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V s <y J FOR THE FISCAL YEAR ENDED MARCH 31/1991 McDermott international, inc. 1 rsptp-' RESULTS AT A GLANCE McDermott International, Inc. lor the Fiscal Years ended March 31, 1991 and 1990 In thousands of dollars except per share amounts, shares outstanding, and number of employees Revenues Operating Loss Loss From Continuing Operations Income From Discontinued Operations Net Loss Primary and Fully Diluted Earnings (Loss) Per Common and Common Equivalent Share: Continuing Operations Discontinued Operations Net Loss Stockholders' Equity Per Common Share Cash Dividends Per Common Share Common Stock Price Per Common Share: High Low Weighted Average Number of Common and Common Equivalent Shares Outstanding During the Year Capital Expenditures Backlog Number of Employees Including Subcontract Labor 1991 $ 3,135,954 $ (10,966) $ (86,349) $ 16,824 $ (69,525) 1990 $ 2,644,690 $ (89,406) $ (100,552) $ 90,351 $ (10,201) $ (1.97) $ (2.68) $ 0.39 $ 2.41 $ (1.58) $ (0.27) $ 12.88 $ 15.24 $ 1.00 $ 1.00 $ 34V* $ 20V* $ 273/e $ ITVe 43,939,768 $ 139,335 $ 5,240,051 34,000 37,458328 $ 127,370 $ 4,167,781 30.000 TO OUR STOCKHOLDERS: In light of our expectations a year agor-rthe past fiscal year was disappointing. Our businesses continued to grow, as we expected; however, several events contributed to disappointing financial results for the year. The Gulf Crisis caused us to suspend offshore work in that region, idling equipment and delaying revenues and income; a worldwide overcapacity of equipment depressed our offshore markets; and the U.S. recession caused many of our power genera' tion customers to reduce spending during the las# half of the fiscal year. Despite these setbacks, we continue to believe in our future. Our worldwide energy markets and our U.S. government markets will grow in the 1990s, creating many opportunities in production and processing, in protecting the environment, and in manufacturing. We are positioned both technologically and geographically to take advantage of these oppor tunities, and we intend to do so profitably. McDermott will continue to be where the world comes for energy solutions. Financial Results In fiscal 1991, revenues increased to $3,136 billion from $2,645 billion in the previous year. Once again, the increase was primarily on the strength of Marine Construction revenues, which were up nearly 54 percent. The net loss for the year was $69.5 million, compared with a net loss of $10.2 million in fiscal 1990. However, the loss from continuing operations declined in fiscal 1991 to about $86 million, from Robert H. Howson Chairman of the Board and Chief Executive Officer just over $100 million the year before. Income from discontinued operations was about $90 million in fiscal 1990, compared to about $17 million in fiscal 1991. 1 Looking Ahead -*ven though our operations will face many of the ame conditions as in 1991--overcapacity of offhore equipment and delays in power generation rojects--and we will begin to see the effect of educed demand for components for the Naval Reactors Program, our fiscal 1992 revenues will ncrease significantly as we work through our ecord marine construction backlog. We expect tarked improvements in our operating results. Our capital requirements will also present us 'ith an important challenge in fiscal 1992. We ill need funds for scheduled repayments of long:rm debt, capital expenditures and working ipital. We expect to obtain them through a )mbination of operating activities, liquidation of lort-term investments, additional debt financing, id a public stock offering. However, several positive factors will benefit us t the fiscal year. Our marine fabrication opera,ons will be profitable again and our offshore perations will continue to make improvements. )ur power generation operations expect orders for nvironmental equipment. And our government perations will see increasing returns from the new rograms they have established. We do not intend to rely on these developments ione to bring us back to profitability and to .ovide for our future. Instead, we are implementing rategies that will benefit our finances and our aerations in both the short and long terms. Strategies for the Future For the short term, we will reduce our overall costs. While we cannot control the outside factors which influence our profitability, we can control our costs. These controls will not interfere with our obliga tion to quality, technology, the environment, or our customers. However, they will allow us to honor our obligation to our shareholders by maximizing our potential for earnings. For the long term, we will find new markets tor McDermott. We have a unique mixture of capabilities in nuclear energy, solid fuels, oil, and natural gas that can help the world meet the grow ing demand for energy in the next decade and beyond. Those capabilities have been created within the traditional boundaries of our core businesses, but we are developing ways to use them that will expand those boundaries. There are many projects for which we can provide or arrange a full scope of services. In some cases they will come from the combined resources of two or more McDermott divisions; in other cases, they will come from a team that includes McDermott divisions as well as the resources of outside partners. Equally important is developing new streams of revenue. To do this, we will seek long-term con tracts for our service, repair, and management capabilities for power generation, environmental and nuclear projects, and hydrocarbon production and processing facilities onshore and offshore. We will also seek equity in certain kinds of projects, which can lower costs for our customers while providing us with a steady stream of income. To implement these strategies, we made several important personnel changes in fiscal 199h selecting people from both inside and outside our organization to strengthen our management team. Management Changes To direct the focus of our traditional businesses, we named Jack Eckert our president and chief operating officer. Jack was formerly senior vice president and group executive of our Defense and Nuclear Power Group. He is now responsible for the Government Group, McDermott Marine Construction, the Power Generation Group, and the Research &. Development and Contract Research Divisions. For most of his 35-year cared, Jack held manage ment positions in our nuclear operations. In his new post, he will implement company-wide the high standards of quality, innovation, and respon siveness that made our U.S. government and commercial nuclear operations the Company's most profitable over the past several years. As a group executive, Jack maintained our excellent relationship with the Navy's nuclear program, while finding new projects to replace declining Navy work. Among those projects are three for which we now have contracts: the new production reactor design for the Department of Energy (DOE), the quadrupole magnets for the DOE's superconducting super collider, and the advanced solid rocket motor for the National Aeronautics and Space Administration. To help us on the financial side, we named Brock Hattox as our new' chief financial officer. He comes to us from the Eaton Corporation, where he was vice president, controller and plan ning. At McDermott, he will formulate financial policies, plan and execute new financial programs, and monitor and report our results. He is also reviewing our accounting methods to help us manage our cash flow and monitor and control project, manufacturing, and general and administrative costs. Brock is an important addition to our team, and we look forward to benefiting from his guidance as we move into new financial territory, including equity ventures to provide steady, long-term returns and strategies for financing major projects. To improve our engineering and construction capabilities, we brought on board Bob Page, a former chairman of the board and chief executive officer of Kellogg Rust and most recently the Assistant Secretary of the Army for civil works. Bob, who reports directly to me, is executive vice president and group executive of our Engineering and industrial Group, which also includes our Washington D.C. Operations. Bob has worked in international construction and engineering for over 35 years, and he will help us apply our resources in both private and public projects in the United States and internationally. We are changing the course of the past five years. We are a diverse organization with many unique capabilities and accomplishments. We serve many customers in many different parts of the world and in many different markets. In the years to come, these broad abilities will bring us great strength. But in fiscal 1992, our immediate common focus will be on one goal: a return to profitability for McDermott International, Inc. Robert E. Howson Chairman of the Board and Chief Executive Officer July 1991 3 PRESIDENT AND CHIEF OPERATING OFFICER'S COMMENTS 'n fiscal 1991, our operating results improved over iscal 1990, and overall, our markets grew stronger. \s a result of better markets, especially in the narine construction business, we ended the year vith a total backlog of over $5.2 billion, the lighest it has been since fiscal 1982. The backlog, which is almost a billion dollars hgher than a year ago, ensures that most of the \'ork that will generate our fiscal 1992 revenues is ilready booked. Our challenge is to meet our ustomer's requirements while performing this work rofitably. We have the experience and resources to make his happen. Historically, McDermott has been the jader in our major markets, and we are proud of ur achievements. Among our resources, we count ot oniy outstanding equipment and facilities, but Iso 34,000 talented and dedicated employees who ave an established tradition of service to istomers in each of our markets. Through the proper management of these -sources and by concentrating on our core skills, e will continue to improve our operations. Our foremost task will be improving the financial erformance of our marine segment. Since fiscal }89, the revenues and backlog of this segment ive improved markedly. The operating loss has -own smaller each year, but in fiscal 1992, it is tr job to return this segment to profitability. With a profitable marine segment, we can >ncentrate on using our unique offshore equip.ent and our strategically located fabrication yards provide the products and services our marine instruction customers will demand in the future. .'e will continue to review every aspect of this isiness and we will use the diverse resources-- eluding facilities, equipment, and personnel-- ailable within McDermott International to help e marine segment improve its performance. Secondly, as Bob Howson mentions in his letter, e will make all of our operations more cost eccive. Each of our core businesses has unmatched -ilities to do its job. But in our competitive >rld, cost effectiveness is essential if we are to wide superior products at the best price. It will o provide a base for growth by improving our ility to plan and forecast. Third, we will expand our quality programs ross the board. While these programs will help achieve our goal of cost effective operation, we pect the benefits to extend much further. Our 'jective is to establish a program of continuous improvement through every layer of the organi zation to the benefit of our customers and our investors. There are places in the Company where exemplary quality programs already exist, and we will use this experience to institute similar programs throughout McDermott. It has been said many times that McDermott is a diverse company, but the message bears repeating. We are diverse not only in the capabilities we possess and the markets we serve, but also in the experience and ralents of our employees. In fiscal 1992 and beyond, we will be successful by blending these experiences and talents into a corporate culture that preserves our strengths and overcomes our weaknesses. The potential of our operations is unlimited. With proper management and the best use of our resources, I look forward to reaching our goal of profitability in fiscal 1992. J. P. (jack) Eckert President and Chief Operating Officer july 1991 POWER GENERATION SYSTEMS AND EQUIPMENT Results For The Fiscal Year Ended March 31, MARINE CONSTRUCTION SERVICES Results For The Fiscal Year Ended March 31, Revenues in this segment come primarily from our Government Group, our Power Generation Group, and Diamond Power Specialty Company arid Hudson Products Corporation in our Engineering and Industrial Group. This segments slight improvement in revenues came primarily from the Government Group. The Naval Nuclear Fuel Division and the Aerospace Components Division both had higher revenues, whicn more than offset declines in revenues from the Nuclear Equipment Division. In the Power Generation Group, Babcock &. Wilcox International had higher revenues as did the Energy Services Division. However, the Fossil Power Division and Americon, Inc. had lower revenues. B&.W Nuclear Technologies also had lower revenues; however, our commercial nuclear activities have been part of a joint venture since November 1, 1989, and are accounted for on the equity method. The segment's operating income improved primarily because we reversed part of a reserve set aside during fiscal 1990. The reserve was made for the repair of internal corrosion damage to first-of-akind heat-pipe heat-exchangers installed at certain utility and industrial facilities. In addition, we accrued lower environmental clean-up costs in fiscal 1991. Operating income increased in the Government Group in fiscal 1991, but the improvement was more than offset by lower operating income in the Power Generation Group. This segment's revenues come primarily from McDermott Marine Construction's engineering, fabrication, offshore, and shipyard operations, and from Hudson Engineering and Project Management Corporation. During fiscal 1991, the segment's revenues grew because of increased activity in both domestic and foreign fabrication and engineering, and because of incremental revenues from a majority-owned foreign joint venture. The operating loss fell as activity increased and profit margins improved in foreign engineering and domestic and foreign fabrication operations. Profit margins also increased in our domestic offshore operations but declined in our foreign offshore operations. In addition, a majority-owned joint venture recognized losses on certain initial contracts included by our partner at the start-up of the venture. These contracts should be completed without further losses. The segment's results were also influenced by increased workers compensation expense and the Iraqi crisis in the Middle East. 5 \mericon Inc. International ^&.W Nuclear Technologies domestic Fossil Operations .nergy Services Division .nvironmental Equipment Division Joe J. Stewart Executive Vice President and Croup Executive. Power Generation Croup In fiscal 1991, our Power Generation Group completed major projects for the pulp and paper industry, electric utilities, and cogeneracors. The current recession slowed our industrial markets in the last half of the year, and the market for base-load electrical capaciry was weak. However, we received three orders for base-load equipment, and we remain confident that a significant amount of new. base load generating capacity will be ordered in the United States and the rest of the world, especially East Asia, in the 1990s. We also expect the passage of the Clean Air Act by the U.S. 5? Radiographic inspection of in-cote detector components at B&W Fuel Co. Congress to create a demand for our flue-gas desulphurization systems and low-emission burners, which will help U.S. utilities reduce emissions that cause acid rain. We formed the Environ mental Equipment Division to pursue that work, and we expect our customers to begin awarding contracts for flue-gas scrubbers in fiscal 1992. Our strategy for our power generation markets is to capitalize on our proven clean-coal technology for both existing and new power plants; to continue to improve our service to nuclear and fossil power plants; and to use our turnkey capabilities to increase our scope of work in future projects. Pulp and paper manufacturers continued to provide a strong market during the fiscal year, despite an overall decline in capital spending in that industry. Naheola Cogeneration Limited Partnership awarded us a $180-million turnkey contract for a biack liquor recovery and power generation facility in Alabama. In Canada, Malette Inc. ordered a chemical recovery boiler island valued at approximately $45 million for a mill upgrade. Coming on line were two turn key projects, a $120-million facility we built for Weyerhaeuser and a $?5-milIion facility we built for Champion International. We completed a $70-million boiler rebuild for Great Southern Paper Company, taking only 48 days to demolish and replace two boilers. In British Columbia, Canada, we completed and commissioned the world's largest chemical recovery boiler for Howe Sound Pulp &. Paper Ltd. The unit is sufficient to process 2,000 tons a day of pulp. We received orders for base-load generating systems in the United States and Asia, and we com pleted three important U.S. utility projects in fiscal 1991. The Orlando (Florida) Utilities Commission awarded us a $46-million order for a 440-mega watt coal-fired boiler for its Stanton plant. Korea Heavy Industries Corpafetion gave us a $28-million order for CANDU steam generators and heat ex changers, and Taiwan Power Company ordered a $45-million, 550-megawatt natural gas-fired boiler. We finished the erection of the 1,300-megawatt universal pressure boiler, the auxiliary boilers, and the scrubbers at the William H. Zimmer Station, operated by the Cincinnati Gas &. Electric Co. At American Electric Power's Tidd plant, a 70-megawatt Clean Coal demonstration project, we completed construction of the United States' first pressurized fluidized-bed combustion system, and at our Canadian facility, we completed the replacement steam generators for Northeast UtilitieF Millstone nuclear plant. We supplied boilers and flue gas scrubbers at the William H. Zimmer Station. Our equity participation in power plants continued with the startup of the SllO-million, 55-megawatt Ebensburg, Penn sylvania, cogeneration plant. We own 100 percent of this plant, which makes it economical to bum culm, a waste from coal mining. It is the fifth power plant our Power Systems business operates, utilizing a variety of lowcost fuels, including wood chips and municipal solid waste. Power Systems showed a profit in fiscal 1991 for the first time, marking the culmination of development work which was initiated in fiscal 1985. We expect this unit to con tribute increasing profits in the future. Our commercial nuclear joint ventures, B&.W Fuel Co. and B&.W Nuclear Service Co., continued to perform well. Our partners in both are leading companies in the French nuclear program--Framatome in both the service and fuel company and Cogema and Uranium Pechiney in the fuel company. The service company, with our partner, Framatome, won a major international contract, performing repairs on the Alamaraz reactor in Spain. It also modified a nuclear pressure vessel at Baltimore Gas &. Electric's Calvert Cliffs station and won a contract for the long term management of outages at Arizona Public Services' Palo Verde plant. The B&.W Fuel Co. shipped its first production quantities of nuclear fuel for a large class of competitor-designed reactors. As part of a team led by Ebasco, we were awarded a contract by the Department of Energy to design a heavy-water reactor, one of two reactor designs being considered to produce strategic materials for the United States nuclear defense program. (Our Government Group has an agreement to produce fuel and equipment for the alternative design.) 