<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. 1-13570
J. RAY McDERMOTT, S.A.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-1278896
(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) 587-5300
--------------
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 outstanding of the Company's common stock at January 28,
1999 was 39,041,343.
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J. RAY M c D E R M O T T, S.A.
I N D E X - F O R M 1 0 - Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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 20
PART II - OTHER INFORMATION
Item 3 - Legal Proceedings 30
Item 6 - Exhibits and Reports on Form 8-K 32
SIGNATURES 33
Exhibit 27.1 - Financial Data Schedule
(Nine months ending 12/31/98) 35
Exhibit 27.2 - Financial Data Schedule
(Restated nine months ending 12/31/97) 36
</TABLE>
2
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PART I
J. RAY McDERMOTT, S.A.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
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J. RAY McDERMOTT, S.A.
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 $ 123,325 $ 152,011
Accounts receivable - trade 169,504 227,538
Accounts receivable - unconsolidated affiliates 31,959 45,072
Accounts receivable - other 21,973 26,327
Contracts in progress 45,092 71,084
Other current assets 30,563 45,634
---------- ----------
Total Current Assets 422,416 567,666
---------- ----------
Property, Plant and Equipment, at Cost 975,604 1,182,448
Less accumulated depreciation 696,796 839,298
---------- ----------
Net Property, Plant and Equipment 278,808 343,150
---------- ----------
Investments in Debt Securities 752,059 543,658
---------- ----------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $3,246,000 at December 31, 1998
and $8,542,000 at March 31, 1998 11,708 22,153
---------- ----------
Investment in Unconsolidated Affiliates 14,568 29,069
---------- ----------
Other Assets 36,030 43,024
---------- ----------
TOTAL $1,515,589 $1,548,720
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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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 $ 4,944 $ 31,272
Accounts payable 122,786 171,180
Accrued contract costs 49,660 88,518
Accrued liabilities - other 123,042 110,345
Advance billings on contracts 70,131 91,549
Accrued employee benefits 44,200 44,572
U.S. and foreign income taxes 31,233 23,057
---------- ----------
Total Current Liabilities 445,996 560,493
---------- ----------
Long-Term Debt 245,756 245,822
---------- ----------
Deferred and Non-Current Income Taxes 26,605 46,989
---------- ----------
Other Liabilities 64,128 78,854
---------- ----------
Commitments and 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 41,241,543 at
December 31, 1998 and 41,130,328 at March 31, 1998 412 411
Capital in excess of par value 619,268 615,515
Retained earnings 193,341 35,418
Treasury stock at cost, 2,200,200 shares at
December 31, 1998 and 362,500 shares
at March 31, 1998 (71,809) (13,537)
Accumulated other comprehensive loss (8,140) (21,277)
---------- ----------
Total Stockholders' Equity 733,104 616,562
---------- ----------
TOTAL $1,515,589 $1,548,720
========== ==========
</TABLE>
5
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J. RAY McDERMOTT, S.A.
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 $ 313,348 $ 458,094 $1,032,999 $1,442,363
--------- --------- ---------- ----------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 256,867 383,081 809,521 1,196,677
Depreciation and amortization 13,126 22,208 40,310 77,746
Selling, general and
administrative expenses 24,402 25,374 78,544 79,573
--------- --------- ---------- ----------
294,395 430,663 928,375 1,353,996
--------- --------- ---------- ----------
Gain (Loss) on Asset Disposals and
Impairments - Net (4,229) (40,330) 38,849 (40,306)
--------- --------- ---------- ----------
Operating Income (Loss) before
Income (Loss) from Investees 14,724 (12,899) 143,473 48,061
Income (Loss) from Investees (2,398) 63,938 7,335 61,311
--------- --------- ---------- ----------
Operating Income 12,326 51,039 150,808 109,372
--------- --------- ---------- ----------
Other Income (Expense):
Interest income 11,639 6,961 34,631 16,549
Interest expense (7,433) (6,951) (20,287) (23,995)
Other-net (689) 6,279 10,536 7,571
--------- --------- ---------- ----------
3,517 6,289 24,880 125
--------- --------- ---------- ----------
Income before Provision for
(Benefit from) Income Taxes 15,843 57,328 175,688 109,497
Provision for (Benefit from) Income Taxes (16,166) 6,214 12,365 31,379
--------- --------- ---------- ----------
Net Income $ 32,009 $ 51,114 $ 163,323 $ 78,118
========= ========= ========== ==========
Net Income Applicable to Common Stock
(after Preferred Stock Dividends) $ 30,209 $ 49,314 $ 157,923 $ 72,718
========= ========= ========== ==========
Earnings per Common Share
Basic $ 0.77 $ 1.20 $ 3.97 $ 1.78
Diluted $ 0.71 $ 1.08 $ 3.57 $ 1.66
========= ========= ========== ==========
Cash Dividends:
