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Annual Report for the Fiscal Year ended March 31,1982 *' McDermott Incorporated Results at a Glance McDermott Incorporated for the Fiscal Years Ended March SI, 1982 and 1981 In thousands of dollars except per share amounts and number of employees 1982 Operating income ------------------------------------------------- 410,267 1981 S 3,839,698 172,976 Earnings per^common and common equivalent share --------------------4.98 Stockholders' eqtf| per common share-------------------- ----------------31.92 Cash dividends ----------------------------------------------------- ------------- 90,481 Cash dividends per common share--------------------------- ------------- 1.65 Working capital ---------------------------------------------------- 800,534 99,561 1.89 28.5S 83,303 1.45 704,138 Capital expenditures-------------------------------------- ---------------- 167,018 272,377 Number of employees including subcontract labor ------------ 59,000 59,000 McDermott Incorporated is a comprehensive energy services',company. The company. provides .engineering, fabrication, and marine constnictioivfor. the oil and gas industry worldwide. The company also engineers and mamifactures^ehergy systems, including fossil- and nuclear-fueled steam generating equipment,^cOnta^'hhd auxiliary equipment. In addition, McDermott is a major supplier of specialty steel tubing and insulating - products.: . , * -14 'n ` -i? , fix -r-. M To Our Stockholders: Fiscal 1982 was a record year in terms both of revenues and net earnings despite the deepening recession which continued to depress certain of the company's business segments. Revenues exceeded $4.8 billion and net income doubled from fiscal 1981 to $213 million. Primary ear nings per share were $4.98 com pared to $1.89 in 1981. The quarterly eas"h dividend on the common stock was increased from $0.40 to $0.45 per share, or-12.5 percent. The year was highlighted by substantially higher revenues and operating income on the part of Engineered Materials and significant improvement in Marine Construction Services. .Power Generation Systems and Equip ment continued to perform satisfactorily under the very dif- ficult market conditions that have prevailed since 1974. Engineered Materials Engineered Materials' revenues were approximately $310 million higher than last year, and operating income increased by $198 million, reflecting strong de mand and improved pricing for oil country tubing, which has become one of this segment's principal pro ducts. Higher operating levels, cost reduction programs, and the ; elimination of certain-low margin . and unprofitable products have contributed to the improved results. While the demand for oil coun try tubing has softened in recent months, we expect that our sector of the market, heavy-upset produc tion tubing for deep wells of ex treme pressure, heat, and corro sion, will remain relatively strong. We also expect that as the economy improves, demand for other.Iines of our pressure and mechanical tubing will strengthen. At present, we are spending about $100 million to add a continuous caster and a quench and temper operation which will make us more cost effective and improve the quality control in our steelmaking facilities/ Insulating Products, also part of Engineered.Materials, is a market leader in insulating firebrick and ceramic fibers. Of special significance this year was the introduction of rapid fire technology (RFTTM) castables, a new type of furnace lining. The RFT castables have all the advan tages of conventional castables but can safely be heated ten times faster. Marine Construction Services McDermott Marine Construc tion enjoyed significant gains in revenues andOperating income. PrmcipaUyas^a result of foreign operations,:fq^nu&';increased by almost $500)millip^|fihp|pyed pro fit mdrgins/itegfe^ ;. increased dtilirationMjimrine ; eqmpinnt,^Bqlp^fdre^hT'mu&/':' domestic; confribute&^td'hhMn-' cbmpletfori^ 952^ppt C^Eyez^ja^tl^Miast - & sui^eri^AilhO&hdt^the^^gest ri oriejpiece ja^etieveriB>--',,`Sia" than.$100 million. Thus;Snc^|: again McDermott has'proyei^the 'Over.thepast threeyearswe have'silbstantially upg^ied^ur fleet;7.while theindustry`as^whole hasbuiltno^e^ vessels. Much'attentio^^Been paid^o'our addition semisubmersiBle derrick^and^' ' i ment. That is, we have upgraded the cranes on several of our con ventional derrick barges. The enlarged capacity of the barges is in response to a continued trend in marine construction. To minimize risk and save time and money, lifts are becoming heavier. As plat forms become bigger, a necessity as we move to deeper water, the larger capacity will become even more important. We are thus well positioned to participate in the an ticipated demand for construction services for deep water projects, and the number of projects should increase in the future. Power Generation Systems and Equipment Historically, Babcock & Wilcox has had a very large share of the domestic fossil utility steam generating market. Despite this high market share, our shops-- as are those of our competitors-- are operating substantially below capacity. Because the slow market for new electric generating capaci ty is expected to continue for 3 to 5 years, we have closed our Brunswick, Georgia, plant to bring our manufacturing capabilities more in line with projected markets. Our capacity is under continuous review. Inasmuch as few of our customers are buying new power generation plants, emphasis has shifted to maintenance and im proved efficiency of existing facilities. It's similar to the American consumer who used to buy a car every year; now he keeps his old car as long as he can. As a result, we have strengthened our service business, and plants built by B&W and our competitors are a primary and very, large market. Our service operations in clude outage management and planning, technical support, field service to aid in upgrading the effi ciency of equipment, and replace ment parts. The B&W Construc tion Company, which traditionally has erected about 70 percent of new B&W boilers, also has established an outstanding record The recession has directly af for repair and maintenance. fected McDermott by causing a Diamond Power Specialty decrease in energy' demand. Oil de Company, the world's largest mand, already reduced by conser manufacturer of boiler-cleaning vation resulting from high prices, systems, now has a network of ser has fallen further. Inventories now vice centers to help its customers are being drawn down, and we'll obtain higher productivity' from begin to see firming prices in the their plants. Bailey Controls Com marketplace. The recession, pany has made inroads into the however, is still with us, and de microprocessor-based, distributed- mand is still low. control sector of the process in Changes in the world dustry with the sale of over two marketplace that make it difficult hundred Network 90 systems. for American industry' to compete The business of Hudson Products, have been amplified by the reces a leading worldwide supplier of sion. For example, the worldwide air-cooled heat exchangers, re automobile, steelmaking, and mains strong. heavy equipment industries are Our commercial nuclear power characterized by over capacity. As operations are marginal, as are a result, an extensive world those of the rest of the industry. economic realignment is occurring However, we are a leading sup in which American industry is plier of components for the nuclear struggling to find its place. Navy. The Nuclear Equipment For McDermott, the problems Division, for example, has booked are not as difficult as for many over $250 million worth of work, companies. We have a clear including a long-term contract for technological edge in many ways the manufacture of trident sub because we spent money for new marine missile tubes. equipment and technological ad vancements when others did not or Outlook could not. But if we are going to Given the softness of the world stay competitive through the '80s economy for the past couple of and beyond, we must be prepared years, we have done well. The fun to restructure the way we do damental reason is that we not on business as the world changes. ly have accepted that things are ' A very sad event occurred dur- changing, but we have anticipated; - ing the year, the death of board and adapted to those changes. . . member Douglas Carver. An in- ->h / Coping with a changing economic dependent oil operator for 31 environment requires a continuous years, Mr. Carver had served on process of better matching our board since 1974. He is missed, management skills with re- . both as a friend and counsellor. quirements in the marketplace;;. In February, we welcomed continued integration of our. opera- James L. Dutt, Chairman and.. tions so that the parts furictionr. . ;-,^:. Chief Executive Officer.of Beatrice more efficiently toward our goals; Foods Co., to the board. Mr. Datt . and the maintenance of a . . has been with Beatrice since 194T-. workforce, our most important and has headed the Chicago-based asset, that has the ability and company since 1979. loyalty to adapt to change. Further tests of our ability to cope with rapid technological and economic change He ahead. This recession has been broader and deeper than many expected, and while economic activity probably J.E. Cunningham has reached its low point, the.road.'', Chairman of the Board arid Chief# to recovery will be a long one. ; . / - Executive Officer ',;\sUs'.V f-y 'i; . * V f "V JBB Marine Construction McDermott Marine Construc tion designs, builds, and in stalls offshore platforms and marine pipelines used in drill ing for, producing, process ing, and transporting oil and gas. To support its worldwide operations, Marine Construc tion has the largest fleet of marine construction vessels in the world. We have fabricated and installed more fixed platforms, in depths from ten to more than one thousand feet, than any other company. Marine Construc tion also designs onshore pro cessing plants; engineers and constructs facilities for oil production in shoreline and marsh areas; and operates three shipyards in the southeastern United States for the construction, repair, and maintenance of tug and supply boats, barges, and other vessels. July 1981:^Weldingpiles on Cervedci--at 952 feet, the tallestjacket ever launched as a single unit Equipped to do thejob: Together these cranes in the Ardersier,Scotland fabrication yard have , lifted as much as 2,480 tons. .. Xay Barge 28 installed two Cognacplatform pipelines in waters as'.:*#-* deep as 1,020 feet--anew record forplatform to shore. -TV -vT'jt , yf:., - -* *-* ^ - >'v . : 9 *s ' ft-* ***. V* . '* Marine Construction For Fiscal Years Ended March 31, 1982 1981 (In thousands of dollars) Revenues: $ 1,907,820 $ 1,417,222 Operating Income 72,231 5,207 wv' t.vT'Wi* " *tVCSE Power Generation Systems Power Generation engineers, manufactures, and erects complete fossil-fueled and nuclear steam systems. We also provide parts and customer services and engineered modifications to existing steam systems for electric utility, industrial, and marine applications. Fossilfueled boilers are for power generation and industrial processes. We engineer and build all accesories and components, including air heaters, fans, precipitators, cleaning equipment, and computer controls. We manufacture nuclear fuel and fuel assemblies, control-rod drives, and reflective metallic insulation. Through its construction unit, the company erects, repairs, and alters power generation systems and equipment. The Bailey Controls Network 90, a microprocessor-based, distributed control system, has been well-received by the utility and process industries. 4 B&W's dry scrubbing system, the largest in the world, began commercial operation during 1982 at Basin Electric's Laramie River Station in Wheatland, Wyoming. B&W West Point Mississippi welders rebuild a cyclone boiler, one of many plant modernization programs underway at electric utility power stations throughout the United States. *-y.' rv* *> .V Power Generation Systems For Fiscal Years Ended March 31, 1982 1981 (In o: dollars) Revenues: $ 1,949,289 3 1.727,556 Operating Income 107,629 116,21S Engineered Materials Our engineered materials divisions manufacture specialty metal and in sulating products. Tubular products for pressure and mechanical applications in clude stainless, alloy, and carbon steel, seamless and welded tubes and pipe, tubular and solid shapes, ex trusions and special metal tubes. These specialty pro ducts are of high quality and engineered for special ap plications such as for deep, high pressure oil and gas wells, power generation, rail transportation, and automotive, farm equipment and metal-working industries. In sulating products include kaolin clays, engineered and vacuum formed ceramic fibers,..insulating and specialty firebrick, plastics, mortars, castables, and special ox ide refractories. Refractories are used where rates of combustion or chemical reactions cause .unusually demanding temperature condi tions. ,V. Tubular Products Division heavy-upset oil fieldproduction tubing can'withstand the corrosion, heat and ' tremendous pressures encountered miles beneath the earth's surface. Engineered Materials For Fiscal Years Ended March 31, 1982 1981 (In thousands of dollars) Revenues: S 1,017,215 Operating Income 294,706 Insulating Products ' Division Kaowool ceramic fiber insulation .ptcreases the efficiency'of *industrwlfumdces.TPD is the market leader in '' insulating firebrick and.t ceramic Principal Locations CORPORATE HEADQUARTERS NEW ORLEANS. LOUISIANA MARINE CONSTRUCTION SERVICES Equipment and Materials New Orleans. Louisiana Harvey Division Dredging Division Harvey Fabrication Division McDermott Divers Division Marine Pipeline Division Harvey, Louisiana Harvey Supply Company Harvey, Morgan City, Louisiana McDermott Marine Engineering Houston, Texas New Orleans, Lafayette, Louisiana London, England Singapore Oslo, Norway McDermott Shipyards Morgan City, New Iberia, Louisiana Gulfport, Mississippi McDermott Structural McDermott Fabricators Division Morgan City. Louisiana McDermott Offshore Division Morgan City, Louisiana Bayou Black Division Bayou Black, Louisiana Central and South America Rio de Janeiro, Brasil Port of Spain, Trinidad-Tobago Middle East Ain Soukhna, Egypt Bombay, India Solmiya, Kuwait Doha, Qatar Dhahran, Saudi Arabia Abu Dhabi, Dubai, Ras Al Khaimah, . United Arab Emirates North Sea Antwerp, Brussels, Belgium London. England Sandvika, Stavanger, Norway Aberdeen, Inverness, Scotland Southeast Asia Melbourne. Perth, Sale, Sydney. Australia Kuala Beluit, Brunei Balikpapan. Batam Island. Jakarta. Indonesia Kuala Lumpur. Malaysia Miri, Sarawak. East Malaysia Philippines Singapore West Africa Lagos. Warri, Nigeria POWER GENERATION SYSTEMS AND EQUIPMENT Advanced Energy and Environmental Systems Division Barberton. Ohio Babcock & Wilcox Canada Cambridge, Ontario. Canada B&W Construction Company Copley, Ohio BaiJev Controls Company Wickliffe, Ohio Williamsport, Pennsylvania Burlington, Ontario, Canada Regents Park, New South Wales, Australia Sao Paulo. Brazil Shizuoka, Japan Contract Research Division Alliance, Ohio Diamond Power Sj>ocial<y Company Lancaster. Ohio Burlington, Ontario. Canada Bromma. Sweden Dumbarton. Scotland Fossil Power Generation Division Barberton, Ohio Fossil Power Manufacturing Division Canton. Ohio Paris. Texas West Point, Mississippi Wilmington. North Carolina Hudson Products Corporation Beasley, Houston, Texas Industrial and Marine Division North Canton. Ohio Naval Nuclear Fuel Division Lynchburg, Virginia Nuclear Equipment Division Barberton. Ohio Nuclear Power Generation Division Lynchburg, Virginia Apollo. Pennsylvania Research and Development Division Alliance. Ohio Lynchburg, Virginia TLT-Babcock. Inc. Akron, Medina. Ohio ENGINEERED MATERIALS Insulating Products Division Augusta, Heph2ibah. Georgia Burlington, Ontario. Canada Ponce, Puerto Rico Rio de Janeiro. Brazil Tubular Products Alliance. Ohio Ambridge, Beaver Falls. Pennsylvania Milwaukee. Wisconsin Bryan. Texas Vbx.awC Invemes *>*l*sJ'.* \ -.^Abealee * London _ ' "Ahtwerp Brussels -Beaver Falls Y'Ambridge ^ Lynchburg Augusta West Point ..Port of Spain "--Trinidad-Tobago Lagos Ward1 Rio de Janeiro *-Sao Paulo \i V> -;; ^Vshizadka iy\' `Solmiya Ohahran Bombay \ f-Abu Dhabi ^Jakarta hDubat J-Raa Al Khaimah A.'v in Soukhna Sydney Perth* 9 Sal*'?'. Metbot m e Corporate Information J.E. Cunningham2 Chairman of the Board and ChiefExecutive Officer J.E. Cunningham Chairman ofthe Board and ChiefExecutive Officer James L. Dutt1 Chairman of the Board and ChiefExecutive Officer Beatrice Foods Company producer offood, chemical, and manufactured products C.L. Graves Former Chairman of the Board and ChiefExecutive Officer ofthe Company Robert E. Howson President and ChiefOperating Officer, McDermott Marine Construction James A. Hunt1*2*5'4 Partner--Kalb, Voorhis & Co. securities brokers John A. Lynott Executive Vice President, ChiefFinancial and Administrative Officer John A. Morgan1'2'3 Vice Chairman of the Board, Smith Barney, Harris Upham & Co. Incorporated - investment bankers John D. Ritchie2>3 Consultant and Director ofvarious corporations A. Salem Vice President and Administrative Assistant to the ChiefExecutive Officer R.E. Howson President and ChiefOperating Officer, ' McDermott Marine Construction W.M. Vannoy 7' ;? , President and ChiefOperating Officer, Babcock & Wilcox -V-' *- .. v4*- - > s. .y. * * - J.A. Lynott \v . -4' Executive Vice President,-.. . -3r-~ .. ChiefFinancial and Administrative Officer ' R.C. Bassett Vice President, fg;Materials & Transportation P. Breitmeyer, II Vice President, Corporate Planning & Development - v?V.~ M. .. .\ ' S XT i >r'r^*?:> i G.F. Ellis Vice President, : . r '---S' Government Operations'... R.A. Jolllff^ Treasurer .. \ f. , .............. -X: William T. Seawall2-5'4. Retired Chairman of the Board and ChiefExecutive Officer, Pan American World Airways, Inc. commercial air transportation Walter B. Shaw1'4 Chairman ofthe Board, ChiefExecutive Officer and President, Turner Construction Company - general construction contractors -SfPe' N.E Mezey^ 'VVice PPrreessidiednet,nL.'.'^iS^'Tr Benefit Funds: EA. Robidoux-^^ v Vice President a Controller Walter 0. Spencer3 Former Dean, Graduate School of Business Administration, Tulane University , G*A* Stoddart^P^M^^ '.Vice President,*' ? ^Financial ReU^^s^-^^^. John B. Tweedy1*4 ' = Former Executive Vice President and Director, .-f: ` Tosco Corporation - oil refining and marketing :W . J. Tusa v> ' " s-vVice .. Corporate Management Information Services . Walter M. Vannoy President and ChiefOperating Officer, Babcock & Wilcox R.E Woolbert - Vice President, Employee Relations Russell L. Wagner1*2'3 Retired Chairman ofthe Board and ChiefExecutive Officer, NLT Corporation insurance holding company ^ .. KJ. Gilly ' ' Vice President and GenendCounsel and . -v Corporate Secretary r ^tty- -'v.., >,.r. :*.,;. ' 1Audit Committee . tDirectors Nominating Committee' *Officers Salary and Supplemental Compensation Committee *nare:e<r Executive. Stark Pbvn.Comtn.iiiAP. . r.