7 Villiam L. Higgins, III \ecutive Vice President id Group Executive, omestic and Southeast Asia Group domestic Operations outheast Asia Operations James J. Wlidasin Vice President and Group Executive. North Sea, Middle East, and West Africa Group North Sea Operations HeereMac McDermott-ETPM Above: Installation work proceeds on FreeportMcMoRan Resource Partners' Wain Pass complex m the Gulf of Mexico. The Marine Construction group's backlog reached nearly $2.4 billion in fiscal 1991, its highest level ever. The growth was driven primarily by oil prices. Although they increased sharply during the Iraqi crisis, they began and ended the fiscal year at about the same level, thereby giving our customers confidence to proceed with new projects. As the demand for energy increases during the 1990s, we expect our customers worldwide to proceed with new projects. Oil- An artist's concept of the Shell Auger tension leg platform. for which ue received contracts in fiscal 1991. related projects will continue to make up a large part of our back log, and we will see a growing number of natural gas projects as environmental considerations make it the fuel of choice for many applications. Our strategy is to continue our leadership in our marine markets by taking advantage of our worldwide presence, our strong relationships with our customers, our technological superiority, and our unique ability to perform turn key marine construction projects anywhere in the world. In the near-term, the marine fabrication business will generally remain strong and our offshore in stallation business will improve; however, there will continue to be an overcapacity of offshore equip ment, worldwide. By region, weak gas prices will slow activity in the Gulf of Mexico. However, stable or improved oil prices should allow deepwater developments to continue. In the North Sea, activity will increase in fiscal 1992, and we expect to benefit from our established presence there. We also expect both Southeast Asia and the Middle East to be strong markets over the next several years as nations in these regions go for ward with programs to expand their production of oil and gas. During fiscal 1991, we began to see a trend towards large, complex projects, which will characterize the marine construction industry in the future. We worked on several of these kinds of projects during the year, both in the United States and in international markets. In the Gulf of Mexico, we con tinued fabrication and began to install structures in FreeportMcMoRan Resource Partners' Main Pass complex. The value of our work on this project, which is the largest single offshore develop ment ever undertaken in the Gulf of Mexico, now exceeds $300 million. When complete in 1992, it will include 19 platforms, 14 of which will be connected by bridges, and will stretch nearly a mile across the Gulf of Mexico. We were also awarded contracts to fabricate the deck, mate and install the deck and hull, and install the pipelines for Shell's tension-leg platform, Auger, which will operate in a record 2,800 feet of water. Value of our work is about $200 million. In the North Sea, Amerada Hess awarded us a $200-million contract to fabricate two large jackets, one which weighs over 14,000 tons and another which weighs just under 8,000 tons. In Southeast Asia, we com pleted the Maxus project, worth approximately $300 million, which developed the largest offshore field in Indonesia. We continued work on the $150-million Goodwyn project for Woodside Offshore Petroleum of Australia at our Batam Island facility in Indonesia. Improvements made to complete the Goodwyn work have made the Batam facility the most advanced fabrication yard in the region. The Iraqi crisis resulted in the delay of the $200-million Salman project off Iran, as well as other projects in the region. But at the close of the fiscal year, work was again underway in the'area. HeereMac, our joint venture with Heerema, was a major participant in the North Sea market for offshore lifts. McDermott-ETPM was also active in the North Sea, signing a contract worth $225 million to install the 25 5-mile Amoco Central Area Transmission System (CATS) pipeline. Our shipyard continued work on several projects for the U.S. Navy, including the T-AGOS SWATH program. Two SWATH ships were launched during the year, and two more of the twin-hulled ships are being fabricated. In the future, the shipyard will benefit from its expertise in an emerging commer cial shipbuilding market. The Occidental Piper B jacket being fabricated at the McDermott Scotland facility. \erospace Components Division Manufactured Systems and Technology 'Javal Nuclear Fuel Division Nuclear Environmental Services Nuclear Equipment Division ;pace &. Nuclear Systems special Metals Roger E. Tetrault Vice President and Group Executive, Government Group Above: Harpoon missiles incorporate precision mechanical components produced by Manufactured Systems and Technology. Right: Our Government Group is the principal supplier of the Navy's MK 48 ADCAP torpedo warheads. During fiscal 1991, our Govern ment Group faced a significant decline in its traditional markets as the U.S. Congress cut spending for new nuclear-powered aircraft carriers and submarines for the US. Navy. Despite the overall decline in the Naval Reactors market, our position improved when the government selected our Naval Nuclear Fuel Division to become the sole-source fuel supplier for the Navy's nuclear reactors. With this selection, the division remains at the center of our profi table government business. Tt WT'If will use out precision manufacturing capabilities to manufacture mupwo for the DOE's super conducting super collider. In order co offset these declines, which will continue for the next two years, we are developing new areas of business, based on the group's strengths. We have worked with the Department of Energy (DOE) for over 30 years, and for five of the past six years, we have been the department's largest supplier. DOE defense projects have given us valuable experience in working with nuclear material, which we are using to develop program management, environ mental restoration, and waste management businesses. The unique automation and precision manufacturing technologies we developed for the Navy are being transferred to other DOE programs. The quality and performance standards we developed to compete in the Naval Reactors market have helped us win new customers who demand high quality and on-time delivery. On these strengths, we intend to maintain our government operations at approximately their current levels, while preparing them for growth in other Depart ment of Energy and Department of Defense markets. Our technologies helped us win contracts in fiscal 1991 worth over $220 million to manufacture reusable casings for the National Aeronautics and Space Adminis tration space shuttle's advanced solid rocket motor. Contract options could bring another $270 million. Manufacturing of the casings-- which will be 12-and-a-haIf feet in diameter, 5/8th of an inch thick, and about 115 feet long when assembled for launch--will begin in 1992 at our facilities in Mt. Vernon, Indiana, which are now being expanded to handle the program. The first shuttle flight powered by the new design rockets is currently scheduled for the mid-1990s. The Mt. Vernon facility and our Nuclear Equipment Division both used their large-component manufacturing capabilities to support McDermott Marine Construction's Freeport-McMoRan project. This is a model for the kind of cross-functional relation ships we are striving to develop throughout McDermott. After the end of fiscal 1991, we were awarded a $62-million contract by the DOE's Supercon ducting Super Collider Laboratory to manufacture quadrupole magnets. We will set up the first commercial manufacturing program in the United States for these magnets, which will focus sub atomic particles as they travel along the 54-mile super collider ring. The superconducting quadrupole magnets are an important compo nent of the super collider, which will accelerate subatomic particles to very high energies and then cause them to collide. The results of the collisions will be studied by scientists to leam more about the fundamental nature of energy and matter. We have also transferred our precision manufacturing technology into ordnance markets. Three years ago, we began a program to manufacture the Navy's MK 48 ADCAP torpedo, warheads; in fiscal 1990, we delivered three pro totypes; and in fiscal 1991, we became the principle supplier of the warheads. In addition, we are also manufacturing warheads for the Navy's latest production lightweight torpedo, the MK 50. We were active in other U.S. defense programs in fiscal 1991 as well. We received contracts to manufacture advanced HARM (high-speed, anti-radar missile) warheads and Maverick missile warheads. We manufactured com ponents and provided engineering services for the DOE's weapons programs, and we expect this experience to benefit us as the DOE consolidates its weapons complex. For the new production reactor planned by the DOE, the Govern ment Group is teamed with General Atomics and has been awarded a contract to produce fuel and equipment for the gas-cooled reactor design, one of two designs being considered by the DOE. (Our Power Generation Group is preparing the alternative design.) We are developing this teaming arrangement into a joint venture that will also supply fuel for the commercial version of the gas cooled reactor. The commercial market is expected to develop by the end of this decade. Other DOE work includes design and engineering on compact reac tors for space and defense applica tions, and a project to clean up radioactive waste for the Naval Reactors Program. We expect the DOE to budget nearly $40 billion for waste management and environ mental restoration over the next five years, and we believe our experience in this business will help us be competitive. Our large component manufacturing capabilities will be used to make casings for the advanced solid rocket motor. diamond Power Specialty Company Hudson Engineering and Project Management Corporation ludson Products Corporation The Engineering and Industrial Group was formed in November 1990 and comprises McDermott companies whose products and services are used by other McDermott divisions, and by energy and process industries worldwide. Robert W. Page Executive Vice Present and Croup Executive, Engineering and Induscrial Group In a partnership with Weyerhaeuser, we are refining infra-red imaging techniques that will measure deposits of ash and soot on boiler walls and allow our customers to more accurately determine when the walls need to be cleaned. These techniques and our superior equipment offer an excellent solution for cleaning boilers that bum low-sulphur coal. Diamond Power soot blowers work under conditions of extreme heat. Diamond Power Specialty Company Hudson Engineering and Project Management Hudson Engineering provides McDermott with a broad range of Diamond Power continues to be engineering expertise and computer the world's leading supplier of technology. We intend to use boiler cleaning equipment, Hudson's capabilities to compete providing equipment for boiler for engineering, procurement and rebuilds and retrofits, as well as for construction contracts, maximizing new boilers. the assets and expertise of other Demand for this equipment McDermott operating units. remains stable as our customers In fiscal 1991, as oil and gas maintain, repair, and replace markets strengthened, the demand existing equipment. New oppor for our engineering services grew tunities will come from expanded substantially. We were awarded service, from utilities who switch several important marine engineer to low-sulphur coal to comply ing contracts, and began to with the Clean Air Act, and later address opportunities in in the decade, from orders for new petrochemical and cogeneration base-load generating equipment. markets which will draw on our In fiscal 1991, we established experience in gas processing. service partnerships with our We continue to be a leading customers to help them control designer for deepwater structures, costs, and we developed products completing the design of a that increase the efficiency of structure for over 1,200 feet of boiler cleaning equipment and water. The fixed structure will be boilers. built and installed in the Gulf of Our service partnerships provide Mexico. our customers with on-site In China, we were awarded a engineers to help forecast service contract worth approximately on boiler cleaning equipment, $25 million for engineering and plan the service outage, and older procurement of oil and gas the parts from our inventory to producing equipment for an off arrive at our customer's plant in shore floating production and time to minimize the outage. storage unit. This is one of several To help utilities who will switch contracts we have been awarded in from high-sulphur to low-sulphur China in recent years. coal, we will offer methods to both diagnose and solve their Hudson Products unique boiler cleaning problems. In fiscal 1991, Hudson Products benefited from a worldwide increase in hydrocarbon processing and refining projects, as well as from power generation projects. Hudson Products also implemented Total Quality Management, which will be fundamental to success in our global markets. In the power generation market, we completed a $19-miIlion con tract to supply steam condensers for a combined-cycle power plant in Virginia, and we completed a contract to supply 80 air-cooled heat exchangers holding 240 of our Tuf-Lite fans to the Mammoth Pacific Geothermal Power Plant in California. Because our heat exchangers don't use water for cooling, they made the Mammoth-Pacific plant acceptable in an environmentally sensitive area. In the oil and gas market, we provided new heat exchangers to a major U.S. refinery in just 27 days, three fewer days than the contract required. Getting repairs made and the refinery back on line was critical to the customer, and by quickly responding to stringent specifications, Hudson provided a crucial service. Total Quality Management was initiated at Hudson Products in late 1989, and has resulted in measurable reductions in costs and increases in productivity, as well as in improvements in the overall quality of products. Hudson's suc cess in Total Quality Management will assure our customers that we are the best choice for heat transfer equipment. Hudson Products' air-cooled heat exchangers at the Mammoth Pacific Geothermal Power Plant. E. Allen Womack, Jr. Vice Prejkfenr, Research & Development and Contract Research Divisions he research and development of ew technologies is essential to he products and services offered v McDermott International. Our research centers in dliance, Ohio and Lynchburg, 'irginia provide services to all of ur operations and provide con.act research to a variety of ustomers. The centers, with a staff of ationally and internationally nown engineers and scientists, ive McDermott and our customers n ever-expanding horizon of nowledge in fossil power and uclear systems, in thermal /draulics and fluid mechanics, in materials development and evaluaon, in manufacturing technology, id in other specialized areas. We routinely work with uncom mon materials such as uranium, tanium, and zirconium, and we ive developed unique instrumen:ion systems using fiber optics nd lasers to analyze many .fferent processes. One of our greatest successes is lean Coal Technology research. e are the only company to parcipate as a prime contractor in 1 three rounds of the Departent of Energy's Clean Coal rogram. Out Alliance Research Center used this fuel assembly for thermal hydraulics experiments supporting a Department of Energy program. To clean flue gasses, we've developed and demonstrated new technologies which resolve the conflict between the use of coal as a fuel for electricity and our environment. Were also working on systems which allow new or existing boilers to bum coal more cleanly, while improving powerplant efficiency. Besides technologies to bum coal cleanly, we're developing methods for coal gasification, another way to derive energy from coal. The world's supply of coal is ten times greater than its supply of oil and natural gas, combined. In the future, gasification of coal will provide fuel for energy as well as for the manufacturing of syn thetic materials. In the field of manufacturing, we are developing automated welding systems that will plan, control, and evaluate welding to improve productivity and quality. Our ability to work with highstrength material helped the Company's Aerospace Components Division win the contract to manufacture casings for the space shuttle's advanced solid rocket motor. We will perform over 5,000 tests to analyze the material and to develop methods of welding, heat treating, and inspection for this project. In the future, we will use this knowledge of materials and testing for other new applications, such as equipment for refining oil and gas and for the subsea development of hydrocarbons. As science and technology progresses, industry is moving to an age of new materials. Were preparing for that era by develop ing advanced materials such as ceramic fibers that behave like steel and other durable materials, but that can be fabricated into large, complex shapes. Our commitment to research and development prepares McDermott International for a future which will be increasingly determined by our ability' to provide our customers with technological solutions which balance their needs for enesgfc economy, and protection of the environment. DIRECTORS AND MANAGEMENT Officer-Directors Robert . Howson Owof the 8w>*J dftJ Chief Execruv Ofpse* J. P. (Jack) Eckert P'ClULmt and Chief Operating Officer John A. Lynott CtWpCT4tircum* Vtce Praident. Directors * L i \ t > 'dP j * *. -v If * ***'' Philip J. Burgyieres Pr<iidsnt and Chmf Executive Officer. .'Xeamerford Iniemaa^r-xl Incorporated nv< and Tr^ufacturrrg tampans - '7>v* .'A; *** -' -- Walter B. Shaw Petittd Chairman of 1he Board and Chief Eircvrire Officer. Turner Corporation leneral construction contractors James E. Cunningham Feured Chairman of the Board and Chief Bxecutit* Officer. McDermott internaliond. \nc. James A. Hunt Preacfau, Jama A. Hm, ini. . miacmenr tanking James L. Outt re--ncr Chairman of the Board jni Chief Executive Office. Bejcnce Campania, be. food, chemical, and masufactiered products John A. Morgan Parmer. Woijwt lews Qithens& Ahn e investment bwiicm* J. Howard Macdonald Former Chairman of the Board and Chief Executive Officer, Ndritest Itwesoneru 8o& - commercial and tnvcmcfu John P. Bookout Faired President ad Ctef Executive Officer, SMI Oi Comp? - bueftated peerotam company Audit Committee John A. Morgan. C/wirman Philip J. Burgtueres James E. Cunningham James L Durr James A. Hunt William McCoIlam, Jr. Walter 8. Shaw John B. Tweedy Compensation Committee William T. Seawell, Chairman Thomas D. Barrow John F. Bookout James A. Hunt J. Howard Macdonald John A. Morgan Writer B. Shaw Directors Nominating Committee James A. Hunt. Chairman Thomas D. Barrow John F. Bookout James L Dim John A. Morgan William T Seawell John B. Tweedy Employee Benefits Committee John & Tweedy, Chairman James E. Cunningham James L Durr Wiliiam McCoIlam, Jr. J. Howard Macdonald Wiliiam T Seawell Waher B. Shaw Finance Committee Robert E. Howson, Chairman Thomas D. Barrow John E Bookout James A. Hunt John A. Lynott J. Howard Macdonald John A. Morgan William T Seawell Technical Oversight Committee John E Bookout, Chairman Thomas D. Borrow Philip J. Burguieres James E. Cunningham William McCoIlam, Jr. J. P. (Jack) Eckert John 8. Tweedy - . 0*J>*aau,ri - snd fend;:'- vf<"U.*v Thomas 0. Barrow Fettitd Vue Chapman ofthe Board, The SunfiW Od Company petroleum company William McCoIlam, Jr. Energy Management Consultant; PresSent Eivniw, Ediusn Electric |rumuf< osVfCtation of mi<eitcn-c*aned electnc wfi&rto William T. Seawell focueJ Ctermon erf t/* Board end Chief Exec**** Officer, P&i American WM Airways, Inc. convnercui ear tronxport&xon 15 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 1 0 - K TxT ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31, 1991 OR TT TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number 1-8430 McDermott international, inc. (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA (State or other jurisdiction of incorporation or organization) 72-0593134 (I.R.S. Employer Identification No.) 1010 COMMON STREET NEW ORLEANS, LOUISIANA (Address of principal executive offices) 70112-2401 (Zip Code) Registrant's Telephone Number, including area code (5041 587-5400 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Common Stock, $1.00 par value Name of each Exchange on which registered New York Stock Exchange Rights to Purchase Common Stock (Currently Traded with Common Stock) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been sub.iect to such filing requirements for the past 90 days. YES | X | NO JL The aggregate market value of voting stock held by non-affiliates of the registrant was $1,055,729,488 as of May 20, 1991. The number of shares outstanding of the Company's Common Stock at May 20, 1991 was 44,174,605. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the 1991 Annual Meeting of Shareholders is incorpo rated by reference into Part III of this report. McDermott international, inc. INDEX - FORM 10-K PART I Items 1. & 2. BUSINESS AND PROPERTIES A. General B. Power Generation Systems and Equipment General Foreign Operations Raw Materials Customers and Competition Backlog Factors Affecting Demand C. Marine Construction Services General Foreign Operations Raw Materials Customers and Competition Backlog Factors Affecting Demand D. Patents and Licenses E. Research and Development Activities F. Insurance G. Employees H. Government Regulations I. Intercompany Agreement 0. Discontinued Operations Item 3. LEGAL PROCEEDINGS AND PROPOSED TAX DEFICIENCY Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS PART II Item 5. Item 6. Item 7. Item 8. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS SELECTED FINANCIAL DATA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations 1991 VS 1990 1990 VS 1989 Effect of Inflation and Changing Prices Liquidity and Capital Resources CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Company Report on Consolidated Financial Statements Report of Independent Auditors Consolidated Balance Sheet - March 31, 1991 and 1990 Consolidated Statement of Income (Loss) and Retained Earnings for the Three Fiscal Years ended March 31, 1991 Consolidated Statement of Cash Flows for the Three Fiscal Years ended March 31, 1991 Notes to Consolidated Financial Statements PAGE 1 2 3 4 4 5 5 6 8 8 8 8 9 9 9 10 11 11 12 12 13 13 14 14 15 17 19 19 22 23 24 26 27 29 i INDEX - FORM 10-K Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT Item 11. EXECUTIVE COMPENSATION Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Exhibit 11 - Statement Re Computation of Per Share Earnings(Loss) Exhibit 22 - Significant Subsidiaries of the Registrant Consent of Independent Auditors Signatures of the Registrant Signatures of Directors PAGE $5 55 55 55 55 56 58 58 59 60 61 n jr3 PART I Items 1. and 2. BUSINESS AND PROPERTIES A. GENERAL McDermott International, Inc. (''International") was incorporated under the laws of the Republic of Panama in 1959. International is the parent company of the McDermott group of companies, which includes McDermott Incorporated. Interna tional's Common Stock and McDermott Incorporated's Series A $2.20 Cumulative Convertible Preferred Stock and Series B $2.60 Cumulative Preferred Stock are publicly held. Unless the context otherwise requires, hereinafter ''International" will be used to mean McDermott International, Inc., a Panama corporation; the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and its consolidated subsidiaries, joint ventures and partnerships; and "McDermott International" will be used to mean the consolidated enterprise. McDermott International operates in two business segments: o Power Generation Systems and Equipment, which principally serves the electric utility industry and the U.S. Government, o Marine Construction Services, which principally serves the oil and gas industry for offshore development drilling and for the production and trans portation of oil and gas on a worldwide basis. During fiscal 1991, McDermott International sold its seamless tubular line of business, which was discontinued in fiscal 1987. In fiscal 1990, McDermott International sold its Bailey Controls operations. During fiscal 1989, McDermott International completed the sale of its Trading segment and in fiscal 1988, sold its Insulating Products Group. (See Note 2 to the consolidated financial statements for additional information with respect to discontinued operations.) The business of the Power Generation Systems and Equipment segment is conducted primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox Investment Company, the principal subsidiary of which is The Babcock & Wilcox Company ("B&W"). B&W was acquired by McDermott Incorporated in 1978. McDermott International has a continuing program of reviewing joint venture, acquisition and disposition opportunities. The following tables show revenues and operating income (loss) from the con tinuing operations of McDermott International for the three fiscal years ended March 31, 1991. See Note 12 to the consolidated financial statements for additional information with respect to McDermott International's business segments and operations in different geographic areas. i i REVENUES AND PERCENT OF REVENUES (Dollars in Mill ions) Power Generation Systems and Equipment Marine Construction Services Intersegment Transfer FIiroinations Total FOR FISCAL YEARS ENDED MARCH 31, 1991 1990 1989 $1,756.6 56% $1,747.1 66% $1,576.9 73% 1,397.8 45% 910.0 34% 593.2 27% (18.4) (11% $3,136.0 100% (12.4) $2,644.7 100% (3.3) $2,166.8 100% Power Generation Systems and Equipment Marine Construction Services Total OPERATING INCOME (LOSS) (1J (Dollars in Millions) FOR FISCAL YEARS ENDED MARCH 31, 1991 1990 1989 $ 88.2 $ 27.9 $ 48.7 (52.0) $ 36.2 (61.2) $ (33.3) (60.9) $ (12.2) (1) Reconciling items between Segment Operating Income (Loss) and Operating