Document nmedyY9p24D68aK3kMbbrZJbG

J. Ray McDermott & Co., Inc. A Leading Energy Services Company Serving Offshore Oil and Gas Companies McDermott provides a range of engineering and construction services'which enable the discoverer of an offshore oil or gas field anywhere in the world to bring the field into production. Services include the designing and building of offshore drilling and production platforms, the laying of subsea pipe lines, and a variety of ancillary services. Serving Electrical Power Generating Companies McDermott's Babcock & Wilcox Company pro vides a range of engineered and highly technical Contents 2 To Our Shareholders 7 The Year in Review 24 Management's Discussion and Analysis of the Consolidated Statement of Income 24 Market Price of Common Stock 25 Dividends 26 Ten Year Summary of Operations 28 Revenues and Operating Income by Lines of Business 29 Graphs 30 Audited Financial Statements 30 Reports of Certified Public Accountants 31 Consolidated Statement of Revenues and Retained Earnings 32 Consolidated Balance Sheet 34 Consolidated Statement of Changes in Financial Position 35 Notes to Consolidated Financial Statements 46 Corporate Information 'enufactured products and construction services - inch enable utilities to produce steam to generate electricity horn nuclear and fossil-fueled power slants. Principal products and services include sliding steam generating systems, along with automated control systems and pollution control equipment, such as precipitators, sulfur dioxide errtovai systems, air heaters and fans. Serving Other Industries Other McDermott and B&W operations include the manufacture of specialty steel tubing for the oil and gas, automotive and other industries; the building of medium sized and small boilers for a wide range of industries; and the engineering and construction of processing plants, largely for the oil and chemical industries. Results at a Glance J. Ray McDermott & Co., Inc. and Subsidiaries/for the Fiscal Years Ended March 31,1978 and 1977 In thousands of dollars except per share figures'1 and number of employees 1978 1977 Revenues................................................................................................ Operating income................................................................................. Income before extraordinary gain..................................................... Net income............................................................................................. Earnings per common share: Primary................................................................................................ Fully diluted....................................................................................... Stockholders' equity per common share.......................................... Cash dividends...................................................................................... Cash dividends per common share................................................... Working capital..................................................................................... Capital expenditures............................................................................ Backlog................................................................................................... Number of employees including subcontract labor....................... $1,293,711 $1,223,841 197,76fT~";> 259,631 159,092 191,510 159,092 191,642 5.02 4.92 26.15 28,571 0.90 514,970 84,975 5,253,000'" 58,730** 6.11 5.93 22.12 18,038 0.575 462,945 63,657 1,291,000 19,364 "Per share amounts adjusted for two-for-one stock split of December 15,1977 -Includes data relative to B 5 Wat March 31,1978 The Babcock & Wilcox Company/for the Fiscal Years Ended December 31,1977 and 1976 In thousands of dollars 1977 1976 Revenues................. Net income.............. Orders received Capita! expenditures $1,877,200 61,800 2,056,800 61,700 $1,691,800 53,100 1,589,600 62,000 For pro forma combined results of operations see Note 2 of Notes to Consolidated Financial Statements. lo Our Shareholders WlltlMtt Fiscal 1978 was an exciting year for J. Ray McDermott & Co., Inc., its Board of Direc tors, its management, its employees, and, I am quite certain, its shareholders. As most of you are aware, events which had been developing throughout the fiscal year culminated on March 31 with the merger of The Babcock & Wilcox Company into McDermott. The enlargement of the scope of our operations represents the successful beginning of our planned expansion from a traditional role as a service company to the oil and gas industry into a new role as an almost total energy services company. rC,ha.irman of the Board - l want to make use of and Chief Executive Officer this letter to discuss with all shareholders the key factors that lie behind the results of both McDermott and B & W, the planned developments that brought us together, and some important policy mat ters that will affect our future -? as a unified company. Marine Construction Grew Less Rapidly The Results at a Glance section will show you that McDermott operations contin ued to expand during fiscal 1978, with the posting of rec ord revenues. You will notice, however, that our profit mar gins have declined. Many com plex developments around the world contributed to this ap parently contradictory result, yet they add up to one rel atively simple factor: The capacity of the industry in which we participate has grown more rapidly than the demand for its services. Marine Construction Will Continue to Grow The best indication of the future prospects for the ma rine construction industry is today's record-setting level of offshore exploration for oil and gas. As the spring drilling season got under way this year some 360 mobile rigs were under contract and drill ing under the waters of the world. More than 90 percent of these rigs were concentrat ing on exploration -- looking for new fields or testing the extent of newly discovered deposits by "stepping out" with wells to determine the perimeter. The 360 rigs represent an increase of 30 percent over the number of mobile rigs drilling two years ago, a record number for the spring season at the time. And off shore exploration continues to grow. Mew exploration suc cesses are announced almost weekly. The sites of recent new field discoveries include the widely separated coastal waters of Chile, the Philip pines, Malaysia, Greece, Tunisia and India. Although the average water depth of exploration has started to increase year by year, most of the signifi cant new discoveries have occurred in water depths of 1,000 feet or less. Thus, the next generation of new fields appears virtually certain to develop in water depths where platforms can econom ically be installed and in which pipelines can readily be laid. Increased exploratory drilling and a wave of new discoveries are normally followed, after about two years, by a surge of new field development, but we are facing at least another year of continuing excess capacity and pressure on prices. I am confident, from past experi ence, that an upturn will follow and we at McDermott are ready for that growth of demand for platforms and pipelines when it resumes. We are implementing Our Diversification Plan More than two years ago, at the height of the boom in marine construction, your management began a reas sessment of the offshore service industry, the Com pany's position in the indus try, and its future prospects. We correctly identified the high probability of the slow down we are now experienc ing, in which, essentially, we are paying today for the very high growth rates of the past few years. We further con cluded -- and we feel more strongly about this now than ever -- that McDermott is still part of an interesting growth business. As a result of these studies it was obvious that we would be generating more cash in the short-term than we could put to work in our traditional business. Thus, management decided upon a principal strategy to broaden the Company's operating base. In last year's Annual Report, I commented that we believed attractive investment opportunities were going to develop in industries associ ated with power generation. Consumption of electricity in the United States and throughout the world has, for the past century, grown half again faster than either the economy or the demand for basic energy. We expect that the growth in demand for elec tricity will continue to grow considerably faster than the long-term growth rates of the United States economy and for energy consumption generally. Babcock Q Wilcox Makes a "Good Fit" These important strategic as sumptions were in our minds when we identified Babcock & Wilcox as a company that would fit well with McDermott. In 1S77, 52 percent of B & W's sales was to the elec tric utility industry. B & W has been a leader in the design and manufacture of steam generating and associated .. equipment. It is particularly strong in the field of coalfired boilers, which have significant growth potential in the immediate future. Dur ing the past year more than half the new orders for coalfired boiler systems in the United States were placed with B & W. It is also a leader in nuclear powered generators, so that B & W will benefit whether coal or the atom becomes the primary fuel source behind electric power growth. McDermott tradition ally has provided services to oil and gas companies need ing engineering, construction and installation of complex heavy steel platforms and pipelines to start producing energy from a newly discov ered offshore field. B & W provides services, in much the same manner, to utility companies needing the engi neering, manufacturing, construction and installation of complex heavy steel boiler systems to produce electricity. With the addition of B & W, McDermott has now become a provider of services to a wider range of energy companies. In short, your manage ment believes that B & W is a logical extension of the busi ness of J. Ray McDermott & Co., Inc. The companies are non-competitive with each other. They operate on differ ent cycles; the growth phase of one often offsets the con solidation phase of the other. There are numerous possibilities for constructive interaction between the two companies. Because both companies are capital inten sive, there is potential for the joint planning and coordina tion of capital allocations. B & W, with its more predict able and consistent earnings growth in the United States, will add stability to McDer mott's earnings from its tra ditional operations. And of great significance to both shareholders and employees, the combination will bring together two successful management teams that are highly qualified to capitalize on the many opportunities that lie ahead. We Have Plans for the Future We believe that we still have a long way to go in broadening the base of McDermott's operations and securing the consistent growth of earnings, in particular, we can identify other segments of the energy business which we believe have high growth potential and which we could profitably serve. Even after making the investment in B & W shares, our cash position and our balance sheet remain strong. We expect to continue to explore new opportunities to acquire profitable companies with solid positions in ex panding fields of operations that are compatible but non competitive with our own. We Have Realigned Management Responsibilities It is clear that we cannot expect to manage what is now a $3 billion enterprise in exactly the same manner that proved so effective in manag ing McDermott when, as re cently as four years ago, it had revenues of less than $500 million. We have under taken a carefully designed program, building on our past successes, io expand our capability to direct and con trol what has become a very large and complex worldwide network of operations. In order to facilitate our program of diversification, to deal with the rapid growth of our basic business, and to promote the mostefficient use of our human resources we have realigned our top management responsibilities. The key positions and recent changes are as follows: I will continue