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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________________ to ____________________
Commission File Number 1-8430
McDERMOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
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) 587-5400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
- ----------------------------- -----------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $1,154,884,075 as of May 12, 1997.
The number of shares outstanding of the Company's Common Stock at May 12, 1997
was 55,064,216.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with the Company's 1997 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART 1
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Power Generation Systems and Equipment
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 4
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services
General 7
Foreign Operations 9
Raw Materials 9
Customers and Competition 10
Backlog 10
Factors Affecting Demand 11
D. Patents and Licenses 11
E. Research and Development Activities 11
F. Insurance 11
G. Employees 13
H. Environmental Regulations and Matters 13
Item 3. LEGAL PROCEEDINGS 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
I
INDEX - FORM 10-K
PART II
PAGE
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 20
Fiscal Year 1997 vs Fiscal Year 1996 21
Fiscal Year 1996 vs Fiscal Year 1995 23
Effects of Inflation and Changing Prices 25
Liquidity and Capital Resources 25
New Accounting Standards 29
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Company Report on Consolidated Financial Statements 30
Report of Independent Auditors 31
Consolidated Balance Sheet - March 31, 1997 and 1996 32
Consolidated Statement of Income (Loss) for the Three
Fiscal Years ended March 31, 1997 34
Consolidated Statement of Stockholders' Equity for the
Three Fiscal Years ended March 31, 1997 36
Consolidated Statement of Cash Flows for the Three
Fiscal Years ended March 31, 1997 38
Notes to Consolidated Financial Statements 40
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 78
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 79
Item 11. EXECUTIVE COMPENSATION 79
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 79
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 79
II
INDEX - FORM 10-K
PART IV
PAGE
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 80
Signatures 84
Exhibit 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS) 88
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT 89
Exhibit 23 - CONSENT OF INDEPENDENT AUDITORS 90
Exhibit 27 - FINANCIAL DATA SCHEDULE 91
III
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("McDermott International") was incorporated under
the laws of the Republic of Panama in 1959 and is the parent company of the
McDermott group of companies, which includes J. Ray McDermott, S.A. ("JRM") and
McDermott Incorporated. McDermott International's Common Stock, JRM's Common
Stock and 9-3/8% Senior Subordinated Notes due July 2006, and McDermott
Incorporated's Series A $2.20 Cumulative Convertible Preferred Stock and
Series B $2.60 Cumulative Preferred Stock are publicly traded.
Unless the context otherwise requires, hereinafter "McDermott International"
will be used to mean McDermott International, Inc., a Panama corporation; "JRM"
will be used to mean J. Ray McDermott, S.A., a Panama corporation, which is a
majority owned subsidiary of McDermott International, and its consolidated
subsidiaries; the "Delaware Company" will be used to mean McDermott
Incorporated, a Delaware corporation which is a subsidiary of McDermott
International, and its consolidated subsidiaries; and "International" will be
used to mean the consolidated enterprise.
International operates in two business segments:
o Power Generation Systems and Equipment, whose principal businesses are the
supply of fossil-fuel and nuclear steam generating equipment to the electric
power generation industry, and nuclear reactor components and nuclear fuel
assemblies to the U. S. Navy; and
o Marine Construction Services, which supplies worldwide services for the
offshore oil and gas exploration and production and hydrocarbon processing
industries, and to other marine construction companies, primarily through
JRM. Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production platforms and other
specialized structures, modular facilities, marine pipelines and subsea
production systems and onshore construction and maintenance services.
The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company. Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.
International has a continuing program of reviewing joint venture, acquisition
and disposition opportunities.
1
The following tables show revenues and operating income (loss) of International
for the three fiscal years ended March 31, 1997. See Note 17 to the
consolidated financial statements for additional information with respect to
International's business segments and operations in different geographic areas.
REVENUES
(Dollars in Millions)
FOR FISCAL YEARS ENDED MARCH 31,
1997 1996 1995
-------------- --------------- ---------------
Power Generation Systems
and Equipment $ 1,514.5 48% $ 1,708.6 52% $ 1,663.2 54%
Marine Construction Services 1,653.7 52% 1,555.5 48% 1,390.9 46%
Intersegment Transfer
Eliminations (17.3) - (19.8) - (10.4) -
- ----------------------------------------------------------------------------------------------------
Total Revenues /(1)/ $ 3,150.9 100% $ 3,244.3 100% $ 3,043.7 100%
====================================================================================================
OPERATING INCOME (LOSS)
(Dollars in Millions)
FOR FISCAL YEARS ENDED MARCH 31,
1997 1996 1995
--------------- --------------- ---------------
Segment Operating Income (Loss):/(2)/
Power Generation Systems
and Equipment $ (81.0) 85% $ 24.8 33% $ 13.6 26%
Marine Construction Services (14.7) 15% 51.5 67% 38.4 74%
- ----------------------------------------------------------------------------------------------------
Total Segment Operating
Income (Loss) /(1//)/ (95.7) 100% 76.3 100% 52.0 100%
- ----------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems
and Equipment 2.0 - 36.5 75% 8.4 25%
Marine Construction Services/(3)/ (6.1) - 11.9 25% 25.5 75%
- ----------------------------------------------------------------------------------------------------
Total Equity in Income (Loss)
of Investees (4.1) - 48.4 100% 33.9 100%
- ----------------------------------------------------------------------------------------------------
General Corporate Expenses/(2)/ (47.4) - (37.1) - (38.9) -
- ----------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ (147.2) - $ 87.6 - $ 47.0 -
====================================================================================================
(1) See Note 2 to the consolidated financial statements regarding acquisitions
during fiscal years 1996 and 1995.
(2) Fiscal years 1996 and 1995 have been restated to conform to the fiscal year
1997 presentation which includes gains and losses on asset disposals and
impairments in Operating Income (Loss). This restatement increased Segment
Operating Income by $17,275,000 and $6,423,000 and General Corporate
Expenses by $3,945,000 and $113,000 in fiscal years 1996 and 1995,
respectively, from amounts previously reported.
(3) See Note 3 to the consolidated financial statements regarding the change to
the cost method of accounting for International's investment in the
HeereMac joint venture in fiscal year 1997.
2
B. POWER GENERATION SYSTEMS AND EQUIPMENT
GENERAL
The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide. It supplies individually
engineered boilers, complete fossil fuel steam generating systems and related
equipment and facilities, and environmental control systems for electric power
generation and for industrial processes. These facilities use a wide variety of
fuels, including, but not limited to, coal, oil, bitumen, natural gas, solid
municipal waste, agricultural waste and biomass. This segment is also engaged
in the erection of electric power plants and industrial facilities and the
repair and alteration of such existing equipment. It provides replacement parts
and engineered plant enhancements for existing fossil fuel steam generating
systems and specially engineered accessories and components, such as air heaters
and cleaning systems for heat transfer surfaces. This segment also supplies
air-cooled and condensing heat exchangers for the process and power industries.
B&W is also a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators and
supplies field repair and refurbishment services in the Canadian, U. S. and
international markets.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power plants and other independent power producing
plants. It is participating in this market as a contractor for engineer-
procure-construct services, as an equipment supplier, as an operations and
maintenance contractor and through ownership interests.
The Power Generation Systems and Equipment segment provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program. This activity has made significant contributions to operating
income of International in all three fiscal years and is expected to do so in
the foreseeable future. B&W, in addition to its Naval Reactors Program
business, supplies other equipment and services to the U. S. Government and is
proceeding with new Government projects and exploring new programs which require
the technological capabilities it developed as a Government contractor. B&W has
applied its technological capabilities by supplying new products for power
generation applications. It has diversified into new markets and activities not
related to power generation that require complex engineering and machining.
Examples of these markets include environmental restoration services, computer-
integrated manufacturing products and services and the management of government-
owned facilities, primarily within the Department of Energy's nuclear weapons
complex.
The principal plants of this segment, which are owned by B&W, are located at
West Point, Mississippi; Barberton and Lancaster, Ohio; Beasley and Paris,
Texas; Lynchburg, Virginia; and Cambridge, Ontario, Canada. This segment's
unconsolidated affiliates' (equity investees) foreign plants are located in
Beijing, China; Batam Island, Indonesia; Pune, India; and Cairo, Egypt. All
these plants are well maintained, have suitable equipment and are of adequate
size.
3
FOREIGN OPERATIONS
The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income (loss) derived from
operations located outside of the United States, and the approximate
percentages to International's total revenues and total segment operating income
(loss), respectively, follow:
REVENUES SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
1997 $361,675 11% $(28,699) 30%
1996 652,016 20% 33,250 44%
1995 521,657 17% 34,186 66%
Revenues and segment operating income (loss) presented above do not include the
operating results of this segment's equity investees. Products for
international installation are engineered and built in B&W's United States and
Canadian facilities, as well as in the facilities of the segment's equity
investees in China, Indonesia, India and Egypt.
RAW MATERIALS
The principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for supplied systems and equipment. These raw materials and components
generally are purchased as needed for individual contracts. Although shortages
of certain of these raw materials have existed from time to time, no serious
shortage exists at the present time.
This segment is not sole source dependent for any significant raw materials
except for uranium, which is furnished and owned by the U.S. Government, and
used in the nuclear fuel assemblies supplied to the U.S. Navy for the Naval
Reactors Program.
