Document 15xorka1Vqa3RVJ9JXRdJr1kE

McDermott INTERNATIONAL, INC. ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1990 WHERE THE WORLD COMES FOR ENERGY SOLUTIONS RESULTS AT A GLANCE McDermott International, Inc. for the Fiscal Years ended March 31, 1990 and 1989 In thousands of dollars except per share amounts, shares outstanding, and number of employees 1990 1989 Revenues Operlffrig Loss $ 2,644,690 S (89,406) $ 2,166,806 $ (57,180) Loss From Continuing Operations $ (100,552) $ (122,610) Income (Loss) From Discontinued Operations $ 90,351 $ (21,645) Cumulative Effect of Accounting Change -- $ 52,580 Net Loss a*:- Primary and Fully Diluted Earnings (Loss) Per Common and Common Equivalent Share: Continuing Operations Discontinued Operations Accounting Change Net Loss $ (10,201) $ (91,675) $ (2.68) $ (3.29) S 2.41 $ (0.59) -- $ 1.42 S (0.27) $ (2.46) Stockholders' Equity Per Common Share $ 17.16 $ 16.04 Cash Dividends Per Common Share $ 1.00 $ 1.40 Common Stock Price Per Common Share: High * Low S 27V8 $ 21V2 S 17/e $ 14Va Weighted Average Number of Common and Common Equivalent Shares Outstanding During the Year 37,458,528 37,216.057 Capital Expenditures Backlog $ 113,640 $ 4,167,781 $ 75,387 $ 3,652.623 Number of Employees Including Subcontract Labor 30,000 23.000 To Our Stockholders: Robert E. Howson Chairman of the Board and Chief Executive Officer As we look forward to the 1990s, McDermott International faces an era of unprecedented opportunity. Our energy-related markets, which weakened considerably during the 1980s, are beginning to grow. I believe we can look forward to significant financial improvements in this fiscal year and for the foreseeable future. Although we have experienced weak markets and losses over the past several years, we have based our business decisions not only on short-term financial performance, but also on our strong belief that the long-term outlook for our markets is excellent. We have remained dedicated to our core businesses and to maintaining technical superiority in them. Today, I am confident that our course was correct. Financial Improvements In fiscal 1990, revenues increased to $2,645 billion from $2,167 billion in the previous year, primarily because Marine Construction Services revenues were up 53 percent. The net loss for the year was $10.2 million compared with a net loss of $91.7 million the year before. The loss decreased in fiscal 1990 principally as the result of gains realized from the sale of the Bailey Controls operations and the formation of our new commercial nuclear service joint venture. The sale of Bailey generated proceeds of $295 million. To establish the joint venture, a U.S. subsidiary of Framatome S. A. of France purchased net assets representing 50 percent of our nuclear service business foT $51 million. These funds helped us pay down short-term debt and gave us a positive cash flow for fiscal 1990. From March 2, 1990, through April 2, 1990, we conducted a warrant exchange that brought us about $25 million in cash and retired approximately $107 million in carrying value of debentures. Approximately $5 million in cash and $91 million in debentures were received in fiscal 1990 and the remainder in fiscal 1991. The cash and debentures helped us reduce the debt and increase the equity on our balance sheet. In the exchange, we issued approximately 6.3 million shares of common stock for approx imately 5.9 million warrants, or about 99 percent of the warrants outstanding, raising our total shares outstanding to about 43.8 million. 1 Commitment to Technology Although many of our markets have been weak in past years, we have remained steadfast in our belief that we must provide our customers with techno logically superior'products. We enter the 1990s prepared to continue this commitment. To increase our focus on technology, I have formed a committee of Directors whose respon sibility is to guide our endeavors in this area. In the later pages of this report, you will find a special section on our technologies. Operations Focused in Five Areas We define five core businesses for our operations: marine construction, project management, fossil power generation, commercial nuclear power, and U.S. government operations. Our marine construction backlog grew approx imately 150 percent and marine revenues increased 53 percent over the previous year. However, the operations remained unprofitable primarily because of the under-utilization of our marine construction vessels. We continued to work off unprofitable marine fabrication backlog during fiscal 1990, and by the end of the year, our fabrication operations were profitable. They should remain so in fiscal year 1991 and for the foreseeable future. As fabrication work is completed and the util ization of our vessels improves, our entire marine construction segment should once again become profitable. Our project management group continued to be involved in developing projects in the Soviet Union during the fiscal year. In November 1989, we were asked to participate in one of those projects, but only as an equity partner. Because we have no intention of making an initial investment nor of being a passive equity-participant, we declined to participate in the project. We do believe, however, that the Soviet Union remains a viable market for us. The project management group also pursued other opportunities and has brought together our engineering and construction capabilities for several projects. Our fossil power operations continue to be a leading source of revenue, providing service in the United States and abroad, working on gas, coal, and refuse projects, and on pulp and paper projects--both new plants and upgrades of existing facilities. The markets for our fossil operations' environmental control systems will grow signifi cantly stronger with the passage the Clean Air Act now pending in Congress. Recently, several of our competitors in the power generation equipment industry' have formed part nerships to increase the scope of their operations. While these partnerships have produced stronger competitors, we do not believe they affect our ability to competeTor power generation projects in any of our markets. We retain the flexibility to operate at any level--whether as equipment supplier, prime contractor; or member of a short-term alliance, such as a consortium or project joint venture with any strong partner of our choosing. We strengthened the long-term prospects and the scope of products and services for our commercial nuclear service business by forming a joint venture with a U.S. subsidiary of Framatome, the world's largest supplier of standardized pressurized wacer reactors. TTe venture will provide important long term benefits by enhancing our technology and improving our already strong position in the U.S. commercial nuclear service market. 2 Our U.S. government operations made significant strides in fiscal 1990 with the announcement that Babcock &. Wilcox had been chosen as part of the team that will manufacture the advanced solid rocket motor for the space shuttle. As the year ended, it also appeared we would become the sole source of nuclear fuel for the U.S. Navy. Despite the shrinking U.S. defense budget, there remain many government and defense markets where we can apply our unique manufacturing technologies, and we are pursuing those markets aggressively. Changes on the Board We welcomed two new members to our Board of Directors this year and bid another farewell. Walter O. Spencer, who joined the Board in 1979, retired in February 1990. We wish Mr. Spencer well and are grateful for his many years of guidance and good counsel. Also in February, Philip J. Burguieres, Chairman of the Board, President, and Chief Executive Officer of Panhandle Eastern Corporation, and William McCollam, Jr., President Emeritus of the Edison Electric Institute, joined our Board. Prior to joining Panhandle Eastern in 1989, Mr. Burguieres served as Chairman of the Board and Chief Executive Officer of Cameron Iron Works, Inc. He has served on Panhandle Eastern's board since 1984. Mr. McCollam joined the Edison Electric Institute in 1978, when he was named its President. Prior to 1978, he was President of New Orleans Public Service Inc., and he has served as a Director of Middle South Utilities (now Entergy Corporation), Middle South Services, Middle South Energy Inc., Louisiana Power & Light, and Systems Fuels, Inc. Outlook As the 1990s begin, we believe the Company's future looks brighter than ever. Our marine business is poised for growth, as the price of oil remains stable or improves and our customers increase their exploration and production budgets. Our project management business should grow with the worldwide refurbishment and expansion of oil and gas producing, refining, and processing facilities, and of the chemical and petrochemical infrastructure. In the fossil power business, the continued growth in demand for electricity as well as grow ing environmental concerns should provide tremendous opportunities. With many reactors reaching 20 years of opera tion, our commercial nuclear business will grow as we provide service and components to B&.W reactors and to an increasing number of our competitors' reactors. And finally, our U.S. government operations are positioned to continue their current level of business as we expand the products and services we offer our traditional customers and develop new customers who demand our ability to solve tough manufacturing problems. While the past few years have been rough going for McDermott International, I am proud of our Company. I am grateful for the support of our employees, who persevered to bring us to the threshold of what I believe will be the most exciting decade in the Company's history, and I am especially grateful to our shareholders, who have supported us so strongly through the past several years of weak markets and disappointing performance. Robert E. Howson Chairman of the Board and Chief Executive Officer July 1990 3 POWER GENERATION SYSTEMS AND EQUIPMENT Results For The Fiscal Year Ended March 31, 1990 1989 Revenues in c/ioitsaruis $ 1,747,110 $1,576,928 Operating Income 27,908 48,661 Backlog 2,548,545 3,002,077 The higher revenues for this segment reflect improve ments from the Power Generation Group and the Defense and Nuclear Power Group, as well as from Diamond Power Specialty Company. The lower operating income was principally due to a provision of approximately $27.2 million to repair first-of-a-kind heat-pipe heat-exchangers at certain utility and industrial sites. The operating income was also reduced by higher selling, marketing, and adminis trative expenses, higher workers' compensation and general liability costs, and higher provisions for environ mental clean-up costs. The performance of this segment during fiscal 1990 reflected an increased demand for services from utilities and other customers, continued demand for industrial boilers, and the supply of components to the U.S. Navy. This segment includes all of Babcock &. Wilcox and its subsidiaries. The operations included in this segment are the Power Generation Group, the Defense and Nuclear Power Group, Hudson Products Corporation, Power Computing Company, Diamond Power Specialty Company, and the Tubular Products Division. A Move into Space During fiscal 1990, Babcock &. Wilcox was .^elected as a member of the team that will build the advanced solid rocket motor (ASRM) for NASA. B&.W will manufacture the casings for the new motors, which NASA is scheduled to begin using in 1995. The U.S. Congress has approved 'unding for the ASRM program, and we expect B&.W will sign contracts during fiscal 1991. New Emphasis for Government Work In order to pursue the ASRM project and other space- and defense-related work, our Defense and Nuclear Power Group formed the Aerospace and Ordnance Division. In addition to the ASRM program, the division will be involved in the manufacture of metal parts, subassemblies, and warheads for torpedoes and missiles used by the U.S. departments of Energy and Defense. In fiscal 1990, we delivered a prototype warhead for the Navy's MK-48 ADCAP torpedo and were selected as a second source of supply for these warheads, as well as for MK-50 torpedo warheads. The division also began deliveries of HARM and Phoenix missile warheads for the 'Department of Defense, and continued full-scale engineering development of 120 millimeter high-explosive anti tank ordnance for Honeywell Inc. We continued to be the leading supplier to the U.S. Naval Reactors Program, delivering critical Seawolf submarine components as well as com ponents for aircraft carriers and other submarine programs from both our Nuclear Equipment Division and the Naval Nuclear Fuel Division. Service Continues to Grow The segment's business for fossil customers included improvement projects, manufacture and supply of replacement parts for boilers, and construction services. R>r nuclear utilities, the segment's business included refueling, and steam generator inspection, repair, and replacement. These activities continued to grow in fiscal 1990 and accounted for about 35 percent of the segment's revenues. B&.W Nuclear Service Company, our new joint venture with a U.S. subsidiary of Framatome SA., won long-term contracts with key customers, including a four-year contract for service to seven nuclear units operated by Duke Rawer Company. ;> y ^ j|' Record Operations for Nuclear Plants A Nuclear plants with B&W-designed reactors were recognized for their operating efficiency in 1989. In a survey by Nucleonics Week. General Public 4 FAR LEFT: BetW Nuclear Service Company provides remote inspection and repair services to nuclear utilities. LEFT: American, Inc. provides construction equipment and services, such as the erection of this boiler for a Weyer haeuser pulp and paper mill. LEFT: Orders for B&W's baseload, coal-fired utility boilers, like the. 44Q-megu>att unit at the San Miguel station near San Antonio, Texas, are expected to grow in the 1990s. ABOVE: The pressure vessel (with the boiler installed) for the Tidd PFBC project traveled by river from B&Ws Me. Vernon, Indiana, facility to the Ohio utility station. I ABOVE: Inspecting fuel Tods B<?W Fuel Company, a joint venture with U.S. subsidiaries of three French companies, which refuels nuclear utility plants designed by both BsW and our competitors. Utilities' Three Mile Island, Unit 1, was ranked first in the world with a gross capacity factor of >ust over 100 percent for the year. Duke Power's Oconee Nuclear Station, with hree B&.W reactors, produced more electricity han any other U.S. nuclear plant between 1984 ind 1989, according to a survey by the Utility }ata Institute. important Industrial, Waste Projects During the year, B&W completed pulp and paper projects in the United States worth $150 million as those projects continued to provide an important market. We were awarded new pulp and paper projects in :he United States and Canada worth over $200 million, and B&W's Canadian operations moved coward completing the installation of a process recovery boiler for Howe Sound Pulp & Paper Ltd. m British Columbia that will be the largest in the world, sufficient to process 2,000 tons a day of pulp. We also managed the successful start-up of the Palm Beach County waste-to-energy facility in Florida and will operate the plant under a long:erm contract. The plant bums 2,000 tons a day of municipal solid waste to produce steam for 60 megawatts of electricity. To improve our scope of -upply for waste-to-energy projects, we acquired the issets of National Ecology, Inc., a company which .iuilds equipment that separates combustible waste rom recyclable materials and offers us an entry nto the significant new market that recycling :reates. 3oaWFired Projects Move Ahead \lthc^f|h the market for new base-load boilers imains flat, B&.W worked toward completing averal important projects, each of which provides echnologies for controlling emissions from the ombustion of coal. At the Zimmer plant, an uncompleted nuclear cation being converted to a coal-fired plant for American Electric Power (AEP), Dayton Power &. -ight, and Cincinnati Gas and Electric, we ielivered the largest single-boiler wet scrubber vstem in the world. We also supplied the 1,300-megawatt boiler for Zimmer and installed the toiler, the scrubber, and the precipitator.. We completed and shipped the pressure vessel nd boiler for the first pressurized fluidized-bed combustion (PFBC) system in the United States. Fhe 70-megawatt system, designed by Asea Babcock, our partnership with a subsidiary of Asea Brown Bovari, Inc., is being installed at AEP's Tidd station in Ohio as part of a pilot project be ing undertaken with the utility, the U.S. Depart ment of Energy's Clean Coal Program, and the Ohio Coal Development Office. In Illinois, we brought on-line our first coal-fired circulating fluidized-bed boiler, which we will operate for Lauhoff Grain Co. We are moving toward completion of another coal-fired circulating fluidized-bed boiler at a plant in Ebensburg, Pennsylvania, that we will own and operate. This boiler will bum waste coal to produce steam and electricity. Outlook Three factors dominate the outlook for our Power Generation segment: increasing consumption of electricity, environmental legislation, and the U.S. defense budget. Currently, power producers are meeting much of the growing demand by adding gas turbines for peak capacity, a market in which we provide con struction and engineering services. However, we believe a significant number of new, coal-fired baseload plants will be ordered in the period beginning in about two years and lasting through the rest of the 1990s. In the meantime, there will be a growing market for service, which we will continue to provide both for fossil and nuclear power plants. Federal Clean Air legislation, which is pending, will provide tremendous opportunities for B&W, based on the percentage of scrubbers we have tradi tionally supplied to U.S. utilities. Finally, the U.S. defense budget appears to be diminishing. Several of our military programs have been scaled back or deleted. However, our only competitor for the supply of nuclear fuel to the U.S. Navy has announced its intention to drop out of the business, so we expect to become the single source supplier. We will also attempt to consolidate our position in other defense-related markets, and we expect to expand the range of government programs in which we participate, especially those that require precision manufacturing and quality systems. We believe this thrust will allow the Company to continue its success in U.S. government work. 6 LEFT: Ontario Hydro's Lakeview generating station near Toronto, u>her BfirW's Canadian operations are performing a major rehabilitation project. BELOW: BeW built the largest process recovery boiler in the world for Howe Sound Pulp & Paper Limited in British Columbia. ABOVE; Retrofits of scrubbers such as these at the BeW~ built Four Comers station in New Mexico, will provide a significant market with the passage of federal Clean Air legislation. RIGHT: Boiler components be ing shipped from BffW's West Point, Mississippi, facility for a palp and paper project. il MARINE CONSTRUCTION SERVICES Results For The Fiscal Year Ended March 31, 1990 1989 Revenues In thousands $ 909,935 $ 593,166 Operating Loss (61,200) (60,948) Backlog 1,619,236 650,546 Revenues for this segment were higher than in fiscal 1989, primarily as a result of increased utilization of marine vessels and increased fabrication and engineer ing activity. The operating loss increased due to the recognition of higher bid expenses and general and administrative costs, costs associated with the pursuit of new work, and increased employee benefit costs. These costs were offset by improved operating results, both domestic and foreign, in marine and engineering operations, and improved results in foreign fabrication activities. A U.S. Navy torpedo test-craft built at McDermott Shipyard undergoes sea trials. The fiscal 1990 results indicate a turning point for the operations in this segment. Revenues and back log grew substantially as customers for our marine construction services began new projects. The Marine Construction Services Segment includes the worldwide operations of McDermott Marine Construction, as well as McDermott Project Management and Hudson Engineering, divisions of the Project Management Group. Improvements in Backlog At March 31, 1990, this segments backlog was the highest since fiscal 1981. Our marine construction operations have received a number of new contracts for traditional structures, and several prospective jobs were pending at the end of fiscal 1990. Among the new projects included in our marine backlog were: The fabrication and installation of facilities for an offshore sulfur mine in the Gulf of Mexico under a $250-million contract with an affiliate of Freeport-McMoRan Inc. When complete, this will be the largest single offshore development in the world. The fabrication of two Gulf of Mexico platforms for Freeport-McMoRan affiliates under contracts valued at $37 million. The fabrication of Occidental Petroleum (Caledonia) Limited's Piper Bravo and Saltire platforms for the North Sea, and the installation of the platforms by our HeereMac joint venture. Total value to McDermott is about $200 million. The fabrication of a large structure and laying of pipelines off Australia for Woodside Offshore Petroleum Pty. Ltd. The facility will be installed by HeereMac. Total value of the contracts is about $164 million. The fabrication and installation of platforms and pipelines off China for ACT Operators Group (AGIP, Chevron, and Texaco) under a contract worth about $100 million to our consortium with a Chinese partner. 