-* ... Xj:., 7 Corporate Information R.E. Howson President and ChiefOperating Officer W.E. Earles Senior Vice President and Group Executive, North and South America Operations A.H. Cortese Vice President and General Manager Morgan City Fabrication and Structural Operations V.J. LeBlanc Vice President and General Manager, Shipyard Operations F.J. San Miguel Vice President, Morgan City and Gulfport Shipyards R.D. Miller Vice President and General Manager, Harvey Operations R.V. Joffrion Vice President, Marine Pipeline and Harvey Fabrication I.R. Foster, Jr. Senior Vice President and Group Executive, Marine Engineering J.L. Bates Vice President, Houston Engineering W.H. Fraser - Vice President, London Engineering G.C. Lee 7 Vice President, Research & Development R.P. Stagg Vice President, New Orleans Engineering S.P. Victory Vice President, Singapore Engineering ... v. H.R. Reeves Senior Vice President and Group ' Executive, North Sea and West Africa Operations M.H. Lam Vice President and General Manager, European & Marine Operations B.J. McDonald Vice President, McDermott Scotland L.E. Walker Vice President and General . Manager, West Africa Operations W.L. Higgins J.H. MacMillan Vice President and General Manager, Senior Vice President and Middle East Operations R.E. Curtis Group Executive, Advanced Technology Vice President, Egypt R.J. Machen E.S. Gaffney Vice President and General Manager, Vice President and General Manager, Nuclear Equipment Division Southeast Asia Operations E.J. Dressei J.F. Ewing Vice President, Vice President, Quality & Technology General Estimating and Project Management E.P. Cline Vice President, W. Markert, Jr. Vice President, Research & Development and Contract Research Divisions Project Management C.W. Dyerson E.C. Moncrief Senior Vice President and Group Vice President, Executive, Power Generation General Estimating J.W. McCarte C.J. Baroch Vice President and General Vice President and General Sales Manager, Manager, Worldwide Sales Advanced Energy & Environmental Systems Division J.S. Dziewisz W.M. Vannoy President and ChiefOperating Officer Vice President and General Manager, Fossil Power Generation Division D.R. Brown D.E. Guilbert Senior Vice President and Group Executive, Industrial Products & Services Vice President and General Manager, Nuclear Power Generation Division J.B. Given Vice President and General Manager, Insulating Products Division _. ;; MA. Keyes President/^- - Bailey Controls Company '/ F.G. Raynor - J.R. Hill Vice President and General Manager, Manufacturing Division E.O. Hooker Vice President and General Manager, Industrial & Marine Division JJ. Stewart --U-' ? President, TLT-Babcock, Inc. -- President, ' V-: Babcock & Wilcox Canada R.C. Scamehorn President, Diamond Power Specialty Company W.D.Wick Vice President and General Manager, B&W Construction E.C.Smlth Company - President, . " Hudson Products Corporation 1 D.K. Davies Vice President, :' * T.M. Krebs i* - International Operations ' Senior Vice President and Group Executive, Tubular Products J.W. Thompson rr- Vice President, - Utility Sales & Marketing " r R.C. Angell Vice President and General Sales Manager, Tubular Products J.E. McCann...................... Vice President and General Manufacturing Manager, J.P. Eckert Vice President and General Manager,' Naval Nuclear Fuel Division D.E. Heybum Vice President, Marketing - -7^: ?< and Customer Service Tubular Products r If you wish to eliminate multiple mailings of the Annual Report, Quarterly Reports, and other shareholder publications, please complete this form. Have you considered McDermott Incorporated's Dividend Reinvestment Plan? Elimination of multiple mailings Morgan Guaranty Trust Company of New York maintains all of our shareholder records and can handle your requests quickly if you write directly to them. Dividend Reinvestment Plan The Dividend Reinvestment Plan provides shareholders of common or preferred stock with a convenient, systematic way to pur chase additional shares of McDermott Incor porated common stock without payment of any brokerage fees or service charges. Shareholders of record can obtain a copy of the McDermott Incorporated Dividend Reinvestment Plan and authorization forms by completing the attached card. 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 For the fiscal year ended March 31,1982 McDermott incorporated Commission file number 1-4095 (Exact name of Registrant as specified in its Charter) Delaware (State or other Jurisdiction of Incorporation or Organization) 1010 Common Street, New Orleans, Louisiana (Address of Principal Executive Offices) 74-1032246 (I.R.S. Employer Identification No.) 70112 (Zip Code) Registrant's Telephone Number, including area code 504/587-4411 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Common Stock $1 Par Value Series A $2.20 Cumulative Convertible Preferred Stock $1 Par Value Series B $2.60 Cumulative Preferred Stock $1 Par Value 10.20% Sinking Fund Debentures Due December, 1999 9.40% Notes Due December, 1984 9-5/8% Sinking Fund Debentures Due March, 2004 Securities Registered Pursuant to Section Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange (g) of the Act: None (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been sub ject to such filing requirements for the past 90 days. Yes X No___ The aggregate market value of voting stock held by nonaffiliates of the registrant is $1,136,035,255 as of May 19, 1982. The number of shares outstanding of the Company's common stock at May 19,1982 was 36,804,014. The Proxy Statement for the 1982 Annual Meeting of Shareholders is incorporated by reference into Part III of this report. McDermott incorporated INDEX - FORM 10-K PARTI Items 1. & 2. Business and Properties A. General B. Marine Construction Services General Foreign Operations Raw Materials Customers and Competition Backlog Factors Affecting Demand C. Power Generation Systems and Equipment GeneralRaw Materials Customers and Competition Backlog Factors Affecting Demand D. Engineered Materials General Raw Materials Customers and Competition Backlog Factors Affecting Demand E. Other Products and Services General Backlog F. Patents and Licenses G. Research andDevelopment Activities H. Insurance I. Employees J. Government Regulations Page 6 9 9 10 10 10 11 11 11 11 12 12 12 13 13 13 13 14 14 14 14 14 15 15 15 15 16 16 INDEX - FORM 10-K Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 4.A. Executive Officers of the Registrant PART II 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 of Financial Condition and Results of Operations Results of Operations 1982 VS 1981 1981 VS 1980 Impact of Inflation and Changing Prices On Revenues and Net Income Liquidity and Capital Resources Item 8. Consolidated Financial Statements and Supplementary Data Company Report on Consolidated Financial Statements Report of Certified Public Accountants Consolidated Balance Sheet - March 31,1982 and 1981 Consolidated Statement of Income and Retained Earnings For the Three Fiscal Years ended March 31,1982 Consolidated Statement of Changes in Financial Position For the Three Fiscal Years ended March 31,1982 Notes to Consolidated Financial^^tements Item 9. Disagreements with Accountants on Accounting and Financial Disclosure Page 16 20 20 21 22 23 23 23 24 25 25 26 26 27 28 30 31 32 48 4 INDEX - FORM 10-K PARTIII Item 10. Directors and Executive Officers of the Registrant Item 11. Management Remuneration and Transactions Item 12. Security Ownership of Certain Beneficial Owners and Management PART IV Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K Exhibit 11 Statement Re Computation of Per Share Earnings Exhibit 22 - Subsidiaries of the Registrant Consent of Certified Public Accountants - Form S-8 and Form S-16 Signatures of the Registrant Signatures of Directors Page 48 48 48 49 50 51 52 53 64 PARTI Items 1. and 2. BUSINESS AND PROPERTIES A. GENERAL McDermott Incorporated (the Company) was incorporated in 1946 as a successor to businesses which had been engaged in providing construction services to the oil and gas industry since the 1920's. On March 31,1978, the Company acquired The Babcock & Wilcox Company (B&W) which was founded in 1867. The Company has operated principally in three industry segments since the acquisition of B&W--marine construction services, power generation systems and equipment, and engineered materials. Marine construction services principally consists of the design, construction and installation of specialized off shore fixed platforms and marine pipelines and other facilities for worldwide offshore development (as distinguished from exploratory) drilling, production and 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 Texas); operates three shipyards in the Southeastern United States for the construction, repair and maintenance of tugboats, barges and other small vessels; and is engaged in the engineering and construction of processing plants for the oil, gas and petrochemical and mineral industries, primarily for offshore installation. Power generation systems and equipment includes individually engineered complete fossil fuel steam systems, nuclear steam systems, steam generating parts and customer services, engineered modifications of existing steam systems, nuclear fuel and nuclear fuel assemblies for electric utility and marine applications, and fossil fuel boilers for industrial processes and power generation; process recovery boilers and pollution control systems for the process and utility industries; control and performance computers, automated controls and in struments; nuclear control-rod drives and inflective metallic thermal insulation; specially engineered ac cessories and components, such as air heaters, fans, air and water-cooled heat exchangers, precipitators and nuclear reactor components; and the erection of utility plants and other industrial facilities. '% Engineered materials includes stainless., alloy and carbon steel, seamless and welded tubes and pipe, tubular and solid shapes, extrusions, special metal tubes, and seamless rolled rings. These are principally "specialty" products of high quality and engineered for special applications. One of this segment's principal products is high quality tubing for petroleum operations. This segment also includes the manufacture of refractories, primarily consisting of products for use in furnaces and other process equipment in which the temperatures and rates of combustion or chemical reactions are unusually high. -m, Other products and services includes the design and manufacture of automated machines and machine tools. McDermott has a continuing program of reviewing acquisition opportunities. The following tables show revenues, operating income and their respective percentage contributions for the business segments of the Company for three years ended March 31; 1982 and identifiable^ assets at tributable to each segment at March 31,1982,1981 and 1980. Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. In April 1981 the Company adopted the percentage of completion method of income recognition for its marine construction contracts. Financial information for periods prior to the fiscal year ended March 31, 1982 has been restated to apply the new method retroactively. 6 REVENUES Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Intersegment Transfer Eliminations Total For Fiscal Years Ended March 31, 1982 1981 1980 (In thousands) $ 1,907,820 1,949,289 1,017,215 69,729 (100,867) $ 4,843,186 $ 1,417,222 1,727,556 706,915 104,968 (116,963) $ 3,839,698 $ 1,020,583 1,487,515 660,778 80,649 (82,466) $ 3.167,059 PERCENT OF REVENUES Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Intersegment Transfer Eliminations Total For Fiscal Years Ended March 31, 1982 1981 1980 39% 40% 21% 2% (2%) 100% 37% 45% 18% 3% (3%) 100% 32% 47% 21% 3% (3%) 100% Intersegment transfers consist principally of sales of tubular products from engineered materials to power generation systems and equipment. OPERATING INCOME (1) Marine Construction Services ^ Power Generation Systems & Equipment IP-- Engineered Materials Other Products & Services Total - For Fiscal Years Ended March 31, 1982 1981 ' 1980 (In thousands) $ 72,231 $ 5,207 107,629 116,218 294,706 ^ 97,445 8,031 10,565 $ 482,597 $ 229,435 $ (57,965) 140,724 62,901 7,524 $ 153,184 PERCENT OF OPERATING INCOME For Fiscal Years Ended March 31, 1982 1981 1980 Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Total 15% 22% 61% 2% 100% 2% 51% 42% 5% 100% (38%) 92% 41% 5% 100% (1) Reconciling items between Operating Income and Income Before Provision for Income Taxes are General Cdfporate Expenses and Other Income (Expense). Identifiable assets, including investments in net assets of joint venture companies, attributable to business segments are as follows: Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Corporate Total For Fiscal Years Ended March 31, 1982 1981 1980 (In thousands) $ 1,311,332 1,244,887 752,144 54,944 666,725 $ 1,402,320 1,279,405 637,057 85,866 501,613 $ 951,026 1,289,767 672,249 89,255 539,615 $ 4,030,032 $ 3,906,261 $ 3,541,912 The Company operates in both domestic and foreign geographic areas. The following tables show domestic and foreign revenues, operating income, and identifiable assets for the fiscal years ended March 31, 1982, 1981 and 1980. 1982 1981 (In thousands) 1980 Revenues (1) - Domestic - Foreign $ 3,434,086 $ 2,896,106 1,409,100 943,592 $ 2,463,671 703,388 Operating Income by Geographic Area (2) - Total - Domestic Foreign $ 4,843,186 $ 3,839.698 $ 3,167,059 $ 500,060 $ 277,272 (17,463) (47,837) $ 217,946 (64,762) Identifiable Assets - Total - Domestic - Foreign - Corporate $ 482,597 $ 2,545,661 817,646 666,725 $ 229,435 $ 2,565,633 839,015 501,613 $ 153.184 $ 2,401,793 600,504 539,615 - Total $ 4,030,032 $ 3.906.261 $ 3,541.912 (1) Transfers between geographic areas and export sales are immaterial and not separately presented. (2) Reconciling items between Operating Income by Geographic Areas and Income Before Provision for In come Taxes are General Corporate Expenses and Other Income (Expense). 8 International operations of the Company are subject to the usual risks arising out of foreign government regulation of such operations, including unsettled political situations, foreign exchange controls, expropria tions and demands for local participation. See Note 9 of notes to consolidated financial statements for additional information with respect to the Com pany's business segments. In addition to the restatement of periods prior to the fiscal year ended March 31, 1982 resulting from the change to the percentage of completion method of income recognition, segment reporting information for all periods reported has been reclassified to reflect onshore construction services as part of the marine construc tion services segment, and to reflect air and water-cooled heat exchangers operations and that portion of automated machines and machine tools related to certain nuclear operations as part of the power generation systems and equipment segment. These operations were previously included as part of the other products and services segment. All financial information related to the Company's business segments has been adjusted to reflect this reclassification. B. MARINE CONSTRUCTION SERVICES General Historically the Company's principal expertise has been in the design, construction and installation of specialized offshore fixed platforms and marine pipelines used for development drilling, production and transportation of oil and gas. The Company also engages in the engineering and construction of processing plants for the oil, gas, petrochemical and mineral industries, primarily for offshore installation. Fixed platforms, which are fastened to the seafloor by pilings driven through their structural legs, have been installed by the Company in water depths of more than 1,000 feet. These platforms have been engineered to withstand increasingly greater weights and stresses as the search for oil and gas has expanded into deeper water and into areas subject to severe weather conditions. The Company, a world leader in the fabrication of offshore structures, has a principal fabrication yard located on approximately 1,500 acres of leased land near Morgan City, Louisiana. Smaller yards are maintained at nearby Bayou Black and Harvey, Louisiana. The Company also operates fabrication yards on leased property in South East Asia at Singapore, and on Batam Island, Indonesia; in the Middle East at Dubai, United Arab Emirates and Ain Soukhna, Egypt; in West Africa at Warri, Nigeria; and on its own property near Inverness, Scotland. The equipment used at these yards, which is capable of fabricating a full range of offshore struc tures, consists principally of cranes, welding equipment, machine tools and other fabrication equipment, most of which is movable. The Company also operates shipyards in Morgan City and New Iberia, Louisiana; and Gulfport, Mississippi. Expiration dates, including renewal options, of leases covering land for fabrication yards are as follows: Morgan City, Louisiana Warri, Nigeria Singapore Batam Island, Indonesia Dubai, U. A. E. Ain Soukhna, Egypt Years 2001-2024 Year 2065 Year 2000 Year 2008 Year 1982 (Monthly) Year 2001 Underwater pipelaying operations conducted by the Company have also required the development of new techniques and equipment as water depths have increased. The Company has the capability of installing pipelines with an outside diameter (including concrete coating) of up to 72 inches. The Marine Pipeline Divi sion has installed one of the world's deepest marine pipelines from a platform that stands in over 1,000 feet of water in the Gulf of Mexico. In association with its construction and pipelaying activities, the Company conducts extensive diving opera tions. The Company operates one of the largest fleets of marine equipment used in 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. The lifting capacities of the derrick and combination derrick-pipelaying barges range from 250 tons to 2,000 tons. Four teen (14) of the Company's barges have lifting capacities of 500 tons or more. The barges, which range in length from 240 feet to 554 feet, are fully equipped with revolving cranes, auxiliary cranes, welding equip ment, pile driving hammers, anchor winches and a variety of additional gear. Existing vessels have quarters for as many as 548 workers. The Company owns and operates 10 derrick barges, 10 pipelaying barges, 9 combination derrick-pipelaying barges and 4 pipeburying barges. These include three semisubmersible vessels operating in the North Sea, of which two are derrick barges each capable of lifting 2,000 tons, one of which is self-propelled. The other semisubmersible vessel is a lay barge capable of laying 60 inch diameter pipe in water depths up to 2,000 feet. The Company also owns or leases a substantial number of other vessels such as tugs, utility boats and cargo barges to support the major marine vessels. Major spreads of equipment are in the Gulf of Mexico, the Middle East, South East Asia, the North Sea, West Africa, and South America. The Company's Shipyard Group, with construction facilities in Morgan City and New Iberia, Louisiana; and Gulfport, Mississippi, supplies complete maintenance and construction facilities and is a builder of large tugs, packaged rigs, dredges, oceanographic research and ocean-going work vessels. Foreign Operations The amounts of marine construction's revenues and operating income derived from operations outside of the United States, and approximate percentages of those revenues to the Company's total revenues were as follows: REVENUES OPERATING LOSS Fiscal Year Amount (In thousands of dollars) Percent Amount (In thousands of dollars) 1982 1981 1980 ' $ 1,240,930 785,340 477,024 26% 20% 15% $ (12.158) (45.130) (43,741) The slowdown in worldwide hydrocarbon development in offshore areas has resulted in operating losses in fiscal years 1982,1981 and 1980. In fiscal 1982, although losses decreased, operating results continued to be depressed as a result of provisions for losses recognized in connection with the winding-up of certain large con tracts. Raw Materials The raw materials used by the Company in its marine construction services, such as carbon and alloy steel in various forms, welding gases, concrete, fuel oil and gasoline, are available from many sources and the Com pany is not dependent upon any single supplier or source. Although shortages in certain raw materials and fuels required to be purchased by the Company have existed from time to time, no serious shortage exists a: the present time. Customers and Competition The Company's principal customers are the larger domestic and international oil and gas companies and foreign governments. Customers generally contract with the Company for the design, construction and in stallation of specific platforms, pumping stations, marine pipelines, and production networks. Contracts are usually awarded on a competitive bid basis and work is performed on a fixed price, cost plus or day rate basis. The Company's contracts for work in foreign areas generally provide for payment in United States dollars, with exceptions for payments in foreign currencies in amounts approximately equal to expenses to be incurred by the Company in those currencies. 