CUSTOMERS AND COMPETITION
The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power producers),
the U.S. Government (including its contractors), and the pulp and paper and
other process industries such as oil refineries and steel mills; and other
industries and institutions. The electric power generation industry accounted
for approximately 22%, 22% and 30% of International's total revenues
4
for fiscal years 1997, 1996 and 1995, respectively. For the fiscal years 1997,
1996 and 1995, the U.S. Government, excluding government-owned utilities,
accounted for approximately 11%, 12% and 12% of total revenues, including 10%,
10% and 10% related to nuclear fuel assemblies and reactor components for the
U.S. Navy.
Steam generating system equipment orders are customarily awarded after
competitive bids have been submitted as proposals based on the estimated cost of
each job. Within the United States, a number of domestic and foreign-based
companies, specializing in steam generating systems, equipment and services,
compete with B&W in the fossil fuel steam generating system business. In
international markets, these companies plus additional foreign-based companies
compete with B&W. B&W also manufactures and sells components such as
replacement recirculating steam generators, which are incorporated into nuclear
steam generating systems designed by other firms. In the sale of these nuclear
steam generating systems, B&W competes with a small number of companies. A
number of companies are in competition with B&W in environmental control
equipment, related specialized industrial equipment and the independent power
producing business. Other suppliers of fossil fuel steam systems, as well as
many other businesses, compete for replacement parts, repair and alteration, and
other services required to backfit and maintain existing systems.
B&W is the sole supplier to the U.S. Navy of all major nuclear steam system
equipment and all nuclear fuel assemblies and reactor components for the Naval
Reactors Program. There are a small number of suppliers of small nuclear
components with B&W being the largest based on revenues. B&W is involved along
with other companies in the operation of the Idaho National Engineering and
Environmental Laboratory located near Idaho Falls, Idaho; the Rocky Flats
Environmental Technology Site located near Boulder, Colorado; the Savannah River
Site located in Aiken, South Carolina, and the Hanford Site located in Richland,
Washington.
BACKLOG
Backlog as of March 31, 1997 and 1996 for the Power Generation Systems and
Equipment segment was $2,344,951,000 and $2,261,799,000, or approximately 55%
and 67%, respectively, of International's backlog. Of the March 31, 1997
backlog, it is expected that approximately $1,200,482,000 will be recognized in
revenues in fiscal year 1998, $568,218,000 in fiscal year 1999 and $576,251,000
thereafter, of which approximately 25% will be recognized in fiscal years 2000
through 2002. At March 31, 1997, this segment's backlog with the U.S.
Government was $797,470,000 (of which $26,448,000 had not yet been funded), or
approximately 19% of International's total backlog.
During fiscal year 1997, the Power Generation Systems and Equipment segment
received contract awards valued at $111,000,000 to supply two 350-megawatt coal-
fired boilers to the Huaneng International Power Development Corporation of
China for the Nantong project site, located in the Jiangsu province; a
$90,000,000 contract with Saba Power Company Limited of Pakistan to supply a
125-megawatt oil-fired steam power plant near Farouqabad in Pakistan; and a
$68,000,000 contract from Public Service Company of New Mexico to retrofit
scrubbers on all four units at the utility's San Juan Generation Station in New
Mexico. The remaining value of these three contracts reflected in the March 31,
1997 backlog is $241,597,000. In fiscal year 1997, B&W was awarded
approximately $257,000,000 in new orders for aircraft carrier components and
prototypical steam generation equipment for the newest submarine design.
5
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
B&W is usually entitled to a financial settlement related to the individual
circumstances of the contract. Operations and maintenance contracts, which are
performed over an extended period, are included in backlog based upon an
estimate of the revenues from these contracts.
B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses. Most long-term contracts have provisions for progress payments.
FACTORS AFFECTING DEMAND
Electric utilities in Asia and the Middle East are active purchasers of large,
new baseload generating units, due to the rapid growth of their economies and to
the small existing stock of electrical generating capacity in most developing
countries. These newly emerging economies need power and steam generating
systems, equipment and services to build their industrial base.
Electrical consumption has grown moderately in the United States in recent
years. Competition within the electric power industry in the United States has
intensified, as the Federal Energy Regulatory Commission has begun to implement
the provisions of the Energy Policy Act of 1992, which deregulated the electric
power generation industry by allowing independent power producers and other
companies access to the electric utilities' transmission and distribution
systems. Several states have recently changed their laws to encourage
competition among generators of electricity. The modest growth in demand and
the changes associated with this transition from a regulated to a competitive
industry have caused electric utilities to defer ordering of large, new baseload
power plants in the United States. When electric utilities are in need of
peaking capacity, many are purchasing combustion turbines with short lead-times
or they are purchasing electricity from other utilities and non-regulated
sources, such as cogenerators and independent power producers.
Substantially all the customers of B&W are affected by environmental regulations
of the countries in which their facilities are located. In the United States,
the Clean Air Act Amendments of 1990 required many customer industries to
implement systems to limit or remove emissions. These mandated expenditures
have caused some customers to defer repairs and refurbishments on existing
plants. The same requirements have caused other customers to purchase
environmental control equipment from B&W. Future changes in environmental
regulations will continue to affect demand for B&W products and services.
The systems, products and services of B&W are capital intensive. As such,
demand for the company's products is heavily affected by the variations in the
business cycles in the customer industries and in the overall economies of their
countries. Availability of funds for financing, investment and maintenance at
B&W's customers varies with the conditions of their domestic businesses.
Even with the maturing of the U. S. Navy's shipbuilding program and U. S.
Government defense budget reductions, the demand for nuclear fuel assemblies
and reactor components
6
for the U. S. Navy has continued to comprise a substantial portion of this
segment's backlog. Orders for U. S. Navy nuclear fuel assemblies and nuclear
reactor components are expected to continue to be a significant part of backlog
since B&W is the sole source provider of these assemblies and nuclear reactor
components.
C. MARINE CONSTRUCTION SERVICES
GENERAL
On January 31, 1995, International contributed substantially all of its marine
construction services business to JRM, a new company incorporated under the laws
of the Republic of Panama in 1994. Also, on January 31, 1995, JRM acquired
Offshore Pipelines, Inc. (the "Merger"). Prior to the Merger with Offshore
Pipelines, Inc. ("OPI"), JRM was a wholly owned subsidiary of McDermott
International; as a result of the Merger, JRM is a majority owned subsidiary of
McDermott International. The business activities of this segment are conducted
primarily through JRM and to a lesser extent through McDermott Engineers &
Constructors (Canada), Ltd., formerly Delta Catalytic Corporation.
The Marine Construction Services segment consists of the basic and detailed
design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. This segment also provides
comprehensive project management services, feasibility studies, engineering
services, subsea trenching services, diving services, and removal, salvage and
refurbishment services for offshore fixed platforms. This segment operates
throughout the world in all major offshore oil and gas producing regions,
including the Gulf of Mexico, the North Sea, West Africa, South America, the
Middle East, India and the Far East.
This segment conducts operations both directly and through its participation in
joint ventures, some of which it manages and others of which are managed by
other marine construction contractors. Some of the joint ventures are
consolidated for financial reporting purposes while others are accounted for
using either the equity or the cost methods. JRM's joint ventures are largely
financed through their own resources, including, in some cases, stand-alone
borrowing arrangements. JRM's two most significant joint venture investments are
in the HeereMac joint venture, which is accounted for by the cost method, and
the McDermott-ETPM West, Inc. joint venture, which is accounted for by the
equity method.
The HeereMac joint venture was formed with Heerema Offshore Construction Group,
Inc. ("Heerema") in January 1989 and utilizes the specialized, heavy-lift marine
construction vessels which were previously owned by the two parties. Each party
has a 50% interest in the joint venture, and Heerema has responsibility for its
day-to-day operations. In March 1996, JRM and Heerema, through their respective
subsidiaries, sold to companies included in the HeereMac joint venture the semi
submersible derrick vessels which they were formerly chartering to the joint
venture (JRM's DB101 and DB102 and Heerema's Hermod and Balder). Effective as of
the beginning of fiscal year 1997, International changed from the equity to the
cost method of accounting for its investment in the HeereMac joint venture as a
result of International's determination that it is unable to exercise
significant influence over HeereMac's operating and financial policies.
7
JRM formed its initial joint venture with ETPM S.A., McDermott-ETPM, in April
1989 to provide general marine construction services to the petroleum industry
in West Africa, South America, the Middle East and India and offshore pipelaying
services in the North Sea. With the addition of two new joint venture operating
companies in March 1995, JRM and ETPM S. A. have expanded their joint venture's
operations to include the Far East and to begin jointly pursuing subsea
contracting work on a worldwide basis. Most of the operating companies in the
McDermott-ETPM joint venture are majority-owned and controlled by JRM. However,
the operations of McDermott-ETPM West, Inc., which conducts operations in the
North Sea, South America and West Africa, are managed and controlled by ETPM
S.A. ETPM S.A. has dedicated all of its marine construction assets to the joint
ventures with JRM, including 3 combination derrick-pipelaying vessels and
fabrication yards in Sharjah, U.A.E. and Tchengue, Gabon. JRM currently charters
4 combination derrick-pipelaying vessels and 1 pipelaying vessel to the ETPM
joint ventures and provides the use of its facilities in Jebel Ali in the
U.A.E., Batam Island, Indonesia and Warri, Nigeria.