Loss in the Consolidated Statement of Income (Loss) and Retained Earnings are General Corporate Expenses, B. POWER GENERATION SYSTEMS AND EQUIPMENT GENERAL The Power Generation Systems and Equipment segment is a supplier of individually engineered complete fossil fuel and nuclear steam generating systems, and nuclear fuel assemblies for the electric utility industry, as well as fossil fuel steam generating systems for industrial processes and power generation. This segment also provides replacement parts and engineered plant enhancements for existing fossil and nuclear steam generating systems, and specially engi neered accessories and components, such as air heaters and cleaning systems for heat transfer surfaces. It also supplies process recovery boilers and pollution control systems for the process and utility industries, and air-cooled heat exchangers. This segment also provides non-boiler related equipment when it is contractually obligated for extended scope of supply on a project. It is also engaged in the erection of utility plants and industrial facilities and the repair and alteration of such existing equipment. In addition, it provides tubing for various mechanical and pressure applications for the automotive, machinery, fabricated metal and power generation industries. This segment is actively involved in the market for providing power through cogeneration, refuse-fueled power units, and other small power plants with primarily nontraditional fuel-burning capability. It is participating in this 2 market as an equipment supplier, as an operations and maintenance contractor and through ownership interests. No new contracts for domestic nuclear steam generating systems have been awarded for a number of years. As a consequence, the commercial nuclear power genera tion business currently consists of fuel assemblies for refueling and engineer ing, field repair and refurbishment services, and computer services for existing nuclear reactors. This segment conducts its nuclear fuel assembly business through B&W Fuel Company, a 51%-owned partnership which was formed in fiscal 1989 with Virginia Fuels, Inc., a company formed by the U.S. subsidiaries of three French companies, and conducts its commercial nuclear service business through B&W Nuclear Service Company, a 50%-owned partnership formed in fiscal 1990 with Framatome Services Company, Inc., a U.S. subsidiary of a French company. The Power Generation Systems and Equipment segment also provides nuclear fuel assemblies and -nuclear reactor components to the U.S. Navy for the Naval Reac tors Program. Revenues from the U.S. Government related to this activity were approximately 14%, 14% and 15% of McDermott International's total revenues for fiscal years 1991, 1990 and 1989, respectively. This activity has made signi ficant contributions to the operating income of McDermott International in all three fiscal years. B&W, in addition to its Naval Reactors Program business, is a supplier of ordnance and other equipment and services to the U.S. Government, and just recently, B&W has contracted to manufacture reusable steel casings for space shuttle advanced solid rocket motors. The principal plants of this segment, which manufacture power generation systems and equipment, are situated at Indianapolis and Mount Vernon, Indiana; West Point, Mississippi; Alliance, Barberton and Lancaster, Ohio; Beasley and Paris, Texas; Lynchburg, Virginia; and Cambridge, Ontario, Canada. These plants and properties are owned by B&W and are well maintained, have suitable equipment, and are of adequate size. Babcock & Wilcox Investment Company has recently acquired a plant in Little Rock, Arkansas to expand capacity for replacement parts and small industrial boilers and to participate in the steam flood boiler market. FOREIGN OPERATIONS The amounts of Power Generation Systems and Equipment's revenues and operating income derived from operations outside of the United States, and the approximate percentages of those total revenues to McDermott International's total revenues. follow: FISCAL YEAR REVENUES AMOUNT PERCENT (Dollars in Thousands) OPERATING INCOME 1991 1990 1989 $ 228,052 219,059 143,986 7 8 7 $ 5,780 9,052 4,994 B&W primarily conducts its foreign business at its Cambridge, Ontario location, which also serves the Canadian market. Products for international installation are engineered and built in B&W's United States and Canadian facilities, as well as in the facilities of less than majority-owned joint venture companies in China, Indonesia and India. RAW MATERIALS The principal raw materials used by this segment to construct power generation systems and equipment consist of carbon and alloy steels in various forms, such as plate, forgings, structural, bars, sheet, strip, heavy wall pipe and tubes. Significant amounts of components are also purchased for assembly into B&W supplied systems and equipment. These raw materials and components generally are purchased as needed for individual contracts. The principal raw materials used by this segment in the manufacture of nuclear fuel components and assemblies consist of uranium (customer furnished), zircalloy and specialized stainless steel. Although shortages of certain of these raw materials have existed from time to time, no serious shortage exists at the present time. In addition, this segment is not sole source dependent for any significant raw materials except for the uranium for the nuclear fuel assemblies supplied to the Naval Reactors Program which is furnished and owned by the U.S. Government. CUSTOMERS AND COMPETITION The principal customers of this segment are the electric utility industry (including government-owned utilities), the U.S. Government (including its contractors), and the pulp and paper and other process industries. The electric utility industry (including government-owned utilities) accounted for approxi mately 19%, 25% and 34% of McDermott International's total revenues for fiscal years 1991, 1990 and 1989, respectively. U.S. Government business with this segment, excluding government-owned utilities, accounted for approximately 17%, 16% and 17% of McDermott International's total revenues for such periods. Steam generating system and nuclear fuel assembly orders are customarily awarded in response to competitive bids submitted pursuant to proposals based on the estimated cost of each job. Domestically, a relatively small number of com panies, specializing in large steam generating equipment, compete with B&W in the utility fossil fuel steam generating system business. In international markets, these companies plus several foreign-based companies compete with B&W. In the sale of nuclear steam generating systems, B&W competes with a small number of companies. In the sale of nuclear fuel assemblies, B&W competes with the other manufacturers of nuclear steam generating systems. A number of companies are in competition with B&W in pollution control equipment, industrial steam generating systems and the small power plant business. Other suppliers of fossil and nuclear fuel steam systems, as well as many other businesses, compete for repair and alteration and other services required to backfit and maintain existing systems. B&W competes with a small number of domestic suppliers of tubing and also with foreign suppliers, depending on market conditions. In regard to the Naval Reactors Program, B&W is the sole source supplier of nuclear fuel assemblies to the U.S. Navy. However, there are a small number of suppliers of nuclear components, with B&W being the largest based upon revenues. L-nv;:a&i. 4 BACKLOG Backlog as of March 31, 1991 and 1990 for the Power Generation Systems and Equipment segment was $2,863,400,000 and $2,548,545,000 or approximately 55% and 61%, respectively, of McDermott International's backlog. Of the March 31, 1991 backlog, it is expected that approximately $977,381,000 will be recorded in revenues in fiscal year 1992, $1,394,103,000 in fiscal years 1993-1996, and $491,916,000 thereafter. Also, this segment's backlog with the U.S. Government was approximately 26% of McDermott International's total backlog at March 31, 1991. If in management's judgment it becomes doubtful whether contracts will proceed, the backlog is adjusted accordingly. If contracts are deferred or cancelled, B&W is usually entitled to a financial settlement related to the individual circumstances of the contract. Operations and maintenance contracts, which are performed over an extended period, are included in backlog based upon an estimate of the revenues from these contracts. No estimate of revenues from power sales agreements or thermal energy contracts associated with owned cogeneration or small power plants is included in backlog. B&W attempts to cover increased costs of anticipated changes in labor, material and service costs of long-term contracts either through an estimation of such changes, which is reflected in the original price, or through price escalation clauses. Most long-term contracts have provisions for progress payments. FACTORS AFFECTING DEMAND Electrical consumption has grown moderately since 1983. As a result, certain electric utilities in several regions of the United States are investigating potential sources of new generating capacity. However, electric utilities have deferred ordering large, new base load units because of continuing uncertainties over rate regulation and environmental rules. Where electric utilities are in need of peaking capacity, many are purchasing alternate equipment with short lead-times. Certain electric utilities are purchasing electricity from :other utilities with excess capacity or from non-regulated sources such as cogenera tors and independent power producers. The current recession and uncertainties created by passage of the Clean Air Act have caused utilities to defer repairs and refurbishments in the short-term. Ultimately, the Clean Air Act should create significant demand for pollution control equipment and related plant enhancements. In addition, the current recession has affected demand for tubular products and other industrial related product lines. With the maturing of the U.S. Navy's shipbuilding program, the demand for nuclear fuel assemblies and reactor components for the U.S. Navy has been reduced from levels experienced in the mid-1980's. This decline in demand has less of an adverse impact on the supply of nuclear fuel assemblies due to reload business. The backlog of orders for U.S. Navy nuclear fuel assemblies and nuclear reactor components comprised a substantial portion of this segment's backlog with the U.S. Government at March 31, 1991 and this activity is expected to continue to be a significant part of McDermott International's business. B&W received a contract in fiscal 1991 to manufacture the reusable steel casings for the space shuttle advanced solid rocket motors. The -contract award was in 5 excess of $200 million, including related equipment and installation, and includes an option by the U.S. Government to order work of a similar magnitude which is expected to begin in the mid-1990's. C. MARINE CONSTRUCTION SERVICES GENERAL The Marine Construction Services segment consists of the design, construction and installation of specialized offshore fixed platforms and marine pipelines used for development drilling, production 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); operation of a shipyard for the construction, repair and maintenance of specialized ships for the U.S. Navy, as well as ferries, barges, tugboats and other small vessels; the engineering and construction of processing plants for the oil, gas and petrochemical and mineral industries, primarily for offshore installation; and vessel chartering operations, principally to affiliated companies. Fixed platforms, which are fastened to the seafloor by pilings driven through their structural legs, have been installed by McDermott International in water depths of more than 1,000 feet. These platforms have been engineered to with stand 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. In addition, this segment is capable of fabricating and installing tension-leg platforms, floating production systems and subsea templates. In order to compete effectively in markets with overcapacity for offshore marine construction equipment, McDermott International participates in joint ventures with other marine contractors. McDermott International owns 50% of the HeereMac joint venture, formed with Heerema Offshore Construction Group, Inc., to provide heavy-lift marine installation services to the petroleum industry on a worldwide basis, especially in harsh environmental areas. Each party charters to the joint venture, on a long-term basis, 2 semi-submersible derrick barges, with the largest being McDermott International's DB-102 with a lift capacity of 13,200 tons. McDermott International owns approximately 57% of the McDermott-ETPM joint venture, formed with ETPM S.A., to provide general marine construction services to the petroleum industry in the Middle East, India, West Africa and South America; it also provides offshore marine installation services in the North Sea. This joint venture utilizes 3 combination derrick-pipelaying barges and 1 semi-submersible lay barge which are owned by McDermott International. The lay barge is capable of. laying 60-inch diameter pipe (including concrete coating) and operable in water depths up to 2,000 feet. McDermott International also provides fabrication facilities located at Jebel Ali and Ras-al-Khairaah in the U.A.E., and at Warri, Nigeria. ETPM S.A. charters to this joint venture 4 combination derrick-pipelaying barges and provides fabrication facilities at Sharjah, U.A.E. and Tchengue, Gabon. McDermott International also owns a 49% interest in a Mexican joint venture that operates 2 self-propelled combination barges (1 capable of lifting 2,000 tons) and 1 pipelaying barge. McDermott International, a world leader (based upon industry standards) in the fabrication of offshore structures, has its principal domestic fabrication yard and offshore base located on approximately 1,224 acres of land, under lease, near Morgan City, Louisiana. This segment also operates a shipyard on approxi mately 58 acres of leased land in Morgan City. It also owns approximately 134 acres of land at Gulfport, Mississippi and New Iberia, Louisiana for sub-assem bly of components for the Morgan City fabrication yard and shipyard and for participation in the shallow water fabrication market. This segment has a fabrication yard on approximately 367 acres of owned and leased land near Morgan City and operates an additional fabrication yard on approximately 283 acres of leased land in Nueces County, Texas. McDermott International also operates fabrication yards on leased property in Indonesia at Batam Island and at Ain Soukhna, Egypt and on company-owned property in Scotland, near Inverness. The equipment used at these yards, which are capable of fabricating a full range of offshore structures, consists principally of cranes, welding equipment, machine tools, and robotic and other automated equipment, in addition to other fabrication equipment, most of which is movable. Expiration dates, including renewal options, of leases covering land for the shipyard and fabrication yards, follow: Morgan City, Louisiana Nueces County, Texas Batam Island, Indonesia Oebel All, U.A.E. Ras-al-Khaimah, U.A.E. Ain Soukhna, Egypt Warri, Nigeria Years 1996-2032 Year 1996 Year 2008 Year 2005 Year 1991 Year 2001 Year 2065 McDermott International expects to renew the lease at Ras-al-Khaimah, U.A.E. which is negotiated on an annual basis. This segment owns the largest fleet of marine equipment used in major offshore construction. The nucleus of a "construction spread" is a large derrick barge, pipelaying barge or combination derrick-pipelaying barge capable of offshore operations for an extended period of time in remote locations. McDermott International owns 6 derrick barges, 3 pipelaying barges, 9 combination der rick-pipelaying barges and 2 pipeburying barges. The lifting capacities of the derrick and combination derrick-pipelaying barges range from 700 tons to 13,200 tons. These barges, which range in length from 300 feet to 660 feet, are fully equipped with revolving cranes, auxiliary cranes, welding equipment, pile driving hansners, anchor winches and a variety of additional gear. The largest of these vessels is the DB-102, which is one of the world's largest semi-sub mersible derrick barges in both size and lifting capacity, and provides quarters for approximately 750 workers. In addition, this segment owns a shearleg crane capable of lifting up to 5,000 tons. This segment has performed a commercial dual crane offshore lift of over 8,200 tons and has installed one of the deepest pipelines in over 1,400-ft. waters. Of the above equipment, two semi-submersible derrick barges are operated by the HeereMac joint venture. In addition to the equipment it owns, McDermott Inter national also has a long-term Tease on. a derrick barge with a lifting capacity of approximately 4,000 tons. It also owns or leases a substantial number of other vessels, such as tugs, utility boats and cargo barges to support the major marine vessels. Major spreads of equipment operated by McDermott International are in the Gulf of Mexico and Southeast Asia. In connection with its construction and pipelaying activities, this segment conducts diving operations which, because of the water depths involved, require sophisticated equipment, including diving bells and an underwater habitat. This segment's shipyard facility supplies complete maintenance and construction facilities and is a builder of a variety of marine vessels, including large tugs, packaged rigs, dredges, barges, ferries, oceanographic research and other ocean-going work vessels. This facility is currently building prototype ocean going surveillance vessels and torpedo test and recovery vessels for the U.S. Navy. FOREIGN OPERATIONS The amounts of Marine Construction's revenues and operating loss derived from operations outside of the United States, and the approximate percentages of those revenues to McDermott International's total revenues follows: OPERATING REVENUES LOSS FISCAL YEAR AMOUNT PERCENT (Dollars in Thousands) 1991 1990 1989 $ 881,879 28 $ (38,303) 520,492 20 (26,180) 337,781 16 (30,114) RAW MATERIALS The raw materials used by this segment, such as carbon and alloy steel in various forms, welding gases, concrete, fuel oil and gasoline, are available from many sources and this segment is not dependent upon any single supplier or source. Although shortages of certain of these raw materials and fuels have existed from time to time, no serious shortage exists at the present time. CUSTOMERS AND COMPETITION This segment's principal customers are oil and gas companies and the U.S. and other governments. Customers generally contract with this segment for the design, construction and installation of specific platforms, pumping stations, marine pipelines, and production networks and the construction of marine vessels. Contracts are usually awarded on a competitive bid basis. There are a number of companies which compete effectively with McDermott Inter national in each of the separate marine construction phases in various parts of the world, but none has the geographical distribution or the overall capabili ties of McDermott International. BACKLOG As of March 31, 1991 and 1990, the Marine Construction Services' backlog amount ed to $2,376,651,000 and $1,619,236,000 or approximately 45% and 39%, respec tively, of McDermott International's total backlog. The significant increase in this segment's backlog, of approximately 47%, is the result of increased demands for this segment's fabrication activities. Of the March 31, 1991 backlog, $1,546,304,000 is expected to be recognized in fiscal 1992, and $830,347,000 thereafter. 