ITEM 3. LEGAL PROCEEDINGS
In March 1997, International and JRM, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of International and JRM and others. The allegations concerned the heavy-lift business of the HeereMac joint venture. Upon becoming aware of these allegations, International and JRM notified authorities, including the Antitrust Division of the U. S. Department of Justice and the European Commission. As a result of International's and JRM's prompt disclosure of the allegations, both companies and the individuals who were officers, directors and employees of International or JRM at the time of the disclosure were granted immunity from criminal
prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities.
After receiving the allegations, JRM initiated action to terminate its interest in HeereMac, and on December 19, 1997, JRM's partner in the joint venture, Heerema Offshore Construction Group, Inc. ("Heerema"), acquired JRM's interest in exchange for $318,500,000 in cash and title to several pieces of equipment, including launch barges and the derrick barge 101, a 3,500 ton lift capacity semi-submersible derrick barge. On December 21, 1997, HeereMac and a HeereMac employee pled guilty to criminal charges by the Department of Justice that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East. HeereMac was fined $49,000,000 and the employee $100,000. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither International, JRM nor any of their officers, directors or employees was a party to those proceedings.
International and JRM have cooperated and are continuing to cooperate with the Department of Justice in its investigation. Near the end of calendar 1997, the Department of Justice requested additional information from the companies relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. Pursuant to the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. Subsequent to the formation of JRM and its acquisition of Offshore Pipelines, Inc. in January 1995, McDermott Incorporated no longer participates in the heavy-lift barge service business nor the marine construction business, which is the subject of this investigation.
International and JRM are also cooperating with the Securities and Exchange Commission ("SEC"), which also requested information and documents from the companies with respect to certain of the foregoing matters. International and JRM are subject to a judicial order entered in 1976, with the consent of McDermott Incorporated (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint ("Consent Decree"). The Consent Decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of the Consent Decree could result in substantial civil and/or criminal penalties to the companies.
In June 1998, Phillips Petroleum Company (individually, and on behalf of certain co-venturers) and certain related entities filed a complaint in the United States District Court for the Southern District of Texas against McDermott Incorporated, International, JRM, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates, and others. The complaint alleges that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, North Sea and Far East. In addition to seeking actual damages and attorneys' fees, the plaintiffs have requested punitive as well as treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC inquiry, the companies' internal investigation, the above referenced lawsuit, or the actions that may be taken by others as a result of HeereMac's guilty plea or otherwise. However, these matters could result in civil and/or criminal liability and have a material adverse effect on McDermott Incorporated's consolidated financial position and results of operations.
In addition to the foregoing, McDermott Incorporated and certain of its officers, directors and subsidiaries are defendants in numerous other legal proceedings. Management believes that the outcome of these proceedings will not have a material adverse effect upon McDermott Incorporated's consolidated financial position or results of operations.
See Item 1H and Note 11 to the consolidated financial statements regarding McDermott Incorporated's potential liability for non-employee products liability asbestos claims.
ITEM 4.
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.
PART I I
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of McDermott Incorporated's outstanding Common Stock is owned by McDermott International and, consequently, there is no market for McDermott Incorporated's Common Stock. For restrictions on McDermott Incorporated's present or future ability to pay dividends, see Item 7 Liquidity and Capital Resources and Note 6 to the consolidated financial statements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See Note 16 to the consolidated financial statements for significant items included in fiscal year 1998 and 1997 results. Fiscal year 1996 results include an equity income gain of $30,612,000 resulting from the sale of two power purchase contracts, a favorable workers' compensation cost adjustment of $5,746,000, and a 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. 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 1995 includes the sale of a portion of McDermott Incorporated's marine construction services business to International and the cumulative effect of the adoption of Statement of Accounting Standards ("SFAS") No. 112. Fiscal year 1994 includes the cumulative effect of the adoption of Emerging Issues Task Force Issue No. 93-5. See Note 11 regarding the uncertainty as to the ultimate loss relating to products liability asbestos claims and the results of the ongoing investigation by International, JRM and the U.S. Department of Justice into possible anti-competitive practices by International and JRM, and a related lawsuit filed in federal court in June 1998.
All of the Common Stock of McDermott Incorporated is owned by McDermott International and, therefore, no per share data is shown above.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - - -------
Revenues of the Power Generation Systems segment are largely a function of capital spending by the electric power generation industry. 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 and replacement nuclear steam generators to the domestic utility industry continue at significant levels. In addition, most foreign markets for industrial and utility boilers remain strong. However, the currency crisis, which began in Southeast Asia in the summer of 1997, has slowed the number of inquiries and orders from the level of the previous year. This segment is also expected to be adversely affected by the economic and political instability in Indonesia and political turmoil on the Indian subcontinent.
Revenues of the Government Operations segment are largely a function of capital spending by the U. S. Government. Management does not expect this segment to experience any significant growth because of reductions in the defense budget over the past several years; however, management does expect the segment to remain relatively constant since it is the sole source provider of nuclear fuel assemblies and nuclear reactor components to the U. S. Government.
In general, McDermott Incorporated's Power Generation Systems and Government Operations segments are capital intensive businesses that rely on large contracts for a substantial amount of their revenues.
Revenues of the Engineering and Construction Operations segment are somewhat capital intensive and the demand for its services are affected by variations in the business cycles in the customers' industries and economies in both Canada and the United Kingdom.
Revenues of Other Operations are somewhat capital intensive and the demand for its equipment and services are affected by variations in the business cycles in the customers' industries and the overall United States economy. Other Operations is also affected by legislative issues such as environmental regulations and fluctuations in U. S. Government funding patterns.
A significant portion of McDermott Incorporated's revenues and operating results are derived from its foreign operations, which are primarily located in Canada. As a result, McDermott Incorporated's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. McDermott Incorporated attempts to minimize its exposure to changes in foreign currency exchange rates by attempting to match foreign currency contract receipts with like foreign currency disbursements. To the extent that it is unable to match the foreign currency receipts and disbursements related to its contracts, its practice of entering into forward exchange contracts to hedge foreign currency transactions reduces the impact of foreign exchange rate movements on operating results.
Statements made herein which express a belief, expectation or intention, as well as those which are not historical fact, are forward looking. They involve a number of risks and uncertainties which may cause actual results to differ materially from such forward looking statements. These risks and uncertainties include, but are not limited to: the deregulation of the U.S. energy market; governmental regulation and the continued funding of McDermott Incorporated's contracts with U.S. governmental agencies; estimates for pending and future non- employee asbestos claims; the highly competitive nature of McDermott Incorporated's businesses; economic and political instability in Indonesia; political turmoil on the Indian subcontinent; and the results of the ongoing investigation by International and JRM and the U.S. Department of Justice into possible anti-competitive practices by International and JRM, and a related lawsuit filed in federal court in June 1998.
During fiscal years 1998 and 1997, McDermott Incorporated's Canadian operations contributed $406,920,000 and $515,389,000 to total revenues and $6,144,000 and ($31,405,000) to operating income (loss), respectively. These results reflect activity on contracts performed at B&W's Cambridge, Ontario location, principally for the supply of replacement recirculating steam generators to domestic and foreign utilities and work for government owned utilities located in the Middle and Far East.
FISCAL YEAR 1998 VS. FISCAL YEAR 1997
Power Generation Systems - - ------------------------
Revenues increased $157,656,000 to $1,142,721,000, primarily due to higher revenues from fabrication and erection of fossil fuel steam and environmental control systems, plant enhancement projects, boiler cleaning equipment and engineering, procurement and construction of cogeneration plants. These increases were partially offset by lower revenues from replacement nuclear steam generators.
Segment operating income (loss) increased $118,392,000 from a loss of $33,930,000 to income of $84,462,000, primarily due to higher volume and margins from fabrication and erection of fossil fuel steam and environmental control systems, plant enhancement projects, boiler cleaning equipment and engineering, procurement and construction of cogeneration plants. In addition, there were higher margins from replacement nuclear steam generators and replacement parts and lower selling and general and administrative expenses.
Loss on asset disposals and impairments - net decreased $12,821,000 to $6,079,000, primarily due to the write-down of an equity investment in a domestic cogeneration joint venture and an asset impairment loss on a domestic manufacturing facility in the prior year.
Income from investees increased $2,513,000 to $3,150,000. This represents the results of approximately six joint ventures. The increase was primarily due to a provision for a loss on a Canadian joint venture in the prior year. This increase was partially offset by a favorable termination agreement of a domestic joint venture in the prior year.
Backlog for the Power Generation Systems segment at March 31, 1998 and 1997 was $1,071,094,000 and $1,495,787,000, respectively. Backlog decreased primarily as a result
of delays and cancellations of power projects in Southeast Asia due to the current Asian economic crisis and management's focus on higher margin projects.
Government Operations - - ---------------------
Revenues decreased $2,532,000 to $370,519,000, primarily due to lower revenues from nuclear fuel assemblies and reactor components for the U.S. Government, commercial nuclear environmental services and other government related operations. These decreases were partially offset by higher revenues from management and operation contracts for U.S. Government owned facilities.
Segment operating income increased $3,358,000 to $35,816,000, primarily due to higher volume from management and operation contracts for U.S. Government owned facilities and higher margins from nuclear fuel assemblies and reactor components for the U.S. Government and other government related operations. These increases were partially offset by lower volume and margins from commercial nuclear environmental services and higher operating expenses.
Backlog for the Government Operations segment at March 31, 1998 and 1997 was $810,230,000 and $791,981,000, respectively. At March 31, 1998, this segment's backlog with the U.S. Government was $799,967,000 of which $40,376,000 had not been funded.
Engineering and Construction Operations - - ---------------------------------------
Revenues decreased $71,338,000 to $198,689,000, primarily due to lower revenues from engineering and construction activities. These decreases were partially offset by higher revenues from plant maintenance activities.
Segment operating loss decreased $12,745,000 to $536,000, primarily due to cost overruns on an engineering and construction contract in the prior year and lower selling and general and administrative expenses in the current year. These increases were partially offset by lower margins from plant maintenance activities.
Gain (loss) on asset disposals and impairments - net decreased $9,155,000 from a gain of $1,091,000 to a loss of $8,064,000, primarily due to an impairment loss relating to goodwill associated with McDermott Engineers & Constructors (Canada) Ltd.