Per Preferred Share $ 0.5625 $ 0.5625 $ 1.6875 $ 1.6875
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
J. RAY McDERMOTT, S.A.
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 $ 32,009 $ 51,114 $ 163,323 $ 78,118
--------- --------- --------- ---------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation
adjustments, excluding the effect
of the purchase of an
equity investment from McDermott
International, Inc. of $10,262,000 1,118 (11,809) 5,691 1,333
Sales of investments in foreign
entities - - 15,596 -
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising
during the period, net of taxes (2,756) 40 2,112 209
--------- --------- --------- ---------
Other Comprehensive Income (Loss) (1,638) (11,769) 23,399 1,542
--------- --------- --------- ---------
Comprehensive Income $ 30,371 $ 39,345 $ 186,722 $ 79,660
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
J. RAY McDERMOTT, S.A.
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 $ 163,323 $ 78,118
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 40,310 77,746
Income from investees, less dividends 14,046 2,138
(Gain) loss on asset disposals and
impairments - net (38,849) 40,306
Benefit from deferred taxes (7,187) (5,698)
Other (2,070) (921)
Changes in assets and liabilities, net of effects
from divestitures:
Accounts receivable 45,159 49,060
Net contracts in progress and advance billings 4,604 29,884
Accounts payable (47,711) (388)
Accrued contract costs (38,858) 28,351
Accrued and other current liabilities 56,042 20,370
Income taxes 7,886 24,804
Other, net (48,377) 17,201
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 148,318 360,971
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (30,510) (22,004)
Proceeds from asset disposals 131,568 283,841
Purchases of investments (415,275) (317,350)
Sales and maturities of investments 213,814 76,400
Acquisition of equity investment from
McDermott International, Inc. (8,984) -
Return from (investment in) equity investees 6,371 (1,419)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (103,016) 19,468
--------- ---------
</TABLE>
8
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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 $ (6,551) $ (82,697)
Decrease in short-term borrowings (2,251) (24,207)
Issuance of common stock 1,317 8,477
Preferred dividends paid (5,400) (5,400)
Purchases of treasury stock (58,272) -
Other (3,492) -
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (74,649) (103,827)
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 661 485
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (28,686) 277,097
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 152,011 136,795
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,325 $ 413,892
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 14,451 $ 19,955
Income taxes (net of refunds) $ 23,580 $ 11,613
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
J. RAY McDERMOTT, S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 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 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 $3,624,000.
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 the acquisition of Offshore Pipelines, Inc. ("OPI").
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. Results for the three and nine months ended December 31, 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.
10
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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' equity. Accumulated balances for each
classification in accumulated other comprehensive loss are disclosed in Note 3.
Comprehensive income is displayed in a separate Condensed Consolidated Statement
of Comprehensive Income included in the financial statements.
NOTE 3 - 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 $ (9,937) $ (20,962)
Net Unrealized Gain (Loss) on Investments 1,797 (315)
- ------------------------------------------------------------------------
$ (8,140) $ (21,277)
========================================================================
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 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 $7,824,000 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 JRM's consolidated financial
position or results of operations.