JRM participates in other joint ventures (including joint ventures in Mexico and
Malaysia) involving operations in foreign countries that require majority-
ownership by local interests. Through a subsidiary, JRM also participates in an
equally owned joint venture with the Brown & Root Energy Services unit of
Halliburton Company ("Brown & Root"), which was formed in February 1995 to
combine the operations of JRM's Inverness and Brown & Root's Nigg fabrication
facilities in Scotland.
The Marine Construction Services segment owns or operates 6 fabrication
facilities throughout the world. This segment's principal domestic fabrication
yard and offshore base is located on 1,114 acres of land, under lease, near
Morgan City, Louisiana. This segment also owns or operates fabrication
facilities near Corpus Christi, Texas, near Inverness, Scotland, in Indonesia on
Batam Island, in Jebel Ali, U.A.E. and in Warri, Nigeria. This segment also owns
and operates a shipyard in VeraCruz, Mexico.
The fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM has the capability to fabricate a full range of offshore
structures, from conventional jacket-type fixed platforms to deepwater platform
configurations employing compliant-tower, tension leg, floating production
platform and spar technology. JRM also fabricates platform deck structures and
modular components, including complete production processing systems,
hydrocarbon separation and treatment systems, pressure and flow control systems
and personnel quarters.
Expiration dates, including renewal options, of leases covering land for the
fabrication yards, follow:
Morgan City, Louisiana Years 2000-2033
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
Warri, Nigeria Year 2065
8
JRM owns or, through its ownership interests in joint ventures, has interests in
the largest fleet of marine equipment used in major offshore construction. The
nucleus of a "construction spread" is a large derrick barge, pipelaying barge or
combination derrick-pipelaying barge capable of offshore operations for an
extended period of time in remote locations. JRM owns or, through ownership
interests in joint ventures, has interests in 9 derrick vessels, 6 pipelaying
vessels, 10 combination derrick-pipelaying vessels and 3 pipe burying vessels.
The lifting capacities of the derrick and combination derrick-pipelaying vessels
range from 250 to 13,200 tons. These vessels range in length from 400 to 660
feet and are fully equipped with stiff leg or revolving cranes, auxiliary
cranes, welding equipment, pile-driving hammers, anchor winches and a variety of
additional gear. Some of these vessels hold various records for heavy lifts and
installations of deepwater pipelines in different regions of the world. The
largest vessels are the derrick barge DB 102, which is one of the world's
largest semi submersible derrick vessels in both size and lifting capacity and
provides quarters for approximately 750 workers, and the LB 200, a semi
submersible pipelaying vessel capable of laying 60-inch diameter pipe (including
concrete coating) and operating in water depths of up to 2,000 feet.
To support the operations of these major marine construction vessels, JRM and
its joint ventures also own or lease a substantial number of other vessels, such
as tugboats, utility boats, launch barges and cargo barges. In connection with
its construction and pipelaying activities, this segment conducts diving
operations which, because of the water depths involved, require sophisticated
equipment, including diving bells and an underwater habitat.
FOREIGN OPERATIONS
The amount of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income derived from operations located outside
of the United States, and the approximate percentages to International's total
revenues and total segment operating income, respectively, follow:
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in thousands)
1997 $ 1,036,791 33% $ 5,083 -
1996 1,103,844 34% 49,783 65%
1995 1,021,986 34% 62,026 119%
Revenues and segment operating income presented above do not include the
operating results of this segment's equity investees.
RAW MATERIALS
The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this
9
segment is not dependent upon any single supplier or source. Although shortages
of certain of these raw materials and fuels have existed from time to time, no
serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas companies, including foreign
government owned companies. Customers generally contract with this segment for
the design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems and onshore construction and
maintenance services. Contracts are usually awarded on a competitive bid basis.
There are a number of companies which compete effectively with International,
the HeereMac joint venture, McDermott-ETPM and International's other joint
ventures in each of the separate marine construction phases in various parts of
the world.
BACKLOG
As of March 31, 1997 and 1996, the Marine Construction Services' backlog
amounted to $1,882,471,000 and $1,137,597,000, or approximately 45% and 33%,
respectively, of International's total backlog. Of the March 31, 1997 backlog,
it is expected that approximately $1,389,705,000 will be recognized in revenues
in fiscal year 1998, $443,305,000 in fiscal year 1999 and $49,461,000
thereafter.
During fiscal year 1997, Marine Construction Services received contract awards
valued at $141,000,000 for the fabrication and installation of the Genesis spar
platform, a deepwater development in the Gulf of Mexico by Chevron U.S.A.
Production Company; a $140,000,000 contract for the design, fabrication, and
installation of a compliant tower to be installed in 1,754 feet of water in the
Gulf of Mexico for Texaco Exploration & Production Inc.; and a contract valued
at $88,000,000 for work awarded by Unocal Thailand, Ltd., a wholly-owned
subsidiary of Union Oil Company of California, in the Gulf of Thailand for the
first phase development of its Pailin Field. In addition, JRM's McDermott-ETPM
East, Inc. joint venture was awarded a $130,000,000 contract by Qatar Liquefied
Gas Company ("Qatargas") for the offshore portion of the third train of its Ras
Laffan Liquified Natural Gas project. The remaining value of all contracts with
the above four customers reflected in the March 31, 1997 backlog is
$683,609,000.
Not included in Marine Construction Services' backlog at March 31, 1997 and 1996
was backlog relating to contracts to be performed by unconsolidated joint
ventures of approximately $1,491,000,000 and $1,407,000,000, respectively.
Work has historically been performed on a fixed price, cost plus or day rate
basis or combination thereof. More recently, certain partnering type contracts
have seen the introduction of a risk and reward element wherein a portion of
total compensation is tied to the overall performance of the alliance partners.
This segment attempts to cover increased costs of anticipated changes in labor,
material and service costs of long-term contracts either through an estimation
of such changes, which is reflected in the original price, or through price
escalation clauses. Most long-term contracts have provisions for progress
payments.
10
FACTORS AFFECTING DEMAND
The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction. These expenditures are influenced by the selling
price of oil and gas along with the cost of production and delivery, the terms
and conditions of offshore leases, the discovery rates of new reserves offshore,
the ability of the oil and gas industry to raise capital, and local and
international political and economic conditions.
Oil company capital exploration and production budgets for calendar year 1997
are higher than 1996 expenditures. While oil prices remain flat, domestic
natural gas prices have increased as compared to calendar year 1995.
Expenditures in both domestic and international areas are expected to increase;
domestic at a higher rate. Worldwide demand for offshore drilling rigs has
increased and this, historically, has been a leading indicator for an increase
in the need for marine construction services. This segment's markets are
expected to begin to emerge from the competitive environment that has put
pressure on margins in prior periods.
D. PATENTS AND LICENSES
Many U. S. and foreign patents have been issued to International and it has many
pending patent applications. Patents and licenses have been acquired and
licenses have been granted to others when advantageous to International. While
International regards its patents and licenses to be of value, no single patent
or license or group of related patents or licenses is believed to be material in
relation to its business as a whole.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
International conducts its principal research and development activities at its
research centers in Alliance, Ohio and Lynchburg, Virginia; and also conducts
development activities at its various manufacturing plants and engineering and
design offices. During the fiscal years ended March 31, 1997, 1996 and 1995,
approximately $50,749,000, $68,106,000 and $64,145,000, respectively, was spent
by International on research and development activities, of which approximately
$34,170,000, $45,106,000 and $44,240,000, respectively, was paid for by
customers of International. Research and development activities were related to
development and improvement of new and existing products and equipment and
conceptual and engineering evaluation for translation into practical
applications. International's new multi-million dollar clean environment
development facility in Alliance, Ohio was constructed in response to present
and future emission pollution standards in the U.S. and worldwide. Approximately
200 employees were engaged full time in research and development activities at
March 31, 1997.
F. INSURANCE
International maintains liability and property insurance that it considers
normal in the industry. However, certain risks are either not insurable or
insurance is available only at rates which International considers uneconomical.
Among such risks are war and confiscation of property in certain areas of the
world, pollution liability in excess of relatively low limits and, in recent
years, asbestos liability. Depending on competitive conditions and other
factors, International endeavors to obtain contractual protection against
uninsured risks from its customers.
11
However, there is no assurance that insurance or contractual indemnity
protection, when obtained, will be sufficient or effective under all
circumstances or against all hazards to which International may be subject.
International's insurance policies do not insure against liability and property
damage losses resulting from nuclear accidents at reactor facilities of its
utility customers. To protect against liability for damage to a customer's
property, International obtains waivers of subrogation from the customer and its
insurer and is generally named as an additional insured under the utility
customer's nuclear property policy. To protect against liability from claims
brought by third parties, International is insured under the utility customer's
nuclear liability policies and has the benefit of the indemnity and limitation
of any applicable liability provision of the Price-Anderson Act, as amended (the
"Act"). The Act limits the public liability of manufacturers and operators of
licensed nuclear facilities and other parties who may be liable in respect of,
and indemnifies them against, all claims in excess of an amount which is
determined by the sum of commercially available liability insurance plus certain
retrospective premium assessments payable by operators of commercial nuclear
reactors. For those sites where International provides environmental remediation
services, it seeks the same protection from its customers as it does for its
other nuclear activities.