8 LEFT: DB 50 (rear) and DB 51 li/t-launch Mobil's 442-fooi South Marsh island /ache:. LEFT: Loading out Texaco's 620`foot Kilauea /acket in Mav 1989, from the Morgan City fabrication yard for instal lation in the Gulf of Mexico. A., a A rmm .tiiigsK}'*-'- m,i- -, tefV .4^r i b ; - jjt; ABOVE: McDermott Scotland's automated pipe mill. The Ardersier yard is among the most efficient in the world. LEFT: DB 50 installing the 2,500-ton deck for the Green Canyon central production platform associated with Conoco's Joliet TLP project. Space Added as Fabrication Work Grows As worldwide fabrication markets have improved, the operations in the marine construction segment have added space and made plans to improve capabilities. In March 1990, McDermott agreed to lease the Harbor Island fabrication yard owned by Brown &. Root, a subsidiary of Halliburton Company. The vard, located near Corpus Christi, Texas, is an excellent site for deepwater fabrication and will be the assembly site for Exxon's Alabaster jacket, which we were awarded after the end of the fiscal year under a $27-million contract. In Southeast Asia, we are upgrading our yard on Batam Island, Indonesia, to increase capacity for heavy, deepwater structures and to fabricate com ponents for export to other McDermott operations. Upon completion of this work, the Batam yard will be the premier fabrication facility in that part of the world. Commitment to Defense Work The first of four small waterplane area twin hull (SWATH) ships we are building for the U.S. Navy was christened shortly after the end of the fiscal year, and work is continuing on the three other SWATH vessels. The shipyard also launched three torpedo test craft for the Navy and is preparing to launch the fourth. The ships are scheduled for delivery in fiscal 1991. The Morgan City fabrication yard continued to fabricate modules for Navy ships under subcontract to Newport News Shipbuilding Company. Hudson Engineering Pursues EPC Work Hudson Engineering Corporation was assigned to .he McDermott Project Management Group to more actively pursue engineering-procurement:onstruction (EPC) contracts for onshore facilities, mch as chemical and petrochemical plants. Hudson was awarded a $l2-million contract for the construction of an onshore gas processing plant in China and as part of the project arranged finan cing through the U.S. Export-Import Bank for the entire $50-million development. In addition, at the end of the fiscal year, Hudson had nearly completed a 150-ton-per-year plastics plant in Bayport, Texas, valued at $12 million. Hudson was also awarded a $40-million EPC contract for a 49-megawatt combined cycle cogeneration plant in New York state. The plant will use a gas turbine to produce electricity and gives Hudson an entry into a market that should be very active over the next several years. During the year, Hudson completed engineering of BP's 1,040-foot Mississippi Canyon jacket. McDermott Marine Construction will install the structure. Marine Work Reaches Record Depths McDermott's marine operations set depth records during the year on three pipelines. We installed two pipelines that reached depths near 1,400 feet for Conoco Inc.'s Joliet project, and a third pipeline near the same depth for Shell's Bullwinkle project. These are the deepest pipelines in U.S. waters. The company also installed a unified connector skid for the Joliet project in 1,070 feet of water using saturation diving. The installation required the deepest working dives recorded in the Gulf of Mexico. Outlook The outlook for McDermott's marine construction operations is increasingly bright. During the current fiscal year, the demand for oil and natural gas should continue to grow. The non-OPEC supply should peak, and OPEC will apparently move to increase its production capacity. Also, environ mental concerns should create a growing demand for clean-burning natural gas, hastening the end of the surplus in the United States. By region, we expect the following developments in our marine markets. In the Gulf of Mexico, the market for gas and oil projects should grow, providing more opportunities for our marine fabrication facilities. The addition of the Harbor Island yard and the former Avondale yard (acquired in 1988) to our Morgan City, New Iberia, and Gulfport yards should provide adequate space for the anticipated increase in fabrication work. In the United Kingdom sector of the North Sea, where McDermott has traditionally competed, we expect the market to make a strong turn upward as oil companies plan capacity increases and as gas markets are deregulated. In the Middle East and Southeast Asia, markets should also strengthen as OPEC nations begin to increase capacity, refurbish and rebuild facilities, and start programs for new developments. During fiscal 1991, the markets for our marine vessels will remain low. However, the worldwide market for transportation and installation of off shore structures should improve as fabrication of jackets and decks is completed. 10 LEFT: A nighttime deck installation for a FreeportMcMoRan project in the Gulf of Mexico. BELOW: The shear-leg crane lifting the Victorious--the first V.S. Navy SWATH ship, the first Navy ship to be launched by crane, and the first Navyship to be awarded to McDermott Shipyard. LEFT: Hudson Engineering Corporation designed the fixed drilling (left) and central production platforms for Conoco's Joliet project, both in 600 feet of water. LEFT: High-strength steel modules for JJ.S. Navy aircraft carriers are being fabricated at the Morgan City fabrication yard. TECHNOLOGY TODAY FOR TOMORROW'S WORLD dcDermott technology provides distinctive answers )r distinctive problems: Systems to meet the orld's increasing demand for energy. Solutions for nvironmental problems. State-of-the-art manufaciring and engineering for products that work from :ie depths of the ocean to the edge of space. TCHNOLOGY FOR ENERGY ram the production of hydrocarbons to the eneration of power from steam, our goal is to rovide energy products and services that are 'liable and technologically superior. -- ! IT Deepwater CLPs and CCLPs: To produce from deepwater sites, we offer our oil and gas customers our steelsaving composite-leg platform and compliant composite-leg platform designs--concepts that use our traditional bottom-founded fabrication and in stallation technologies, but that require 20 percent less steel in 1,400 to 1,600 feet of water and save an even larger percentage at greater water depths. Our studies show light-weight CLPs are practical to 1,600 feet. CCLPs, which would flex with wind, wave, and current, appear to be practical and eco nomically attractive from 1,600 to 3,000 feet--over twice the depth of the deepest fixed platform. TLPs: Today, two tension-leg platforms are operating, and McDermott helped complete both--building the 17,400-ton deck for one and installing deepwater pipelines for the other. In the future, our goal is to supply turnkey services for TLPs to help our customers develop reserves of oil and natural gas in waters that just a few years ago were too deep to conquer--waters not hundreds, but thousands of feet deep, where fixed pjgifbrms would be impossible. These floating platforms, anchored to the sea floor by steel tendons, are already planned for depths near 3,000 feet and may someday work in waters well over 5,000 feet deep. Our automated engineering and fabrication technologies, our skill in modular construction, our experience in marine installation, and our expansive fabrication yards give us unmatched capabilities to efficiently and economically build TLPs and other floating systems, as well as CLPs, CCLPs and tradi tional fixed platforms. -OVE: Compliant composite towers can be installed in iters 3,000 feet deep, over ice as deep as the deepest ed plat/orm today and twice tali as the tallest building the Neu> York skyline. RIGHT: McDermott built the 17,400-ton deck for Conoco's Hutton TLP in the North Sea in a single module. Electric Poiver PFBC: Pressurized fluidized-bed combustion provides an economical, efficient, and clean source of steam for the generation of electricity. The United States' first PFBC system, built by B&.W and designed by Asea Babcock, is being installed in a demonstration project at the Tidd power plant in Ohio, part of a program sponsored by AEP, the U.S. Department of Energy, and the Ohio Coal Development Office. PFBC mixes limestone with coal during combus tion to reduce sulfur dioxide by more than 90 percent--even if the coal has a high sulfur content. Its low-temperature fluid-bed process reduces nitrogen oxide emissions by as much as 50 percent. It also generates power in a relatively small facility. Pressurized combustion reduces size and cost relative to a conventional system, and combined-cycle technology improves efficiency. For example, the Tidd plant will use 10 percent less coal than a conventional facility of the same capacity. CFBC: Other B&AV fluidized-bed technologies help our customers bum difficult fuels. For instance, when the town of Ebensburg, Pennsylvania, wanted to produce energy from coal-mine waste, Babcock &. Wilcox provided the solution: a circulating fluidized-bed combustion system. Our CFBC boilers not only consume hard-tobum fuels, they also give our customers lowemission plants that are inexpensive to operate. As part of our commitment to continue improving CFBC technology, we have installed a 2.5-megawatt facility at our research center in Alliance, Ohio, to test solid fuels. ABOVE: At the Tidd plant, combustion trill be pressurized in this heavy steel vessel. The boiler is inside the 70-foot high, 44-foot diameter vessel. RIGHT: The 2-5-megawatt CFBC facility at the Alliance Research Center will test solid fuels. 13 Pulverized Coal: Small generating stations meet mly part of the growing demand for electricity; oon, the United States will need large new baseoad stations incorporating boilers fired by pulverized oal like the one we're installing at the Zimmer ration in Ohio. The station will use proven B&.W technology, ncluding a boiler that will produce steam for :,300 megawatts of electricity, equal to the largest 'Oilers operating today. These B&.W boilers have a ound reputation for reliability--one of them >perated for a record 607 consecutive days at an AEP plant in West Virginia before being shut lown for routine maintenance. Inspection and Repair: Our technologies are not only important in making plants operate efficiently and cleanly, they also help plants stay in service longer and perform reliably. At our research and development centers, we perfect high-technology inspection and repair systems, such as the NOTIS monitor, which measures oxide thick nesses on tubes deep in a boiler. Once these systems are proven, our service divi sions use them to help our customers get the most from their equipment. For example, we've combined our remote inspection technology with our know ledge of metals and welding to create a unique way to repair nuclear steam generator tubes. Plugging, the traditional solution, reduces the capacity of the generator and the plant's ability to produce electricity. Our solution allows the tube to remain in service by welding a sleeve over the defective area. First we use our remote inspection equipment to find the flaw; then we insert a sleeve into the tube until it covers the flaw. Finally--in a space threequarters of an inch in diameter--we detonate a precisely measured explosive, strong enough to weld the sleeve to the tube but not so strong as to rupture the tube. BeW bar proven technology for the construction of large pouter plants and environ* mental controls. At top is the 1,300-megawatt Zimmer station. Below is the instal lation of scrubber modules at Zimmer. TECHNOLOGY FOR THE ENVIRONMENT Many new McDermott technologies are being developed specifically to protect the environment by finding better ways to clean emissions from solid fuels, to reduce solid waste, and to transport and store nuclear fuel. The Clean Coal Program: While coal is the primary fuel for generating electricity, plants that bum it must meet strict guidelines for emissions. In the 1990s, those guidelines will grow even stricter. B&.W has been developing clean ways to bum coal since the 1970s and has participated as a prime contractor in every phase of the U.S. Department of Energy's Clean Coal Technology program, the only company with that distinction. Our technologies clean coal during combustion (PFBC and CFBC) and after combustion (wet and dry scrubbers and sorbent injection systems), both in existing power plants and in new power plants. Scrubbers: While technologies like PFBC and CFBC are controlling emissions in a new genera tion of power plants, scrubbers are the workhorse for the older generation. B&W scrubbers are known for their reliability, as well as their effectiveness. To reduce emissions at the Zimmer station, B&.W designed and built the largest single-boiler wet-scrubbers in the world. 14 LEFT: Our technologies for remote inspection and repair of nuclear steam systems help our customers operate their plants more efficiently. BELOW: Thirty percent of the steam generated by the com bustion of municipal solid u'aste in the United States comes from BeW boilers, such as those at the Palm Beach County waste-to-energy facility. which will remove 91 percent of the sulfur dioxide from the plant's flue gas. In Canada, Ontario Hydro has selected B&.W exclusively to develop a new sulfur dioxide scrubber technology called the dual alkali process. Though not yet in operation, many observers believe this technology shows promise of being superior to conventional sulfur dioxide scrubbers. Waste-to-Energy: Safe and effective disposal of municipal solid waste ranks with clean air as one of the world's most important environmental needs. B&.W has long been a leader in building boilers that bum garbage to make steam, reducing the volume of trash substantially, destroying many pollutants, and producing electricity in the process. B&.W boilers bum as much as 1,000-tons-a-day of waste--everything from old newspapers to lawn clippings to old tires. Thirty percent of the municipal solid waste used to produce energy in the United States is burned in B&W boilers, and B&.W boilers hold industry records for the amount ot solid waste handled in a year. Our construction expertise gives us turnkey technology for waste-to-energy plants, such as the state-of-the-art facility we've completed in Palm Beach County, Florida. Spent Nuclear Fuel Storage: Nuclear utilities in the United States are required to store spent fuel at their own sites, and storage space is critical. To help our nuclear customers get maximum utilization from this space, we've developed Fuel MasterTM. This remotely-operated system removes spent rods from used fuel assemblies and arranges them in a pattern that reduces space requirements by half. It then shears the remaining pieces of the assembly into bits that are stored compactly in drums. 15 TECHNOLOGY FOR MANUFACTURING To provide our customers with state-of-the-art equipment and facilities, we have developed unique technologies to manufacture our products, from iarge offshore structures to small ordnance com ponents. Modularization: As designs become more complex, erection will grow more complicated and expensive, making schedules increasingly critical. In these circumstances, modular construction will create tremendous advantages for industrial development. McDermott is the world leader in modular technology. For offshore projects, we routinely build complicated modules that weigh thousands of cons--our largest weighed over 17,000 tons-- transport them hundreds" of miles and install them it sea. For power generation projects, we save time and noney for our customers by building large modules in the controlled environment of our shops instead of at the construction site. Substantial portions of both the Zimmer and Tidd stations (including the seven-story Tidd pressure vessel) were completed and installed in modules. In the future, we will build entire new industrial complexes in modules and transport them by water to installation sites, often in remote inland areas where harsh climate, small populations, and the lack of an industrial infrastructure would make on site construction nearly impossible. Lifting and Transportation: Our experience in modularization has made us a leader in lifting capacity. We install heavy structures offshore, move them from place to place on shore, and lift them between the shore and the water. Our derrick barges can lift as much as 13,000 tons offshore, and our unique barge-mounted shear-leg crane can work offshore or on waterways far inland to lift objects up to 5,000 tons. This capability gives McDermott unique versatility. Fabrication: Our fabrication technologies allow us to manufacture products to tolerances within thousandths of an inch, whether they are as large as components for the U.S. Naval Reactors Program, which requires us to weld high-strength steel several inches thick, or as small as the cap on a nuclear fuel rod, which requires an air-tight weld the size of a pinpoint. We use our technologies to machine exotic metals into precise shapes without compromising the strength of the material; to analyze materials and processes; to devise unique machine tools; and to create state-of-the-art inspection and nondes tructive testing systems. Our experience in the Naval Reactors Program, as well as in other programs with rigorous demands for quality, is the key to our participation in a project that opens a new vista for McDermott--the advanced solid rocket motors for the space shuttle. B&W will manufacture the casings for the motor to the exacting specifications demanded for the safety of the shuttle and the durability of the reusable motor. The components will be precisely manufactured using materials capable of withstand ing the unique stresses generated by the launch and the return of the rocket motor to Earth. To ensure the components are of the highest quality, we will use and develop state-of-the-art inspection and testing systems. TECHNOLOGIES FOR TOMORROW Technology has opened important new paths for McDermott International, paths that will take us into new markets and a new century, beyond the surface of the Earth and the demands of today. In our research centers, we are working on processes to manufacture components entirely from weld wire, methods to form metallic heat exchangers using air pressure, programmable systems to control welding, and sensors and controls that will improve quality and productivity in a host of manufacturing processes. In components built with watchmaker precision and in structures standing over 1,000 feet tall; in products that contain combustion at well over 3,000 degrees Fahrenheit and products that endure the violent punishment of an ocean storm; in systems that produce energy from unusual fuels and in systems that produce products of uncommon quality, technology sets McDermott apart. Out ability to manufacture large components (such as the one above for a replacement nucleaT steam generator being assembled at BsW's Cambridge, Ontario, facility) to precise specifications is key to our participation in NASA's advanced solid rocket motor program. The first of these rockets will be used in space shuttle launches beginning in the mid-1990s. 17 A RECORD OF RELIABILITY AND ACCOMPLISHMENT I~he performance of B&W-designed power planes and the achievements of McDermott Marine Construction demonstrate the Company's commitment to technology. B&.W-manufactured CANDU nuclear steam generators have the lowest tube failure rate in the world--over 1,000 times better than the nearest competitor. Our 1,300-megawatt fossil boilers are consistent leaders in efficiency and performance--the unit we built for AEP's Mountaineer station generated power for a record 607 consecutive days. A waste-to-energy plant in Baltimore operated by a subsidiary of Wheelabrator Technologies, Inc. and powered by three B&.W boilers set industry records in 1989 for the amount of municipal solid waste handled. In 1989, GPU's B&W-designed Three Mile Island, Unit 1, was the most productive nuclear plant in the world, generating at a gross capacity factor of just over 100 percent. From 1984 to 1989, Duke Power's Oconee Nuclear Station, with three B&.W reactors, was the most productive U.S. nuclear utility station and the fourth most productive utility station in the United States. In a Gulf of Mexico test co-sponsered by McDermott and several other companies. McDermott drove 60-inch piles into the sea floor in 3,300 feet of water, the deepest water where piles of that sue have ever been driven. McDermott divers made the deepest working dive in the Gulf of Mexico, reaching 1,070 feet, when they installed equipment and tested a pipeline for Conoco Inc.'s Joliet project. To manufacture components for U.S. Navy air craft carriers, McDermott's Morgan City fabri cation yard welds high-strength steel according to military specifications, a unique accomplish ment among U.S. marine construction yards. In 1989, McDermott's 4,400-ton capacity DB 50 and 3,000-ton capacity DB 51 lift-launched a 442-foot jacket, the largest ever launched in that manner, which saved about 600 tons of steel. McDermott Shipyard built the U.S. Navy's first SWATH ship and launched it with a crane, a method that previously had never been used to launch a Navy ship. 18 Officer-Directors Robert E. Howson5 Chairman of the 8oard and Chie/ Executive Officer Directors John A. Lynott5 Executive Vice President and Chief Financial Officer DIRECTORS AND MANAGEMENT 'Audit Committee 3 Directors Nominating Committee 3 Compensation Committee 4 Emoloyee Benefits Committee iFmance Committee * Technical Committee Thomas D. Barrow 2'3,s'6 Retired Vice Chairman of the Board. The Standard Oil Company integrated petroleum company John F. Bookout 2'3'> Retired President and Chief Executive Officer. Shell Oil Company integrated petroleum company Philip J. Burguieres1'6 Chairman of the Board, President and Chief Executive Officer. Panhandle Eastern Corporation transportation and sale of natural gas James E. Cunningham1'4* Retired Chairman of the Board and Chief Executive Officer. McDermott International, Inc James L. Dutt1,2'4 Former Chairman of the Board and Chief Executive Officer, Beatrice Companies. Inc produce/ of food, cnem.ca'. and manufactured prccucs James A. Hunt1'2,3* Director, Curragh Resources Canadian natural resources company William McCollam, Jr.1,4,6 Energy Management Consultant; President Emeritus. Edison Electric Institute association of investor-owned electric utilities J. Howard Macdonald3,4,5 Chairman of the Board and Chief Executive Officer. NatWest Investment Bank investment banking John A. Morgan1*2'3'5 Partner. Morgan Levns G inerts & Ann investment bankxg William T. Seawell2,3'4,s Retired Chairman of the Board and Chief Executive Officer. Pan American World Ajrways. Inc commercial air transporation Walter B. Shaw1,3,4 Retired Chairman of the Board and Chief Executive Officer. Turner Corporation general construction contractors John B. Tweedy1'2'4 Attorney and Former Executrve Vice President and Director. Tosco Corporation oil refining and marketing Executive Operating Committee Robert E. Howson, Chairman John P. Eckert William L. Higgins, 111 John A. Lynott Joe J. Stewart Babcock & Wilcox John P. Eckert Senior Vice President and Group Executive. Defense and Nuclear Power Group William M. Farrell Vice President and General Manager. Aerospace and Ordnance Division Charles W. Pryor Vice President and General Manager. BiW Nuclear Technologies Roger E. Tetrault Vice President and General Manager. Naira' Nuclear Fuel Division Paul E. Perrone Resident, Diamond Power Specialty Company Joe J. Stewart Senior Vice President and Group Executive. Power Generation Group George J. Clessuras Vice President and General Manager, Energy Services Division E.O. (Neal) Hooker Vice President and General Manager, Fossil Power Division Vice President and General Manager, Americon, Inc. R.J. (Reg) Thibeault Vice President and General Manager, BiW Construction Company Paul P. Koenderman Vice President and General Manager, Babcock & Wilcox International John E. Pollock Vice President, Power Generation Sales and Sen/ice E. Allen Womack, Jr. Vice President. Research & Development and Contract Research Divisions McDermott Marine Construction William L. Higgins, III Senior Vice President and Group Executive, McDermott Marine Construction Alex H. Cortese Vice President. Marine Engineering and Estimating Gary W. Drinkwater Vice President and General Manager, Domestic Operations Robert J. Machen Vice President and Group Executive. Southeast Asia and Egypt Operations James J. Wildasin Vice President and General Manager, London Engineering Project Management Frank B. Fugate Senior Vice President and Group Executive. Project Management Group Sidney P. Victory President, Hudson Products Corporation Worldwide Marketing Robert D. Miller Vice President and Director, Worldwide Marketing Anton Salem Vice President, Worldwide Marketing Staff Organization Frank C. Allen, Jr. Vice President and General Counsel. Corporate Secretary John A. Lynott Executive Vice President and Chief Financial Officer Thomas A. Henzler Vice President. Tax Administration Edmund A. Robidoux Vice President and Controller Robert A. Joltiff Treasurer Richard T. Tyner President, McDermott International Investments Co., Inc George A. Stoddart Vice President. Financial Relations Richard E. Woolbert Vice President and Chief Administrate Officer 20 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31, 1990 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commision File Number 1-8430 McDermott International, inc. (Exact name of Registrant as specified in its Charter) Republic of Panama (State or Other Jurisdiction of Incorporation or Organization) 1010 Common Street New Orleans, Louisiana (Address of Principal Executive Offices) 72-0593134 (I.R.S. Employer Identification No.) 70112-2401 (Zip Code) Registrant's Telephone Number, including area code (504) 587-5400 Securities Registered Pursuant to Section 12(b) of the Act; Title of Each Class Common Stock, SI.00 Par Value Rights to Purchase Common Stock (Currently Traded with Common Stock) Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (I) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 0 No The aggregate market value of voting stock held by non-affiliates of the registrant was $1,200,593,899 as of May 10. 