On May 7, 1998, JRM's 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 work in
the North Sea. In the three and nine months ended December 31, 1998, these
11
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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 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 was 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 amendment to the plan, the
total projected benefit obligation of JRM increased $16,549,000. The decrease
in the accumulated postretirement benefit obligation was measured against the
increase in the projected benefit obligation of the pension plan and the
resulting gain of $3,624,000 was recognized in the nine months ended December
31, 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 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
12
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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. 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.
JRM and MII are also cooperating with the Securities and Exchange Commission
(the "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 (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 JRM, MII, McDermott Incorporated, 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.
13
<PAGE>
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 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 (the "Shell Litigation"). Subsequent thereto, Amoco Production Company and
BP 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.
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
JRM's consolidated financial position and results of operations.
Additionally, JRM 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 JRM's consolidated financial
position or 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 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
14
<PAGE>
chartering activity as well as consolidating adjustments that pertain to
operations but are excluded from management's evaluation of segment performance.
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. Other reconciling items before provision for income taxes are
interest income, interest expense, and other-net. Segment assets of Europe and
West Africa Operations decreased approximately $196,000,000 since March 31,
1998, primarily as a result of the dispositions of MSCL and MMCL described in
Note 4.
15
<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:
North American Operations $127,935 $203,539 $ 467,075 $ 558,519
Middle East Operations 53,844 84,972 187,367 266,964
Far East Operations 130,164 73,417 300,326 238,356
Europe and West Africa Operations 12,398 78,602 69,883 310,990
Engineering Operations 10,176 28,870 48,166 102,804
Other (9,566) 7,207 5,832 21,928
Eliminations/(1)/ (11,603) (18,513) (45,650) (57,198)
- ---------------------------------------------------------------------------------------
Total Revenues $313,348 $458,094 $1,032,999 $1,442,363
=======================================================================================
/(1)/ Segment revenues are net of the following intersegment transfers:
North American Operations $ 930 $ 89 $ 1,981 $ 89
Middle East Operations - - 1,048 -
Far East Operations - - 128 -
Europe and West Africa Operations - 23 - 215
Engineering Operations 6,366 13,551 30,600 44,683
Other 4,307 4,850 11,893 12,211
- ---------------------------------------------------------------------------------------
Total $ 11,603 $ 18,513 $ 45,650 $ 57,198
=======================================================================================
</TABLE>
16
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<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 (Loss):
North American Operations $ 7,674 $ 22,147 $ 52,536 $ 66,335
Middle East Operations 8,456 8,678 27,466 30,101
Far East Operations 9,395 1,128 51,055 (13,736)
Europe and West Africa Operations (752) 1,663 (923) 9,810
Engineering Operations 1,135 1,666 253 9,735
Other (3,976) (6,448) (16,188) (4,774)
- ---------------------------------------------------------------------------------------
Total Segment Operating Income $ 21,932 $ 28,834 $ 114,199 $ 97,471
- ---------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and Impairments - Net:
North American Operations $ (3,732) $ (9,306) $ (4,592) $ (6,810)
Middle East Operations 6 5 6 141
Far East Operations 6 - (8) 814
Europe and West Africa Operations (543) 219,605 35,592 220,486
Engineering Operations 1 (25) 1 (25)
Other 33 (250,609) 7,850 (254,912)
- ---------------------------------------------------------------------------------------
Total Gain (Loss) on Asset Disposals
and Impairments - Net $ (4,229) $(40,330) $ 38,849 $ (40,306)
- ---------------------------------------------------------------------------------------
Income (Loss) from Investees:
North American Operations $ (3,651) $ 389 $ (4,358) $ (503)
Far East Operations 310 1,378 10,968 2,961
Europe and West Africa Operations 1,431 62,247 1,732 58,666
Other (488) (76) (1,007) 187
- ---------------------------------------------------------------------------------------
Total Income (Loss) from Investees $ (2,398) $ 63,938 $ 7,335 $ 61,311
- ---------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS):
North American Operations $ 291 $ 13,230 $ 43,586 $ 59,022
Middle East Operations 8,462 8,683 27,472 30,242
Far East Operations 9,711 2,506 62,015 (9,961)