10 The Company's main competitor in offshore construction has operations comparable in size to those of the Company but is a subsidiary of a company that also provides other services to the oil and gas industry. A number of smaller companies also competes effectively with the Company in various parts of the world, but none has the geographical distribution or the range of capabilities of the Company and its main competitor. Backlog As of March 31, 1982 and 1981 the marine construction services backlog amounted to $1,396,000,000 and $1,301,000,000, respectively, an increase of approximately 7%. Of the March 31,1982 backlog, $1,140,000,000 is expected to be recognized in fiscal 1983, with the remainder to be recognized in subsequent years. Included therein are ten contracts, each of which has a revenue value of more than 4% of this segment's backlog. These contracts are with major international oil and gas companies and foreign governments and range in amounts from approximately $64,000,000 to approximately $167,000,000. Almost all contracts call for progress payments and the Company 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. Factors Affecting Demand Marine construction activity has fluctuated widely, principally due to changes in the amount of capital expen ditures by the larger domestic and international oil and gas companies and foreign governments for developmental construction. These expenditures are influenced by the sale and expiration dates of offshore leases in the United States and abroad, the discovery rates of new oil and gas reserves in offshore areas, local and international political and economic conditions, and the ability of the oil and gas industry to generate capital. Marine construction has traditionally been a cyclical industry, depending mainly on the capital expenditure outlay of major oil and gas companies. Oil prices have a strong effect on exploration and production which ultimately affects the demand for marine construction activity in all areas of the world. The Company expects over the long term an end to the current oil surplus and an improved level of demand for its construction ser vices. C. POWER GENERATION SYSTEMS AND EQUIPMENT General Power generation systems and equipment includes individually engineered complete fossil fuel boilers, nuclear steam systems, and nuclear fuel and nuclear fuel assemblies for electric utility and marine applications, as well as fossil fuel boilers for industrial processes and power generation. Power generation systems and equipment also includes replacement parts, customer services and engineered modifications of existing steam systems, and specially engineered accessories and components, such as air heaters, precipitators, cleaning systems for heat transfer surfaces, nuclear reactor components, control and performance computers, automatic controls and instruments and nuclear control-rod drives. In addition, it includes process recovery boilers and pollution control systems for the process and utility industries, heavy pressure vessels and air and water-cooled heat ex changers, hollow forgings for steam piping and other uses and reflective metallic thermal insulation. The Com pany, through a separate construction unit, is engaged in the erection of utility plants and industrial facilities and the repair and alteration of such existing equipment. In fiscal 1982,1981 and 1980, nuclear power generation systems revenues were approximately 11%, 12%, and 15%, respectively, of the Company's total revenues. This segment's total nuclear activity was profitable in all three years. Government nuclear activity was profitable in fiscal 1982 and 1980 but sustained losses in fiscal 1981, due, primarily, to cost increases on two major programs that could not be recovered. Commercial nuclear activity was profitable in all three years due, primarily, to significant termination claims on the cancellation of nuclear steam contracts and the related sales of surplus uranium, which the Company does not anticipate in fiscal 1983. The Company does not currently have any nuclear steam contracts which obligate it to provide uranium. 11 The principal plants of the Company and its subsidiaries manufacturing power generation systems and equip ment are situated at Barberton, Lancaster and Wickliffe, Ohio; Lynchburg, Virginia; Wilmington, North Carolina; and Cambridge, Ontario. These plants and properties are owned by the Company and are well main tained, have suitable equipment and are of adequate size. The low level of orders for power generation systems and equipment, coupled with delays and suspensions of certain contracts in backlog, has caused the Company to review its capacity requirements and to provide for the closing of certain of its facilities. Raw Materials The principal raw materials used by the Company to construct power generation systems and equipment con sist 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 the equipment. These raw materials and components generally are purchased by the Company as needed for individual contracts except that requirements for tubes are supplied mainly from within the Company. Significant amounts of natural gas are used in the manufacture of power generation systems and equipment. The principal raw materials used by the Company in the manufacture of nuclear fuel consist of uranium, zircalloy and nickel. The Company's commercial nuclear fuel contracts provide for the customers to furnish the uranium. Although shortages in certain raw materials and fuels required to be purchased by the Company have existed from time to time, no serious shortage exists at the present time. Customers and Competition The principal customers of this business segment are the electric utility industry (including governmentowned utilities) and the United States Government. The electric utility industry (including government-owned utilities) accounted for 25%, 30% and 29% of the Company's total revenues for fiscal years 1982, 1981 and 1980, respectively. The United States Government accounted for 6%, 6% and 7% of the Company's total revenues for the same periods, respectively. Power generation systems and equipment orders are customarily awarded in response to competitive bids sub mitted pursuant to proposals based on the estimated cost of each job. A relatively small number of companies specializing in large steam generating equipment competes with the Company in the fossil fuel field. In sales of nuclear steam generating equipment the Company also competes with a small number of companies, including two major manufacturers whose reported sales of this equipment significantly exceed those of the Company, but which do not compete with it in the sale of fossil fuel boilers. In the sale of nuclear fuel, the Company com petes with each of the other manufacturers of nuclear steam generating equipment, as well as with one petroleum company which is a supplier of nuclear fuel. A number of companies are in competition with the Company, in small industrial boilers. The Company performs significant amounts of work for the United States Government under both prime contracts and subcontracts, and thus, is subject to continuing reviews by government agencies. Other suppliers of nuclear and fossil fuel systems, as well as many other smaller businesses, in the case of fossil fuel system, compete for repair and alterations and other sendees required for backfitting and maintaining older systems. Backlog The power generation systems and equipment backlog as of March 31, 1982 was $3,630,000,000, compared with $3,449,000,000 as of March 31, 1981. Of the March 31, 1982 backlog, it is expected that approximately $1,153,000,000 will be recorded as revenues in fiscal 1983, $1,575,000,000 in fiscal 19S4 - 1986. and $902,000,000 thereafter. The reduced electric utility load growth, excess generating capacity, environmental restraints and financial pressures on the utility industry have resulted in continued delays, suspensions and cancellations of nuclear steam system and related fuel contracts. In addition; the Company has not received an order for a new nuclear steam system in several years. No nuclear steam systems have been cancelled since fiscal 19S0, when there 12 were seven cancellations. However, it is doubtful that certain other commercial nuclear steam systems under contract will be completed and the backlog has been adjusted accordingly. Of the commercial nuclear steam systems and associated fuel contracts remaining in backlog, one is suspended. Commercial nuclear steam system and related fuel contracts constitute a relatively small portion of total backlog. The Company's total nuclear backlog, of which somewhat less than 30% relates to commercial contracts, constitutes approximately 23% of the Company's total backlog. Delays and supensions have also affected fossil fuel utility boiler con tracts and in fiscal 1982 two such contracts were cancelled. Delayed or suspended fossil fuel utility contracts constitute less than 10% of the Company's total backlog. The Company expects to proceed with these fossil fuel utility boiler contracts after the period of delay or suspension. If contracts are delayed, suspended or cancelled, the Company is entitled to a financial settlement related to the individual circumstances of the con tract. The Company 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 utility proposals and new contracts contain escalation clauses. Most long-term contracts have provisions for progress payments. Factors Affecting Demand New orders by the U. S. electric utility industry have been at low levels for the past several years, primarily due to cost induced conservation and a resultant decline in electric demand growth and uncertainties caused by excessive government regulation and the lack of a cogent national energy policy. As orders for new power generating systems and equipment have decreased, backfitting of old systems requiring replacement parts, repair and alterations and other services have become a significant portion of this segment's business. D. ENGINEERED MATERIALS General Engineered materials consists of tubular and refractory products designed and manufactured from basic and raw materials. Tubular products include stainless, alloy and carbon steel, seamless and welded tubes and pipe, tubular and solid shapes, extrusions, special metal tubes and seamless rolled rings. These are principally "specialty" pro ducts of high quality and engineered for special applications. One of this segment's principal products is high quality tubing for petroleum production operations. Refractory products include kaolin clays, specially engineered and vacuum formed ceramic fibers, insulating and specially firebrick, plastics, mortars, castables and special oxide refractories. These refractories are used in high temperature furnaces for various heating and heat treating purposes and in other applications where the temperatures and rates of combustion or chemical reactions are unusually demanding. The Company's principal plants manufacturing tubular products are located at Beaver Falls and Ambridge, Pennsylvania; Alliance, Ohio; Milwaukee, Wisconsin; and Bryan, Texas. It manufactures refractory products principally at Augusta, Georgia; and Burlington, Ontario and mines kaolin clay at Hepzibah, Georgia. All of these plants and properties are owned by the Company, are well maintained, have suitable equipment, and are of adequate size. During fiscal 1982 the Company divested its fittings and forgings product line. The cost associated with this divestment was fully provided for in fiscal 1981. Revenues from this product line were not material in relation to the Company's total revenues. Raw Materials The principal raw materials used by the Company in the manufacture of tubular products consist of steel, steel scrap, special metals and alloying materials. Most of the steel and special metals used for seamless tubemaking purposes are produced by the Company's own electric furnace facilities, but the Company purchases its re quirements for strip steel in the open market. Most of the steel scrap and all alloying materials utilized in the manufacturing process are also purchased in the open market. The principal raw material used to produce the Company's refractory products is kaolin clay which it obtains from its own mine. Also used are bauxite, alumina, silicon carbide, gypsum, plaster and wood chips, which are purchased on the open market. Significant amounts of natural gas and oil are used in the manufacture of tubular and refractory products Although shortages in certain raw materials and fuels required to be purchased by the Company have existed from time to time, no serious shortage exists at the present time. Customers and Competition The principal customers of the tubular products portion of this business segment are the petroleum and petrochemical industries. Other major customers include the bearing, the automotive, the agricultural and construction machinery, the primary metal, the fabricated metal, and the process and power generation in dustries. In addition, material amounts of tubes are manufactured by this segment to satisfy the Company's own requirements for power generation systems and equipment. The principal customers of the refractory portion of this business segment are the iron and steel, the chemical process, the ceramic, foundry and furnace builders industries. A number of companies, both domestic and foreign, are in competition with the Company with respect to tubular and refractory products. Backlog The backlog of this business segment as of March 31,1982 was $187,000,000, compared with $255,000,000 as of March 31,1981, substantially all of which is expected to be recognized as revenues in the coming fiscal year. Factors Affecting Demand Increases in oil prices have provided a strong incentive for increased exploration for and production of petroleum products. This has led to a significant increase in demand for high quality production tubing for the oil industry, which has become a significant class of products for engineered materials over the last few years. However, the recent oil surplus and declining oil prices have caused a softening in demand for oil country pro duction tubing in recent months. This segment also supplies other pressure tubing to makers of steam generating equipment for use in power plants, refineries, chemical and petrochemical plants and pulp and paper and other process industries. Demand for such tubing is closely tied to the capital spending plans of these industries or their ultimate customers, and such spending levels are currently depressed. In addition, this segment supplies mechanical tubing to the automotive, bearing, and agricultural and construction machine industries. Purchases of tubular products by these industries tend to follow the trend of the general economy. Insulating products provided by this segment fall into two major categories, high temperature in sulations and special performance refractories. Demand for such insulating products comes primarily from the iron and steel, refining and chemical processing, ceramics and utilities industries and is dependent upon capital spending for modernization and expansion, production levels and energy conservation in such in dustries. Demand associated with capital spending and production levels in such user industries has declined in the past several months. E. OTHER PRODUCTS AND SERVICES General Other products and services provided by the Company include the design and manufacture of automated machines and machine tools. The control valve product line was sold in July 1981 and an agreement in priDpie has been reached to sell the automated machine and machine tool product lines in fiscal 1983. Total revenues from this segment are not material in relation to the Company's total revenues. d f Backlog The backlog of this business segment as of March 31,1982 was $23,000,000, substantially all of which will be transferred to the buyer of the automated machine and machine tool product lines. F. PATENTS AND LICENSES Many U. S. and foreign patents have been issued to the Company and it has many pending patent applications. Patents and licenses have been acquired and licenses have been granted to others when advantageous to the Company. While the Company 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. G. RESEARCH AND DEVELOPMENT ACTIVITIES The Company maintains research and development activities in Alliance, Ohio; Lynchburg, Virginia; and New Orleans, Louisiana; and also conducts development activities at its various manufacturing plants and engineering and design offices. During the fiscal years ended March 31,1982,1981 and 1980, approximately $106,000,000, $81,300,000 and $54,800,000, respectively, was spent by the Company on research and develop ment activities, of which approximately $54,000,000, $39,000,000 and $23,400,000, respectively, was paid for by customers of the Company. Research and development activities sponsored by the Company were related to both development and improvement of new and existing products and equipment, improving operating techniques, and conceptual and engineering evaluation for translation into practical applications. The majority of customer sponsored research activities were related to the development of new products. Approximately 477 employees were engaged full time in this activity. H. INSURANCE The Company maintains liability and property insurance that it considers normal in the industry. It does not maintain insurance covering certain risks for which insurance is not available or is only available at rates which the Company considers uneconomical. Among such risks are war and confiscation in certain areas of the world at certain times, and pollution liability in excess of relatively low limits. Depending on competitive con ditions and other factors, the Company endeavors to obtain contractual protection against uninsured risks from its customers. In addition to coverage under nuclear liability and property insurance for its five nuclear facilities, two of these facilities are covered by the limitations of liability and indemnity provisions of the Price-Anderson Act which, among other things, limit the public liability of manufacturers of licensed nuclear facilities and other in demnified parties to an aggregate of $560,000,000 per nuclear incident and indemnify such persons in an ag gregate amount which when added to amounts available under commercially available liability insurance policies will total $560,000,000. The Company's insurance policies do not cover liability and property damage losses resulting from nuclear in cidents at facilities of its utility customers. To protect against such losses the Company has obtained contrac tual indemnification from such customers and waivers of their insurers' rights of subrogation and generally has been named as an additional insured under its customers' nuclear property insurance policies. In addition, the Company's third-party nuclear liability is an insured risk under such customers' nuclear liability policies and the Price-Anderson indemnity discussed above. The Company's offshore construction business is subject to the usual risks of operations at sea, with additional exposure due to the utilization of expensive and technical construction equipment under sometimes extreme weather conditions, often in remote areas of the world. In addition, the Company operates in many cases on or in proximity to existing offshore facilities which are subject to damage by the Company and such damage could result in the escape of oil and gas into the sea. The Company has two wholly-owned insurance subsidiaries. To date, these subsidiaries have written policies