1990. The number of shares outstanding of the Company's Common Stock at May 10, 1990 was 43,957,881. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the 1990 Annual Meeting of Shareholders is incorporated by reference into Part III of this report. 1 McDermott international, inc. INDEX - FORM 10-K PART I Items 1. & 2. BUSINESS AND PROPERTIES A. General B. Power Generation Systems and Equipment General Foreign Operations Raw Materials Customers and Competition Backlog Factors Affecting Demand C. Marine Construction Services General Foreign Operations Raw Materials Customers and Competition Backlog Factors Affecting Demand D. Patents and Licenses E. Research and Development Activities F. Insurance G. Employees H. Government Regulations I. Intercompany Agreement J. Discontinued Operations Item 3. LEGAL PROCEEDINGS AND PROPOSED TAX DEFICIENCY Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PAGE 4 o 7 7 7 8 8 8 10 iO 10 10 11 11 11 11 12 12 13 13 13 14 2 PART n Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Item 6. SELECTED FINANCIAL DATA Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OT FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations 1990 VS 1989 1989 VS 1988 Effect 0/ Inflation and Changing Prices Liquidity and Capital Resources Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Company Report on Consolidated Financial Statements Report of Independent Auditors Consolidated Balance Sheet - March 31, 1990 and 1989 Consolidated Statement of Income (Loss) and Retained Earnings for the Three Fiscal Years ended March 31, 1990 Consolidated Statement of Cash Flows for the Three Fiscal Years ended March 31, 1990 Notes to Consolidated Financial Statements Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE part m Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 11. EXECUTIVE COMPENSATION Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Exhibit 11 - Statement Re Computation of Per Share Earnings (Loss) Exhibit 22 - Significant Subsidiaries of theRegistrant Exhibit 24 Consent of Independent Auditors Exhibit 28 Additional Exhibits Signatures of the Registrant Signatures of Directors PAGE 14 15 16 17 18 18 20 21 22 24 25 26 43 44 44 44 44 44 46 46 47 48 50 51 3 j PART I Items 1. and 2. BUSINESS AND PROPERTIES A.GENERAL McDermott International, Inc. ("International'') was incorporated under the laws of the Republic of Panama in 1959. International is the parent company of the McDermott group of companies, which includes McDermott Incorporated, international's Common Stock and McDermott Incorporated's Series A S2.20 Cumulative Converti ble Preferred Stock and Series B $2.60 Cumulative Preferred Stock are publicly held. Unless the context otherwise requires, hereinafter "International'' will be used to mean McDermott Interna tional, Inc., a Panama corporation; the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and its consolidated subsidiaries, joint ventures and partnerships; and "McDermott International" will be used to mean the consolidated enterprise. McDermott International operates in two business segments: Power Generation Systems and Equipment which principally serves the electric utility industry and the U.S. Government. Marine Construction Sendees which principally serves the oil and gas industry for offshore development drill ing and for the production and transportation of oil and gas on a worldwide basis. During fiscal 1990, McDermott International sold its Bailey Controls operations, which were previously reported in its Power Generation and Equipment segment, and has an agreement to sell its seamless tubular line of business, which was discontinued in fiscal 1987. During fiscal 1988, McDermott International sold its Insulating Products Group, which was previously reported in its Engineered Materials segment and decided to discontinue its business previously reported in its TYading segmem. (See Note 2 to the consolidated financial statements for additional information with respect to discontinued operations.) The business of the Power Generation Systems and Equipment segment is conducted primarily through a sub sidiary of McDermott Incorporated, The Babcock & Wilcox Company ("B&W"), which was acquired in 197$. McDermott International has a continuing program of reviewing joint venture, acquisition and disposition opportunities. The following tables show revenues and operating income (loss) from the continuing operations of McDermott International for the three fiscal years ended March 31,1990. See Note 11 to the consolidated financial statements for additional information with respect to McDermott International's business segments and operations in different geographic areas. 4 REVENUES AND PERCENT OF REVENUES (Dollars in Millions) For Fiscal Years Ended March 31, 1990 1989 1988 Power Generation Systems and Equipment Marine Construction Services Intersegment Transfer Eliminations Tbtal S 1,747.1 910.0 (12.4) S 2,644.7 66% 34% 100% S 1,576.9 593.2 (3.3) $ 2,166.8 73% 27% 100% S 1,477.8 642.1 (1-1) S 2,118.8 70% 30% 100% OPERATING INCOME (LOSS)C1) (Dollars in Millions) For Fiscal Years Ended March 31, 1990 1989 1988 Power Generation Systems and Equipment $ 27.9 $ 48.7 Marine Construction Services(61.2)(60.9)(93.3) $ 68.8 Tbtal$ (33.3)$ (12.2)$ (24.5) (1) Reconciling items between Segment Operating Loss and Operating Loss in the Consolidated Statement of Income (Loss) and Retained Earnings are General Corporate Expenses. 5 B. POWER GENERATION SYSTEMS AND EQUIPMENT GENERAL The Power Generation Systems and Equipment segment, which business is primarily conducted through B&W, is a supplier of individually engineered complete fossil fuel and nuclear steam generating systems, and nuclear fuel assemblies for the electric utility industry, as well as fossil fuel steam generating systems for industrial processes and power generation. This segment also provides replacement parts and engineered modifications for existing fossil and nuclear steam generating systems, and specially engineered accessories and components, such as air heaters and cleaning systems for heat transfer surfaces. It also supplies process recovery boilers and pollution control systems for the process and utility industries and air-cooled heat exchangers. It is also engaged in the erection of utility plants and industrial facilities and the repair and alteration of such existing equipment. In addition, it provides welded tubing for various mechanical and pressure applications for the automotive, machinery, fabricated metal and power generation industries. No new contracts for domestic nuclear steam generating systems have been awarded for a number of years. As a consequence, the commercial nuciear power generation business consists of field repair and refurbishment services, fuel assemblies for refueling and engineering and computer sendees for existing nuclear reactors. This segment conducts its fuel-assembly business through B&W Fuel Company, a 51%-owned partnership which was formed in fiscal 1989 with Virginia Fuels, Inc., a company formed by the U.S. subsidiaries of three French companies, and its commercial nuclear service business through B&W Nuclear Service Company, a 50%-owned partnership formed in fiscal 1990 with Framatome Services Company, Inc., a U.S. subsidiary of a French company. In addition, this segment is actively involved in the market for providing power through cogeneration, refusefueled power units, and other small power plants with primarily nontraditional fuel-burning capability. It is partic ipating in this market as an equipment supplier, an equity holder and as an operations and maintenance contractor. The Power Generation Systems and Equipment segment also provides nuclear fuel assemblies and nuclear reac tor components to the U.S. Navy for the Naval Reactors Program. This business is an important part of this seg ment's results. Revenues from the U.S. Government related to this activity were approximately 14%, 15% and 18% of McDermott International's total revenues for fiscal years 1990,1989 and 1988, respectively. This activity has made a significant though declining contribution to the operating income of McDermott International in all three fiscal years. B&W, in addition to its Naval Reactors Program business, is a supplier of ordnance and other equipment and services to the U.S. Government. The principal plants of this segment, which manufacture power generation systems and equipment, are situated at Alliance, Barberton and Lancaster, Ohio; Lynchburg, Virginia; Paris and Beasley, Texas; West Point, Mississippi: Indianapolis, Indiana; and Cambridge, Ontario, Canada. These plants and properties are owned by B&W and are well maintained, have suitable equipment, and are of adequate size. FOREIGN OPERATIONS The amounts of Power Generation Systems and Equipment's revenues and operating income derived from opera tions outside of the- United States, and the approximate percentages of those total revenues to McDermott Inter national's total revenues, follow; Fiscal Year REVENUES Amount Percent OPERATING INCOME (Dollars in Thousands) 1990 1989 1988 $ 219,059 143,986 212,748 8 7 10 S 9,052 4,994 3,790 B&W primarily conducts its foreign operations through its Canadian subsidiary, which services the Canadian market as well as other foreign markets by exporting from Canada. RAW MATERIALS The principal raw materials used by this segment to construct power generation systems and equipment consist of carbon and alloy steels in various forms, such as plate, structurals, bars, sheet, strip, heavy wall pipe and tubes.Significant amounts of components are also purchased for assembly into B&W-supplied systems and equipment. These raw materials and components generally are purchased as needed for individual contracts. The principal raw materials used by this segment in the manufacture of nuclear fuel components and assemblies consist of uranium (customer furnished), zircalloy and specialized stainless steel. Although shortages of certain of these raw materials have existed from time to time, no serious shortage exists at the present time. In addition, this segment is not sole source dependent for any raw materials except that uranium for the nuclear fuel assemblies supplied to the Naval Reactors Program is furnished only by the U.S. Government. CUSTOMERS AND COMPETITION The principal customers of this segment are the electric utility industry (including government-owned utilities), the U.S. Government (including its contractors), and the pulp and paper and other process industries. The elec tric utility industry (including govemment-owned utilities) accounted for approximately 25%, 34% and 36% of McDermott International's total revenues for fiscal years 1990, 1989 and 1988, respectively. U.S. Government business, excluding govemment-owned utilities, with this segment accounted for approximately 16%, 17 % and 19% of McDermott International's total revenues for such periods. Steam generating system and nuclear fuel assembly orders are customarily awarded in response to competitive bids submitted pursuant to proposals based on the estimated cost of each job. Domestically, a relatively small number of companies, specializing in large steam generating equipment, compete with B&W in the utility fossil fuel steam generating system business. In international markets, these companies plus several foreign-based com panies compete with B&W. In the sale of nuclear steam generating systems, B&W competes with a small number of companies. In the sale of nuclear fuel assemblies, B&W competes with the other manufacturers of nuclear steam generating systems. A number of companies are in competition with B&W in industrial steam generating systems and the small power plant business. Other suppliers of fossil and nuclear fuel steam systems, as well as many other businesses, compete for repair and alteration and other services required to backfit and maintain existing systems. B&W competes with a small number of domestic suppliers of welded tubing and also with foreign suppliers, depending on market conditions. In the supply of nuclear fuel assemblies and nuclear components to the U.S. Navy, there are a small number of suppliers, with B&W being the largest based upon revenues. 7 BACKLOG Backlog as of March 31, 1990 and 1989 for the Power Generation Systems and Equipment segment was S2.548,545.000 and $3,002,077,000 or approximately 61 % and 82%, respectively, of McDermott International's backlog. Of the March 31. 1990 backlog, it is expected that approximately S927,739,000 will be recorded in revenues in fiscal year 1991, SI.091,926,000 in fiscal years 1992-1995, and S528,8S0,000 thereafter. Also, this segment's backlog with the U.S. Government was approximately 26% of McDermott International's total backlog at March 31. 1990. If in management's judgment it becomes doubtful whether contracts will proceed, the backlog is adjusted accordingly. If contracts are deferred or cancelled, B&W is usually entitled to a financial settlement related to the individual circumstances of the contract. Operations and maintenance contracts, which are performed over an extended period, are included in backlog based upon an estimate of the revenues from these contracts. No estimate of revenues from power sales agreements or thermal energy contracts associated with owned cogeneration or small power plants is included in backlog. B&W attempts to cover increased costs of anticipated changes in labor, material and service costs of long-term contracts either through an estimation of such changes, which is reflected in the original price, or through price escalation clauses. Most long-term contracts have provisions for progress payments. FACTORS AFFECTING DEMAND After an extended period of low or no growth in electrical demand which severely depressed orders of new equip ment from electric utilities, a moderate increase in electrical consumption began in 1983. As a consequence of this growth in demand for electricity, certain electric utilities in several regions of the United States are nowinvestigating potential sources of new generating capacity. However, electric utilities have deferred ordering large, new base load units because of continuing uncertainties over rate regulation and environmental rules. Where electric utilities are in need of peaking capacity, many are purchasing alternate equipment with short lead-times. Certain electric utilities are purchasing electricity from other utilities with excess capacity or from non-regulated sources such as cogenerators and independent power producers. As a consequence of deferring new base load units, electric utilities have increased orders for repair and refurbishment of existing plants. Capital spending programs in the petrochemical, pulp and paper, and refuse-to-energy industries have resulted in increased de mand for industrial steam systems. With the maturing of the U.S. Navy's shipbuilding program, the demand for nuclear fuel assemblies and reactor components for the U.S. Navy has been reduced from levels experienced in the mid-1980's. This decline in demand has less of an adverse impact on the supply of nuclear fuel assemblies due to reload business. The backlog of orders for U.S. Navy nuclear fuel assemblies and nuclear reactor components comprised substantially all of this segment's backlog with the U.S. Government at March 31, 1990 and this activity is expected to continue to be a significant part of McDermott International's business. C. MARINE CONSTRUCTION SERVICES GENERAL The Marine Construction Services segment consists of the design, construction and installation of specialized offshore fixed platforms and marine pipelines used for development drilling, production anc transportation of oil and gas. Marine Construction Services also includes engineering and construction services for oil production in shoreline and marshland areas (principally in Louisiana and Tfexas); operation of a shipyard for the construc tion, repair and maintenance of specialized ships for the U.S. Navy, as well as ferries, barges, tugboats and other small vessels; the engineering and construction of processing plants for the oil, gas and petrochemical and mineral industries, primarily for offshore installation; and vessel chartering operations, principally to affiliated companies. Fixed platforms, which are fastened to the seafloor by pilings driven through their structural legs, have been installed by McDermott International in water depths of more than 1,000 feet. These platforms have beer, engineered to withstand increasingly greater weights and stresses as the search for oil ana gas has expanded into deeper water and into areas subject to severe weather conditions. In addition, this segment is capable of fabricating and installing tension-leg platforms, floating production systems and subsea templates. 8 Sn order to compete effectively at the low levels of demand for marine construction services currently being experienced, particularly in regard to offshore construction equipment, McDermott international has entered into joint, ventures with other marine contractors. McDermott International owns 50% of the HeereMac joint venture, formed with Heerema Oifshore Construction Group, Inc., to provide heavy-lift marine installation services to the petroleum industry on a worldwide basis, especially in harsh environmental areas. Each party charters to the joint, venture on a long-term basis, 2 semi-submersible derrick barges, with the largest being McDermott International's DB-102 with a lift capacity of 13,000 tons. McDermott International owns approximately 61% of the McDermott-ETPM joint venture, formed with Entrepose G.T.M. pour les Travaux Petroiiers Maritimes ETPM S.A. ("ETPM"), to provide general marine construction services to the petroleum industry in the Middle East. India, West Africa and South America; it also provides offshore marine installation services in the North Sea. McDermott International charters to this joint venture 3 combination derrick-pipelaying barges and 1 semisubmersibie lay barge capable of laying 60-inch diameter pipe (including concrete coating) and operable in water depths up to 2,000 feet. ETPM charters to this joint venture 3 combination derrick-pipelaying barges. Fabrication facilities within this joint venture's area of operation are located at Jebel Ali, Sharjah and Ras-al-Khaimah in the U.A.E. and at Warri, Nigeria and Tchengue, Gabon. McDermott International also owns a 49% interest in a Mexican joint venture that operates 3 self-propelled combination barges and 1 pipelaying barge. Of these, 2 barges are capable of lifting 2,000 tons. McDermott International, a world leader (based upon industry standards) in the fabrication of offshore structures, has a principal fabrication yard and domestic offshore base located on approximately 1.224 acres of land, under lease, near Morgan City, Louisiana. This segment also operates a shipyard on approximately 58 acres of leased land in Morgan City. It also owns approximately 134 acres of land at Gulfport, Mississippi and New' Iberia, Louisiana for sub-assembly of components for the Morgan City fabrication yard and shipyard and for participation in the shallow water fabrication market. This segment has a fabrication yard on approximately 367 acres of owned and leased land near Morgan City and has entered into a lease of a fabrication yard on approximately 283 acres in Nueces County, Texas. This segment also operates fabrication yards on leased property in Indonesia at Batam Island and at Ain Soukhna, Egypt. McDermott International also operates a fabrication yard on company-owned property in Scotland, near Inverness. The equipment used at these yards, which are capable of fabricating a full range of offshore structures, consists principally of cranes, welding equipment, machine tools, and robotic and other automated equipment, in addition to other fabrication equipment, most of which is movable. Expiration dates, including renewal options, of leases covering land for the shipyard and fabrication yards, follow: Morgan City, Louisiana Nueces County, Tfexas Batam Island, Indonesia Jebel Ali, U.A.E. Ras-al-Khaimah, U.A.E. Ain Soukhna, Egypt Warri, Nigeria Years 1996-2032 Year 1996 Year 2008 Year 2005 Year 1990 Year 2001 Year 2065 McDermott International expects to renew the lease at Ras-al-Khaimah, U.A.E. which is negotiated on an annual basis. This segment owns the largest fleet of marine equipment used in major offshore construction. The nucleus of a "construction spread'' is a large derrick barge, pipelaying barge or combination derrick-pipelaying barge capable of offshore operations for an extended period of time in remote locations. McDermott International owns 9 derrick barges. 3 pipelaying barges, 10 combination derrick-pipelaying barges and 2 pipeburying barges. The lifting capacities of the derrick and combination derrick-pipelaying barges range from 700 tons to 13,000 tons. These barges, which range in length from 300 feet to 660 feet, are hilly equipped with revolving cranes, auxiliary cranes, welding equipment, pile driving hammers, anchor winches and a variety of additional gear. The largest of these vessels is the DB-102, which is one of the world's largest semi-submersible derrick barges in both size and lifting capacity and provides quarters for approximately 750 workers. In addition, this segment owns a shearleg crane capable of lifting up to 5,000 tons. The shearleg crane has the capability of being installed on a number of vessels within the marine fleet. In the North Sea, this segment has performed the world's heaviest commercial single crane lift offshore, in excess of 5,500 tons. McDermott International also has a long-term lease on a derrick barge with a lifting capacity of approximately 4,000 tons. It also owns or leases a substantial number of other vessels, such as tugs, utility boats and cargo barges, to support the major marine vessels. 9 Of the above equipment, McDermott Internationa! operates 7 derrick barges. 