Europe and West Africa Operations 136 283,515 36,401 288,962
Engineering Operations 1,136 1,641 254 9,710
Other (4,431) (257,133) (9,345) (259,499)
- ---------------------------------------------------------------------------------------
Total Segment Income 15,305 52,442 160,383 118,476
- ---------------------------------------------------------------------------------------
General Corporate Expenses (2,979) (1,403) (9,575) (9,104)
- ---------------------------------------------------------------------------------------
Total Operating Income $ 12,326 $ 51,039 $ 150,808 $ 109,372
=======================================================================================
</TABLE>
17
<PAGE>
NOTE 8 - 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 $ 32,009 $ 51,114 $ 163,323 $ 78,118
Dividends on preferred stock (1,800) (1,800) (5,400) (5,400)
- --------------------------------------------------------------------------------------------------------
Net income for basic computation $ 30,209 $ 49,314 $ 157,923 $ 72,718
========================================================================================================
Weighted average common shares 38,985,212 41,073,649 39,781,623 40,909,416
========================================================================================================
Basic earnings per common share $ 0.77 $ 1.20 $ 3.97 $ 1.78
========================================================================================================
Diluted:
Net income $ 32,009 $ 51,114 $ 163,323 $ 78,118
Dividends on preferred stock - - - -
- --------------------------------------------------------------------------------------------------------
Net income for diluted computation $ 32,009 $ 51,114 $ 163,323 $ 78,118
========================================================================================================
Weighted average common shares (basic) 38,985,212 41,073,649 39,781,623 40,909,416
Effect of dilutive securities:
Stock options and restricted stock 233,761 299,928 282,426 284,718
Series A $2.25 Cumulative
Convertible Preferred Stock 5,740,940 5,740,940 5,740,940 5,740,940
- --------------------------------------------------------------------------------------------------------
Adjusted weighted average common
shares and assumed conversions 44,959,913 47,114,517 45,804,989 46,935,074
========================================================================================================
Diluted earnings per common share $ 0.71 $ 1.08 $ 3.57 $ 1.66
========================================================================================================
</TABLE>
18
<PAGE>
NOTE 9 - 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 and unpaid 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 being validly tendered and not withdrawn prior to
its expiration. The offer will expire on March 5, 1999, unless extended.
19
<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. As a result of continuing lower oil prices, JRM's
customers have significantly reduced capital expenditures for exploration and
production spending. As a result, JRM's backlog has declined by 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
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.
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, 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 highly competitive nature of the marine
construction services business; 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 JRM
and MII and the U. S. Department of Justice into possible anti-competitive
practices by JRM and MII; and the lawsuits disclosed in Item 3, Legal
Proceedings.
20
<PAGE>
RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 VS. THREE MONTHS
ENDED DECEMBER 31, 1997
Revenues decreased $144,746,000 to $313,348,000, primarily due to lower volume
in Europe as a result of the 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 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 impairments - net 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.
Interest income increased $4,678,000 to $11,639,000, primarily due to increases
in investments in government obligations and other debt securities.
Other - net decreased $6,968,000 from income of $6,729,000 to expense of
$689,000, primarily due to higher foreign currency transaction gains in the
prior period.
The provision for income taxes decreased $22,380,000 from a provision of
$6,214,000 to a benefit of $16,166,000, while income before provision for income
taxes decreased $41,485,000 to $15,843,000. The change in the relationship of
pretax income to the provision for income taxes was primarily the result of an
increase in the proportion of income earned in non-taxable jurisdictions and
favorable tax settlements totaling $21,367,000 of prior years' disputed items in
foreign jurisdictions. JRM operates in many different tax jurisdictions. Within
these jurisdictions, tax provisions vary because of nominal rates, allowability
of deductions, credits and other benefits, and
21
<PAGE>
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.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1998 VS. NINE MONTHS
ENDED DECEMBER 31, 1997
Revenues decreased $409,364,000 to $1,032,999,000, primarily due to lower volume
in Europe as a result of the 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 included
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.