Income (loss) from investees increased $1,215,000 from a loss of $923,000 to income of $292,000, primarily due to the write-down of three joint ventures in the prior period.
Backlog for the Engineering and Construction Operations' segment at March 31, 1998 and 1997 was $200,652,000 and $104,617,000, respectively. The increase in backlog is primarily due to higher awards for engineering contracts.
Other Operations - - ----------------
Revenues decreased $49,148,000 to $139,712,000, primarily due to the disposition of non-core businesses (domestic shipyard and ordnance operations). These decreases were partially offset by higher revenues from air cooled heat exchangers.
Operating income (loss) increased $23,924,000 from a loss of $16,773,000 to income of $7,151,000, primarily due to prior year losses in non-core businesses (shipyard and ordnance operations), higher volume on air-cooled heat exchangers and lower selling and general and administrative expenses in the current year.
Gain on asset disposals and impairments - net increased $36,916,000 from a loss of $1,376,000 to a gain of $35,540,000, primarily due to the sale of McDermott Incorporated's interest in Universal Fabricators Incorporated.
Income from investees decreased $2,078,000 to $1,632,000, primarily due to lower operating results from a domestic joint venture.
Backlog for Other Operations at March 31, 1998 and 1997 was $61,171,000 and $60,068,000, respectively. At March 31, 1998, Other Operations' backlog with the U. S. Government was $8,029,000 (all of which had been funded).
Other Unallocated Items - - -----------------------
Other unallocated items decreased $49,244,000 to expense of $9,064,000, primarily due to provisions for estimated future non-employee products asbestos claims in the prior year.
General Corporate Expenses - Net - - --------------------------------
General corporate expenses - net decreased $5,966,000 to $15,036,000, primarily due to staff reductions, other economic measures, and certain one-time costs incurred in the prior period, which were partially offset by gains on sales of certain corporate aircraft in the prior period.
Other Income Statement Items - - ----------------------------
Interest income increased $2,233,000 to $4,754,000, primarily due to income in the current year for delinquent payment of amounts due from a joint venture.
Interest expense decreased $5,292,000 to $51,029,000, primarily due to changes in debt obligations and interest rates prevailing thereon.
Other-net expense decreased $16,720,000 to $7,300,000. This increase was primarily due to bank fees and discounts on the sale of certain accounts receivable and a loss of $19,446,000 for insolvent insurers providing coverage for estimated future non-employee asbestos claims, both in the prior year. These decreases were partially offset by increased minority interest expense due to improved results of McDermott Engineers & Constructors (Canada) Ltd.
The provision for (benefit from) income taxes increased $65,644,000 from a benefit of $25,586,000 to a provision of $40,058,000 while income (loss) before the provision for (benefit from) income taxes increased $280,839,000 from a loss of $200,391,000 to income of $80,448,000. The increase in income taxes is due primarily to the increase in income.
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
Power Generation Systems - - ------------------------
Revenues decreased $159,714,000 to $985,065,000, primarily due to lower revenues from fabrication and erection of fossil steam and environmental control systems, replacement nuclear steam generators, nuclear services, boiler cleaning equipment and replacement parts. These decreases were partially offset by higher revenues from plant enhancement projects.
Segment operating income (loss) decreased $56,166,000 from income of $22,236,000 to a loss of $33,930,000, primarily due to lower volume and margins from fabrication and erection of fossil fuel steam and environmental control systems and replacement parts. There were also lower volumes on replacement nuclear steam generators and boiler cleaning equipment, lower margins on plant enhancement projects and higher net operating expenses.
Gain (loss) on asset disposals and impairments-net decreased $23,150,000 from a gain of $4,250,000 to a loss of $18,900,000, primarily due to the write-down of an equity investment in a domestic cogeneration joint venture and an asset impairment loss on a domestic manufacturing facility.
Income from investees decreased $30,548,000 to $637,000. This represents the results of approximately 7 active joint ventures. The income in fiscal year 1996 was primarily due to the gain on the sale of power purchase contracts back to a local utility.
Government Operations - - ---------------------
Revenues increased $3,346,000 to $373,051,000, primarily due to higher revenues from commercial nuclear environmental services and management and operation contracts for U.S. Government owned facilities. These increases were partially offset by lower revenues from nuclear fuel assemblies and reactor components for the U.S. Government.
Segment operating income increased $6,589,000 to $32,458,000, primarily due to higher volume and margins from commercial nuclear environmental services and higher volume from management and operation contracts for U.S. Government owned facilities. These increases were partially offset by lower volume and margins from nuclear fuel assemblies and reactor components for the U.S. Government.
Income from investees increased $1,371,000 to $3,630,000, primarily due to the favorable operating results from a domestic joint venture.
Engineering and Construction Operations - - ---------------------------------------
Revenues decreased $83,055,000 to $270,027,000, primarily due to lower revenues from engineering and construction activities in Canadian operations and construction activities from domestic operations.
Segment operating loss decreased $6,635,000 to $13,281,000, primarily due to higher volume and margins from plant maintenance activities and lower selling and general and administrative expenses. These increases were partially offset by cost overruns on a contract for a cogeneration plant.
Gain (loss) on asset disposals and impairments-net increased $1,316,000 from a loss of $225,000 to a gain of $1,091,000, primarily due to a gain on the sale of assets.
Income from investees decreased $1,128,000 from income of $205,000 to a loss of $923,000, primarily due to the write-down of three joint ventures.
Other Operations - - ----------------
Revenues increased $4,312,000 to $188,860,000, primarily due to higher revenues from barge construction activities in shipyard operations and increased shipbuilding activities. These increases were partially offset by lower revenues from domestic engineering operations.
Operating loss increased $8,087,000 to $16,773,000, primarily due to cost overruns on domestic barge and ordnance operations and lower volume and margins from domestic engineering operations. These decreases were partially offset by lower general and administrative expenses.
Gain (loss) on asset disposals and impairments-net decreased $4,664,000 from a gain of $3,288,000 to a loss of $1,376,000, primarily due to an asset impairment loss on an office building, partially offset by the gain on the sale of the shipyard operations.
Income from investees increased $1,078,000 to $3,710,000, primarily due to higher operating results from a domestic engineering joint venture, partially offset by lower operating results from a domestic fabrication joint venture.
Other Unallocated Items - - -----------------------
Other unallocated items increased $28,866,000 to expense of $58,308,000, primarily due to provisions for estimated future non-employee products asbestos claims, partially offset by the write-off of an insurance claim of $12,600,000 due to an unfavorable arbitration ruling in the prior year.
General Corporate Expenses - Net - - --------------------------------
General corporate expenses - net decreased $2,190,000 to $21,002,000, primarily due to increased allocations of cost to International and JRM, partially offset by certain one-time costs in the current year. In addition, there were gains on the sales of certain corporate aircraft in the current year.
Other Income Statement Items - - ----------------------------
Interest income decreased $9,277,000 to $2,521,000, primarily due to decreased investments in government obligations and other investments.
Interest expense increased $3,411,000 to $56,321,000, primarily due to changes in debt obligations and interest rates prevailing thereon.
Other-net expense increased $21,976,000 to $24,020,000, 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 and gains on the sales of investments in the prior year.
The benefit from income taxes increased $20,317,000 to $25,586,000 while loss before the benefit from income taxes increased $167,979,000 to $200,391,000. The increase in the benefit from income taxes is due primarily to the increase in loss from operations, offset, in part, due to a limitation on the recognition of income tax benefits in the U.S.
EFFECT OF INFLATION AND CHANGING PRICES - - ---------------------------------------
McDermott Incorporated'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.
In order to minimize the negative impact of inflation on its operations, McDermott Incorporated 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 1998, McDermott Incorporated's cash and cash equivalents increased $1,409,000 to $58,191,000 and total debt decreased $227,991,000 to $465,188,000, primarily due to a net reduction in short-term borrowings of $182,691,000 and repayment of long-term debt of $45,164,000. During this period, McDermott Incorporated provided cash of $232,388,000 from operating activities; received cash of $54,220,000 from assets disposals and $2,500,000 from the redemption of International stock; and used cash of $17,869,000 for the purchase of property, plant and equipment, $15,406,000 for the repurchase of McDermott Incorporated's preferred stock to satisfy current and future sinking fund requirements, $12,821,000 for cash dividends on preferred stocks and $6,627,000 for acquisitions.
Pursuant to agreement with the majority of its principal insurers, McDermott Incorporated negotiates and settles products liability asbestos claims from non- employees and bills these amounts to the appropriate insurers. As a result of collection delays inherent in this process and the effect of agreed payment schedules with specific insurers, reimbursement is usually delayed for three months or more. The average amount of these claims (historical average of approximately $6,400 per claim over the last three years) has continued to rise. Claims paid during the fiscal year ended March 31, 1998 were $196,091,000, of which $179,251,000 has been recovered or is due from insurers. At March 31, 1998, receivables of $101,680,000 were due from insurers for reimbursement of settled claims, including $20,988,000 classified as long-term receivables. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from McDermott Incorporated'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 an analysis of insurers providing coverage of the estimated liabilities. Inherent in the estimate of such liabilities and recoveries are expected trends in claim severity and frequency and other factors, including recoverability from insurers, which may vary significantly as claims are filed and settled. Accordingly, 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 upon McDermott Incorporated's liquidity, and management believes, based on information currently available, that they will not have a material adverse effect on liquidity in the future.
McDermott Incorporated's expenditures for property, plant and equipment decreased $8,794,000 to $17,869,000 in fiscal year 1998. The majority of fiscal year 1998 expenditures were to maintain and replace and upgrade existing facilities and equipment. McDermott Incorporated has committed to make capital expenditures of approximately $13,743,000 during fiscal year 1999.
At March 31, 1998 and 1997, The Babcock & Wilcox Company had sold, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable of approximately $82,783,000 and $93,769,000, respectively, under an agreement with a U.S. bank. During fiscal year 1998, the maximum sales limit available under the agreement was reduced from $125,000,000 to $100,000,000. Depending on the amount of qualified accounts receivable available for the pool, the amount sold to the bank can vary (but not greater than the maximum sales limit available) from time to time. The existing agreement will expire on July 31, 1998; however, B&W's management is currently negotiating a new receivables sales agreement. McDermott Incorporated currently accounts for these sales as secured borrowings.
