current Liabilities 544,572 560,493
- -------------------------------------------------------------------------------
Long-Term Debt 245,534 245,822
- -------------------------------------------------------------------------------
Deferred and Non-Current Income Taxes 47,392 46,989
- -------------------------------------------------------------------------------
Other Liabilities 64,059 78,854
- -------------------------------------------------------------------------------
Contingencies
- -------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 10,000,000 shares;
outstanding 3,200,000 Series A $2.25 cumulative
convertible, par value $0.01 per share,
(liquidation preference $160,000,000) 32 32
Common stock, par value $0.01 per share,
authorized 60,000,000 shares; issued
41,189,993 at June 30, 1998 and
41,130,328 at March 31, 1998 412 411
Capital in excess of par value 617,724 615,515
Retained Earnings 122,058 35,418
Treasury stock at cost; 637,700 shares at June 30,
1998 and 362,500 at March 31, 1998 (24,110) (13,537)
Accumulated other comprehensive loss (16,265) (21,277)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 699,851 616,562
- -------------------------------------------------------------------------------
TOTAL $1,601,408 $1,548,720
===============================================================================
</TABLE>
5
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
JUNE 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $370,552 $478,223
- --------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 294,544 398,331
Depreciation and amortization 14,282 27,229
Selling, general and
administrative expenses 27,910 27,839
- --------------------------------------------------------------------
336,736 453,399
- --------------------------------------------------------------------
Gain on Asset Disposals and
Impairments-net 45,047 594
- --------------------------------------------------------------------
Operating Income before
Income (Loss) from Investees 78,863 25,418
Income (Loss) from Investees 13,515 (4,399)
- --------------------------------------------------------------------
Operating Income 92,378 21,019
- --------------------------------------------------------------------
Other Income (Expense):
Interest income 11,454 4,649
Interest expense (6,414) (9,615)
Other-net 11,413 1,221
- --------------------------------------------------------------------
16,453 (3,745)
- --------------------------------------------------------------------
Income before Provision for Income Taxes 108,831 17,274
Provision for Income Taxes 20,391 9,164
- --------------------------------------------------------------------
Net Income $ 88,440 $ 8,110
====================================================================
Net Income Applicable to Common Stock
(after Preferred Stock Dividends) $ 86,640 $ 6,310
====================================================================
Earnings per Common Share:
Basic $ 2.13 $ 0.16
Diluted $ 1.89 $ 0.15
====================================================================
Cash Dividends:
Per Preferred Share $ 0.5625 $ 0.5625
====================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
J. RAY McDERMOTT, S. A.
CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
JUNE 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Net Income $ 88,440 $ 8,110
- ---------------------------------------------------------------------------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translations adjustments,
excluding the effect of the purchase of an
equity investment from McDermott
International, Inc. of $10,262,000 (315) (15,470)
Sales of investments in foreign entities 15,596 -
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during
the period, net of tax (7) 89
- ---------------------------------------------------------------------------
Other Comprehensive Income (Loss) 15,274 (15,381)
- ---------------------------------------------------------------------------
Comprehensive Income (Loss) $103,714 $ (7,271)
===========================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
JUNE 30, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98 6/30/97
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 88,440 $ 8,110
- -------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,282 27,229
Income from investees,
less dividends (13,515) 4,399
Gain on asset disposals and impairments-net (45,047) (594)
Provision for (benefit from) deferred taxes (17,093) 2,371
Other 538 67
Changes in assets and liabilities, net of
effects of divestitures:
Accounts receivable 25,116 (1,122)
Net contracts in progress and advance billings 5,278 4,176
Accounts payable (8,909) 17,364
Accrued contract costs (18,690) 10,164
Accrued liabilities 34,556 15,228
Income taxes 17,550 4,775
Other, net (15,792) (4,693)
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 66,714 87,474
- -------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (12,810) (8,478)
Proceeds from asset disposals 114,366 693
Purchases of investments (182,041) -
Sales and maturities of investments 5,230 -
Other - 39
- -------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (75,255) (7,746)
- -------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (1,700) $ (2,396)
Increase (decrease) in short-term borrowing 19,201 (11,460)
Issuance of common stock 1,051 1,988
Preferred dividends paid (1,800) (1,800)
Purchases of treasury stock (10,573) -
Other (1,708) (647)
- -----------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,471 (14,315)
- -----------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 99 373
- -----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,971) 65,786
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 152,011 136,795
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $148,040 $202,581
=============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 566 $ 1,506
Income taxes (net of refunds) $ 6,377 $ 4,442
=============================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
J. RAY McDERMOTT, S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION
J. Ray McDermott, S.A. ("JRM") is a majority owned subsidiary of McDermott
International, Inc. ("MII").