Interest income increased $18,082,000 to $34,631,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $3,708,000 to $20,287,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
22
<PAGE>
Other - net income increased $2,965,000 to $10,536,000, primarily due to a net
gain on the settlement and curtailment of postretirement benefit plans (see Note
5 to the condensed consolidated financial statements) and minority shareholder
participation in the increased losses of a consolidated foreign joint venture.
These increases were partially offset by higher foreign currency transaction
gains in the prior period.
The provision for income taxes decreased $19,014,000 to $12,365,000, while
income before provision for income taxes increased $66,191,000 to $175,688,000.
The change in the relationship of pretax income to the provision for income
taxes was primarily the result of an increase in the proportion of income earned
in non-taxable jurisdictions and favorable tax settlements totaling $21,367,000
of prior years' disputed items in foreign jurisdictions. JRM 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.
Backlog 12/31/98 3/31/98
- ------- -------- -------
(In thousands)
North American Operations $ 312,904 $ 629,374
Middle East Operations 103,096 181,127
Far East Operations 109,153 367,454
Europe and West Africa Operations 22,614 86,611
Engineering Operations 10,668 10,657
Other (2,474) (8,075)
- --------------------------------------------------------------
TOTAL BACKLOG $ 555,961 $1,267,148
==============================================================
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 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.
Liquidity and Capital Resources
During the nine months ended December 31, 1998, JRM's cash and cash equivalents
decreased $28,686,000 to $123,325,000 and total debt decreased $26,394,000 to
$250,700,000, primarily
23
<PAGE>
due to repayment of $6,551,000 in long-term debt, the settlement of a note
payable of $14,565,000 pursuant to the termination of the McDermott-ETPM joint
venture, and a decrease in short-term borrowings of $2,251,000. During this
period, JRM provided cash of $148,318,000 from operating activities and received
cash of $131,568,000 from asset disposals, including $95,546,000 from the
termination of the McDermott-ETPM joint venture, and $1,317,000 from the
issuance of stock upon exercise of stock options. JRM used cash of $201,461,000
for net purchases of investments, $30,510,000 for additions to property, plant
and equipment, $58,272,000 for stock repurchases and $5,400,000 for dividends on
preferred stock.
During the nine months ended December 31, 1998, JRM used cash of $8,984,000 to
purchase 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 as a reduction of capital in excess of par value.
Expenditures for property, plant and equipment increased $8,506,000 to
$30,510,000. The majority of these expenditures were to maintain, replace and
upgrade existing facilities and equipment.
At December 31 and March 31, 1998, JRM had available various uncommitted short-
term lines of credit from banks totaling $23,112,000 and $25,234,000,
respectively. Borrowings against these lines of credit at March 31, 1998 were
$2,251,000. There were no borrowings against these lines at December 31, 1998.
At March 31, 1998, JRM and certain of its subsidiaries were parties to a
revolving credit facility under which there were no borrowings. In June 1998,
JRM and such subsidiaries entered into a new $200,000,000 three-year, unsecured
credit agreement (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.
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
24
<PAGE>
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.
JRM maintains an investment portfolio of government obligations and other
investments. The fair value of long-term investments in debt securities at
December 31, 1998 was $752,059,000. Management anticipates using a portion of
this portfolio to fund the offer described above.
Working capital decreased $30,753,000 from $7,173,000 at March 31, 1998 to a
deficit of $23,580,000 at December 31, 1998. During the remainder of fiscal
year 1999, JRM expects to obtain funds to meet capital expenditure, working
capital 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.
During fiscal year 1998, JRM's Board of Directors 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
25
<PAGE>
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 repurchased 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.
At December 31, 1998 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 the
remaining deferred tax assets are realizable through carrybacks and future
reversals of existing taxable temporary differences. 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 JRM company-wide Year 2000 Project is proceeding on schedule. The project
addresses information technology components (hardware and software) in internal
business systems and the 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
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, a common approach as outlined below was developed that fit the
requirements of each JRM operating location.
A consistent work breakdown structure for the project is being employed
throughout JRM:
. 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 JRM, (4) implement solutions defined for those items assessed to have Year
2000 impact, and (5) test and validate solutions.
26
<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 85% of the work completed. The inventory of internal Embedded
Systems is nearing completion 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 90% 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.
The IT Systems, Facilities and Embedded Systems that support JRM's engineering,
fabrication and marine operations are on schedule and are forecast to be
completed by June 30, 1999. The IT Systems and Facilities that support the
corporate office functions are scheduled to be Year 2000 compliant by June 30,
1999. The analysis and the compliance tasks for JRM 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, MII has
elected to outsource its payroll function. JRM's payroll is included in the
scope of the project as a corporate service from MII. The transition to the
payroll service provider will be completed by September 30, 1999.
JRM 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 $6,000,000 and is being funded through
operating cash flows. The cost incurred to date is approximately $3,000,000.
JRM'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 JRM
or its agents or suppliers to achieve Year 2000 compliance could result in,
among other things, production interruptions, delays in the delivery of
products, delays in the receipt of supplies, invoice and collection errors, and
inaccurate inventories. These consequences could have a material adverse impact
on JRM'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 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
27
<PAGE>
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 JRM is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on its results of operations, JRM
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 JRM
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, JRM 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. 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,"
28
<PAGE>
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 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 effect the adoption of SFAS No. 133 will have on its
consolidated financial position or results of operations.
29
<PAGE>
PART II
J. RAY McDERMOTT, S.A.
OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
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 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 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. 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.
JRM and MII are also cooperating with the Securities and Exchange Commission
(the "SEC"), which also requested information and documents from the companies
with respect to certain of the
30
<PAGE>
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 (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 JRM, MII, McDermott Incorporated, 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 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 (the "Shell Litigation"). Subsequent thereto, Amoco Production Company and
BP 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
31
<PAGE>
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
JRM's consolidated financial position and results of operations.
Additionally, JRM 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 JRM's consolidated financial
position or results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule (Nine months ending 12/31/98)
Exhibit 27.2 - Financial Data Schedule (Restated nine months ending
12/31/97)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by J. Ray McDermott, S.A. during
the three months ended December 31, 1998.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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)
February 8, 1998
33
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27.1 Financial Data Schedule (Nine months ending 12/31/98)
27.2 Financial Data Schedule (Restated nine months ending 12/31/97)
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM J. RAY
MCDERMOTT'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> 123,325
<SECURITIES> 752,059
<RECEIVABLES> 194,490
<ALLOWANCES> 24,986
<INVENTORY> 46,608
<CURRENT-ASSETS> 422,416
<PP&E> 975,604
<DEPRECIATION> 696,796
<TOTAL-ASSETS> 1,515,589
<CURRENT-LIABILITIES> 445,996
<BONDS> 245,756
0
32
<COMMON> 412
<OTHER-SE> 732,660
<TOTAL-LIABILITY-AND-EQUITY> 1,515,589
<SALES> 1,032,999
<TOTAL-REVENUES> 1,032,999
<CGS> 928,375
<TOTAL-COSTS> 928,375
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,287
<INCOME-PRETAX> 175,688
<INCOME-TAX> 12,365
<INCOME-CONTINUING> 163,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,323
<EPS-PRIMARY> 3.97
<EPS-DILUTED> 3.57
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 413,892
<SECURITIES> 317,350
<RECEIVABLES> 253,764
<ALLOWANCES> 38,718
<INVENTORY> 106,577
<CURRENT-ASSETS> 858,955
<PP&E> 1,180,376
<DEPRECIATION> 826,042
<TOTAL-ASSETS> 1,624,294
<CURRENT-LIABILITIES> 609,907
<BONDS> 270,798
0
32
<COMMON> 411
<OTHER-SE> 619,683
<TOTAL-LIABILITY-AND-EQUITY> 1,624,294
<SALES> 1,442,363
<TOTAL-REVENUES> 1,442,363
<CGS> 1,353,996
<TOTAL-COSTS> 1,353,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,995
<INCOME-PRETAX> 109,497
<INCOME-TAX> 31,379
<INCOME-CONTINUING> 78,118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,118
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.66
</TABLE>