3 pipelaying barges, 10 combina tion derrick-pipelaying barges and 2 pipeburying barges. These include a semi-submersible vessel capable of lifting 2.000 tons. This segment has installed the deepest pipeline in the Gulf of Mexico in over 1,300-ft. waters. Major spreads of equipment operated by McDermott International are in the Gulf of Mexico, the US. West Coast and Southeast Asia. In connection with its construction and pipelaying activities, this segment conducts diving operations which, because of the water depths involved, require sophisticated equipment, including diving bells and an under water habitat. This segment's shipyard facility supplies complete maintenance and construction facilities and is a builder of a variety of marine vessels, including large tugs, packaged rigs, dredges, barges, ferries, oceanographic research and other ocean-going work vessels. This facility is currently building prototype oceangoing surveillance vessels and torpedo test and recovery vessels for the U.S. Navy. FOREIGN OPERATIONS The amounts of Marine Construction's revenues and operating loss derived from operations outside of the United States, and the approximate percentages of those revenues and operating loss to McDermott International's total revenues and operating loss, follow: Fiscal Year REVENUES Amount Percent OPERATING LOSS Amount Percent 1990 1989 1988 RAW MATERIALS $ 520.492 337.781 435.497 (Dollars in Thousands) 20 S (26,180) 16 (30,114) 21 (60,539) 29 53 109 The raw materials used by this segment, such as carbon and alloy steel in various forms, welding gases, concrete, fuel oil and gasoline, are available from many sources and this segment is not dependent upon any single supplier or source. Although shortages of certain of these raw materials and fuels have existed from time to time, no serious shortage exists at the present time. CUSTOMERS AND COMPETITION This segment's principal customers are the larger oil and gas companies and the U.S. and other governments. Customers generally contract with this segment for the design, construction and installation of specific platforms, pumping stations, marine pipelines, and production networks and the construction of marine vessels. Contracts are usually awarded on a competitive bid basis. There are a number of companies which compete effectively with McDermott International in each of the separate marine construction phases in various parts of the world, but none has the geographical distribution or the overall capabilities of McDermott International. BACKLOG As of March 31, 1990 and 1989, the Marine Construction Services' backlog amounted to SI.619,236,000 and $650,546,000 or approximately 39% and 18%, respectively, of McDermott International's total backlog. The signifi cant increase in this segment's backlog, of approximately 149%, is the result of recent demands for this segment's fabrication activities. Of the March 31, 1990 backlog, $997,173,000 is expected to be recognized in fiscal 1991. and S622,063,000 thereafter. Also, this segment's backlog with the U.S. Government was approximately 3% of McDermott International's total backlog at March 31, 1990. Work is performed on a fixed price, cost plus or day rate basis or combination thereof. Almost all contracts call for progress payments and the segment attempts to cover increased costs of anticipated changes in general labor rates and material costs on long-term contracts, either through an estimation of such changes, which is reflected in the original fixed price, or through price escalation clauses. This segment's contracts for work in foreign areas generally provide for payment in U.S. Dollars, with exceptions for payments in foreign currencies in amounts approximately equal to expenses to be incurred by this segment in those currencies. 10 FACTORS AFFECTING DEMAND Marine Construction Services' activity depends mainly on the capital expenditures of oil and gas companies and foreign governments for developmental construction and has traditionally been cyclical. These expenditures are influenced by the selling price of oil and gas along with the cost of production and delivery, the terms and condi tions of offshore leases, the discovery rates of new reserves offshore, the ability of the oil and gas industry to generate capital and local and international political and economic conditions. Oil company capital expenditure budgets in calendar year 1990 are in general increasing when compared with the prior calendar year. The average price of oil increased by 24% during fiscal year 1990 and has led to a more optimistic outlook for offshore construction. Natural gas consumption in the United States increased by about 4% during fiscal year 1990. It is estimated that gas demand and supply should be in balance by the end of fiscal 1991 and the average wellhead price should rise. This outlook has opened the way for an upturn in natural gas development projects. As a result of design changes, technological improvements and general restructuring, oil and gas companies are able to move forward today with projects that only a few years ago were uneconomical. The fabrication sector of the marine construction market has improved during the past several months and is expected to continue improving during fiscal year 1991. The offshore installation sector will gradually follow, although the worldwide overcapacity of marine equipment will continue. D. PATENTS AND LICENSES Many U.S. and foreign patents have been issued to McDermott International and it has many pending patent applications. Patents and licenses have been acquired and licenses have been granted to others when advan tageous to McDermott International. While McDermott International regards its patents and licenses to be of value, no single patent or license or group of related patents or licenses is believed to be material in relation to its business as a whole. E. RESEARCH AND DEVELOPMENT ACTIVITIES McDermott International conducts research and development activities at Alliance, Ohio; Lynchburg, Virginia; and Houston, Tfexas; and also conducts development activities at its various manufacturing plants and engineer ing and design offices. During the fiscal years ended March 31,1990,1989 and 1988, approximately $53,000,000, S72,100,000 and $65,300,000, respectively, was spent by McDermott International on research and development activities, of which approximately $33,600,000, $48,700,000 and $44,400,000, respectively, was paid for by customers of McDermott International. Research and development activities were related to development and improvement of new and existing products and equipment and conceptual and engineering evaluation for translation into practical applications. Approximately 307 employees were engaged full time in this activity at March 31,1990. F. INSURANCE McDermott International maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insurable or insurance is available only at rates which McDermott Interna tional considers uneconomical. Among such risks are war and confiscation of property in certain areas of the world, pollution liability in excess of relatively low limits, and asbestos liability. Depending on competitive condi tions and other factors, McDermott International endeavors to obtain contractual protection against uninsured risks from its customers. McDermott International's insurance policies do not cover liability and property damage losses resulting from nuclear accidents at reactor facilities of its utility customers. Tb protect against such losses, McDermott Interna tional has obtained contractual indemnification from such customers and waivers of their insurers' rights of subroga tion and generally has been named as an additional insured under its customers' nuclear property insurance policies. In addition, McDermott International's third-party nudear liability is an insured risk under such customers' nuclear liability policies and it has the benefit of the indemnity and limitation of liability provisions of the PriceAnderson Act, as amended ("the Act"). The Act limits the public liability of manufacturers and operators of licensed nuclear facilities and other parties who may be liable in respect of, and indemnifies them against, all claims in excess of an amount which is determined by the sum of commercially available liability insurance plus certain retrospective premium assessments payable by operators of commercial nuclear reactors. 11 Although McDermott international does not own or operate any nuclear reactors, it has coverage under commer cially available nuclear liability and property insurance for five of its six facilities which are licensed to maintain special nuclear materials. The sixth facility operates primarily as a conventional research center. However, this facility is licensed to possess special nuclear material and has a small and limited amount of special nuclear material on the premises. Due to the type or quantity of nuclear material present, two of the facilities have the benefit of the indemnity and limitation of liability provisions of the Act, pursuant to agreements entered into with the U.S. Government. In addition, contracts to manufacture and supply nuclear fuel or nuclear components to the U.S. Government generally contain contractual indemnity clauses, which become effective at. the time of ship ment, whereby the U.S. Government has assumed the risks of public liability claims. McDermott International's offshore construction business is subject to the usual risks of operations at sea. with additional exposure due tp the utilization of expensive construction equipment, sometimes under extreme weather conditions, often in remote areas of the world. In addition, McDermott International operates in many cases on or in proximity to existing offshore facilities which are subject to damage by McDermott International and such damage could result in the escape of oil and gas into the sea. The liability insurance coverage of McDermott international for product liability claims is subject to varying insurance limits which are dependent upon the year of coverage. B&W has signed an agreement with its principal insurers concerning the method of allocation of asbestos claims payments to the years of coverage: the conclusion of this agreement reduces B&W's liability for such claims payments and, based upon information currently available, management does not believe that its future liability for claims payments will be have a significant impact on the financial position of McDermott International. McDermott International has two wholly-owned insurance subsidiaries. Tb date, these subsidiaries have written policies concerning general and automobile liability, builders' risk within certain limits, marine hull, and workers' compensation for McDermott International. No significant amounts of insurance have been written for unrelated parties. G. EMPLOYEES At March 31, 1990, McDermott International employed, under its direct supervision in continuing operations, approximately 30,000 persons compared with 28,000 at March 31, 1989. Approximately 7.300 employees were members of labor unions at March 31,1990 as compared with approximately 7,400 at March 31. 19S9. The majority of B&W's primary facilities operate under union contracts which customarily are renewed every two to three years. During the next twelve months, four contracts covering approximately 100 of B&W's hourly workers will expire. B&W has not yet begun to renegotiate these contracts, but expects to be able to renew them. McDermort International considers its relationships with its employees to be satisfactory. H. GOVERNMENT REGULATIONS McDermott International's compliance with U.S. federal, state and local environmental protection regulations necessitated capital expenditures of $1,252,000 in fiscal 1990, and it expects to spend another $2,994,000 on capital expenditures over the next five years. However, McDermott International cannot predict all the environ mental requirements or circumstances which will exist in the future. The cost of complying with environmental regulations was a charge against income before taxes of approximately $20,958,000 in fiscal 1990. McDermott International performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and operates certain nuclear facilities and thus is subject to continuing reviews by governmental agencies, including the Environmental Protection Agency and the Nuclear Regulatory Commission. During fiscal 1989, federal regulations were promulgated which require licensees of nuclear facilities to provide certain financial assurances relating to environmental clean-up costs. The most significant of these regulations will require B&W, at the time of the next renewal of each of its licenses in 1992 through 1995. to fund (or pro vide other financial assurances for) the then estimated future environmental clean-up costs for the facility being licensed. The amount of such estimated costs at each license renewal date will depend largely upon characteri zation of the facility being licensed and upon the current regulations relating to methods of. and standards for. disposal of contaminated material. Compliance with government regulations controlling the discharge of materials into the environment, or other wise relating to the protection of the environment, does not have, nor is it expected to have, a material effect upon the competitive position of McDermott International. 12 I. INTERCOMPANY AGREEMENT Pursuant to a Stock Purchase and Sale Agreement (the "intercompany Agreement"), the Delaware Company has the right to sell to International and International has the right to buy from the Delaware Company, 100,000 units, each unit consisting of one share of International Common Stock and one share of International Series A Participating Preferred Stock, at a price based primarily upon the stockholders' equity of McDermott Interna tional 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 the Delaware Company's exercise of its right to sell under the Intercompany Agree ment, the purchase price of such unitwill be 90% of the then current value of the unit (the "current unitValue"). If a unit is sold to International pursuant to an exercise by International of its right to purchase under the Inter company Agreement, the purchase price of such unit will be 110% of the current unit value. At April 1, 1990, the current unit value was S3,296 and the aggregate current unit value of the Delaware Company's 100,000 units was $329,594,000. At April 1, 1990, the price at which the units could be sold to International upon the exercise by the Delaware Company of its right to sell, calculated in accordance with the terms of the Intercompany Agree ment, was approximately $296,634,000. The net proceeds to the Delaware Company of such sales would be subject to U.S. federal, state and other applicable taxes for which no provisions have been made. J. DISCONTINUED OPERATIONS On October 31, 1989,' McDermott International sold its Bailey Controls ("Bailey") operations to ELSAG, a sub sidiary of Finmeccanica Societa Finanziaria per Azioni, a manufacturing holding company of IRI, an Italian industrial group. Bailey is a supplier of instrumentation, automation, diagnostic, control and computer systems. Pursuant to a Purchase and Sale Agreement entered into in January 1990, McDermott International has agreed to sell to Ambridge Tube Corporation ("Ambridge"), a Texas corporation (or a related entity designated by Ambridge), substantially all of the assets of its seamless tubular line of business, which was discontinued in fiscal 1987, and to transfer to Ambridge certain of its liabilities and obligations. The proposed sale is expected to take place during the first quarter of fiscal 1991, subject to certain contingencies, primarily related to applicable govern ment approvals and environmental-related matters. The seamless tubular line of business includes the equip ment, technology, and plants located in Beaver Falls, Ambridge and Koppel, Pennsylvania; and Bryan, Ttexas. During fiscal 1989, McDermott International completed the sale of its Trading segment to Raulino Treuhand-Und Verwaltungs AG, a subsidiary of York Hanover Holding AG, a Swiss corporation. During fiscal 1988, McDermott International completed the sale of its Insulating Products Group to Thermal Ceramics, Inc., a subsidiary of the Morgan Crucible Company Pic, a company headquartered in the United Kingdom. Item 3. LEGAL PROCEEDINGS AND PROPOSED TAX DEFICIENCY During fiscal 1988, decisions were entered in the United States Thx Court which completed a group of settlements concerning the Delaware Company's U.S. federal income tax liability for the fiscal years ended March 31, 1972 through March 31, 1980 and International's U.S. federal income tax liability for the years ended November 30, 1976 through March 31,1983. In the quarter ended March 31, 1990, decisions were entered in the United States Thx Court concerning the Delaware Company's U.S. federal income tax liability for the fiscal years ending March 31, 1981 and March 31, 1982. The Internal Revenue Service (the ``IRS'') has issued a statutory notice which asserts additions to the U.S. federal income tax liability of the Delaware Company for its fiscal year ending March 31, 1983. That notice treated the reorganization in that fiscal year as a taxable event, asserting a deficiency of approximately $300,000,000 in U.S. federal income taxes. In the quarter ended March 31, 1990, the IRS conceded that issue. The notice also asserts substantial additional U.S. federal income taxes on other grounds which the Delaware Company is contesting in court. If the remaining issues in the statutory notice for the fiscal year ended March 31, 1983 are disposed of under an overall agreement incorporating the IRS's concession on the reorganization issue, that overall agree ment might be subject to review by the Joint Committee of Congress on Taxation. In view of recent decisions in test cases in the United States Tax Court and in the Courts of Appeals for two Federal circuits that determined the effect of the reorganization on former shareholders of the Delaware Company, McDermott International believes that the Joint Committee would approve a concession of the reorganization issue if it is asked to review an overall settlement agreement including that concession. McDermott International believes that any U.S. federal income taxes ultimately assessed on the basis of the notice to the Delaware Company for its fiscal year ended March 31,1983 will not exceed reserves established with respect thereto. 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 II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS International's Common Stock is traded on the New York Stock Exchange. High and low stock prices and dividends declared for the years ended March 3L. 1989 and 1990 follow: QUARTER ENDED June 30, 1988 September 30, 1988 December 31. 198S March 31, 1989 ' FISCAL 1989 SALES PRICE CASH DIVIDENDS HIGH LOW DECLARED 21V2 20% 18% 18% 18 17% 14% 14% SO.45 SO.45 SO.25 SO. 25 QUARTER ENDED June 30, 1989 September 30, 1989 December 31, 1989 March 31, 1990 FISCAL 1990 SALES PRICE CASH DIVIDENDS HIGH LOW DECLARED 24% 26% 24% 27% 17% 21% 19 21% SO.25 SO.25 SO.25 SO.25 As of March 31, 1990, the approximate number of record holders of Common Stock was S.226. 14 Item 6. SELECTED FINANCIAL DATA 1990 For The Fiscal Years Ended March 31, 1989 1988 1987 (In thousands except for per share amounts) Revenues S 2.644,690 S 2.166,S06 S 2,118,810 S 2.213,856 income (Loss) From Continuing Operations -S (100,552) S (122,610) $ (236,859) S 113.236 Earnings (Loss) Per Common Share: Primary From Continuing Operations S (2.68) S (3.29) S (6.38) S 3.06 Fully Diluted From Continuing Operations S (2.68) S (3.29) S (6.38) S 2.95 Tbtal Assets S 3.335,696 S 3,293,622 S 3,824,817 S 4,383,259 Long-Tferm Obligations S 873,321 S 932,759 S 840,225 S 781.124 Subsidiary's Redeemable Preferred Stocks 204,487 204,487 204,637 204,693 1986 S 2,193,537 S 70,154 S 1.90 S 1.90 S 4.350,942 S 913,260 204,693 Total S 1.077,808 S 1.137,246 S 1,044,862 $ 985,817 s 1,117,953 Cash Dividends Per Common Share S 1.00 S 1.40 $ 1.80 3 1.80 3 1.80 Revenues, income and earnings per share amounts have been restated for all prior periods reported to include only results from continuing operations (See Note 2 to the consolidated financial statements). See Note 6 regard ing the adoption of Statement of Financial Accounting Standards (SFAS) No. 96 in fiscal 1989 and reversal of accrued interest expense and accrued income taxes in fiscal year 1988. included in income (loss) from continuing operations for the fiscal years ended 1988, 1987 and 1986 are pre-tax gains (losses) on the sale of government obligations of 3(283,725,000), 3237,340,000 and $94,712,000, respectively. Also included in income in fiscal year 1987 was a pre-tax pension settlement gain of 3110,585,000. 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations 1990 VS 1989 Power Generation Systems and Equipment's revenues of $1,747,110,000 were S17G.182.00O higher than fiscal 1989. This was principally due to higher revenues from fabrication and extended scope of supply for industrial and refuse boilers and erection of industrial and utility fossil steam systems. In addition, there were higher revenues from nuclear fuel assemblies for the U.S. Government, plant enhancements, replacement, parts, repair and alteration of existing fossii steant systems, boiler-cleaning equipment and commercial nuclear fuel assemblies, including a contract termination settlement. These higher revenues were partially offset by lower nuclear service activity through October 31, 1989, and lower revenues resulting from the incorporation of a new joint venture at November 1, 1989 which is accounted for on the equity method. Also, there were lower revenues from fabrication of utility fossil fuel steam systems and the fabrication and extended scope of supply for fluid-bed boilers and tubular products. This segment reported operating income of $27,908,000 which was $20,753,000 lower than fiscal 1989's operating income of $48,661,000. The lower operating results were primarily due to a provision of $27,150,000 for corrective action with regard to internal corrosion in certain utility and industrial installations of a first-of-a-kind heat pipe heat exchanger. Operating income was further reduced by the lower nuclear services revenues arid gross margins and lower gross margins on reactor components to the U.S. Government. Also contributing to the lower operating results were higher selling, marketing and administrative expenses, higher workers' compensation and general liability costs and higher provisions for environmental clean-up costs. In addition, this segment sustained a loss provision on an industrial cogeneration project, provided for costs to downsize certain data processing opera tions, and experienced lower margins on revenues from external sales of computer services. Also, in fiscal 19S9 a reduction in warranty reserve requirements was recorded. These were partially offset by the higher volume and gross margins from the fabrication and extended scope of supply for industrial and refuse boilers, commer cial nuclear fuel assemblies, replacement parts, plant enhancements, repair and alterations of existing fossil fuel steam systems, nuclear fuel assemblies for the U.S. Government and boiler-cleaning equipment, as well as improved margins from fluid-bed boiler projects. Other items partially offsetting the lower fiscal 1990 operating results were the reversal of a prior period provision (as a decision to consolidate certain manufacturing facilities was rescinded due to changes in the business environment), lower employee benefit costs and a gain on the termina tion of a commercial nuclear fuel assembly contract; Results of the Power Generation Systems and Equipment segment include provisions of approximately $17.621.000 and $15,748,000, respectively, for fiscal years 1990 and 1989 for future environmental clean-up costs at its nuclear facilities. Results for future years will include provisions for this purpose, the amount of which will depend upon the then current information and regulatory requirements. Increased demand for supply of new base load electric power plants is not expected to occur over the next two years and, as a consequence, no significant increase in revenues from this source is expected before the mid-1990s. However, continued moderate growth in orders for repair and refurbishment of existing fossil-fueled steam systems is expected in fiscal 1991. Revenues from environmental clean-up systems related to fossil-fueied steam systems have not been significant in recent years. However, the acid rain provisions of the proposed Clean Air Act. if enacted, could generate a significant demand for flue gas clean-up systems and other products that this segment supplies. Marine Construction Services' revenues increased $316,769,000 to $909,935,000. The improved revenues resulted from a significant increase in utilization of this segment's domestic and foreign marine equipment. There was also increased activity, both domestic and foreign, in this segment's fabrication facilities and engineering operations. Marine Construction Services' operating loss increased $252,000 to a loss of $61,200,000. The increased operating loss was due to the recognition of increased bid and general and administrative costs, principally in foreign marine operations, costs associated with the pursuit of new and expanded markets, increased employee benefit costs, and favorable claims related to certain foreign contracts in fiscal 1989. These increased costs were largely offset by improved operating results, both domestic and foreign, in this segment's marine and engineering operations, as well as improved operating results in foreign fabrication activities. Backlog for this segment at March 31, 1990 was $1,619,236,000. This is the highest level of backlog for this seg ment since the early 1980's. A significant part of this backlog is for fabrication activities and related engineering operations. Lagging demand and overcapacity still continue in the marine operations. Interest expense increased $6,661,000 for fiscal year 1990 compared with fiscal 1989. This increase was consistent with changes in McDermott International's debt and the interest rates prevailing thereon in the respective periods, and included an increase in accrued interest on estimated income taxes. 