as Chair man of the Board and Chief Executive Officer. J. E. Cunningham, who has been Executive Vice Pres ident and Chief Financial and Administrative Officer, has been elected Vice Chairman -- Finance and Administration. Cunningham will also con tinue to direct the Company's strategic business planning, and diversification program. R. K. Richie, formerly President of Oceanic Contrac tors, Inc., our international operating subsidiary, has been named President and Chief Operating Officer of the traditional McDermott marine engineering and construction activities. George G. Zipf, former ly Chairman and President of A-Dccck & Wilcox, has been elected Vice Chairman, J. Ray McDermott & Co., Inc, and President and Chief Operat ing Officer of The Babcock & Wilcox Company subsidiary. Other Important Developments The affairs of our broadened enterprise will require con tinued astute direction. For this purpose the Board of Directors has been enlarged from 12 to 17. Elected to fill the new positions were Zipf; W. O. Baker, President of Beil Telephone Laboratories, Inc; R. J. Cantwell, Senior Exec utive Vice President of B & W; Waiter B. Shaw, Chairman and President of Turner Construction Company; and William L. Wearly, Chairman and Chief Exec utive Officer of IngersollRand Company; all of whom were members of the B5W Board. Messrs. Zipf and Shaw will serve as Directors until the 1978 Annual Meeting of Stockholders, Mr. Baker will serve until 1979, and Messrs. Cantwell and Wearly will serve until 1980. W. O. Baker, President of Bell Telephone Laboratories, inc., resigned from the Board of Directors because-of prior business commitments which did not permit him to attend scheduled Board Meetings. William T. Seawell, Chairman and Chief Executive Officer of Pan American World Airways, has been appointed to fill Mr. Baker's term. Another member elected to the Board at last year's Annual Meeting of Stockholders is John D. Ritchie. Mr. Ritchie, a con sultant, is former President and Chief Executive Officer of Asiatic Petroleum Corpor ation, a member company of the Royal Dutch/Shell Group. 1 regret to report the death in February of George D. Aldrich who had been a Director of the Company since it became publicly held in 1955. Mr. Aldrich in his long years of service as a Director contributed greatly to the growth of McDermott to its present international stature, and his sage counsel will be missed. This vacancy was filled by the election of John B. Tweedy, Executive Vice President and a Director of Tosco Corporation, to fill the unexpired term that ex tends until the!978 Annual Meeting. The Board at its Movember meeting autho rized a two-for-one stock split of the Common Stock of McDermott. The additional shares were distributed in January to stockholders of record on December 15. And for the fourth consecutive year, reflecting its enthusiasm for the prospects of growth, the Board voted a 25 percent increase in the regular quarterly Common Stock 5 --a. mass dividend to 25C per share from 20C per share. The total Common Stock cash dividend declared in fiscal 1978 was 90C per share as compared to 57.5c per share in fiscal 1977. The current annual cash divi dend rate is $1 per share. An important step en abling the merger with B & W to take place was the approval by McDermott stockholders at their special March meeting of the issuance of 6,317,545 shares of Series A $2.20 Cumulative Convertible Pre ferred Stock and the same number of shares of Series B $2.60 Cumulative Preferred Stock. Holders of B & W Common Stock as of the date of the merger received, for each B & W share, one share each of the two new McDer mott series Preferred Stock. Dividends on each of the two Preferred Stocks will be paid quarterly on the first day of January, April, July and October, commencing July 1, 1978. The Preferred Stocks, like the Common Stock, are traded on the Mew York Stock Exchange. The holder of a share of Preferred Stock of either series is entitled to one-half of a vote on matters coming before McDermott shareholders. A Word to Shareholders and Employees I want to take this opportunity to welcome our new McDer mott shareholders, and par ticularly those who ex changed B & W shares for our new preferred shares. We hope that this 1978 Annual Report will inform you about the activities and the pros pects of your new Company, whiie at the same time add to the knowledge of the tradi tional McDermott share holders about the operations and potential qrowth of B& W. I want also, on behalf of the Board, to express my appreciation to all employees of J. Ray McDermott, both old and new, for the spirit they have shown during the diffi cult and sometimes rather try ing days of the merger period through which we have just passed. 1 look forward to an extended period of growth as these 60,000 skilled, loyal men and women now move forward as one McDermott. C. L. GRAVES Chairman of the Board JMUBBg 6 J. Ray McDermott & Co., Inc. and Subsidiaries TheYear In Review i Operations of the enlarged J. Products and Services. From Ray McDermott <S Co., Inc., an operating point of view can now be categorized under fiscal 1978 was a year of four general headings, as growth for each of these shown in the chart below: segments and revenues from To connect a platform with the marine pipeline, McDermott installs a riser. Marine Construction Services; Steam Generating Equipment; Tubular Products; and Other each segment were at record high levels. PRO FORMA COMBINED REVENUES For Fiscal Year Ended March 31. 1978 ^$1,452 Billion U(45%) Of $3,216 Billion '.$1.116 Billion C.-: *(35%) ,, $418 $230%/.^ / Million Million^jfe (1396) (7%) * Steam Generating Equipment Marine Construction Services Tubular Products Other Products and Services i, i i i * i i 7 \  ; -.000-ton base section . :ne Cognac Structure was -oved from the McDermott joric3tion yard through the _ou:Siana bayous to its Gulf o; Mcmco launch site. After launch, the base section floated while derrick barges readied to begin controlled flooding that would lower the base to the sea floor 1.025 feet below. MARINE CONSTRUCTION SERVICES The Company's traditional expertise has been in the building of offshore fixed steel platforms and the laying of subsea pipelines, to be used for development drilling, production, and transporta tion of oil and gas. The plat forms, pinned to the ocean fioor by piling driven through their legs, are permanently in place, in contrast to the mobile floating and jack-up rigs that are used mainly for exploratory drilling. Since its beginning, building drilling rigs in the East Texas oilfields in 1923, McDermott has evolved into concentration of its efforts on work offshore, in marshlands and along the ocean shores. It now has eight fabrication yards around the world in which it assembles structural steel pipe and shapes into platforms, some as tall as the highest skyscrapers. The Company has 32 barges equipped with cranes, pipe laying facilities, pipe-burying jet sleds, or combinations of this equipment. It also has a large supporting fleet of work and supply vessels. The overall volume of the Company's Marine Con struction operations in fiscal 1978 was at a high level during the year. Sales were generally strong in the Gulf of Mexico but less so in other key offshore oil and gas provinces. 9 % One of McDermott's majoi fabrication vords is located on 1.300 acres at Morgan City. Louisiana. The United States McDermott has two principal rubrication yards in the United States. The larger is located o~ Savou Boeuf near Morgan C::v. Louisiana. The smaller is a: Harvey. Louisiana, just outside New Orleans. At Morgan City the Company has pipe-roliing facilities for' the production of largediameter, heavy walled pipe used in platform fabrication, and buildings where deck sections can be built under one roof, as well as a wide variety of heavy lifting equip ment and machine tools. McDermott's dredging operations are carried out all over the world. Both of these United States yards worked at highly satisfactory rates through fiscal 1978 and on into the spring and summer this year. The most notabie symbols of their activity have been giant sections of a platform being fabricated for the Cognac field in the Gulf of Mexico. These sections have grown and towered over the Bayou Boeuf Yard during most of the year. The Cognac platform, which McDermott is building in three stages, is being in stalled in more than 1,000 feet of water, a new world record depth for the installation of a fixed platform. When installed, Cognac will be taller than the Empire State Building. In offshore construc tion and in marine pipelaying, derrick and lay barges in the Gulf of Mexico maintained high utilization rates, close to the record levels of the pre vious year. A program important to McDermott because of its size and comprehensiveness has been the development of the High Island gas fields discov ered off the Texas coast. McDermott was awarded inte grated contracts which involved the fabrication and the installation of a series of platforms, and the laying of the network of interconnect ing pipelines to transport the gas to processing facilities on key platforms and to shore. Exploratory and in-field drilling off the Texas and Louisiana coasts continues at a high level of activity. The Federal Government this spring held another highly 10 r-' \ . .-r'l'iot: Shipyards, such as this one at Morgan City. Louisiana, Nbncaie large hoi sepo.ve; tun:, anc ^rsho;e - vessels. i j i-l i j successful round of lease sales in the Gulf. These de velopments give promise of continuing strength in the demand for platforms and pipelines4n this area. And, naturally, McDermott's engi neers are carefully watching the drilling reports from the East Coast where the first Baltimore Canyon wells will be approaching their objec tives this summer. Discovery of oil or gas so near to the high-energy-consumption industrial Northeast would bring a surge of demand for permanent drilling and production facilities and pipelines. McDermott is well prepared to help supply such a demand. The McDermott Ship yard Group, with yards at Morgan City and New Iberia, Louisiana, produced nine new tugboats and supply boats during the year for cus tomers with fleets operating from Hawaii to the North Sea. Modularized drilling rigs for platform use also comprise an important part of output. McDermott has developed advanced production meth ods for new classes of larger, more powerful vessels such as 3000-horsepower harbor tugs and 210-foot supply vessels. These designs have met with rapid acceptance from the nation's principal iugboat fleet operators and offshore supply contractors. A newly installed series of automated devices enable the shipmakers, for example, to cut patterns and shapes for parts from metal sheets using computerized machines that optimize the use of metal, re duce waste, and speed up the fabrication, assembly and welding processes. Because of the backlog of work on or der. an expansion is planned this summer at Morgan City for a third assembly building. 