Effective February 1, 1989, McDermott Incorporated and a subsidiary of International, McDermott International Investments Co., Inc. ("MIICO"), entered into a reverse repurchase agreement whereby either party acting as a "buyer" would purchase for cash certain U. S. Government obligations owned by the other party acting as a "seller", and, at the date of purchase, the "seller" would agree to repurchase the same securities at a set price (including accrued interest) at a future specified date. There were no transactions under this agreement during fiscal year 1998.
McDermott Incorporated and MIICO are parties to an agreement pursuant to which McDermott Incorporated may borrow up to $150,000,000 from MIICO at interest rates computed at the applicable federal rate determined by the IRS. There were no borrowings against this agreement at March 31, 1998 or 1997.
At March 31, 1998 and 1997, McDermott Incorporated and its consolidated subsidiaries had available various uncommitted short-term lines of credit from banks totalling $100,328,000 and $134,695,000, respectively. Borrowings against these lines of credit at March 31, 1998 and 1997 were $2,849,000 and $24,555,000, respectively. In addition, The Babcock & Wilcox Company had available to it a $150,000,000 unsecured committed revolving credit facility (the "B&W Revolver"). There were no borrowings against this facility at March 31, 1998, while at March 31, 1997, $150,000,000 was outstanding. As a condition to borrowing under the B&W Revolver, The Babcock & Wilcox Company must meet or exceed certain financial covenant requirements. Negotiations are in progress to replace the current B&W Revolver with a $200,000,000 three year unsecured committed revolving credit and letter of credit facility (the "BWICO Revolver") to be issued jointly to the Babcock & Wilcox Investment Company, The Babcock & Wilcox Company and BWXT. Borrowing by the three companies against the facility cannot exceed an aggregate amount of $50,000,000. The remaining $150,000,000 will be reserved for the issuance of letters of credit. During fiscal year 1999, borrowings against the BWICO Revolver are expected to be minimal as management expects The Babcock & Wilcox Company to be able to fund itself from operating cash flow.
McDermott Incorporated is restricted, as a result of covenants in certain agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. Substantially all of the net assets of McDermott Incorporated are subject to such restrictions. At March 31, 1998, the most restrictive of these covenants with respect to the payment of dividends by McDermott Incorporated would prohibit the payment of dividends other than current dividends on outstanding preferred stock.
Subsequent to March 31, 1998, McDermott Incorporated amended its public debt indentures to permit the call for redemption of its preferred stock provided that any cash outlay is funded by a capital infusion from International. Management has called for redemption on July 17, 1998, all of McDermott Incorporated's outstanding Series B Cumulative Preferred Stock. Management is also considering calling for redemption the outstanding Series A Cumulative Convertible Preferred Stock.
Working capital decreased to $69,900,000 at March 31, 1998 from $71,284,000 at March 31, 1997. During 1998, McDermott Incorporated expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities, additional borrowings and capital contributions from International (if required). Leasing agreements for equipment, which are short- term in nature, are not expected to impact McDermott Incorporated's liquidity or capital resources.
McDermott Incorporated's quarterly dividends of $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 were the same in 1998 and 1997.
McDermott Incorporated has provided a valuation allowance ($51,861,000 at March 31, 1998) 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, 1998 are realizable through carrybacks and future reversals of existing taxable temporary differences and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. An uncertainty that affects the ultimate realization of deferred tax assets is the possibility of declines in value of appreciated assets involved in identified tax planning strategies. This factor has been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis.
IMPACT OF THE YEAR 2000 - - -----------------------
The Year 2000 issue is the result of computer systems being written using two digits rather than four to define the applicable year. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, an inability to process transactions, send invoices, or engage in similar normal business activities. McDermott Incorporated has established a Year 2000 risk management program to identify and correct problems associated with the Year 2000 issue. The scope of McDermott Incorporated's Year 2000 risk management program covers computer systems, process control systems, and products liability.
Based on assessments, McDermott Incorporated has determined that it will be required to modify or replace significant portions of its business system software so that those systems will function properly with respect to dates in the Year 2000 and thereafter. McDermott Incorporated presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. McDermott Incorporated has several hardware and operating systems software environments. The mainframe computing environment is provided by a third party. Operating system upgrades, application remediation and application replacement projects are in progress. If modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of McDermott Incorporated.
McDermott Incorporated has initiated a program to determine the nature of potential exposure related to the Year 2000 issue for products it has sold, to develop a communication program for customers potentially impacted, and to assess process control systems. McDermott Incorporated does not expect this exposure to have a material adverse effect on its results of operations.
McDermott Incorporated will use both internal and external resources to reprogram, replace, and test the software for Year 2000 modifications. McDermott Incorporated's business units and its Corporate Office are anticipating having all critical systems Year 2000 compliant no later than June 30, 1999, which is prior to any anticipated impact on their business. The total cost of the Year 2000 projects is estimated at $24,000,000 and is being funded through operating cash flows. Of the total project cost, $6,000,000 is attributable to the purchase of software which will be capitalized and the $18,000,000 will be expensed as incurred. Costs to date include $3,000,000 capital and $5,000,000 of expense.
The costs of the project and the dates on which McDermott Incorporated believes it will complete its Year 2000 project are based on management's best estimates. These estimates were derived using numerous assumptions of future events, including continued availability of resources, third party modification plans, and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel, the ability to identify and correct all Year 2000 impacted areas, and other similar uncertainties.
NEW ACCOUNTING STANDARD - - -----------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. McDermott Incorporated has not yet finalized its review of the impact of this statement, but management does not expect it to have a material impact on the consolidated financial statements.
Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS ------------------------------
The Board of Directors and Stockholders McDermott Incorporated
We have audited the accompanying consolidated balance sheet of McDermott Incorporated as of March 31, 1998 and 1997, and the related consolidated statements of income (loss), stockholder's equity and cash flows for each of the three years in the period ended March 31, 1998. 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 Incorporated at March 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New Orleans, Louisiana May 19, 1998, except for the fifth and sixth paragraphs of Note 11, as to which the date is June 1, 1998
MCDERMOTT INCORPORATED CONSOLIDATED BALANCE SHEET MARCH 31, 1998 AND 1997 ASSETS
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDER'S EQUITY
McDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF INCOME (LOSS) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998
See accompanying notes to consolidated financial statements.
MCDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998 (In thousands)
(1) There were 3,600 common shares outstanding at March 31, 1998, 1997, and 1996 consisting of 3,000 voting shares entitled to 12,000 votes per share and 600 non-voting shares.
See accompanying notes to the consolidated financial statements.
McDERMOTT INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Continued
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
See accompanying notes to consolidated financial statements.
MCDERMOTT INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - - ---------------------------
The consolidated financial statements include the accounts of McDermott Incorporated and all its subsidiaries. Investments in joint venture and other entities in which McDermott Incorporated has a 20% to 50% interest are accounted for on the equity method. Differences between the cost of equity method investments and the amount of underlying equity in net assets of the investees are amortized systematically to income. All significant intercompany transactions and accounts have been eliminated. Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 1998.
Unless the context otherwise requires, hereinafter, "International" means McDermott International, Inc., a Panama corporation; "JRM" means J. Ray McDermott, S.A., a majority owned subsidiary of International, and its consolidated subsidiaries; and "McDermott International" means the consolidated enterprise. International is the parent company of McDermott Incorporated.
Use of Estimates - - ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting Changes - - ------------------
Transfers of Financial Assets - During the fiscal year ended March 31, 1997, McDermott Incorporated adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly, beginning January 1, 1997, transfers of accounts receivable previously accounted for as sales are accounted for as secured borrowings. Other-net expense includes expenses of $4,737,000 and $8,518,000 in fiscal years 1997 and 1996, respectively, on receivables accounted for as sales. Adoption of the new standard was not material to results for the three months ended March 31, 1997.
Segments - During the fiscal year ended March 31, 1998, McDermott Incorporated adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosure of segment information.
Foreign Currency Translation - - ----------------------------
Assets and liabilities of foreign operations, other than operations in highly inflationary economies, are translated into U. S. Dollars at current exchange rates and income statement items are translated at average exchange rates for the year. Adjustments resulting from the translation of foreign currency financial statements are recorded in a separate component of equity. Foreign currency transaction adjustments are reported in income. Included in Other Income (Expense) are transaction gains (losses) of $(135,000), $801,000, and $(750,000) for fiscal years 1998, 1997 and 1996, respectively.
Contracts and Revenue Recognition - - ---------------------------------
Contract revenues and related costs are principally recognized on a percentage of completion method for individual contracts or components thereof based upon work performed or a cost to cost method, as applicable to the product or activity involved. Revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, are included in Contracts in Progress. Billings that exceed accumulated contract costs and revenues and costs recognized under percentage of completion are included in Advance Billings on Contracts. Most long-term contracts have provisions for progress payments. There are no unbilled revenues which will not be billed. Contract price and cost estimates are reviewed periodically as the work progresses and adjustments proportionate to the percentage of completion are reflected in income in the period when such estimates are revised. Provisions are made currently for all known or anticipated losses. Variations from estimated contract performance could result in a material adjustment to operating results for any fiscal quarter or year. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. Included in Accounts Receivable and Contracts in Progress are approximately $4,177,000 and $39,346,000 relating to commercial and U. S. Government contracts claims whose final settlement is subject to future determination through negotiations or other procedures which had not been completed at March 31, 1998 and 1997, respectively.
McDermott Incorporated is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems contracts. McDermott Incorporated does not recognize such settlements or claims for additional compensation until final settlement is reached.
Included in accounts receivable - trade are amounts representing retainages on contracts as follows:
Of its long-term retainages at March 31, 1998, McDermott Incorporated anticipates collection of $14,699,000 in fiscal year 2000, $17,261,000 in fiscal year 2001 and $1,607,000 in fiscal year 2002.
Inventories - - -----------
Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis except for certain materials inventories, for which the last-in-first-out (LIFO) method is used. The cost of approximately 17% and 12% of total inventories was determined using the LIFO method at March 31, 1998 and 1997, respectively. Inventories at March 31, 1998 and 1997 are summarized below:
Warranty Expense - - ----------------
Estimated warranty expense which may be required to satisfy contractual requirements, primarily of the Power Generation Systems segment, is accrued relative to revenue recognition on the respective contracts. In addition, specific provisions are made where the costs of warranty are expected to significantly exceed such accruals.