The accompanying unaudited condensed consolidated financial statements are
presented in U.S. Dollars, and have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Such adjustments are of a normal,
recurring nature except for a gain on the dissolution of a joint venture of
$37,390,000, a gain of $12,000,000 from the sale of assets of a joint venture
and a gain on the settlement and curtailment of postretirement benefit plans of
$9,435,000 during the three months ended June 30, 1998. Operating results for
the three months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 1999. Results
for the quarter ended June 30, 1997 have been restated to reflect the
acquisitions from MII during fiscal year 1998 of a controlling interest in
Talleres Navales del Golfo, S.A. de C.V., a Mexican shipyard, a 100% interest in
Menck GmbH, a manufacturer of marine hammers, and the remaining interest in
McDermott Engineering Houston, LLC, an engineering joint venture. These
acquisitions have been accounted for in a manner similar to a pooling of
interests. For further information, refer to the consolidated financial
statements and footnotes thereto included in JRM'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, JRM 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'
10
<PAGE>
Equity. Accumulated balances for each classification in Accumulated other
comprehensive loss is disclosed in Note 3. Comprehensive Income (Loss) is
displayed in a separate Condensed Statement of Comprehensive Income (Loss)
included in the financial statements.
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity at June 30 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
----------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $(15,943) $(20,962)
Net Unrealized Loss on Investments (322) (315)
- ----------------------------------------------------------------
$(16,265) $(21,277)
================================================================
</TABLE>
NOTE 4 - DISPOSITIONS
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture. Pursuant to the termination, JRM received cash of approximately
$105,000,000, ETPM, S.A.'s derrick/lay barge 1601 and minority ownership in
McDermott-ETPM East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received
JRM's lay barge 200 and ownership in McDermott Subsea Constructors Limited and
McDermott-ETPM West, Inc. The Consolidated Statement of Income for the three
months ended June 30, 1997 includes revenues of $26,870,000 and operating income
of $1,726,000 attributable to operations transferred to ETPM S.A..
On May 7, 1998, JRM sold its interest in its brownfield engineering operations
and received net cash of approximately $2,210,000. Management also intends to
exit its greenfield engineering operations. In the three months ended June 30,
1998 and 1997, these operations had revenues of $34,147,000 and $75,964,000,
respectively, and operating income (loss) of ($2,082,000) and $1,301,000,
respectively.
11
<PAGE>
During the three months ended June 30, 1998, JRM's Malaysian joint venture sold
two combination pipelay and derrick barges. The joint venture, in which JRM
holds a 49% interest, received approximately $47,000,000 in cash for the barges.
NOTE 5 - SETTLEMENT AND CURTAILMENT OF POSTRETIREMENT BENEFIT PLANS
Effective April 1, 1998, JRM terminated all postretirement health care benefits
and substantially all postretirement life insurance benefits for employees. As a
result of the termination, the total accumulated postretirement benefit
obligation of JRM decreased $20,173,000. On the same date, the pension plan for
the employees affected by the termination were amended to increase the benefits
payable to the participants to offset the cost of postretirement health care and
life insurance. As a result of the amendment to the plan, the total projected
benefit obligation of JRM increased $10,738,000. The decrease in the accumulated
postretirement benefit obligation was measured against the estimated increase in
the total projected benefit obligation of the pension plan and the resulting
gain of $9,435,000 was recognized in the three months ended June 30, 1998.