16 Equity in loss of investees decreased $6,122,000 from the prior fiscal year, due primarily to equity income in the newly-formed B&W Nuclear Service Company (See Note li to the consolidated financial statements), and lower net equity losses on marine operations joint ventures. Other-net income and minority interest increased $40,811,000 to $37,368,000 in fiscal 1990, due primarily to the gain on the sale of assets to Framatome Sendees Company, Inc. (See Note 11 to the consolidated financial statements), recognition of a marine asset casualty gain, and foreign currency transaction gains, partially offset by bank fees and discount expenses on the additional sale of certain accounts receivable. The benefit from income taxes increased $12,340,000 while the loss from continuing operations before benefit from income taxes decreased $9,718,000. The increase in benefit from income taxes from the prior year is due primarily to increased losses in taxing jurisdictions where tax benefits are available and to a decrease in tax attributable to activities in high tax jurisdictions. 1989 VS 1988 Power Generation Systems and Equipment's revenues of $1,576,928,000 were $99,114,000 higher than in fiscal 1988. This was principally due to higher revenues from the fabrication of and extended scope of supply for refuse and small power plants, and fabrication and erection of new fossil steam systems. In addition, there were higher revenues from plant enhancements, welded tubular products, and air-cooled heat exchangers. These higher revenues were partially offset by lower revenues from fossil steam generating system exports from North America, and nuclear fuel and reactor components for the U.S. Government. The Power Generation Systems and Equipment segment reported operating income of S48,661,000 which was S20,178.000 lower than fiscal 1988's operating income of $68,839,000. The lower operating results were primarily due to significantly higher workers' compensation and product liability costs and provisions for future environ mental clean-up costs. Also contributing to decreased operating results were lower revenues and gross margins from nuclear fuel and reactor components for the U.S. Government and nuclear fuel assemblies, together with lower margins on revenues from refuse and small power plants, and repair and alteration of existing fossil steam systems. In addition, administrative and research and development expenses were higher. These were partially offset by the higher revenues and gross margins from fabrication and erection of new fossil steam systems, replace ment parts, air-cooled heat exchangers and welded tubular products and reduced warranty reserve requirements. Results of the Power Generation Sj'stems and Equipment segment for fiscal 1989 included a provision of approx imately $15,748,000 for future environmental clean-up costs (referred to above) at certain facilities where nuclear activities are or were conducted. Marine Construction Services' revenues decreased $48,893,000 to $593,166,000. The decreased revenues resulted from a significant reduction in utilization of this segment's foreign marine construction equipment, in marine work on the West Coast of the United States, and in domestic onshore construction work. There was also reduced activity in a certain foreign fabrication facility and in foreign engineering. These decreases were offset in part by increased activity in domestic fabrication facilities and certain other foreign fabrication facilities, increased domestic engineering activity, increased marine work in the Gulf of Mexico and recognition of favorable claims on certain foreign contracts. Marine Construction Services' operating loss decreased $32,427,000 to a loss of $60,948,000 due to improved operating results in domestic fabrication and the majority of foreign fabrication operations. The operating loss was also decreased due to improved operating results and cost savings in a foreign marine operation, the transfer in the fourth quarter of fiscal year 1989 of a significant part of that operation to the newly-formed HeereMac joint venture, and classifying losses associated therewith as an equity loss. Operating results were further improved by recognition of favorable claims related to certain foreign contracts, and a reduction in workers' compensation cost. Foreign engineering operating income also increased due to reduced operating costs and provisions for redun dancy made in the prior fiscal year. These decreased losses were offset in part by less favorable operating results in a foreign fabrication operation and marine work on the West Coast of the United States. While backlog for this segment increased significantly over the last twelve months, backlog continued at levels below that of earlier years. Overcapacity continued in the majority of this segment's major activities. Interest income for fiscal year 1989 decreased $12,165,000 compared with fiscal 1988. The decrease in interest income was generally consistent with changes in McDermott International's investment portfolio and interest rates prevailing thereon. As a result of a settlement of certain income tax liabilities during fiscal 1988, accrued interest on estimated income taxes was reduced by $78,411,000, including approximately $8,000,000 accrued during fiscal 1988. 17 Equity in loss of investees in fiscal year 1989 increased $12,204,000 over fiscal 198S due primarily to losses in the newly-formed HeereMac joint venture. Other-net income for fiscal 19S9 was $11.085.000 as compared with other-net expense of $274,512,000 for fiscal 19S8. The decrease in other-net expense was primarily due to the recognition of a net loss of $283,725,000 on the sale of government obligations in fiscal 1988. The loss was incurred when the portfolio was repositioned to shorten the maturities in order to reduce the exposure to the volatility of long-term interest rates. The benefit from income taxes decreased $68,281,000 while the loss from continuing operations before benefit from income taxes decreased S182.530.000. The benefit from income taxes in fiscal 1988 included an adjustment of $50,199,000 resulting from settlement of tax examinations and reappraisal of McDermott Internationals worldwide income tax liabilities. Excluding the settlement and reappraisal benefit, the benefit from income taxes decreased $18,082,000 due primarily to continued losses in jurisdictions producing li'tle or no income tax benefits. Effect of Inflation and Changing Prices McDermott International's financial statements are prepared in accordance with generally accepted accounting principles, using historical dollar accounting (historical cost). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation. The management of McDermott International is cognizant of the effects of inflation and, in order to minimize the negative impact of inflation on its operations, attempts to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimation of such changes, which is reflected in the original fixed price, or through price escalation clauses in its contracts. Liquidity and Capital Resources During fiscal 1990, McDermott International's cash and cash equivalents increased $56,413,000 to S 132,537.000 and total debt decreased $172,053,000 to $1,002,530,000. During the same period, McDermott International used $126,086,000 in operations including payments for insured asbestos claims, and expended $127,370,000 for additions to property, plant and equipment, $37,340,000 for cash dividends on International's Common Stock, and $86,590,000 for scheduled maturities of long-term debt. In December 1988, a subsidiary of McDermott Incorporated entered into a three-year agreement with a certain U.S. bank whereby the subsidiary can sell, up to a maximum of $100,000,000, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Effective December 1989, the maximum sales limit was increased to $200,000,000. At March 31, 1990, approximately $175,000,000 of receivables had been sold for cash under this agreement and the proceeds used to repay long-term debt obligations and to fund operations. During the March quarter of fiscal 1990, International amended the terms of its outstanding warrants such that, from March 2, 1990 to April 2, 1990, the number of shares of its Common Stock issuable upon exercise of one warrant, either by payment per share of $25 cash or $25 principal amount of the Delaware Company's 10% Subor dinated Debentures due 2003, increased from one share to 1.075 shares. During the period from March 2. 1990 to March 31. 1990, cash of $4,935,000 and debentures with a book value of $90,800,000 (par value of $104,073,000) were received from the exercise of 4,360.331 warrants in exchange for 4,687,339 shares of Common Stock. This transaction resulted in an increase in Common Stock of $4,687,000 and Capital in Excess of Par of $91,047,000 at March 31, 1990. In April 1990, cash of S20,084,000 and debentures with a book value of $16,222,000 (par value of $18,593,000) were received from the exercise of 1,547,084 warrants in exchange for 1.663,090 shares of Common Stock. A partnership formed by two wholly-owned subsidiaries of B&W has available to it $87,000,OCO of proceeds from the issuance of certain tax-exempt energy development revenue bonds and a $23,000,000 project financing line of credit issued by a foreign bank. The proceeds from the issuance of the energy development revenue bonds and the project financing line of credit are to be used only for qualified expenditures made in connection with the construction by the partnership of a small power plant in Pennsylvania. At March 31, 1990. the partnership had borrowings against these lines of credit of approximately $68,268,000 and anticipates additional qualified expenditures of approximately $36,000,000 during fiscal 1991. The Delaware Company has committed to make minimum contributions of $11,500,000 to the partnership by May 1991. At March 31, 1990 and 1989, International and the Delaware Company had available to them jointly various uncommitted short-term lines of credit of $186,500,000 and $146,500,000, respectively. There were borrowings by International of $40,000,000 against these joint lines of credit at March 31, 1990. There were no borrowings by International at March 31, 1989. There were no borrowings by the Delaware Company against these lines at March 31, 1990 or March 31, 1989. 18 At March 31, 1990, McDermott International had obligations under short-term repurchase agreements totaling $24,420,000 secured by $24,300,000 par value of its portfolio of government obligations, compared with obliga tions under short-term repurchase agreements totaling $139,429,000 secured by $140,275,000 par value of its portfolio of government obligations at March 31, 1989. McDermott International maintains an investment portfolio of government obligations and Eurodollar time deposits which is held for long-term investment purposes, The amortized cost of the long-term portfolio at March 31. 1990 was $740,662,000 (market value of $738,466,000). At March 31, 1990, approximately $223,006,000 amortized cost (market value of $222,754,000) of these obligations were pledged to secure a letter of credit in connection with a long-term loan and certain reinsurance agreements. The Delaware Company 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. At March 31, 1990, approximately $662,586,000 of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity. McDermott International has committed to make capital expenditures, excluding the small power plant in Pennsylvania, of approximately $15,736,000 during fiscal 1991. These proposed expenditures are principally to maintain McDermott International's existing facilities. McDermott International expects to obtain funds for its capital expenditures, other than specially-financed projects, and working capital requirements from operations and additional borrowings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact McDermott International's liquidity nor capital resources. Proceeds received in the amount of $295,000,000 from the sale of the Bailey operations during fiscal 1990 (See Note 2 to the consolidated financial statements), and $51,000,000 from the sale of assets to Framatome Services Company, Inc. (See Note 11 to the consolidated financial statements), were used to pay down $50,000,000 of short-term lines of credit and $238,000,000 of obligations under short-term repurchase agreements. The remain ing funds were invested in cash equivalents. Dividends paid to shareholders decreased $22,167,000 or 37% in fiscal year 1990. This reflects the January 1989 decrease in the quarterly dividend rate on the common stock of International, from $0.45 per share to $0.25 per share, resulting from McDermott International's decision to conserve cash. The rate, currently in effect at March 31. 1990, results in an annual payment of $1.00 per common share. The Delaware Company'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 have been maintained at the same rates as in fiscal years 1989 and 1988. At March 31, 1990, the ratio of long-term debt to total common stock and other stockholders' equity was 1.36 as compared with 1.56 at March 31, 1989 and 1.15 at March 31, 1988. 19 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS International has prepared the consolidated financial statements and related financial information included in this report. International has the primary responsibility for the financial statements and other 1'inancia) informa tion and for ascertaining that the data fairly reflect the financial position and results of operations of McDermott International. The financial statements were prepared in accordance with generally accepted accounting prin ciples appropriate in the circumstances, and necessarily reflect estimates and judgments by appropriate officers of McDermott International with appropriate consideration given to materiality. McDermott International believes that it maintains an internal control structure designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting prin ciples. Tiie concept of reasonable assurance is based on the recognition that the cost of an internal control structure must not exceed tire related benefits. Although internal control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. McDermott International seeks to assure the objectivity and integrity of its accounts by its selection of qualified personnel, by organizational arrangements that provide an appropriate division of responsibility and by the establishment and communication of sound business policies and procedures throughout the organization. McDermott Internationa! believes that its internal control structure provides reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected. McDermott International's accompanying consolidated financial statements have been examined by its independent auditors, who provide McDermott International with expert advice on the application of U.S. generally accepted accounting principles to McDermott International's business and also provide an objective assessment of the degree to which McDermott International meets its responsibility for the fairness of financial reporting. They regularly evaluate the internal control structure and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The report of the independent auditors appears elsewhere herein. The Board of Directors pursues its responsibility for McDermott International's consolidated financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of McDermott International. The Audit Committee meets periodically with the independent auditors, management and the internal auditors to review matters relating to the quality of financial reporting and internal control structure and the nature, extent and results of the audit effort. In addition, the Audit Committee is responsible for recom mending to the Board of Directors the engagement of independent auditors for McDermott International, who in turn submit the engagement to the stockholders for their approval. The independent auditors, as well as the internal auditors, have free access to the Audit Committee. June 4, 1990 20 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders McDermott International, Inc. We have audited the accompanying consolidated balance sheet of McDermott International, Inc. as of March 31, 1990 and 1989, and the related consolidated statements of income (loss) and retained earnings and cash flows for each of the three years in the period ended March 31, 1990. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDermott International, Inc. at March 31, 1990 and 1989, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31. 1990, in conformity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1989. ERNST & YOUNG New Orleans, Louisiana June 4, 1990 21 McDermott international, inc. CONSOLIDATED BALANCE SHEET MARCH 31, 1990 AND 1989 ASSETS Current Assets: Cash and cash equivalents Short-term investments Accounts receivable - trade Accounts receivable - other Contracts in progress Inventories Deferred income taxes Other current assets Total Current Assets Property, Plant and Equipment, at Cost: Land Buildings Machinery and equipment Property under construction Less accumulated depreciation Net Property, Plant and Equipment Investments: Government obligations Eurodollar time deposits Total Investments Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $61,499,000 at March 31, 1990 and $61,805,000 at March 31, 1989 Prepaid Pension Costs Other Assets TOTAL See accompanying notes to consolidated financial statements. 1990 1989 (In thousands) S 132.537 2,350 390.6S3 200,173 250,965 107,783 50.715 44.306 1.179.512 S 76.124 27.4S6 45d.907 69.69S 285.114 161.328 -- 12.175 1.0S7.S32 19.406 217,162 1,904,279 98.151 2.238.99S 1.315,143 923.855 21.257 225.900 1.952.6SS 33.787 2.233.632 1,270.665 962.967 453.067 287.595 740.662 675.683 74.994 750.677 148.565 189,269 153,833 $ 3,335,696 167.560 164.556 160.030 $ 3,293.622 22 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current maturities of long-term debt Accounts payable Accrued employee benefits Accrued interest payable Accrued self-insurance costs Accrued liabilities - other Advance billings on contracts U. S. and foreign income taxes Total Current Liabilities Deferred Income Thxes Long-Tferm Debt Other Liabilities Contingencies Minority Interest: Subsidiary's Redeemable Preferred Stocks: Series A S2.20 cumulative convertible, $1.00 par value; at redemption value Series B S2.60 cumulative, $1.00 par value; at redemption value Other minority interest Tbtal Minority Interest Preferred Stock Common Stock and Other Stockholders' Equity: Common stock, par value SI.00 per share, authorized 150,000,000 shares; outstanding 42,164,394 at March 31, 1990 and 37,320,211 at March 31, 1989 Capital in excess of par value Retained earnings Cumulative foreign exchange translation adjustments Tbtal Common Stock and Other Stockholders' Equity TOTAL 1990 1989 (In thousands) $ 129.209 230,638 75,404 94.308 79,531 241,825 220,307 121,423 1,192,645 147,596 873,321 252,528 $ 241.824 208,576 95,609 83.888 67,210 265,869 160,876 100,975 1,224,827 131,460 932,759 178,381 88,094 116,393 22,343 226,830 _ 88,094 116,393 24,597 229,084 _ 42,164 412,051 196,415 (7,854) 642,776 $ 3,335,696' 37,320 318,152 244,031 (2,392) 597,111 S 3,293,622 23 MCDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1990 Revenues Costs and Expenses: Cost of operations Depredation and amortization Seiling. general and administrative expenses Operating Loss Other Income (Expense): Interest income Interest expense Interest expense adjustment Equity in loss of investees Minority interest Other net Loss From Continuing Operations Before Provision for Income "foxes, Extraordinary Item and Cumulative Effect of Accounting Change Benefit From Income 'foxes Loss From Continuing Operations Before Extraordinary Item and Cumulative Effect of Accounting Change Income (Loss) from Discontinued Operations Loss Before Extraordinary Item and Cumulative Effect of Accounting Change Extraordinary Item Cumulative Effect of Accounting Change Net Loss Retained Earnings -- Beginning of Year Deduct Cash Dividends -- Common (per share, .. $1.00 in 1990; $1.40 in 1989; and $1.80 in 1988) Retained Earnings -- End of Year PRIMARY AND FULLY DILUTED: Earnings (Loss) Per Common and Common Equivalent Share: Continuing operations Discontinued operations Extraordinary item Accounting change Net loss Cash Dividends Per Common Share See accompanying notes to consolidated financial statements. 1990 S 2,644,690 1989 (In thousands) S 2.166.S06 1988 S 2.118.S10 2.399,947 112,966 221,183 2,734.096 (89,406) 1.928,875 107,658 18) ,453 2.223,986 (57.ISO) 1.S50.932 131.601 IS5.S49 2.174.332 (55.572) 74,751 (135,865) -- (9,422) (14,726) 52,094 (33,168) 73.079 (129.204) -- (15,544) (14.52$) 11.0S5 (75,112) 85.244 (129.099) 78.411 (3.340) (15.954) (274.512) (259.250) (122,574) 22,022 (132,292) 9.6S2 (314.S22) 77.963 (100,552) 90,351 (122.610) (21,645) (236.$59) (29.1SS) (10,201) -- -- (10,201) 244,031 (144,255) -- 52.5S0 (91,675) 387,S25 (266.047) 4.276 -- (261.771) 716.429 37,415 $ 196,415 52.119 $ 244.031 66.533 S 387.525 $ (2.68) s (3.29'' S (6.35) 2.41 (0.59'' (0.7S) -- -- 0.11 -- 1.42 -- $ (0.27) $ (2.46) $ (7.05) $ 1.00 s 1.40 s I.SO 24 McDermott international, inc. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1990 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization (Gain) loss on disposal of assets Interest adjustment and tax settlement Cumulative effect of accounting change Gain on disposal of Bailey Operations, net of applicable income taxes (Gain) loss on sale of government obligations Net (increase) decrease in contracts in progress and advance billings on contracts (Increase) decrease in accounts receivable Increase (decrease) in accounts payable (Increase) decrease in inventories Net decrease in current, non-current and deferred income taxes payable Net decrease in other net liabilities Other NET GASH USED IN OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the disposal of assets Purchases of property, plant and equipment Sale of minority interest Proceeds from sale of Bailey Operations Purchase of short-term investments, government obligations and Eurodollar investments Sales of short-term investments, government obligations and Eurodollar investments Other NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES; Payment of long-term debt Issuance of iong-term debt Increase (decrease) in short-term borrowing Issuance of common stock Dividends paid Other NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES EFFECTS OF EXCHANGE RATE CHANGES ON CASH NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH .AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) Income taxes SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Exchange of 10% subordinated debentures See accompanving notes to consolidated financial statements. 25 1990 $ (10,201) 112,966 (53,826) -- -- (88,314) 21 42,091 (105,068) 34,991 (12,994) (13,579) (30,217) (1,956) S (126,086) $ 79,111 (127,370) 13,730 295,000 (2,662,190) 2,706,826 (2,277) S 302,830 S (86,590) 58,824 (60,362) 6,378 (37,340) (1,419) s (120,509) 178 56,413 76,124 s 132,537 s 125,445 s 45,009 s 90,800 1989 (In thousands) s (91.675) 107.658 4.895 -- (52,580) -- (164) (11.776) 74.112 (12.285) 19,660 (38,629) (68,704) 4.997 S (64,491) $ 25.698 (59,864) -- -- (1,158,850) 1,184,934 (6,286) S (14,368) $ (337,662) 372,871 35,295 90 (59,507) (1,596) S 9,491 1,839 (67,529) 143,653 S 76,124 S 110,134 $ 25,565 $-- 1988 S (261.771) 131.601 (5,403) (12S.610) -- -- 283,725 10,823 16,703 22,646 (28,358) (30,682) (31,845) 19,204 $ (1,967) $ 87,692 (48,965) 23,000 -- (931,531) 1,123,045 (9,727) $ 243,514 $ (216,529) 248,500 (142,924) 933 (66,833) (2,470) $ (179,323) 746 62,970 80,683 $ 143,653 $ 134,717 $ 13,994 $-- McDermott international, inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1990 NOTE I SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements are presented in U.S. Dollars in accordance with accounting principles generally accepted in the United States and include the accounts of McDermott International. Inc. and all sub sidiaries and controlled joint ventures and partnerships. Investments in joint venture and other entities in which McDermott International has a 20% to 50% interest are accounted for on the equity method. AH significant inter company transactions and accounts have been eliminated. Unless the context otherwise requires, hereinafter "International" will be used to mean McDermott Interna tional, Inc., a Panama corporation; the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and its consolidated subsidiaries, joint ventures and partnerships; and, "McDermott International" will be used to mean the consolidated enterprise. Certain amounts previously reported have been reclassified to conform with the presentation at March 31. 1990. The notes to consolidated financial statements are presented on the basis of continuing operations, unless other wise stated. 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 the ratio of costs incurred to total estimated costs, as applicable to the product or activity involved. Revenues and related costs so recorded, plus accumulated contract cost that exceeds amounts invoiced to customers under the terms of the contract 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. 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. There are no unbilled revenues which will not be billed. Provisions are made currently for all known or anticipated losses. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. Included in Contracts in Progress is approximately $34,900,000 and $13,900,000 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, 1990 and 1989. respec tively. International and certain of its subsidiaries keep books and file tax returns on the completed contract method of accounting. 1990 1989 Included in Contracts in Progress are: (In thousands) Costs incurred less costs of revenue recognized Revenues recognized less billings to customers Contracts in Progress Included in Advance Billings on Contracts are: $ 125,011 125,954 $ 250,965 S 163.3S7 121.727 $ 285.114 Billings to customers less revenues recognized Costs of revenues recognized less costs incurred Advance Billings on Contracts $ 236.829 (16,522-) S 220.307 S 183.459 (22.533') s 160.S76 McDermott International is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems and Equipment contracts. McDermott International 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: 1990 19S9 (In thousands) Retainages_______________________________________________ $ Retainages expected to be collected after one year_______ $ 95,772$ 132.Q5S 84,031$ 62.S4S 26 Depreciation, Maintenance and Repairs and Drydocking Expenses Except for major marine vessels, McDermott International's 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 2S years for machinery and equipment. Major marine vessels are depreciated on the units-of-production method based on the utilization of each vessel. Depreciation expense calculated under the units-of-production method may be less than, equal to. or greater than depreciation expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than 25% of annual straight-line depreciation, nor less than 50% of cumulative straight-line depreciation. Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the marine fleet, which are estimated and accrued over the period of time between drydockings, and such accruals are charged to operations currently. Cash Equivalents Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, which are not held as part of a long-term investment portfolio. Investments At March 31, 1990, McDermott International held $453,067,000 (amortized cost) and $287,595,000 (amortized cost) of government securities and Eurodollar time deposits, respectively, as a long-term investment, compared with S675,683,000 and $74,994,000, respectively, at March 31. 1989. The market and face values of the govern ment securities and Eurodollar time deposits were $451,573,000 and $453,250,000, and $286,893,000 and $287,537,000. respectively, at March 31, 1990. These securities are carried at amortized cost, as in manage ment's opinion there is no permanent loss in value of the portfolio, and there is no present intention to liquidate the securities at less than cost. Included in other-net expense in fiscal 1988 was a net loss of S283,725,000 on the sale of government obligations. The loss was incurred when the portfolio was repositioned to shorten the maturities in order to reduce the exposure to the volatility of long-term interest rates. 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 McDermott Interna tional's investment in The Babcock & Wilcox Company ("B&W"), which is being amortized on a straight-line basis over forty years. During fiscal 1990 and 1988, $14,799,000 and $19,674,000, respectively, of excess cost was written off in connection with discontinued operations. Warranty Expense McDermott international provides for estimated future warranty expense which may be required to satisfy contractual requirements, primarily of the Power Generation Systems and Equipment segment. Such provisions are 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 International provides for future environmental clean-up for 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. McDermott International is accruing the current estimated cost of those clean-up activities over the economic useful life of each of these facilities, which is estimated at 40 years. In addi tion, a specific provision of approximately $12,800,000 was made at March 31, 1990 to reflect changes in the current estimate of clean-up costs for these facilities and changes in the economic lives of certain of these facilities. 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 $19,400,000, $23,400,000 and $20,900,000 in fiscal years 1990, 1989 and 198S, respectively. In addition, expenditures on research and development activities of approximately $33,600,000, $48,700,000 and $44,400,000 in fiscal years 1990, 1989 and 1988, respectively, were paid for by customers of McDermott International. 27 Capitalization of Interest Cost in fiscal vears 1990, 1989 and 198$. total interest cost incurred, including discontinued operations, was $139.41o!000, $129,582,000 and $137,736,000, respectively, of which $3,498,000. $24,000 and $1.'>10,000, respectively, was capitalized. Foreign Currency Translation Assets and liabilities of foreign operations, other than operations in highly inflationary economies, are translated into U.S. Doiiars 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; an analysis of these adjustments follows: (In thousands) Balance March 31. 1987 Divestiture of foreign investments Translation adjustments for fiscal 1988________ _ $ Balance March 31, 1988 Divestiture of foreign investments Translation adjustments for fiscal 1989UiAil) Balance March 31, 1989 Divestiture of foreign investments Translation adjustments for fiscal 1990(S13) Balance March 31, 1990$ (34.371) 7.278 25.905 (1.1SS) ^57) (2.392') (4.649) (7.S54) Foreign currency transaction adjustments are reported in income. Included in Other Income (Expense) are trans action gains (losses) of $4,022,000, $371,000 and $(2,072,000) for fiscal years 1990, 1989 and 1988. respectively. Earnings Per Share Primary earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings per share include the dilutive effect of convertible preferred stock and warrants. NOTE 2 - DISCONTINUED OPERATIONS Bailey Controls Group On October 31, 1989, McDermott International sold its Bailey Controls ("Bailey") operations to ELSAG. a sub sidiary of Finmeccanica Societa Finanziaria per Azioni, a manufacturing holding company of IRJ. an Italian industrial group. The purchase price paid at closing was S295,000,000 and is subject to final purchase price adjustments that have not yet been determined. Bailey's operations have been accounted for as a discontinued operation in the consolidated financial statements and the Consolidated Statement of Income (Loss) and Retained Earnings has been restated for all prior periods presented. Condensed financial information for Bailey follows: Revenues Income (loss) from operations, net of applicable income taxes of $423,000, $3,509,000 and $1,914,000, respectively, in fiscal 1990. 1989 and 1988 Gain on disposal, net of applicable income taxes of $52,457,000 1990 S 170,996 1989 (In thousands) $ 255.S50 19S8 S 232.S95 (318) 88,314 7.677 5.510 The gain of $88,314,000 in fiscal 1990 included income from operations of $2,474,000 during the phase out period. Final sales price adjustments are not expected to have a material effect on the consolidated financial statements. 28 Trading In fiscal 1988, International decided to dispose of its Trading segment and accounted for it as a discontinued operation. During fiscal 1989, International*entered into an agreement with Raulino Treuhand-Und Verwaitungs AG, a sub sidiary of York Hanover Holding AG, a Swiss corporation, for the sale of its wholly-owned German subsidiaries, McDermott International Trading GmbH (MIT GmbH) and Coutinho Caro AG. Under the terms of this agreement. wherein the sales price is subject to the determination of the final net asset value of the subsidiaries. Interna tional assumed and prepaid approximately $29,300,000 of MIT GmbH's notes payable and accrued interest and gave certain guarantees regarding specific contracts. Condensed financial information for the Trading segment follows: 1989 1988 (In thousands) Revenues $- SI,171,854 Loss from operations, net of applicable income taxes of $1,193,000 -- (10,282) Loss on discontinuance, including income taxes of $1,676,000 and $3,102,000, respectively, in fiscal 1989 and 1988 (27,506) (27,382) The loss of $27,506,000 in fiscal 1989 resulted from additional operating losses during the phase-out period and losses on the sale of certain assets. The sale and liquidation of the Trading segment was substantially completed during fiscal 1989. Final sales price adjustments and guarantees are not expected to have a material effect on the consolidated financial statements. Insulating Products Group In fiscal 1988, McDermott International sold its Insulating Products Group to Thermal Ceramics, Inc., a subsidiary of Morgan Crucible Company Pic, a company headquartered in the United Kingdom, for approximately $76,000,000 and accounted for it as a discontinued operation. Condensed financial information for the Insulating Products Group follows: 1990 1989 (In thousands) 1988 Revenues $- s- $ 61,380 Income from operations, net of applicable income taxes of $659,000 1,025 Gain (loss) on disposal, net of applicable income taxes (benefit) of $53,000, $(137,000) and $9,060,000, respectively, in fiscal 1990, 1989 and 1988 2,355 (1,816) 1,941 Seamless Tubular Line of Business In June 1987, McDermott International announced its intention to permanently close its seamless tubular line of business and accordingly accounted for it as a discontinued operation at March 31, 1987. During fiscal year 1990, McDermott International agreed to sell to Ambridge Tube Corporation ("Ambridge"), a Texas corporation (or a related entity designated by Ambridge), substantially all of the assets of its seamless tubular line of business and to transfer to Ambridge certain of its liabilities and obligations. The seamless tubular line of business includes the equipment, technology and plants located in Beaver Falls, Ambridge and Koppel, Pennsylvania; and Bryan, Tfexas. The proposed sale is expected to take place during the first quarter of fiscal 1991, subject to certain contingencies, primarily related to applicable government approvals and environmentalrelated matters. 29 No gain or loss attributable to the discontinued operations was recognized in fiscal years 1990. 1989, and 198S and"at March 31. 1990 management believes remaining provisions are adequate. Net assets of S12,140,000 of the seamless tubular line of business are included in the consolidated balance sheet in Other current assets at March 31, 1990. NOTE 3 - SALE OP' ACCOUNTS RECEIVABLE In December 1988, a subsidiary of McDermott Incorporated entered into a three-year agreement with a certain U.S. bank, whereby the subsidiary can sell, up to a maximum of S100,000,000. with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold accounts receivable. Effective December 19S9. the maximum sales limit was increased to $200,000,000. At March 31. 1990, approximately $175,000,000 of receivables had been sold for cash under this agreement. Included in Other-net income were expenses recorded on the sale of receivables which represent bank fees and discounts of $13,087,000 and SI.350,000 for the fiscal years ended March 31, 1990 and 1989, respectively. NOTE 4 - 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 37% and 21?6 of total inventories was determined using the LIFO method at March 31,1990 and March 31. 19S9. respectively. Consolidated inventories at March 31, 1990 and 1989 are summarized below: 1990 1989 (In thousands) Raw Materials and Supplies Work in Progress Finished Goods $ 60.647 $ 64.60S 28.145 36.-363 18,99160,3-57 $ 107,783 NOTE 5 - PENSION PLANS AND POSTRETIREMENT BENEFITS Pension Plans * McDermott International 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 Common Market country or who do not earn income in the I'nited 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 Interna tional'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 recom mended by the respective plan actuary and in accordance with applicable law. At January 1,1990. approximately one-half of total plan assets were held in U.S. Government securities. The remaining assets were invested in listed stocks and bonds and investments of a short-term nature. Net periodic pension cost for fiscal years 1990, 1989 and 1988 included the following components: 1990 1989 (In thousands) 1988 Service cost - benefits earned during the period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and deferral_____________ Net periodic pension cost $ 18,431 47,452 (161,548) 80,286 S (15,379) S 17,695 42.140 (77,276') 7,205 S (10,236') $ 19.2S0 36.777 2-55 (75.9*65'; S (19.653) 30 Al January 1, 1990 and 19S9, the weighted-average discount rate for active and retired emplovees and the expected long-term rate of return on assets were both 8-1/2% and 8-1/2%, respectively. The rate of increase in future compen sation ievels used in determining the actuarial present value of the projected benefit obligations was 5% and 4-1/2%, respectively. Due to the sale of its Bailey operations on October 31, 1989, McDermott International curtailed certain related salaried pension plans in the United States and Canada. Consequently, income from discontinued operations in fiscal year 1990 includes a net after-tax gain of S3,118,000 resulting from the curtailments. Accordingly, net periodic pension cost relating to these pension pians was remeasured at October 31. 1989. The impact on net periodic pension cost for fiscal year 1990 was to reduce the pre-tax loss from continuing operations by $3,523,000. The following table sets forth the plans' funded status and amounts recognized in McDermott International's consolidated financial statements: Actuarial present value of benefit obligations: Plans for Which Assets Exceed Accumulated Benefits Plans for Which Accumulated Benefits Exceed Assets 1990 1989 1990 1989 (In thousands) Vested benefit obligation Accumulated benefit obligation Projected benefit obligation Plan assets at fair value Projected benefit obligation (in excess of) or less than plan assets Unrecognized net (gain) or loss Prior service cost not yet recognized in net periodic pension cost Unrecognized transition (asset) obligation Adjustment required to recognize minimum liability Prepaid pension cost (pension liability) recognized in the consolidated financial statements $ 423,988 $ 484,730 $ 581,097 956,425 375,328 (74,203) 11,293 (123,149) -- $ 367,146 $ 416,814 $ 516,164 808,952 292,788 388 6,374 (134,994) -- S 66,969 $ 85,144 S 85,893 57,890 (28.003) (5,387) 5,079 530 (1,854) $ 62,427 $ 76,800 S 77,391 52,257 (25,134) (1,259) 491 304 -- $ 189,269 $ 164,556 $ (29,635) $ (25,598) The two principal 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 occurred within a 60-month period following a change in control of International. Multiemployer Plans - One of McDermott International'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 $9,059,000, $8,691,000 and $8,121,000 in fiscal years 1990, 1989 and 1988, respectively. Postretirement Health Care and Life Insurance Benefits McDermott International 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 Common Market country or who, while employed, did not earn income in the United States, Canada or the United Kingdom. McDermott International shares the cost of providing these benefits with all affected retirees. McDermott international's cost of providing such benefits is recognized by expensing the insurance programs' premiums, the self-insured program's claims paid, and the estimated unpaid liability for claims incurred by plan participants. The aggregate cost, including discontinued operations, totaled $21,611,000, $21,689,000 and $16,831,000 in fiscal years 1990, 1989 and 1988, respectively. McDermott International has made no provi sion for recognizing the cost of postretirement benefits which may eventually be paid to employees who have not yet retired. 31 NOTE 6 INCOME TAXES Effective April 1, 1988, McDermott International adopted SFAS No. 96, "Accounting for Income Taxes" The State ment provides for a liability approach under which deferred income taxes are provided Ixised upon enacted tax laws and rates applicable to the periods in which the taxes become payable. For periods prior to April 1. 1988. deferred income taxes were provided based upon tax laws and rates applicable to the current year without adjustment for subsequent changes. The cumulative effect of the accounting change at April 1, 19S8 was S52.5S0.000 (SI.42 per share). The effect of the change, excluding the cumulative effect, was to decrease the loss from continuing operations by $2.863.000 (SO.08 per share) and the loss before extraordinary item and cumulative effect of accounting change by $4.142.000 (SO. 11 per share) and to decrease the net loss by $1,146.000 (SO.03 per share) for the fiscal year ended March 31, 1989. Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted. All income'has been earned outside of Panama and McDermott International is not subject to income tax in Panama on income earned outside of Panama. Therefore, there is no expected relationship between the provision for, or benefit from, income taxes and income, or loss, before income taxes. The major reason for the variations in such relationships is that income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation which varies from that of any other country (not only with respect to nominal rate but also with respect to the allowability of deductions, credits and other benefits) and because the proportional extent to which income is earned in, and subject to tax by, any particular country or countries varies from year to year. In addition, in fiscal 1988 McDermott International recognized a benefit from reappraisal of its liabilities for worldwide income taxes. The provision for (benefit from) income taxes from continuing operations consists of: 1990 Current Deferred U.S. - Federal U.S. - State & Local Other than U.S. S 25,951 10,001 9.365 S 45,317 S (56,709) (10,125) (505) S (67,339) 1989 Current Deferred (In thousands) S 6,771 $ (31,057) 9,882 18,954 S 35,607 (10,926) (3,306) S (45,289) 1988 Current Deferred $ (22.990) 3.023 (21.35$) S (41.325) $ (25.74S) (2.059) (S.831) $ (36.63S) Loss from continuing operations before benefit from income taxes was as follows: US. Other than U.S. 1990 $ 92,510 30,064 $ 122,574 1989 (In thousands) $ 77.653 54.639 S 132.292 1988 $ 34.453 2S0.369 $ 314.S22 An extraordinary item in fiscal 1988 of $4,276,000 resulted from the utilization of operating loss carryforwards. U.S. federal tax credits, principally investment tax credits, are accounted for on the flow-through method. Fbr U.S. federal income tax purposes, tax credits, principally investment tax credits, of $7,480,000 a* March 31,1990 are available to reduce taxes payable through 2004. These credits, which have been reduced under the provi sions of the 'fax Reform Act of 1986, are available on an unreduced basis to offset taxes payable in earlier years which may result from settlement of ongoing tax examinations. 