concerning general liability, builders' risk within certain limits, marine hull, and workmen's compensation for the Company and certain subsidiaries. As of March 31,1982, the only insurance written for unrelated parties was a participation in a reinsurance contract with a major domestic insurance company. r: I. EMPLOYEES At March 31, 1982, the Company employed, under its direct supervision, approximately 59,000 persons. Ap proximately 15,600 employees were members of labor unions. The Company considers its relations with its employees to be satisfactory. J.GOVERNMENT REGULATIONS The Company's compliance with Federal, State and local environmental protection regulations necessitated capital expenditures of $3,410,000 in 1982, and it expects to spend another $16,600,000 over the next five years. However, the Company cannot predict all the environmental requirements or circumstances which will exist in the future. The recurring costs of complying with environmental regulations was a charge against in come before taxes of approximately $10,765,000 in 1982. Item 3. LEGAL PROCEEDINGS On December 14,1978 a Federal grand jury in New Orleans, Louisiana indicted the Company, Brown & Root, Inc. ("Brown & Root") and certain of their officers on charges of conspiring to allocate contracts and to fix prices and contract terms for marine construction projects in violation of Section 1 of the Sherman Act and other federal statutes. In 1978 the Company and Brown & Root each pleaded nolo contendere to the Sherman Act charges and were each fined $1,000,000. In March and April, 1979, two officers, a former chief operating officer, and a former chief executive officer of the Company (all but one of whom were directors of the Com pany) pleaded nolo contendere to the Sherman Act charges and certain related charges of mail fraud and wire fraud. The Company and Brown & Root (and in some cases, Oceanic Contractors, Inc. (now McDermott Inter national, Inc.) a wholly-owned subsidiary of the Company, and certain former officers of the Company) have been named as defendants in over 75 pending actions (which have been filed in or transferred to the United States District Court for die Eastern District of Louisiana) instituted by or on behalf of purchasers of marine construction services in the United States and abroad and in an action by a competitor, alleging a combination and conspiracy to restrain or eliminate competition in marine construction in violation of Sections 1 and 2 of the Sherman Act and various state laws through a conspiracy to allocate contracts, fix prices and contract terms and other means. Plaintiffs seek treble damages and other relief for injuries allegedly sustained, in some cases as early as the mid-1950's. Other private parties have received temporary waivers of the statute of limitations, and these parties may assert additional treble damage claims against die Company. The Company has filed answers denying the material allegations of wrongdoing in the complaints and in some cases has filed a counterclaim. These cases are now in discovery proceedings. The outcome of these actions could have a material adverse effect on the Company. On March 25, 1980, General Public Utilities Corporation and three of its subsidiaries filed an action against B&W and the Company in the United States District Court for the Southern District of New York for damages resulting from the March 28, 1979 accident at Three Mile Island-Unit 2 ("TMI-2"), which was owned and operated by one of such subsidiaries. The original complaint alleged that the nuclear steam supply system and certain auxiliary equipment and systems provided by B&W, including training and drafting work on pro cedures and specifications for TMI-2, were improperly performed. The original complaint purported to set forth causes of action based on negligence, strict liability, breach of contract, and breach of warranty theories. The Company and B&W filed an answer denying the material allegations of the complaint and asserting cer tain affirmative defenses, including plaintiffs' negligent maintenance and operation of TMI-2 and contractual limitations on B&W's liability. In December 1981 plaintiffs filed an amended complaint restating their claims against B&W and the Company and deleting therefrom all claims based on breach of contract or warranty. They now assert five separately stated claims. The first four seek to hold B&W liable under alternative theories of per se negligence, gross negligence, wanton, willful and reckless misconduct, and ordinary negligence for (1) failure to warn plaintiffs following an allegedly similar incident that occurred at another nuclear facility which had a B&W reactor; (2) failure to warn plaintiffs concerning certain characteristics of the reactor coolant pumps; (3) negligent misrepresentation concerning the earlier incident at the other facility; and (4) failure to provide certain additional safety equipment and analyses which plaintiffs claim would have mitigated or prevented the accident. Plaintiffs' fifth claim asserts that the matters alleged in the first four claims constitute a defect in the equipment sold to them by B&W and that B&W is therefore liable for any resulting damages under the doctrine of strict products liability. The amended complaint seeks damages "in an amount to be determined, no less than $4 billion". Simultaneously with the filing of the amended complaint, 16 the Company and B&W filed their answer thereto, denying the material allegations of the amended complaint and reasserting the affirmative defenses. There has been extensive discovery, which is continuing. Plaintiffs have waived their demand for jury trial. A tentative trial date has been set for October 18,1982. It is extreme ly difficult to predict the outcome of litigation of this magnitude and complexity and, accordingly, the outcome of this case could have a material adverse effect on the Company. However, based upon the facts developed to date and the Company's review of the contracts for furnishing equipment and services, management believes that liability, if any, arising out of this proceeding should not have a material adverse effect upon the con solidated financial position of the Company. In addition to the action described in the preceding paragraph, B&W and, in certain cases, the Company, are defendants in numerous suits seeking very substantial damages allegedly caused by the nuclear incident at TMI-2. In the contracts between B&W and the utility, there are contractual provisions for indemnification pur suant to the Price-Anderson Act and, separately, from the utility. On behalf of the defendants, the utility's in surers have entered into a proposed settlement with the two classes of plaintiffs which the court has heretofore certified. The settlement, which was approved by the court on September 9,1981, provides for an aggregate payment by the insurers of approximately $25,000,000. Additional actions which are not part of the consolidated class action are being defended by the insurers, subject to their reservation in certain cases of the right to contest liability under the policies. The Price*Anderson Act limits the public liability of all parties who may be liable for a nuclear incident to an aggregate of $560,000,000 per nuclear incident and provides for rais ing this sum through nuclear liability insurance, retrospective premium assessments and government indem nity. Based upon these considerations and other available information, management believes that liability, if any, arising out of these proceedings will not have a material adverse effect upon the consolidated financial position of the Company. On February 12,1981 an action entitled Arkansas Power & Light Co. v. B&W and McDermott was filed in the United States District Court for the Eastern District of Arkansas, Western Division. This complaint arises out of an agreement between B&W and Arkansas Power & Light Co. ("AP&L") pursuant to which B&W has pro vided AP&L with nuclear fuel for AP&L's Arkansas Nuclear One electric generating facility. The agreement provided that B&W would supply a specified quantity of nuclear fuel for use in AP&L's facility and would repurchase, for a price of approximately $5,000,000, such fuel when discharged from the reactor. The com plaint alleges that B&W has refused to purchase and remove from the premises of AP&L spent nuclear fuel which has been discharged. The complaint further alleges that, as a result of B&W's Mure to purchase and remove the spent fuel, AP&L has incurred substantial expenses in order to modify and expand its spent fuel storage capacity. B&W has asserted as affirmative defenses that B&W, under certain provisions of the con tract, is not liable for loss or damage arising out of events beyond its reasonable control; that B&W is excused from performance of this agreement because of actions of the Federal government which have prevented the reprocessing of spent fuel; and that performance has been rendered commercially impracticable. Plaintiff seeks a judgment declaring that the defendants are contractually obligated to purchase spent fuel and a decree directing defendants to purchase and remove all spent fuel which is subject to the agreement. Plaintiff also seeks to recover costs of modifying its fuel storage capabilities, the amount of the payments for purchase of the spent fuel, any damages suffered for ultimate disposal of the fuel if not removed by defendants, and the cost of storage of the fuel until defendants obtain storage elsewhere. The potential damages attributable to a judgment requiring B&W to bear the cost of storage and disposal of spent fuel cannot be calculated at this time, although such damages could be very substantial. Based upon the information presently available to it, management believes that any liability arising out of the proceeding should not have a material adverse effect upon the consolidated financial position of the Company. In August 1977 an action entitled Zeidman, et al, v. McDermott, et al., was filed by a former holder of common stock of B&W and a former holder of call options to purchase such common stock in the United States District Court for the Eastern District of Louisiana against the Company, certain of its officers, and Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"), the Company's financial advisor, alleging violations of federal securities laws prohibiting fraudulent and manipulative devices. The plaintiffs seek to represent all former holders of B&W common stock and all former holders of call options to purchase such common stock who sold such shares or call options during the period March 30, 1977 through August 14,1977. They allege that the Company failed to disclose in a timely fashion that it and Smith Barney were engaged in a tender offer for the purpose of acquiring control of B&W and that the price received by members of the purported class was substantially below what they could have received had the defendants made timely disclosure of their actions and intentions. Plaintiffs seek rescission of the sales of B&W securities made by the class prior to full 17 disclosure by the Company of its tender offer, or in the alternative, damages in unspecified amounts suffered by the class, plus attorneys' fees and costs. The District Court denied plaintiffs' motion for class certification and granted in part defendants' motion for summary judgment dismissing certain of the plaintiffs' claims. The Company, on behalf of all defendants, tendered to the two named plaintiffs the full amount of their claimed damages, $22,475, and defendants moved to dismiss the entire action as moot. Such motion was granted by the District Court. Plaintiffs appealed from the District Court's denial of class certification and dismissal of the suit. The U.S. Court of Appeals for the Fifth Circuit reversed the judgment of the District Court and remanded the case for further proceedings with respect to various class certification issues. In January 1978 a stockholder of B&W filed an alleged class action, Osofsky v. Zvpf et al., in the United States District Court for the Southern District of New York against the Company, B&W, the directors of B&W, Smith Barney, and Morgan Stanley & Co. Incorporated ("Morgan Stanley"), B&W's financial advisor, alleging violations of federal securities laws prohibiting fraudulent or misleading statements or omissions and of state common law in connection with the Company's tender offer for B&W common stock (the "tender offer") and the subsequent merger of B&W into a wholly-owned subsidiary of the Company (the "merger"). The plaintiff, who seeks to represent all B&W stockholders, alleges, among other things, that the Company planned to violate its "promise" in the tender offer that the consideration to be received by B&W's stockholders in the merger would have to approximate the price paid pursuant to the tender offer by offering securities which the plaintiff claims to have a market value of $61.00 or less, that the other defendants aided and abetted the Com pany with respect to this violation, and that such violation constitutes a breach of fiduciary duty owed to the stockholders of B&W by the Company, B&W and the directors of B&W. Plaintiff seeks specific performance of the Company's alleged promise to pay the stockholders of B&W the approximate sum of $65.00 per share of B&W common stock upon the issuance by the Company of its $2.20 convertible preferred stock and $2.50 (subsequently $2.60) preferred stock, plus attorneys' fees and costs. On February 14,1978 the Company filed an answer denying the material allegations of the complaints. On November 30,1978 plaintiff filed a motion for class certification. On July 12,1979 defendants filed a motion for summary judgment and papers in opposi tion to class certification. On August 21,1979 plaintiffs filed a motion to consolidate this action with a similar action which had been filed in the same Court in March 1978, Udoffv. B&W, et al., for which class certification was also sought. The District Court granted defendants' motion for summary judgment on the ground that plaintiffs had failed to allege a theory of damages cognizable under the federal securities laws. The Court of Appeals for the Second Circuit reversed the order of summary judgment and remanded both actions to the District Court. Renewed motions for summary judgment by the Company and the other defendants on the grounds not previously determined by the District Court and the Court of Appeals were denied. Osofsky and Udoffhave been certified as class actions, and notices have been sent to class members. The cases are now in discovery, and it is expected that the cases will be tried in late 1982. On the basis of information currently available to it, management believes both of these suits are without merit. In March, 1978 a stockholder of the Company had filed a derivative action, Lewis v. Graves, et al, in the United States District Court for the Southern District of New York against the Company, its directors, B&W, Smith Barney and Morgan Stanley alleging violations of federal securities laws prohibiting fraudulent and misleading statements or omissions and state common law in connection with the B&W tender offer and merger and in connection with the receipt by certain of the Company directors of stock pursuant to the Com pany's Career Executive Stock Plans. The plaintiff alleges that the purchase of B&W stock by the Company on the open market and pursuant to the tender offer were fraudulent in that, among other things, the price paid was "unconscionably high" and further alleges that some of the defendants concealed the alleged fact that such purchases and any subsequent merger of the Company and B&W "posed antitrust problems". The plain tiff also alleges that the proxy statement issued by the Company prior to the merger was deficient under the federal securities laws in that it did not disclose, among other things, that there were "serious questions" as to the legality of the merger under the antitrust laws, that the Company's directors had not determined that the proposed merger was fair to the Company's shareholders, or that the merger would have adverse effects on the Company's financial position. The plaintiff further alleges that the sums expended by the Company in con nection with the tender offer and merger constituted a waste of the Company's assets and that the receipt of Company stock by certain of the Company's directors pursuant to its Career Executive Stock Plans was fraudulent in that such individuals concealed their knowledge of or participation in certain questionable or il legal payments and practices in which the Company had been involved. Plaintiff seeks rescission of the merger, an accounting from the individual defendants for damages they allegedly caused the Company, the cancellation of stock issued to certain defendants pursuant to the Company's Career Executive Stock Plan, an accounting from Smith Barney and Morgan Stanley for damages allegedly suffered by the Company as a result of the tender offer and merger and for all profits made by them in connection therewith, and attorneys' and experts' fees. On June 9,1978 the Company filed an answer denying the material allegations of the com plaint. In December 1980, the Company and all the other defendants moved for judgment on the pleadings based in part on the Court's decision in a similar suit involving the Company and in part plaintiffs failure to make a demand oh the Board of Directors, and, in the alternative, for summary judgment based on the fin dings of the Independent Committee on Litigation of the Board of Directors (comprised entirely of outside directors) charged with the responsibility of answering the plaintiffs demand, which Committee, after exten sive investigation with the assistance of independent legal counsel, determined that to pursue the plaintiffs claims would not be in the best interest of the the Company. By opinion and order dated February 4,1982, the Court granted defendants' motion for judgment on the pleadings for failure to make a demand upon the direc tors but allowed plaintiff to replead if a demand was made on or before March 5,1982. Plaintiff subsequently notified the Court that he had decided not to make such demand. Judgment was entered dismissing the com plaint against all the defendants, and plaintiff has filed Notice of Appeal. On the basis of the information cur rently available to it, management believes that this suit is without merit. In June 1981, the Florida Power Corporation, a customer of B&W, filed an action, Florida Power Corporation v. B& W and McDermott, in the Middle District of Florida against the Company and B&W alleging breach of contract, breach of warranties, negligence, strict liability and fraud in the inducement arising out of an inci dent at the Florida Power Crystal River Unit 3 site. Crystal River Unit 3 is a nuclear reactor facility for which B&W supplied the nuclear steam supply system. During operation in February 1978, a piece of a lumped bumable poison rod assembly escaped from the core of the reactor and traveled through the reactor to the inter face with the steam generator where damage was done to the top of the steam generator. Florida Power Cor poration, not specifying the amount of damages except to allege that such amount exceeds $10,000 seeks damages which are both direct and consequential, including replacement power. The Company and B&W filed answers denying the material allegations of the complaint and asserting various affirmative defenses, and also filed a third-party demand on the nuclear insurers of Florida Power Corporation. Discovery in the form of document production has commenced, and it is expected that deposition discovery will commence later this year. Management believes that any liability arising from these proceedings will not have a material adverse effect on the consolidated financial position of the Company. In October 1981 a trustee for a stockholder of the Company filed an alleged shareholder's derivative action, Richardson v. Graves, et al., in the Court of Chancery of the State of Delaware for New Castle County, against the Company, its directors, a former director and officer of the Company and a former officer of the Company alleging that certain defendants engaged in, and the remaining defendants authorized or acquiesced in, various instances of unlawful conduct which resulted, among other things, in the Company paying fines or forfeiture of profits of at least $2,000,000 in 1978 and 1979 and being named as a defendant in the pending civil treble damage actions arising out of alleged violations of the federal antitrust laws. The plaintiff seeks a broad range of relief, including replacement of the Company's Board of Directors and the appointment of a receiver to manage the Company; an accounting of the expenses incurred in connection with the litigations and in vestigations caused by the unlawful acts alleged; an award of damages in the amount sustained by the Com pany, and an injunction prohibiting the defendants from acting in the manner set forth above; a declaration that the defendants have committed a gross abuse of trust and have violated their fiduciary duties to the Com pany and its stockholders; an order requiring certain named defendants, who are officers and directors or former officers and directors of the Company, to return portions of the compensation received by them respec tively from the Company; and punitive damages. On January 22, 1982 the defendants, with one exception, moved to dismiss this action for the reason that the plaintiff had failed to make formal demand on the Board of Directors prior to filing the action. The Independent Committee on Litigation of the Board of Directors, com prised entirely of outside directors, has been charged with the responsibility of investigating and assessing the allegations of the complaint; the Committee's investigation is continuing with the assistance of independent legal counsel. Management believes that the outcome of the investigation will not have a material adverse ef fect on the consolidated financial position of the Company. 