NOTE 6 - INVESTIGATIONS AND LITIGATION
In March 1997, JRM and MII, with the help of outside counsel, began an
investigation into allegations of wrongdoing by a limited number of former
employees of JRM and MII 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,
JRM and MII notified authorities, including the Antitrust Division of the U. S.
Department of Justice and the European Commission. As a result of JRM's and
MII's prompt disclosure of the allegations, both companies and the individuals
who were officers, directors and employees of JRM or MII 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
12
<PAGE>
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 JRM, MII nor any of their officers, directors or employees was a party
to those proceedings.
JRM and MII have cooperated and are continuing to cooperate with the Department
of Justice in its investigation. Near the end of calendar 1997, the Department
of Justice requested additional information from the companies relating to
possible anti-competitive activity in the marine construction business of
McDermott-ETPM East, Inc., one of the operating companies within JRM's former
McDermott-ETPM joint venture with ETPM S.A., a French company. In connection
with the termination of the McDermott-ETPM joint venture on April 3, 1998,
JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed
J. Ray McDermott Middle East, Inc.
JRM and MII 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. JRM and MII are subject to a
judicial order entered in 1976, with the consent of McDermott Incorporated
(which at that time was the parent of the McDermott group of companies),
pursuant to an SEC complaint ("Consent Decree"). The Consent Decree prohibits
the companies from making false entries in their books, maintaining secret or
unrecorded funds or using corporate funds for unlawful purposes. Violations of
the Consent Decree could result in substantial civil and/or criminal penalties
to the companies.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities filed a complaint in the United
States District Court for the Southern District of Texas against JRM, MII,
McDermott Incorporated, McDermott-ETPM, Inc., certain JRM subsidiaries,
HeereMac, Heerema, certain Heerema affiliates, and others. The complaint alleges
that the defendants engaged in anti-competitive acts in violation of Sections 1
and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business
and Commerce Code, engaged in fraudulent activity and tortiously interfered with
the plaintiffs' businesses in connection with certain offshore transportation
and installation projects in the Gulf of Mexico, North Sea and Far East. In
addition to seeking actual damages and attorneys'
13
<PAGE>
fees, the plaintiffs have requested punitive as well as treble damages. Also in
June 1998, Shell Offshore, Inc. and certain related entities filed a complaint
in the United States District Court for the Southern District of Texas against
JRM, MII, HeereMac, Heerema and others alleging that the defendants engaged in
anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act. In
addition to seeking actual damages, among other things, the complaint also
requests treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC inquiry, or the companies' internal investigation, the
above referenced lawsuits, or the actions that may be taken by others as a
result of HeereMac's guilty plea or otherwise. However, these matters could
result in civil and/or criminal liability and have a material adverse effect on
JRM's consolidated financial position and results of operations.
NOTE 7 - SEGMENT REPORTING
JRM supplies worldwide services for the offshore oil and gas exploration and
production and hydrocarbon processing industries. Principal activities include
the design, engineering, fabrication and installation of offshore drilling and
production platforms, specialized structures, modular facilities, marine
pipelines and subsea production systems. JRM also provides subsea trenching
services, 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.
Other is comprised of chartering activity as well as consolidating adjustments
which pertain to operations but are excluded from management's evaluation of
segment performance.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses. Other reconciling items before provision for income taxes are
interest income, interest expense and other-net.