Environmental Clean-up Costs - - ----------------------------
McDermott Incorporated accrues for future decommissioning of its nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a condition of its licenses from the Nuclear Regulatory Commission, except for one facility which has provisions in its government contracts pursuant to which all of its decommissioning costs are covered by the U.S. Government. Such accruals, based on the estimated cost of those activities, are over the economic useful life of each facility, which is estimated at 40
years. Estimated costs are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental clean-up are not discounted to their present value. Recoveries of environmental clean-up costs from other parties are recognized as assets when their receipt is deemed probable.
Research and Development - - ------------------------
The cost of research and development which is not performed on specific contracts is charged to operations as incurred. Such expense was approximately $12,771,000, $14,842,000 and $21,491,000 in fiscal years 1998, 1997 and 1996, respectively. In addition, expenditures on research and development activities of approximately $22,803,000, $34,170,000 and $45,106,000 in fiscal years 1998, 1997 and 1996, respectively, were paid for by customers of McDermott Incorporated.
Depreciation, Maintenance and Repairs - - -------------------------------------
Property, plant and equipment is depreciated on the straight-line method, using estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment. Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased - - ------------------------------------------------------------------------- Businesses - - ----------
Excess of the cost over fair value of net assets of purchased businesses primarily pertains to the acquisition of The Babcock & Wilcox Company, which is being amortized on a straight-line basis over 40 years. Management periodically reviews goodwill to access recoverability, and impairments would be recognized in operating results if permanent diminution in value were to occur.
Capitalization of Interest Cost - - -------------------------------
In fiscal years 1998, 1997 and 1996, total interest cost incurred was $51,030,000, $56,428,000 and $53,511,000, respectively, of which $1,000, $107,000 and $601,000, respectively, was capitalized.
Cash Equivalents - - ---------------- Cash equivalents are highly liquid investments, with maturities of three months or less when purchased.
Derivative Financial Instruments - - --------------------------------
Derivatives, primarily forward exchange contracts, are utilized to minimize exposure and reduce risk from foreign exchange fluctuations in the regular course of business. Gains and losses related to qualifying hedges of firm commitments are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transactions occur. Gains and losses on forward exchange contracts which hedge foreign currency assets or liabilities are recognized in income as incurred. Such amounts effectively offset gains and losses on the foreign currency assets or liabilities that are hedged.
Stock-Based Compensation - - ------------------------
McDermott Incorporated follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its participation in International's employee stock plans. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the measurement date, no compensation expense is recognized. If the measurement date is later than the date of grant, compensation expense is recorded to the measurement date based on the quoted market price of the underlying stock at the end of each period.
NOTE 2 - ACQUISITION
During fiscal year 1998, McDermott Incorporated acquired the minority ownership in Diamond Power Specialty U.K. for $6,627,000.
During fiscal year 1996, McDermott Incorporated acquired the assets of Joy Environmental Technologies, which specialized in technologies used by electric utilities and other industrial companies to comply with clean air regulations. The purchase price was $13,083,000, of which approximately $6,457,000 was assigned to excess of cost over the fair value of net assets acquired, and is being amortized over a period of twenty years. Operating results have been included in the Consolidated Statement of Loss from the acquisition date. Pro forma results of operations have not been presented because the effects were not significant.
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
Investments in entities which are accounted for on the equity method were $21,347,000 and $31,434,000 at March 31, 1998 and 1997, respectively. Transactions with entities for which investments are accounted for on the equity method included sales to ($14,182,000, $22,043,000 and $37,487,000 in fiscal years 1998, 1997 and 1996, respectively) and purchases from ($8,000, $11,921,000 and $378,000 in fiscal years 1998, 1997 and 1996, respectively) these entities. Included in Accounts receivable - trade at March 31, 1998 and 1997 are $2,134,000 and $2,390,000, respectively of receivables from unconsolidated affiliates. Included in Accounts payable at March 31, 1998 and 1997 are $6,143,000 and $39,000, respectively, of payables to unconsolidated affiliates. Dividends received from unconsolidated investees were $10,967,000, $12,702,000 and $39,734,000 in fiscal years 1998, 1997 and 1996, respectively. Undistributed earnings of unconsolidated affiliates accounted for by the equity method were $12,204,000 and $15,700,000, respectively, at March 31, 1998 and 1997.
Summarized combined balance sheet and income statement information, based on the most recent financial information, for investments accounted for by the equity method are presented below:
NOTE 4 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of March 31, 1998 and 1997 were as follows:
1998 1997 -------- -------- (In thousands) Deferred tax assets: Accrued warranty expense $ 15,582 $ 15,915 Accrued vacation pay 8,985 8,013 Accrued liabilities for self-insurance (including postretirement health care benefits) 161,444 162,481 Accrued liabilities for executive and employee incentive compensation 24,114 15,397 Investments in joint ventures and affiliated companies 6,959 6,705 Environmental and products liabilities 363,598 434,852 Operating loss carryforwards 7,363 5,535 Other 18,545 23,987 - - ------------------------------------------------------------------------------- Total deferred tax assets 606,590 672,885 - - ------------------------------------------------------------------------------- Valuation allowance for deferred tax assets (51,861) (53,192) - - ------------------------------------------------------------------------------- Deferred tax assets 554,729 619,693 - - ------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 15,325 19,419 Prepaid pension costs 107,413 101,982 Investments in joint ventures and affiliated companies 13,921 10,483 Insurance and other recoverables 291,899 353,579 Other 2,644 4,028 - - ------------------------------------------------------------------------------- Total deferred tax liabilities 431,202 489,491 - - ------------------------------------------------------------------------------- Net deferred tax assets $ 123,527 $130,202 ===============================================================================
Income (loss) before provision for (benefit from) income taxes was as follows:
1998 1997 1996 -------- --------- --------- (In thousands)
U. S. $78,364 $ (156,922) $(33,241) Other than U. S. 2,084 (43,469) 829 - - ------------------------------------------------------------------------------- $80,448 $ (200,391) $(32,412) ===============================================================================
The provision for (benefit from) income taxes consists of: 1998 1997 1996 --------- -------- --------- (In thousands) Current: Federal $26,992 $ (29,113) $(18,163) State and local 5,695 (2,301) (3,810) Foreign 696 (2,789) 6,343 - - ------------------------------------------------------------------------------- Total current 33,383 (34,203) (15,630) - - ------------------------------------------------------------------------------- Deferred: Federal 1,416 14,398 14,703 State and local (108) 723 (3,009) Foreign 5,367 (6,504) (1,333) - - ------------------------------------------------------------------------------- Total deferred 6,675 8,617 10,361 - - ------------------------------------------------------------------------------- Provision for (Benefit from) Income Taxes $40,058 $ (25,586) $ (5,269) ===============================================================================
The effective income tax rate is reconciled to the statutory federal income tax rate as follows:
1998 1997 1996 PERCENT PERCENT PERCENT -------- -------- -------- Statutory federal tax rate 35.0 (35.0) (35.0) State and local income tax effect 4.6 0.2 (8.5) Foreign operations (2.2) 2.2 10.6 Excess of cost over fair value of net assets of purchased businesses 6.7 2.1 7.3 Non-deductible business expenses 1.2 0.6 4.9 Dividends from affiliates 4.4 0.9 1.7 Minority interest 1.0 (1.1) (6.9) Federal valuation allowance (0.1) 16.3 3.8 Other (0.8) 1.0 5.8 - - ------------------------------------------------------------------------------- Effective Income Tax Rate 49.8 (12.8) (16.3) ===============================================================================
Undistributed earnings of foreign subsidiaries amounted to approximately $43,000,000 at March 31, 1998. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state and local income taxes has been provided. Upon distribution of those earnings, McDermott Incorporated would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign jurisdictions. The unrecognized deferred income tax liability is estimated to be approximately $16,700,000. Withholding taxes of approximately $4,000,000 would be payable upon remittance of all previously unremitted earnings at March 31, 1998.
Settlements were reached with the Internal Revenue Service ("IRS") concerning McDermott Incorporated's U.S. income tax liability through the fiscal year ended March 31, 1988,
disposing of all U.S. federal income tax issues. A preliminary agreement has been reached between McDermott Incorporated and the IRS for the fiscal years ended March 31, 1989 and March 31, 1990, subject to review by the joint committee on taxation. The IRS has issued notices for fiscal years ended March 31, 1991 and March 31, 1992 asserting deficiencies in the amount of taxes reported. The deficiencies are based on issues substantially similar to those of earlier years. McDermott Incorporated believes that any income taxes ultimately assessed will not exceed amounts already provided.
McDermott Incorporated has provided a valuation allowance ($51,861,000 at March 31, 1998) 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, 1998 are realizable through carrybacks and future reversals of existing taxable temporary differences and, if necessary, the implementation of tax planning strategies involving sales of appreciated assets. An uncertainty that affects the ultimate realization of deferred tax assets is the possibility of declines in value of appreciated assets involved in identified tax planning strategies. This factor has been considered in determining the valuation allowance. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis.
NOTE 5 - RELATED PARTY TRANSACTIONS
McDermott Incorporated has material transactions with International and its other subsidiaries occurring in the normal course of operations. Related party transactions reflected in McDermott Incorporated's revenues include the sales of engineering and design services and fabrication services ($6,439,000, $12,838,000, and $40,718,000 in fiscal years 1998, 1997 and 1996 respectively). Other related party transactions include the allocation of general and administrative and other costs to International ($20,074,000, $21,488,000 and $11,900,000 in fiscal years 1998, 1997 and 1996, respectively), placing certain insurance coverage (at prices determined on an annual basis of $3,283,000, $4,287,000, and $15,213,000 in fiscal years 1998, 1997 and 1996, respectively) through commercial insurance carriers, which in turn substantially reinsure such exposure to a wholly-owned subsidiary of International, and the management of certain of the investments of McDermott Incorporated and its pension plans by a wholly-owned subsidiary of International for which McDermott Incorporated paid fees of $2,642,000, $2,746,000 and $2,901,000 in fiscal years 1998, 1997 and 1996, respectively.