8 Work is performed on a fixed price, cost plus or day rate basis or combination thereof. Almost all contracts call for progress payments and the segment attempts to cover increased costs of anticipated changes in general labor rates and material costs on long-term contracts, either through an estimation of such changes, which is reflected in the original fixed price, or through price escalation clauses. This segment's contracts for work in foreign areas gene rally provide for payment in U.S. Dollars, with exceptions for payments in foreign currencies in amounts approximately equal to expenses to be incurred by this segment in those currencies. FACTORS AFFECTING DEMAND Marine Construction Services' activity depends mainly on the capital expendi tures of oil and gas companies and foreign governments for developmental construction and has traditionally been cyclical. These expenditures are influenced by the selling price of oil and gas along with the cost of production and delivery, -the terms and conditions of offshore leases, the discovery rates of new reserves offshore, the ability of the oil and gas industry to generate capital and local and international political and economic conditions. Oil company capital expenditures in calendar year 1991 are in general increasing when compared with the prior calendar year, principally in foreign areas. The average price of oil in calendar year 1990 increased substantially over 1989 because of the Iraqi invasion of Kuwait. Projects planned for 1991 were based on oil price expectations excluding the unusual rise in the latter half of 1990, and have not been affected by the expected price decline to pre-war levels. The spot price for natural gas in the United States averaged about the same in calendar year 1990 as in 1989. Following another warm winter, spot prices have declined sharply, and are expected to be below the 1990 level on average for the calendar year 1991. Unanticipated warm weather has again prolonged the gas surplus and slowed down gas-driven development in the Gulf of Mexico. Oil companies are continuing the trend begun in calendar year 1990 and moving forward with projects which only a few years ago were uneconomical. The fabri cation sector of the marine construction market improved during fiscal year 1991 and is expected to remain strong during fiscal year 1992 in most areas. The offshore installation sector will gradually improve as fabrication projects are completed. However, the overcapacity of marine equipment worldwide will con tinue to create a competitive environment. D. PATENTS AND LICENSES Many U.S. and foreign patents have been issued to McDermott International and it has many pending patent applications. Patents and licenses have been acquired and licenses have been granted to others when advantageous to McDermott International. While McDermott International regards its patents and licenses to be of value, no single patent or license or group of related patents or licenses is believed to be material in relation to its business as a whole. E. RESEARCH AND DEVELOPMENT ACTIVITIES McDermott International conducts research and development activities at Alliance, Ohio; Lynchburg, Virginia; and Houston, Texas; and also conducts development activities at its various manufacturing plants and engineering and 9 design offices. During the fiscal years ended March 31, 1991, 1990 and 1989, approximately $63,300,000, $53,000,000 and $72,100,000, respectively, was spent by McDermott International on research and development activities, of which approximately $40,200,000, $33,600,000 and $48,700,000, respectively, was paid for by customers of McDermott International. Research and development activi ties were related to development and improvement of new and existing products and equipment and conceptual and engineering evaluation for translation into practical applications. Approximately 300 employees were engaged full time in this activity at March 31, 1991. F. INSURANCE McDermott International maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insur able or insurance is available only at rates which McDermott International considers uneconomical. Among such risks are war and confiscation of property in certain areas of the world, pollution liability in excess of relatively low limits, and asbestos liability. Depending on competitive conditions and other factors, McDermott International endeavors to obtain contractual protection against uninsured risks from its customers. McDermott International's insurance policies do not cover liability and property damage losses resulting from nuclear accidents at reactor facilities of its utility customers. To protect against liability for damage to customer's prop erty, McDermott International has obtained waivers of subrogation from the customer and its insurer and is generally named as an additional insured under the customer's nuclear property policy. To protect against liability from claims brought by third parties, McDermott International is insured under the customer's nuclear liability policies and has the benefit of the indemnity and limitation of any applicable liability provision of the Price-Anderson Act, as amended ("the Act"). The Act limits the public liability of manufacturers and operators of licensed nuclear facilities and other parties who may be liable in respect of, and indemnifies them against, all claims in excess of an amount which is determined by the sum of commercially available liability insurance plus certain retrospective premium assessments payable by operators of conrnercial nuclear reactors. Although McDermott International does not own or operate any nuclear reactors, it has coverage under commercially available nuclear liability and property insurance for five of its six facilities which are licensed to maintain special nuclear materials. The sixth facility operates primarily as a conventional research center. However, this facility is licensed to possess special nuclear material and has a small and limited amount of special nuclear material on the premises. Due to the type or quantity of nuclear material present, two of the facilities have the benefit of the indemnity and limitation of liability provi sions of the Act, pursuant to agreements entered into with the U.S. Government. In addition, contracts to manufacture and supply nuclear fuel or nuclear com ponents to the U.S. Government generally contain contractual indemnity clauses, which become effective at the time of shipment, whereby the U.S. Government has assumed the risks of public liability claims. McDermott International's offshore construction business is subject to the usual risks of operations at sea, with additional exposure due to the utilization of expensive construction equipment, sometimes under extreme weather conditions, 10 often in remote areas of the world. In addition, McDermott International operates in-many cases on or in proximity to existing offshore facilities which are subject to damage by McDermott International and such damage could result in the escape of oil and gas into the sea. The insurance coverage of McDermott International for product liability and employers' liability claims is subject to varying insurance limits which are dependent upon the year involved. B&W has an agreement with its principal insurers concerning the method of allocation of products liability asbestos claim payments to the years of coverage, which operates to reduce B&W's lia bility for such claim payments. Litigation has recently been commenced against product liability excess insurers regarding coverage in one year in order to fix McDermott International's exposure in that year. Amounts not otherwise recover able from insurers will be borne by McDermott International. Based upon informa tion currently available, management believes that its future liability for claim payments will not have a material adverse effect upon the consolidated financial statements cf McDermott International. McDermott International has two wholly-owned insurance subsidiaries. To date, these subsidiaries have written policies concerning general and automobile liability, builders' risk within certain limits, marine hull, and workers' compensation for McDermott International. No significant amounts of insurance have been written for unrelated parties. G. EMPLOYEES At March 31, 1991, McDermott International employed, under its direct supervi sion in continuing operations, approximately 34,000 persons compared with 30,000 at March 31, 1990. Approximately 7,300 employees were members of labor unions at March 31, 1991 and 1990. The majority of B&W's primary facilities operate under union contracts which customarily are renewed every two to three years. During the next twelve months, two contracts covering approximately 420 of B&W's hourly workers will expire. B&W has renegotiated one of these contracts and expects to renew the other contract successfully, without incident. McDermott International considers its relationships with its employees to be satisfactory. H. GOVERNMENT REGULATIONS McDermott International's compliance with U.S. federal, state and local environ mental protection regulations necessitated capital expenditures of 5832,000 in fiscal 1991, and it expects to spend another $6,201,000 on capital expenditures over the next five years. However, McDermott International cannot predict all the environmental requirements or circumstances which will exist in the future. The cost of complying with environmental regulations was a charge against income before taxes of approximately $5,787,000 in fiscal 1991. McDermott International performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and operates certain nuclear facilities and thus is subject to continuing reviews by governmental agencies, including the Environmental Protection Agency and the Nuclear Regu latory Commission. During fiscal 1989, federal regulations were promulgated which require licensees of nuclear facilities to provide certain financial assurances relating to ii environmental clean-up costs. The most significant of these regulations will require B&W, at the time of the next renewal of each of its licenses in 1992 through 1997, to fund (or provide other financial assurances for) the then estimated future environmental clean-up costs for the facility being licensed. The amount of such estimated costs at each license renewal date will depend largely upon characterization of the facility being licensed and upon the current regulations relating to methods of, and standards for, disposal of contaminated material. Compliance with government regulations controlling the discharge of materials into the environment, or otherwise relating to the protection of the environ ment, does not have, nor is it expected to have, a material effect upon the competitive position of McDermott International. I. INTERCOMPANY AGREEMENT Pursuant to a Stock Purchase and Sale Agreement (the "Intercompany Agreement"), the Delaware Company has the right to sell to International and International has the right to buy from the Delaware Company, 100,000 units, each unit con sisting of one share of International Common Stock and one share of Interna tional Series A Participating Preferred Stock, at a price based primarily upon the stockholders' equity of McDermott International at the close of the fiscal year preceding the date at which the right to sell or buy, as the case may be, is exercised, and, to a limited extent, upon the price-to-book value of the Dow Jones Industrial Average. If a unit is sold to International upon the Delaware Company's exercise of its right to sell under the Intercompany Agreement, the purchase price of such unit will be 90% of the then current value of the unit (the "current unit value"). If a unit is sold to International pursuant to an exercise by International of its right to purchase under the Intercompany Agree ment, the purchase price of such unit will be 110% of the current unit value. At April 1, 1991, the current unit value was $2,784 and the aggregate current unit value of the Delaware Company's 100,000 units was $278,433,000. At April 1, 1991, the price at which the units could be sold to International upon the exercise by the Delaware Company of its right to sell, calculated in accor dance with the terms of the Intercompany Agreement, was approximately $250,590,000. The net proceeds to the Delaware Company of such sales would be subject to U.S. federal, state and other applicable taxes for which no provi sions have been made. J. DISCONTINUED OPERATIONS On October 5, 1990, McDermott International sold substantially all the assets of its seamless tubular line of business in Ambridge, Koppel and Beaver Falls, Pennsylvania, and Bryan, Texas to PMAC Limited, a Texas limited partnership and Koppel Steel Corporation, a Pennsylvania corporation. The seamless product line was discontinued in fiscal 1987. The facilities had previously produced seam less mechanical and pressure tubings, and steel solids. During fiscal 1990, McDermott International sold its Bailey Controls ("Bailey") operations to Elsag, S.p.A., a subsidiary of Finmeccanica Societa Finanziaria per Azioni, a manufacturing holding company of IRI, an Italian industrial group. Bailey is a supplier of instrumentation, automation, diagnostic, control and computer systems. 12 m During fiscal 1989, McDermott International completed the sale of its Trading segment to Raulino Treuhand-Und Verwaltungs AG, a subsidiary of York Hanover Holding AG, a Swiss corporation. During fiscal 1988, McDermott International completed the sale of its Insulating Products Group to Thermal Ceramics, Inc., a subsidiary of the Morgan Crucible Company Pic, a company headquartered in the United Kingdom. Item 3. LEGAL PROCEEDINGS AND PROPOSED TAX DEFICIENCY In the quarter ended March 31, 1990, decisions were entered in the United States Tax Court concerning the Delaware Company's U.S. federal income tax liability for the fiscal years ended March 31, 1981 and March 31, 1982. The Internal Revenue Service (the "IRS") has issued a statutory notice which asserts additions to the U.S. federal income tax liability of the Delaware Company for its fiscal year ended March 31, 1983. That notice treated the reorganization in that fiscal year as a taxable event, asserting a deficiency of approximately $300,000,000 in U.S. federal income taxes. The notice also asserted substantial additional deficiencies in U.S. federal income taxes on other grounds. The Delaware company contested in Tax Court all the deficiencies asserted for that fiscal year. The Delaware Company and the IRS have reached an agreement which reflects a concession of the reorganization issue by the IRS and disposes of all but one of the other issues for the year. This agreement is to become effective only if and when approved by the Joint Committee of the Con gress on Taxation. In view of decisions in test cases in the United States Tax Court and in the Courts of Appeals for two Federal circuits that determined the effect of the reorganization on former shareholders of the Delaware Company, McDermott International believes that the Joint Committee will approve the agreement. The issue for the fiscal year ended March 31, 1983 not subject to the agreement is being litigated in Tax Court. The IRS has issued notices for the fiscal years ended March 31, 1984, 1985 and 1986 which reduced net operating losses incurred in those years. The losses were carried back to earlier years, including the fiscal years ended March 31, 1981 through 1983, resulting in refunds. The Delaware Company is contesting the proposed reduction of these net operating losses which would result in substan tial additional taxes for the earlier years. McDermott International believes that any U.S. federal income taxes ultimately assessed on the basis of the notices to the Delaware Company for its fiscal years ended March 31, 1983 through 1986 will not exceed reserves established with respect thereto. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. 13 PART II Item 5- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS International's Common Stock is traded on the New York Stock Exchange. High and low stock prices and dividends declared for the years ended March 31, 1990 and 1991 follow: FISCAL 1990 QUARTER ENDED SALES PRICE HIGH LOW CASH DIVIDENDS DECLARED June 30, 1989 September 30, 1989 December 31, 1989 March 31, 1990 24-1/8 26-1/4 24-3/8 27-3/8 17-3/8 21-1/4 19 21-5/8 $0.25 $0.25 $0.25 $0.25 QUARTER ENDED FISCAL 1991 SALES PRICE HIGH LOW CASH DIVIDENDS DECLARED June 30, 1990 September 30, 1990 December 31, 1990 March 31, 1991 32-1/2 34-1/2 29-1/4 28-1/4 25-1/8 25 22-3/8 20-1/2 $0.25 $0.25 $0.25 $0.25 As of March 31, 1991, the approximate number of record holders of Common Stock was 7,658. Item 6. SELECTED FINANCIAL DATA FOR THE FISCAL YEARS ENDED MARCH 31, 1991 1990 1989 1988 1987 (In thousands except for per share amounts) Revenues $3,135,954 Income (Loss) From Continuing Operations Before Cumulative Effect Of Accounting Change $ (86,349) Earnings (Loss) Per Common Share: Primary - From Continuing Operations $ (1.97) Fully Diluted - From Continuing Operations $ (1.97) Total Assets $3,314,017 $2,644,690 $2,166,806 $2,118,810 $2,213,856 $ (100,552) $ (122,610) $ (236,859) $ 113,236 $ (2.68) $ (3.29) $ (6.38) $ 3.06 $ (2.68) $ (3.29) $ (6.38) $ 2.95 $3,244,822 $3,285,022 $3,824,817 $4,383,259 14 1991 FOR THE FISCAL YEARS ENDED MARCH 31, 1990 1989 1988 1987 Long-Term (In thousands except for per share amounts) ObTigations $ 639,645 $ 873,321 $ 932,759 $ 840,225 $ 781,124 Subsidiary's Redeemable Preferred Stocks 204.482 204.487 204.487 204.637 204.693 Total $ 844,127 $1,077,808 $1,137,246 $1,044,862 $ 985,817 Cash Dividends Per Common Share $ 1.00 $ 1.00 $ 1.40 $ 1.80 $ 1.80 See Note 2 to the consolidated financial statements regarding discontinued operations and Note 6 regarding the adoption of Statement of Financial Accounting Standards (SFAS) No. 96 in fiscal 1989. Included in income (loss) from continuing operations for the fiscal years ended 1988 and 1987 were pre-tax gains (losses) on the sale of government obligations of $(283,725,000) and $237,340,000, respectively. In addition, $128,610,000 was included in income for the 1988 fiscal year resulting from the reversal of accrued interest payable and accrued income taxes. Also included in income in fiscal year 1987 was a pre-tax pension settlement gain of $110,585,000. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations 1991 VS 1990 Power Generation Systems and Equipment's revenues of $1,756,566,000 were $9,456,000 higher than last year. This was principally due to higher revenues from nuclear fuel assemblies and reactor components for the U.S. Government, plant enhancements, repair and alteration of existing fossil steam systems, replacement parts, air-cooled heat exchangers, other defense and space-related products, fabrication of industrial boilers, managing the operations of small power plant and refuse-to-energy facilities, and welded tubular products. These higher revenues were partially offset by lower revenues from the fabrication and erection of fossil steam systems, and the extended scope of supply for refuse, industrial, and fluid-bed boilers, as well as lower revenues from the fabrica tion of fluid-bed and refuse boilers, and commercial nuclear fuel assemblies including a contract termination settlement last year. Additionally, as prin cipally all commercial nuclear service activities are now accounted for on the equity method due to the formation of a joint venture on November 1, 1989, revenues from these activities are no longer included in the Power Generation Systems and Equipment segment's revenues. Power Generation Systems and Equipment segment reported operating income of $88,217,000, which was' $60,309,000 higher than the same period last year. A substantial portion of this increase is attributable to a provision last year for corrective action in regard to internal corrosion in certain utility and industrial installations of a first-of-a-kind heat pipe heat exchanger. In the current period a portion of this reserve was reduced based on the anticipated recovery of certain costs from the Company's insurance. In addition, there was 15 recovery of certain insurance claims related to previously expensed product lia bility costs, lower workers' compensation expenses, and lower employee benefits costs. Operating results also improved . due to the higher volume and gross margins from nuclear fuel assemblies and reactor components for the U.S. Govern ment, and the higher revenues from replacement parts and plant enhancements, fabrication of industrial boilers, air-cooled heat exchangers, repair and alteration of existing fossil steam systems, and other defense and space related products. Operating income was further improved by lower environmental cleanup accruals. In addition, last year this segment sustained a loss provision on an industrial cogeneration project. These improvements were partially offset by the lower volume and gross margins from the fabrication and erection of fossil steam systems, commercial nuclear fuel assemblies including a contract termina tion settlement last year, fabrication of refuse and fluid bed boilers, and because of the equity accounting of the joint venture to conduct commercial nuclear service activities. Also, last year there was a reversal of a prior period provision as a decision to consolidate certain manufacturing facilities was rescinded. In addition, there were lower margins on welded tubular products and higher administrative and research and development expenses. Results of the Power Generation Systems and Equipment segment include provisions of approximately $1,587,000 and $17,621,000, respectively, for fiscal years 1991 and 1990 for future environmental clean-up costs at its nuclear facilities. Results for future years will include provisions for this purpose, the amount of which will depend upon the then current information and regulatory requirements. Increased demand for supply of new base load electric power plants is not expected to occur in the near term; and as a consequence, no significant increase in revenues from this source is expected before the mid-1990's. The current recession and uncertainties created by passage of the Clean Air Act have caused utilities to defer repair and refurbishments in the short-term. Ultimately, the Clean Air Act should create significant demand for pollution control equipment and related plant enhancements. Marine Construction Services' revenues increased $487,824,000 to $1,397,759,000. The improved revenues resulted from an increase in activity in this segment's fabrication facilities and engineering operations, both domestic and foreign, as well as incremental revenues from a majority-owned foreign joint venture. The improved revenues were offset in part by reduced utilization of offshore equip ment, both domestic and foreign. Marine Construction Services' operating loss decreased $9,138,000 to a loss of $52,062,000. The decreased operating loss was principally due to significantly increased activity and margins in both the domestic and foreign fabrication and foreign engineering operations. Offshore operations recognized higher domestic margins, while foreign margins were lower. Operating results were further unfavorably impacted by the recognition of losses on certain initial contracts of a majority-owned foreign joint venture, increased workers' compensation expense and as a result of the Iraqi crisis in the Middle East. Operating results were further decreased by reduced utilization of offshore equipment, both foreign and domestic. Backlog for this segment at March 31, 1991 exceeded $2,300,000,000 and includes substantially more offshore work than this time last year. The Marine Construc tion backlog is expected to decline from this extremely high level during fiscal 16 year 1992, but will remain significantly above the levels experienced during the 1980's. Interest expense decreased $24,182,000 for fiscal year 1991 compared with fiscal 1990. This decrease resulted from the exchange of the Delaware Company's 10% Subordinated Debentures due 2003 with a book value of $107,022,000 (face value of $122,666,000) during March and April, 1990 for shares of International's common stock under the terms of International's warrant agreement, and changes in other debt obligations and the interest rates prevailing thereon in the respective periods. Equity in loss of investees increased $20,263,000 from the prior fiscal year principally due to increased losses in a certain Marine Construction Service segment joint venture primarily due to lower activity and margins. Minority interest expense for fiscal 1991 was $1,220,000, compared with $14,726,000 for fiscal 1990. The decrease between years was principally due to minority interest participation in higher losses of a majority-owned foreign joint venture. Other-net income decreased $42,661,000 to $9,433,000 in fiscal 1991, . due primarily to a marine asset casualty gain and a gain resulting from the sale of assets to Framatome Services Company, Inc. (See Note 12 to the consolidated financial statements), which were recognized in fiscal 1990. Management fees in fiscal 1991 from the nuclear service joint venture were mostly offset by bank fees and discount expenses on the additional sale of certain accounts receivable. The provision for income taxes increased $37,344,000 while the loss from continuing operations before provision for income taxes decreased $51,547,000. The increase in provision for income taxes is primarily due to a decrease in losses from continuing operations, continued losses in jurisdictions which provide little or no income tax benefits and increased taxes attributable to operations in other high tax jurisdictions. 