Although International does not own or operate any nuclear reactors, it has
coverage under commercially available nuclear liability and property insurance
for three of its four facilities which are licensed to possess special nuclear
materials. The fourth facility operates primarily as a conventional research
center. This facility is licensed to possess special nuclear material and has a
small and limited amount of special nuclear material on the premises. Two of the
four owned facilities are located at International's Lynchburg, Virginia site.
These facilities are insured under a nuclear liability policy which also insures
the facility of B&W Fuel Company ("BWFC") that was sold during fiscal year 1993.
All three facilities share the same nuclear liability insurance limit as the
commercial insurer would not allow BWFC to obtain a separate nuclear liability
insurance policy. Due to the type or quantity of nuclear material present, two
of the four facilities have the benefit of the indemnity and limitation of
liability provisions of the Act, pursuant to Indemnity Agreements entered into
with the U. S. Government. In addition, contracts to manufacture and supply
nuclear fuel or nuclear components to the U. S. Government generally contain
contractual indemnity clauses, which become effective at the time of shipment,
whereby the U. S. Government has assumed the risks of public liability claims.
International's offshore construction business is subject to the usual risks of
operations at sea, with additional exposure due to the utilization of expensive
construction equipment, sometimes under extreme weather conditions, often in
remote areas of the world. In addition, International operates in many cases on
or in proximity to existing offshore facilities which are subject to damage by
International and such damage could result in the escape of oil and gas into the
sea.
The insurance coverage of International for products liability and employers'
liability claims is subject to varying insurance limits which are dependent upon
the year involved. The Babcock & Wilcox Company has an agreement with a
majority of its principal insurers concerning the method of allocation of
products liability asbestos claim payments to the years of coverage. Pursuant
to the agreement, The Babcock & Wilcox Company negotiates and settles these
12
claims and bills these amounts to the appropriate insurers. For financial
reporting purposes, a provision has been recognized to the extent that recovery
of these amounts from International's insurers has not been determined to be
probable. Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from International's claims history and
constitute management's best estimate of such future costs. Estimated insurance
recoveries are based upon analysis of insurers providing coverage of the
estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers (see Note 11 to the consolidated
financial statements), which may vary significantly as claims are filed and
settled. Accordingly, the ultimate loss may differ materially from the amount
provided in the consolidated financial statements.
International has two wholly owned insurance subsidiaries. To date, these
subsidiaries have written policies concerning general and automobile liability,
builders' risk within certain limits, marine hull, and workers' compensation for
International and its subsidiaries. No significant amounts of insurance have
been written for unrelated parties.
G. EMPLOYEES
At March 31, 1997, International employed, under its direct supervision,
approximately 24,600 persons compared with 25,400 at March 31, 1996.
Approximately 4,600 employees were members of labor unions at March 31, 1997 as
compared with approximately 6,400 at March 31, 1996. The majority of B&W's
manufacturing facilities operate under union contracts which customarily are
renewed every two to three years. There are no contracts covering B&W hourly
workers expiring during the next twelve months. International considers its
relationship with its employees to be satisfactory.
H. ENVIRONMENTAL REGULATIONS AND MATTERS
International is subject to the existing and evolving standards relating to the
environment. These laws include the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") of 1980, and similar laws which
provide for responses to and liability for releases of hazardous substances into
the environment; and the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act and other federal laws, each as amended, and
similar foreign, state or local counterparts to these federal laws, which
regulate air emissions, water discharges, hazardous substances and wastes, and
require public disclosure related to the use of various hazardous substances.
International's operations are also governed by laws and regulations relating to
workplace safety and worker health, primarily the Occupational Safety and Health
Act and regulations promulgated thereunder. International believes that its
facilities are in substantial compliance with current regulatory standards.
International's compliance with U.S. federal, state and local environmental
control and protection regulations necessitated capital expenditures of
$468,000 in fiscal year 1997, and it expects to spend another $2,827,000 on such
capital expenditures over the next five years. International cannot predict all
of the environmental requirements or circumstances which will exist in the
future, but it anticipates that environmental control and protection standards
will become increasingly stringent and costly. Complying with existing
environmental regulations resulted in pre-tax charges of approximately
$8,821,000 in fiscal year 1997.
13
International has been identified as a potentially responsible party at various
cleanup sites under CERCLA. International has not been determined to be a
major contributor of wastes to these sites. However, each potentially
responsible party or contributor may face assertions of joint and several
liability. Generally, however, a final allocation of costs is made based on
relative contribution of wastes to each site. Based on its relative
contribution of waste to each site, International's share of the ultimate
liability for the various sites is not expected to have a material effect on
International's consolidated financial position, results of operations or
liquidity in any given year.
Remediation projects have been or may be undertaken at certain of
International's current and former plant sites, and, during fiscal year 1995,
B&W completed subject to Nuclear Regulatory Commission ("NRC") certification,
the decommissioning and decontamination of its former nuclear fuel processing
plant at Apollo, Pennsylvania. All fabrication and support buildings have been
removed, and all contaminated soil has been shipped to authorized disposal
facilities. In fiscal year 1997, B&W was notified by the NRC that the Apollo
plant site had been released for unrestricted use. The Apollo plant site is the
first major nuclear facility in the U. S. to achieve "green-field" status after
remediation, and will now be removed from the NRC's Site Decommissioning
Management Plan. The nuclear license for the plant was terminated.
During fiscal year 1995, a decision was made to close B&W's nuclear
manufacturing facilities in Parks Township, Armstrong County, Pennsylvania
("Parks Facilities"), and a provision of $41,724,000 for the decontamination,
decommissioning and the closing of these facilities was recognized. Previously,
decontamination and decommissioning costs were being accrued over the
facilities' remaining expected life. Decontamination is proceeding as permitted
by the existing NRC license. A decommissioning plan was submitted to the NRC
for review and approval during January 1996. B&W expects to reach an agreement
with the NRC in fiscal year 1998 on a plan that provides for the completion of
facilities dismantlement and soil restoration by 2001. B&W expects to request
approval from the NRC to release the site for unrestricted use at that time.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP"), by letter dated March 19, 1994, advised B&W that it would seek
monetary sanctions, and remedial and monitoring relief, related to B&W's Parks
Facilities. The relief sought related to potential groundwater contamination
related to the previous operations of the facilities. PADEP has recently advised
B&W that is does not intend to assess any monetary sanctions provided that B&W
continues its remediation program of the Parks Facilities.
International performs significant amounts of work for the U. S. Government
under both prime contracts and subcontracts and operates certain facilities that
are licensed to possess and process special nuclear materials and thus is
subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the Nuclear Regulatory Commission.
Decommissioning regulations promulgated by the U.S. Nuclear Regulatory
Commission require B&W to provide financial assurance that it will be able to
pay the expected cost of decommissioning its facilities at the end of their
service lives. B&W will continue to provide financial assurance of $18,163,000
during fiscal year 1998 by issuing letters of credit for the ultimate
decommissioning of all its licensed facilities, except one. This facility,
which
14
represents the largest portion of B&W's eventual decommissioning costs, has
provisions in its government contracts pursuant to which all of its
decommissioning costs and financial assurance obligations are covered by the U.
S. Government.
Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material effect upon the consolidated financial position of
International.
15
Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, International is, from time to time, involved
in routine litigation related to its business activity. It is management's
opinion that none of this litigation will have a material adverse effect on the
consolidated financial position of International.
In addition to matters of the type referred to in the preceding paragraph,
McDermott International and JRM are conducting an internal investigation, with
the assistance of outside counsel, of allegations of wrongdoing by a limited
number of former employees of McDermott International and JRM and by others.
McDermott International and JRM notified the appropriate authorities of their
investigation in April 1997. In June 1997, McDermott International received a
federal grand jury subpoena for documents relating principally to an
investigation of possible anti-competitive activity in the heavy-lift barge
service business of JRM and HeereMac. In July 1997, McDermott International
received an informal request from the Securities and Exchange Commission for the
voluntary production of documents. McDermott International and JRM are
cooperating with the authorities. The allegations which are the subject of the
internal investigation, if true, and the outcome of the grand jury proceedings,
could result in civil and/or criminal liability. At this time, McDermott
International and JRM do not have sufficient information to predict the ultimate
outcome of this matter.
See Item 1F and Note 11 to the consolidated financial statements regarding
International's potential liability for non-employee products liability asbestos
claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
16
P A R T I I
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
McDermott International's Common Stock is traded on the New York Stock Exchange.
High and low stock prices and dividends declared for the fiscal years ended
March 31, 1996 and 1997 follow:
FISCAL YEAR 1996
----------------
CASH
SALES PRICE DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- ---------
June 30, 1995 $ 28 $ 23 - 1/4 $ 0.25
September 30, 1995 25 - 3/8 19 - 5/8 0.25
December 31, 1995 22 - 1/8 15 - 3/8 0.25
March 31, 1996 21 - 3/4 17 - 7/8 0.25
FISCAL YEAR 1997
----------------
CASH
SALES PRICE DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- ---------
June 30, 1996 $23 - 1/4 $ 19 - 1/4 $ 0.25
September 30, 1996 22 - 1/4 17 - 7/8 0.25
December 31, 1996 22 - 1/2 16 0.05
March 31, 1997 22 - 7/8 16 0.05
As of March 31, 1997, the approximate number of record holders of Common Stock
was 5,684.