14
<PAGE>
Segment Information for the Three Months Ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
REVENUES: (In thousands)
- ---------
<S> <C> <C>
North American Operations $169,788 $158,331
Middle East Operations 59,343 98,781
Far East Operations 95,367 90,283
Europe and West Africa Operations 38,662 106,771
Engineering Operations 20,849 33,528
Other 7,269 8,081
Eliminations/(1)/ (20,726) (17,552)
- ------------------------------------------------------------------
Total Revenues $370,552 $478,223
==================================================================
/(1)/ Segment revenues are net of the following intersegment transfers:
North American Operations $ 1,017 $ -
Middle East Operations 1,042 -
Far East Operations 127 -
Europe and West Africa Operations - 138
Engineering Operations 13,519 14,854
Other 5,021 2,560
- ------------------------------------------------------------------
Total Intersegment Transfers $ 20,726 $ 17,552
==================================================================
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98 6/30/97
------- -------
(Unaudited)
OPERATING INCOME: (In thousands)
<S> <C> <C>
Segment Operating Income (Loss):
- --------------------------------
North American Operations $ 17,190 $13,691
Middle East Operations 9,483 10,629
Far East Operations 19,431 (2,190)
Europe and West Africa Operations (901) 483
Engineering Operations (1,594) 3,028
Other (6,370) 1,958
- --------------------------------------------------------------
Total Segment Operating Income $37,239 $27,599
- --------------------------------------------------------------
Gain (Loss) on Asset Disposals
- ------------------------------
and Impairments - Net:
----------------------
North American Operations $ 959 $ 526
Middle East Operations - (250)
Far East Operations (14) 233
Europe and West Africa Operations 36,340 7
Other 7,762 78
- --------------------------------------------------------------
Total Gain on Asset Disposals
and Impairments - Net $45,047 $ 594
- --------------------------------------------------------------
Income (Loss) from Investees:
- -----------------------------
North American Operations $ 798 $(1,916)
Far East Operations 12,036 433
Europe and West Africa Operations 1,143 (2,843)
Other (462) (73)
- --------------------------------------------------------------
Total Income (Loss) from Investees $13,515 $(4,399)
- --------------------------------------------------------------
SEGMENT INCOME (LOSS):
- ----------------------
North American Operations $18,947 $12,301
Middle East Operations 9,483 10,379
Far East Operations 31,453 (1,524)
Europe and West Africa Operations 36,582 (2,353)
Engineering Operations (1,594) 3,028
Other 930 1,963
- --------------------------------------------------------------
Total Segment Income 95,801 23,794
- --------------------------------------------------------------
General Corporate Expenses (3,423) (2,775)
- --------------------------------------------------------------
Total Operating Income $92,378 $21,019
==============================================================
</TABLE>
16
<PAGE>
NOTE 8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
1998 1997
---- ----
(Unaudited)
(In thousands, except shares
and per share amounts)
<S> <C> <C>
Basic:
Net income $ 88,440 $ 8,110
Dividends on preferred stocks (1,800) (1,800)
- ----------------------------------------------------------------------------
Net income for basic computation $ 86,640 $ 6,310
- ----------------------------------------------------------------------------
Weighted average common shares 40,704,816 40,682,082
- ----------------------------------------------------------------------------
Basic earnings per common share $ 2.13 $ 0.16
- ----------------------------------------------------------------------------
Diluted:
Net income $ 88,440 $ 8,110
Dividends on preferred stocks - (1,800)
- ----------------------------------------------------------------------------
Net income for diluted computation $ 88,440 $ 6,310
- ----------------------------------------------------------------------------
Weighted average common shares (basic) 40,704,816 40,682,082
Effect of dilutive securities:
Stock options and restricted stock 373,233 256,497
Series A $2.25 cumulative preferred stock 5,740,940 -
- ----------------------------------------------------------------------------
Adjusted weighted average common
shares and assumed conversions 46,818,989 40,938,579
- ----------------------------------------------------------------------------
Diluted earnings per common share $ 1.89 $ 0.15
- ----------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
J. Ray McDermott, S.A. ("JRM") is a majority owned subsidiary of McDermott
International, Inc. ("MII").
Revenues of JRM 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. JRM's 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. During fiscal year 1998, U.S. and North Sea
markets remained steady while Far East and Middle East markets started to
weaken. Economic and political instability in Indonesia and political turmoil
on the Indian subcontinent will have an adverse effect on exploration and
production spending.