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 securi ty holders, through the solicitation of proxies or otherwise. Item 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT The following lists the executive officers of the registrant, their ages, positions currently held with the Com pany, and their business experience for the past five years. J. E. Cunningham - 59 Chairman of the Board and Chief Executive Officer of the Company since 1979. During the past five years, and prior to assuming his present position, Mr. Cunningham had been Executive Vice President, Finance and Administration, Vice Chairman of the Board and Chief Financial and Administrative Officer and then Vice Chairman of the Board and Chief Executive Officer of the Company. Mr. Cunningham is a Director of Reading & Bates Corporation. Robert E. Howson - 50 President and Chief Operating Officer of McDermott Marine Construction. During the past five years, and prior to assuming his present position in 1981, Mr. Howson was a Group Vice President of McDermott International, Inc., a wholly-owned subsidiary of the Company, and then Senior Vice Presi dent of the Company. W. M. Vannoy - 54 President and Chief Operating Officer of Babcock & Wilcox. During the past five years, and prior to assuming his present position in 1980, Mr. Vannoy had been Executive Vice President of The Babcock & Wilcox Company, a wholly-owned subsidiary of the Company, and then Executive Vice President and Chief Administrative Officer of the Company. Mr. Vannoy is a Director of Figgie International Incorporated. H. W. Bailey - 59 Executive Vice President and Chief Administrative Officer of the Company since 1980. During the past five years, and before assuming his present position, Mr. Bailey had been Executive Vice President, North American Operations, of the Company. Mr. Bailey is a Director of Guaranty Bank and Trust Com pany in Morgan City, Louisiana. John A. Lynott * 46 Executive Vice President and Chief Financial Officer of the Company since 1979. During the past five years, and before assuming his present position, Mr. Lynott was Treasurer, Vice President - Finance and then Vice President and Chief Financial Officer of the Company. Kennedy J. Gilly - 55 Vice President, General Counsel and Secretary of the Company. Elected Vice President and General Counsel in 1977 and Secretary in 1979. Prior to assuming these positions with the Company, he was engaged in the practice of law as a partner with a New Orleans based law firm. There are no family relationships between any of the executive officers, directors or persons nominated to be such, and no executive officer was elected to his position pursuant to any arrangement or understanding be tween himself and any other person. Each executive officer of the registrant will hold the.office listed until his successor is elected and qualified or until his earlier death, resignation or removal. See Item 10 "Directors and Executive Officers of the Registrant" for further information with respect to the Company's executive officers. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange. High and low stock prices and dividends for the last two years were: QUARTER FISCAL 1982 SALES PRICE CASH DIVIDENDS High Low DECLARED 1st - ended June 30 2nd ended September 30 3rd - ended December 31 4th - ended March 31 - QUARTER 39 40-Vg 41-Vg 38-V# 27-Vg 27-Va 31 21-3/4 $0.40 0.40 0.40 0.45 FISCAL 1981 SALES PRICE CASH DIVIDENDS High Low DECLARED 1st * ended June 30 2nd - ended September 30 3rd - ended December 31 4th - ended March 31 30-3/* 33-7/g 46-6/g 41-V2 22-V* 26-6/g 27 34-Vg $0.35 0.35 0.35 0.40 As of March 31,1982, the approximate number of holders of common stock was 10,800. For restrictions on the Company's present or future ability to pay dividends, see Note 5 of notes to the consolidated financial statements. The Company has paid dividends on its common stock continuously since 1955. 21 Item 6. SELECTED FINANCIAL DATA For The Fiscal Years Ended March 31, 1982__________ 1981__________ 1980__________ 1979__________ 1978 (In thousands except for per share amounts) Revenues Net Income Earnings Per Common and Common Equivalent Share Primary Fully Diluted Total Assets $ 4,843,186 $ 3,839,698 $ 3,167,059 $3,414,577 $ 1,162,268 $ 213,449 $ 99,561 $ 90,821 $ 112,984 $ 129,112 $ 4.98 $ 4.56 $ 4,030,032 $ 1.89 $ 1.88 $ 3,906,261 $ 1.85 $ 1.84 $ 3,541,912 $ 2.55 $ 2.53 $ 3,294,728 $ 4.10 $ 4.00 $ 3,197,739 Long-Term Obligations Redeemable Preferred Stocks $ 419,259 393,763 $ 436,397 394,192 $ 471,853 394,468 $ 492,647 394,507 $ 479,432 394,847 Total $ 813,022 $ 830,589 $ 866,321 $ 887,154 $ 874,279 Cash Dividends per common share $ 1.65 $ 1.45 $ 1.25 $ 1.00 $ 0.90 In April 1981 the Company adopted the percentage of completion method of income recognition for its marine construction contracts. Financial information for periods prior to the fiscal year ended March 31, 1982 presented herewith has been restated to apply the new method retroactively. See Note 1 of notes to consoli dated financial statements. As discussed in Note 6 of notes to consolidated financial statements, the Company has been named as a defen dant in pending actions alleging violations of Section 1 and 2 of the Sherman Act and various state laws. Addi tional similar claims may also be asserted. The ultimate amount of any liability that might result from such ac tions is not presently determinable and no provision for any liability that might result has been made in the financial statements. On March 31,1978 the Company acquired The Babcock & Wilcox Company, (B&W). Amounts shown above for 1979 and other years subsequent to the merger include the operations of B&W. 22 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1982 VS 1981 Beginning in April 1981, the Company has accounted for revenues and costs for its marine construction con* tracts using the percentage of completion method, whereas in prior years revenues and costs for such con tracts had been accounted for using the completed contract method. The change in method of accounting was adopted to better reflect the progress and performance of contract work in the marine construction operations and to conform with criteria contained in the Statement of Position "Accounting for Performance of Construction-Type Contracts" issued by the American Institute of Certified Public Accountants in July, 1981. Financial statements of prior periods presented herewith have been restated to apply the new method retroac tively. For income tax purposes, the completed contract method will be continued. Marine construction sendees revenues increased by $490,598,000. This increase in revenues was principally related to foreign operations. As a result of higher profit margins, higher revenues and increased utilization of marine vessels, this segment's operating'income increased by $67,024,000. Domestic and foreign operations contributed to the improvement in operating income. Losses were incurred or provided for on certain marine contracts in both fiscal 1982 and 1981. Lower oil prices in fiscal 1982 resulted in a softening in the demand for marine construction services in certain areas of this business segment, particularly in domestic operations. For the fiscal year ended March 31,1982, the effect of the accounting change discussed above increased net in come by $42,873,000. For the fiscal year ended March 31, 1981, the effect of this same accounting change decreased net income by $7,136,000. Power generation systems and equipment revenues for fiscal 1982 were $221,733,000 higher than fiscal 1981 principally due to higher revenues from fossil steam generating systems, termination claim settlements of nuclear steam system contracts, and improved boiler parts and service business. In addition, improvements were recorded in revenues from process recovery boilers and controls, heat exchangers for the process and utility industry, as well as nuclear fuel and components for the Navy. Partially offsetting these favorable results were a lower level of repair and alteration business and lower environmental systems business. Operating income of this segment for fiscal 1982 was $8,589,000 lower than fiscal 1981. Principal factors con tributing to this decrease were higher unrecoverable costs on certain fossil steam generating system con tracts, increased costs for the repair of certain nuclear steam generators, and higher spending on research and development and increased selling expenses. Partially offsetting these unfavorable factors were termination claim settlements of nuclear steam system contracts and the related sales of surplus uranium which con tributed approximately $32,588,000 more to this segment's operating income in fiscal 1982, compared with fiscal 1981. In addition, losses were recorded in fiscal 1981 on two major government nuclear programs due to higher than anticipated costs which could not be recovered. The low level of orders for power generation systems and equipment, coupled with delays and suspensions of certain contracts in backlog, has caused the Company to review its capacity requirements and to provide for the closing of certain of its facilities. This provision is included in Other Income (Expense). Engineered materials revenues were $310,300,000 higher than last year, principally reflecting the strong de mand and improved pricing for petroleum industry related tubing. Operating income increased $197,261,000 primarily due to the higher volume and improved prices for pressure and mechanical tubing shipped to the petroleum industry. Higher operating levels resulting in lower per unit costs, cost reduction programs and elimination of certain low margin and unprofitable products from this segment have also aided results. Other products and services revenues decreased $35,239,000 due to divestment of the control valve product line and the industry-wide slump in machine tool orders. Operating income for the segment was $8,031,000 or $2,534,000 lower than last year and is due to divestment of the control valve product line partially offset by lower operating expenses resulting from reduced manpower levels in the machine tool unit. An agreement in principle has been reached to sell the automated machine and machine tool product lines in fiscal 1983 and a provision has been made for this disposition. Other income decreased by $43,968,000. This decrease is primarily attributable to provisions of $51,000,000 for plant closings and disposition of product lines referred to above and to losses of $7,918,000 in foreign ex change translation in fiscal 1982 compared with a gain in fiscal 1981. Provision for income taxes increased by $95,100,000 with effective tax rates of 49% and 53% for the respec tive periods. Taxes increased due to the higher income before provision for income taxes in the current period. However, a lower effective tax rate in the current year is due to anticipated higher effective foreign tax benefits which result from the dispersion of profits and losses among jurisdictions with varying rates of taxa tion. 1981 VS 1980 Marine construction services revenues increased by $396,639,000 in domestic and foreign operating areas. Operating income increased by $63,172,000 principally in domestic operations. Foreign operating losses for fiscal 1981 decreased slightly from those of fiscal 1980. Losses were incurred or provided for on certain marine contracts in both fiscal 1981 and 1980. However, such losses were at a lower level in fiscal 1981. As a result of these lower losses and improved profit margins on its other marine contracts, this segment was in a net pro fitable position in fiscal 1981. Fower generation systems and equipment revenues were $240,041,000 higher than fiscal 1980, primarily due to increased boiler and component parts shipments which were deferred from fiscal 1980 due to an extended labor strike in that period. In addition, higher navy reactor fuel and components shipments, increased repair and alteration business and higher control system sales increased revenues in fiscal 1981. Operating income in fiscal 1981, however, was $24,506,000 lower than fiscal 1980. Principal factors contributing to this decrease were lower margins on contracts due to lower demand and competitive pressures, inflationary increases in operating costs, increased losses on two major government nuclear programs due to significantly higher than anticipated costs which could not be recovered, and significantly lower operating income from sales of nuclear fuel. Settlements of cancellation claims of nuclear steam system contracts and the related sales of surplus uranium contributed approximately $27,300,000 to this segment's operating income in fiscal 1981, as com pared with approximately $42,300,000 in fiscal 1980. Partially offsetting these negative factors was additional operating income in fiscal 1981 generated by the increased repair and alteration and control businesses. Operating income in fiscal 1980 was reduced by approximately $46,000,000 in the aggregate due to the adverse impact of labor strikes, the higher provision for losses made for steam generator repairs in Canada and a provision for certain export contracts. Engineered materials revenues increased by $46,137,000 in spite of lower market demand for insulating pro ducts and tubular products, except tubing for petroleum production operations. Higher prices and a shift in tubular product shipments to a greater percentage of such tubing, which carries a higher price per ton, were the factors increasing the dollar volume. Operating income increased $34,544,000 resulting from the higher prices and a more profitable product mix. Other products and services revenues increased by $24,319,000 due to increased shipments of machine tools and control valve products. Operating income also increased by $3,041,000 for both of these classes of pro ducts. Interest income increased by $23,486,000 for the comparative periods. The interest income was consistent with changes in the Company's investments (principally short-term) and the interest rates prevailing in the respective periods. In fiscal 1980, certain cash available for short-term investments was instead placed in for ward contracts for the sale of foreign currency, and the premiums earned thereon were reported as other in come in that period. Interest expense for fiscal 1981 increased by $11,187,000 from that of fiscal 1980, primarily due to interest ex pense accrued in fiscal 1981 with respect to income taxes provided in prior years. Other income decreased by $25,882,000 for the comparative fiscal years. Of this decrease, 15,481,000 was at tributable to premium income earned in fiscal 1980, when certain cash available for short-term investments was placed in forward contracts for the sale of foreign currency. The Company made provisions in fiscal 1981 of $18,883,000 to cover the shut-down costs of certain domestic and foreign operations included in the engineered materials segment and other minor product lines. These decreases were offset by the gain of ap proximately $17,000,000 on the disposal of the Company's investment in Pullman Incorporated. Provision for income taxes increased by $47,688,000 for fiscal 1981 over the income taxes provided for fiscal 1980, with effective tax rates of 53% and 42% for the respective periods. This increase was due to an increase in net income before taxes, lower effective foreign tax benefits which resulted from the dispersion of profits and losses among jurisdictions with varying rates of taxation, and reduced investment tax credits in the cur rent fiscal year. ` Impact of Inflation and Changing Prices on Revenues and Net Income As a result of significant and continued inflation, historical dollar accounting (as reflected in the financial statements) does not reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar. The effects of inflation and its impact upon the Company and its reported results are shown pursuant to FASB No. 33 in Note 11 of notes to consolidated financial statements. The Company attempts to cover increased costs of anticipated changes in labor, material and service costs on long-term contracts either through an estimation of such changes which is reflected in the original price or through price escalation clauses. However, increased competition in some areas has prevented the full recovery of increasing costs, and, consequently, profit margins are under pressure. Liquidity and Capital Resources There has been no significant change in the Company's financial position since March 31, 1981. The Company's working capital increased by $96,396,000, principally due to increases in accounts and notes receivable of $92,957,000, increases in cash and short-term investments of $87,604,000 and decreases in notes payable to banks of $63,212,000, partially offset by decreases in the net of contracts in progress and advance billings related thereto of $64,528,000 and increases in accrued liabilities-other of $83,647,000. During the fiscal year ended March 31,1982 the Company spent $167,018,000 for additions to property, plant and equipment and paid cash dividends of $90,481,000. The Company has committed to make capital expenditures of approximately $240,000,000 during fiscal 1983. These proposed expenditures are principally to increase the capacity of and upgrade and modernize the Com pany's marine fleet and its support facilities, and to expand and modernize the Company's steelmaking facilities. The Company expects to obtain funds for these purposes from its operations and through borrowings. During the fiscal year ended March 31, 1982, the Company's outstanding borrowings under its short-term lines of credit and revolving credit agreement averaged $79,820,000, with $21,560,000 outstanding at March 31,1982. At March 31,1982 the Company had $110,632,000 available under its short-term lines of credit. In addition, to help assure its ability to meet future committments, in fiscal 1982, the Company established a $200,000,000 eight-year revolving credit and term loan agreement with a group of banks. Depending on market conditions and other factors, the Company may also meet its cash requirements through the issuance of additional equity or debt securities. The Company attempts to manage its long-term and short-term debt in such a manner that maturing obliga tions will not adversely affect the Company's liquidity. See Note 5 of notes to consolidated financial statements for maturities of long-term debt in coming fiscal years. At March 31,1982, the ratio of long-term debt to total common stock and other stockholders' equity was .36, as compared with .42 at March 31, 1981 and .46 at March 31,1980. Certain of the Company's consolidated subsidiaries and affiliated companies are restricted, principally as a result of credit agreement covenants, in their ability to transfer funds to the Company through intercompany loans, advances or cash dividends. At March 31,1982, approximately $950,000,000 of the net assets of such subsidiaries and affiliated companies were subject to such restrictions. It is not expected that these restric tions will have any significant practical effect on the Company's liquidity. Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Company Report on Consolidated Financial Statements The Company has prepared the consolidated financial statements and related financial information included in this report. The Company has the primary responsibility for the financial statements and other financial infor mation and for ascertaining that the data fairly reflect the financial position and results of operations of the Company. 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 of ficers of the Company with appropriate consideration given to materiality. The Company believes that it maintains a system of internal accounting controls 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 ac cepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must not exceed the related benefits. Although accounting control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless oc cur. The Company seeks to assure the objectivity and integrity of its accounts by its selection of qualified per sonnel, 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. The Company believes that its accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected. The Company's accompanying consolidated financial statements have been examined by its certified public ac countants, who provide the Company with expert advice on the application of generally accepted accounting principles to the Company's business and also provide an objective assessment of the degree to which the Com pany meets its responsibilty for the fairness of financial reporting. They regularly evaluate the system of inter nal accounting controls and perform such tests and other procedures as they deem necessary to reach and ex press an opinion on the fairness of file financial statements. The report of the certified public accountants ap pears elsewhere herein. The Board of Directors pursues its responsibility for the Company's consolidated financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. The Audit Committee meets periodically with the certified public accountants, management and the internal auditors to review matters relating to the quality of financial reporting and internal accounting control 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 certified public accountants for the Company, who in turn submit the engagement to the stockholders for their approval. The certified public accountants, as well as the internal auditors, have free access to the Audit Committee. May 19, 1982 Report of Certified Public Accountants The Board of Directors and Stockholders McDermott Incorporated We have examined the accompanying consolidated balance sheet of McDermott Incorporated at March 31, 1982 and 1981 and the related consolidated statements of income and retained earnings and changes in finan cial position for each of the three years in the period ended March 31,1982. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As discussed in Note 6 to the financial statements, the Company has been named as a defendant in pending actions alleging violations of Sections 1 and 2 of the Sherman Act and various state laws. Additional similar claims may also be asserted. The ultimate amount of any liability that might result from such actions is not presently determinable and no provision for any liability that might result has been made in the financial statements. In our opinion, the financial statements mentioned above present fairly the consolidated results of operations and changes in financial position of McDermott Incorporated for each of the three years in the period ended March 31,1982 and, subject to the effects of such adjustments, if any, as might have been required had the out come of the uncertainty referred to in the preceding paragraph been known, the consolidated financial posi tion at March 31, 1982 and 1981, in conformity with generally accepted accounting principles applied on a consistent basis during the period after restatement for the change, with which we concur, in the method of accounting for marine construction contracts as described in Note 1 to the financial statements. ARTHUR YOUNG & COMPANY New Orleans, Louisiana May 19, 1982 27 McDermott incorporated CONSOLIDATED BALANCE SHEET MARCH 31, 1982 and 1981 (In thousands) ASSETS: Current Assets: Cash Short-term investments, principally time deposits at cost which approximates market Accounts and notes receivable Contracts in progress Inventories Prepaid expenses Total Current Assets Property, Plant and Equipment, at Cost: Land Buildings Machinery and equipment Property under construction Less accumulated depreciation and amortization Net Property, Plant and Equipment Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization ($40,198,000 in 1982 and $30,962,000 in 1981) Other Assets 1982 $ 26,865 507,594 1,010,505 407,181 367,797 11,993 2,331,935 38,937 270,864 1,529,097 87,306 1,926,204 728,576 1,197,628 338,782 161,687 1981 $ 14,988 431,867 917,548 513,769 361,805 10,106 2,250,083 40,160 223,144 1,448,795 91,445 1,803,544 626,066 1,177,478 348,018 130,682 TOTAL See accompanying notes to consolidated financial statements $ 4,030,032 $ 3,906,261 (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable to banks and current maturities of long-term debt Accounts payable Accrued employee benefits Accrued liabilities other Advance billings on contracts Provision for warranty expense U. S. and foreign income taxes Dividends payable Total Current Liabilities Deferred and Non-Current Income Taxes Long-Term Debt Other Liabilities Contingencies Redeemable Preferred Stocks Common Stock and Other Stockholders' Equity: Common stock Capital in excess of par value Retained earnings Less: Cost of common stock in treasury Unamortized deferred career executive stock plan expense Total Common Stock and Other Stockholders' Equity TOTAL 1982 $ 39,347 244,023 155,725 379,899 364,962 97,659 225,438 24,348 1,531,401 373,329 419,259 137,722 393,763 37,110 262,004 881,760 1,180,874 2,800 3,516 1,174,558 $ 4,030,032 1981 $ 116,784 231,918 124,549 296,252 407,022 93,587 253,604 22,229 1,545,945 356,362 436,397 125,685 394,192 36,979 258,996 758,792 1,054,767 2,912 4,175 1,047,680 $ 3,906,261 29 McDermott incorporated CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1982 (In thousands) 1982 1981 1980 Revenues Costs and Expenses: Cost of operations Depreciation and amortization Selling, general and administrative expenses Operating Income Other Income (Expense): Interest income Interest expense Equity in earnings of joint venture companies Other Income Before Provision For Income Taxes Provision for Income Taxes: Current Deferred Net Income Retained Earnings, Beginning of Year Deduct: Cash dividends - common ($1.65 in 1982, $1.45 in 1981, and $1.25 in 1980 per share) - preferred (Series A, $2.20 and Series B, $2.60 per share) Retained Earnings, End of Year Earnings Per Common and Common Equivalent Share Primary Fully Diluted $ 4,843,186 $ 3,839,698 $ 3,167.059 3,977,476 140,076 313,367 4,432,919 410,267 3,235,309 126,222 305,191 3,666,722 172,976 2,687,465 111,803 261,184 3,060,452 106.607 77,830 (54,583) 17,715 (30,320) 10,642 420,909 72,691 (59,820) 12,426 13,648 38,945 211,921 49,205 (4S.633) 8,784 39,530 4S.886 155,493 133,553 73,907 207,460 213,449 758,792 65,985 46,375 112,360 99,561 742,534 19,155 45,517 64.672 90.S21 722 397 60,621 29,860 $ 881,760 53,013 30,290 $ 758,792 40,388 30,296 $ 742,534 $ 4.98 $ 1.89 $ 1.85 $ 4.56 $ 1.88 $ 1.84 See accompanying notes to consolidated financial statements. McDermott incorporated CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1982 (In thousands) SOURCE OF FUNDS: Operations: Net income Charges (credits) not affecting working capital: Depreciation and amortization Deferred income taxes Equity in earnings of joint venture companies net of dividends received of $11,801,000 in 1982, $4,976,000 in 1981 and $8,052,000 in 1980 Other Working capital provided from operations Issuance of common stock Proceeds from sale and exchange of property, plant and equipment Long-term borrowing (including fluctuations under the revolving credit agreement) APPLICATION OF FUNDS: Additions to property, plant and equipment Reduction of long-term debt (including fluctuations under the revolving credit agreement) Reduction of deferred and non-current income taxes Cash dividends Other - net NET INCREASE (DECREASE) IN WORKING CAPITAL CHANGES IN COMPONENTS OF WORKING CAPITAL: Increase (decrease) in current assets: Cash and short-term investments Accounts and notes receivable Contracts in progress Inventories Prepaid expenses Increase (decrease) in current liabilities: Notes and accounts payable and accrued liabilities Advance billings on contracts Provision for warranty expense U. S. & foreign income taxes Dividends payable NET INCREASE (DECREASE) IN WORKING CAPITAL See accompanying notes to consolidated financial statements 1982 1981 $ 213,449 $ 99,561 140,076 55,190 126,222 42,692 (5,914) 10,585 413,386 3,139 31,352 170,000 617,877 167,018 (7,450) 18,873 279,898 4,686 2,782 131,357 418,723 272,377 187,138 38,223 90,481 38,621 521,481 166,813 69,046 83,303 2,451 593,990 $ 96,396 $ (175,267) $ 87,604 $ 92,957 (106,588) 5,992 1,887 81,852 (77,292) 192,482 161,380 (60,544) (4,783) 211,243 49,491 (42,060) 4,072 (28,166) 2,119 (14,544) 191,169 115,699 (13,316) 89,652 3,306 386,510 $ 96,396 $ (175,267) 1980 $ 90,821 111,803 64,861 (732) 8,622 275,375 125,728 58,320 189,976 649,399. 257,005 210,770 63,921 70,684 37,980 640,360 $ 9,039 $ (116,717) 121,007 78,182 30,256 4,806 117,534 25,325 47,538 (31) 32,363 3,300 108,495 $ 9,039 McDermott incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31,1982 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and all significant subsidiaries. All significant intercompany transactions and accounts have been eliminated. Investments in joint venture companies (20% to 50% owned) are accounted for on the equity method. Certain amounts previously reported in the consolidated financial statements at March 31,1981 and 1980 have been reclassified to conform with the presentation at March 31, 1982. Contracts and Revenue Recognition In April 1981 the Company adopted the percentage of completion method of income recognition for its marine construction contracts. Prior to this date, the Company generally used the completed contract method of in come recognition for these contracts. The change in method of accounting was adopted to better reflect the progress and performance of contract work in the marine construction operations and to conform with criteria contained in the Statement of Position "Accounting for Performance of Construction-Type Contracts" issued by the American Institute of Certified Public Accountants in July, 1981. Financial statements of prior periods presented herewith have been restated to apply the new method retroactively. The effect of the accounting change on net income for 1982 and on net income for 1981 and 1980 as previously reported was: Increase (Decrease) 1982 1981 1980 Net income Earnings per common and common equivalent share: $ 42,873,000 $(7,136,000) $ 2,455,000 Primary $ 1.16 $ (0.19) $ 0.08 Fully Diluted $ 0.99 $ (0.19) $ 0.08 Revenues were increased $240,055,000 in 1981 and decreased $115,451,000 in 1980 from amounts previously reported as a result of the change. Retained earnings at the beginning of 1980 was increased by $7,514,000 from the amount previously reported for the cumulative effect of the change to that date. Contract revenues and related costs for marine construction services and power generation systems and equipment are principally recognized on a percentage of completion method for individual contracts or compo nents 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 prog ress. Billings that exceed accumulated contract costs and revenues and costs recognized under percentage of completion are included in advance billings. Most long-term contracts have provisions for progress payments. Contract price and cost estimates are reviewed periodically as the work progresses and adjustments propor tionate to the percentage of completion are reflected in income in the period when such estimates are revised. Provisions are made currently for all known or anticipated losses. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. The Company is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of power generation systems and equipment contracts. The Company does not recognize such settlements or claims for additional compensation until final settlement is reached. Included in contracts in progress are unbilled revenues on contracts of $31,626,000 and $52,329,000 at March 31, 1982 and 1981, respectively, expected to be collected after one year. Included in accounts and notes receivable are amounts representing retainages on contracts as follows: Retainages$ 67,255$ Retainages expected to be collected after one year$ 1982 1981 (In thousands) 49,577 6,521$ 8,821 Depreciation, Maintenance and Repairs and Drydocking Expenses Property, plant and equipment is depreciated by the straight-line method, using estimated useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment. Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the Company's marine fleet, which are estimated and accrued pro rata over the period of time between drydockings, and such accruals are charged to operations currently. Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses The excess of the Company's investment in Babcock & Wilcox (B&W) over the fair value of net assets acquired is being amortized on a straight-line basis over forty years. Excess cost arising from business combinations prior to 1971 is not being amortized because, in the opinion of management, there has been no diminution in value. Warranty Expense The Company provides for estimated future warranty expense which may be required to satisfy contractual requirements, primarily of the power generation systems and equipment segment. Such provision is accrued relative to revenue recognition on the respective contracts. 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 $52,000,000, $42,300,000 and $31,400,000 in fiscal 1982,1981 and 1980, respec tively. Capitalization of Interest Cost In 1980, in accordance with Statement of Financial Accounting Standard (FASB) No. 34, interest cost was capitalized on qualifying assets. This change increased net income in 1980 by $6,153,000 ($0.19 per share). In fiscal 1982,1981 and 1980 total interest cost incurred was $61,620,000, $67,267,000 and $59,265,000, respec tively, of which $7,037,000, $7,447,000 and $10,632,000 was capitalized. Tax Benefit Leases Pursuant to the Safe Harbor Leasing provisions under die Economic Recovery Act of 1981, the Company acquired tax benefits in 1982 from other companies in connection with the purchase and lease-back of capital equipment. There is no effect on net income in 1982 and there will be no material effect on net income in future years as a result of these leases. Foreign Currency Translation The accounts of foreign subsidiaries maintained in foreign currencies are translated into U. S. Dollars based on current exchange rates at the end of the fiscal year for assets and liabilities except for inventories, prepaid expenses, property, plant and equipment, and stockholders' equity for which historical exchange rates are used. Average exchange rates prevailing during the fiscal years are used for revenues and expenses other than depreciation and prepaid expenses. Exchange gains and losses are recognized in the year of occurrence. Included in other income are losses of $7,918,000 for fiscal 1982, and gains of $3,446,000 and $3,178,000 for fiscal 1981 and 1980, respectively. 33 Earnings Per Share Primary earnings per common and common equivalent share are computed after preferred dividend require ments and are based on the weighted average number of common and Common equivalent shares (stock options, stock appreciation rights and performance units) outstanding during the year. NOTE 2 - INVENTORIES Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis except for certain domestic and foreign construction materials inventories, for which the last-in first out (LIFO) method is used. The cost of approximately 12% and 15%, respectively, of total inventories was determined using the LIFO method at March 31,1982 and 1981. Consolidated inventories at March 31,1982 and 1981 are summa rized below: Raw Materials and Supplies Work in Progress Finished Goods52,48259,119 1982 1981 (In thousands) $ 164,843 $ 156,804 150,472 145,882 $ 367,797 __________________________________ NOTE 3 - PENSION PLANS The Company provides retirement benefits, primarily through non-contributory pension plans, for substan tially 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 United States, Canada, or the United Kingdom. The Company's policy is to fund the amounts expensed. Total pension ex penses included in cost and expenses were $83,072,000, $72,675,000, and $62,137,000 in fiscal 1982,1981 and 1980, respectively, which includes amortization of prior service costs over periods of 30 and 40 years. The following table presents information regarding the financial condition of the Company's pension plans as defined in FASB No. 36 and estimated by the Company and its consulting actuaries on that basis: Actuarial present value of accumulated plan benefits: January 1, 1981 . 1980 (In thousands) Vested Nonvested Total $ 441,350 73,853 $ 515,203 $ 407,324 65,537 $ 472,861 Net assets available for benefits $ 581,399 $ 483,978 The assumed rate of return used in determining the actuarial present value of accumulated plan benefits was 9% in fiscal 1982 and 8% in fiscal 1981. NOTE 4 - INCOME TAXES The provision for income taxes consists of: Federal Foreign State & Local 1982__________ Current Deferred $ 85,763 26,543 21,247 $ 133,553 $ 77,019 (5,338) 2,226 $ 73,907 1981__________ _____ 1980 Current Deferred (In thousands) $ 47,885 $ 41,781 9,694 1,773 8,406 2,821 Current Deferred $ 18,560 (8,785) 9,380 $ 47.109 (4,936) 3,344 $ 65,985 $ 46,375 $ 19,155 $ 45,517 34 The provision for income taxes is based on income (loss) before provision for income taxes as follows: 1982 Domestic $ 375,985 Foreign44,9244,889 $ 420,909 1981 (In thousands) $ 207,032 1980 $ 163,684 (8,191) $ 211,921 $ 155,493 Tax benefits of $12,696,000 in 1980, arising from the use of net operating loss and investment tax credit carry forwards available from the B&W acquisition, have been credited to excess of cost over fair value of net assets of purchased businesses. Investment tax credits, accounted for on the flow-through method utilized in fiscal 1982, 1981 and 1980, were $6,738,000, $9,234,000 and $13,278,000, respectively. The effective income tax rate is reconciled to the statutory federal income tax rate as follows: Statutory federal tax rate Increase (reduction) in income tax rate resulting from: Foreign operations Investment tax credits Amortization of excess of cost over fair value of net assets of B&W State income taxes net of federal benefit Other Effective Tax Rate 1982 Percent 46.0 0.5 (1.6) 1.0 3.1 0.3 49.3 1981 Percent 46.0 6.3 (4.4) 2.0 2.9 0.2 53.0 1980 Percent 46.0 (4.1) (8.5) 2.8 4.4 1.0 41.6 Deferred income taxes are provided in the financial statements due to timing differences between financial and taxable income. 