17
Item 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED MARCH 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except for per share amounts)
Revenues $3,150,850 $3,244,318 $3,043,680 $3,059,912 $3,172,555
Income (Loss) before Extraordinary
Items and Cumulative Effect of
Accounting Changes $ (206,105) $ 20,625 $ 10,876 $ 89,956 $ 67,323
Net Income (Loss) $ (206,105) $ 20,625 $ 9,111 $ (10,794) $ (188,732)
Primary and Fully Diluted
Earnings (Loss) Per Common Share:
Income (Loss) before Extraordinary
Items and Cumulative Effect of
Accounting Changes $ (3.92) $ 0.23 $ 0.05 $ 1.57 $ 1.29
Net Income (Loss) $ (3.92) $ 0.23 $ 0.02 $ (0.32) $ (3.63)
Total Assets $4,599,482 $4,387,251 $4,751,670 $4,223,569 $3,092,963
Long-Term Debt $ 667,174 $ 576,256 $ 579,101 $ 667,066 $ 583,211
Subsidiary's Redeemable Preferred
Stocks 170,983 173,301 179,251 196,672 204,482
---------- ----------- ---------- ---------- ----------
Total $ 838,157 $ 749,557 $ 758,352 $ 863,738 $ 787,693
Cash Dividends Per Common Share $ 0.60 $ 1.00 $ 1.00 $ 1.00 $ 1.00
18
See Note 18 to the consolidated financial statements for significant items
included in fiscal year 1997 and 1996 results. Fiscal year 1995 results include
a $46,489,000 charge for the decontamination, decommissioning and closing of
certain nuclear manufacturing facilities and the closing of a manufacturing
facility, a $14,478,000 charge for the reduction of estimated products liability
asbestos claims recoveries from insurers, and a $26,300,000 benefit for a
reduction in accrued interest expense due to the settlement of outstanding tax
issues. Fiscal year 1993 results include a $23,968,000 gain from the sale of
interests in its two commercial nuclear joint ventures.
See Note 3 to the consolidated financial statements regarding the change to the
cost method of accounting for International's investment in the HeereMac joint
venture in fiscal year 1997. Equity in income of HeereMac was $1,083,000,
$6,244,000, $79,386,000, and $44,318,000 in fiscal years 1996, 1995, 1994 and
1993, respectively. Beginning with fiscal year 1997, only distributions of
profits received from HeereMac will be included in income. International
received distributions of profits from HeereMac of $25,741,000 and $42,899,000
in fiscal years 1995 and 1994, respectively. There were no distributions of
profits in fiscal years 1997, 1996 or 1993. See Note 2 regarding acquisitions in
fiscal years 1996 and 1995. See Note 1 regarding the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 112 in fiscal year 1995. Fiscal year
1994 includes the cumulative effect of the adoption of Emerging Issues Task
Force Issue No. 93-5. Fiscal year 1993 includes the cumulative effect of the
adoption of SFAS No. 106 and SFAS No. 109. See Note 11 regarding the uncertainty
as to the ultimate loss relating to products liability asbestos claims and an
internal investigation of allegations of wrongdoing by a limited number of
former employees of McDermott International and JRM, and by others.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
A significant portion of International's revenues and operating results are
derived from its foreign operations. As a result, International's operations
and financial results are affected by international factors, such as changes in
foreign currency exchange rates. International attempts to minimize its exposure
to changes in foreign currency exchange rates by attempting to match foreign
currency contract receipts with like foreign currency disbursements. To the
extent that it is unable to match the foreign currency receipts and
disbursements related to its contracts, its practice of entering into forward
exchange contracts to hedge foreign currency transactions reduces the impact of
foreign exchange rate movements on operating results.
In general, both of International's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
Revenues of the Power Generation Systems and Equipment segment are largely a
function of capital spending by the electric power generation industry and by
the U.S. Government. This segment has recently experienced weak and difficult
markets in nearly all of its product lines. Domestic utility original equipment
markets remain sluggish as growth in demand remains modest and the electric
power industry transitions from a regulated to a competitive environment.
However, demand for services to the domestic utility industry and for nuclear
fuel assemblies and reactor components for the U.S. Navy continue at significant
levels. In addition, foreign markets for industrial and utility boilers remain
strong in Asia and the Middle East.
Revenues of the Marine Construction Services segment are largely a function of
the level of oil and gas development activity in the world's major hydrocarbon
producing regions. Consequently, revenues reflect the variability associated
with the timing of significant development projects. This segment's operating
results have been adversely affected by a substantial decline in significant
development projects in Southeast Asia, and low margins in all of its other
major markets. International expects improvements in its markets, especially in
Southeast Asia and the Gulf of Mexico. Consolidated backlog has increased
significantly and there have been some pricing improvements.
The foregoing statements regarding International's markets and other statements
in this discussion are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties. These include
uncertainties relating to deregulation and the Clean Air Act, as well as
offshore development decisions to be made by oil and gas exploration and
development companies.
20
FISCAL YEAR 1997 VS FISCAL YEAR 1996
Power Generation Systems and Equipment's revenues decreased $194,089,000 to
$1,514,477,000 primarily due to lower revenues from the fabrication and erection
of fossil fuel steam and environmental control systems, replacement nuclear
steam generators, construction of cogeneration plants, nuclear services and
replacement parts. These decreases were partially offset by higher revenues
from commercial nuclear environmental services.
Power Generation Systems and Equipment's segment operating income (loss)
decreased $105,821,000 from income of $24,836,000 to a loss of $80,985,000. A
provision for estimated future non-employee products asbestos claims, the write-
down of an equity investment in a domestic cogeneration joint venture and an
asset impairment loss on a domestic manufacturing facility, net of gains on
asset disposals, resulted in an increase in segment loss of $80,446,000 in the
current year. There were also lower volume and margins on the fabrication and
erection of fossil fuel steam and environmental control systems and on
replacement parts. There were also lower volume on replacement nuclear steam
generators, lower margins on plant enhancement projects, cost overruns on a
contract for a Canadian cogeneration plant and increased severance and
relocation costs. These decreases were partially offset by higher volume and
margins on commercial nuclear environmental services and lower workers'
compensation expense.
Power Generation Systems and Equipment's equity in income of investees, which
represents the results of approximately 15 active joint ventures, decreased
$34,482,000 to $2,007,000. The income in fiscal year 1996 was primarily due to
the gain on the sale of power purchase contracts back to a local utility. There
were also lower operating results in three of the joint ventures in the current
year.
Backlog for this segment at March 31, 1997 and 1996 was $2,344,951,000 and
$2,261,799,000, respectively. At March 31, 1997, this segment's backlog with
the U.S. Government was $797,470,000 (of which $26,448,000 had not been funded)
and includes orders for nuclear fuel assemblies and reactor components for the
U.S. Navy. These orders are expected to continue to comprise a substantial
portion of backlog with the U.S. Government as B&W is the sole source provider
of these nuclear fuel assemblies and reactor components.
Marine Construction Services' revenues increased $98,148,000 to $1,653,678,000,
primarily due to higher volume in North America, the Middle East and the Far
East. In addition, there was higher volume from barge construction activities
in domestic shipyard operations and increased ship repair activities in Mexican
operations. These were partially offset by lower volume in the North Sea and in
engineering and construction activities. There was also lower leasing revenues
due to the sale of the DB101 and DB102 to the HeereMac joint venture.
Marine Construction Services' segment operating income (loss) decreased
$66,171,000 from income of $51,465,000 to a loss of $14,706,000. Net gains on
asset disposals, after deduction for certain writedowns of asset valuations,
were $4,410,000 in fiscal year
21
1997 and $40,138,000 in fiscal year 1996. Excluding these net gains, operating
income decreased $30,443,000. The decrease was primarily due to lower volume in
the North Sea, lower leasing activities due to the sale of the DB101 and DB102,
lower margins in the Far East, and the completion of profitable contracts in
West Africa in the prior year as well as cost overruns on domestic barge
operations in the current year. These were partially offset by higher volume in
North America and the Middle East.
Marine Construction Services' equity in income (loss) of investees decreased
$18,054,000 from income of $11,949,000 to a loss of $6,105,000. This decrease
was primarily due to the lower results from the McDermott-ETPM West, Inc. joint
venture. Revenues of the McDermott-ETPM West, Inc. joint venture increased
$97,207,000 to $347,849,000 in fiscal year 1997 primarily due to increased
volume in the North Sea and West Africa. Equity in income of this joint venture
decreased $19,366,000 to a loss of $16,833,000 in fiscal year 1997 primarily
due to lower margins in West Africa. In addition, there were favorable results
from a Mexican joint venture.
Backlog for this segment at March 31, 1997 and 1996 was $1,882,471,000 and
$1,137,597,000, respectively. Not included in backlog at March 31, 1997 and
1996 was backlog relating to contracts to be performed by unconsolidated joint
ventures of approximately $1,491,000,000 and $1,407,000,000, respectively.