32 In fiscal 1990 and i989, deferred income taxes resulted from the tax effect of temporary differences in the finan cial and tax bases of assets and liabilities. In fiscal 1988, deferred income taxes resulted from the tax effect of transactions which were recognized in different periods for financial and tax reporting purposes. Significant components of deferred income taxes and their related impact on the provision for (benefit from) deferred income taxes were: 1990 1989 (In thousands) 1988 Excess tax over financial depreciation Long-term contracts, primarily on the completed contract method for tax purposes Warranty expense Provision for cost of certain facility closings, relocations and dispositions and environmental clean-up Interest on proposed tax deficiencies Pension expense Purchased tax benefits Deferred financial gain Thx loss carryforwards Ihx credits Bad debt expense Equity income of investees Other S (10,309) (42,321) (340) $ (1.257) (40,902) 6,573 S (7,074) (68,679) 1,862 (3,499) (3,992) (7,278) (1,151) 545 (3,772) 4,262 (1,208) 658 1,066 S (67,339) (6,374) (2,764) 1,904 (2,899) 471 (2,221) (518) (2.528) 2,309 2,917 S (45,289) 2,240 27,894 6,660 (2,586) (5,526) (9,905) 8,956 (337) 4,147 5,710 S (36,638) During the fiscal year ended March 31, 1988, decisions were entered in the United States T&x Court which complete a group of settlements concerning International's liability for United States federal income taxes for its fiscal years ended November 30, 1976 through March 31, 1983 and the Delaware Company's liability for the fiscal years ended March 31, 1972 through March 31, 1980. In these settlements. International and the Delaware Company agreed to pay a total of approximately $20,000,000 in U.S. federal income taxes and penalties, plus interest on that amount. As a result of these settlements, during the third quarter of fiscal year 1988, McDermott Interna tional reappraised its liabilities for worldwide income taxes and related interest and recognized a net income benefit from income taxes and reduced interest expense of S128,610,000. During the fiscal year ended March 31, 1990, decisions were entered in the United States Thx Court concerning the Delaware Company's U.S. income tax liability for the fiscal years ending March 31,1981 and March 31,1982. The Delaware Company is continuing to contest claims for its fiscal year ended March 31, 1983 in the United States Thx Court. The Internal Revenue Service has issued notices for fiscal 1984, 1985 and 1986 which propose substantial additional taxes. McDermott International believes that the outcome of any income taxes ultimately assessed will not have a material adverse effect on its consolidated financial statements. 33 NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE Long-term debt consists of: Unsecured Debt: 10.25% Notes due 1995 Floating rate notes ($150,000,000 face value) interest at three month LIBOR plus 0.125% (S.6$75% inclusive at March 31, 1990) due 1992 6.50% DM 100,000.000 Bearer-bonds due 1991 8.27% Note due 1991 with annual sinking fund installments of $15,000,000 10.20% Sinking fund debentures due 1999 with annua! sinking fund installments of $2,500,000 Floating rate notes Other notes payable through 2009 (interest at various rates ranging from 6.80% to 9.625%) 12.25% Senior subordinated notes due 1998 10.00% Subordinated debentures ($45,848,000 face value at March 31, 1990) due 2003 with annual sinking fund installments beginning 2002 Secured Debt: 10.375% Note payable due 1998 Project financing notes Other notes payable through 2011 and capitalized lease obligations Less: Amounts due within one year 1990 1989 (lit thousands) $ 150,000 S 150.000 149.843 59.135 15,000 27,003 -- 43,302 200,000 149,763 52.795 30.000 30.000 51.750 46.276 200.GG0 40.000 142,400 68.26S 13,720 908.671 35,350 $ 873,321 129.439 152.400 10.577 17.363 1,020.363 $7,604 $ 932.759 The 12.25% Senior Subordinated Notes due 1998 (the "Subordinated Notes") are redeemable at par plus a premium (as defined in the Indenture) at the option of the Delaware Company, in whole or in part, on or after June 1, 1993. Mandatory annual sinking fund payments in the amount of $50,000,000, commencing June 1, 1996. are required to retire 50% of the Subordinated Notes prior to maturity on June 1,1998. As defined in the Indentures, both the 10.25% Notes due 1995 and the Subordinated Notes maybe redeemed at the option of the holders upon a change of control of International. The Indentures contain certain covenants which restrict the amount of funded indebtedness that the Delaware Company may incur, and place limitations on certain restricted payments, certain transactions between affiliates, the creation of certain liens and the amendment of a certain intercompany agreement. Project financing notes of $68,268,000 result from withdrawals of funds available from the issuances, by a govern mental authority, of approximately $87,000,000 of tax-exempt energy development revenue bonds and a $23,000,000 project financing line of credit. The revenue bonds bear interest at variable interest rates (6.50% at March 31, 1990) and the project financing line of credit bears interest at 90 day LIBOR plus 1-1/4% (9.91% at March 31. 1990). The project financing notes are secured solely by the assets of the project. McDermott International's $142,400,000 long-term loan at an interest rate of 10.375% is secured by a letter of credit issued by a U.S. bank. The letter of credit was secured by approximately $159,005,000 amortized cost (market value of $158,528,000) of McDermott International's long-term portfolio at March 31. 1990. The principal is repayable in seventeen ascending semi-annual payments with the final installment due Jur.e 20, 199S. The letter of credit and collateral amounts decline as the loan principal is repaid. Maturities of long-term debt during the five fiscal years subsequent to March 31, 1990 are as- follows: 1991 $35,350,000; 1992 - $239,885,000; 1993 - $25,266,000; 1994 - $23,140,000; 1995 $23.SS2.000. 34 The Delaware Company 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. At March 31, 1990, approximately $662,586,000 of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity. International and the Delaware Company at March 31, 1990 had available unused short-term lines of credit from various banks totaling approximately $146,500,000. Current notes payable to banks at March 31, 1990 and 1989 were $69,439,000 and 814.791,000, respectively. At March 31, 1990, other current notes payable of $24,420,000 were secured by $24,300,000 par value of govern ment obligations. At March 31, 1989, other current notes payable were $139,429,000. NOTE 8 - CONTINGENCIES AND COMMITMENTS Litigation - International and certain of its officers, directors and subsidiaries are defendants in numerous legal proceedings. Management and general counsel believe that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial statements. Operating Leases - Future minimum payments required under operating ieases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 1990 are as follows: 1991 - $16,445,000; 1992 $13,013,000; 1993 - $10,182,000; 1994 - $8,365,000; 1995 - $5,520,000; and thereafter - $33,562,000. Future minimum lease payments and leased property under capital leases are not material. 'fatal rental expense for fiscal 1990,1989 and 1988 was $92,120,000, $69,753,000 and $83,392,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material. Other - McDermott International 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 International maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insurable or insurance is available only at rates which McDermott Interna tional considers uneconomical. Commitments for capital expenditures, including specially-financed projects, amounted to approximately $44,965,000 at March 31, 1990, of which approximately $41,398,000 relates to fiscal 1991. McDermott International is contingently liable under standby letters of credit totaling $261,507,000 at March 31, 1990, issued in the normal course of business. At March 31, 1990, McDermott International pledged approximately $64,001,000 amortized cost (market value of $64,226,000) of government obligations to secure payments under and in connection with certain reinsurance agreements. NOTE 9 - SUBSIDIARY'S REDEEMABLE PREFERRED STOCKS At March 31, 1990 and 1989, 13,000,000 shares of Delaware Company Preferred Stock, with a par value of $1 per share, were authorized. Of the authorized shares, 2,818,941 shares of Series A Preferred Stock and 3,724,629 shares of Series B Preferred Stock were outstanding at March 31, 1990 and 1989. The outstanding shares are entitled to $31.25 per share in liquidation. Preferred dividends of approximately $15,900,000 are classified as minority interest in Other Income (Expense) in each of the fiscal years 1990, 1989 and 1988. The outstanding shares were issued in connection with the acquisition of B&W and are stated at the mandatory redemption value which approximated m^et value at the time the shares were issued. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of Preferred Stock, and may set terms of each new series except that the Delaware Company 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 such Preferred Stock. Each share of the outstanding Series A Preferred Stock is convertible into one share of Common Stock of Interna tional plus $0.10 cash. The shares are redeemable at the option of the Delaware Company through March 31, 2008 at $31.25 per share, plus accrued dividends. On March 31, 1991 and each subsequent year through March 31, 2008, the Delaware Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A Preferred Stock. The obligation to redeem Series A Preferred Stock is $9,809,000 for each of the fiscal years 1991 through 1995. The Delaware Company applied 313,878 shares of Series A Preferred Stock that it owned to satisfy the March 31, 1990 mandatory sinking fund obligation. 35 Series B Preferred Stock is redeemable at the option of the Delaware Company at $31.25 per share plus accrued dividends. On March 31 of each of the fiscal years 1991 through 1995, March 31 of each of the fiscal years 1996 through 2006, and March 31 of each of the fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 315,877. 252,702 and 189,526 shares of Series B Preferred Stock, respectively. The obligation to redeem Series B Preferred Stock is $9,871,000 for each of the fiscal years 1991 through 1995. The Delaware Company applied 315,877 shares of Series B Preferred Stock that it owned to satisfy the March 31. 1990 mandatory sinking fund obligation. Additional shares of Series A or Series B Preferred Stock, equal to the number of shares the Delaware Company is obligated to redeem, may be redeemed on each mandatory redemption date by the Delaware Company, on a non-cumulative basis. The Delaware Company may apply to the mandatory sinking fund obligations any Series A or B Preferred Stock owned, previously redeemed or surrendered for conversion which have not been previously credited against the mandatory sinking fund obligations. At March 31, 1990, 49,476 shares of Series A Preferred Stock have been converted to date and the Delaware Company owned 2.830.S56 and 1,013,531 shares of Series A and Series B Preferred Stock, respectively. NOTE 10 - CAPITAL STOCK Common Stock - Changes in Common Stock during the three years ended March 31, 1990 are summarized below; Shares Par Value Capital in Excess of Par Value (In thousands except tor share data) Balance. March 31. 1987 Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Stock plan restricted stock purchases (net of forfeitures) Shares issued upon exercise of warrants Deferred career executive stock plan expense Balance, March 31, 1988 Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Stock plan restricted stock purchases (net of forfeitures) Deferred career executive stock plan expense Balance, March 31, 1989 Shares issued upon exercise of stock options Stock plan restricted stock purchases (net of forfeitures) Shares issued upon exercise of warrants Deferred career executive stock plan expense Balance, March 31, 1990 37,053,417 $ 37,053 1,805 29,476 59,210 295 _ 37,144,203 2 30 59 _ 37,144 4,808 750 170,450 _ 37,320,211 94,094 62,750 4,687,339 5 1 170 _ 37,320 94 63 4,687 42,164,394 $ 42.164 $ 316.164 55 837 326 317,3S9 145 14 . 604 31S.152 2.02S _ 91.047 S24 $ 412.051 The Panamanian regulations relating to acquisitions of securities of companies, such as International, registered with the National Securities Commission require, among other matters, that detailed disclosure concerning the offerer, which is subject to review by either the Panamanian National Securities Commission or the Board of Directors of the subject company, be finalized prior to the beneficial acquisition of more than 5 percent of the outstanding shares of any class of stock. Transfers of securities in violation of these regulations are invalid and cannot be registered for transfer. 36 At March 31, 1990 and 1989, 58,043,314 and 62,933,449 shares of Common Stock, respectivelv, were reserved for issuance in connection with exercise of warrants, exercise of rights, the 1974 Career Executive Stock Plan, exercise of stock options, the 1983 and 1987 Long-Term Performance Incentive Compensation Programs and con version of Series A Preferred Stock. International Rights - On December 30, 1985, each holder of Common Stock received a dividend distribution of one Right for each outstanding share of Common Stock. The Rights currently trade with the Common Stock and at March 31, 1990 and 1989, Internationa] had outstanding Rights to purchase 42,264,394 and 37.420,211 shares, respectively, of its Common Stock at a price of S50 per share subject to anti-dilution adjustments. The rights will become exercisable and will detach from the Common Stock 10 days after a person or a group either becomes the beneficial owner of 20 percent or more of the outstanding Common Stock, or commences or announces an intention to commence a tender or exchange offer for 30 percent or more of the outstanding Common Stock. If thereafter the acquiring person or group engages in certain self-deaiing transactions, holders of Rights may purchase at the exercise price that number of shares of Common Stock having a market value equal to twice the exercise price. In the event International merges with or transfers 50 percent or more of its assets or earnings to any person after the Rights become exercisable, holders of Rights may purchase at the exercise price that number of shares of Common Stock of the acquiring entity having a market value equal to twice the exercise price. The Rights are redeemable by International and expire on December 30, 1995. International Warrants - At March 31, 1990 and 1989, International had outstanding warrants to purchase 1,635.364 and 5,995,695 shares of its Common Stock, respectively. During the March quarter of fiscal 1990, International amended the terms of its outstanding warrants such that from March 2,1990 to April 2, 1990 the number of shares of its Common Stock issuable upon exercise of one warrant, either by payment per share of S25 cash or S25 principal amount of the Delaware Company's 10% Subordinated Debentures due 2003, increased from one share to 1.075 shares. During the period from March 2, 1990 to March 31, 1990, cash of $4,935,000 and debentures with a book value of S90.800.000 (par value of $104,073,000) were received from the exercise of 4,360,331 warrants in exchange for 4.687.339 shares of Common Stock, which resulted in an increase in Common Stock of S4,687,000 and Capital in Excess of Par of $91,047,000. In April 1990, cash of $20,084,000 and debentures with a book value of S16.222.000 (par value of $18,593,000) were received from the exercise of 1,547,084 warrants in exchange for 1,663.090 shares of Common Stock. 1983 Long-Term Performance Incentive Compensation Program - Under the program which was adopted February S. 1983, the Compensation Committee, formerly the Career Executive Stock Plan Committee (the "Committee"), may grant to the officers and key employees options to purchase in the aggregate up to 2,000,000 shares of Common Stock at 100% of the fair market value on the date of grant. Options become exercisable on or before the third anniversary of the date of grant, and remain exercisable not more than ten years after the date of grant. The Committee, until August 1987, was permitted to grant stock appreciation rights in connection with the granting of options under the program. Such stock appreciation rights permit the holders thereof to surrender exercisable options in exchange for shares of Common Stock having a fair market value on the date of such surrender equal to the excess (up to, but not greater than, the fair market value of the underlying shares on the date of grant) of the fair market value on such date of the shares to which such surrendered option relates over the aggregate option price under the related options. The Committee may, at its discretion, grant holders of stock appreciation rights the right to receive up to 50% of such excess in cash in lieu of shares of Common Stock. The program also authorizes the Committee to grant performance unit awards which are earned by the achievement of performance standards established by the Committee. Performance units are paid in cash or shares of Common Stock or both at the discretion of the Committee. At March 31. 1990, 1989 and 1988, stock option and stock appreciation rights awards of 1,402,468, 1,544,283 and 956.515. respectively, were awarded and outstanding at an average price of $20.7188, $20.6122 and $21.4248 per share, respectively. At March 31, 1990, 1989 and 1988, 42,887, 6,747 and 595,265 shares were available for award under the program and 105,645, 750 and 71,070 options were exercised or surrendered for stock appreciation rights during the year ended on each such date. During fiscal 1990, no stock options were awarded. During fiscal 1989 and 1988, respectively, 627,330 and 322,470 stock options, without stock appreciation rights, were awarded. Awards relating to 36,170, 38,812 and 28,070 shares were forfeited during fiscal 1990, 1989 and 1988. respectively. Charges to income with respect to stock appreciation rights, performance units and dividend equivalency expense were $1,693,000, S 1,390,000 and $1,857,000 during fiscal 1990,1989 and 1988, respectively. I9S7 Long-Term Rxforrnance Comjxrnsatiov Program - Under the program, which was approved by the shareholders on August li. 1987. the Compensation Committee, formerly the Career Executive Stock Plan Committee, (the "Committee") may grant, to the officers and key employees options to purchase in the aggregate up to 2.500,000 shares of Common Slock at no less than SO'.',, nor more than 100'/< of the fair market value on the date of grant. Options become exercisable on or before the third anniversary of the date of grant, and remain exercisable not more than ten years and one day after the date of grant. Pursuant to the program, the Committee may grant eligible employees the right to purchase up to 700,000 shares of the 2.500,000 shares of Common Stock issuable under the program at a purchase price of par value (SI.00 per share) subject to restrictions on transfer. The restrictions lapse as to 50% of the shares purchased pursuant to any one grant of such rights on the fifth anniversary date of such grant, and as to the other 50% of such shares, on the third through the tenth anniversary dates of such grant, depending upon the comparison of McDermott International's three-year average Return on Capital to that of a comparative group of companies. In the event of a change in control of McDermott International. the Committee may cause such restrictions to lapse and accelerate the exercisability of any options outstanding. At March 31, 1990 and 1989, 1,339,809 and 1,034,120 stock options were awarded and outstanding at an average price of S18.7582 and S16.3961 per share, respectively. No options were awarded and outstanding in 1988. During fiscal 1990, 28,020 options were forfeited. During fiscal 1990, 34,111 options were exercised. No options were exercised during fiscal 1989 and 1988. During fiscal 1990 and 19S9, 367,820 and 1.034.120 options were awarded, respectively. In fiscal 1988, no options were awarded. Rights to purchase 67,980, 174.110 and 63,970 shares were granted during fiscal years 1990, 1989 and 1988, respectively; however, 5,230, 3.660 and 4,760 of such shares were subsequently forfeited to McDermott International during fiscal 1990, 19S9 and 19SS. respectively. Charges to income were $1,222,000, $594,000 and $166,000 during fiscal 1990, 1989 and 19SS. respectively. At March 31, 1990, 1989 and 1988, 833,670. 1,236,220 and 2.440,790 shares, respectively, were available for awards or grants under the program. Career Executive Stock Plan - This plan, which was adopted as a plan of International effective March 15. 19S3. originally authorized 600,000 shares of Common Stock to be issued to eligible employees in consideration of their services. Employees granted stock under the plan pay $1.00 per share as the option purchase price. Restrictions with respect to issued shares lapse in approximately equal amounts on the second through tenth anniversary dates of the date of issuance. The cost of the plan, based on fair market value on the date of issuance of Common Stock, is amortized over a ten year period following the date of issuance. Upon forfeiture of stock by employees, previous expense attributable to unvested stock is credited to income. During fiscal 1990. 19S9 and 19SS. no shares were forfeited under the plan. As of June 30, 1984, no further awards could be made under the plan. Charges to income under the plan were S149.000, $152,000 and $160,000 during fiscal 1990. 1989 and 19SS. respectively. International Preferred Stock - At March 31,1990 and 1989, 25,000,000 shares of Preferred Stock were authorized and International has issued 100,000 shares of Series A Participating Preferred Stock (the "Participating Preferred Stock") and 100,000 shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred Stock"), all of which are owned by the Delaware Company. The annual per share dividend rates for the Participating Preferred Stock and the Non-Voting Preferred Stock are S10 (but no more than ten times the amount of the per share dividend on International Common Shares) and $20, respectively, payable quarterly, and dividends on such shares are cumulative to the extent not paid. In addition, shares of Participating Preferred Stock are entitled to receive additional dividends whenever dividends in excess of $3.00 per International Share are declared (or deemed to have been declared) in any fiscal year. In 1887, the voting rights of the Participating Preferred Stock were eliminated. The issuance of additional International Preferred Stock in the future and the specific terms thereof, such as the dividend rights, conversion rights, voting rights, redemption prices and similar matters, may be authorized by the Board of Directors of International without stockholder approval, except to the extent such approval may be required by applicable rules of the New York Stock Exchange or applicable law. If additional Preferred Stock is issued, such additional shares will rank senior to International Common Stock as to dividends and upon liquidation. NOTE 11 - SEGMENT REPORTING McDermott International operates in two industry segments--Power Generation Systems and Equipment, and Marine Construction Services. Power Generation Systems and Equipment includes individually engineered complete fossil fuel and nuclear steam generating systems and nuclear fuel assemblies, fossil fuel steam generating systems for industrial processes and power generation, replacement parts and engineered modifications for existing fossil and nuclear steam generating systems, specially engineered accessories and components, and welded mechanical and pressure tubing. 