'Hie principal timing differences in recognizing certain revenues and expenses for tax return and financial statement purposes and their effect on the provision for deferred income taxes were: Excess tax over financial depreciation Interest capitalized on assets constructed Long-term contracts, primarily on the completed contract method for tax purposes Warranty expense Equity in earnings of joint venture companies Estimated loss on facility closings and dispositions Purchased tax benefits Other 1982 $ 24,295 1,398 1981 (In thousands) $ 14,792 2,907 1980 $ 6,884 4,418 42,979 (10,146) 4,737 43,260 (11,442) 4,998 52,160 (7,624) 185 (24,594) 38,335 (3,097) $ 73,907 $ (4,688) -- (3,452) 46,375 $ (874) -- (9,632) 45,517 Undistributed income of foreign subsidiaries included in consolidated retained earnings at March 31, 1982, amounted to approximately $508,147,000. Under present law, such amount would be subject to United States income taxes at prevailing tax rates less foreign tax credits if remitted to the parent company; no provision for such taxes has been made in the consolidated financial statements as it is the Company's intention to indefi nitely reinvest said undistributed earnings in the foreign subsidiaries. 35 NOTE 5 - LONG-TERM DEBT Long-term debt consists of: Unsecured Debt: 7.30% Note payable $3,000,000 annually to 1998 10.20% Sinking fund debentures due 1999 with annual sinking fund installments of $2,500,000 beginning 1981 9.40% Notes due 1984 4-3/4% Convertible (at $16.75 per share) subordinated debentures due 1987 9-1/2% Note due 198T 9-5/8% Sinking fund debentures due 2004 with annual sinking fund installments of $9,850,000 beginning 1990 6.80% Pollution control revenue bonds due 2009 with annual sinking fund installments of $4,250,000 beginning 2006 8*1/2% Note payable $3,960,000 annually to 1997 beginning 1983 9% Note payable $3,300,000 annually to 1991 9% Note payable $1,650,000 annually to 1996 beginning 1982 Other notes payable through 1999 and capitalized lease obligations Less due within one year MARCH 31. 1982 (In thousands) 1981 $ 51,000 $ 54,000 47,500 35,000 767 -- 47,500 35,000 2,326 20,000 150,000 150,000 17,000 60,000 33,500 25,000 17,279 437,046 17,787 $ 419,259 17,000 60,000 36,800 25,000 20,783 468,409 32,012 $ 436,397 6 During the year ended March 31,1982, the Company negotiated a new revolving credit and term loan agree ment in the amount of $200,000,000, replacing the existing agreement in the amount of $150,000,000. The Company may elect to borrow at the prime rate, 1/2 of 1% plus the London Interbank Offered Rate, or 1/2 of 1% plus the certificate of deposit rate. On June 14, 1985, all outstanding borrowings will convert to a term loan, payable in sixteen equal quarterly installments and bearing interest at the applicable rate of 1/4 of 1% plus the prime rate,'3/4 of 1% plus the London Interbank Offered Rate, or 3/4 of 1% plus the certificate of deposit rate, to maturity at June 14,1989. The Company pays a commitment fee at the rate of 3/8 of 1% and a fee of 5% of the prime per annum on the unused portion. No amounts were outstanding under the facility as of March 31, 1982. Maturities of long-term debt during the five fiscal years subsequent to March 31,1982 are as follows: 1983 $17,787,000; 1984 - $17,242,000; 1985 - $50,456,000; 1986 - $15,501,000; 1987 - $15,485,000. Certain of the Company's debt agreements contain, among other things, requirements as to maintenance of working capital and limitations on the payment of dividends and incurrence of future borrowings. Under the most restrictive of these agreements at March 31, 1982, dividends were restricted to approximately $233,837,000. Certain of the Company's consolidated subsidiaries and affiliated companies are restricted, principally as a result of credit agreement covenants, in their ability to transfer funds to the Company through intercompany loans, advances or cash dividends. At March 31, 1982, approximately $950,000,000 of the net assets of such subsidiaries and affiliated companies were subject to such restrictions. It is not expected that these restric tions will have any significant practical effect on the Company's liquidity. NOTE 6 - CONTINGENCIES AND COMMITMENTS Litigation - On December 14, 1978 a Federal grand jury in New Orleans, Louisiana indicted the Company, Brown & Root, Inc. ("Brown & Root") and certain of their officers on charges of conspiring to allocate con tracts and to fix prices and contract terms for marine construction projects in violation of Section 1 of the Sherman Act and other federal statutes. In 1978 the Company and Brown & Root each pleaded nolo con tendere to the Sherman Act charges and were each fined $1,000,000. In March and April 1979, two officers, a former chief operating officer, and a former chief executive officer of the Company (all but one of whom were directors of the Company) pleaded nolo contendere to the Sherman Act charges and certain related charges of mail fraud and wire fraud. The Company and Brown & Root (and in some cases, Oceanic Contractors, Inc. (now McDermott International, Inc.), a wholly-owned subsidiary of the Company, and certain former officers of the Company) have been named as defendants in over 75 pending actions (which have been filed in or transferred to the United States District Court for the Eastern District of Louisiana) instituted by or on behalf of purchasers of marine construction services in the United States and abroad and in an action by a com petitor, alleging a conspiracy to restrain or eliminate competition in marine construction in violation of Sections 1 and 2 of the Sherman Act and various state laws through a conspiracy to allocate contracts, fix prices and contract terms and other means. Plaintiffs seek treble damages and other relief for injuries al legedly sustained, in some cases as early as the mid-1950's. Other private parties have received temporary waivers of the statute of limitations, and these parties may assert additional treble damage claims against the Company. The Company has filed answers denying the material allegations of wrongdoing in the complaints and in some instances has filed a counterclaim. These cases are now in discovery proceedings. The outcome of these actions could have a material adverse effect on the Company. The Company and certain of its officers, directors and subsidiaries are defendants in numerous other legal pro ceedings claiming amounts which are material, alleging, among other things, liability for damages allegedly caused by a nuclear incident at the nuclear power plant on Three Mile Island outside Harrisburg, Pennsylvania and violations of federal securities laws in connection with the acquisition of B&W. Management and general counsel believe that the outcome of these proceedings will not have a material adverse effect upon the Com pany's consolidated financial statements. 37 Operating Leases - Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at March 31,1982 are as follows: 1983 - $15,282,000; 1984 $11,190,000; 1985 - $7,427,000; 1986 - $5,392,000; 1987 - $4,700,000; and thereafter - $31,722,000. Future minimum lease payments and leased property under capital leases are not material. Total rental expense for fiscal 1982, 1981 and 1980 was $186,262,000, $143,338,000 and $98,519,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material. Other - The Company performs significant amounts of work for the government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies. Firm and contemplated commitments for capital expenditures amounted to approximately $300,000,000 at March 31, 1982. The Company and certain subsidiaries are contingently liable under standby letters of credit totalling $230,982,000 primarily issued in the normal course of business which relate primarily to indemnity agreements for performance bonds on contracts. NOTE 7 - REDEEMABLE PREFERRED STOCKS At March 31, 1982 and 1981, 25,000,000 shares of $1 par value preferred stock were authorized, 6,600,000 shares were designated Series A $2.20 Cumulative Convertible Preferred Stock and 6,600,000 shares were designated Series B $2.60 Cumulative Preferred Stock. Of the authorized Series A and Series B Preferred Stock 6,282,875 and 5,775,545 shares, (excluding 542,000 shares reissued subsequent to year end) respec tively, were issued and outstanding at March 31,1982 and 6,296,583 and 6,317,545 shares, respectively, were issued and outstanding at March 31,1981. The issued and outstanding shares are entitled to $31.25 per share in liquidation. The outstanding shares were issued in connection with the acquisition of B&W and are stated at the mandatory redemption value which approximated market 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 may authorize additional series of preferred stock and may set terms of each new series except that the 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. The shares are redeemable at the option of the Company on or after March 31 of each of the following years, at the following prices, plus accrued dividends: 1983 - $33.45; 1984 - $33.09; 1985 - $32.72; 1986 - $32.35; 1987 -$31.97; 1988 - $31.62; and 1989 through 2008 - $31.25. On March 31,1989 and each subsequent year through March 31, 2008, the Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 5% of the number of shares which are outstanding at December 31, 1988. Series B Preferred Stock is redeemable at the option of the Company on or after March 31 of each of the following years, at the following prices plus accrued dividends: 1983 - $32.25; 1984 - $32.00; 1985 - $31.75; 1986 - $31.50; 1987 through 2008 - $31.25. For the periods March 31,1986 through March 31,1995, March 31, 1996 through March 31, 2006, and March 31, 2007 through March 31, 2008, the Company is obligated to redeem during each year shares of Series B Preferred Stock equal to 5%, 4% and 3%, respectively, of the number of shares which are outstanding at December 31,1985. The obligation to redeem Series B Preferred Stock is $9,866,000 for each of the fiscal years 1986 and 1987. Additional shares of Series A or Series B Preferred Stock, equal to the number of shares the Company is obligated to redeem, may be redeemed on each mandatory redemption date by the Company, on a noncumulative basis. The 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. 38 NOTE 8 * COMMON STOCK At March 31,1982 and 1981,150,000,000 and 60,000,000 shares, respectively, of $1 par value common stock were authorized. Changes in common stock during the three years ended March 31,1982 are summarized as follows: Shares Par Value Capital in Excess of Par Value (In thousands except for share data) Balance, March 31, 1979 Conversion of 4-3/4% convertible subordinated debentures Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Additional shares sold 32,522,770 106,323 1,272 138,040 4,000,000 $ 32,523 106 1 138 4,000 $ 133,038 1,658 38 2,287 117,500 Balance, March 31, 1980 Conversion of 4-3/4% convertible subordinated debentures Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Shares issued under the Career Executive Stock Plan (net of forfeitures) Balance, March 31, 1981 Conversion of 4-3/4% convertible subordinated debentures Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Balance, March 31,1982 36,768,405 84,589 $ 36,768 85 8,837 80,178 9 80 37,000 36,979,009 93,064 37 $ 36,979 93 13,708 24,550 37,110,331 14 . 24 $ 37,110 3 254,521 1,313 267 1,581 1,314 $ 258,996 1,449 415 1,144 $ 262,004 39 At March 31, 1982 and 1981, 310,492 and 327,232 shares, respectively, were in treasury. At March 31, 1982, 8,492,056 shares were reserved for issuance in connection with the 1974 Career Executive Stock Plan, exer cise of stock options, the 1980 Long-Term Performance Incentive Compensation Program, conversion of the 4-3/4% convertible subordinated debentures and Series A cumulative convertible preferred stock. Stock Options - In connection with the acquisition of B&W, options granted under a B&W stock option plan became options to purchase two shares of the Company's common stock. All options outstanding under this plan are non-qualified stock options and no additional options will be granted under the plan. Options were granted at an option price equal to at least 100% of the fair market value on the date of grant (adjusted to October 31,1974 closing price for options issued prior to that date). Changes in the number of shares covered by the stock option plan during the three years ended March 31,1982 are as follows: Outstanding and Exercisable Number of Shares Option Price Per Share Total Balance, March 31, 1979 349,610 $ 3,128,000 Exercised Expired Balance, March 31, 1980 Exercised Expired Balance, March 31, 1981 Exercised Expired Balance, March 31, 1982 138,040 13,350 198,220 80,178 1,500 116,542 24,550 -- 91,992 $6,813 - $9,688 9.688 $6,813 - $9,688 9.688 $6,813 - $9,688 -- 1,176,000 129,000 $ 1,823,000 $ 733,000 15,000 $ 1,075,000 $ 227,000 -- 3 848,000 1980 Long-Term Performance Incentive Compensation Program - Under the program, the Career Executive Stock Plan Committee (the "Committee") may grant to the officers and key employees of the Company and subsidiaries 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 are exercisable not less than one year and not more than ten years after the date of grant. The Committee may grant stock appreciation rights in connection with the granting of options under the program. Such stock appreciation rights would 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 sur render equal to the excess 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 up to, but not in excess of, twice the feumarket value of such underlying shares on the date of grant. 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 31,1981,437,665 shares for stock options and stock appreciation rights were awarded and outstanding at a price of $28,375 per share. During 1982, three stock option and stock appreciation rights awards were made of 3,500,14,535 and 10,415 shares each, at a price of $37,188, $29.25 and $29.75 per share, respectively. Also, 59,500 performance units had been awarded and are outstanding to date. There were no forfeitures during 1981: however, awards relating to 45,060 shares were forfeited during 1982. With respect to the stock appreciation rights and the per formance units, the Company has charged income $2,042,000 and $1,521,000 during fiscal years 19S2 and 1981, respectively. 40 Career Executive Stock Plan - The Plan, which was adopted in 1974, 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. Shares may be issued pursuant to the Plan until June 30, 1984. 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. Forfeited shares under the Plan returned to the Company amounted to 1,760 and 1,100 shares during 1982 and 1981, respectively. During fiscal 1982, the Company awarded 18,500 shares under the Plan. As of March 31,1982, 82,876 shares of common stock are available for grant to eligible employees pursuant to the terms of the Plan. Amounts charged to income under the Plan and its predecessor Plan amounted to $1,193,000, $1,125,000, and $1,093,000 in fiscal 1982,1981 and 1980, respectively. NOTE 9 - SEGMENT REPORTING The Company operates primarily in three industry segments marine construction services, power generation systems and equipment and engineered materials. Marine construction services principally involve construction of specialized offshore platforms and marine pipelines used for development drilling, production and transportation of oil and gas. Power generation systems and equipment include individually engineered complete fossil fuel boilers, nuclear steam systems, nuclear fuel and nuclear fuel assemblies, replacement parts and customer services and associated equipment for electric utility and marine applications as well as fossil fuel boilers for industrial pro cesses and power generation. The associated equipment includes process recovery boilers and pollution con trol systems for the process and utility industries, cleaning systems for heat transfer surfaces, control and per formance computers, fans, and air and water-cooled heat exchangers. In addition, the Company is engaged in the erection of this and other equipment through a separate construction unit and the repair and alteration of such equipment. Engineered materials consist of tubular and refractory products designed and manufactured from basic and raw materials. Tubular products include stainless, alloy and carbon steel, seamless and welded tubes and pipe, tubular and solid shapes, extrusions, special metal tubes, and seamless rolled rings. These are primarily "specialty" products of high quality and engineered for special applications. One of this segment's principal products is high quality tubing for petroleum production operations. Material amounts of tubes are manufac tured by the Company to satisfy its own requirements. However, the major portion of the Company's tubes are sold for use in the petroleum, bearing, primary metal, fabricated metal and agricultural and construction machine industries. Refractory products include kaolin clays, specially engineered and vacuum formed ceramic fibers, and other insulating and specialty products for use in high temperature furnaces for various heating and heat treating purposes and in other applications where the temperatures and rates of combustion or chemical reactions are unusually demanding. Other products and services engaged in by the Company during fiscal 1982 include the design and manufactur ing of control valves, automated machines and machine tools. The control valve product line was sold in July, 1981 and an agreement in principle has been reached to sell the automotive machine tool product lines in fiscal 1983 for the approximate book value of the assets. Identifiable assets by industry segment are those assets that are used in the Company's operations in each seg ment. Corporate assets are principally cash, short-term investments and marketable securities. Intersegment sales are accounted for at prices which are generally established by reference to similar trans actions with unaffiliated customers. Revenues attributable to transactions with unconsolidated joint venture companies were $88,887,000 in fiscal 1982, $25,435,000 in fiscal 1981 and $107,920,000 in fiscal 1980. Operating income (loss) does not reflect provisions of $51,000,000 made by the Company in fiscal 1982 to cover the closing of certain of its power generation systems and equipment facilities and the disposition of its 41 automated machine and machine tools product lines. Such provisions are included in the other income (ex penses) section of the income statement as other expense. In addition to the restatement of prior periods resulting from the change to the percentage of completion method of income recognition, segment reporting information for all periods reported has been reclassified to reflect onshore construction services as part of the marine construction services segment, and to reflect air and water-cooled heat exchangers operations and that portion of automated machines and machine tools related to certain nuclear operations as part of the power generation systems and equipment segment. These operations were previously included as part of the other products and services segment. Segment Information For the Fiscal Years Ended March 31, 1982. 