1 11 McDermott engineers must design structures to with stand the forces of wind and waves. The deck section of this platform is 95 feet above the normal water ievel of the North Sea. but still not above the waves' reach. t i I The North Sea At Ardersier, near Inverness in Scotland, McDermott owns and operates the most mod ern fabrication facility in the \ North Sea area. Its North Sea barge fieet is based in Ant werp. with a secondary operating port at Great Yar mouth, on the English East Coast. \ Development activity in the North Sea has slowed down. Exploratory drilling continues at a high level with * 55 mobile rigs at work this i spring, some 20 more than most observers had been forecasting a year ago. But the marginal size of most of the new discoveries, the impact of new governmental regulations and pressures, the recognition that oil is at least I temporarily in long supply in comparison to demand in i i 4 12 1 Europe, and the increased recognition of the costliness of full-scale production facili ties have led most companies to hesitate before committing their resources to the de velopment of new North Sea finds. Consequently, utiliza tion rates of the industry's off shore equipment in the North Sea have been lowered. A number of barges have been transferred to the Gulf of Mex ico or to other regions where more work appears to be avail able. McDermott has not been exempt from this industry wide trend. With the flow of North Sea oil approaching 1.5 million barrels per day, with the completion of an infra structure of pipelines with a capacity for interconnection with new fields, and with the steady succession of an nouncements of new discov eries, observers remain confident of a revival of de velopment activity in the North Sea over the next several years. The concrete platforms,,which some com panies installed in North Sea fields, have proved costlier to build and maintain than their promoters had anticipated. .McDermott wili be in a strong There are encouraging signs that activity is picking up. The Company has re cently been awarded a con tract for hook-up work for a platform in the Cormorant field. McDermott barges will be laying 42 miles of 18-inch pipe this summer connecting the Frigg field to the pipeline systems of the Piper and Tartan fields. When fabrication is complete, jackets are pulled from the shore onto launch barges. After being secured to the launch barge, jackets begin their sea-journey to the installation site that may be hundreds of mites away. 7c facilitate launch of (his 5:vjciur5 for 830-ft. water ceoth. after fabrication was completed it was cut ir naif. Each section was launched separately then rejoined as it f:cated off the southern California coast. 14 Middle East For its Middle East operations McDermott operates out of Dubai, United Arab Emirates, where it has a fabriation yard and an offshore base. New oil production from Alaska and the North Sea has tended to cut back OPEC production and tem porarily to increase the margin of spare production capacity in the Middle East. Consequently, the pressure is off most of the producing governments there to bring new production onto line. Demand for facilities has leveled off. but the Company continues to fabricate and install a variety of platforms and other equipment through out the region. In one important devel opment, McDermott late last year signed a S130 million contract to build extensive gas production and storage facilities in Dubai, both off shore and onsfcSgre. Work is underway on this "Dugas" program and Company teams have been leveling sand dunes where storage tanks will stand, stabilizing the desert surface, and doing foundation work. The pro gram involves, among other projects, the laying of one 60-mile, 16-inch pipeline as well as other shorter i'nes. Another project is McDermott's undertaking the laying of the shore ap proaches of the pipeline linking the Indian National Oil Company's steadily grow ing Bombay High field to shore facilities. Other International Regions Demand for marine construc tion in the rest of the world has been at relatively mod erate levels for the past year. With production levels cut back by a third in Nigeria, most of the work in the West African Region has involved fabrication of jackets anc other equipment at the Com pany's Warri Yard for tewing elsewhere along the African .JL After structures are pinned to the sea floor and their deck section secured in place, McDermott derrick barges will position the modules that include equipment and quarters facilities. coast. Work on a water-flood station, for example, was completed this spring and the equipment is scheduled to be towed to Cabinda during the summer. In Latin America, activity continues to-be strong off the coast of Brazil. The Company has transferred a barge from the Red Sea to Brazilian waters to install well protection jackets. Another developing center of activity is Trinidad and Tobago where the Com pany is laying a subsea gas pipeline which will enable the National Gas Board to supply energy to a developing indus trial district. In South East Asia.the Company completed the engineering for an eight-pile platform to be installed in 300 feet of water off the is land of Java, in Indonesia. Just as the fiscal year ended McDermott was awarded the contract for fabrication and installation of the platform, along with the installation of a single buoy mooring system and the laying of associated pipelines. In other parts of Indo nesia the Company laid a pipeline in the Java Sea and designed and built a crude oil loading facility on Sadawati Island off West Irian, the Indonesia portion of New Guinea. Another contract last year involved the laying of five miles of pipeline of vari ous sizes off Brunei and the fabrication and installation of four jackets. Although there was little growth in the market during fiscal 1978 and sharp competition, McDermott is poised and ready for an ex pected surge of development in Southeast Asia in the wake of the recent step-up of ex ploration activity. McDermott Crane Barge 14 installs an oil and water treat ment plant in the Ardjuna Field, Java Sea, Indonesia. STEAM GENERATING EQUIPMENT McDermott's newest acquisi tion, Babcock & Wilcox, has been building boilers to pro duce steam for 110 years. In 1882 four of the company's boilers produced the steam that powered the first com mercial electric generating plant in the world, the Pearl Street Station of the Edison Electric Illuminating Com pany in New York City. Much of B & W's history has been linked with the growth of the electric utility industry ever since. Boilers today have become highly complex, sc phi sweated --ecnanisms for producing steam efficiently. The small chamber in which steam is produced in a nu clear power plant, for instance, is a far cry from the traditional' concept of a boiler, with its large fire-box and tall smoke? stack. To describe this range of products, B & W employs the term "steam generating systems." Sales of steam generat ing products and services to the electric utility industry represent about half of B & W's total revenues. Suc cess in this field of operations must be measured not only by current revenues, but also by the volume of new orders received, which imply future revenues. Viewed from both perspectives, calendar 1977 (which was B & W's fiscal year prior to the merger) was a record-breaking year for those operations dealing in coai-fired boilers and their auxiliary equipment. In the field of nuclear power genera tion, B & W shared with the industry the effects of the current pause in the nation's -expansion of nuclear power. No new orders for nuclear steam generating systems were expected or received '.'during the year. More than a century of ex perience has given B&W an outstanding reputation in the building of fossil-fuel boilers. This steam drum being fab ricated at the Barberton. Ohio, plant will be part of one of these boiiers. 16 \ '% & Two 1,300-Megawatt BSW coal-fired boilers were in stalled at this major power generation plant at Cheshire. Ohio. Fossil-Fueled Power Generating Equipment B & W has long been the recognized industry leader in the design and manufacture of boiler systems for use with fossil fuels -- oil, gas and coal. B & W's plants involved in the making, assembling and construction of fossilfueled steam generating equipment, are located in Ohio, Georgia, Texas, Missis sippi, North Carolina, and a number of foreign locations. During the 1950's and 1960's the utility industry in the United States significantly increased its dependence on oil and gas, and the bulk of B & W's orders were for boilers fired by those versatile -- and, in that era, low-cost -- fuels. The oil embargo of 1973-74 and the steep in crease that followed in the world price of oil sharply altered the economics of power generation, as well as the rules and regulations established by Federal and State authorities. Today, coal has once again become the predomi nant choice of utilities adding new facilities. Furthermore, many utilties and many com panies in other industries are under constraints requiring them to "retrofit" their boilers so that they will be able to substitute coal as a fuel for the gas and oil for which the boilers were originally de signed. Fortunately for B & W, it had through earlier lean years maintained and ex panded its coal technology so that it was ready to step in and meet the need of utili ties for efficient coal-fired steam generating systems. B 5 W engineers had also developed the types of hightechnology pollution control equipment that are now a necessary supplement to the burning of coal. The years immediately following the world increase in the price of oil were un settled ones for the utility industry, as the nation for the first time in a century tempered its voracious thirst for electricity. Particularly in 1974 and 1975, companies in i i i i The Division continued work on contracts obtained in earlier years. Two nuclear units built by B & W were started up in 1977, one in Florida and one in Ohio. i i B & W Canada is the leading suppiier'of nuciear steam generators to Ontario Hydro, Canada's largest utility. Current contracts in B & W also established its from comparable tubing and clude 80 steam boiler systems own steel mill in Beaver shapes made from high- for Hydro reactors. The first Falls, Pennsylvania, to make quality stainless, alloy and nuclear steam boiler systems sure of supplies of quality carbon steel. B & W is now manufactured by B & W steel. From this base the a major supplier of specialty Canada to be utilized in South Tubular Products Division tubing for deep oil and gas America were shipped during expanded into other specialty wells, as well as a supplier the year to a power station in Argentina. markets for products made to the automotive, bearing and heavy machinery indus JI The Nuclear Equip tries. ment Division, which supplies The year 1977 was components for the nuclear marked by the opening of Navy, booked a major share operations at B & W's modern of available naval business new tubing mill at Ambridge, during the year. The Naval Pennsylvania. The first new Nuclear Fuel Division also achieved record results. mill in the industry in many years, it was built at a cost of more than $60 million. i !i i TUBULAR PRODUCTS B & \V originally began manufacturing tubing in order to assure for its boiler manu facturing operation a supply of heat-resistant, pressureresistant tubes so necessary i to the functioning of a boiler. Replacement and moderniza tion of major components in one of B & W's two seamless tube mills in Milwaukee, Wis consin, and modernization of facilities at the welded tube plant in Alliance, Ohio, are now under way. The S60 million Ambridge, t Pennsylvania, mill produces oil well and other specialty tubing. 