McDermott Incorporated had sales to unconsolidated affiliates of International of $9,199,000, $5,649,000 and $6,138,000 in fiscal years 1998, 1997 and 1996, respectively. Purchases from these affiliates were $16,533,000, $19,021,000 and $29,538,000 in fiscal years 1998, 1997 and 1996, respectively. Included in Accounts receivable - trade at March 31, 1998 and 1997 are $3,613,000 and $2,887,000, respectively, of receivables due from unconsolidated affiliates of International. Included in non-current Other Assets at March 31, 1998 and 1997 are $3,733,000 and $5,976,000, respectively, of receivables from these affiliates. Included in Accounts payable at March 31, 1998 and 1997 are $2,633,000 and $3,204,000, respectively, of payables to these affiliates.
During fiscal year 1998, McDermott Incorporated sold its investment in McDermott Engineering Houston, LLC having a net book value of $6,035,000 to International for
$2,909,000. The excess of the net book value over the sales price was included in Capital in Excess of Par Value.
During fiscal year 1997, McDermott Incorporated sold certain property, plant and equipment having a net book value of $1,440,000 to International for $8,602,000. The excess of the sales price over the net book value of net assets sold to International of $4,655,000 (net of tax of $2,507,000) was included in Capital in Excess of Par Value. During fiscal year 1998, a purchase price adjustment of $2,094,000 (net of taxes of $1,128,000) was made on the above sale. The purchase price adjustment was included in Capital in Excess of Par Value.
McDermott Incorporated and MIICO are parties to an agreement pursuant to which McDermott Incorporated may borrow up to $150,000,000. There were no borrowings against this agreement at March 31, 1998 or 1997.
Under a reorganization during the fiscal year ended March 31, 1983, International became the parent of the McDermott group of companies, which includes McDermott Incorporated which prior to the reorganization was the parent company. McDermott Incorporated's investment in International represents its right to the undistributed earnings of International existing at the time of the reorganization less subsequent distributions by International to McDermott Incorporated. In order to preserve McDermott Incorporated's right to the undistributed earnings and provide for the distribution of such earnings to McDermott Incorporated should either McDermott Incorporated or International elect not to keep these earnings invested with International, McDermott Incorporated retained its ownership of 100,000 shares of International Common Stock, received 100,000 shares of International Series A Participating Preferred Stock and 100,000 shares of International Series B Non-Voting Preferred Stock, and entered into a Stock Purchase and Sale Agreement with International (the "Intercompany Agreement"). Both Series A and Series B Preferred Stocks have certain rights in the event of liquidation of International. Series B Preferred Stock is currently callable by International at $275 per share and 10,000 shares are being redeemed by International each year at $250 per share. Such redemption began in November 1992. The Series A and Series B Preferred Stocks are entitled to annual per share dividends of $10 (but no more than ten times the amount of per share dividends paid by International on its Common Stock) and $20, respectively, and such dividends are cumulative to the extent not paid. Shares of Series A Preferred Stock are also entitled to additional dividends whenever dividends in excess of $3 per International Common Share are declared in any fiscal year. Dividends and proceeds from redemption of Series B Preferred Stock received from International have been accounted for as a reduction of McDermott Incorporated's investment in International.
Pursuant to the Intercompany Agreement, McDermott Incorporated has the right to sell to International and International has the right to buy from McDermott Incorporated, 100,000 units, each unit consisting of one share of International Common Stock and one share of International Series A Participating Stock, at a price based primarily upon the stockholders' equity of McDermott International at the close of the fiscal year preceding the date at which the right to sell or buy, as the case may be, is exercised, and, to a limited extent, upon the price- to-book value of the Dow Jones Industrial Average. If a unit is sold to International upon McDermott Incorporated's exercise of its right to sell under the Intercompany Agreement, the purchase price of such unit will be 90% of the then current value of the unit (the "current unit value"). If a unit is sold to International pursuant to an exercise by International of its right
to purchase under the Intercompany Agreement, the purchase price of such unit will be 110% of the current unit value. At April 1, 1998, the current unit value was $2,424 and the aggregate current unit value for McDermott Incorporated's 100,000 units was $242,357,000. Both parties intend to preserve McDermott Incorporated's right to the undistributed earnings by not exercising any rights under the Intercompany Agreement that would result in a loss to McDermott Incorporated. The net proceeds to McDermott Incorporated from the exercise of any rights under the Intercompany Agreement would be subject to U.S. federal, state and other applicable taxes. No tax provisions have been established, since there is no present intention by either party to exercise such rights.
McDermott Incorporated maintains the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift Plan"), which is a defined contribution plan that includes a cash or deferred arrangement. Monthly employer contributions are equal to 50% of the first 6% of compensation (as defined in the plan) contributed by participants, and may be made, at the discretion of McDermott Incorporated, in cash or in Common Stock of International. When monthly employer contributions are made in stock, McDermott Incorporated pays cash to International and shares of Common Stock of International are issued to the Thrift Plan from the authorized but unissued share capital of International. The number of such shares is determined based on the closing price on the last business day of the month as reported on the New York Stock Exchange Composite Tape with fractional shares paid in cash. During fiscal years 1998, 1997 and 1996, respectively, 191,058, 306,089 and 300,951 shares were purchased by McDermott Incorporated for $5,986,000, $6,030,000 and $6,347,000.
NOTE 6 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of: 1998 1997 ---- ---- (In thousands) Unsecured Debt: Series A Medium-Term Notes (maturities ranging from 1 to 5 years; interest at various rates ranging from 8.20% to 9.00%) $ 40,000 $ 75,000 Series B Medium-Term Notes (maturities ranging from 1 to 25 years; interest at various rates ranging from 6.50% to 8.75%) 91,000 101,000 9.375% Notes due 2002 ($225,000,000 principal value) 224,665 224,598 Other notes payable through 2009 (interest at various rates ranging to 10%) 19,030 19,170 Secured Debt: Other notes payable through 2012 and capitalized lease obligations 4,861 5,087 - - -------------------------------------------------------------------------------- 379,556 424,855 Less: Amounts due within one year 27,196 45,368 - - -------------------------------------------------------------------------------- $352,360 $ 379,487 ================================================================================
Notes payable and current maturities of long-term debt consist of:
1998 1997 ---- ---- (In thousands) Short-term lines of credit - unsecured $ 2,849 $ 174,555 Secured borrowings 82,783 93,769 Current maturities of long-term debt 27,196 45,368 - - ------------------------------------------------------------------------------- $112,828 $ 313,692 =============================================================================== Weighted average interest rate on short-term borrowings 5.82% 6.26% ===============================================================================
The Indentures for the 9.375% Notes due 2002 and the Series A and B Medium Term Notes contain certain covenants which restrict the amount of funded indebtedness that McDermott Incorporated may incur, and place limitations on certain restricted payments, certain transactions with International and its other subsidiaries, the creation of certain liens and the amendment of the Intercompany Agreement.
Maturities of long-term debt during the five fiscal years subsequent to March 31, 1998 are as follows: 1999 - $27,196,000; 2000 - $30,673,000; 2001 - $34,000; 2002 -$224,699,000; 2003 - $25,000.
McDermott Incorporated is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. Substantially all of the net assets of McDermott Incorporated are subject to such restrictions. At March 31, 1998, the most restrictive of these covenants with respect to the payment of dividends by McDermott Incorporated would prohibit the payment of dividends other than the current dividends on outstanding preferred stock.
The Babcock & Wilcox Company has an agreement with a U.S. bank whereby it can sell, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, which is subject to annual renewal, new receivables are added to the pool as collections reduce previously sold accounts receivable. The maximum sales limit was reduced during fiscal year 1998 from $125,000,000 to $100,000,000. At March 31, 1998 and 1997, approximately $82,783,000 and $93,769,000, respectively, of receivables had been sold under this agreement and are accounted for as secured borrowings in the accompanying balance sheet.
At March 31, 1998 and 1997, McDermott Incorporated had available various uncommitted short-term lines of credit from banks totalling $100,328,000 and $134,695,000, respectively. Borrowings against these lines of credit at March 31, 1998 and 1997 were $2,849,000 and $24,555,000, respectively. In addition, at March 31, 1998, there were no borrowings under the $150,000,000 unsecured committed revolving credit facility of The Babcock & Wilcox Company (the "B&W Revolver"), while at March 31, 1997, $150,000,000 was outstanding. As a condition to borrowing under the B&W Revolver, The Babcock & Wilcox Company must
meet or exceed certain financial covenant requirements. Negotiations are in progress to replace the current B&W Revolver with a new three year unsecured committed revolving credit and letter of credit facility to be issued jointly to the Babcock & Wilcox Investment Company, The Babcock & Wilcox Company and BWX Technologies, Inc. ("BWXT").
NOTE 7 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - McDermott Incorporated provides retirement benefits, primarily through non-contributory pension plans, for substantially all of its regular full-time employees, except certain non-resident alien employees of foreign subsidiaries who are not citizens of a European Community country or who do not earn income in the United States, Canada, or the United Kingdom. Salaried plan benefits are based on final average compensation and years of service, while hourly plan benefits are based on a flat benefit rate and years of service. McDermott Incorporated's funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, generally, to fund other pension plans as recommended by the respective plan actuary and in accordance with applicable law. At January 1, 1998 and 1997, approximately one-half of total plan assets were invested in listed stocks and bonds. The remaining assets were held in foreign equity funds, U.S. Government securities and investments of a short-term nature.
U.S. Pension Plans - - ------------------
The net periodic pension benefit for fiscal years 1998, 1997 and 1996 included the following components:
The following table sets forth the U.S. plans' funded status and amounts recognized in the consolidated financial statements:
1998 1997 1998 1997 ---- ---- ---- ---- (In thousands) Actuarial present value of benefit obligations: Vested benefit obligation $ 922,699 $ 806,533 $ 35,467 $ 30,063 =============================================================================== Accumulated benefit obligation $ 995,426 $ 870,713 $ 35,467 $ 30,063 =============================================================================== Projected benefit obligation $1,096,615 $ 977,594 $ 36,497 $ 31,772 Plan assets at fair value 1,461,403 1,254,944 - - - - ------------------------------------------------------------------------------- Projected benefit obligation (in excess of) or less than plan assets 364,788 277,350 (36,497) (31,772) Unrecognized net (gain) loss (93,996) (22,276) 8,368 4,955 Unrecognized prior service cost 15,267 21,738 2,629 2,862 Unrecognized transition asset (19,405) (25,873) (173) (148) Adjustment required to recognize minimum liability - - (9,836) (5,960) - - -------------------------------------------------------------------------------- Prepaid pension cost (pension liability) $ 266,654 $ 250,939 $(35,509) $(30,063) ===============================================================================
The assumptions used in determining the funded status of the U.S. plans were: 1998 1997 1996 ----- ----- ----- Actuarial assumptions: Discount rate 7.0% 7.5% 7.25% =============================================================================== Rate of increase in future compensation levels 4.5% 5.0% 5.0% =============================================================================== Expected long-term rate of return on plan assets 8.5% 8.5% 8.5% ===============================================================================
Effective April 1, 1995, McDermott Incorporated transferred to JRM an accrued pension liability of approximately $4,585,000 relating to certain former employees who are now covered under JRM's plan and transferred to JRM's plan assets, which were equal to the projected benefit obligation, of approximately $40,456,000.