1. Information about the Company's Operations in Different Industry Segments. (In thousands) 1982 1981 Total Revenues^) Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Intersegment Transfer Eliminations $ 1,907,820 1,949,289 1,017,215 69,729 (100,867) $ 1,417,222 1,727,556 706,915 104,968 (116,963) Total Revenues $ 4,843,186 $ 3,839,698 1980 $ 1,020,583 1,487,515 660,778 80,649 (82,466) $ 3,167,059 Operating Income^) Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Total Operating Income 1982 $ 72,231 107,629 294,706 8,031 $ 482,597 1981 $ 5,207 116,218 97,445 10,565 $ 229,435 1980 ? (57,965) 140,724 62,901 7,524 $ 153,184 Capital Expenditures Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Corporate Total Capital Expenditures 1982 $ 85,820 24,528 12,450 966 43,254 $ 167,018 1981 $ 201,351 35,135 30,541 1,771 3,579 $ 272,377 1980 $ 157,697 37,450 28,367 2,708 30,783 $ 257,005 Depreciation and Amortization Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Corporate Total Depreciation and Amortization $ 79,796 34,122 18,237 1,829 6,092 $ 140,076 $ 68,789 33,777 16,734 1,952 4,970 $ 126,222 $ 63,105 28,783 14,809 1,526 3,580 $ 111,803 Total Identifiable Assets Marine Construction Services Power Generation Systems & Equipment Engineered Materials Other Products & Services Corporate Total Identifiable Assets $ 1,311,332 1,244,887 752,144 54,944 666,725 $ 4,030,032 $ 1,402,320 1,279,405 637,057 85,866 501,613 $ 3,906,261 $ 951,026 1,289,767 672,249 89,255 539,615 $ 3,541,912 (1) Total revenues include intersegment transfers as follows: (In thousands) Power Generation Systems & Equipment Engineered Materials Other Products & Services Total 1982 $ 840 98,056 1,971 $ 100,867 1981 $ 698 110,935 5,330 $ 116,963 1980 $ 1,099 79,820 1,547 $ 82,466 (2) Reconciling items between Operating Income and Income Before Provision for Income Taxes are General Corporate Expenses and Other Income (Expense). 2. Information about the Company's Operations in Different Geographic Areas. (In thousands) Revenues (1) - Domestic - Foreign - Total 1982 $ 3,434,086 1,409,100 $ 4,843,186 1981 $ 2,896,106 943,592 $ 3,839,698 1980 $ 2,463,671 703,388 $ 3,167,059 Operating Income by Geographic Area (2) - Domestic - Foreign -Total $ 500,060 $ 277,272 (17,463) (47,837) $ 482,597 $ 229,435 $ 217,946 (64,762) $ 153,184 Identifiable Assets - Domestic - Foreign Corporate -Total $ 2,545,661 817,646 666,725 $ 4,030,032 $ 2,565,633 839,015 501,613 $ 3,906,261 $ 2,401,793 600,504 539,615 $ 3,541,912 (1) Transfers between geographic areas are immaterial and not separately stated. (2) Reconciling items between Operating Income by Geographic Areas and Income Before Provision for Income Taxes are General Corporate Expenses and Other Income (Expense). 43 NOTE 10 - QUARTERLY FINANCIAL DATA The following tables set forth selected unaudited quarterly financial information for the years ended March 31, 1982 and 1981: June 30, 1981 1982 Quarter Ended Sept. 30, Dec. 31, 1981 1981 March 31, 1982 (In thousands except for per share amounts) Revenues Operating Income Net Income $ 1,148,819 84,753 49,540 $ 1,196,131 83,490 55,564 $ 1,199,708 116,491 56,030 $ 1,298,528 125,533 52,315 Earnings per common and common equivalent share: Primary Fully diluted 1.14 1.30 1.32 1.05 1.19 1.20 1.22 1.12 During the quarter ended March 31,1982, net income was increased by $16,306,000 resulting from settlement of a cancellation claim on a nuclear steam system contract. During the same quarter, net income was reduced by $17,762,000 for costs provided for the closing and disposal of certain of the Company's facilities. June 30, 1980 1981 Quarter Ended Sept. 30, Dec. 31, 1980 1980 March 31, 1981 (In thousands except for per share amounts) Revenues Operating Income Net Income $ 854,261 11,290 8,169 $ 905,879 39,486 24,059 $ 967,010 54,048 39,060 $ 1,112,548 . 68,152 28,273 Earnings per common and common equivalent share: Primary Fully diluted 0.02 0.45 0.86 0.02 0.45 0.81 0.56 0.56 During the quarter ended March 31,1981, net income was reduced by costs provided for the shut-down of cer tain engineered materials operations and additional interest accrued on income taxes provided in prior years of $6,200,000 and $6,700,000 (net of taxes), respectively. The effect of the change to the percentage of completion method for the quarter ended March 31, 1981 increased net income by $9,742,000 ($0.27 per share). 44 NOTE 11 - EFFECTS OF GENERAL INFLATION (Unaudited) In compliance with FASB Statement No. 33 "Financial Reporting and Changing Prices", certain supple mentary information relating to the effects of general inflation and changes in specific prices is presented below. The information adjusted for general inflation is calculated by adjusting cost of sales and depreciation expense to a unit of common purchasing power determined by the Consumer Price Index for All Urban Consumers. The information adjusted for changes in specific prices is calculated by adjusting cost of sales and depreciation expense for changes in those prices that relate to property, plant and equipment, and inventory being used in the activities of the business. No other items of revenue or expense in the Condensed Consoli dated Statement of Income are adjusted. Depreciation expense included in income adjusted for changes in general inflation and adjusted for changes in specific prices is computed using the same depreciation methods and depreciable lives as are used for conven tional financial statements. Any comparison between the conventional financial statements and the required supplemental disclosures must be viewed with caution. The amounts shown adjusted for general inflation only correct for distortions caused by recording transactions in dollars of varying purchasing power. The amounts shown adjusted for changes in specific prices include the use of estimates and assumptions. Changes in individual prices are caused in part by changes in the general purchasing power of the dollar and in part by other supply and demand factors including technological change. The provision for income taxes remains unchanged because tax laws do not allow the Company to claim tax deductions related to these adjustments. These disclosures highlight an important view of the Company's annual effective tax rate: 49% as presented in the conventional financial statements, 58% as adjusted for the effects of general inflation, and 64% as adjusted for the effects of specific inflation. The gain from the decline in purchasing power of net amounts owed reflects the fact that total liabilities having a future fixed cash settlement exceeded total assets with similar characteristics. This unrealized gain theoretically represents the fact that net liabilities can be repaid with dollars having a lesser value than at the beginning of the year due to inflation. The increase in specific prices of inventories and property, plant and equipment represents the difference between the current cost amounts at the beginning of the year and the end of the year. Part of the difference is attributable to inflation in general and part is attributable to economic factors affecting the individual prices of the particular assets owned. To the extent that the difference has been realized by a sale during the year, it is included in income from operations on a current cost basis. The unrealized portion does not represent receipt of cash and should not be considered as providing funds for reinvestment or dividend distribution in the cur rent period. The net assets shown under changes in general inflation and under changes in specific prices are adjusted only for changes in inventory and property, plant and equipment. In April, 1981 the Company adopted the percentage of completion method of income recognition for its marine construction contracts. The Five-Year Comparision of Selected Supplementary Financial Data Adjusted for Inflation has been restated accordingly. 45 CONDENSED CONSOLIDATED STATEMENT OF INCOME ADJUSTED FOR INFLATION FISCAL YEAR ENDED MARCH 31, 1982 Revenues (In thousands except for per share amounts) As Reported in the Conventional Financial Statements Adjusted for General Inflation (Constant Dollars) $ 4,843,186 $ 4,843,186 Adjusted for Changes in Specific Prices (Current Costs) $ 4,843,186 Cost and Expenses Cost of operations Depreciation and amortization Selling, general and administrative expenses Other income Income Before Provision for Income Taxes Provision for Income Taxes Net Income Income (loss) per common and common equivalent share (Primary) (After providing preferred dividends) Gain from decline in purchasing power of net amounts owed Increase in current cost of inventory and property, plant and equipment held during the year (based on specific price changes)" 3,977,476 140,076 315,367 10,642 420,909 207,460 $ 213,449 3,983,043 197,106 315,367 10,642 358,312 207,460 $ 150,852 $ 4.98 $ 3.28 $ 46,230 4,006,532 208,219 315,367 10,642 323,710 207.460 $ 116,250 $ 2.34 $ 46,230 $ 162,963 Effects of increase in general price level Increase in current cost of inventory and property, plant and equipment held during the year (based on specific price changes) net of changes in the general price level (136,074) $ 26,889 Net assets at year end$ 1,174,558$ 1,620,667$ 1,705.459 * At March 31,1982, current cost of inventory was $416,202 and current cost of property, plant and equip ment, net of accumulated depreciation was $1,680,123. 46 Revenues Net income Net income (loss) per common and common equivalent share Net assets at year end Cash dividends per common share Market price per common share at year end Net income Net income (loss) per common and common equivalent share Net assets at year end Increase in current cost inventory and property, plant and equipment held during the year, (based on specific price changes) net of changes in the general price level Other information: Gain from decline in purchasing power of net amounts owed Average consumer price index FIVE-YEAR COMPARISON OF SELECTED SUPPLEMENTARY FINANCIAL DATA ADJUSTED FOR INFLATION (In thousands except for indices and per share amounts) 1982 For Fiscal Year Ended March 31, 1981 1980 1979 Adjusted for General Inflation (Constant Dollar) $ 4,843,186 $ 4,203,363 $ 3,908,106 $ 4,733,652 150,852 45,677 30,719 1978 $ 1,748,444 3.28 1,620,667 1.64 0.34 1,521,796 1.57 (0.20) 1,525,289 1.52 1.37 22 39-3/4 28-5/8 25-1/2 Adjusted for Changes in Specific Prices (Current Costs) 116,250 14,115 21,375 2.34 1,705,459 (0.51) 1,663,067 (0.49) 1,725,803 1.34 34-3/4 - 26,889 15,646 109,203 46,230 277.4 74,212 253.4 123,339 224.8 200.1 184.4 47 Item 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 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 be such, and no executive officer was elected to his position pursuant to any arrangement or understanding be tween himself and any other person. Information required by this item with respect to directors is incorporated by reference to the material ap pearing under the headings "Election of Officers" and "Litigation Involving Directors and Officers" in the Proxy Statement for the 1982 Annual Meeting of Shareholders. Information required by this item with respect to the involvement of certain of the Company's executive of ficers in certain legal proceedings is incorporated by reference to the material appearing under the heading "Litigation Involving Directors and Officers" in the Proxy Statement for the 1982 Annual Meeting of Shareholders. Item 11. MANAGEMENT REMUNERATION AND TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading "Remuneration and Transactions of Directors and Officers" in the Proxy Statement for the 1982 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 "Election of Directors" in the Proxy Statement for the 1982 Annual Meeting of Shareholders. 48 PART IV Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K PAGE Consolidated Financial Statements Report of Certified Public Accountants Consolidated Balance Sheet March 31,1982 and 1981 Consolidated Statement of Income and Retained Earnings For The Three Fiscal Years Ended March 31,1982 Consolidated Statement of Changes in Financial Position For The Three Fiscal Years Ended March 31,1982 Notes to Consolidated Financial Statements 27 28 30 31 32 Consolidated Financial Schedules All required schedules will be filed by amendment to this Form 10-K on Form 8. Exhibit Index 3 Articles of Incorporation and By-Laws (a) The Company's Restated Certificate of Incorporation (b) The Company's By-Laws (incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K for the fiscal year ended March 31,1981) 4 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 (Items 10(a) thru (d) are incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K for the fiscal year ended March 31,1981) (a) Supplemental Executive Retirement Plan (b) 1980 Long-Term Performance Incentive Compensation Program (c) Supplemental Compensation Plan (d) Restoration of Retirement Income Plan for Certain Participants in the Retirement Plan for Employees of McDermott Incoiporated. (e) Career Executive Stock Plan--1974 (f) 1972 Stock Option Plan. 11 Statement Re Computation of Per Share Earnings 22 List of Significant Subsidiaries Exhibits 3(a), 10(e) and 10(f) will be filed by amendment to this Form 10-K on Form 8. 50 51 FORM 8-K REPORTS No reports on Form 8-K have been filed for the quarter ended March 31, 1982. 49 McDermott incorporated STATEMENT RE COMPUTATION OF PER SHARE EARNINGS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1982 (In thousands, except shares and per share amounts) Primary 1982 1981 EXHIBIT 11 1980 Net income Less dividend requirements of Preferred Stock Series A $2.20 Cumulative Con vertible and Series B $2.60 Cumulative Net income applicable to common stock Weighted average number of common shares outstanding during the year Common stock equivalents of stock options, stock appreciation rights and performance units based on "treasury stock" method Weighted average number of common and common equivalent shares outstanding during the year Earnings per common and common equivalent share $ 213,449 $ 99,561 $ 90,821 29,860 $ 183,589 36,732,334 30,290 30,296 $ 69,271 $ 60,525 36,538,377 32,570,158 155,998 137,902 175,386 36,888,332 $ 4.98 36,676,279 32,745,544 $ 1.89 $ 1.85 Fully Diluted Net income applicable to common sto^k Preferred A dividends - converted shares W Interest and amortization of debt issuance expense on 4-3/4% Convertible Subordinated Debentures (net of taxes) $ 1982 183,589 13,830 45 1981 $ 69,271 1980 $ 60,525 78 137 Net income for fully diluted computation $ 197,464 $ 69,349 $ 60,662 Weighted average number of common and common equivalent shares outstanding during the year Shares applicable to 4-3/4% Convertible Subordinated Debentures Shares applicable to Series A $2.20 Cumulative Convertible Preferred Stock (1) Weighted average number of common and common equivalent shares outstanding during the year, assuming full dilution 36,888,332 107,606 6,286,919 43,282,857 36,676,279 187,746 32,745,544 301,396 36,864,025 33,046,940 Earnings per common and common equivalent shares assuming full dilution (1) $ 4.56 $ l.SS $ 1.84 (1) Includes only computations which cause dilution. If calculated assuming complete conversion into com mon stock of Series A $2.20 Cumulative Convertible Preferred Stock, antidilution would have occurred. CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-62259 and Form S-16 No. 2-47696) of McDermott Incorporated of our report dated May 19,1982 with respect to the financial statements of McDermott Incorporated included in this Form 10-K. ARTHUR YOUNG & COMPANY New Orleans, Louisiana May 24, 1982 52 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duJy caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McDermott incorporated (Registrant) May 19, 1982 By: s/J. E. Cunningham J. E. Cunningham Chairman of the Board and Chief Executive Officer May 19, 1982 By: s/John A. Lynott John A. Lynott Executive Vice President and Chief Financial Officer May 19, 1982 By: s/E. A. Robidoux E. A. Robidoux Vice President and Controller 53 In response to Instruction D to Form 10-K, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. s/J. E. Cunningham J. E. Cunningham Chairman of the Board, Chief Executive Officer and Director May 24, 1982 s/H. W. Bailey H. W. Bailey Executive Vice President, Chief Administrative Officer and Director May 24, 1982 s/R. E. Howson R. E. Howson President and Chief Operating Officer McDermott Marine Construction and Director May 24, 1982 s/John A. Lynott John A. Lynott Executive Vice President, Chief Financial Officer and Director May 24, 1982 s/Walter M. Vannoy________ Walter M. Vannoy President, Chief Operating Officer The Babcock & Wilcox Co. Operating Unit and Director May 24,1982 s/John A. Morgan John A. Morgan Director May 24, 1982 s/John D. Ritchie John D. Ritchie Director May 24, 1982 s/William T. Seawell William T. Seawell Director May 24, 1982 54 s/Walter B. Shaw Walter B. Shaw Director May 24,1982 s/C, L. Graves________________ C. L. Graves Former Chairman of the Board and Chief Executive Officer and Director May 24, 1982 s/WalterO. Spencer Walter 0. Spencer Director May 24, 1982 s/John B. Tweedy John B. Tweedy Director May 24, 1982 s/Russell L. Wagner Russell L. Wagner Director May 24, 1982 s/James A. Hunt James A. Hunt Director May 24, 1982 s/J. L. Putt J. L. Dutt Director May 24,1982 55 Dear Stockno/der: it y0u receive more than one copy of the Annual Report, Quarterly Reports, and other j * shareholder publications in your household and have no need for the extra copies, you may I ff authorize us to discontinue sending the extra copies by completing and returning this card. [ ` ` Your authorization will discontinue multiple mailings of such reports and will not affect dividend t checks or proxy materials. If in the future you should wish us to resume any of the discontinued mailings, it will be necessary to notify us. : j ! l (we) hereby authorize McDermott Incorporated to discontinue mailing Annual Reports, Quarterly Reports, and other shareholder publications to the following: t_______ | i (Print name exactly as it appears on the Annual Report) i 1 ( Street Address City State Zip Code If only one copy of shareholder publications is sent to your address, please do not return this form. Morgan Guaranty Trust Company P. O. Box 3506 New York, N. Y. 10008 f Yes, please send me information on McDermott incorporated's Dividend 1 Reinvestment Plan. Name (please print) ; Street Address City State Zip Code Ill BUSINESS REPLY CARD FIRST CLASS PERMIT NO. 1600 NEW YORK. N.Y. POSTAGE WILL BE PAID BY ADDRESSEE Morgan Guaranty Trust Company of New York Transfer Agent, McDermott Incorporated 30 West Broadway New York, NY 10015 No Postage Necessary if Mailed in the United States BUSINESS REPLY CARD FIRST CLASS PERMIT NO. 1600 NEW YORK. N.Y. POSTAGE WILL BE PAID BY ADDRESSEE Morgan Guaranty Trust Company of New York Dividend Reinvestment Plan McDermott incorporated P.O. Box 3506 New York, NY 10008 No Postage Necessary if Mailed in the United States TRANSFER AGENTS AND REGISTRARS First City National Bank of Houston Post Office Box 809 Houston, Texas 77002 Morgan Guaranty Trust Company 30 West Broadway New York, New York 10015 Common Stock T Series A $2.20 Cumulative Convertible Preferred Stock Series B $2.60 Cumulative Preferred Stock TRUSTEES AND PAYING AGENTS Morgan Guaranty Trust Company 30 West Broadway New York, New York 10015 96/g% Sinking Fund Debentures Due March 15, 2004 10.20% Sinking Fund Debentures Due December 1,1999 9.40% Notes Due December 1,1984 Pittsburgh' National Bank V " Post Office.Box 340747 d Pittsburgh,' Pennsylvania 15230 ; 6.80% Pollution Control V Revenue jBonds, Series A. d dd Due February 1,-2009. TRUSTEE, PAYING AGENT AND CONVERSION AGENT Citibank, N.A. - 7 d- 111 Wall-Street: . New York, NewYork ibOl5 42/*% Convertible Subordinated Dbb&ntiipes Due October15^ 1987g, r, ANNUAL MEETING The Annual Meeting of the Stockholders of McDermott Incorporated for the fiscal year ended March 31,1982 will be held at the Royal Orleans Hotel, New Orleans, Louisiana on Tuesday, August 10,1982 at 9:3.0 a.nd local time. dr; <<$$;- -*:i TNFORMAITON;^,^ Additional informatioma^utthe d;..- company,: including fiminciali^ , statement schedules and .exhibits ` to the Annual RewrttCo'share- McDermott Incorporated P. O, Box 60035 New Orleans, LA 70160