21 Our ceramic fiber. Kaowool', insulation is an important energy saver in heat treating furnaces, chemical process and refinery heating units, as '.veil as a variety of consumer products. I* Our steei mill at Koppei, Pennsyl vania. provides the basic material for the Tubular Products Division. Although shipments by the division were higher than they had been in 1976, earn ings were lower. The reason was a combination of a less favorable product mix and generally depressed prices. While costs keep rising, tubing is subject to severe price competition from im ports, in the same manner as much of the rest of the steel industry. Results for the division improved, however, as 1977 went along. OTHER PRODUCTS AMD SERVICES Onshore Construction Services and Products The Company is engaged in the engineering and construction of processing plants for the oil, gas.chem- Automated Machine Division's automatically-controlled transfer lines are key production tools for the automotive industry. Automated Machinery ical and mineral industries, Among the wide variety of principally in the United equipment produced by States. A major project com B & W's Automated Machine pleted in fiscal 1978 was the Division are precision boring construction of a petrochemi machines, broaching ma cal plant on the Houston Ship chines and broaches, large Channel. A new major project grinders, cutting tools, spe involves the modernization of cialized lathes and numerical an oil refinery near Mew control machines. All are Orleans to increase its pro designed for use in manu duction of lead-free gasoline. facturing processes, and Hudson Products Com pany manufactures heat exchangers at a facility in most notably in highly engi neered, multi-station produc tion lines. Beasley, Texas. High export The strong bookings shipments during fiscal 1978 produced a volume of reve nues second only to the record 1977 year. A new Refractories The Refractories Division of B & W manufactures products achieved by the division in 1977 are expected to continue at a high level for 1978. This is primarily the result of the round of orders from the for use in high-temperature continuing re-design of auto Middle East is maintaining furnaces and in other process mobiles to meet new emis k . operations at a satisfactory equipment in which demand sion and styling standards. : level. ing rates of combustion or of chemical reactions are in volved. The continuing world wide pressure on industry to ii. i conserve energy has in v creased the demand for the division's insulating materials and heat resistant products. Shipments of insulating fire brick, firebrick, and koalin day were at high levels during the year. Sales of Kaowool, a ceramic fiber developed by B & W, have been particularly strong. Designed to solve noise, vibration and erosion prob *s<*- lems. Control Components valves are widely used in high velocity fluid transmission. & 23 t Management's Discussion and Analysis of the Consolidated Statement of Income 1978 VERSUS 1977 Revenues for the fiscal year ended March 31, 1978 increased $69,870,000 (6%) as compared to the fiscal year ended March 31, 1977. This increase marks the culmination of five years of extraordinary growth of world wide hydrocarbon development in offshore areas, peaking in the third quarter of this fiscal year. Compared with the prior fiscal year, domestic revenues in creased to an all-time high, while foreign revenues de creased. Costs and expenses (including depreciation and selling, general and adminis trative expenses) for the fiscal year ended March 31, 1978 were 85% of revenues as com pared to 79% for the fiscal year ended March 31, 1577. This increase was attributable to lower utilization of Company- Market Price of Common Stock The Common Stock of the Company is listed on the New York Stock Exchange (symbol: MDE). The following table shows theTeported high and low sales price of these securities on a quarterly basis in fiscal years ended March 31, 1978 and 1977 and reflect the two-for-one stock split of December 15, 1977. FISCAL 1978 Hiah Low First Quarter Ended June 30, 1977.......... .........29% 25% Second Quarter Ended Sept. 30, 1977 ......... .........29% 22% Third Quarter Ended Dec. 31, 1977 ........... .........29% 22% Fourth Quarter Ended March 31, 1978 .... .........28% 21% FISCAL 1977 Hiah Low 26% 21% 27% 22% 26% 22% 25% 21% operated equipment, particularly in the North Sea, South East Asia and West Africa areas, resulting from a slowdown in offshore activity and increased competition in our foreign markets. Interest income has increased S12.300.000 (56%), consistent with changes in interest bearing investments, as well as interest rates thereon, prevailing in the respective periods. Interest expense has increased S 10.730,000 (66%). principally as a result of the additional borrowings related to the investment in The Babcock & Wilcox Company (B&W). The increase in equity in earnings of affiliated companies in the current fiscal year is principally attributable to the Company's share of the earnings of B&W. The Company increased its investment to approximately 49% of B&W in September 1977, and its share of B&W's earnings has been accounted for on the equity method through March 31, 1978, at which time McDer mott acquired the remaining interest in B&W. The Company has recorded its equity in the earnings of B&W as other income (expense) -- equity in earnings of affiliated companies in the amount of S20,364,000. Other income increased by $17,111,000 for the fiscal year ended March 31, 1978 over the fiscal year ended March 31, 1977. The principal reason for this increase is a net gain on foreign currency exchange trans lation of S12^74,000. Among items making up the remaining increase were workmen's com- 24 \ pensation premium adjustments, gains and losses on disposal, royalty income, bad debt recoveries and inventory adjust ments. Domestic operations accounted for a greater propor tion of income before provision for income taxes during the current fiscal year than was the case in the prior fiscal year. United States investment tax. credits for the current fiscai year are iess than those for the prior fiscal year. Also, a greater proportion of income before taxes attributable to foreign operations is currently being generated in geopolitical areas subject to higher tax rates. Addi tionally, an income tax holiday applicable in the prior fiscal year was not applicable in the current fiscal year. These com bined factors increased the effective income tax rate for the fiscal year ended March 31,1978 to 34% as compared to 27% for the fiscal year ended March 31, 1977, producing provisions for income taxes of $80,995,000 and 570,116,000 respectively. Met income after taxes was increased for the fiscal year ending March 31, 1977 by an extraordinary item of $132,000 resulting from utilization of foreign tax benefits from an operating loss carryforward. There were no extraordinary items in the current fiscal year. 1977 VERSUS 1976 Revenues remained at a high level during 1977, increasing ' 1.0% over the prior year. Operating'income was maintained at a corresponding level, increasing 12.7% over 1976. It is obvious from this that the Company was able to maintain its gross profit margins despite increases in costs of operations, depreciation and selling, general and adminis trative expenses. Depreciation expense increased to 5.1%. of sales for 1977 versus 4.8% of sales for 1976. Similary, selling, general and administrative expenses increased as a percent of income from operations to 8.1% in 1977 versus 7.0% in 1976. The in crease in depreciation represents the recognition in 1977 of a full year's amortization of equipment cost which came into use during the 1976 year. The percentage increase in selling, general and administrative expense is prin cipally due to the expenditure of $1.9 million in connection with the SEC special investigation and $2.3 million of increased research and development expense. Other net income in 1977 was $10.6 million greater than in 1976. The reasons for such increase were due principally from greater interest income earned on a larger investment base, as well as decreased interest expense incurred on a reduced debt levei. While income from equity in earnings of affili ated companies increased and losses arising out of currency translations decreased, minority interests' share in net loss (income) of subsidiaries in creased. Investment tax credits in 1977 were $4.9 million less than in 1976. However, net taxes were at a lower effective rate in 1977 versus 1976 due to the variety of taxation applicable to the Com pany's operations in a multitude of geographic areas of the world. Met income after taxes in 1977 and 1976 was increased by an extraordinary item of $0.1 and $4.9 millions, respectively, resulting from utilization of foreign tax benefit from an operating loss carryforward. Dividends The Company has declared a quarterly dividend for 93 con secutive quarters. A quarterly comparison of dividends declared in fiscal years ended March 31,1978 and 1977 on a per-share basis, and reflecting the two-for-one stock split of December 15, 1977, is as follows: FISCAL FISCAL 1978 1977 First Quarter Ended June 30, 1977............... $ .20 $ .125 Second Quarter Ended Sept. 30, 1977 ...................20 .125 Third Quarter Ended Dec. 31, 1977.......... .25 .125 Fourth Quarter Ended March 31, 1978......... .25 $ .90 .200 $ .575 25 J. Ray McDermott & Co., Inc and Subsidiaries Ten Year Summary of Operations in Thousands of Dollars Except Shares and Per Share Amounts FOR THE FISCAL YEARS ENDED MARCH 31, 1978 Revenues .............................................................................. Cost and expenses.............................................................. 1,293,711 1.095.943 Operating income............................................................... Other income (expense): interest expense............................................................... Other................................................................................. 197,768 (26,887) 69.206 income before provision for income taxes....................... Provision for income taxes................................................ 240,087 80.995 Income before extraordinary items and cumulative effect of accounting change....................... Extraordinary items (net of taxes on income).................. Cumulative effect of accounting change (net of taxes on income)................................................. 159,092 - Net income........................................................................... ....S 159.092 1977 S 1,223.841 964.210 259,631 (16,157) 18.152 261,626 70.116 191,510 132 5 191.642 1976 S 1.102,078 871.797 230,281 (22.067) 13.4S7 221,701 66.427 155,274 4,910 S 160.184 Earnings per common share: Primary earnings: Before extraordinary items and cumulative effect of accounting change...................................... Extraordinary items (net of taxes on income)............ Cumulative effect of accounting change (net of taxes on income)........................................... Net income.................................................................... Fully diluted earnings: Before extraordinary items and cumulative effect of accounting change...................................... Extraordinary items (net of taxes on income)............ Cumulative effect of accounting change (net of taxes on income)........................................... Net income.................................................................... ....S 5.02 $ -- 5.02 $ 4.92 S -- 4.92 $ 6.11 s -- 6.11 s 5.93 s -- 5.93 5 4.97 .16 5.13 4.80 .15 4.95 Cash dividends: Per common share........................................................... .90 Total amount.................................................................... 28,571 Average number of common shares outstanding............ ___ 31,670,923 Stockholders' equity per common share at March 31----- ....$ 26.15 $ .575 18,038 31,342,492 S 22.12 5 .425 13,283 31,247,192 N 16.54 26 1975 , 742,825 649.543 93,282 (15.972) 13.354 90.664 14.217 76,447 - $ 76,447 1974 S 425,756 379,339 46,417 (8,679) 9,461 47,199 12.178 35,021 - (3,023) S 31.998 1973 5 358,399 331.145 27,254 (5,974) 8,179 29,459 12,554 16,905 270 __ 17,175 1972 $ 321,509 313.949 7,560 (4.146) 6.867 10,281 2.128 8,153 10,962 $ 19.115 1971 5 238,158 231.052 7,106 (3,888) 4.762 7,980 1.188 6,792 -- _ S 6.792 1970 S 284,547 259,234 25,313 (3,842) 3,409 24,880 8.801 16,079 8,109 -- S 24.188 1969 $ 194,928 163.906 31,022 (1,943) 2.418 31,497 6.417 25,080 1,106 -- 26.186 5 2.47 5 1.26 $ -- (.11) 3 2.47 S 1.15 .63 $ .01 .64 $ .30 . -41 $ .71 $ .25 -- -- .25 S .61 $ .31 -- .92 5 1.00 .04 -- 1.04 5 2.39 5 - 3 2.39 1.13 -- $ (.09) 1.04 $ .61 $ .01 _ .62 $ .30 $ .41 -- .71 $ .25 $ -- -- .25 .61 $ .31 -- .92 $ 1.00 .04 -- 1.04 5 .30 . 9,289 30,891,736 5 11.79 S .2625 7,380 27.852.508 S 9.74 S .25 6,733 26,928,184 $ 7.66 .25 6,724 26,884,332 $ 7.22 $ .25 6,715 26,859,712 $ 6.75 $ .25 6,604 26,404,928 6.91 .25 6,289 25.068,844 $ 6.35 > Ij V, . 1fc . ; St 1 1 .i 1 1 *i i 1 ;i 27 Revenues and Operating Income by Lines of Business The Company's revenues and operating income for the last five fiscal years for its Marine Construction Services and for Onshore Construction Services were as follows: ftCIES ______________________ Fiscal Year Ended March 31, On thousands of dollars) 1978 1977 1976 1975 Marine Construction Services.............. ...$1,116,119 Onshore Construction Services..................... ... 177.592 $1,089,455 134.386 $1,010,105 91.973 $ 684,309 58.516 TOTAL................... ...