A significant portion of JRM's revenues and operating results are derived from
its foreign operations. As a result, JRM's operations and financial results are
affected by international factors, such as changes in foreign currency exchange
rates. JRM attempts to minimize its exposure to changes in foreign currency
exchange rates by attempting to match foreign currency contract receipts with
like foreign currency disbursements. To the extent that it is unable to match
the foreign currency receipts and disbursements related to its contracts, its
practice of entering into forward exchange contracts to hedge foreign currency
transactions reduces the impact of foreign exchange rate movements on operating
results.
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 highly competitive nature of the marine
construction services business; operating risks associated with the marine
construction services business; economic and political instability in Indonesia;
political turmoil
18
<PAGE>
on the Indian subcontinent; and the results of the ongoing investigation by JRM
and MII and the U.S. Department of Justice into possible anti-competitive
practices by JRM and MII, and related lawsuits filed in federal court in June
1998.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED
JUNE 30, 1997
Revenues decreased $107,671,000 to $370,552,000, primarily due to lower volume
in Europe and West Africa as a result of the withdrawal from the European
engineering markets and from lower volume in all activities in the Middle East
and in worldwide engineering. These decreases were partially offset by higher
volume in offshore and fabrication activities in North America and virtually all
activities in the Far East.
Segment operating income increased $9,640,000 to $37,239,000, primarily due to
higher volume and margins in virtually all activities in the Far East and North
America. These increases were partially offset by lower volume in worldwide
engineering and higher net operating expenses.
Gain on asset disposals and impairments-net increased $44,453,000 to $45,047,000
primarily due to the gain recognized from the termination of the McDermott-ETPM
joint venture and the sale of three Gulf of Mexico vessels.
Income (loss) from investees increased $17,914,000 from a loss of $4,399,000 to
income of $13,515,000, primarily due to the gain on the sale of assets in a
Malaysian joint venture and losses recorded by McDermott-ETPM West, Inc. in the
prior year.
Interest income increased $6,805,000 to $11,454,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $3,201,000 to $6,414,000, primarily due to changes in
debt obligations and interest rates prevailing thereon.
Other-net income increased $10,192,000 to $11,413,000, primarily due to a net
gain on the settlement and curtailment of postretirement benefit plans (see Note
5 to the condensed consolidated financial statements).
19
<PAGE>
The provision for income taxes increased $11,227,000 to $20,391,000 while
income before the provision for income taxes increased $91,557,000 to
$108,831,000. The change in the relationship of pretax income to the provision
for income tax was primarily the result of an increase in the proportion of
income earned in non-taxable jurisdictions. JRM operates in many tax
jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits, and tax
basis (for example, revenue versus income). These variances, along with
variances in the mix of income within jurisdictions, are often responsible for
shifts in the effective tax rate. As a result of these factors, the provision
for income taxes was 19% of pretax income for the three months ended June 30,
1998 compared to 53% for the three months ended June 30, 1997.
<TABLE>
<CAPTION>
Backlog
- -------
6/30/98 3/31/98
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
North American Operations $ 607,428 $ 629,374
Middle East Operations 151,046 181,127
Far East Operations 305,418 367,454
Europe and West Africa Operations 40,562 86,611
Engineering Operations 13,579 10,657
Other (11,057) (8,075)
- -----------------------------------------------------------
TOTAL BACKLOG $1,106,976 $1,267,148
===========================================================
</TABLE>
In general, JRM's business is capital intensive and relies on large contracts
for a substantial amount of its revenues.
JRM's backlog declined in all operating areas as a result of lower oil prices.
In addition, backlog in Europe and West Africa declined as a result of the
withdrawal from the European engineering markets. Finally, backlog decreased as
a result of sluggish economic environments in the Middle and Far East and the
political instability in the Far East. Backlog relating to contracts to be
performed by JRM's unconsolidated joint ventures (not included above) was
$578,000,000 at June 30, 1998 compared to $587,000,000 at March 31, 1998.