1990 VS 1989 Power Generation Systems and Equipment's revenues of $1,747,110,000 were $170,182,000 higher than fiscal 1989. This was principally due to higher revenues from fabrication and extended scope of supply for industrialand refuse boilers and erection of industrial and utility fossil steam systems. In addi tion, there were higher revenues from nuclear fuel assemblies for the U.S. Government, plant enhancements, replacement parts, repair and alteration of existing fossil steam systems, boiler-cleaning equipment and commercial nuclear fuel assemblies, including a contract termination settlement. These higher revenues were partially offset by lower nuclear service activity through October 31, 1989, and lower revenues resulting from the incorporation of a new joint venture at November 1, 1989 which is accounted for on the equity method. Also, there were lower revenues from fabrication of utility fossil fuel steam systems and the fabrication and extended scope of supply for fluid-bed boilers and tubular products. This segment reported operating income of $27,908,000 which was $20,753,000 lower than fiscal 1989's operating income of $48,661,000. The lower operating 17 results were primarily due to a provision of $27,150,000 for corrective action in regard to internal corrosion in certain utility and industrial installations of a first-of-a-kind heat pipe heat exchanger. Operating income was further reduced by the lower nuclear services revenues and gross margins and lower gross margins on reactor components to the U.S. Government. Also contributing to the lower operating results were higher selling, marketing and administrative expenses, higher workers' compensation and general liability costs and higher provisions for environmental clean-up costs. In addition, this segment sus tained a loss provision on an industrial cogeneration project, provided for costs to downsize certain data processing operations, and experienced lower margins on revenues from external sales of computer services. Also, in fiscal 1989 a reduction in warranty reserve requirements was recorded. These were partially offset by the higher volume and gross margins from the fabrication and extended scope of supply for industrial and refuse boilers, commercial nuclear fuel assemblies, replacement parts, plant enhancements, repair and alterations of existing fossil steam systems, nuclear fuel assemblies for the U.S. Govern ment and bofler-cleaning equipment, as well as improved margins from fluid-bed boiler projects. Other items partially offsetting the lower fiscal 1990 oper ating results were the reversal of a prior period provision (as a decision to consolidate certain manufacturing facilities was rescinded due to changes in the business environment), lower employee benefits costs and a gain on the termina tion of a commercial nuclear fuel assembly contract. Results of the Power Generation Systems and Equipment segment include provisions of approximately $17,621,000 and $15,748,000, respectively, for fiscal years 1990 and 1989 for future environmental clean-up costs at its nuclear facilities. Results for future years will include provisions for this purpose, the amount of which will depend upon the then current information and regulatory requirements. Marine Construction Services' revenues increased $316,769,000 to $909,935,000. The improved revenues resulted from a significant increase in utilization of this segment's domestic and foreign marine equipment. There was also increased activity, both domestic and foreign, in this segment's fabrication facilities and engineering operations. Marine Construction Services' operating loss increased $252,000 to a loss of $61,200,000. The increased operating loss was due to the recognition of in creased bid and general and administrative costs, principally in foreign marine operations, costs associated with the pursuit of new and expanded markets, increased employee benefit costs, and favorable claims related to certain foreign contracts in fiscal 1989. These increased costs were largely offset by improved operating results, both domestic and foreign, in this segment's marine and engineering operations, as well as improved operating results in foreign fabrication activities. Backlog for this segment at March 31, 1990 was $1,619,236,000. A significant part of this backlog was for fabrication activities and related engineering operations. Lagging demand and overcapacity continued in marine operations. Interest expense increased $6,661,000for fiscal year 1990 compared with fiscal 1989. This increase was consistent with changes in McDermott International's debt and the interest rates prevailing thereon in the respective periods, and included an increase in accrued interest on estimated income taxes. 18 Equity in loss of investees decreased $6,122,000 from the prior fiscal year, due primarily to equity income in the newly-formed B&W Nuclear Service Company (See Note 12 to the consolidated financial statements), and lower net equity losses on marine operations joint ventures. Other-net income and minority interest increased $40,811,000 to $37,368,000 in fiscal 1990, due primarily to the gain on the sale of assets to Framatome Services Company, Inc., recognition of a marine asset casualty gain, and foreign currency transaction gains, partially offset by bank fees and discount expenses on the additional sale of certain accounts receivable. The benefit from income taxes increased $12,340,000 while the loss from continu ing operations before benefit from income taxes decreased $9,718,000. The increase in benefit from income taxes from the prior year is due primarily to increased losses in jurisdictions where tax benefits are available and to a decrease in tax attributable to activities in high tax jurisdictions. Effect of Inflation and Changing Prices McDermott International's financial statements are prepared in accordance with generally accepted accounting principles, using historical dollar accounting (historical cost). Statements based on historical cost, however, do not ade quately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation. The management of McDermott International is cognizant of the effects of infla tion and, in order to minimize the negative impact of inflation on its operations, attempts to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimation of such changes, which is reflected in the original fixed price, or through price escalation clauses in its contracts. Liouiditv and Capital Resources During fiscal 1991, McDermott International's cash and cash equivalents in creased $7,102,000 to $139,639,000 and total debt increased $83,082,000 to $1,085,612,000. During the same period, McDermott International provided net cash of $5,580,000 from operating activities and expended $139,335,000 for additions to property, plant and equipment, $42,358,000 for cash dividends on International's Common Stock, and $33,200,000 for repayment of long-term debt. In December 1988, a subsidiary of McDermott Incorporated entered into a threeyear agreement with a certain U.S. bank whereby the subsidiary can sell, up to a maximum of $100,000,000, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Effective December 1989 and November 1990, the maximum, sales . limit was increased to $200,000,000 and $250,000,000, respectively. At: March 31, 1991, the designated pool included substantially all of the Delaware Company's domestic trade accounts receivable. At March 31, 1991, approximately $225,000,000 of receivables had been sold for cash under this agreement and the proceeds were used to repay long-term debt obligations and to fund operations. The subsidiary expects to extend the agreement with the bank, which is currently scheduled to expire at December 31, 1991. 19 During the March quarter of fiscal 1990, International amended the terms of its outstanding warrants such that, from March 2, 1990 to April 2, 1990, the number of shares of its Common Stock issuable upon exercise of one warrant, either by payment per share of $25 cash or $25 principal amount of the Delaware Company's 10% Subordinated Debentures due 2003, increased from one share to 1.075 shares. In April 1990, cash of $20,084,000 and debentures with a book value of $16,222,000 (face value of $18,593,000) were received from the exercise of 1,547,084 warrants in exchange for 1,663,090 shares of Common Stock. A partnership formed by two wholly-owned subsidiaries of B&W has available to it $87,000,000 of proceeds from the issuance of certain tax-exempt energy develop ment revenue bonds and a $23,000,000 project financing line of credit issued by a foreign bank. During fiscal 1991, the project financing line of credit with the foreign bank was reduced to $11,500,000 pursuant to the terms of the agreement. The proceeds from the issuance of the energy development revenue bonds and the project financing line of credit are to be used only for qualified expenditures made in connection with the construction by the partnership of a small power plant in Pennsylvania. At March 31, 1991, borrowings against these lines of credit were $82,450,000, excluding an established reserve of $5,200,000 required to satisfy future sinking fund requirements, and the partnership anticipates additional qualified expenditures of approximately $10,850,000 during fiscal 1992. At March 31, 1991 and 1990, International and the Delaware Company had available to them jointly various uncommitted short-term lines of credit of $94,000,000 and $186,500,000, respectively. Borrowings by McDermott International against these lines of credit at March 31, 1991 and March 31, 1990 were $20,000,000 and $40,000,000, respectively. At March 31, 1991, McDermott International had obligations under short-term repurchase agreements totaling $140,988,000 secured by short-term investments and $105,515,000 face value of its long-term portfolio of government obliga tions, compared with obligations under short-term repurchase agreements totaling $24,420,000 secured by $24,300,000 face value of its portfolio of government obligations at March 31, 1990. McDermott International maintains an investment portfolio of government obli gations and Eurodollar time deposits which is held for long-term investment purposes. The amortized cost of the long-term portfolio at March 31, 1991 was $676,463,000 (market value of $678,003,000). At March 31, 1991, approximately $209,238,000 amortized cost (market value of $210,006,000) of these obligations were pledged to secure a letter of credit in connection with a long-term loan and certain reinsurance agreements. The Delaware Company is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to International and its subsi diaries through cash dividends or through unsecured loans or investments. At March 31, 1991, approximately $649,181,000 of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity. McDermott International has committed to make capital expenditures, excluding the small power plant in Pennsylvania, of approximately $39,496,000 during fiscal 1992. These proposed expenditures are principally to maintain McDermott International's existing facilities. 20 During fiscal 1991, working capital decreased from $19,368,000 at March 31, 1990 to a deficit of $285,867,000 at March 31, 1991, reflecting an increase in notes payable and current maturities of long-term debt from $129,209,000 at March 31, 1990 to $445,967,000 at March 31, 1991. During fiscal 1992, McDermott Interna tional expects to obtain funds to meet scheduled maturities of long-term debt of $245,491,000, and capital expenditure (except for specially financed projects) and working capital requirements from operating activities, liquidation of short-term investments and additional debt financings or public stock offerings. Leasing agreements for equipment, which are short-term in nature, are not expected to impact McDermott International's liquidity nor capital resources. During January 1989 the quarterly dividend rate on the common stock of International decreased from $0.45 per share to $0.25 per share, resulting from McDermott International's decision to conserve cash. The rate, currently in effect at March 31, 1991, results in an annual payment of $1.00 per common share. The Delaware Company's quarterly dividends of $0.55 per share on the Series A $2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60 Cumulative Preferred Stock have been maintained at the same rates as in fiscal years 1990 and 1989. At March 31, 1991, the ratio of long-term debt to total common stock and other stockholders' equity was 1.13 as compared with 1.36 at March 31, 1990. In December 1990, the Financial Accounting Standards Board issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective for fiscal years beginning after December 15, 1992 which mandates a new approach in accounting for postretirement benefits other than pensions. SFAS No. 106 will require McDermott International to adopt the accrual method of accounting for the costs of providing life insurance and health care benefits to employees retiring under McDermott International's health and welfare plans. These new requirements, which will have no impact on the cash costs for these retiree benefits, must be implemented no later than fiscal 1994. McDermott International has not yet finalized its review of the impact of this statement. 21 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS International has prepared the consolidated financial statements and related financial information included in this report. International has the primary responsibility for the financial statements and other financial information and for ascertaining that the data fairly reflect the financial position and results of operations of McDermott International. The financial statements were pre pared in accordance with generally accepted accounting principles appropriate in the circumstances, and necessarily reflect estimates and judgments by appropri ate officers of McDermott International with appropriate consideration given to materiality. McDermott International believes that it maintains an internal control structure designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of an internal control structure must not exceed the related benefits. Although internal control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. McDermott International seeks to assure the objectivity and integrity of its accounts by its selection of qualified personnel, by organizational arrangements that provide an appropriate division of responsi bility and by the establishment and communication of sound business policies and procedures throughout the organization. McDermott International believes that its internal control structure provides reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected. McDermott International's accompanying consolidated financial statements have been audited by its independent auditors, who provide McDermott International with expert advice on the application of U.S. generally accepted accounting principles to McDermott International's business and also provide an objective assessment of the degree to which McDermott International meets its responsi bility for the fairness of financial reporting. They regularly evaluate the internal control structure and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The report of the independent auditors appears elsewhere herein. The Board of Directors pursues its responsibility for McDermott International's consolidated financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of McDermott International. The Audit Committee meets periodically with the independent auditors, management and the internal auditors to review matters relating to the quality of financial reporting and internal control structure and the nature, extent and results of the audit effort. In addition, the Audit Committee is responsible for recommending to the Board of Directors the engagement of inde pendent auditors for McDermott International, who in turn submit the engagement to the stockholders for their approval. The independent auditors, as well as the internal auditors, have free access to the Audit Committee. June 5, 1991 22 McDermott international, inc. CONSOLIDATED BALANCE SHEET MARCH 3], 1991 and 1990 ASSETS Current Assets: Cash and cash equivalents Short-term investments, at amortized cost which approximates market Accounts receivable - trade Accounts receivable - other Contracts in progress Inventories Deferred income taxes Other current assets Total Current Assets 1991 1990 (In thousands) $ 139,639 $ 132,537 63,894 432,244 132,363 288,806 113,540 35,897 10.936 2,350 384,466 174,244 245,265 107,783 50,715 44.306 1,217,319 1,141,666 Property, Plant and Equipment, at Cost: Land Buildings Machinery and equipment ProDertv under construction Less accumulated deDreciation Net Property, Plant and Equipment 19,631 227,503 1,918,899 170.163 2,336,196 1.367.143 969,053 19,406 217,162 1,904,279 98.151 2,238,998 1.315.143 923,855 Investments: Government obligations Eurodollar time deoosits 403,832 272.631 Total Investments 676.463 Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $66,861,000 at March 31, 1991 and $61,499,000 at March 31. 1990 143.203 Preoaid Pension Costs 213.584 Other Assets 94.395 TOTAL $3.314.017 See accompanying notes to consolidated financial statements. 453,067 287.595 740.662 148.565 189.269 100.805 $3.244.822 24 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current maturities of long-term debt Accounts payable Accrued employee benefits Accrued interest payable Accrued liabilities - other Advance billings on contracts U.S. and foreian income taxes Total Current Liabilities Deferred Income Taxes Lona-Term Debt Other liabilities Continaencies Minority Interest: Subsidiary's Redeemable Preferred Stocks: Series A $2.20 cumulative convertible, $1.00 par value; at redemption value Series B $2.60 cumulative, $1.00 par value; at redemption value Other minority interest Total Minority Interest Preferred Stock Common Stock and Other Stockholders' Equity: Common stock, par value $1.00 per share, authorized 150,000,000 shares; outstanding 44,069,349 at March 31, 1991 and 42,164,394 at March 31, 1990 Capital in excess of par value Retained earnings Minimum pension liability Cumulative foreign exchange translation adjustments Total Common Stock and Other Stockholders' Eauitv 1991 1990 (In thousands) $ 445,967 252,106 82,055 99,698 308,527 213,786 101.047 1.503.186 154.155 639.645 237,263 $ 129,209 198,492 75,404 94,308 283,155 220,307 121.423 1.122.298 147.596 873.321 232,001 88,089 116,393 7.809 212.291 - 88,094 116,393 22.343 226.830 - 44,069 451,935 82,919 (2,577) (8.8691 567.477 42,164 412,051 196,415 (7.8541 642.776 in TOTAL $3,314,017 $3,244,822 25 McDermott international, inc. CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1991 1991 1990 (In thousands) 1989 Revenues $3,135,954 Costs and Expenses: Cost of operations Depreciation and amortization 2,815,112 103,398 Selling, general and administrative exDenses 228.410 3.146.920 Operating Loss (10.9661 Other Income (Expense): Interest income 73,094 Interest expense (111,683) Equity in loss of investees (29,685) Minority interest (1,220) Other-net 9.433 (60.0611 Loss from Continuing Operations before Provision for (Benefit from) Income Taxes and Cumulative Effect of Accounting Change* (71,027) Provision for (Benefit froml Income Taxes 15.322 Loss from Continuing Operations before Cumulative Effect of Accounting Change (86.3491 Income (Lossl from Discontinued Operations 16,824 Loss before Cumulative Effect of Accounting Change (69,525) Cumulative Effect of Accounting Change - Net Loss (69.5251 Retained Earnings - Beginning of Year 196,415 Deduct Cash Dividends - Common (per share, $1.00 in 1991 and 1990: $1.40 in 19891 43.971 Retained Earninos - End of Year $ 82.919 $2,644,690 $2,166,806 2,399,947 112,966 1,928,875 107,658 221.183 2.734.096 (89.4061 187.453 2.223.986 (57.1801 74,751 (135,865) (9,422) (14,726) 52.094 (33.1681 73,079 (129,204) (15,544) (14,528) 11.085 (75.1121 (122,574) (132,292) (22.0221 ______ (9,6821 (100.5521 90,351 (122.6101 (21.6451 (10,201) - (10.2011 244,031 (144,255) 52.580 (91.6751 387,825 37.415 $ 196.415 52.119 $ 244.031 PRIMARY AND FULLY DILUTED: Earnings (Loss) Per Common and Common Equivalent Share: Continuing operations Discontinued operations Accounting change Net loss Cash Dividends Per Common Share 1991 1990 1989 $ (1.97) $ (2.68) $ (3.29) 0.39 2.41 (0.59) -- 1.42 $ (1.58) $ (0.27) $ (2.46) $ 1.00 $ 1.00 $ 1.40 See accompanying notes to consolidated financial statements. 26 McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1991 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES: 1991 1990 (In thousands) 1989 Net LossS Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Equity in loss of investees, including dividends (Gain) loss on sale and disposal of assets Cumulative effect of accounting change (Gain) loss on disposal of discontinued operations, net of applicable income taxes Net (increase) decrease in contracts in progress and advance billings on contracts (Increase) decrease in accounts receivable Increase (decrease) in accounts payable (Increase) decrease in inventories Net decrease in current, non-current and deferred income taxes payable Net increase (decrease) in other net liabilities Other (69.525) 103,398 39,570 (2,713) - (16,824) (51,152) (65,028) 53,341 (5,250) (14,117) 34,931 (1,051) $ (10.2011 S __(V91.6^7> 5V' 1< 112,966 13.262 (53,826) - (90,669) 39,191 (91,981) 34,991 (12,994) (13,579) (43,769) (9.477) 107,658 16,188 4,895 (52,580) 29,322 (11,776) 74,112 (12,285) 19,660 (38,629) (96,676) (12.705) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES S 5,580 5(126.086) $ (64.491) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale and disposal of assets Purchases of property, plant and equipment Sale of minority interest Proceeds from sale of discontinued operations Purchases of short-term investments. government obligations and Eurodollar time deposits Sales of short-term investments, government obligations and Eurodollar time deposits Investments in equity investees Other $ 5,564 (139,335) 51,337 (1,866,886) 1,870,322 (3,213) 2.916 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (79.2951 $ 70,361 $ 12,843 (127,370) 13,730 (59,864) - 303,750 12,855 (2,662,190) (1 ,158,850) 2,706,826 (14,050) 11.773 1 ,184,934 (6,286) - -- S 302.830 J- (14.368) 27 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt Issuance of long-term debt Increase (decrease) in short-term borrowing Issuance of common stock Dividends paid Other NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1991 1990 (In thousands) 1989 $ (33,200) 26,530 106,619 24,069 (42,358) (2,304) $ (86,590) 58,824 (60,362) 6,378 (37,340) (1.419) $(337,662) 372,871 35,295 90 (59,507) (1.596) S 79.356 5(120.509) S 9.491 F.FFFCTS OF EXCHANGE RATE CHANGES ON CASH 1.461 178 1.839 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7.102 56.413 (67.529) CASH AND CASH EQUIVALENTS AT BEGINNING OF YFAR CASH AND CASH EQUIVALENTS AT END OF YFAR 132.537 76.124 143.653 $ 139.639 J 132.537 S 76.124 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) Income taxes____________________________ $ $ 106,304 27.568 $ 125,445 $ 45,009 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Exchange of 10% subordinated debentures$ 16,222 $ 90.800 See accompanying notes to consolidated financial statements. $ 110,134 $ 25,565 $_ 28 McDermott international, inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1991 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements are presented in U.S. Dollars in accor dance with accounting principles generally accepted in the United States and include the accounts of McDermott International, Inc. and all subsidiaries and controlled joint ventures and partnerships. Investments in joint venture and other entities in which McDermott International has a 20% to 50% interest are accounted for on the equity method. Differences between the cost of these investments and the amount of underlying equity in net assets of the investees are amortized- systematically to income. All significant intercompany transac tions and accounts have been eliminated. Unless the context otherwise requires, hereinafter "International" will be used to mean McDermott International, Inc., a Panama corporation; the "Delaware Company" will be used to mean McDermott Incorporated, a Delaware corporation which is a subsidiary of International, and its consolidated subsidiaries, joint ventures and partnerships; and, "McDermott International" will be used to mean the consolidated enterprise. Certain amounts previously reported have been reclassified to conform with the presentation at March 31, 1991. The notes to consolidated financial statements are presented on the basis of continuing operations, unless otherwise stated. Contracts and Revenue Recognition Contract revenues and related costs are principally recognized on a percentage of completion method for individual contracts or components thereof based' upon work performed or a cost to cost method, as applicable to the product or activity involved. Revenues and related costs so recorded, plus accumulated contract cost that exceeds amounts invoiced to customers under the terms of the contract, are included in Contracts in Progress. Billings that exceed accumu lated contract costs and revenues and costs recognized under percentage of completion are included in Advance Billings on Contracts. Most long-term con tracts have provisions for progress payments. Contract price and cost estimates are reviewed periodically as the work progresses and adjustments proportionate to the percentage of completion are reflected in income in the period when such estimates are revised, there are no unbilled revenues which will not be.billed. Provisions are made currently for all known or anticipated losses. Claims for extra work or changes in scope of work are included in contract revenues when collection is probable. Included in Accounts Receivable and Contracts in Prog ress are approximately $48,555,000 and $34,900,000 relating to commercial and U.S. Government contracts claims whose final settlement is subject to future determination through negotiations or other procedures which had not been completed at March 31, 1991 and 1990, respectively. International and certain of its subsidiaries keep books and file tax returns on the completed contract method of accounting. 