$1,293,711 $1,223,841 $1,102,078 $ 742.825 1974 $ 379,311 46.445 s 425.756 PERCENT OF REVENUES Marine Construction Services..................... Onshore Construction Services..................... TOTAI.... .............. 1978 86% 14% 100% Fiscal Year Ended March 31. 1977 1976 1975 89% 92% 92% 11% 100% 8% 100% 8% 100% 1974 89% 11% 100% OPERATING INCOME 1978 Fiscal Year Ended March 31. (In thousands of dollars) 1977 1976 1975 Marine Construction Services.............. ...$ 205,559 $ 247,644 $ 219,752 $ 95,893 Onshore Construction Services.............. 15.364. TOTAL......... _-.-$^220,923'^' r- 00 o> 1 259.631 10.529 $ 230.281 f2.6l 1) $ 93.282 1974 s 44,966 1.451 $ 46.417 PERCENT OF OPERATING INCOME Marine Construction Services.............. Onshore Construction Services.............. TOTAL............. 1978 93% 100% Fiscal Year Ended March 31.________ 1977 1976 1975 95% 5% 100% 95% 5% 100% 100% 100% 1974 97% 3% 100% For the current fiscal year, Marine Construction Services and Onshore Construction Services have been determined on a basis different than in prior years to conform with FASB 14 on Segment Reporting, and operating income is before allocation of general corporate expenses of $23,155,000. For the prior years, Onshore Construction Services consisted of amounts at tributable principally to Hudson Engineering Corporation and its subsidiaries, and Marine Construction Services represented all other. Operating Income for these prior years was after allocation of general corporate expenses. 28 Revenues ______ ` 743 426 1974 1975 1,102 1,224 S MILLIONS -----------1500 1,294 - 1200 - 900 - 600 -300 1976 1977 1978 _ Operating income s millions 300 ----------- 259.6 230.3 240 197.8 - 180 933 46.4 . 1974 1975 . 1976 ** 1977'"' '"l978_ 120 60 0 Primary* Earnings Per Common Share $ dollars Capital Expenditures & Depreciation 151.1 $ MILLIONS ----------- 175 Excludes Extraordinary income. Adjusted for two-for-one stock splits. S3 Capital Expenditures SS Depreciation Book Value Per Common Share* 16.54 s dollars "26715"'-- 25 22.12 20 i ' ,C Total Capitalization $ MILLIONS 2000 1,710.8 T,23l'.;4l-1600 861.5 120C vJwi'.'L. 800 i;4-J-400 1974 1975 1976 1977 Adjusted (or two-for-one stock splits. 1978 13 Long Term Debt TiHi Stockholders' Equity 29 Reports of Certified Public Accountants The Board of Directors and Stockholders J. Ray McDermott & Co., Inc. We have examined the accompanying consoli dated balance sheet of J. Ray McDermott & Co., Inc. and subsidiaries at March 31, 1S78 and the related consolidated statements of.income and retained earnings and changes in financial position for the year then ended. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The financial statements of J. Ray McDermott Q Co., Inc. and subsidiaries for the year ended March 31, 1977 were examined by other auditors whose opinion, as reissued and dated May 31, 1977 and Novem ber 10, 1977, was, qualified as being subject to the effects of such adjustments, if any, as might have been required had the outcome of the grand jury investigation discussed in Note 8 to the financial statements been known. As discussed in Note 8 to the financial statements, the Company is the subject of a grand jury investi gation which appears to be focused on possible antitrust violations. The ultimate outcome of this investigation is not presently known, and no provision for liability, if any, that might result from such investigation has been made in the financial statements. In our opinion, subject to the effects, if any, on the financial statements of the ultimate resolution of the matter discussed in the preceding paragraph, the statements mentioned above present fairly the consolidated financial position of J. Ray McDermott & Co., Inc. and subsidiaries at March 31, 1978 and the consolidated results of operations and changes in consolidated financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. To the Shareholders and Board of Directors of J. Ray McDermott & Co., Inc. We have examined the consolidated balance sheet of J. Ray McDermott & Co., Inc. and subsidiaries as of March 31, 1977 and the related consolidated statements of income and retained earnings and changes in financial position for the year then ended. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As more fully described in the first paragraph of Note 8 to the Consolidated Financial Statements. J. Ray McDermott & Co., Inc. is the subject of a grand jury investigation which appears to be focused on possible antitrust violations. Since the outcome of this investigation is not presently known, no provision for liability, if any, which may result has. been made in the financial statements. In our opinion, subject to the effects, if any, of the ultimate resolution of the matter discussed in the preceding paragraph, the accompanying consoli dated financial statements referred to above present fairly the financial position of J. Ray McDermott & Co., Inc. and subsidiaries at March 31, 1977 and the results of their operations and changes in their financial position for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Houston, Texas May 31, 1977 except as to the first paragraph of Note 8 as to which the date is November 10. 1977. New Orleans, Louisiana May 31, 1978 30 r J. Ray McDermott & Co., Inc and Subsidiaries Consolidated Statement of Income and Retained Earnings for the Fiscal Years Ended March 31, 1978 and 1977 1978 1977 (In thousands of dollars except per share amounts) Revenues.................................................................................................................. $1,293,711 SI.223,841 Costs and Expenses: Cost of operations................................................................................................... 901,696 Depreciation.............................................................................................................. 67,342 Selling, general and administrative expenses........................................................ 126,905 1,095,943 Operating Income................................................................................................ 197,768 793,928 63,004 107,278 964,210 259,631 Other Income (Expense): interest income......................................................................................................... Interest expense....................................................................................................... Equity in earnings of affiliated companies--B&W (Mote 2).................................. -Other.................................................. Other.......................................................................................................................... 34,124 (26,887) 20,364 3,554 11,164 42,319 Income Before Provision for Income Taxes and Extraordinary Gain.................... 240,087 21,824 (16,157) -- 2,275 (5,947) 1,995 261,626 Provision for Income Taxes (Note 6): Current...................................................................................................................... Deferred.................................................................................................................... 68,290 12.705 80,995 Income Before Extraordinary Gain.......................................................................... 159,092 51,544 18,572 70,116 191,510 Extraordinary Gain (Foreign tax benefit from operating loss carryforward)............................................................................. -- 132 Net Income................................................................................................................................. 159,092 191,642 Retained Earnings, Beginning of Year............................................................................ 553,832 Deduct: Cash dividends ($0.90 in 1978 and S0.575 in 1977, per share).............................. 28,571 380,228 18,038 Retained Earnings, End of Year (Note 7)....................................................................... Earnings Per Common Share: Primary......................................................................................................................... Fully diluted........................................................................................................................ $5.02 $4.92 6.11 $5.93 See accompanying notes to consolidated financial statements 31 J. Ray McDermott & Co., Inc. and Subsidiaries Consolidated Balance Sheet March 31, 1978 and 1977 ASSETS 1978 - I977 (In thousands of dollars) Current Assets: Cash.......................................................................................................................................S Temporary investments, at cost which approximates market................................................................................................... Accounts and notes receivable (Note 3)..................................................................... Marketable securities, at cost (market S17,056 in 1978 and.$14,277 in 1977)................................................... Contracts in progress (Mote 3)...................................................................................... lnventories(Mote 4).......................................................................................................... Prepaid expenses.............................................................................................................. 22,842 595,150 535.281 9,231 324,126 332,030 12.354 S 5,231 527,291 257,652 9,231 32,250 50,969 5,789 Total Current Assets............................................................................................. 1,831,014 888,413 Investments in Affiliated Companies, at Equity...................................................................................................... 18,689 Property, Plant and Equipment, at Cost: Land...................................................................................................................................... Buildings.............................................................................................................................. Machinery and equipment.............................................................................................. Property under construction.......................................................................................... 36,077 174,390 931,226 97,114 1,238,807 Less accumulated depreciation and amortization.................................................... Met Property, Plant and Equipment.......................................................................... 347,226 891.581 1 1,912 11,544 57,582 664,223 21,440 754,789 288,640 466.149 Excess of Cost Over Fair Value of Net Assets of Purchased Businesses less Amortization (Mote 2)............................... 403,320 Other Assets.......................................................................................................................... -38,203 6,252 3,2?9 Total......................................................................... ................................................$3,182.807 SI .376.005 See accompanying notes to consolidated financial statements 32 LIABILITIES AMD STOCKHOLDERS' EQUITY 1978 1977 Current Liabilities: (In thousands of dollars) Motes payable to banks and current maturities of long-term debt (Note 7)..............................................................$ 12,108 $ 2,328 Accounts payable.................................................................................................. 255,534 60,149 Accrued liabilities.................................................................................................. Advance billings on contracts (Note 3)............................................................... Provision for warranty expense............................................................................ 256,744 278,530 79,390 93,705 173,991 -- (IS. and foreign income taxes............................................................................. 425,739 Dividends payable................................................................................................ 