20
<PAGE>
Liquidity and Capital Resources
During the three months ended June 30 ,1998, JRM's cash and cash equivalents
decreased $3,971,000 to $148,040,000 and total debt increased $1,359,000 to
$278,453,000, primarily due to an increase in short-term borrowings of
$19,201,000 less the settlement of a note payable of $14,565,000 pursuant to the
dissolution of the ETPM joint venture. During this period, JRM provided cash of
$66,714,000 from operating activities and received cash of $114,366,000 from
asset disposals, including $95,546,000 from the sale of its ETPM joint venture,
and $1,051,000 from the issuance of stock upon exercise of stock options. JRM
used cash of $176,811,000 for net purchases of investments, $12,810,000 for
additions to property, plant and equipment, $10,573,000 for purchases of
treasury stock and $1,800,000 for dividends on preferred stock.
During the three months ended June 30, 1998, JRM purchased from MII its equity
investment in a Mexican joint venture. The excess of the purchase price over
the net book value of the net assets acquired of $322,000 was included in
Capital in Excess of Par Value.
Expenditures for property, plant and equipment increased $4,332,000 to
$12,810,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
At June 30 and March 31, 1998, JRM had available various uncommitted short-term
lines of credit from banks totaling $25,105,000 and $25,234,000, respectively.
Borrowings by JRM against these lines of credit at June 30 and March 31, 1998
were $637,000 and $2,251,000, respectively. At March 31, 1998, JRM and certain
of its subsidiaries were also parties to a revolving credit facility under which
there were no borrowings. In June 1998, JRM and such subsidiaries entered into
a new $200,000,000 three year, unsecured credit agreement ("JRM Credit
Agreement") with a group of banks. Borrowings against the JRM Credit Agreement
cannot exceed $50,000,000. The remaining $150,000,000 is reserved for the
issuance of letters of credit. Management does not anticipate JRM will need to
borrow funds under the JRM Credit Agreement during fiscal year 1999.
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
21
<PAGE>
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 June 30,
1998, JRM could pay cash dividends on, or repurchase shares of, its capital
stock (including shares held by MII) in the amount of $45,175,000, could pay up
to an additional $9,600,000 of cash dividends on its Series A Preferred Stock
held by MII, and could make unsecured loans to or investments in MII of
approximately $30,000,000. Additionally under such indenture, JRM is required to
offer to purchase its outstanding 9.375% Senior Subordinated Notes at 100% of
their principal amount, plus accrued and unpaid interest, to the extent that it
has proceeds from certain asset sales and dispositions equal to or exceeding
$25,000,000 that it has not used to permanently reduce certain senior or other
indebtedness or reinvested in its business within a specified time period,
generally 18 months, following each such asset sale or disposition. Currently,
JRM has approximately $237,000,000 in proceeds from such asset sales and
dispositions, which, if not used for repayment of debt or reinvested as
described above, would be subject to this obligation commencing June 1999.
During fiscal year 1998, JRM's Board of Directors approved a limited stock buy
back program. Under the program, JRM can purchase up to two million shares of
its Common Stock from time to time on the open market or through negotiated
transactions, depending on the availability of cash and market conditions.
JRM's plan is also dependent on its ability to satisfy its debt covenants.
During the quarter ended June 30, 1998, JRM purchased 275,200 shares of its
Common Stock at an average share price of $38.38.
JRM maintains an investment portfolio of government obligations and other
investments. The fair value of long-term investments in debt securities at June
30, 1998 was $721,339,000.
Working capital decreased $55,336,000 to a deficit of $48,163,000 at June 30,
1998 from $7,173,000 at March 31, 1998. During the remainder of fiscal year
1999, JRM expects to obtain funds to meet working capital, capital expenditure
and debt maturity requirements from operating activities and cash and cash
equivalents. Leasing agreements for equipment, which are short-term in nature,
are not expected to impact JRM's liquidity or capital resources.
22
<PAGE>
JRM has provided a valuation allowance for deferred tax assets of $17,196,000
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 future taxable income. An uncertainty that
affects the ultimate realization of deferred tax assets is the risk of incurring
losses in the future. This factor has been considered in determining the
valuation allowance. Management will continue to assess the adequacy of the
valuation allowance on a quarterly basis.