29 Included in Contracts in Progress are: Costs incurred less costs of revenue recognized Revenues recoanized less billinas to customers Contracts in Progress_______ 1991 1990 (In thousands) $ 161,282 127.524 $ 288,806 $ 125,011 120.254 $ 245,265 Included in Advance Billings on Contracts are: Billings to customers less revenues recognized Costs of revenues recognized less costs incurred Advance Billinas on Contracts $ 349,015 (135.2291 ___ $ 213,786 $ 236,829 (16.5221 $ 220,307 McDermott International is usually entitled to financial settlements relative to the individual circumstances of deferrals or cancellations of Power Generation Systems and Equipment contracts. McDermott International does not recognize such settlements or claims for additional compensation until final settlement is reached. Included in accounts receivable - trade are amounts representing retainages on contracts as follows: 1991 1990 (In thousands) RetainagesS 117.571$ 95.772 Retainaoes expected to be collected after one year $ 78.252$ 84.031 Of its long-term retainages at March 31, 1991, McDermott International antici pates collection as follows: $49,404,000 in fiscal 1993, $15,060,000 in fiscal 1994 and $13,788,000 in fiscal 1995. Depreciation. Maintenance and Repairs and Drvdockina Expenses r Except for major marine vessels, McDermott International's property, plant and equipment is depreciated on the straight-line method, using estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment. Major marine vessels are depreciated on the-units-of-production method based on the utilization of each vessel. Depreciation expense calculated under the units-of-production method may be less than, equal to, or greater than deprecia tion expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than 25% of annual straight-line depreciation, nor less than 50% of cumulative straight-line depreciation. Maintenance, repairs and renewals which do not materially prolong the useful life of an asset are expensed as incurred except for drydocking costs for the marine fleet, which are estimated and accrued over the period of time between drydockings, and such accruals are charged to operations currently. 30 Cash Equivalents Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, which are not held as part of a long-term investment portfolio. Investments At March 31, 1991, McDermott International held $403,832,000 (amortized cost) and $272,631,000 (amortized cost) of government securities and Eurodollar time deposits, respectively, as a long-term investment, compared with $453,067,000 and $287,595,000, respectively, at March 31, 1990. The market and face values of the government securities and Eurodollar time deposits were $404,681,000 and $404,722,000, and $273,322,000 and $272,543,000, respectively, at March 31, 1991. Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Excess of the cost over fair value of net assets of purchased businesses pri marily pertains to The Babcock & Wilcox Company ("B&W"), which is being amor tized on a straight-line basis over forty years. During fiscal 1990, $14,799,000 of excess cost was written off in connection with discontinued operations. Warranty Expense McDermott International provides for estimated future warranty expense which may be required to satisfy contractual requirements, primarily of the Power Genera tion Systems and Equipment segment. Such provisions are accrued relative to revenue recognition on the respective contracts. In addition, specific provi sions are made where the costs of warranty .are expected to significantly exceed such accruals. Environmental Clean-uo Costs McDermott International provides for future environmental clean-up for its nuclear facilities that will permit the release of these facilities to unre stricted use at the end of each facility's life, which is a condition of its licenses from the Nuclear Regulatory Commission. McDermott International is accruing the current estimated cost of those clean-up activities over the economic useful life of each of these facilities, which is estimated at 40 years. In addition, a specific provision of approximately $12,800,000 was made at March 31, 1990 to reflect changes in the current estimate of clean-up costs for these facilities and changes in the economic lives of certain of these facilities. Research and Development The cost of research and development which is not performed on specific con tracts is charged to operations as incurred. Such expense was approximately $23,100,000, $19,400,000 and $23,400,000 in fiscal years 1991, 1990 and 1989, respectively. In addition, expenditures on research and development activities 31 of approximately $40,200,000, $33,600,000 and $48,700,000 in fiscal years 1991, 1990 and 1989, respectively, were paid for by customers of McDermott International. Capitalization of Interest Cost In fiscal years 1991, 1990 and 1989, total interest cost incurred, including discontinued operations, was $119,478,000, $139,415,000 and $129,582,000, respectively, of which $7,795,000, $3,498,000 and $24,000, respectively, was capitalized. Foreign Currency Translation Assets and liabilities of foreign operations, other than operations in highly inflationary economies, are translated into U.S. Dollars at current exchange rates and income statement items are translated at average exchange rates for the year. Adjustments resulting from the translation of foreign currency financial statements are recorded in a separate component of equity; an analysis of these adjustments follows: (In thousands) Balance March 31, 1988 Divestiture of foreign investments Translation adiustments for fiscal 1989 Balance March 31, 1989 Divestiture of foreign investments Translation adiustments for fiscal 1990 Balance March 31, 1990 Translation adiustments for fiscal 1991 Balance March 31, 1991 $ (1,188) (57) (1-147) (2,392) (4,649) (813) (7,854) (1.0151 S (8.869) Foreign currency transaction adjustments are reported in income. Included in Other Income (Expense) are transaction gains of $9,788,000, $4,022,000 and $371,000 for fiscal years 1991, 1990 and 1989, respectively. Forward Exchange Contracts McDermott International enters into forward exchange contracts primarily as hedges relating to identifiable currency positions. These financial instruments are designed to minimize exposure and reduce risk from exchange rate fluctua tions in the regular course of business. Gains and losses on forward exchange contracts which hedge exposures on firm foreign currency commitments are de ferred and recognized as adjustments to the bases of those assets. Gains and losses on forward exchange contracts which hedge foreign currency assets or liabilities are recognized in income as incurred. Such amounts effectively offset gains and losses on the foreign currency assets or liabilities that are hedged. At March 31, 1991, McDermott International had forward exchange contracts to purchase $157,180,000 in foreign currencies (primarily Deutschmarks and French Francs), and to sell $150,931,000 in foreign currencies (primarily British 32 Pounds, Malay Ringgits and Dutch Guilders), at varying maturities, most of which occur during fiscal year 1992. Earnings Per Share Primary earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year. Fully diluted earnings per share include the dilutive effect of convertible preferred stock, warrants, and stock options and appreciation rights. NOTE 2 - DISCONTINUED OPERATIONS Bailev Controls Group In fiscal 1990, McDermott International sold its Bailey Controls ("Bailey") operations to Elsag, S.p.A., a subsidiary of Finmeccanica Societa Finanziaria per Azioni, a manufacturing holding company of IRI, an Italian industrial group and accounted-for it as a discontinued operation. The purchase price paid at closing was $295,000,000. During fiscal 1991, purchase price and other income adjustments of $1,718,000 were recognized in income from discontinued operations. Proceeds collected in fiscal 1991 were $3,931,000. Condensed financial information for Bailey follows: Revenues Income (loss) from operations, net of applicable income taxes of $423,000 and $3,509,000, respectively, in fiscal 1990 and 1989 Gain on disposal, net of applicable income taxes of $550,000 and $52,457,000, respectively, in fiscal 1991 and 1990 1991 $ 1,718 1990 (In thousands) $ 170,996 (318) 88,314 1989 $ 255,850 7,677 - The gain of $88,314,000 in fiscal 1990 included income from operations of $2,474,000 during the phase out period. Trading In fiscal 1988, International decided to dispose of its Trading segment and accounted for it as a discontinued operation. During fiscal 1989, International entered into an agreement with Raulino Treuhand-Und Yerwaltungs AG, a subsidiary of York Hanover Holding AG, a Swiss corporation, for the sale of its wholly-owned German subsidiaries, McDermott International Trading GmbH (MIT GmbH) and Coutinho Caro & Co., AG. Under the terms of this agreement, wherein the sales price is subject to the determination of the final net asset value of the subsidiaries, International assumed and prepaid approximately $29,300,000 of MIT GmbH's notes payable and accrued interest and gave certain guarantees regarding specific contracts. 33 Included in Loss from Discontinued Operations for fiscal 1989 is a loss of $27,506,000 (including income taxes of $1,676,000) which resulted from additional operating losses during the phase-out period and losses on the sale of certain assets. The sale and liquidation of the Trading segment was substantially completed during fiscal 1989. Final sales price adjustments and guarantees are not expected to have a material effect on the consolidated financial statements. Insulating Products Group In fiscal 1988, McDermott International sold its Insulating Products Group to Thermal Ceramics, Inc., a subsidiary of Morgan Crucible Company Pic, a company headquartered in the United Kingdom, for approximately $76,000,000 and accounted for it as a discontinued operation. Included in Income (Loss) from Discontinued Operations are gains (losses) on disposal of $2,355,000 and $(1,816,000), in fiscal 1990 and 1989; net of applicable income taxes (benefit) of $53,000 and $(137,000), respectively. Seamless Tubular Line of Business In June 1987, McDermott International announced its intention to permanently close its seamless tubular line of business and accordingly accounted for it as a discontinued operation at March 31, 1987. In July 1990, McDermott International sold certain assets of the seamless tubular line of business. Proceeds from the sale were $2,635,000. In October 1990, McDermott International sold substantially all the assets of its seamless tubular line of business to PMAC Limited, a Texas limited partnership and Koppel Steel Corporation, a Pennsylvania corporation. Proceeds from the sale were $44,771,000, excluding $5,000,000 collected during fiscal 1990. These proceeds are subject to final purchase price adjustments that have not yet been deter mined, but are not expected to have a material effect on the consolidated financial statements. Gain on disposal of $15,106,000, net of applicable income taxes of $17,081,000, is included in Income from Discontinued Operations for fiscal 1991. NOTE 3 - SALE OF ACCOUNTS RECEIVABLE In December 1988, a subsidiary of McDermott Incorporated entered into a threeyear agreement with a certain U.S. bank, whereby the subsidiary can sell, up to a maximum of $100,000,000, with limited recourse, an undivided interest in a designated pool of qualified accounts receivable. Under the terms of the agreement, new receivables are added to the pool as collections reduce previ ously sold accounts receivable. Effective December 1989, and November 1990 the maximum sales limit was increased to $200,000,000 and $250,000,000, respectively. At March 31, 1991, the designated pool included substantially all of the Delaware Company's domestic trade accounts receivable. At March 31, 1991, approximately $225,000,000 of receivables had been sold for cash under this agreement. Included in Other-net income were expenses recorded on the sale of receivables which represent bank fees and discounts of $17,498,000, $13,087,000 and $1,350,000 for the fiscal years ended March 31, 1991, 1990 and 1989, respectively. The subsidiary expects to extend the agreement with the bank, which is currently scheduled to expire at December 31, 1991. 34 NOTE 4 - INVENTORIES Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis except for certain materials inventories, for which the last-in first-out (LIFO) method is used. The cost of approximately 40% and 37% of total inventories was determined using the LIFO method at March 31, 1991 and March 31, 1990, respectively. Consolidated inventories at March 31, 1991 and 1990 are summarized below: 1991 1990 (In thousands) Raw Materials and Supplies Work in Progress Finished Goods18.692:18.991 $ 63,734 31,114 $ 60,647 28,145 S 113.540$ 107.783 NOTE 5 - PENSION PLANS AND POSTRETIREMENT BENEFITS Pension Plans - McDermott International provides retirement benefits, primarily through non-contributory pension plans, for substantially all of its regular full-time employees, except certain non-resident alien employees of foreign subsidiaries who are not citizens of a European Common Market country or who do not earn income in the United States, Canada, or the United Kingdom. Salaried plan benefits are based on final average compensation and years of service, while hourly plan benefits are based on a flat benefit rate and years of service. McDermott International's funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, generally, to fund other pension plans as recommended by the respective plan actuary and in accordance with applicable law. At January 1, 1991 and 1990, approximately one-half of total plan assets were held in U.S. Government securities. The remaining assets were invested in listed stocks and bonds and investments of a short-term nature. Net periodic pension cost for following components: Service cost - benefits earned during the period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and deferral fiscal years 1991 , 1990 and 1989 1991 1990 (In thousands) $ 21,147 $ 18,431 57,651 (5,201) 196.1831 47,452 (161,548) 80.286 included the 1989 $ 17,695 42,140 (77,276) 7.205 Net periodic pension cost $ (22,586) S (15.3791 i (10.2361 Due to the sale of its Bailey operations on October 31, 1989, McDermott International curtailed certain related salaried pension plans in the United States and Canada. Consequently, income from discontinued operations in fiscal year 1990 includes a net after-tax gain of $3,118,000 resulting from the curtailments. Accordingly, net periodic pension cost relating to these pension 35 plans was remeasured at October 31, 1989. The impact on net periodic pension cost for fiscal year 1990 was to reduce the pre-tax loss from continuing operations by $3,523,000. The following table sets forth the plans' funded status and amounts recognized in McDermott International's consolidated financial statements: Actuarial present value of benefit obligations: Vested benefit obligation Plans for Which Plans for Which Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets 1991 1990 1991 1990 (In thousands) $ 485.540 S 423.988 $ 77.297 $ 66.969 Accumulated benefit obligation $ 532.121 S 484.730 $ 96.379 $ 85.144 Projected benefit obligation $ 657,947 $ 581,097 $ 98,266 $ 85,893 Plan assets at fair value Projected benefit obliga tion (in excess of) or less than plan assets Unrecognized net (gain) or loss Prior service cost not yet recognized in net periodic pension cost Unrecognized transition (asset) obligation Adjustment required to recognize minimum liability 941.197 956.425 283,250 35,269 375,328 (74,203) 11,563 (116,498) 11,293 (123,149) 59.822 (38,444) 4,840 5,043 306 (8.2051 57.890 (28,003) (5,387) 5,079 530 (LS5_4) Prepaid pension cost (pension liability) recognized in the consolidated financial statements $ 213.584 $ 189.269 S (36.4601 S (29.6351 At January 1, 1991, 1990 and 1989, the weighted-average discount rate for active and retired employees and the expected long-term rate of return on assets were both 8-1/2% and 8-1/2%, respectively. The rate of increase in future compensa tion levels used in determining the actuarial present value of the projected benefit obligations was 5%, 5% and 4-1/2%, for fiscal 1991, 1990 and 1989, respectively. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions," McDermott International 36 recorded during fiscal 1991 and 1990, an additional minimum liability for certain of its plans of $8,205,000 and $1,854,000, respectively. These liabilities were offset by a $5,628,000 intangible asset and a $2,577,000 direct reduction of stockholders' equity in fiscal 1991, and an intangible asset of $1,854,000 in fiscal 1990. The two principal ERISA pension plans provide that, subject to certain limita tions, any excess assets in such plans would be used to increase pension benefits if certain events occurred within a 60-month period following a change in control of International. Multiemolover Plans - One of McDermott International's subsidiaries contributes to various multiemployer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. Amounts charged to pension cost and contributed to the plans were $6,407,000, $9,059,000 and $8,691,000 in fiscal years 1991, 1990 and 1989, respectively. Postretirement Health Care and Life Insurance Benefits - McDermott International offers postretirement health care and life insurance benefits to substantially all of its retired regular full-time employees, including those associated with discontinued operations, except certain non-resident alien retired employees who are not citizens of a European Common Market country or who, while employed, did not earn income in the United States, Canada or the United Kingdom. McDermott International shares the cost of providing these benefits with all affected retirees. McDermott International's cost of providing such benefits is recog nized by expensing the insurance programs' premiums, the self-insured program's claims paid, and the estimated unpaid liability for claims incurred by plan participants. The aggregate cost, including discontinued operations, totaled $22,750,000, $21,611,000 and $21,689,000 in fiscal years 1991, 1990 and 1989, respectively. McDermott International has made no provision forrecognizing the cost of postretirement benefits which may eventually be paid to employees who have not yet retired. See Management's Discussion and Analysis of Financial Conditions and Results of Operations regarding future adoption of FASB Statement No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." NOTE 6 - INCOME TAXES Effective April 1, 1988, McDermott International adopted SFAS No. 96, "Account ing for Income Taxes." The Statement -provides for a liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. For periods prior to April 1, 1988, deferred income taxes were provided based upon tax laws and rates applicable to the current year without adjustment for subsequent changes. The cumulative effect of the accounting change at April 1, 1988 was $52,580,000 ($1.42 per share). The effect of the change, excluding the cumulative effect, was to decrease the loss from continuing operations by $2,863,000 ($0.08 per share) and the loss before cumulative effect of accounting change by $4,142,000 ($0.11 per share) and to decrease the net loss by $1,146,000 ($0.03 per share) for the fiscal year ended March 31, 1989. Income taxes have been provided based upon the tax laws and rates in the coun tries in which operations are conducted. All income has been earned outside of 37 Panama and McDermott International is not subject to income tax in Panama on income earned outside of Panama. Therefore, there is no expected relationship between the provision for, or benefit from, income taxes and income, or loss, before income taxes. The major reason for the variations in such relationships is that income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation which varies from that of any other country (not only with respect to nominal rate but also with respect to the allowability of deductions, credits and other benefits) and because the proportional extent to which income is earned in, and subject to tax by, any particular country or countries varies from year to year. The provision consists of: for (benefit from) income taxes from continuing operations 1991 Current Deferred 1990 Current Deferred (In thousands) 1989 Current Deferred U.S. - Federal $ U.S. - State & Local Other than U.S. S (6,575) S 1,945 13.139 -8.409 $ 7,237 $ 25,951 $ (56,709) S 6,771 $ (31,057} 141 14651 6.913 $ 10,001 9.365 45.317 (10,125) f 5051 $ 167.3391 S 9,882 18.954 35.607 (10,926) (3.3061 S (45.2891 Loss from continuing operations before provision for or benefit from income taxes was as follows: '1991 1990 (In thousands) 1989 U.S. Other than U.S. $ 22,115 48.912 _$ 71.027 $ 92,510 30.064 $ 122.574 $ 77,653 54.639 $ 132.292 38 Deferred income taxes result from the tax effect of temporary differences in the financial and tax bases of assets and liabilities. Significant components of deferred income taxes and their related impact on the provision for (benefit from) deferred income taxes were: 1991 19?0 1989 (In thousands) Excess tax over financial depreciation Long-term contracts Warranty expense Provision for cost of certain facility closings, relocations and dispositions and environmental clean-up Interest on proposed tax deficiencies Self-insurance Pension expense Purchased tax -benefits Deferred financial gain Tax loss carryforwards Tax credits Supplemental compensation Bad debt expense Vacation pay expense Equity income of investees Other $ (1,276) 27,355 (1,718) 1,502 (4,392) 1,548 (9,950) - - (575) - 1,357 (1,134) (3,840) (2,251) 287 S 6.913 $ (10,309) (42,321) (340) (3,499) (3,992) 2,948 (7,278) (1,151) 545 (3,772) 4,262 (1,740) (1,208) (638) 658 496 S (67.3391 $ (1,257) (40,902) 6,573 (6,374) (2,764) 1,517 . 