38 Marine Construction Services principally involves the design, construction and installation of specialized offshore fixed platiorms and marine pipelines for use in development drilling and for the production and transportation of oil and gas. Identifiable assets by industry segment are those assets that are used in McDermottTnternational's operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments, marketable securities and prepaid pension costs. Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Revenues attributable to transactions with entities for which investments are accounted for by the equity method were $90,338,000, $72,099,000 and $63,217,000 in fiscal years 1990, 1989 and 1988, respectively, including approximately $30,579,000 and $11,200.000 attributable to leasing activities in fiscal years 1990 and 1989, respec tively. Included in accounts receivable-trade at March 31, 1990 and 1989 are $61,426,000 and $26,807,000 of receivables with unconsolidated affiliates. At March 31, 1990 and March 31, 1989, property, plant and equip ment included $246,964,000 and S247.288.000, respectively, and accumulated depreciation included $64,221,000 and S53.056.000, respectively, of marine equipment that is leased to unconsolidated affiliates. In the fiscal years 1990, 1989 and 1988. the U.S. Government accounted for approximately 19%, 20% and 21%, respectively, of McDermott International's total revenues. These revenues are principally included in the Power Generation Systems ancl Equipment segment. Segment Information For the Three Fiscal Years Ended March 31, 1990. 1. Information about McDermott International's Operations in Different Industry Segments. RevenuesOX^) Power Generation Systems & Equipment Marine Construction Services Intersegment Transfer Eliminations Total Revenues 1990 S 1,747,110 909,935 (12,355) $ 2,644,690 1989 (In thousands) $ 1,576,928 593,166 (3,288) S 2,166,806 1988 $ 1,477,814 642,059 (1,063) $ 2,118,810 Operating Income (Loss)(^X3) Power Generation Systems & Equipment Marine Construction Services Total Operating Loss $ 27,908 (61,200) $ (33,292) $ 48,661 (60,948) $ (12,287) $ 68,839 (93,375) $ (24,536) Equity in Earnings (Loss) of Investees(^) Power Generation Systems & Equipment Marine Construction Services Total Equity in Loss of Investees $ 3,654 (13,076) $ (9,422) $ (91) (15,453) $ (15,544) $ 711 (4,051) $ (3,340) (1) Segment revenues include intersegment transfers as follows: Power Generation Systems & Equipment Marine Construction Sendees Total S 12,355 $ 12,355 $ 18 3,270 $ 3,288 $ 387 676 $ 1,063 (2) Reconciling items between Segment Operating Loss and Operating Loss on the Consolidated Statement of Income (Loss) and Retained Earnings are General Corporate Expenses. (3) On November 1, 1989, McDermott International sold net assets representing 50% of its commercial nuclear services business to Framatome Services Company, Inc. ("Framatome"). Also, on November 1, 1989, McDermott International and Framatome formed B&W Nuclear Service Company ("NSC") by contributing their respective net assets of the business for an equal ownership interest in the new company, which carries on the nuclear services business formerly provided by McDermott International's Nuclear Power Division. Prior to November 1,1989, revenues and operating results of this business were included in the consolidated financial statements and in the Power Generation Systems & Equipment segment. This segment's share of earnings after formation of NSC of $2,452,000 is included in Equity in Loss of Investees. 39 Capital Expenditures Power Generation Systems & Equipment Marine Construction Services Corporate Discontinued Operations Total Capital Expenditures 1990 S 92,408 15,008 1,332 4,892 S 113,640 1989 (In thousands) S 35,571 34.894 524 4.398 S 75,387 1988 S 25.768 16.021 325 6.S51 $ 48,965 Depreciation and Amortization (1) Power Generation Systems & Equipment Marine Construction Services Corporate Discontinued Operations Total Depreciation and Amortization S 42,316 69,330 1.320 112,966 3,046 S 116,012 S 44,567 61,506 1,685 107,65S 6,425 S 114,0S3 S 4S.5S7 SI. 601 1.413 131.601 12.942 S 144.543 Identifiable Assets Power Generation Systems & Equipment Marine Construction Sendees Corporate Discontinued Operations Total Identifiable Assets $ 1,130,547 1.022,771 1,170,238 12,140 $ 3,335,696 s 1,086,313 985,125 1,007,260 214.924 s 3,293,622 S 1.163.096 9S6.361 1.101.978 573.382 S 3.S24.S17 (1) Depreciation and amortization excludes the write-down of property, plant and equipment in connection with discontinued operations and the write-off of goodwill. 2. Information about McDermott International's Operations in Different Geographic Areas. 1990 1989 (In thousands) 1988 Revenues (1) - United States - Europe and West Africa - Other Foreign - Tbtal S 1,905,180 216,020 523,490 $ 2,644,690 S 1,686,187 . 127,737 352,882 s 2,166,806 S 1,470.682 231.915 416.213 S 2,118.810 Operating Income (Loss) by Geographic Area (2) - United States - Europe and West Africa - Other Foreign Tbtal % (16,164) (12,278) (4,850) $ (33,292) s 12,833 (22,260) (2,860) s (12,287) S 32.213 (31.074) (25.6-0) S (24.536) Identifiable Assets - United States $ 1,227,490 - Europe and West Africa 524,542 - Other Foreign 401,286 - Corporate 1,170,238 - Discontinued Operations 12,140 - Total s 3,335,696 s 1,243,781 539,837 287,820 1,007,260 214,924 s 3,293.622 S 1,264.772 553.5-45 331.140 1,101.978 573.382 S 3,S24.S27 (1) Transfers between geographic areas and export sales are immaterial and not separately presented. (2) Reconciling items between Segment Operating Income (Loss) by Geographic Area and Operating Loss in the Consolidated Statement of Income (Loss) and Retained Earnings are General Corporate Expenses. 40 NOTE 12 - QUARTERLY FINANCIAL DATA The following tables set forth selected unaudited quarterly financial information for the fiscal vears ended March 31, 1990 and 1989: June 30, 1989 1990 Quarter Ended Sept. 30, Dec. 31, 1989 1989 (In thousands except for per share amounts) March 31, 1990 Revenues Operating loss Loss from continuing operations Net income (loss) Earnings (loss) per share: Primary From continuing operations Net earnings (loss) Fully Diluted From continuing operations Net earnings Goss) $ 658,774 (15,705) (19,352) (19,670) S 696,131 (4,505) (13,157) (10,802) S 623,124 (44,883) (29; 184) 49,994 S 666.661 (24,313) (38,859) (29,723) (0.52) (0.53) (0.52) (0.53) (0.35) (0.29) (0.35) (0.29) (0.78) 1.33 (0.69) 1.28 (1.03) (0.79) (1.03) (0.79) Results for the quarter ended June 30, 1989 have been restated to reflect the discontinuance of the Bailey operations (See Note 2). Results for the June 30, September 30 and December 31,1989 quarters and for the quarter ended March 31, 1990 include gains (losses) from discontinued operations of S(318,000), $2,355,000, $79,178,000 and $9,136,000, respectively. For the nine months ended December 31, 1989, the investment in the HeereMac joint venture was accounted on a cost basis and income from the long-term charter of two derrick barges to the joint venture deferred. During the quarter ended March 31, 1990, a determination was made that equity accounting was appropriate and the first three quarters of fiscal year 1990 have been restated to reflect HeereMac's results on an equity basis. The restatement decreased net loss in the quarters ended June 30, and September 30,1989, and increased net income in the quarter ended December 31, 1989 by $4,840,000, $8,706,000 and $5,582,000, respectively. Results for the quarter ended December 31, 1989 include provisions of approximately $13,100,000 for workers' compensation and general liability costs resulting from a change in actuarial estimate and a provision of $27,150,000 for corrective action associated with internal corrosion in certain utility and industrial installations of a first-of-a-kind heat pipe heat exchanger. Results for the quarter ended March 31,1990 include provisions for environmental clean-up costs of approximately $12,800,000. i 41 CONTINUED June 30, 1988 1989 Quarter Ended Sept. 30, Dec. 31, 1988 1988 (In thousands except for per share amounts) March 31, 1989 Revenues Operating loss Loss from continuing operat ions Net income (loss) S 457.94S (23,486) (32,664) 18,664 S 485,149 (13,124) (30.587) (54,637) S 547.199 (15,719) (3(i.630) (31.829) S 676.510 (4.S51) (22.729) (23.S73) Earnings (loss) per share: Primary' and Fully Diluted From continuing operations Net earnings (loss) (0.88) 0.50 (0.82) (1.47) (0.9S) (0.85) (0.61) (0.64) Results for the four quarters of fiscal year 1989 have been restated to reflea the discontinuance of the Bailey operations (See Note 2). Results for the June 30, September 30 and December 31, 1988 quarters and for the quarter ended March 31, 1989 include gains (losses) from discontinued operations of 3(1,252,000), $(24,050,000), S4.80l.000 and 5(1,144.000). respectively. Results for the quarter ended June 30, 1988 include the cumulative efiea of accounting change for the adoption of SFAS No. 96, "Accounting for Income 'faxes" (See Note 6). Results for the quarter ended December 31, 1988 include provisions of approximately $8,800,000 for workers' compensation and general liability costs resulting from a change in actuarial estimate. Results for the quarter ended March 31, 1989 also include reduced warrant}- reserve provisions of approximately $14,700,000 and provisions for environmental clean-up costs of approximately $14,100,000. 42 NOTE 13 * INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES McDermott International's investments in joint ventures and other entities, which are accounted for on the equity method, was $45,416,000 and $42,133,000 at March 31, 1990 and 1989, respectively. Summarized, combined financial information based on the most recent financial information for these entities follows: At March 31: Current Assets Non-Current Assets285,364 Total Assets 1990 1989 (In thousands) $ 279,876 $ 565,240 $ 126,743 211.899 $ 338,642 Current Liabilities Non-Current Liabilities Owners' Equity Total Liabilities & Owners' Equity $ 263,988 145,252 156,000 $ 565,240 $ 126,437 127,549 84,656 $ 338,642 For the rears ended March 31: Revenues Gross Profit $ 446,508 $ 64,088 $ 220,059 $ 32,889 Loss Before Provision for Income Thxes Provision for Income Thxes Net Loss $ (22,692) 2,732 $ (25,424) $ (45,285) 284 $ (45,569) NOTE 14 - SUBSEQUENT EVENT AND PRO FORMA INFORMATION Pursuant to the amendment of the terms of its outstanding warrants (See Note 10), and subsequent to March 31, 1990, International received cash of $20,084,000 and debentures with a book value of $16,222,000 (par value of $18,593,000) from the exercise of 1,547,084 warrants in exchange for 1,663,090 shares of its Common Stock on April 2. 1990. Pro forma information, giving effect to this transaction as if it had occurred at March 31,1990, follows: Long-Tferm Debt Common Stock and Other Stockholders' Equity: Common Stock (outstanding shares: 42.164,394 historical; 43.827,484 pro forma) Other Stockholders' Equity Total Common Stock and Other Stockholders' Equity Ratio of Long-Tferm Debt Tb Tbtal Common Stock and Other Stockholders' Equity Historical $ 873,321 Adjustments (In thousands) $ (16,222) Pro Forma $ 857,099 $ 42,164 600,612 $ S 642,776 $ 1.36 1,663 34,643 $ 43,827 635,255 36,306 $ 679,082 1.26 Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 43 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There are no family relationships between any of the executive officers, directors or persons nominated to he such, and no executive officer was elected to his position pursuant to any arrangement or understanding between himself and any other person. Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the headings "Election of Directors" in the Proxy Statement for the 1990 Annual Meeting of Shareholders. Item 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material appearing under the heading ' `Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1990 Annual Meeting of Shareholders. 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 heading ''Elec tion of Directors" in the Proxy Statement for the 1990 Annual Meeting of Shareholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading' 'Cash Compensation of Executive Officers and Certain Relationships and Related Transactions' ' in the Proxy Statement for the 1990 Annual Meeting of Shareholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM S-K CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors Consolidated Balance Sheet - March 31, 1990 and 1989 Consolidated Statement of Income (Loss) and Retained Earnings For The Three Fiscal Years Ended March 31, 1990 Consolidated Statement of Cash Flows For The Three Fiscal Years Ended March 31, 1990 Notes to Consolidated Financial Statements PAGE 21 24 25 26 44 CONSOLIDATED FINANCIAL SCHEDULES All required schedules will be filed by amendment to this Form 10-K on Form 8. EXHIBIT INDEX PAGE 3 Articles of Incorporation and By-Laws (Items 3(a) and 3(b) are incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K, as amended, for the fiscal vear ended March 31, 1983). (a) The Company's Restated Articles of Incorporation (b) The Company's By-Laws 4(a) Rights Agreement (incorporated by reference to Exhibit 1 to the Company's registration statement on Form 8-A, dated December 27, 1985). 4(b) Indentures with respect to certain of the Company's long-term debt are not filed as exhibits hereto inasmuch as the securities authorized under any such Indenture do not exceed 10% of the Company's total assets. The Company agrees to furnish a copy of each such Indenture to the Securities and Exchange Commission upon request. 10 Material Contracts (Exhibits 10(b) through 10(e) are incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; Exhibit 10(g) is incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1987 and Exhibit 10(h) is incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1988). (a) Supplemental Executive Retirement Plan will be filed by amendment to this Form 10-K on Form 8. (b) 1983 Long-Tbrm Performance Incentive Compensation Program (c) Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incorporated (d) Career Executive Stock Plan--1974 (e) Intercompany Agreement (f) Trust for Supplemental Executive Retirement Plan will be filed by amendment to this Form 10-K on Form 8. (g) Variable Supplemental Compensation Plan (h) 1987 Long-Term Performance Incentive Compensation Program (i) Retirement Plan for Non-Management Directors of McDermott International, Inc. will be filed by amendment to this Form 10-K on Form 8. 11 Statement Re Computation of Per Share Earnings (Loss) 22 Significant Subsidiaries of the Registrant 24 Consent of Independent Auditors 28 Additional Exhibits 46 46 47 48 FORM 8-K REPORTS Report on Form 8-K. Item 5 was reported, but no financial statements were filed in connection with Interna tional's current report on Form 8-K dated March 2, 1990. 45 EXHIBIT 11 McDermott international, inc. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1990 (In thousands, except shares and per share amounts) Primary and Fully Diluted 1990 1989 1988 Loss from continuing operations Income (loss) on discontinued operations Extraordinary item Cumulative effect of accounting change Net loss for primary computation Weighted average number of common shares outstanding during the year Earnings (loss) per common and common equivalent share: (1) S (100,552) 90,351 - _ S (10,201) S (122.610) (21.645) - 52.5S0 S (91.675) S (236.$59) (29.1SS) 4.276 _ $ (261.77!) 37,458,528 37,216.057 37.113.170 Continuing operations Discontinued operations Extraordinary item Accounting change Net loss $ (2.68) S (3.29) $ (6.3$) 2.41 (0.59) (0.7S) 0.11 1.42 $ (0.27) $ (2.46) S (7.05) (1) Earnings (loss) per common and common equivalent share assuming full dilution are the same for the fiscal years presented. McDermott international, inc. SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT FISCAL YEAR ENDED MARCH 31, 1990 EXHIBIT 22 Name of Company McDermott International Investments Co., Inc. Hydro Marine Services, Inc. McDermott Incorporated The Babcock & Wilcox Company McDermott Scotland Limited The subsidiaries omitted from the foregoing list do subsidiary. Organized Under the Laws of Percentage of Voting Shares Owned Panama Panama 100 100 Delaware Delaware 92 100 United Kingdom 75 considered in the aggregate, const:rj;e a significant 46 EXHIBIT 24 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 2-83692 anc S-8 No. 33-16680) of McDermott International, Inc. and in the related Prospectuses of our report dated J,,. 1990 with respect to the consolidated financial statements of McDermott International, Inc. included in this Annu. Report (Form 10-K) for the year ended March 31, 1990. ERNST & YOUNG New Orleans, Louisiana June 4. 1990 47 EXHIBIT 28 MCDERMOTT INTERNATIONAL, INC. ADDITIONAL EXHIBITS SUPPLEMENTARY FINANCIAL INFORMATION PREPARED IN ACCORDANCE WITH AND SOLELY FOR THE PURPOSE OF COMPLYING WITH CERTAIN PANAMANIAN SECURITIES REGULATIONS ARTICLE 29 F.Y.E. 3/31/90 (Unaudited) (In thousands) RULE #9 - INVESTMENTS IN SUBSIDIARIES AND OTHER INVESTEES AT EQUITY Head Office (Parent Company) Subsidiaries and Affiliates Eliminations/Other McDERMOTT INTERNATIONAL, INC. S $ 974.043 (92S.6274 45.41(3 RULE #25C - PARENT COMPANY ACCOUNTS PAYABLE TO SUBSIDIARIES Head Office (Parent Company) Eliminations/Other McDERMOTT INTERNATIONAL. INC. S 694.353 (694.3534 S- ARTICLE 30 (c) - OPERATING EXPENSES BY SEGMENT Power Generation Systems & Equipment Marine Construction Services Eliminations McDERMOTT INTERNATIONAL, INC. RULE #40 - OPERATING REVENUES Head Office (Parent Company) Subsidiaries and Affiliates Eliminations/Other McDERMOTT INTERNATIONAL, INC. S 1,719.202 971.135 (12.3554 S 2,677.982 S 204.319 2,436.942 3.429 2,644.690 RULE #41 - OPERATING EXPENSES Head Office (Parent Company) Subsidiaries and Affiliates Eliminations/Other McDERMOTT INTERNATIONAL, INC. $ 20$.998 2,521.669 3.429 2,734.096 48 EXHIBIT 28 CONTINUED ARTICLE 30 - CONTINUED RULE #43 - DIVIDENDS RECEIVED Head Office (Parent Company) from Subsidiaries and Affiliates Subsidiaries and Affiliates from Other Corporations Eliminations/Other McDermott international, inc. f.y.e. 3/31/90 (Unaudited) (In thousands) $_ 3,840 -- $~ 3,840 RULE #44 - INTEREST INCOME Head Office (Parent Company) from Subsidiaries and Affiliates from Other Corporations Subsidiaries and Affiliates from Other Corporations Eliminations McDermott international, inc. $ 25,552 1,597 73,154 (25,552) $74,751 RULE #46 - OTHER MISCELLANEOUS REVENUES Net Gain on Asset Disposals Other Items - Net McDermott international, inc. $ 56,718 ______ (4,624) $____52,094 RULE #51 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES AT EQUITY Balance at 3/31/89 Additional Investments Equity Loss Dividends Received Discontinued Operations Other Changes Balance at 3/31/90 (Unasdited) (In thousands) $ 42,133 19,589 (9,422) (3,840) (4,455) 1,411 $ 45,416 SIGNATURES OF DIRECTORS Pursuant to the requirements of the Securities Exchange Act of 1934, this 'eport has been signed below by the following persons on behalf of the registrant and in the capacities indicated on June 4, 1990. s/Thomas D. Barrow Thomas D. Barrow Director s/John F. Bookout John F. Bookout Director s/Philip J. Burguieres Philip J. Burguieres Director s/James E. Cunningham______ James E. Cunningham Retired Chairman of the Board and Chief Executive Officer, and Director s/John A. Lynott__________ John A. Lynott Executive Vice President and Chief Financial Officer, and Director s/J. Howard Macdonald J. Howard Macdonald Director s/William McCoIlam, Jr. William McCoIlam, Jr. Director s/John A. Morgan John A. Morgan Director s/James L. Putt_________________________ James L. Dutt Director s/William T. Seawell William T. Seawell Director s/Robert E. Howson______________________ Robert E. Howson Chairman of the Board and Chief Executive Officer, and Director s/James A. Hunt________________________ James A. Hunt Director s/Walter B. Shaw Walter B. Shaw Director s/John B. Tweedy John B. Tweedy Director 51 Common Stock Transfer Agents and Registrars First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 Preferred Stock Transfer Agent and Registrar First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 Series A $2.20 Cumulative Convertible Preferred Stock of McDermott incorporated Series B $2.60 Cumulative Preferred Stock of McDermott Incorporated Trustees and Agents United States Trust Company of New York Attention: Corporate Trust Department 45 Wall Street New York, New York 10005 10.25% Notes Due June 1. 1995 9.625% Debentures Due March 15, 2004 10.20% Sinking Fund Debentures Due December 1, 1999 Floating Rate Notes Due March 1992 The Bank of New York Attention; Corporate Trust Trustee Administration 21 West Street New York, New York 10286 12.25% Senior Subordinated Notes Due June 1, 1998 Bankers Trust Company Post Office Box 318 Church Street Station New York, New York 10015 10.00% Subordinated Debentures Due April 1, 2003 Morgan Guaranty Trust Company of New York 30 West Broadway New York, New York 10015 Rights to purchase Common Stock of McDermott International, Inc. Pittsburgh National Bank Post Office Box 340747 Pittsburgh. Pennsylvania 15230 6.80% Pollution Control Revenue Bonds, Series A Due February 1. 2009 Deutsche Bank Aktiengeselischaft Taunusanlage 12 D-6000 Frankfurt am Main 1 Federal Republic of Germany 6.50% Deutsche Mark Bearer Bonds Due July 1, 1991 Independent Auditors Ernst & Young 4200 One Shell Square 701 Poydras Street New Orleans, Louisiana 70139 (504) 581-4200 Annual Meeting The Annual Meeting of the Stockholders of McDermott International. Inc. for the fiscal year ended March 31, 1990, will be held at the Hotel Inter Continental. New Orleans, Louisiana, on Tuesday, August 14, 1990, at 9:30 a.m. local time. Information Additional information about the Company, including financial statement schedules and exhibits to the Annual Report to share holders on Form 10-K for the fiscal year ended March 31, 1990, may be obtained, without charge, by writing: Corporate Secretary McDermott International, Inc. 1010 Common Street New Orleans, Louisiana 70112-2401 (504) 587-5400 Inquiries regarding stockholder account matters should be addressed to: First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 (212) 587-6515 The use in this Report of the term International refers solely to McDermott International, Inc., a Panama corporation. Unless the context otherwise requires, the use of the term Delaware Company refers to McDermott Incorporated, a Delaware corporation, and its consolidated subsidiaries. The use of such terms as McDermott International, company, division, organization, joint venture, we, us, our and its, when referring either to McDermott International, Inc. and its consolidated subsidiaries or to subsidiaries and non-subsidiaries either individually or collectively, is only for convenience and is not intended to describe legal relationships. Significant subsidiaries of McDermott International, Inc. are listed as an exhibit to the Annual Report on Form 10-K of McDermott International, Inc. for the fiscal year ended March 31,1990, as filed with the United States Securities and Exchange Commission. The segments, units, divisions, and groups of McDermott International described in this Report are not corporate entities.