The decrease in the discount rate for 1998 increased the projected benefit obligation by $68,751,000 and the decrease in the rate of increase in future compensation levels for 1998 decreased the projected benefit obligation by $16,112,000 at March 31, 1998.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," McDermott Incorporated recorded, at March 31, 1998 and 1997, an additional minimum liability of $9,836,000 and $5,960,000, respectively, resulting in recognition of intangible assets of $2,878,000 and $3,414,000, respectively, and reductions, net of tax, in stockholder's equity of $4,521,000 and $1,655,000, respectively.
The principal U.S. ERISA pension plans provide that, subject to certain limitations, any excess assets in such plans would be used to increase pension benefits if certain events occur within a 60-month period following a change in control of International.
Non-U.S Pension Plans - - ---------------------
The net periodic pension cost for fiscal years 1998, 1997, and 1996 included the following components:
Due to curtailments of foreign pension plans, net income includes a loss of $2,925,000 for fiscal year 1998 and net loss includes a loss of $1,584,000 for fiscal year 1997.
The following table sets forth the non-U.S. plans' funded status (assets exceed accumulated benefits) and amounts recognized in the consolidated financial statements: 1998 1997 ---- ---- (In thousands) Actuarial present value of benefit obligations: Vested Benefit Obligation $ 89,466 $ 78,987 ============================================================================ Accumulated Benefit Obligation $ 90,825 $ 80,532 ============================================================================ Projected Benefit Obligation $ 98,242 $ 89,877 Plan assets at fair value 112,830 103,070 - - ---------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 14,588 13,193 Unrecognized net loss (476) 4,221 Unrecognized prior service cost 2,866 3,439 Unrecognized transition asset (3,471) (5,129) - - ---------------------------------------------------------------------------- Net prepaid pension cost $ 13,507 $ 15,724 ============================================================================
The assumptions used in determining the funded status of the non-U.S. plans were:
1998 1997 1996 ---- ---- ----- Actuarial assumptions: Discount rate 6.75-7.0% 7.75% 7.75-8.25% =============================================================================== Rate of increase in future compensation levels 4.0-4.5% 5.0% 5.0% =============================================================================== Expected long-term rate of return on plan assets 7.5-8.25% 8.5% 8.5% ===============================================================================
Multiemployer Plans - One of McDermott Incorporated's subsidiaries contributes to various multiemployer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. Amounts charged to pension cost and contributed to the plans were $5,151,000, $4,552,000, and $4,441,000 in fiscal years 1998, 1997 and 1996, respectively.
Postretirement Health Care and Life Insurance Benefits - McDermott Incorporated offers postretirement health care and life insurance benefits to substantially all of its retired regular full-time employees, including those associated with discontinued operations, except certain non-resident alien retired employees who are not citizens of a European Community country or who, while employed, did not earn income in the United States, Canada or the United Kingdom. McDermott Incorporated shares the cost of providing these benefits with all affected retirees, except for certain life insurance plans. Postretirement health care and life insurance benefits are offered under separate defined benefit postretirement plans to union and non-union employees. The health care plans are contributory and contain cost-sharing provisions such as deductibles and coinsurance; the life insurance plans are contributory and non-contributory. McDermott Incorporated does not fund any of these plans.
The following table sets forth the amounts recognized in the consolidated financial statements at March 31:
1998 1997 -------- -------- (In thousands) Accumulated Postretirement Benefit Obligation: Retirees $263,404 $284,067 Fully eligible active participants 22,256 20,303 Other active plan participants 38,660 42,318 - - ----------------------------------------------------------------------- 324,320 346,688 Unrecognized net gain 72,636 58,187 - - ----------------------------------------------------------------------- Accrued postretirement benefit cost $ 396,956 $404,875 ======================================================================= Weighted-average discount rate 7.00% 7.50% =======================================================================
The accumulated postretirement benefit obligation includes $281,792,000 and $307,129,000 for health care plans and $42,528,000 and $39,559,000 for life insurance plans at March 31, 1998 and 1997, respectively. The changes in the accumulated postretirement benefit obligation and the unrecognized net gain (loss) at March 31, 1998 were primarily attributable to favorable claims experience.
Net periodic postretirement benefit cost for fiscal years 1998, 1997 and 1996 included the following components:
1998 1997 1996 -------- ------- -------- (In thousands) Service cost $ 2,404 $ 3,414 $ 3,120 Interest cost 24,699 28,584 29,895 Net amortization and deferral (4,159) 705 (1,370) - - --------------------------------------------------------------- Net periodic postretirement benefit cost $22,944 $32,703 $31,645 ===============================================================
For measurement purposes, a weighted-average annual assumed rate of increase in the per capita cost of covered health care claims of 6-1/2% was assumed for 1998, 7-1/2% for 1997 and 10-3/4% for 1996. For 1999, a rate of 5-1/2% was assumed. The rate was assumed to decrease gradually to 4% in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of March 31, 1998 by $19,340,000 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit costs for fiscal year 1998 by $1,766,000.
Subsequent Event - Effective April 1, 1998, McDermott Incorporated terminated all postretirement health care and life insurance benefits for salaried and non- union hourly employees. As a result of the termination, the total accumulated postretirement benefit obligation of McDermott Incorporated will decrease. On the same date, the pension plans for the employees affected by the termination were amended to increase the benefits payable to offset the cost of postretirement health care and life insurance to the participants. As a result of the amendments to the plans, the total projected benefit obligation of McDermott Incorporated will increase. The decrease in the accumulated postretirement benefit obligation will be measured against the increase in the total projected benefit obligation of the pension plans and any resulting gain or loss will be recognized in the first quarter of fiscal year 1999. The actuarial calculations of the decrease in the total accumulated postretirement benefit obligation and the increase in the projected benefit obligation of the pension plans have not yet been finalized.
NOTE 8 - IMPAIRMENT OF LONG LIVED ASSETS
During fiscal year 1998, management concluded that a portion of the goodwill associated with the acquisition of McDermott Engineers & Constructors (Canada) Ltd. no longer had value due to reduced future asset utilization and deteriorating market conditions and recorded a charge of $8,098,000.
During fiscal years 1998 and 1997, management identified certain long-lived assets that are no longer expected to recover their entire carrying value through future cash flows. The assets include manufacturing facilities and related equipment and goodwill in the Power Generation Systems' segment. Fair value was generally determined based on sales prices of comparable assets. Impairment losses to write-down the property, plant and equipment to estimated fair value and to write-off related goodwill totaled $10,315,000 and $15,957,000, respectively, in fiscal years 1998 and 1997.
During fiscal year 1997, management began marketing a building and land which was used as office space. As a result, an impairment loss of $7,295,000 was recognized to reduce the property to its estimated fair value less the cost to sell. Prior to recognition of the impairment loss, the carrying value of the land and building was approximately $15,795,000. The building was sold in fiscal year 1998 resulting in a gain of $1,995,000.
NOTE 9 - STOCK PLANS
Certain officers and employees of McDermott Incorporated participate in benefit plans of International which involve the issuance of International Common Stock.
Under International's 1996 Officer Long-Term Incentive Plan, a total of 1,996,301 shares of International Common Stock (including shares that were not awarded under predecessor plans) are available for stock option grants and restricted stock awards to officers and key employees under the 1996 Officer Long-Term Incentive Plan at March 31, 1998. The Plan permits the grant of nonqualified stock options, incentive stock options and restricted stock. Options to purchase shares are granted at not less than 100% of the fair market value at date of grant, become exercisable at such time or times as determined when granted, and expire not more than ten years after the date of the grant. Under the Plan, eligible employees may be granted rights to purchase shares of International Common Stock at par value ($1.00 per share), which shares are subject to restrictions on transfer that lapse at such times and circumstances as specified when granted. As of March 31, 1998, 715,380 shares of International Common Stock available for award may be granted as restricted stock. Through March 31, 1998, a total of 1,121,940 shares of restricted stock (including 171,930 and 113,110 shares issued in fiscal years 1997 and 1996, with a weighted average fair value per share of $19.92 and $25.13 per share, respectively) have been issued under the Plan (and a predecessor plan). During fiscal year 1998, performance-based awards represented by initial notional grants totaling 86,400 rights (with a weighted average fair value of $33.00 per right) to purchase restricted shares of International Common Stock were granted to certain officers and key employees under the 1996 Officer Long-Term Incentive Plan. Under the provisions of the performance-based awards, no shares are issued at the time of the initial award and the number of shares which will be issued shall be determined based on the change in the market value of the International Common Stock over a specified performance period.
Under International's 1992 Senior Management Stock Option Plan, senior management employees may be granted options to purchase shares of International Common Stock. The total number of shares available for grant is determined by the Board of Directors of International from time to time. Options to purchase shares are granted at not less than 100% of the fair market value on the date of grant, become exercisable at such time or times as determined when granted, and expire not more than ten years after the date of grant.
In the event of a change in control of International, both programs have provisions that may cause restrictions to lapse and accelerate the exercisability of options outstanding.
The following table summarizes activity for International's stock option plans as it relates to employees of McDermott Incorporated (share data in thousands):
The following tables summarize the range of exercise prices and the weighted average remaining contractual life of the International options outstanding and the range of exercise prices for the options exercisable at March 31, 1998 (share data in thousands):
As discussed in Note 1, McDermott Incorporated applies APB 25 and related interpretations in accounting for its participation in International's stock- based compensation plans. Charges to income related to stock plan awards totaled approximately $4,345,000, $5,141,000 and $1,974,000 for fiscal years 1998, 1997 and 1996, respectively. If McDermott Incorporated had accounted for its participation in International's stock option plans using the alternative fair value method of accounting under SFAS No. 123 "Accounting for Stock-Based Compensation," its net income (loss) would have been $39,719,000, $(175,592,000) and $(27,223,000) for fiscal years 1998, 1997 and 1996, respectively. This pro forma net income (loss) information is not indicative of future pro forma amounts. SFAS No. 123 does not apply to awards prior to fiscal year 1996 and additional awards in future years are anticipated.