1,904 (2,899) 471 (2,221) (518) 1,660 (2,528) (1,285) 2,309 1.025 $ (45.2891 During the fiscal year ended March 31, 1990, decisions were entered in the United States Tax Court concerning the Delaware Company's U.S. income tax liability for the fiscal years ended March 31, 1981 and March 31, 1982. The Delaware Company has reached an overall agreement on all but one of the issues raised by the Internal Revenue Service (the "IRS"), pending approval from the Joint Committee of Congress on Taxation, for its fiscal year ended March 31, 1983. The remaining issue for that year is being litigated in Tax Court. The IRS has issued notices for fiscal 1984, 1985 and 1986 which propose substantial additional taxes for earlier years by reducing net operating losses incurred in fiscal 1984 through 1986. McDermott International believes that the outcome of any income taxes ultimately assessed.will not have a material adverse effect on its consolidated financial statements. 39 NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE Long-term debt consists of: 1991 1990 Unsecured Debt: {In thousands) 10.25% Notes due 1995 $ Floating rate notes ($150,000,000 face value) interest at three month LIBOR plus 0,125% (6.4375% inclusive at March 31, 1991) due 1992 lv 6.50% DM 100,000,000 Bearer-bonds due 1991 ^8.27% Note due 1991 (paid April 1, 1991) 10.20% Sinking fund debentures due 1999 with annual sinking fund installments of $2,500,000 .^jOther notes payable through 2009 (interest at ,ii &^ various rates ranging from 6.80% to 12.25% Senior subordinated notes due 9.625%) 1998 10.00% Subordinated debentures ($27,255,000 face value at March 31, 1991) due 2003 with annual sinking fund installments beginning 2002 150,000 149,924 58,473 15,000 24,426 38,028 200,000 23,907 $ 150,000 149,843 59,135 15,000 27,003 43,302 200,000 40,000 Secured Debt: 10.375% Note payable due 1998 Project financing notes Other notes payable through 2011 and caDitalized lease obliaations Less: Amounts due within one vear 131,300 82,450 11.628 885,136 245.491 $ 639.645 142,400 68,268 13.720 908,671 35.350 $ 873.321 The 12.25% Senior Subordinated Notes due 1998 (the "Subordinated Notes") are redeemable at face plus a premium (as defined in the Indenture) at the option of the Delaware Company, in whole or in part, on or after June 1, 1993. Mandatory annual sinking fund payments in the amount of $50,000,000, commencing June 1, 1996, are required to retire 50% of the Subordinated Notes prior to maturity cn June 1, .1998. As defined in the Indentures, both the 10.25% Notes due 1995 and the Subordinated Notes may be redeemed at the option of the holders upon a change of control of International. The Indentures contain certain covenants which restrict the amount of funded indebtedness that the Delaware Company may incur, and place limitations on certain restricted payments, certain transac tions between affiliates, the creation of certain liens and the amendment of a certain intercompany agreement. Project financing notes of $82,450,000 result from withdrawals of funds avail able from the issuances, by a governmental authority, of approximately $87,000,000 of tax-exempt energy development revenue bonds and a $23,000,000 project financing line of credit issued by a foreign bank. During fiscal 1991, the project financing line of credit with the foreign bank was reduced to $11,500,000 pursuant to the terms of the agreement. The revenue bonds bear interest at variable interest rates (5.27% at March 31, 1991) and the project financing line of credit bears interest at 30 day LIBOR plus 1-1/4% (7.81% at March 31, 1991). The project financing notes are secured solely by the assets of the project. 40 McDermott International's $131,300,000 long-term loan at an interest rate of 10.375% is secured by a letter of credit issued by a U.S. bank. The letter of credit was secured by approximately $146,585,000 amortized cost (market value of $147,267,000) of McDermott International's long-term portfolio at March 31, 1991. The outstanding principal is repayable in semi-annual payments with the final installment due June 20, 1998. The letter of credit and collateral amounts decline as the loan principal is repaid. Maturities of long-term debt during the five fiscal years subsequent to March 31, 1991 are as follows: 1992 - $245,491,000; 1993 - $25,505,000; 1994 $23,166,000; 1995 - $24,351,000; 1996 - $175,763,000. The Delaware Company is restricted, as a result of covenants in certain credit agreements, in its ability to transfer funds to International and its subsidi aries through cash dividends or through unsecured loans or investments. At March 31, 1991, approximately $649,181,000 of the net assets of the Delaware Company were subject to such restrictions. It is not expected that these restrictions will have any significant effect on International's liquidity. International and the Delaware Company at March 31, 1991 had available unused short-term lines of credit from various banks totaling approximately $74,000,000. Current notes payable to banks at March 31, 1991 and 1990 were $59,488,000 and $69,439,000, respectively. At March 31, 1991, other current notes payable of $140,988,000 were secured by short-term investments and by $105,515,000 face value of government obligations. At March 31, 1990, other current notes payable were $24,420,000. NOTE 8 - CONTINGENCIES AND COMMITMENTS Litigation - International and certain of its officers, directors and subsid iaries are defendants in numerous legal proceedings. Management and general counsel believe that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial statements. Operating Leases - Future minimum payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 1991 are as follows: 1992 - $18,549,000; 1993 - $16,097,000; 1994 $15,346,000; 1995 - $7,035,000; 1996 - $3,725,000; and thereafter - $32,243,000. Future minimum lease payments and leased property under capital leases are not material. Total rental expense for fiscal 1991, 1990 and 1989 was $109,284,000, $92,120,000 and $69,753,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material. Other - McDermott International performs significant amounts of work for the U.S. Government under both prime contracts and subcontracts and thus is subject to continuing reviews by governmental agencies. McDermott International maintains liability and property insurance that it considers normal in the industry. However, certain risks are either not insurable or insurance is available only at rates which McDermott International considers uneconomical. McDermott International recently commenced litigation 41 against product liability excess insurers regarding the method of allocating claim payments to one year of coverage. Based upon information currently available, management and general counsel believe that the outcome of these proceedings will not have a material adverse effect upon the consolidated financial statements. Commitments for capital expenditures, including specially-financed projects, amounted to approximately $54,735,000 at March 31, 1991, of which approximately 545,770,000relates to fiscal 1992. McDermott International is contingently liable under standby letters of credit totaling $375,849,000 at March 31, 1991, issued in the normal course of business. McDermott International also guarantees approximately $6,120,000 of loans issued to certain unconsolidated foreign joint ventures at March 31, 1991. These guarantees are limited to McDermott International's equity interest in these entities. At March 31, 1991, McDermott International had pledged approximately $62,653,000 amortized cost (market value of $62,739,000) of government obligations to secure payments under and in connection with certain reinsurance agreements. NOTE 9 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK McDermott International's Power Generation Systems and Equipment customers are principally the electric utility industry (including government-owned utili ties), the U.S. Government (including its contractors), and the pulp and paper and other process industries. The principal customers of the Marine Construc tion Services segment are the large oil and gas companies and the U.S. and other governments. These concentrations of customers may impact McDermott Interna tional's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. However, McDermott International's management believes that the portfolio of receivables is well diversified and that such diversification minimizes any potential credit risk. Receivables are generally not collateralized. McDermott International believes that its provision for possible losses on uncollectible accounts receivable is adequate for its credit loss exposure. At March 31, 1991 and 1990, the allowance for possible losses deducted from Accounts Receivable-trade on the balance sheet was $4,226,000 and $5,379,000, respectively. NOTE 10 - SUBSIDIARY'S REDEEMABLE PREFERRED STOCKS At March 31, 1991 and 1990, 13,000,000 shares of Delaware Company Preferred Stock, with a par value of $1 per share, were authorized. Of the authorized shares, 2,818,780 and 2,818,941 shares of Series A Preferred Stock were outstanding at March 31, 1991 and 1990, respectively; and 3,724,629 shares of Series B Preferred Stock were outstanding at March 31, 1991 and 1990. The outstanding shares are entitled to $31.25 per share in liquidation. Preferred dividends of approximately $15,900,000 are classified as minority interest in Other Income (Expense) in each of the fiscal years 1991, 1990 and 1989. The outstanding shares were issued in connection with the acquisition of B1W and are stated at the mandatory redemption value which approximated market value at 42 the time the shares were issued. Both series of Preferred Stock are entitled to general voting rights of one-half vote for each share. The Board of Directors of the Delaware Company may authorize additional series of Preferred Stock, and may set terms of each new series except that the Delaware Company cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of such Pre ferred Stock. Each share of the outstanding Series A Preferred Stock is convertible into one share of Common Stock of International plus $0.10 cash. The shares are redeem able at the option of the Delaware Company through March 31, 2008 at $31.25 per share, plus accrued dividends. On March 31, 1992 and each subsequent year through March 31, 2008, the Delaware Company is obligated to redeem, at a redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A Preferred Stock. The obligation to redeem Series A Preferred Stock is $9,809,000 for each of the fiscal years 1992 through 1996. The Delaware Company applied 313,878 shares of Series A Preferred Stock that it owned to satisfy the March 31, 1991 mandatory sinking fund obligation. Series B Preferred Stock is redeemable at the option of the Delaware Company at $31.25 per share plus accrued dividends. On March 31 of each of the fiscal years 1992 through 1995, March 31 of each of the fiscal years 1996 through 2006, and March 31 of each of the fiscal years 2007 and 2008, the Delaware Company is obligated to redeem 315,877, 252,702 and 189,526 shares of Series B Preferred Stock, respectively. The obligation to redeem Series B Preferred Stock is $9,871,000 for each of the fiscal years 1992 through 1995 and $7,897,000 for 1996. The Delaware Company applied 315,877 shares of Series B Preferred Stock that it owned to satisfy the March 31, 1991 mandatory sinking fund obligation. Additional shares of Series A or Series B Preferred Stock, equal to the number of shares the Delaware Company is obligated to redeem, may be redeemed on each mandatory redemption date by the Delaware Company, on a non-cumulative basis. The Delaware Company may apply to the mandatory sinking fund obligations any Series A or B Preferred Stock owned, previously redeemed or surrendered for conversion which have not been previously credited against the mandatory sinking fund obligations. At March 31, 1991, 49,637 shares of Series A Preferred Stock have been converted to date and the Delaware Company owned 2,517,139 and 697,654 shares of Series A and Series B Preferred Stock, respectively. 43 NOTE 11 - CAPITAL STOCK Common Stock - Changes in 1991 are summarized below: Common Stock during the SHARES three years PAR VALUE ended March 31, CAPITAL IN EXCESS OF PAR VALUE (In thousands except for share data) Balance. March 31. 1988 Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Stock plan restricted stock purchases (net of forfeitures) Deferred career executive stock nlan exDense Balance. March 31. 1989 Shares issued upon exercise of stock options Stock plan restricted stock purchases (net of forfeitures) Shares issued upon exercise of warrants Deferred career executive stock Dlan expense Balance. March 31. 1990 Shares issued upon conversion of Series A $2.20 cumulative convertible preferred stock Shares issued upon exercise of stock options Stock plan restricted stock purchases (net of forfeitures) Shares issued upon exercise of warrants Deferred career executive stock Dlan expense Balance. March 31. 3991 37.144.203 4,808 750 170,450 37.320.211 94,094 62,750 4,687,339 42.164.394 161 159,934 81,770 1,663,090 44.069.349 $ 37.144 5 1 170 37.320 94 63 4,687 42.164 160 82 1,663 $ 44.069 S 317.389 145 14 604 318.152 2,028 91,047 824 412.051 5 3,589 34,642 1.648 5 451.935 The Panamanian regulations relating to acquisitions of securities of companies, such as International, registered with the National Securities Commission re quire, among other matters, that detailed disclosure concerning the offerer, which is subject to review by either the Panamanian National Securities Commis sion or the Board of Directors of the subject company, be finalized prior to the beneficial acquisition of more than 5 percent of the outstanding shares of any class of stock. Transfers of securities in violation of these regulations are invalid and cannot be registered for transfer. 44 At March 31, 1991 and 1990, 56,363,253 and 58,043,374 shares of Common Stock, respectively, were reserved for issuance in connection with exercise of war rants, exercise of rights, the 1974 Career Executive Stock Plan, exercise of stock options, the 1983 and 1987 Long-Term Performance Incentive Compensation Programs and conversion of Series A Preferred Stock. International Rights - On December 30, 1985, each holder of Common Stock re ceived a dividend distribution of one Right for each outstanding share of Common Stock. The Rights currently trade with the Common Stock and at March 31, 1991 and 1990, International had outstanding Rights to purchase 44,169,349 and 42,264,394 shares, respectively, of its Common Stock at a price of $50 per share subject to anti-dilution adjustments. The rights will become exercisable and will detach from the Common Stock 10 days after a person or a group either becomes the beneficial owner of 20 percent or more of the outstanding Common Stock, or commences or announces an intention to commence a tender or exchange offer for 30 percent or more of the outstanding Common Stock. If thereafter the acquiring person or graup engages in certain self-dealing transactions, holders of Rights may purchase at the exercise price that number of shares of Common Stock having a market value equal to twice the exercise price. In the event International merges with or transfers 50 percent or more of its assets or earnings to any person after the Rights become exercisable, holders of Rights may purchase at the exercise price that number of shares of Common Stock of the acquiring entity having a market value equal to twice the exercise price. The Rights are redeemable by International and expire on December 30, 1995. International Warrants - During the March quarter of fiscal 1990, International amended the terms of its outstanding warrants such that from March 2, 1990 to April 2, 1990 the number of shares of its Common Stock issuable upon exercise of one warrant, either by payment per share of $25 cash or $25 principal amount of the Delaware Company's 10% Subordinated Debentures due 2003, increased from one share to 1.075 shares. At March 31, 1990, International had outstanding warrants to purchase 1,635,364 shares of its Common Stock. In April 1990, cash of $20,084,000 and debentures with a book value of $16,222,000 (face value of $18,593,000) were received from the exercise of 1,547,084 warrants in exchange for 1,663,090 shares of Common Stock, which resulted in an increase in Common Stock of $1,663,000 and Capital in Excess of Par of $34,642,000. Unexercised International warrants totaling 88,280 expired on April 2, 1990. During March 1990, cash of $4,935,000 and debentures with a book value of $90,800,000 (face value of $104,073,000) were received from the exercise of 4,360,331 warrants in exchange for 4,687,339 shares of Common Stock, which resulted in an increase in Common Stock of $4,687,000 and Capital in Excess of Par of $91,047,000. 1983 Long-Term Performance Incentive Compensation Program - Under the program which was adopted February 8, 1983, the Compensation Committee, formerly the Career Executive Stock Plan Committee (the "Committee"), may grant to the officers and key employees options to purchase in the aggregate up to 2,000,000 shares of Common Stock at 100% of the fair market value on the date of grant. Options become exercisable on or before the third anniversary of the date of grant, and remain exercisable not more than ten years after the date of grant. The Committee, until August 1987, was permitted to grant stock appreciation rights in connection with the granting of options under the program. Such stock appreciation rights permit the holders thereof to surrender exercisable options in exchange for shares of Common Stock having a fair market value on the date of 45 such surrender equal to the excess (up to, but not greater than, the fair market value of the underlying shares on the date of grant) of the fair market value on such date of the shares to which such surrendered option relates over the aggregate option price under the related options. The Committee may, at its discretion, grant holders of stock appreciation rights the right to receive up to 50% of such excess in cash in lieu of shares of Common Stock. The program also authorizes the Committee to grant performance unit awards which are earned by the achievement of performance standards established by the Committee. Performance units are paid in cash or shares of Common Stock or both at the discretion of the Committee. At March 31, 1991, 1990 and 1989, stock option and stock appreciation rights awards of 1,283,005, 1,402,468 and 1,544,283, respectively, were awarded and outstanding at an average price of $21.2481, $20.7188 and $20.6122 per share, respectively. At March 31, 1991, 1990 and 1989, 2,713, 42,917 and 6,747 shares were available for award under the program and 159,667, 105,645 and 750 options were exercised or surrendered for stock appreciation rights during the year ended on each such date. During fiscal 1991 and 1989, respectively, 86,770 and 627,330 stock options, without stock appreciation rights, were awarded. During fiscal 1990, no stock options were awarded. Awards relating to 46,566, 36,170 and 38,812 shares were forfeited during fiscal 1991, 1990 and 1989, respectively. Charges to income with respect to stock appreciation rights, performance units and dividend equivalency expense were $1,061,000, $1,693,000 and $1,390,000 during fiscal 1991, 1990 and 1989, respectively. 1987 Long-Term Performance Compensation Program - Under the program, which was approved by the shareholders on August 11, 1987, the Compensation Committee, formerly the Career Executive Stock Plan Committee, (the "Committee") may grant to the officers and key employees options to purchase in the aggregate up to 2,500,000 shares of Common Stock at no less than 80% nor more than 100% of the fair market value on the date of grant. Options become exercisable on or before the third anniversary of the date of grant, and remain exercisable not more than ten years and one day after the date of grant. Pursuant tc the program, the Committee may grant eligible employees the right to purchase up to 700,000 shares of the 2,500,000 shares of Common Stock issuable under the program at a purchase price of par value ($1.00 per share) subject to restrictions on transfer. The restrictions lapse as to 50% of the shares purchased pursuant to any one grant of such rights on the fifth anniversary date of such grant, and as to the other 50% of such shares, on the third through the tenth anniversary dates of such grant, depending upon the comparison of McDermott International7s three-year average Return on Capital to that of a comparative group of companies. In the event of a change in control of McDermott International, the Committee may cause such restrictions to lapse and accelerate the exercisability of any options outstanding. At March 31, 1991, 1990 and 1989, 1,627,192, 1,339,809 and 1,034,120 stock options were awarded and outstanding at an average price of $20.1247, $18.7582 and $16.3961 per share, respectively. During fiscal 1991 and 1990, 21,160 and 28,020 options were forfeited, respectively. During fiscal 1991 and 1990, 36,887 and 34,111 options were exercised, respectively. During fiscal 1991, 1990 and 1989, 345,430, 367,820 and 1,034,120 options were awarded, respectively. Rights to purchase 81,770, 67,980 and 174,110 shares were granted during fiscal years 1991, 1990 and 1989, respectively; however, 5,230 and 3,660 of such shares were subsequently forfeited to McDermott International during 46 fiscal 1990 and 1989, respectively. Charges to income were $2,109,000, $1,222,000 and $594,000 during fiscal 1991, 1990 and 1989, respectively. At March 31, 1991, 1990 and 1989, 427,630, 833,670 and 1,236,220 shares, respectively, were available for awards or grants under the program. Career Executive Stock Plan - This plan, which was adopted as a plan of Interna tional effective March 15, 1983, originally authorized 600,000 shares of Common Stock to be issued to eligible employees in consideration of their services. Employees granted stock under the plan pay $1.00 per share as the option pur chase price. Restrictions with respect to issued shares lapse in approximately eoual 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 attribut able to unvested stock is credited to income. During fiscal 1991, 1990 and 1989, no shares were forfeited under the plan. As of June 30, 1984, no further awards could be made under the plan. Charges to income under the plan were $95,000, $149,000 and $152,000 during fiscal 1991, 1990 and 1989, respectively. International Preferred Stock - At March 31, 1991 and 1990, 25,000,000 shares of Preferred Stock were authorized and International has issued 100,000 shares of Series A Participating Preferred Stock (the "Participating Preferred Stock") and 100,000 shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred Stock"), all of which are owned by the Delaware Company. The annual per share dividend rates for the Participating Preferred Stock and the Non-Voting Pre ferred Stock are $10 (but no more than ten times the amount of the per share dividend on International Common Shares) and $20, respectively, payable quar terly, and dividends on such shares are cumulative to the extent not paid. In addition, shares of Participating Preferred Stock are entitled to receive additional dividends whenever dividends in excess of $3.00 per International Share are declared (or deemed to have been declared) in any fiscal year. In 1987, the voting rights of the Participating Preferred Stock were eliminated. The issuance of additional International Preferred Stock in the future and the specific terms thereof, such as the dividend rights, conversion rights, voting rights, redemption prices and similar matters, may be authorized by the Board of Directors of International without stockholder approval, except to the extent such approval may be required by applicable rules of the New York Stock Exchange or applicable law. If additional Preferred Stock is issued, such additional shares will rank senior to International Common Stock as to dividends and upon 1iquidation. NOTE 12 - SEGMENT REPORTING McDermott International operates in two industry segments - Power Generation Systems and Equipment, and Marine Construction Services. Power Generation Systems and Equipment includes individually engineered complete fossil fuel and nuclear steam generating systems and nuclear fuel assemblies, fossil fuel steam generating systems for industrial processes and power gene ration, replacement parts and engineered modifications for existing fossil and nuclear steam generating systems, specially engineered accessories and compo nents, and welded mechanical and pressure tubing. Marine Construction Services principally involves the design, construction and installation of specialized offshore fixed platforms and marine pipelines for 47 use in development drilling and for the production and transportation of oil and gas. Identifiable assets by industry segment are those assets that are used in McDermott International's operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments, marketable securities and prepaid pension costs. Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. In the fiscal years 1991, 1990 and 1989, the U.$. Government accounted for approximately 20%, 19% and 20%, respectively, of McDermott International's total revenues. These revenues are principally included in the Power Generation Systems and Equipment segment. Included in Accounts Receivable-other are receivables of $3,371,000 due from minority owners, primarily ETPM S.A., in McDermott International's majorityowned joint ventures. Included in costs and expenses in fiscal 1991 are expenses of $25,728,000 relating to equipment charters and overhead expenses charged to the McDermott-ETPM joint venture by ETPM S.A. In fiscal 1990, overhead expenses of $8,638,000 were charged by ETPM S.A. to the joint venture. 48 Segment Information For the Three Fiscal Years Ended March 31, 1991. 1. Information about Industry Segments. mm (1,W McDermott International's 1991 Operations in 1990 (In thousands) Different 1989 Power Generation Systems & Equipment Marine Construction Services Tnterseament Transfer Eliminations Total Revenues $1,756,566 1,397,759 (18.371) $3,135,954 $1,747,110 909,935 (12.355) $2,644,690 $1 ,576,928 593,166 (3.288) $2,166,806 OPERATING INCOME (LOSS) Power Generation Systems & Equipment Marine Construction Services Total ODeratinqlncome (Loss) $ 88,217 (52.062) S 36.155 $ 27,908 $ 48,661 (61.200) (60.948) S (33.292) $ (12.287) E0UITY IN EARNINGS (LOSS) OF INVESTEES (3) Power Generation Systems & Equipment Marine Construction Services Total Eauitv in Loss of Investees $ 2,840 (32.525) $ (29.685) $ 3,654 $ (91) (13.076) (15.453) $ (9.422) $ (15.544) (1) Segment revenues include intersegment transfers as follows: Power Generation Systems & Equipment Marine Construction Services Total $ 10,969 7.402 $ 18.371 $$ 12.355 $ 12.355 $ 18 3.270 3.288 (2) Reconciling items between Segment Operating Income (Loss) and Operating Loss in the Consolidated Statement of Income (Loss) and Retained Earnings are General Corporate Expenses. (3) On November 1, 1989, McDermott International sold net assets representing 50% of its commercial nuclear services business to Framatome Services Company, Inc. ("Framatome"). Also, on November 1, 1989, McDermott Inter national and Framatome formed B&W Nuclear Service Company ("NSC") by contributing their respective net assets of the business for an equal ownership interest in the new company, which carries on the nuclear serv ices business formerly provided by McDermott International's Nuclear Power Division. This segment's share of earnings after formation of NSC of $1,137,000 and $2,452,000 is included in Equity in Loss of Investees for fiscal 1991 and 1990, respectively. Included in Other-net income in the Consolidated Statement of Income (Loss) and Retained Earnings is income relating to management fees and service billings to NSC of approximately $10,049,000 and $435,000 in fiscal years 1991 and 1990, respectively. Prior to November 1, 1989, revenues and operating results of this business were included in the consolidated financial statements and in the Power Generation Systems & Equipment segment. 49 CAPITA! EXPENDITURES Power Generation Systems & Equipment Marine Construction Services Corporate Discontinued Operations 1991 1990 1989 (In thousands) $ 82,284 56,511 540 $ 92,408 15,008 1,332 4,892 $ 35,571 34,894 524 4,398 Total Capital Expenditures $ 139,335 $ 113,640 $ 75,387 DEPRECIATION AND AMORTIZATION (11 Power Generation Systems & Equipment Marine Construction Services Corporate Discontinued Operations $ 36,896 63,995 2,507 103,398 - Total Depreciation and Amortization $ 103,398 $ 42,316 69,330 1,320 112,966 3,046 $ 44,567 61,506 1,585 107,658 6,425 $ 116,012 $ 114,083 IDENTIFIABLE ASSETS Power Generation Systems & Equipment Marine Construction Services Corporate Discontinued Operations $1,245,351 1,108,160 960,506 Total Identifiable Assets $3,314,017 $1,167,601 1,039,128 1,025,953 12,140 $1,063,695 1,020,875 985,528 214,924 $3,244,822 $3,285,022 (1) Depreciation and amortization excludes the write-down of property, plant and equipment in connection with discontinued operations and the write-off of goodwill. 50 2. Information about McDermott International's Operations in Different Geo graphic Areas. 1991 1990 1989 (In thousands) Revenues (1) - United States - Europe and West Africa - Middle and Far East - Other Foreign $2,027,707 488,556 364,742 254,949 $1,905,180 216,020 355,475 168,015 $1,686,187 127,737 217,474 135,408 - Total $3,135,954 $2,644,690 $2,166,806 Operating Income (Loss) by Geographic Area (2) - United States * Europe and West Africa - Middle and Far East - Other Foreign $ 68,678 (944) (34,394) 2,815 $ (16,164) (12,278) 399 (5,249) $ 12,833 (22,260) (1,845) (1,015) * Total $ 36,155 $ (33,292) $ (12,287) Identifiable Assets - United States - Europe and West Africa - Middle and Far East - Other Foreign - Corporate - Discontinued Operations $1,394,791 390,560 260,172 307,988 960,506 $1,295,412 343,026 245,409 322,882 1,025,953 12,140 $1,240,938 340,539 200,242 302,851 985,528 214,924 - Total $3,314,017 $3,244,822 $3,285,022 (1) Transfers between geographic areas and export sales are immaterial and not separately presented. (2) Reconciling items between Segment Operating Income (Loss) by Geographic Area and Operating Loss in the Consolidated Statement of Income (Loss) and Retained Earnings are General Corporate Expenses. 51 NOTH 13 - QUARTERLY FINANCIAL DATA The following tables set forth selected unaudited quarterly financial informa tion for the fiscal years ended March 31, 1991 and 1990: JUNE 30, 1990 1991 QUARTER SEPT. 30, 1990 ENDED DEC. 31, 1990 MARCH 31, 1991 (In thousands except for per share amounts) Revenues $ 684,525 Operating income (loss) (34,299) Income (loss) from continuing operations . (44,327) Net income (loss) (44,327) $ 816,095 22,837 11,632 14,842 S 825,820 $ 809,514 13,908 (13,412) (12,112) 1,502 (41,542) (41,542) Earnings (loss) per share: Primary and Fully Diluted From continuing operations Net earnings (loss) (1*01) (1*01) 0.26 0.33 (0.27) 0.03 (0.94) (0.94) Results for the September 30 and December 31, 1990 quarters include gains from discontinued operations of $3,210,000 and $13,614,000, respectively. Results for the quarter ended September 30, 1990 include recovery of certain insurance claims related to previously expensed product liability costs of approximately $8,952,000. Results for the quarter ended December 31, 1990 include a reduction in a reserve for corrective action in regard to internal corrosion in certain utility and industrial installations of a first-of-a-kind heat pipe heat exchanger, based upon the anticipated recovery of certain costs from the company's insurance in the amount of $12,600,000, and provisions of approximately $12,507,000 for workers' compensation and general liability costs resulting from a change in actuarial estimate. 52 Revenues Operating loss Loss from continuing operations Net income (loss) Earnings (loss) per sharei Primary From continuing operations Net earnings (loss) Fully Diluted From continuing operations Net earnings (loss) Continued JUNE 30, 1989 1990 QUARTER SEPT. 30, 1989 ENDED DEC. 31, 1989 MARCH 31, 1990 (In thousands except for per share amounts) $ 658,774 (15,705) $ 696,131 (4,505) $ 623,124 $ 666,661 (44,883) (24,313) (19,352) (19,670) (13,157) (10,802) (29,184) 49,994 (38,859) (29,723) (0.52) (0.53) (0.52) (0.53) (0.35) (0.29) (0.35) (0.29) (0.78) 1.33 (0.69) 1.28 (1.03) (0.79) (1.03) (0.79) Results for the June 30, September 30 and December 31, 1989 quarters and for the quarter ended March 31, 1990 include gains (losses) from discontinued operations of $(318,000), $2,355,000, $79,178,000 and $9,136,000, respectively. Results for the quarter ended December 31, 1989 include provisions of approxi mately $13,100,000 for workers' compensation and general liability costs result ing from a change in actuarial estimate and a provision of $27,150,000 for corrective action associated with internal corrosion in certain utility and industrial installations of a first-of-a-kind heat pipe heat exchanger. Results for the quarter ended March 31, 1990 include a specific provision for environ mental clean-up costs of approximately $12,800,000. NOTE 14 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES McDermott International's investments in joint ventures and other entities, which are accounted for on the equity method, was $41,120,000 and $45,416,000 at March 31, 1991 and 1990, respectively. Revenues attributable to transactions with entities for which investments are accounted for by the equity method were $84,051,000, $90,338,000 and $72,099,000 in fiscal years 1991, 1990 and 1989, respectively, including approximately $38,890,000, $30,579,000 and $11,200,000 attributable to leasing activities in fiscal years 1991, 1990 and 1989, respectively. Included in accounts receivable-trade at March 31, 1991 and 1990 are $44,221,000 and $61,426,000 of receivables with unconsolidated investees. During fiscal 1991, an additional investment of $55,988,000 was made to the HeereMac joint venture. HeereMac subsequently used these funds to settle amounts owed to McDermott International for equipment charters. At March 31, 1991 and March 31, 1990, property, plant and equipment included $246,964,000 and $246,964,000, respectively, and accumulated depreciation included $75,958,000 53 and $64,221,000, respectively, of marine equipment that is leased to uncon solidated investees. Dividends received from unconsolidated investees were $9,885,000, $3,840,000 and $644,000, in fiscal years 1991, 1990 and 1989, respectively. Summarized, combined balance sheet information based on the most recent finan cial information for these entities at March 31, 1991 and 1990, respectively, is presented below: 1991 1990 (In thousands) Current Assets Non-Current Assets Total Assets $ 216,567 283.608 $ 500,175 $ 279,876 285.364 $ 565,240 Current Liabilities Non-Current Liabilities Owners' Equity Total Liabilities and Owners' Equity $ 208,053 129,939 162.183 $ 500,175 $ 268,988 145,252 156.000 $ 565,240 Summarized, combined income statement information based on the most recent financial information for these entities for the fiscal years ended 1991, 1990 and 1989, respectively, is presented below: Revenues Gross Profit 1991 $ 505,535 $ 120,607 1990 (In thousands) $ 446,508 $ 64,088 1989 $ 220,059 $ 32,889 Loss Before Provision for Income Taxes Provision for Income Taxes Net Loss $ (60,631) 132 $ (60,763) $ (22,692) 2.732 $ (25,424) $ (45,285) 284 $ (45,569) 54 Item 9. DISAGREEMENTS WITH AUDITORS 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, direc tors or persons nominated to be such, and no executive officer was elected to his position pursuant to any arrangement or understanding between himself and any other person. Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the headings "Election of Directors" in the Proxy Statement for the 1991 Annual Meeting of Shareholders. Item 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material appearing under the heading "Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1991 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 1991 Annual Meeting of Shareholders. : Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading "Cash Compensation of Executive Officers and Certain Relationships and Related Transactions" in the Proxy Statement for the 1991 Annual Meeting of Shareholders. 55 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Auditors Consolidated Balance Sheet March 31, 1991 and 1990 Consolidated Statement of Income (Loss) and Retained Earnings For The Three Fiscal Years Ended March 31, 1991 Consolidated Statement of Cash Flows For The Three Fiscal Years Ended March 31, 1991 Notes to Consolidated Financial Statements 23 24 26 27 29 CONSOLIDATED FINANCIAL SCHEDULES All required schedules and financial statements of 50% or less owned persons will be filed by amendment to this Form 10-K on Form 8. EXHIBIT INDEX ' a*... 3 Articles of Incorporation and By-Laws (Item 3(a) and 3(b) are incorporated by reference to Exhibit 3 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983). (a) The Company's Restated Articles of Incorporation (b) The Company's By-Laws will be filed by amendment to this Form 10-K on Form 8. 4(a) Rights Agreement (incorporated by reference to Exhibit 1 to the Company's registration statement on Form 8-A, dated December 27, 1985). . 4(b) Indentures with respect to certain of the Company's long-term debt are not filed as exhibits hereto inasmuch as the securities authorized under any such Indenture do not exceed 10% of the Company's total assets. The Company agrees to furnish a copy of each such Indenture to the Securities and Exchange Commission upon request. ^10 Material Contracts (Exhibits 10(a), 10(f) and 10(1) are incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1990; Exhibits 10(b) through 10(e) are incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1983; Exhibit 10(g) is incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, as amended, for the fiscal year ended March 31, 1987 and Exhibit 10(h) is incorporated by reference to Exhibit 10 to the Company's annual report on Form 10-K, -as amended, for the fiscal year ended March 31, 1988). 56 McDermott international, inc. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS) FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1991 (In thousands, except shares and per share amounts) EXHIBIT 11 PRIMARY AND FULLY DILUTED 1991 1990 1989 Loss from continuing operations $ (86,349) $ (100,552) $ (122,610) Income (loss) from discontinued operations 16,824 90,351 (21,645) Cumulative effect of accounting change;_______________________ ____________ 52,580 Net loss for primary computationS (69.5251 $ (10,2011 $ (91,675) Weighted average number of common shares outstanding during the year43.939,768 37.458.528 37.216,057 Earnings (loss) per common and common equivalent share: (1) Continuing operations Discontinued operations Accounting change Net loss $ (1.97) $ (2.68) S (3.29) .39 2.41 (0.59) 1.42 S (1.58) $ (0.27) $ (2.46) (1) Earnings (loss) per common and common equivalent share assuming full dilution are the same for the fiscal years presented. McDermott international, inc. SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT FISCAL YEAR ENDED MARCH 31. 1991 NAME OF COMPANY ORGANIZED UNDER THE LAWS OF EXHIBIT 22 PERCENTAGE OF VOTING SHARES OWNED Creole Insurance Company, Ltd. McDermott - ETPM, Inc. McDermott International Investments Co., Hydro Marine Services, Inc. Varsy International N.V. McDermott (Holland) B.V. McDermott - ETPM V.O.F. McDermott Incorporated Hudson Engineering and Project Management Corporation Babcock & Wilcox Investment Company The Babcock & Wilcox Company McDermott Scotland Limited Bermuda Panama Panama Panama Netherlands Antilles Netherlands Antilles Netherlands Del aware Texas Del aware Del aware United Kingdom .100 57 100 100 100 100 57 92 100 100 100 75 The subsidiaries omitted from the foregoing list do not, considered in the aggregate, constitute a significant subsidiary. 58 SIGNATURES OF THE REGISTRANT Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on June 5, 1991. hcdermott international, inc. (REGISTRANT) By: s/Robert E. Howson______ Robert E. Howson Chairman of the Board and Chief Executive Officer By: s/Brock A. Hattox_______ Brock A. Hattox Senior Vice President and Chief Financial Officer Bv: s/Edmund A. Robidoux Edmund A. Robidoux Vice President and Controller 60 SIGNATURES OF DIRECTORS Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on June 5, 1991. s/Thomas D. Barrow Thomas D. Barrow Director s/James A. Hunt James A. Hunt Director s/John F. Bookout John F. Bookout Director s/Philip J. Burouieres Philip J. Burguieres Director s/James E. Cunningham James E. Cunningham Retired Chairman of the Board and Chief Executive Officer, and Director s/James l. Putt James l. Dutt Director s/John P. Eckert John P. Eckert President and Chief Operating Officer, and Director s/Robert E. Howson_______ Robert E. Howson Chairman of the Board and Chief Executive Officer, and Director s/John A. Lvnott_________ John A. Lynott Executive Vice President, Corporate, and Director s/J. Howard Macdonald J. Howard Macdonald Director s/William McCollam, Or. William McCollam, Or. Director s/John A. Morgan John A. Morgan Director s/William T. Seawell William T. Seawell Director s/Walter B. Shaw Walter B. Shaw Director s/Oohn B. Tweedy John B. Tweedy Director 61 -ommon Stock (-nsfer Agent and ,registrar First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 Preferred Stock Transfer Agent and Registrar First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 . Series A $2.20 Cumulative Convertible Preferred Stock of McOermott Incorporated Series B $2.60 Cumulative Preferred Stock of McDermott Incorporated Trustees and Agents United States Trust Company of New York Attention: Corporate Trust Department 45 Wal! Street New York, New York 10005 10.25% Notes Due June 1, 1995 9.625% Debentures Due March 15. 2004 10.20% Sinking Fund Debentures Due December 1, 1999 Floating Rate Notes Due March 1992 The Bank of New York Attention: Corporate Trust Trustee Administration 21 West Street New \brk, New York 10286 12.25% Senior Subordinated Notes Due June 1, 1998 Bankers Trust Company Post Office Box 318 Church Street Station New York, New York 10015 10.00% Subordinated Debentures Due April 1, 2003 Morgan Guaranty Trust Company of New York 30 West Broadway New York, New York 10015 Rights to purchase Common Stock of McDermott International, Inc. Pittsburgh National Bank Post Office Box 340747 Pittsburgh, Pennsylvania 15230 6.80% Pollution Control Revenue Bonds. Series A Due February 1, 2009 Independent Auditors Ernst & Young 4200 One Shell Square 701 Poydras Street New Orleans, Louisiana 70139 (504) 581-4200 Annual Meeting The Annual Meeting of the Stockholders of McDermott International, Inc. for the fiscal year ended March 31, 1991. will be held at the Hotel Inter Continental, New Orleans, Louisiana, on Tuesday, August 13. 1991, at 9:30 a.m. local time Information Additional information about the Company, including financial statement schedules and exhibits to the Annual Report to share holders on Form 10-K for the fiscal year ended March 31, 1991, may be obtained, without charge, by writing: Corporate Secretary McDermott International, Inc. 1010 Common Street New Orleans, Louisiana 70112-2401 (504) 587-5400 Inquiries regarding stockholder account matters should be addressed to: First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 1-800-446-2617 The use in this Report of the term International refers solely to McDermott International, Inc., a Panama corporation. Unless the context otherwise requires, the use of the term Delaware Company refers to McDermott Incorporated, a Delaware corporation, and its consolidated subsidiaries. The use of such terms as McDermott International, company, division, organization, joint venture, we, us. our and its, when referring either to McDermott International, (nc. and its consolidated subsidiaries or to subsidiaries and non-subsidiaries either individually or collectively, is only for convenience and is not intended to describe legal relationships. Significant subsidiaries of McDermott International, Inc. are listed as an exhibit to the Annual Report on Form 10-K of McDermott International, Inc. for the fiscal year ended March 31,1991, as filed with the United States Securities and Exchange Commission. The segments, units, divisions, and groups of McDermott International described in this Report are not corporate entities.