7.999 89,006 6.289 Total Current Liablities.............................................................................. 1.316.044 425.468 Deferred Income Taxes........................................................................................... 68.050 57,586 Long-Term Debt (Note 7)....................................................................................... 479,432 . 166.078 Other Liabilities....................................................................................................... 87.842 31.431 Contingencies and Commitments (Note 8) Stockholders' Equity (Note 9): Preferred stock..................................................................................................... Common stock..................................................................................................... Capital in excess of par value............................................................................... Retained earnings (Notes 6 and 7)...................................................................... 394,847 32,307 129,505 684,353 1,241,012 Less: Cost of common stock in treasury............................................................. Unamortized deferred career executive stock plan expense................... 2,681 6.892 Total Stockholders'Equity...................................................................... 1,231.439 -- 15,878 136,762 553,832 706,472 2,517 6,513 695,442 Total $3,182.807 $1,376.005 '| ;i >< 'i 33 r J Ray McDermott & Co., Inc. and Subsidiaries Consolidated Statement of Changes in Financial Position for the Fiscal Years Ended March 31, 1978 and 1977 Source of Funds: 1978 1977 (In thousands of dollars) Operations: Income before extraordinary gain................................................................................ S 159,092 Charges not requiring current outlays of working capita!: Depreciation of property, plant and equipment.................................................... Deferred income taxes --noncurrent........................................................................ Equity in earnings of affiliated companies............................................................. Other................................................................................................................................ 67,342 10,464 (23,918) 14,440 Working capital provided from operations exclusive of extraordinary gain . . - 227,420 Extraordinary gain........................................................................................................... issuance of common stock............................................................................................ issuance of preferred stock............................................................................................ Noncurrent liabilities of B&W, principally long-term debt..................................... -- 9,172 394,847 190,610 Long-term borrowing (including fluctuations under the revolving credit agreement)............................................................................... Other--net.......................................................................................................................... 275.000 3.563 1.100.612 $191.510 63,004 21,812 (2,275) 12.680 286.731 132 2,833 -- -- 23,522 (956) 312.262 Application of Funds: Noncurrent assets of B&W: Property, plant and equipr Investments....................... Other assets...................... Additions to property, plant and equipment........................ Payments of long-term debt (including fluctuation under the revolving credit agreement)......................................... Cash dividends............................................................................ 410,412 2,390 34,890 (21,017) 399,764 84,975 108,602 28.571 1.048.587 $ 52.025 -- -- -- -- 63,657 26,704 18.038 108.399 $203,863 Changes in components of working capital: Increase (decrease) in current assets: Prepaid expenses.................................... Increase (decrease) in current liabilities: Notes and accounts payable and accru Advance billings on contracts............... Provision for warranty expense............ Accrued income taxes............................ Dividends payable................................... 5 85,470 277.629 291,876 281,061 6.565 942.601 S315.126 (28,368) (6,246) (26,035) (59) 252.418 368.204 104.539 79.390 336,733 1.710 890.576 & 52.025 (766) 21,664 -- 25,279 2.378 48.555 $203,863 4 See accompanying notes to consolidated financial statements < 34 i J. Ray McDermott & Co., Inc and Subsidiaries Notes to Consolidated Financial Statements MARCH 31, 1978 and 1977 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of the Company and all significant subsidiaries. The assets and liabilities of B G W have been consolidated with the Company's at March 31, 1978. The Company's share of B G W's earnings for 1978 is reflected on an equity basis in the consolidated statement of income. Investments in affiliated (20% to 50% owned) companies are accounted for on the equity method. All significant intercompany transactions and accounts have been eliminated. Certain amounts previously reported in the consolidated financial statements of March 31,1977 have been reclassified to conform with the presentation at March 31, 1978. Marine and OnshoreConstruction Contracts Revenues from marine and onshore construction contracts are generally recognized as contractual obli gations are completed. Revenues are recognized on certain contracts containing identifiable separate projects when such projects are completed and accepted by the customer. Revenues from time or day rate basis contracts are recognized as earned. General and administrative costs are included in contract costs. Contract costs in excess of related billings are classified as current assets under contracts in progress. Bill ings in excess of related costs are classified as current liabilities under advance billings on contracts. Current provisions are made for all known or anticipated losses on contracts which have not been completed. Foreign Currency Translation The accounts of foreign subsidiaries maintained in foreign currencies are translated into (IS. Dollars based on current exchange rates at the end of the fiscal year for assets and liabilities except for inventories, prepaid expenses, property, plant and equipment, and stockholders' equity for which historical exchange rates are used. Average exchange rates prevailing during the fiscal years are used for revenues and expenses other than depreciation and prepaid expenses. Exchange gains and losses are recognized in the year of occurrence. Included in other income are gains of 53,460,000 for the fiscal year ended March 31, 1978 and losses of $8,914,000 for the fiscal year ended March 31, 1977. Depreciation, Maintenance and Repairs Property, plant and equipment is depreciated by the straight line method, using estimated useful lives of 8 to 30 years for buildings and 2 to 20 years for machinery and equipment Maintenance, repairs and renewals which do not materially prolong the useful life of an asset, are expensed as incurred except for drydocking costs for the Company's marine fleet. Under the accounting method for accrual of drydocking costs, estimated costs are provided and charged to operations currently. When expenditures are made for these costs, the reserve for drydocking is charged with the amounts paid. Gains or losses on disposition of property, plant and equipment are included in income as realized. Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses The excess of the Company's investment in B G W over the fair value of net assetsacquired is being amort ized on a straight line basis over forty years. Excess cost arising from business combinations prior to 1971 is not being amortized because, in the opinion of management, there has been no diminution in value. Earnings Per Share Primary earnings per share are based on the weighted average number of common shares outstanding during the year. Fully diluted earnings per share are computed assuming the conversion of the convertible subordinated debentures. All per share data have been restated to give effect to the two-for-one common stock split effective December 15, 1977. 35 B Cr W contract revenues and related costs are recognized principally by a percentage of completion method related principally to physical shipments and direct labor or cost incurred, as applicable to the product or the activity involved. Revenues so recorded are included in unbilled revenues until invoiced to customers under terms of the contracts. Costs of contract revenues on uncompleted contracts are based upon esti mates to complete. Revisions to contract price and cost estimates are recognized in the period in which they are determined. Unbilled revenues on contracts include $39,000,000 not expected to be collected until after one year, included in accounts and notes receivable are amounts representing retainages on contracts as follows: 1978 1977 (in thousands of dollars) Retainages........................................................................................................................ S31,839 $20.78 Retainages not expected to be collected until after one year.........................................$ 2,015 $ -- NOTE 4 - INVENTORIES inventories are valued at the lower of cost or market. Cost is determined on an average cost basis for raw materials and supplies except for certain domestic and foreign construction materials inventories, for which the last-in, first-out (LIFO) method is used. Work in progress and the majority of finished goods inventories were acquired in connection with the acquisition of B & W and are stated at fair market value at the date thereof. Approximately 11% and 63% of total inventories were valued using the LIFO method at March 31, 1978 and 1977, respectively. Consolidated inventories at March 31,1978 and 1977 are summarized below: 1978 1977 Raw Materials and Supplies Work in Progress.............. Finished Goods................. (In thousands of dollars) $179,631 104,365 48.034 $41,592 9.377 $332.030 $50.969 inventories used in the computation of costs and expenses were $54,920,000, $50,969,000 and $77,004,000 at March 31,1978, 1977 and 1976, respectively. NOTE 5 - PENSION AND SUPPLEMENTAL COMPENSATION PLANS Pension Plans -- The Company has several pension plans covering substantially all employees except non resident alien employees of foreign subsidiaries who do not earn income in the United States. Unfunded prior service costs based on the latest actuarial valuation was approximately $275,000,000 including amounts attributable to B Q W pension plans. The Company's poiicy has been to fund pension costaccrued. The total value of the pension funds and balance sheet accruals less deferred charges was in excess of the actuarially computed value of vested benefits for all plans. Total pension expense included in costs and expenses was $8,709,000 in fiscal 1978 and $8,061,000 in fiscal 1977, and includes amortization of prior service costs over thirty years. Supplemental Compensation Plan -- The Company accrues annually an amount equal to 4% of the amount by which consolidated income (as defined in the plan) exceeds an amount equal to 10% of capital employed in the business (as defined in the plan) from which supplemental compensation awards may be made to eligible managerial and other key employees. The aggregate amount of an award may not exceed 50% of the recipient's aggregate compensation for the year for which the award is made. Awards are payable in equal amounts over a five year period. Amounts charged to income under the plan amounted to $6,919,000 and $8,637,000 in 1978 and 1977, respectively. 