Interest income increased $9,504,000 to $46,742,000 primarily due to interest on
the promissory note received as part of the consideration from the sale of the
DB101 and DB102.
Interest expense increased $10,788,000 to $95,100,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense decreased $4,468,000 to $5,562,000 primarily due to
minority shareholder participation in the operating results of JRM.
Other-net expense increased $10,701,000 to $19,532,000 primarily due to a loss
of $19,446,000 in the current year for insolvent insurers providing coverage for
estimated future non-employee asbestos claims, partially offset by foreign
currency transaction gains in the current year compared to foreign currency
transaction losses in the prior year.
The provision for income taxes decreased $15,671,000 from a provision of
$1,079,000 to a benefit of $14,592,000, while income before income taxes
decreased $242,401,000 from income of $21,704,000 to a loss of $220,697,000. The
decrease in income taxes is primarily due to a decrease in income offset, in
part, due to a limitation on the recognition of income tax benefits in the U. S.
In addition, International operates in many different tax jurisdictions. Within
these jurisdictions, tax provisions vary because of nominal rates, allowability
of deductions, credits and other benefits, and even tax basis (for example,
revenues versus income). These variances, along with variances in the mix of
income within jurisdictions, are responsible for shifts in the effective tax
rate. As a result of these factors, the benefit from income taxes was 7% of pre-
tax loss in fiscal year 1997 compared to a provision for income taxes of 5% of
pre-tax income in fiscal year 1996.
22
FISCAL YEAR 1996 VS FISCAL YEAR 1995
Power Generation Systems and Equipment's revenues increased $45,331,000 to
$1,708,566,000. This was primarily due to higher revenues from engineering,
procurement and construction of cogeneration plants, from defense and space-
related products (other than nuclear fuel assemblies and reactor components),
replacement nuclear steam generators for domestic customers manufactured at
B&W's Cambridge, Ontario location and fabrication of industrial boilers. These
increases were partially offset by lower revenues from repair and alteration of
existing fossil fuel steam systems, fabrication and erection of fossil fuel
steam and environmental control systems and nuclear fuel assemblies and reactor
components for the U. S. Government.
Power Generation Systems and Equipment's segment operating income increased
$11,189,000 to $24,836,000 due to provisions of $46,489,000 for the
decontamination, decommissioning and closing of certain nuclear manufacturing
facilities and the closing of a manufacturing facility in the prior year. In
addition, there were higher volume and margins from replacement nuclear steam
generators, improved margins from fabrication of fossil fuel steam and
environmental control systems (including a license buyout agreement of
$8,574,000) and higher volume from defense and space-related products (other
than nuclear fuel assemblies and reactor components). There was also a gain on
the sale of a manufacturing facility. These increases were offset by the write-
off of an insurance claim of $12,600,000 due to an unfavorable arbitration
ruling related to the recovery of cost incurred for corrective action in certain
utility and industrial installations. There were also lower margins from
engineering, procurement and construction of cogeneration plants. In addition,
there were lower volume and margins from the repair and alteration of existing
fossil fuel steam systems and industrial boilers, plant enhancement projects and
from operations and maintenance contracts.
Power Generation Systems and Equipment's equity in income of investees increased
$28,125,000 to $36,489,000. This represents the results of approximately 16
active joint ventures, but is primarily due to a nonrecurring equity income gain
of $30,612,000 resulting from the sale of power purchase contracts back to a
local utility.
Marine Construction Services' revenues increased $164,611,000 to $1,555,530,000,
primarily due to higher purchased engineered equipment and subcontract
activities in the North Sea related to the B.P. Exploration Foinaven Development
program west of the Shetlands in the North Atlantic and revenues resulting from
the acquisition of OPI. There were also higher revenues on marine and
engineering activities in North America. These increases were partially offset
by lower revenues in the Far East and domestic shipyard operations.
Marine Construction Services' segment operating income increased $13,060,000 to
$51,465,000. Excluding the gain of $34,788,000 from the sale of an interest in
Caspian Sea oil fields, segment operating income decreased $21,728,000 due to
higher amortization expense relating to goodwill and other intangibles resulting
from the acquisition of OPI on January 31, 1995. There were lower margins due
to the completion of higher profit margin contracts in the Far East and the
Middle East during fiscal 1995, lower volume in the Far East this year, and
lower operating income in North America on
23
offshore activities because of weather downtime and lower margins on certain
contracts. This decrease was partially offset by a favorable insurance
adjustment of $12,000,000, a net gain on asset disposals, higher volume and
margins in North America on fabrication activities, and higher margins on
shipyard operations. During fiscal year 1995, there were also operating losses
associated with the fabrication yard in Scotland and accelerated depreciation of
$4,314,000 on certain marine equipment in the Far East.
Marine Construction Services' equity in income of investees decreased
$13,539,000 to $11,949,000. This decrease was primarily due to lower results
from both the HeereMac and McDermott-ETPM West, Inc. joint ventures. The
revenues of these two joint ventures declined from $656,490,000 to $542,772,000,
primarily in the Gulf of Mexico, the Far East and the North Sea, partially
offset by increased volume in West Africa. The equity income from these two
joint ventures declined from $24,759,000 to $3,616,000 as a result of reduced
volume and margins in the North Sea. Together these two investees accounted
for 30% of equity in earnings of investees. The decrease was partially offset
by higher operating activity from the Brown and Root McDermott Fabricators
Limited joint venture which was formed in the last quarter of the prior year.
Interest income decreased $15,502,000 to $37,238,000 primarily due to decreases
in investments in government obligations and other investments in the current
year and income recognized in the prior year on a receivable from an equity
investee and settlement of claims for interest relating to foreign tax refunds
and contract claims.
Interest expense increased $27,197,000 to $84,312,000, primarily due to a
reduction in accrued interest of $26,300,000 on proposed tax deficiencies that
was recorded in the prior year.
Minority interest expense decreased $2,137,000 to $10,030,000 primarily due to
minority shareholder participation in the increased losses of the McDermott-ETPM
East joint venture.
Other-net expense decreased $30,770,000 to $8,831,000. This decrease was
primarily due to a loss related to the reduction of estimated products liability
asbestos claim recoveries of $14,478,000 from insurers and a provision for the
settlement of a lawsuit, both in the prior year.
The provision for income taxes increased $21,122,000 from a benefit of
$20,043,000 to a provision of $1,079,000, while income before income taxes and
cumulative effect of accounting change increased $30,871,000 from a loss of
$9,167,000 to income of $21,704,000. The increase in income taxes is primarily
due to an increase in income partially offset by a reappraisal of $5,600,000 of
liabilities in certain foreign tax jurisdictions.
24
Effect of Inflation and Changing Prices
International's financial statements are prepared in accordance with generally
accepted accounting principles, using historical dollar accounting (historical
cost). Statements based on historical cost, however, do not adequately reflect
the cumulative effect of increasing costs and changes in the purchasing power of
the dollar, especially during times of significant and continued inflation.
The management of International is cognizant of the effects of inflation and, in
order to minimize the negative impact of inflation on its operations, attempts
to cover the increased cost of anticipated changes in labor, material and
service costs, either through an estimation of such changes, which is reflected
in an original price, or through price escalation clauses in its contracts.
Liquidity and Capital Resources
During fiscal year 1997, International's cash and cash equivalents increased
$19,120,000 to $257,783,000 and total debt increased $308,517,000 to
$1,119,031,000 primarily due to the issuance of $250,000,000 principal amount of
JRM's 9.375% Senior Subordinated Notes due 2006 and secured borrowings of
$93,769,000 on transfers of receivables (See Notes 1 and 5 to the consolidated
financial statements). During this period, International provided cash of
$106,647,000 from operating activities and received cash of $106,304,000 from
asset disposals and $24,500,000 from returns from investees. International used
cash of $241,336,000 for net purchases of investments; $91,371,000 for additions
to property, plant and equipment; $51,947,000 for dividends on McDermott
International's common and preferred stocks; $31,687,000 for repayment of long-
term debt; $31,030,000 for investments in equity investees; and $2,250,000 for
the repurchase of a subsidiary's preferred stock to satisfy current and future
sinking fund requirements.
Cash from asset disposals includes proceeds of $38,400,000 from the sale of
International's interest in CCC Fabricaciones y Construcciones, S.A. de C.V. (a
Mexican joint venture), 2 derrick barges, and other assets to Global Industries,
Ltd., proceeds of $19,000,000 from the sale of International's shipyard
facilities in Morgan City, Louisiana and certain work-in-progress and proceeds
of $15,050,000 from the sale of a marine vessel by HeereMac on behalf of
International.
Pursuant to an agreement with the majority of its principal insurers,
International negotiates and settles products liability asbestos claims from
non-employees and bills these amounts to the appropriate insurers. As a result
of collection delays inherent in the process, reimbursement is usually delayed
for three months or more. The average amount of these claims (historical
average of approximately $6,000 per claim over the last three years) has
continued to rise. Claims paid in fiscal year 1997 were $188,205,000, of which
$170,003,000 has been recovered or is due from insurers. At March 31, 1997,
receivables of $80,085,000 were due from insurers for reimbursement of settled
claims. The increase in amounts classified current for products liability
asbestos claims and insurance recoverable at March 31, 1997 reflects
management's intention to reduce the
25
level of unpaid asserted claims over the next several quarters. The number of
non-employee asbestos claims, which had declined moderately since fiscal year
1990, increased during the second half of fiscal year 1995 and the first half of
fiscal year 1996, but decreased the second half of fiscal year 1996. Based on
information then currently available, management believed that the increase
represented an acceleration in the timing of receipt of claims but did not
represent an increase in the total liability. The number of claims, however,
increased during the first nine months of fiscal year 1997 and during that
period management was investigating and evaluating the basis for the increase.
As a result of this investigation and evaluation, in the fourth quarter of
fiscal year 1997 International recorded an additional estimated liability for
future non-employee asbestos claims of $427,001,000, estimated related insurance
recoveries of $354,601,000 and a loss of $72,400,000 for estimated future claims
for which recovery from insurers was not determined to be probable. Estimated
liabilities for pending and future non-employee products liability asbestos
claims are derived from International's claims history and constitute
management's best estimate of such future costs. Settlement of the liability
is expected to occur over approximately the next 15 years. Estimated insurance
recoveries are based upon analysis of insurers providing coverage of the
estimated liabilities. Inherent in the estimate of such liabilities and
recoveries are expected trends in claim severity and frequency and other
factors, including recoverability from insurers, which may vary significantly as
claims are filed and settled. Accordingly, the ultimate loss may differ
materially from amounts provided in the consolidated financial statements. The
collection delays and the amount of claims paid for which insurance recovery is
not probable have not had a material adverse effect on International's
liquidity, and management believes, based on information currently available,
that they will not have a material adverse effect on liquidity in the future.
Expenditures for property, plant and equipment increased $5,533,000 to
$91,371,000 in fiscal year 1997. The majority of fiscal year 1997 expenditures
were to maintain, replace and upgrade existing facilities and equipment.
International has committed to make capital expenditures of approximately
$25,333,000 during fiscal 1998.
At March 31, 1997 and 1996, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of approximately $93,769,000 and $107,000,000, respectively, under an
agreement with a U.S. bank. During fiscal year 1997, the maximum sales limit
available under the agreement was reduced from $140,000,000 to $125,000,000 and
is subject to annual renewal. Depending on the amount of qualified accounts
receivable available for the pool, the amount sold to the bank can vary (but not
greater than the maximum sales limit available) from time to time. Beginning
January 1, 1997, International accounts for these sales as secured borrowings
(See Notes 1 and 5 to the consolidated financial statements).
At March 31, 1997 and 1996, McDermott International and its subsidiaries had
available various uncommitted short-term lines of credit from banks totaling
$179,137,000 and $439,610,000, respectively. Borrowings against these lines of
credit at March 31, 1997 and 1996 were $53,165,000 and $149,067,000,
respectively. The reduction in borrowings against uncommitted short-term lines
of credit is primarily due to the collection of the Foinaven project receivables
and repayment of the project financing debt during the fiscal year. At March 31,
1997 and 1996, respectively, there were borrowings of
26
$150,000,000 and $50,000,000 under the $150,000,000 unsecured committed
revolving credit facility of The Babcock & Wilcox Company (the "B&W Revolver").
During May and June 1997, The Babcock & Wilcox Company repaid all amounts
outstanding under the B&W Revolver. As a condition to borrowing under the B&W
Revolver, The Babcock & Wilcox Company must comply with certain requirements. In
July 1997, these requirements of the B&W Revolver were amended so that The
Babcock & Wilcox Company may borrow under this facility in the future. During
fiscal year 1998 borrowings by The Babcock & Wilcox Company through the B&W
Revolver are expected to be minimal as The Babcock & Wilcox Company expects to
be able to fund itself from operating cash flow.
JRM is party to an unsecured and committed revolving credit facility (the "JRM
Revolver") with a group of banks. There were no borrowings outstanding at March
31, 1997 and 1996 under the JRM Revolver. As a condition to borrowing under the
JRM Revolver, JRM must comply with certain requirements. Presently, JRM cannot
satisfy these requirements and cannot borrow under the JRM Revolver. The JRM
Revolver also limits the amount of funds which JRM can borrow from other sources
and JRM is currently at such limits. However, it is not anticipated JRM will
need to borrow funds under the JRM Revolver during fiscal year 1998.
The Delaware Company and JRM are restricted, as a result of covenants in credit
agreements, in their ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At March 31, 1997, substantially all of the net assets of the Delaware Company
and JRM were subject to such restrictions. It is not expected that these
restrictions will have any significant effect on McDermott International's
liquidity.
International maintains an investment portfolio of government obligations and
other investments. The fair value of short and long-term investments in debt
securities at March 31, 1997 was $485,541,000. At March 31, 1997, approximately
$103,315,000 fair value of these obligations were pledged to secure a letter of
credit in connection with a long-term loan and certain reinsurance agreements.
Over the past several years, International has entered into certain investments
in oil and gas projects in the former Soviet Union. In April 1997,
International sold its last Soviet Union oil and gas interest which was in the
Sakhalin Energy Investment Company Ltd., to other members of the consortium.
International received proceeds of approximately $122,000,000.
Working capital decreased $106,415,000 to $225,571,000 at March 31, 1997 due, in
part, to the classification of JRM's 12.875% Guaranteed Senior Notes as a
current liability due to JRM's decision to redeem such Notes on July 15, 1997.
During fiscal year 1997, JRM issued $250,000,000 principal amount of 9.375%
Senior Subordinated Notes due 2006 and received net proceeds of $244,375,000
which were used primarily to repay intercompany indebtedness (including
interest) of approximately $239,000,000 owed to McDermott International.
McDermott International used $50,000,000 of the proceeds to reduce short-term
debt and invested the remainder of the proceeds in its investment portfolio.
During fiscal year 1998, International expects to obtain funds to meet capital
expenditure, working capital and debt maturity requirements from operating
activities, sales of non-strategic assets, cash and cash equivalents,
investments in debt securities
27
and short-term borrowings. Leasing agreements for equipment, which are short-
term in nature, are not expected to impact International's liquidity or capital
resources.
JRM's joint ventures are largely financed through their own resources,
including, in some cases, stand-alone borrowing arrangements.
As of the Board of Directors meeting held November 7, 1996, McDermott
International's quarterly dividends on its Common Stock were reduced from $0.25
per share to $0.05 per share. Its dividend of $0.71875 per share on its Series C
Cumulative Convertible Preferred Stock remained unchanged. The Delaware
Company's quarterly dividends are $0.55 per share on the Series A $2.20
Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60
Cumulative Preferred Stock. McDermott International's quarterly dividends were
$0.05 per share in the last two quarters in fiscal year 1997 and $0.25 per share
in the first two quarters of fiscal year 1997 and in fiscal year 1996. The
Delaware Company's quarterly dividends were at the same rates in 1997 and 1996.
At March 31, 1997, the ratio of long-term debt to total stockholders' equity was
1.53 as compared with 0.84 at March 31, 1996.
International has provided a valuation allowance ($72,328,000 at March 31, 1997)
for deferred tax assets which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. Management believes that
remaining deferred tax assets at March 31, 1997 are realizable through
carrybacks and future reversals of existing taxable temporary differences,
future taxable income and, if necessary, the implementation of tax planning
strategies involving the sales of appreciated assets. Uncertainties that affect
the ultimate realization of deferred tax assets are the risk of incurring losses
in the future and the possibility of declines in value of appreciated assets
involved in identified tax planning strategies. These factors have been
considered in determining the valuation allowance. Management will continue to
assess the adequacy of the valuation allowance on a quarterly basis.
On October 7, 1996, McDermott International, Inc. announced that its Board of
Directors had directed management to implement a series of steps to improve
International's financial and operating performance. Management was directed to
focus International on its core business lines and dispose of non-core
businesses and underperforming assets. Core business lines include the power
generation and government operations of B&W and the marine construction
operations of JRM. Management was also directed to realign the operations of
B&W's Power Generation Group consistent with the current demands of the
worldwide power generation market. This included the rationalization of
manufacturing overcapacity and continued reduction in personnel. Finally,
management was directed to continue efforts to reduce personnel and other costs
at the operating and corporate headquarters of both McDermott International and
JRM. Business and asset disposals associated with this directive have not been
completed.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which is required to be adopted on December 31, 1997. At
that time, International will be required to change the method currently used to
compute
28
earnings per share and to restate all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options
and stock appreciation rights will be excluded. For the fiscal years 1997, 1996
and 1995, the new standard will have no impact on previously reported amounts.
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities."
The SOP provides guidance with respect to the recognition, measurement, and
disclosure of environmental remediation liabilities. International believes
that its accounting for environmental remediation liabilities is essentially in
compliance with the SOP. International will formally adopt SOP 96-1 in fiscal
year 1998, and does not believe the effect of the adoption will be material.
29
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
International has prepared the consolidated financial statements and related
financial information included in this report. International has the primary
responsibility for the financial statements and other financial information and
for ascertaining that the data fairly reflects the financial position and
results of operations of International. The financial statements were prepared
in accordance with generally accepted accounting principles, and necessarily
reflect informed estimates and judgments by appropriate officers of
International with appropriate consideration given to materiality.