Impact of the Year 2000
The Year 2000 issue is the result of computer systems being written using two
digits rather than four to define the applicable year. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. JRM has established
a Year 2000 risk management program to identify and correct problems associated
with the Year 2000 issue. The scope of JRM's Year 2000 risk management program
covers internal computer systems and process control systems, embedded systems
in products delivered to customers and the analysis of critical supplier
dependencies.
Based on assessments, JRM has determined that it will be required to modify or
replace significant portions of its computer systems so that those systems will
function properly with respect to dates in the Year 2000 and thereafter. JRM
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 issue will not pose significant operational
problems for its computer systems. Operating system upgrades, application
remediation and application replacement projects are in progress. If
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of JRM.
JRM has initiated a program to determine the nature of potential exposure
related to the Year 2000 issue for products it has sold, to develop a
communication program for customers potentially impacted, and to assess process
control systems. JRM does not expect this exposure to have a material adverse
effect on its results of operations.
23
<PAGE>
JRM will use both internal and external resources to reprogram, replace, and
test the software for Year 2000 modifications. JRM is anticipating having its
critical systems Year 2000 compliant no later than June 30, 1999, which is prior
to any anticipated impact on its business. The cost of the Year 2000
remediation project is estimated at $6,000,000 and is being funded through
operating cash flows. The cost incurred to date is approximately $1,600,000.
The costs of the project and the dates on which JRM believes it will complete
its Year 2000 project are based on management's best estimates. These estimates
were derived using numerous assumptions of future events, included continued
availability of resources, third party modification plans, and other factors.
However, there can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel, the ability to identify and correct all Year
2000 impacted areas, and other similar uncertainties.
New Accounting Standards
In May 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for fiscal years beginning after December
15,1998. SOP 98-5 provides guidance on accounting for the costs of start-up
activities and requires that entities expense start-up costs and organization
costs as they are incurred. JRM has not yet finalized its review of SOP 98-5,
but it is not expected to have a material impact on its consolidated financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 JRM 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
24
<PAGE>
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.
JRM has not yet determined what the effect of SFAS No. 133 will have on its
consolidated financial position or results of operations.
25
<PAGE>
PART II
J. RAY McDERMOTT, S.A.
OTHER INFORMATION
No information is applicable to Part II for the current quarter, except as noted
below:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K, Item 4, dated July 29, 1998, was filed on
July 30, 1998.
26
<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.
J. RAY McDERMOTT, S.A.
/s/ Daniel R. Gaubert
-------------------------------------------
By: Daniel R. Gaubert
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
August 7, 1998
27
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM J. RAY
MCDERMOTT'S JUNE 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 148,040 202,581
<SECURITIES> 721,339 76,296
<RECEIVABLES> 222,889 300,180
<ALLOWANCES> 37,880 30,727
<INVENTORY> 64,276 92,463
<CURRENT-ASSETS> 496,409 769,165
<PP&E> 972,169 1,211,673
<DEPRECIATION> 680,117 838,922
<TOTAL-ASSETS> 1,601,408 1,566,520
<CURRENT-LIABILITIES> 544,572 638,686
<BONDS> 245,534 273,220
0 0
32 32
<COMMON> 412 409
<OTHER-SE> 699,407 546,034
<TOTAL-LIABILITY-AND-EQUITY> 1,601,408 1,566,520
<SALES> 370,552 478,223
<TOTAL-REVENUES> 370,552 478,223
<CGS> 336,736 453,399
<TOTAL-COSTS> 336,736 453,399
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,414 9,615
<INCOME-PRETAX> 108,831 17,274
<INCOME-TAX> 20,391 9,164
<INCOME-CONTINUING> 88,440 8,110
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 88,440 8,110
<EPS-PRIMARY> 2.13 0.16
<EPS-DILUTED> 1.89 0.15
</TABLE>