The fair value of each option grant was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
1998 1997 1996 ----- ----- ----- Risk-free interest rate 5.47% 6.27% 5.28% Volatility factor of the expected market price of International's common stock .36 .36 .36 Expected life of the option in years 3.5 5.0 5.0 Expected dividend yield of International's common stock 0.6% 1.0% 1.0%
The weighted average fair value of the stock options granted in 1998, 1997 and 1996 was $10.77, $8.21 and $7.02, respectively.
NOTE 10 - REDEEMABLE PREFERRED STOCKS
At March 31, 1998 and 1997, 13,000,000 shares of McDermott Incorporated Preferred Stock, with a par value of $1 per share, were authorized. Of the authorized shares, 2,818,679 and 2,818,780 shares of Series A Preferred Stock, and 2,152,766 and 2,652,660 shares of Series B Preferred Stock, respectively, were outstanding (in each case, exclusive of shares owned by McDermott Incorporated) at March 31, 1998 and 1997. The outstanding shares are entitled to $31.25 per share in liquidation. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of McDermott Incorporated may designate additional series of Preferred Stock, and may set terms of each new series except that McDermott Incorporated cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of each of these series.
Each share of the outstanding Series A Preferred Stock is convertible into one share of International Common Stock plus $0.10 cash. Series A and Series B Preferred Stock are redeemable at the option of McDermott Incorporated at $31.25 per share plus accrued dividends. Pursuant to a mandatory sinking fund requirement, on March 31, 1999 and each subsequent year through March 31, 2008, McDermott Incorporated is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A Preferred Stock. On March 31, 1999, McDermott Incorporated is obligated to redeem 4,800 shares of Series B Preferred Stock. On March 31 of fiscal years 2000 through 2006, and March 31
of fiscal years 2007 and 2008, McDermott Incorporated is obligated to redeem 252,702 and 189,526 shares, respectively, of Series B Preferred Stock. For each of the five fiscal years subsequent to March 31, 1998, the annual cost of McDermott Incorporated's obligation to redeem the Series A and Series B Preferred Stock is $17,706,000. McDermott Incorporated may apply to the mandatory sinking fund obligations any share of Series A or Series B Preferred Stock reacquired, redeemed or surrendered for conversion which have not been previously credited against the mandatory sinking fund obligations. During fiscal year 1998, McDermott Incorporated applied 313,878 shares of Series A Preferred Stock and 251,991 shares of Series B Preferred Stock that it owned to satisfy the March 31, 1998 mandatory sinking fund obligations and 247,902 shares of Series B Preferred Stock that it owned to satisfy a portion of the March 31, 1999 mandatory sinking fund obligation. During fiscal years 1998 and 1997, 151,374 and 74,200 shares, respectively, of Series B Preferred Stock were purchased in the open market and 348,519 shares of Series B Preferred Stock were purchased pursuant to a partial redemption. At March 31, 1998, 49,737 shares of Series A Preferred Stock have been converted to date and McDermott Incorporated owned 319,993 shares of Series A Preferred Stock.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Investigations and Litigation - In March 1997, International and JRM, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of International and JRM and others. The allegations concerned the heavy-lift business of the HeereMac joint venture. Upon becoming aware of these allegations, International and JRM notified authorities, including the Antitrust Division of the U.S. Department of Justice and the European Commission. As a result of International's and JRM's prompt disclosure of the allegations, both companies and the individuals who were officers, directors and employees of International or JRM at the time of the disclosure were granted immunity from criminal prosecution by the Department of Justice for any anti-competitive acts involving worldwide heavy-lift activities.
On December 21, 1997, following JRM's termination of its joint venture with Heerema Offshore Construction Group, Inc. ("Heerema"), HeereMac and a HeereMac employee pled guilty to criminal charges by the Department of Justice that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East. HeereMac was fined $49,000,000 and the employee $100,000. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the Department of Justice investigation. Neither International, JRM nor any of their officers, directors or employees was a party to those proceedings.
International and JRM have cooperated and are continuing to cooperate with the Department of Justice in its investigation. Near the end of calendar 1997, the Department of Justice requested additional information from the companies relating to possible anti-competitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. Pursuant to the termination of the McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East, Inc. Subsequent to the formation of JRM and its acquisition of Offshore Pipelines, Inc. in January 1995, McDermott Incorporated no longer
participates in the heavy-lift barge service business nor the marine construction business, which is the subject of this investigation.
International and JRM are also cooperating with the Securities and Exchange Commission ("SEC"), which also requested information and documents from the companies with respect to certain of the foregoing matters. International and JRM are subject to a judicial order entered in 1976, with the consent of McDermott Incorporated (which at that time was the parent of the McDermott group of companies), pursuant to an SEC complaint ("Consent Decree"). The Consent Decree prohibits the companies from making false entries in their books, maintaining secret or unrecorded funds or using corporate funds for unlawful purposes. Violations of the Consent Decree could result in substantial civil and/or criminal penalties to the companies.
On June 1, 1998, Phillips Petroleum Company (individually, and on behalf of certain co-venturers) and certain related entities filed a complaint in United States District Court for the Southern District of Texas against McDermott Incorporated, International, JRM, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates, and others. The complaint alleges that the defendants engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05(a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, North Sea and Far East. In addition to seeking actual charges and attorneys' fees, the plaintiffs have requested punitive as well as treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice investigation, the SEC inquiry, or the companies' internal investigation, the above referenced lawsuit, or the action that may by taken by others as a result of HeereMac's guilty plea or otherwise. However, these matters could result in civil and/or criminal liability and have a material adverse effect on McDermott Incorporated's consolidated financial position and results of operations.
In addition to the foregoing, McDermott Incorporated and certain of its officers, directors and subsidiaries are defendants in numerous other legal proceedings. Management believes that the outcome of these proceedings will not have a material adverse effect upon McDermott Incorporated's consolidated financial position or results of operations.
Products Liability - At March 31, 1998 and 1997, the estimated liability for pending and future non-employee products liability asbestos claims was $886,691,000 (of which approximately $281,000,000 had been asserted) and $1,082,782,000, respectively. Estimated insurance recoveries are included in environmental and products liabilities recoverable and comprise substantially all of the March 31, 1998 balance and all of the March 31, 1997 balance. The number of non-employee claims, which had declined moderately since fiscal year 1990, increased in 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 the 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, McDermott Incorporated 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. The number of claims in fiscal year 1998 declined from previous years' levels and was consistent with management's expectations. Management expects a continuing decline in the number of claims in fiscal year 1999. Estimated liabilities for pending and future non-employee products liability asbestos claims are derived from McDermott Incorporated'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, which may vary significantly as claims are filed and settled. Accordingly, changes in estimates could result in a material adjustment to operating results for any fiscal quarter or year, including within the next year should expected declines in the number of claims not occur, and the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
Environmental Matters - During fiscal year 1995, management decided to close certain nuclear manufacturing facilities in Parks Township, Armstrong County, Pennsylvania (the "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 these facilities' remaining expected life. Decontamination is proceeding as permitted by the existing Nuclear Regulatory Commission ("NRC") license. A decommissioning plan was submitted to the NRC for review and approval during January 1996. These facilities were recently transferred to BWXT, a subsidiary of The Babcock & Wilcox Company. BWXT's management expects to reach an agreement with the NRC in fiscal year 1999 on a plan that provides for the completion of facilities dismantlement and soil restoration by 2001 and license termination in 2002. BWXT expects to request approval from the NRC to release the site for unrestricted use at that time.
At March 31, 1998 and 1997, McDermott Incorporated had total environmental reserves (including provision for the facilities discussed above) of $44,675,000 and $30,949,000, respectively, of which $8,446,000 and $10,352,000 were included in current liabilities. Estimated recoveries of these costs are included in environmental and products liabilities recoverable at March 31, 1998. Inherent in the estimates of such reserves and recoveries are expected levels of contamination, decommissioning costs, and recoverability from other parties, which may vary significantly as decommissioning activities progress. Accordingly, changes in estimates could result in a material adjustment to operating results and the ultimate loss may differ materially from amounts provided in the consolidated financial statements.
McDermott Incorporated has been identified as a potentially responsible party at various clean up sites under the Comprehensive Environmental Response, Compensation and Liability Act, as amended. McDermott Incorporated 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 its relative contribution of wastes to each site. Based on its relative contribution of waste to each site, McDermott Incorporated's share of the ultimate liability for the various
sites is not expected to have a material adverse effect on its consolidated financial position or results of operations.
The Department of Environmental Protection of the Commonwealth of Pennsylvania, ("PADEP"), by letter dated March 19, 1994, advised The Babcock & Wilcox Company that it would seek monetary sanctions, and remedial and monitoring relief, related to the Parks Facilities. The relief sought related to potential groundwater contamination related to the previous operations of the facilities. These facilities are now a part of BWXT. PADEP has advised BWXT that it does not intend to assess any monetary sanctions provided that BWXT continues its remediation program of the Parks Facilities.
Operating Leases - Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at March 31, 1998 are as follows: 1999 - $8,330,000; 2000 - $7,014,000; 2001 - $4,993,000; 2002 - $3,144,000; 2003 - $2,677,000; and thereafter - $759,000. Total rental expense for fiscal years 1998, 1997 and 1996 was $17,988,000, $22,934,000 and $21,937,000, respectively. These expense amounts include contingent rentals and are net of sublease income, neither of which are material.
Other - McDermott Incorporated performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies.
McDermott Incorporated maintains liability and property insurance against such risk and in such amounts it considers adequate. However, certain risks are either not insurable or insurance is available only at rates which McDermott Incorporated considers uneconomical.
Commitments for capital expenditures amounted to approximately $13,743,000 at March 31, 1998, all of which relates to fiscal year 1999.
McDermott Incorporated is contingently liable under standby letters of credit totaling $248,470,000 at March 31, 1998, all of which were issued in the normal course of business.