International believes that it maintains an internal control structure designed
to provide reasonable assurance that assets are safeguarded against loss or
unauthorized use and that the financial records are adequate and can be relied
upon to produce financial statements in accordance with generally accepted
accounting principles. The concept of reasonable assurance is based on the
recognition that the cost of an internal control structure must not exceed the
related benefits. Although internal control procedures are designed to achieve
these objectives, it must be recognized that errors or irregularities may
nevertheless occur. International seeks to assure the objectivity and integrity
of its accounts by its selection of qualified personnel, by organizational
arrangements that provide an appropriate division of responsibility and by the
establishment and communication of sound business policies and procedures
throughout the organization. International believes that its internal control
structure provides reasonable assurance that errors or irregularities that could
be material to the financial statements are prevented or would be detected.
International's accompanying consolidated financial statements have been audited
by its independent auditors, who provide International with expert advice on
the application of U. S. generally accepted accounting principles to
International's business and also provide an objective assessment of the degree
to which International meets its responsibility for the fairness of financial
reporting. They regularly evaluate the internal control structure and perform
such tests and other procedures as they deem necessary to reach and express an
opinion on the fairness of the financial statements. The report of the
independent auditors appears elsewhere herein.
The Board of Directors pursues its responsibility for International's
consolidated financial statements through its Audit Committee, which is composed
solely of directors who are not officers or employees of International. The
Audit Committee meets periodically with the independent auditors and management
to review matters relating to the quality of financial reporting and internal
control structure and the nature, extent and results of the audit effort. In
addition, the Audit Committee is responsible for recommending the engagement of
independent auditors for International to the Board of Directors, who in turn
submit the engagement to the stockholders for their approval. The independent
auditors have free access to the Audit Committee.
July 10, 1997
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott
International, Inc. as of March 31, 1997 and 1996, and the related consolidated
statements of income (loss), stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
International, Inc. at March 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits and investment
securities in 1995.
ERNST & YOUNG LLP
New Orleans, Louisiana
July 10, 1997
31
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997 and 1996
ASSETS
1997 1996
---------- ----------
(In thousands)
Current Assets:
Cash and cash equivalents $ 257,783 $ 238,663
Short-term investments in debt securities 75,946 -
Accounts receivable - trade 547,082 457,049
Accounts and note receivable - unconsolidated
affiliates 66,074 57,691
Accounts receivable - other 185,138 162,335
Insurance recoverable - current 183,000 116,280
Contracts in progress 326,512 465,876
Inventories 66,322 68,981
Deferred income taxes 60,866 93,104
Other current assets 65,604 64,559
- --------------------------------------------------------------------------------
Total Current Assets 1,834,327 1,724,538
- --------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 29,876 34,097
Buildings 214,142 240,393
Machinery and equipment 1,485,396 1,575,530
Property under construction 34,886 40,083
- --------------------------------------------------------------------------------
1,764,300 1,890,103
Less accumulated depreciation 1,164,555 1,199,416
- --------------------------------------------------------------------------------
Net Property, Plant and Equipment 599,745 690,687
- --------------------------------------------------------------------------------
Investments in Debt Securities:
Government obligations 291,538 132,674
Other investments 118,057 109,352
- --------------------------------------------------------------------------------
Total Investments in Debt Securities 409,595 242,026
- --------------------------------------------------------------------------------
Insurance Recoverable 720,913 606,963
- --------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization
of $158,523,000 at March 31, 1997
and $126,882,000 at March 31, 1996 423,095 460,058
- --------------------------------------------------------------------------------
Prepaid Pension Costs 303,825 283,656
- --------------------------------------------------------------------------------
Other Assets 307,982 379,323
- --------------------------------------------------------------------------------
TOTAL $4,599,482 $4,387,251
================================================================================
See accompanying notes to consolidated financial statements.
32
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
-------- --------
(In thousands)
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 451,857 $ 234,258
Accounts payable 268,274 264,930
Environmental and products liabilities - current 211,841 161,062
Accrued employee benefits 106,498 98,159
Accrued liabilities - other 343,744 410,103
Advance billings on contracts 200,163 187,378
U.S. and foreign income taxes 26,379 36,662
- --------------------------------------------------------------------------------
Total Current Liabilities 1,608,756 1,392,552
- --------------------------------------------------------------------------------
Long-Term Debt 667,174 576,256
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 400,445 401,321
- --------------------------------------------------------------------------------
Environmental and Products Liabilities 903,379 721,740
- --------------------------------------------------------------------------------
Other Liabilities 250,885 268,975
- --------------------------------------------------------------------------------
Contingencies
- --------------------------------------------------------------------------------
Minority Interest:
Subsidiary's redeemable preferred stocks 170,983 173,301
Other minority interest 160,859 168,586
- --------------------------------------------------------------------------------
Total Minority Interest 331,842 341,887
- --------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares;
outstanding 2,875,000 Series C $2.875 cumulative
convertible, par value $1.00 per share,
(liquidation preference $143,750,000) 2,875 2,875
Common stock, par value $1.00 per share,
authorized 150,000,000 shares; outstanding
54,936,956 at March 31, 1997 and
54,435,823 at March 31, 1996 54,937 54,436
Capital in excess of par value 962,445 949,022
Deficit (538,163) (290,968)
Minimum pension liability (2,148) (1,428)
Net unrealized loss on investments (4,132) (1,875)
Currency translation adjustments (38,813) (27,542)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 437,001 684,520
- --------------------------------------------------------------------------------
TOTAL $4,599,482 $4,387,251
================================================================================
33
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
1997 1996 1995
----------- ---------- -----------
(In thousands)
Revenues $3,150,850 $3,244,318 $3,043,680
- --------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 2,878,972 2,834,373 2,636,640
Depreciation and amortization 151,581 139,875 115,558
Selling, general and
administrative expenses 262,918 274,772 276,076
- --------------------------------------------------------------------------------
3,293,471 3,249,020 3,028,274
- --------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and
Impairments - Net (526) 43,903 (2,282)
- --------------------------------------------------------------------------------
Operating Income (Loss) before Equity
in Income of Investees (143,147) 39,201 13,124
Equity in Income (Loss) of Investees (4,098) 48,438 33,852
- --------------------------------------------------------------------------------
Operating Income (Loss) (147,245) 87,639 46,976
- --------------------------------------------------------------------------------
Other Income (Expense):
Interest income 46,742 37,238 52,740
Interest expense (95,100) (84,312) (57,115)
Minority interest (5,562) (10,030) (12,167)
Other-net (19,532) (8,831) (39,601)
- --------------------------------------------------------------------------------
(73,452) (65,935) (56,143)
- --------------------------------------------------------------------------------
Income (Loss) before Provision for
(Benefit from) Income Taxes and
Cumulative Effect of Accounting
Change (220,697) 21,704 (9,167)
Provision for (Benefit from)
Income Taxes (14,592) 1,079 (20,043)
- --------------------------------------------------------------------------------
Income (Loss) before Cumulative
Effect of Accounting Change (206,105) 20,625 10,876
Cumulative Effect of Accounting
Change - - (1,765)
- --------------------------------------------------------------------------------
Net Income (Loss) $(206,105) $ 20,625 $ 9,111
================================================================================
Net Income (Loss) Applicable to
Common Stock (after Preferred
Stock Dividends) $(214,371) $ 12,359 $ 845
================================================================================
34
CONTINUED
1997 1996 1995
---- ---- ----
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary and Fully Diluted:
Income before cumulative
effect of accounting
change $ (3.92) $ 0.23 $ 0.05
Accounting change - - (0.03)
- --------------------------------------------------------------------------------
Net income (loss) $ (3.92) $ 0.23 $ 0.02
================================================================================
CASH DIVIDENDS:
Per common share $ 0.60 $ 1.00 $ 1.00
Per preferred share $ 2.88 $ 2.88 $ 2.88
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
(In thousands, except for share amounts)
Preferred Stock
Series C Common Stock
------------------------------ ----------------------------
Shares Par Value Shares Par Value
------------- ------------ ------------ --------------
Balance March 31, 1994 2,875,000 $ 2,875 53,444,467 $ 53,444
- ------------------------------------------------------------------------------------------------------------------------------------
Adoption of SFAS 115 - - - -
Net income - - - -
Minimum pension liability
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
Acquisition of OPI by JRM - - - -
Exercise of JRM stock options - - - -
Exercise of stock options - - 147,217 148
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 55,030 55
Redemption of preferred shares - - - -
Contributions to thrift plan - - 312,883 313
Deferred career executive
stock plan expense - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 2,875,000 2,875 53,959,597 53,960
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - - -
Minimum pension liability - - - -
Gain on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 76,005 76
Restricted stock purchases - net - - 99,270 99
Redemption of preferred shares - - - -
Contributions to thrift plan - - 300,951 301
Deferred career executive
stock plan expense - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1996 2,875,000 2,875 54,435,823 54,436
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 22,779 23
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 171,290 171
Awards of common stock - - 975 1
Redemption of preferred shares - - - -
Contributions to thrift plan - - 306,089 306
Deferred career executive
stock plan expense - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 2,875,000 $ 2,875 54,936,956 $ 54,937
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
36
Capital Retained Minimum Unrealized Currency Total
in Excess Earnings Pension Loss on Translation Stockholders'