37 r n NOTE 8 - CONTINGENCIES AND COMMITMENTS Anti-Trust Investigation -- In December 1976, the Company, among others, received a grand jury subpoena to produce certain documents pertaining to its domestic offshore pipeline and domestic structure, fabrications and installation activities during the period from January 1, 1968 to the date of the subpoena. The grand jury's investigation appeared to be focused on possible antitrust violations, including possible price fixing and collusive bidding during the period covered by the subpoena. It now appears that the grand jury's investigation has been expanded to include foreign activities, and that it encompasses a substantial portion of the Company's activities. In connection with the investigation, substantial document production has been made and a number of individuals has been interviewed and called to testify, some, including past and present officers and employees of the Company, under grant of immunity from prose cution. As a result of the investigation, criminal or civii proceedings may be brought against the Company, which is a target of the investigation, or against certain of its present or former officers and employees, some of whom are also targets of the investigation. The institution of any such action by the government could lead to private antitrust treble damage actions, which could have a material adverse effect upon the Company. Litigation -- The Company and certain of its officers, directors and subsidiaries are defendants in several legal proceedings claiming amounts significant in the aggregate, alleging, among other things, violations of federal securities laws In the acquisition of B & W. it is the opinion of management and of general counsel that the outcome of these litigations will not materially affect the financial position or operations of the Company. During 1978, the Company entered into a settlement with respect to charges brought by the government arising out of a special investigation into questionable payments and accounting practices. Pursuant to the settlement, the Company paid $1,000,000 in fines and penalties. Operating Leases -- The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining noncancellabie iease terms in excess of one year at March 31, 1978: Years ending March 31: 1979 1980 1981 1982 1983 After 1984 Total minimum payments required (In thousands of dollars) $15,246 9,773 6,963 5.309 4,354 13.142 S54.7S7 Total rental expense attributable to operating leases for fiscal 1978 and 1977, was $84,619,000 and $71,793,000, respectively. These expense figures include contingent rentals and are net of sublease income, both of which are not material. Firm and contemplated commitments for capital expenditures amounted to $162,000,000 at March 31, 1978. NOTE 9 - CAPITAL STOCK Preferred Stock -- At March 31, 1978, 25,000,000 shares of $1 par value preferred stock were authorized, 6,600,000 shares were designated Series A $2.20 Cumulative Convertible Preferred Stock and 6.600,000 shares were designated Series B $2.60 Cumulative Preferred Stock. Each series had 6,317,545 shares issued and outstanding and is entitled to $31.25 per share in liquidation. The outstanding shares were issued in connection with the acquisition of B & W and are stated at the mandatory redemption value which approximated market value of the shares issued. Both series of preferred stock are entitled to general voting rights of one-half vote for each share. The Board of Directors may authorize additional series of preferred stock and may set the terms of each new series except that the Company cannot create any series of stock senior to the existing Series A and Series B Preferred Stock without the consent of the holders of at least 50% of the shares of such preferred stock. 40 Career Executive Stock Plan -- The plan, which was adopted in 1974, authorized 600,000 shares of common stock to be issued to eligible employees in consideration of their services. Employees granted stock under the plan pay SI.00 per share as the option price. Shares may be issued pursuant to the plan until June 30, 1984. Restrictions with respect to issued shares lapse in approximately equal amounts on the second through tenth anniversary dates of the date o? issuance. The cost of the plan, based on fair market value on the date of issuance of common stock, is amortized over a ten year period following the date of issuance. Upon forfeiture of stock by employees, previous expense attributable to unvested stock is credited to income. Forfeited shares under the plan returned to the Company amounted to 6,716 shares during 1978, and 5,280 shares during 1977. As of March 31, 1978, 131,596 shares of common stock are available for grant to eligible employees pursuant to the terms of the plan. Amounts charged to income under the plan and its predecessor plan amounted to $1,541,000 and $1,535,000 in fiscal 1978 and fiscal 1977, respectively. NOTE 10 - FOREIGN SUBSIDIARIES Summarized financial information with respect to consolidated foreign subsidiaries is as follows: ______March 31, 1978 1977 (in thousands of dollars) Assets (including cash and temporary investments of S537.456.000 and $467,597,000 at March 31, 1978 and 1977, respectively)....................... Liabilities..................................................................................................... Met Assets................................................................................................... Met income............................................................. $923,602 338.985 S584.617 S 89.392 S765.940 307,033 S458,907 5147,333 NOTE 11 - FACILITATING PAYMENTS During fiscal 1978 and 1977, the Company made facilitating payments from regular corporate funds, minor in amount, to low level foreign government officials to expedite necessary action to which the Company was otherwise entitled. Commissions to foreign sales agents pursuant to written agreements were made during 1978 and 1977. The Company continued its practice of making modest seasonal gifts to governmental officials and employees of customers. NOTE 12 - SEGMENT REPORTING The Company has operated, prior to the acquisition of B S W, principally in two industry segments, Marine Construction Services and Onshore Construction Services. Marine Construction Services primarily involve construction of specialized offshore platforms and marine pipelines used for development drilling, production and transportation of oil and gas. Onshore Construction Services primarily involve construc tion of land based'oil, gas, chemical, petrochemical and mineral processing plants and manufacture of air-cooled heat exchangers. Operating income is revenues less costs and expenses exclusive of general corporate expenses. Identifiable assets by industry segment are those assets that are used in the Company's operations in each segment. Corporate assets are principally cash, temporary investments and marketable securities. The Company's share of B & W's earnings for fiscal 1978 is reflected on an equity basis in the consolidated statement of income. B & W's operations are principally in the (Jnited States and are not vertically inte grated into the Company's industrial segments. The assets of B & W are included in the accompanying industry segment schedule as steam generating equipment, tubular products and other products. Steam generating equipment includes individually engineered complete fossil fuel boilers, nudear steam systems, nuclear fuel and nudear fuel assemblies, and associated equipment for electric utility and marine applications as well as fossil fuel boilers for industrial processes and power generation. Tubular products include stainless, alloy and carbon steel, seamless and welded tubes and pipe, tubular and solid shapes, extrusions, special metal tubes, welding fittings and flanges, and seamless rolled rings. 42 Transfers between geographic areas are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers or, in certain circumstances, by reference to provisions of the (J.S. Internal Revenue Code. Revenues attributable to Foreign governments were $211,945,000 and to an individual Company were $175,037,000. Revenues attributable to affiliated companies were 5104,338,000 ($46,652,000 in fiscal 1977). SEGMENT INFORMATION FOR THE FISCAL YEAR ENDED MARCH 31, 1978 1. Information about the Company's Operations in Different Industry Segments Revenues................................................................. Marine Onshore Construction Construction Services Services Consolidated (In thousands of dollars) ... $1,116,119 $177,592 SI.293.711 Operating income................................................... ... $ 205.559 $ 15.364 $ 220,923 Equity in earnings of affiliated companies--B & W.............................. --Other................................. ... $ 3.554 20,364 3,554 General corporate expenses................................... Interest expense...................................................... Interest income........................................................ Other income (expense)......................................... Income before provision for income taxes............. (23,155) (26,887) 34,124 11,164 $ 240.087 Capital expenditures................................................. ... $ 61.642 $ 22.660 $ 84,302 Corporate Capita) Expenditures............................. Total capita) expenditures....................................... Depreciation expense............................................... ... S, Corporate depreciation expense............................. Total depreciation expense .......................... 57.528 $ 8.954 673 S 84.975 $ 66,482 860 $67,342 Identifiable Assets at March 31, 1978 --McDermott......................................... .............. ... $ 777.147 3 91.484 $ 868.631 -B&W Steam generating equipment....................... Tubular equipment......................................... Other products.............................................. --Excess of cost over fair value of net assets of B & W not yet allocated.......................... Total B&W........................................................ Total identifiable assets............................................. $ 800,400 379,600 146,458 397.068 $1,723,526 $2,592,157 Investment in net assets of vertically integrated affiliated companies --McDermott..................................................... ... $ -B&W.............................................................. Corporate assets.................................... ................... Total assets at March 31, 1978............. ................... 16.299 16,299 2,390 571.961 $3,182,807 43 1 j [ f it1 I j | i : $r 2. Information about the Company's Operations in Different Geographic Areas Revenues.................................................. Transfers between geographic areas....... Total revenues....................................... Operating income..................................... United States Foreign Consolidated (In thousands of dollars) % 638,556 $655,155 $1,293,711 28.560 (28.5601 $ 667.116 $626,595 SI.293.7 ll s 128.260 $ 92.663 S 220,923 Equity in earnings of affiliated companies General corporate expenses.................... interest expense........................................ Interest income........................................ Other income (expense)........................... income before provision for income taxes s 20.364 $ 3.554 23,918 .............................................. ............................................... ......................................................... .............................................. (23,155) (26,887) 34,124 11,164 ............................................................S 240,087 Identifiable assets at March 31, 1978 --McDermott......................................... -BSW.................................................. --Excess of cost over fair value of net assets of B-& W not yet allocated .. Total identifiable assets............................. $ 340,026 1.237.607 SI .577.633 $528,605 88.851 $617.456 $ 868.631 1.326.458 $2.195.089 ............................................................$ 397.068 ............................................................................... $2.592.157 Investment in net assets of vertically integrated affiliated companies............. 5 18.689 18,689 Corporate assets........................................ Total assets at March 31,1978.............. .............................................................................571.961 ............................................................................. $3.182.807 4 v -tfSrr- ^; NOTE 13 - QUARTERLY FINANCIAL DATA (Unaudited) The following tables set forth selected quarterly financial information for the years ended March 31 1978 and 1977: Revenues............................... Operating income.................. Equity in earnings of B&W ... Net income............................. Earnings per common shareprimary ............................... Fully diluted..........:........... 1978 Quarter Ended June 30, Sept. 30, Dec. 31, March 31, 1977 i977 1977 1978 (in thousands of dollars except per share amounts) $298,852 69,448 $324,972 61,513 $448,869 52,293 $221,018 14,514 - 3,195 7,341 9,828 45,647 46,581 49,779 17,085 1.45 1.41 1.48 1.44 1.57 1.54 0.53 0.53 Revenues............................... Operating income................. Net income........................... Earnings per common share: Primary............................... Fully diluted....................... 1977 Quarter Ended June 30, Sept. 30, Dec. 31, March 31, 1976 1976 1976 1977 (In thousands of dollars except per share amounts) $267,735 $396,658 $301,676 $257,772 53,881 78,023 72,989 54,738 37,097 56,249 58,049 40,247 1.19 1.15 1.79 1.74 1.85 1.79 1.28 1.24 NOTE 14 - REPLACEMENT COST INFORMATION (Unaudited) As required by the Securities and Exchange Commission, the Company's annual report on Form 10-K, a copy of which is available upon request, contains unaudited replacement cost information on inventories and productive capacity and its estimated effect on depreciation expense for the current fiscal year. The information is included in the notes to financial statements included in the Form 10-K. The amounts reported attributable to unaudited replacement cost information are based on hypothetical assumptions and subjective assumptions. On this basis, the Company makes no representation that the replacement cost information is useful. Although, when replacing productive capacity, the Company has been subject to higher replacement cost and increased operating cost as a result of inflation, it has generally been able to compensate for such increases by increasing prices for its products and services. 45 Board of Directors H. W. BAILEY Executive Vice President R. J. CANTWELL Senior Executive Vice President The Babcock & Wilcox Company * C. W. DOUGLAS CARVER Independent oil producer and General Partner of Cardo Company J..E. CUNNINGHAM Vice Chairman of the Board --Finance and Administration C. L. DAVIS President Oceanic Contractors, Inc. W. E. EARLES Group Vice President C. L. GRAVES Chairman of the Board and Chief Executive Officer * JAMES A. HUNT Partner Kalb Voorhis & CoSecurities Brokers GRAHAM D. MATTiSON Director of various corporations * JOHN A. MORGAN Vice Chairman of the Board Smith Barney, Harris Upham & Co., Incorporated, Investment Bankers R. K. RICHIE President and Chief Operating Officer J. Ray McDermott 6 Co., Inc.Operating Unit JOHN D. RITCHIE Consultant and Director of various corporations WILLIAM T.SEAWELL Chairman and Chief Executive Officer Pan American World Airways. Inc.commercial air transportation WALTER B. SHAW Chairman and President Turner Construction Companygeneral construction contractors JOHN B. TWEEDY Executive Vice President and Director Tosco Corporation--oil refining and marketing WILLIAM L. WF.ARLY Chairman and Chief Executive Officer Ingersoll-Rand Companymanufacturer of industrial machinery and equipment GEORGE G. ZIPF Vice Chairman of the Board, President and Chief Operating Officer The Babcock & Wilcox CompanyOperating Unit Member of the Audit Committee .. waste V- \ *tn n i i~~i rrr imJim I"i Officers J. Ray McDermott G Co., Inc. C. L. GRAVES Chairman of the Board and Chief Executive Officer J. E. CUNNINGHAM Vice Chairman of the Board and Chief Financial and Administrative Officer GEORGE G. Z!PF Vice Chairman of the Board, B & W Operating Unit R. K. RICHIE President and Chief Operating Officer. McDermott Operating Unit H. W. BAILEY Executive Vice President, North American Operations W. E. EARLES Group Vice President, McDermott Structural Group I. R. FOSTER, JR. Group Vice President, Administration --Coordination V. J. LeBLANC Group Vice President, McDermott Shipyard Group GRIFF C. LEE Group Vice President, McDermott Hudson Engineering--New Orleans H. ROGERS REEVES Group Vice President, Harvey Division Group L. B. SMITH Group Vice President, Hudson Engineering Group J. LEON BATES Senior Vice President, McDermott Hudson Engineering--New Orleans PHILIP BREITMEYER, li Vice President, Corporate Planning and Development E. J. DRESSEL Vice President, Equipment and Machinery Development JOHN D DUPY Vice President, Administration CHARLES E. YOUNG Vice President, McDermott Hudson Engineering--New Orleans KENNEDY J. G1LLY Vice President and Genera) Counsel ROY R. STRIEKERT, JR. Vice President, Sales JOHN A. LYNOTT Treasurer LOUIS V. SIERRA Secretary The Babcock G Wilcox Company GEORGE G. Z1PF President and Chief Operating Officer R. J. CANTWELL Senior Executive Vice President, Finance and Accounting H. D. KURT Executive Vice President, Industrial Products Group G. W. KROSS, JR. Executive Vice President. Materials Group W. M. VANNOY Executive Vice President, Power Generation Group R. C. BASSETT Vice President, Purchasing and Traffic S. W. BOONE Vice President, Public Affairs W. P. CATTERSON Vice President and Treasurer L. M. FAVRET Vice President, Nuclear Divisions, Power Generation W. H. JACKSON Vice President, Marketing, Power Generation H. D. KENNEY Vice President and Controller W. MARKERT, JR. Vice President, Research and Development H. H. POOR Vice President, Contract Research A. C. TENDLER Vice President, International M. VICTOR Vice President and Secretary L B. WOHLGEMUTH Vice President, Sales, Tubular Products R. E. WOOLBERT Vice President, Employee Relations Power Generation Group W. M. VANNOY Executive Vice President Babcock & Wilcox Canada Ltd. T. M. CAMPBELL President and Chief Executive Officer B&W Construction Company E. M. GRIFFIN Division Vice President Fossil Power Generation Division D. E. HEYBURN Division Vice President TLT-Babcock, Inc. F. G. RAYNOR President Industrial and Marine Division E. C. MONCRIEF Division Vice President Nuclear Divisions L. M. FAVRET Vice President Nuclear Equipment Division W. B. BEISEL Division Vice President Nuclear Materials Division J. S. DZIEWISZ Division Vice President Nuclear Power Generation Division J. H. MacMILLAN Division Vice President Industrial Products Group H. D. KURT Executive Vice President Automated Machine Division S. W. BARANYK Division Vice President Bailey Controls Company R. J. CAMPBELL President Control Components International L W. SMITH President Diamond Power Specialty Corporation J. L. MENSON President Materials Group G. W. KROSS, JR. Executive Vice President Refractories Division R. P. STUNTZ Division Vice President Tubular Products Division T. M. KREBS Division Vice President 47 Other Divisions Naval nuclear Fuel Division J. F. ewing Division Vice President Hudson Engineering Corporation E. J. KOEHL.JR. Senior Vice President. Construction W. . WHITE Vice President, McDermott Hudson Engineering--Houston S. P. VICTORY Vice President. Construction Hudson Products Corporation E. C. SMITH President M. W. LARINOFF Vice President Oceanic Contractors, inc. C. L. DAVIS President E. P. CLIME Group Vice President. Middle East Group R. E. HOWSON Group Vice President, North Sea Group J. W. McCARTE Group Vice President, West Africa, Central and South America Group R. D. MILLER Group Vice President, South East Asia Group E.R.H. SELLEY Group Vice President. McDermott Hudson Engineering-London J. C. ANDREWS Vice President, Hew Orleans Group D. D. BATTERSHELL Vice President. Onshore Coordination R.E. CURTIS Vice President. South East Asia Group W. M. DOUGLAS Vice President, North Sea Group W. L. HIGGINS, III Vice President, North Sea Group R. J. MACHEN Vice President, McDermott Scotiand R. J. MAXSON Vice President, Middle East Group J. M. SMITH Vice President. Middle East Group R. P. STAGG Vice President, McDermott Hudson Engineering--London Debenture Trustee and Paying Agent Morgan Guaranty Trust Company/ 30 West Broadway/New York, New York 10015 9.70*o Sinking Fund/Debentures Due December 1. 1999 * 8.90% Notes Due December 1, 1984 Debenture Trustee, Paying Agent and Conversion Agent Citibank, N.A./111 Wall Street/New York, New York 10015 4-3/4% Convertible Subordinated Debentures Due October, 1987 Certified Public Accountants Arthur Young & Company New Orleans, Louisiana Common Stock Transfer Agents And Registrars First City National Bank of Houston/ Post Office Box 809/Houston, Texas 77002 Morgan Guaranty Trust Company/ 30 West Broadway/New York, New York 10015 Common Stock Series A S2.20 Cumulative Convertible Preferred Stock Series B $2-60 Cumulative Preferred Stock Annual Meeting The Annual Meeting of the Stock holders of J. Ray McDermott & Co., Inc., for the fiscal year ended March31, 1978, will be held at the University Room of the Fairmont Hotel, University Place, New Orleans, Louisiana, on Tuesday, August 8, 1978, at 9:30 a.m. local time. 48 IT Offices Corporate Office 1010 Common Street, Hew Orleans, Louisiana 70112 Principal Offices Aberdeen, Scotland Abu Dhabi, United Arab Emirates Akron. Ohio Alliance, Ohio Ambridge, Pennsylvania Amelia, Louisiana Amsterdam, Holland Antwerp, Belgium Apollo, Pennsylvania Atlanta, Georgia Augusta, Georgia Baltimore, Maryland Bangkok, Thailand Barberton, Ohio Batam island, Indonesia Baton Rouge, Louisiana Beaver Falls, Pennsylvania Bedford, New Hampshire Beirut, Lebanon Birmingham, Alabama Bismark, North Dakota Bombay, India Boston, Massachusetts Bowling Green, Ohio Bromma, Sweden Brunswick, Georgia Brussels, Belgium Buffalo, New York Burlington, Ontario Cairo, Egypt Calgary, Alberta Cambridge, Ontario Canton, Ohio Charlotte, North Carolina Chicago, Illinois Cincinnati, Ohio Clarksville, Indiana Cleveland, Ohio Copley, Ohio Dallas, Texas Daytona Beach, Florida Denver, Colorado Detroit, Michigan Dhahran, Saudi Arabia Doha, Qatar Dubai, United Arab Emirates Dumbarton, Scotland East Flat Rock, North Carolina Edmonton, Alberta Elkhart, Indiana Fredericton, New Brunswick Gibson, Louisiana Great Yarmouth, England Greer, South Carolina Harvey, Louisiana Hendersonville, North Carolina Hephzibah, Georgia Honolulu, Hawaii Houston, Texas lllzach, France Indianapolis, Indiana Inverness, Scotland Irvine, California Jakarta, Indonesia Kansas City, Missouri Kenner, Louisiana Kuala Lumpur, Malaysia Lafayette, Louisiana Lagos, Nigeria La Mirada, California Lancashire, England Lancaster, Ohio London, England Los Angeles, California Lynchburg, Virginia Mannheim, West Germany Medina, Ohio Melbourne, Australia Milwaukee, Wisconsin Minneapolis, Minnesota Montreal, Quebec Morgan City, Louisiana Mount Vernon, Indiana New Iberia, Louisiana New Orleans,.Louisiana New York, New York North Canton, Ohio Oberhausen, West Germany Osaka, Japan Ottawa, Ontario Paris, Texas Parks Township, Pennsylvania Perth, Australia Philadelphia, Pennsylvania Pittsburgh, Pennsylvania Pointe-Claire, Quebec Ponce, Puerto Rico Portland, Oregon Port of Spain, Trinidad-Tabago Ras Ai Khaimah, United Arab Emirates Regents Park, New South Wales, Australia Richmond, Virginia Rio de Janeiro, Brazil Rochester, Michigan Rochester, New York Rockford, Illinois Roseland, New Jersey St. Louis, Missouri St. Paul, Minnesota St. Petersburg, Florida San Francisco, California Sao Paulo, Brazil Sarnia, Ontario Scranton, Pennsylvania Seattle, Washington Shizuoka, Japan Singapore Solmiya, Kuwait Stavanger, Norway Stockholm, Sweden Syracuse, New York Tampa, Florida Tehran, Iran Tokyo, Japan Toronto, Ontario Troy, Michigan Tulsa, Oklahoma Vancouver, British Columbia Venice, Louisiana Warn, Nigeria Wembley, England West Point, Mississippi Wickliffe, Ohio Williamsport, Pennsylvania Wilmington, California Wilmington, North Carolina Windsor, Connecticut Winnipeg, Manitoba Wirrai, England Form 10-K A copy of the Annual Report to the Securities and Exchange Commission (Form 10-K) may be obtained, without charge, by writing Vice President --Administration, J. Ray McDermott & Co., Inc., Post Office Box 60035, Mew Orleans, Louisiana 70160.