NOTE 12 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott Incorporated's Power Generation Systems segment's principal customers are the electric power generation industry (including government-owned utilities and independent power producers), and the pulp and paper and other process industries, such as oil refineries and steel mills. The primary customer of the Government Operations segment is the U.S. Government (including its contractors). The principal customers of the Engineering and Construction Operations segment are oil and natural gas producers, electric power generation industry, and petrochemical and chemical processing industries. The principal customers of Other Operations are petrochemical and chemical processing and electric power generation industries. These concentrations of customers may impact McDermott Incorporated's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. However, International's management believes that the portfolio of receivables is well diversified and that this diversification minimizes any potential credit risk. Receivables are generally not collateralized.
McDermott Incorporated believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. At March 31, 1998 and 1997, the allowance for possible losses deducted from Accounts receivable-trade on the accompanying balance sheet was $9,925,000 and $13,417,000, respectively.
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS
McDermott Incorporated operates internationally giving rise to exposure to market risks from changes in foreign exchange rates. Derivative financial instruments, primarily forward exchange contracts, are utilized to reduce those risks. McDermott Incorporated does not hold or issue financial instruments for trading purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. At March 31, 1998, McDermott Incorporated had forward exchange contracts to purchase $103,249,000 in foreign currencies (primarily Canadian Dollars), and to sell $31,792,000 in foreign currencies (primarily Canadian Dollars), at varying maturities from fiscal year 1999 through 2000. At March 31, 1997, McDermott Incorporated had forward exchange contracts to purchase $90,686,000 in foreign currencies (primarily Canadian Dollars), and to sell $48,546,000 in foreign currencies (primarily Canadian Dollars), at varying maturities from fiscal year 1998 through 2000.
Deferred realized and unrealized gains and losses from hedging firm purchase and sale commitments are included on a net basis in the balance sheet as a component of either contracts in progress or advance billings on contracts. They are recognized as part of the purchase or sale transaction when it is recognized, or as other gains or losses when a hedged transaction is no longer expected to occur. At March 31, 1998 and 1997, McDermott Incorporated had deferred gains of $372,000 and $1,278,000, respectively, and deferred losses of $350,000 and $363,000, respectively, related to forward exchange contracts which will be recognized in accordance with the percentage of completion method of accounting.
McDermott Incorporated is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but it does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contracts.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by McDermott Incorporated in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximates their fair values.
Long and short-term debt: The fair value of debt instruments are based on quoted market prices or, where quoted prices are not available, on estimated prices based on current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward exchange contracts are estimated by obtaining quotes from brokers. At March 31, 1998 and 1997, McDermott Incorporated had net forward exchange contracts outstanding to purchase foreign currencies with notional values of $71,457,000 and $42,140,000 and fair values of $72,943,000 and $48,098,000, respectively.
The estimated fair values of McDermott Incorporated's financial instruments are as follows:
NOTE 15 - SEGMENT REPORTING
McDermott Incorporated's reportable segments are Power Generation Systems, Government Operations and Engineering and Construction Operations. These segments are managed separately and are unique in technology, services and customer class.
Power Generation Systems supplies engineered-to-order services, products and systems for energy conversion, and fabricates replacement nuclear steam generators and environmental control systems. In addition, this segment provides aftermarket services including replacement parts, engineered upgrades, construction, maintenance and field technical services to electric power plants and industrial facilities. This segment also provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities.
Government Operations supplies nuclear reactor components and nuclear fuel assemblies to the U.S. Government, manages and operates government owned facilities, supplies commercial nuclear environmental services and other government and commercial nuclear services.
Engineering and Construction Operations includes the engineering and construction activities and plant outage maintenance of certain Canadian operations.
Other Operations is comprised of certain small businesses which primarily includes the manufacturing of auxiliary equipment such as air-cooled heat exchangers and replacement parts, shipbuilding activities and contract research.
Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, non-employee products liability asbestos claims provisions, insurance claim provisions, legal expenses, employee benefit and insurance income and expense and gain (loss) on sales of corporate assets. Other reconciling items to income (loss) before provision for income taxes are interest income, interest expense and other-net. Assets excluded from segment assets primarily include insurance recoverable
for products liabilities, excess cost over fair values of net assets purchased, McDermott Incorporated's investment in McDermott International and prepaid pension costs. Amortization of the excess of cost over fair value of net assets purchased was allocated to the reportable segments for all years presented.
In fiscal years 1998, 1997 and 1996, the U. S. Government accounted for approximately 19% of McDermott Incorporated's total revenues. These revenues are principally included in the Government Operations segment.
In fiscal year 1998, asset impairment losses, primarily associated with manufacturing facilities, resulted in a decrease in Power Generation Systems segment income of $6,395,000. The write-off of goodwill associated with the acquisition of McDermott Engineers & Constructors (Canada), Ltd. of $8,098,000 accounted for most of the segment loss of Engineering and Construction Operations in fiscal year 1998. A net increase in Other Operations income of $33,072,000 was a result of a gain on the sale of an interest in a joint venture. In fiscal year 1997, the write-down of an equity investment and asset impairment losses, partially offset by a gain from the sale of certain assets, resulted in an increase in Power Generation Systems segment loss of $20,251,000.
Segment Information For the Three Fiscal Years Ended March 31, 1998.
1. Information about McDermott Incorporated's Operations in Different Segments.
2. Information about McDermott Incorporated's Product and Service Lines.
3. Information about McDermott Incorporated's Operations in Different Geographic Areas.
/(1)/Geographic revenues are allocated based on the location of the customer.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial information for the fiscal years ended March 31, 1998 and 1997.
---- Q U A R T E R E N D E D ------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1997 1997 1997 1998 --------- --------- ------------- --------- (In thousands) Revenues $453,180 $422,868 $452,324 $514,287 Operating income 27,992 51,684 37,471 16,876 Net income 4,158 21,133 12,501 2,598
Pretax results for the quarter ended September 30, 1997 include a gain of $33,072,000 from the sale of McDermott Incorporated's interest in Universal Fabricators Incorporated. Pretax results for the quarter ended March 31, 1998 include asset impairment losses of $10,315,000.
------------------------------------------------- Q U A R T E R E N D E D ------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1996 1996 1996 1997 ----------- ---------- ---------- --------- (In thousands)
Revenues $482,510 $453,662 $424,629 $ 435,456 Operating income (loss) (5,097) (11,927) 5,799 (111,346) Net loss (16,323) (18,480) (6,553) (133,449)
Pretax results for the quarter ended September 30, 1996 include an asset impairment loss of $7,295,000. Pretax results for the quarter ended December 31, 1996 include favorable workers' compensation cost adjustments of $12,088,000. Pretax results for the quarter ended March 31, 1997 include gains on asset disposals of $11,792,000, a provision of $72,400,000 for estimated future non-employee products liability asbestos claims, an asset impairment loss of $15,957,000, the write-down of an equity investment of $14,300,000 and a provision of $5,396,000 for employee severance costs.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART I I I
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the material appearing under the headings "Election of Directors" and "Executive Officers" in the Information Statement for action to be taken by McDermott Incorporated without a meeting of stockholders on August 11, 1998.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material appearing under the heading "Compensation of Executive Officers" in the Information Statement for action to be taken by McDermott Incorporated without a meeting of stockholders on August 11, 1998.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material appearing under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Information Statement for action to be taken by McDermott Incorporated without a meeting of stockholders on August 11, 1998.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material appearing under the heading "Certain Transactions" in the Information Statement for action to be taken by McDermott Incorporated without a meeting of stockholders on August 11, 1998.
PART I V
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or incorporated by reference.
1. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors
Consolidated Balance Sheet March 31, 1998 and 1997
Consolidated Statement of Income (Loss) For the Three Fiscal Years Ended March 31, 1998
Consolidated Statement of Stockholder's Equity For the Three Fiscal Years Ended March 31, 1998
Consolidated Statement of Cash Flows For the Three Fiscal Years Ended March 31, 1998
Notes to Consolidated Financial Statements For the Three Fiscal Years Ended March 31, 1998
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not required or the required information is shown in the registrant's consolidated financial statements or notes thereto.
3. EXHIBITS
Exhibit Number Description ------ -----------
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated by reference to Exhibit 3 to McDermott Incorporated's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; Item 3(b) is incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended March 31, 1981).
(a) McDermott Incorporated's Restated Articles of Incorporation
(b) McDermott Incorporated's By-Laws
4 Indentures with respect to certain of McDermott Incorporated's long- term debt are not filed as exhibits hereto inasmuch as the securities authorized under any such Indenture do not exceed 10% of McDermott Incorporated's total assets. McDermott Incorporated agrees to furnish a copy of each such Indenture to the Securities and Exchange Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K for the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; and Exhibit 10(d) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by McDermott Incorporated during the three months ended March 31, 1998.
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDERMOTT INCORPORATED
June 17, 1998 By: /s/ Roger E. Tetrault ------------------------------ Roger E. Tetrault Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title --------- -----
/s/Roger E. Tetrault Chairman of the Board - - -------------------------- Chief Executive Officer and Director Roger E. Tetrault (Principal Executive Officer)
/s/Daniel R. Gaubert Senior Vice President and - - -------------------------- Chief Financial Officer Daniel R. Gaubert (Principal Financial and Accounting Officer)
/s/Richard E. Woolbert Director - - -------------------------- Richard E. Woolbert
/s/ S. Wayne Murphy Director - - --------------------------- S. Wayne Murphy
June 17, 1998
INDEX TO EXHIBITS Exhibit Number Description ------ -----------
3 Articles of Incorporation and By-Laws (Item 3(a) is incorporated by reference to Exhibit 3 to McDermott Incorporated's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; Item 3(b) is incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended March 31, 1981).
(a) McDermott Incorporated's Restated Articles of Incorporation
(b) McDermott Incorporated's By-Laws
4 Indentures with respect to certain of McDermott Incorporated's long- term debt are not filed as exhibits hereto inasmuch as the securities authorized under any such Indenture do not exceed 10% of McDermott Incorporated's total assets. McDermott Incorporated agrees to furnish a copy of each such Indenture to the Securities and Exchange Commission upon request.
10 Material Contracts (Exhibit 10(b) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K for the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; and Exhibit 10(d) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1987; Exhibit 10(e) is incorporated by reference to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
21 Significant Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule