<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the transition period from ______________ to ______________
Commission File No. 1-4095
McDERMOTT INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 74-1032246
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Series A $2.20 Cumulative Convertible New York Stock Exchange
Preferred Stock, $1 Par Value
Series B $2.60 Cumulative Preferred New York Stock Exchange
Stock, $1 Par Value
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of voting stock held by non-affiliates of the
registrant was $192,078,823 as of April 28, 1994.
The number of shares of Common Stock, par value $1 per share, outstanding as of
April 28, 1994 was 3,600.
DOCUMENTS INCORPORATED BY REFERENCE
The Information Statement for action to be taken without a meeting of
shareholders on August 9, 1994 is incorporated by reference into Part III of
this report.
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M c D E R M O T T I N C O R P O R A T E D
I N D E X - F O R M 10 - K
PAGE
PART I
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Power Generation Systems and Equipment
General 3
Foreign Operations 4
Raw Materials 4
Customers and Competition 4
Backlog 5
Factors Affecting Demand 6
C. Marine Construction Services
General 7
Foreign Operations 8
Raw Materials 9
Customers and Competition 9
Backlog 9
Factors Affecting Demand 10
D. Patents and Licenses 10
E. Research and Development Activities 10
F. Insurance 11
G. Employees 12
H. Environmental Regulations and Matters 12
I. Transactions With Related Parties 13
J. Divestitures and Discontinued Operations 14
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I N D E X - F O R M 1 0 - K
PAGE
Item 3. LEGAL PROCEEDINGS 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS 17
Item 6. SELECTED FINANCIAL DATA 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 1994 vs. Fiscal Year 1993 19
Fiscal Year 1993 vs. Fiscal Year 1992 21
Effects of Inflation and Changing Prices 22
Liquidity and Capital Resources 22
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report of Independent Auditors 26
Consolidated Balance Sheet - March 31, 1994 and 1993 27
Consolidated Statement of Income (Loss) and Retained
Earnings (Deficit) for the Three Fiscal Years ended
March 31, 1994 29
Consolidated Statement of Cash Flows for the Three
Fiscal Years ended March 31, 1994 30
Notes to Consolidated Financial Statements 32
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 60
ii
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I N D E X - F O R M 1 0 - K
PAGE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 61
Item 11. EXECUTIVE COMPENSATION 61
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 61
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 61
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
Exhibit 22 - Significant Subsidiaries of the Registrant 64
Exhibit 24 - Consent of Independent Auditors 65
Signatures of the Registrant 66
Signatures of the Directors 67
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P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott Incorporated was incorporated in 1946 as a successor to a business
which had been providing construction services to the oil and gas industry
since the 1920's. McDermott International, Inc. ("International") is the
parent company of the McDermott group of companies, which includes McDermott
Incorporated. International's Common Stock and McDermott Incorporated's Series
A $2.20 Cumulative Convertible Preferred Stock and Series B $2.60 Cumulative
Preferred Stock are publicly traded.
Unless the context otherwise requires, hereinafter the "Delaware Company" will
be used to mean McDermott Incorporated, a Delaware corporation which is a
subsidiary of International, and its consolidated subsidiaries.
"International" will be used to mean McDermott International, Inc., a Panama
corporation; and "McDermott International" will be used to mean the
consolidated enterprise.
The Delaware Company operates in two business segments:
o Power Generation Systems and Equipment, whose principal businesses
are the supply of fossil-fuel and nuclear steam generating systems
and equipment to the electric power generation industry, and
nuclear reactor components to the U.S. Navy; and
o Marine Construction Services, which supplies services for the
offshore oil, natural gas and hydrocarbon processing industries,
and to other marine construction companies. These services, which
are supplied primarily in North America, include the design,
engineering, fabrication and installation of marine pipelines and
offshore structures and subsea production systems for development
drilling and production, and onshore construction and maintenance
services.
The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company. Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.
The Delaware Company has a continuing program of reviewing joint venture,
acquisition and disposition opportunities.
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The following tables show revenues and operating income from the continuing
operations of the Delaware Company for the three fiscal years ended March 31,
1994. See Note 15 to the consolidated financial statements for additional
information with respect to the Delaware Company's business segments and
operations in different geographic areas.
REVENUES
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1994 1993 1992
--------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Power Generation Systems
and Equipment (1) $ 1,613.9 72% $ 1,521.0 77% $ 1,591.5 69%
Marine Constructions Services(2) 632.2 28% 449.1 23% 723.4 31%
Intersegment Transfer
Eliminations (2.8) - (.5) - (5.5) -
- ---------------------------------------------------------------------------------------------------------------
Total $ 2,243.3 100% $ 1,969.6 100% $ 2,309.4 100%
===============================================================================================================
</TABLE>
OPERATING INCOME
(Dollars in Millions)
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
1994 1993 1992
--------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Segment Operating Income:
Power Generation Systems
and Equipment(1) $ 57.5 87% $ 68.5 95% $ 104.3 95%
Marine Constructions Services(2) 8.4 13% 3.4 5% 5.1 5%
- --------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 65.9 100% 71.9 100% 109.4 100%
- --------------------------------------------------------------------------------------------------------------
Equity in Income of Investees:
Power Generation Systems
and Equipment (1) 8.6 95% 6.2 93% 11.2 100%
Marine Construction Services .5 5% .5 7% - -
- --------------------------------------------------------------------------------------------------------------
Total Equity in Income
of Investees 9.1 100% 6.7 100% 11.2 100%
- --------------------------------------------------------------------------------------------------------------
General Corporate Expenses (43.0) - (40.1) - (40.2) -
- --------------------------------------------------------------------------------------------------------------
Total Operating Income $ 32.0 - $ 38.5 - $ 80.4 -
==============================================================================================================
</TABLE>
(1) See Note 3 to the consolidated financial statements regarding the
deconsolidation of B&W Fuel Company to a cost method investment and the
change in B&W Nuclear Service Company from an equity method to a cost
method investment during fiscal year 1992.
(2) See Note 2 to the consolidated financial statements regarding the
acquisition of Delta Catalytic Corporation during fiscal year 1994.
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B. POWER GENERATION SYSTEMS AND EQUIPMENT
GENERAL
The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide. The segment supplies
individually engineered complete fossil fuel steam generating systems for
electric power generation and for industrial processes. This segment also
provides replacement parts and engineered plant enhancements for existing
fossil fuel steam generating systems and specially engineered accessories and
components, such as air heaters and cleaning systems for heat transfer
surfaces. It also supplies process recovery boilers and environmental control
systems for the process and power industries, air-cooled heat exchangers and
condensing heat exchangers. This segment also provides non-boiler related
equipment and services usually in connection with the construction of turnkey
power generation projects. It is also engaged in the erection of electric
power plants and industrial facilities and the repair and alteration of such
existing equipment.
This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power units and other independent power producing
plants. It is participating in this market as an equipment supplier, as an
operations and maintenance contractor and through ownership interests.
The Power Generation Systems and Equipment segment also provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program. Revenues from the U. S. Government related to this activity
were approximately 13%, 13% and 14% of the Delaware Company's total revenues
for fiscal years 1994, 1993 and 1992, respectively. This activity has made
significant contributions to the operating income for the Delaware Company in
all three fiscal years. B&W, in addition to its Naval Reactors Program
business, is a supplier of ordnance, missile and torpedo metal parts and other
equipment and services to the U.S. Government and is proceeding with new,
non-defense Government projects and exploring new programs which require the
technological capabilities it developed as a Government contractor for the
Naval Reactors Program. Recent U.S. Government budget reductions, including
the cancellation of the advanced solid rocket motor and super conducting super
collider projects, have negatively affected this segment's government
operations.
B&W is a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators, in the
Canadian, U.S. and international markets from its Cambridge, Ontario location.
Although no contracts for nuclear steam generating systems have been awarded
for a number of years, this facility was awarded three contracts during fiscal
year 1993 valued at approximately $280,000,000 to supply replacement
recirculating steam generators to three domestic utilities. B&W also supplies
field repair and refurbishment services to the Canadian and international
markets from this location.
The principal plants of this segment, which are owned by B&W, are located at
Little Rock, Arkansas; Indianapolis and Mount Vernon, Indiana; West Point,
Mississippi; Barberton and Lancaster, Ohio; Beasley and Paris, Texas;
Lynchburg, Virginia; and Cambridge, Ontario, Canada. All these plants are
well maintained, have suitable equipment and are of adequate size.
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FOREIGN OPERATIONS
The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income derived from operations
outside of the United States, and the approximate percentages of those revenues
and segment operating income to the Delaware Company's total revenues and total
segment operating income, respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT OPERATING INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1994 $ 372,474 17% $ 31,577 48%
1993 243,394 12% 11,556 16%
1992 193,124 8% 6,583 6%
</TABLE>
B&W primarily conducts its foreign business from its Cambridge, Ontario
location, which also serves the United States market. Products for
international installation are engineered and built in B&W's United States and
Canadian facilities, as well as in the facilities of less than majority-owned
joint venture companies (equity investees) of International, principally
located in China, Indonesia, and India.
RAW MATERIALS
The principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for supplied systems and equipment. These raw materials and
components generally are purchased as needed for individual contracts.
Although shortages of certain of these raw materials have existed from time to
time, no serious shortage exists at the present time. In addition, this
segment is not sole source dependent for any significant raw materials except
for the uranium for the nuclear fuel assemblies supplied to the Naval Reactors
Program, which is furnished and owned by the U.S. Government.
CUSTOMERS AND COMPETITION
The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power
producers), the U. S. Government (including its contractors), and the pulp and
paper and other process industries such as oil refineries and steel mills. The
electric power generation industry accounted for approximately 36%, 29% and 21%
of the Delaware Company's total revenues for fiscal years 1994, 1993 and 1992,
respectively. U.S. Government business with this segment, excluding
government-owned utilities, accounted for approximately 17%, 20% and 21% of the
Delaware Company's total revenues for such periods.
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Steam generating system orders are customarily awarded after competitive bids
have been submitted as proposals based on the estimated cost of each job.
Within the United States, a number of domestic and foreign-based companies,
specializing in steam generating equipment, compete with B&W in the fossil fuel
steam generating system business. In international markets, these companies
plus additional foreign-based companies compete with B&W. B&W also
manufactures and sells components such as replacement recirculating steam
generators, which are incorporated into nuclear steam generating systems
designed by other firms. In the sale of these nuclear steam generating
systems, B&W competes with a small number of companies. A number of companies
are in competition with B&W in environmental control equipment, related
specialized industrial equipment and the independent power producing business.
Other suppliers of fossil fuel steam systems, as well as many other businesses,
compete for replacement parts, repair and alteration and other services
required to backfit and maintain existing systems.
In regard to the Naval Reactors Program, B&W is the sole source supplier of
nuclear fuel assemblies and reactor components to the U. S. Navy. As a
result, B&W was awarded significant new orders for aircraft carrier components
and will retain its prototype design and manufacturing capability for a new
generation of reactors for the submarine program. B&W is now the sole supplier
to the U. S. Navy for all major nuclear steam system equipment for the Naval
Reactors Program. There are a small number of suppliers of small nuclear
components with B&W being the largest based on revenues.
BACKLOG
Backlog as of March 31, 1994 and 1993 for the Power Generation Systems and
Equipment segment was $2,398,285,000 and $2,614,709,000 or approximately 85%
and 90%, respectively, of the Delaware Company's backlog. Of the March 31,
1994 backlog, it is expected that approximately $1,042,181,000 will be
recognized in revenues in fiscal year 1995, $565,773,000 in fiscal year 1996
and $790,331,000 thereafter, of which approximately 90% will be recognized in
fiscal years 1997 through 1999. At March 31, 1994, this segment's backlog
with the U. S. Government was $775,909,000 (of which $17,055,000 had not yet
been funded), or approximately 27% of the Delaware Company's total backlog.
The impact of Congressional budget reductions on the advanced solid rocket
motor and super conducting super collider projects are reflected in these
amounts. Backlog as of March 31, 1994 and 1993 included $5,190,000 and
$153,726,000, respectively, relating to these projects.
During fiscal year 1994, B&W was awarded a $400,000,000 contract from
Perusahaan Umum Listrik Negara ("PLN"), the state utility of Indonesia, for
work on the expansion of the Suralaya power station in West Java. The project
is for three 600 megawatt coal-fired boilers for phase three of PLN's Suralaya
development program to expand Indonesia's electrical system. Also during
fiscal year 1994, B&W was awarded a $123,000,000 contract from Taiwan Power
Company to supply a wet flue gas desulphurization system to the utility's
Taichung Station, units 5-8. The steam generators and selective catalytic
reduction systems for these four 550 megawatt units were awarded to B&W in
fiscal year 1992 under a separate contract. In addition, B&W was awarded an
$80,000,000 contract by the Egyptian Electric Authority to supply two
600-megawatt gas and oil fired boilers, plus all accessories
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at El-Kureimat, the utility's new power station.
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
B&W is usually entitled to a financial settlement related to the individual
circumstances of the contract. Operations and maintenance contracts, which are
performed over an extended period, are included in backlog based upon an
estimate of the revenues from these contracts.
B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses. Most long- term contracts have provisions for progress payments.
FACTORS AFFECTING DEMAND
Electrical consumption has grown moderately in the United States in recent
years. Electric utilities have deferred ordering large, new baseload units
because of continuing uncertainties over fuel prices, rate regulation and
environmental rules. When electric utilities are in need of peaking capacity,
many are purchasing combustion turbines with short lead-times or they are
purchasing electricity from other utilities with excess capacity and
non-regulated sources, such as cogenerators and independent power producers.
The current competitive economic environment and uncertainties created by
passage of the Energy Policy Act of 1992, which deregulated the electric power
generation industry by allowing independent power producers and other companies
access to its transmission and distribution systems, and the Clean Air Act
Amendments of 1990 have caused U.S. utilities to defer repairs and
refurbishments on existing plants. However, the Clean Air Act has created
demand for environmental control equipment and related plant enhancements.
Most utilities have already purchased equipment to comply with Phase I of the
Clean Air Act, and they will purchase equipment to comply with Phase II
deadlines in a gradual manner, spread out over the next several years as
various deadlines approach.
Steam generation equipment is purchased most frequently by firms in the
energy-intensive industries, including pulp and paper, oil refining, chemicals,
primary metals and food processing. Sales into the U.S. by foreign companies
competing in these industries have limited any expansion in steam generating
capacity by the pulp and paper, chemicals and primary metal industries. The
modest outlook for population growth has limited the needs of the food
processing industry for additional steam generation capacity. In addition,
environmental regulations have required the oil refining, pulp and paper,
chemicals, and utility industries to invest in environmental control equipment,
which has limited the investment available for additional steam generation
capacity. These factors and the current economic environment have affected
demand for industrial-related product lines and these markets are expected to
remain very competitive.
Electric utilities in Asia are active purchasers of large, new baseload
generating units, due to the rapid growth of the Pacific Rim economies and to
the small existing stock of electrical generating capacity in most developing
countries.
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With the maturing of the U. S. Navy's shipbuilding program and U. S. Government
defense budget reductions, the demand for nuclear fuel assemblies and reactor
components for the U.S. Navy has been declining since the mid-1980's. However,
B&W became the sole source provider of these assemblies in fiscal year 1991 and
supplies nuclear fuel assemblies due to reload requirements. The backlog of
orders for U. S. Navy nuclear fuel assemblies and nuclear reactor components
comprised a substantial portion of this segment's backlog with the U. S.
Government at March 31, 1994 and this activity is expected to continue to be a
significant, but declining, part of such backlog. Also, additional U.S.
Government budget reductions, including the cancellation of the advanced solid
rocket motor and super conducting super collider projects, have negatively
affected this segment's other government operations.
B&W has applied its technological capabilities by supplying new products for
power generation applications. It has diversified into new markets and
activities not related to power generation that require complex engineering and
machining. Examples of these markets include environmental restoration
services, computer integrated manufacturing products and services, and the
management of government owned facilities. Currently, a majority-owned
subsidiary of B&W manages and operates a government owned facility at the
Department of Energy's Idaho National Engineering Laboratory.
C. MARINE CONSTRUCTION SERVICES
GENERAL
The Marine Construction Services' segment consists of the design, construction
and installation of specialized offshore fixed platforms and marine pipelines
used for development drilling, production and transportation of oil and gas.
Marine Construction Services also includes engineering and construction
services for oil production in shoreline and marshland areas (principally in
Louisiana and Texas) and the engineering and construction of processing plants
for the oil, gas, and hydrocarbon processing and mineral industries. This
segment's shipyard facility supplies complete maintenance and construction
facilities and is a builder of a variety of marine vessels, including ferries,
barges, tugboats, container ships, bulk carriers and other specialized vessels.
Marine Construction Services also provides vessel chartering operations,
principally to affiliated companies.
Fixed platforms, which are fastened to the seafloor by pilings driven through
their structural legs, have been installed by the Delaware Company in water
depths of more than 1,000 feet. These platforms have been engineered to
withstand increasingly greater weights and stresses as the search for oil and
gas has expanded into deeper water and into areas subject to severe weather
conditions. In addition, this segment is capable of fabricating and installing
tension-leg platforms, floating production systems and subsea templates.
The Delaware Company owns a 49% interest in a Mexican joint venture that
operates 2 self-propelled combination derrick-pipelaying barges (1 capable of
lifting 2,000 tons) and 1 pipelaying barge.
The Marine Construction Services' segment has its principal fabrication yard
and offshore base located on approximately 1,114 acres of land, under lease,
near Morgan City, Louisiana. It also owns and operates a fabrication yard on
approximately 218 acres of land in Nueces County, Texas and operates a
shipyard on approximately 58 acres of leased land near Morgan City.
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The equipment used at these yards, which is capable of fabricating a full range
of offshore structures, consists principally of cranes, welding equipment,
machine tools, and robotic and other automated equipment, in addition to other
fabrication equipment, most of which is movable.
Expiration dates, including renewal options, of leases covering land for the
shipyard and fabrication yards at Morgan City, Louisiana range from 2001 to
2032.
The Delaware Company owns one of the largest fleets of marine equipment used in
major offshore construction. The nucleus of a "construction spread" is a large
derrick barge, pipelaying barge or combination derrick-pipelaying barge capable
of offshore operations for an extended period of time in remote locations. The
Delaware Company owns 4 derrick barges, 2 pipelaying barges and 3 combination
derrick-pipelaying barges. The lifting capacities of the derrick and
combination derrick-pipelaying barges range from 750 tons to 3,000 tons. These
barges, which range in length from 400 feet to 589 feet, are fully equipped
with revolving cranes, auxiliary cranes, welding equipment, pile driving
hammers, anchor winches and variety of additional gear.
The marine equipment includes a derrick barge capable of lifting 3,000 tons and
providing accommodation for approximately 240 workers and a semi-submersible
lay barge capable of laying 60-inch diameter pipe (including concrete coating)
and operating in water depths up to 2,000 feet. This segment has performed one
of the largest single lifts (over 2,300 tons) and has installed one of the
deepest marine pipelines (in over 1,400 feet of water) in the Gulf of Mexico.
In addition, the Delaware Company owns and operates a shearleg crane capable of
lifting up to 5,000 tons and has a long-term lease on a derrick barge with a
lifting capacity of approximately 4,000 tons. It also owns or leases a
substantial number of other vessels, such as tugboats, utility boats and cargo
barges to support the major marine vessels.
In connection with its construction and pipelaying activities, this segment
conducts diving operations which, because of the water depths involved, require
sophisticated equipment, including diving bells and an underwater habitat.
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") in the first step in a two-step transaction which
will be completed during fiscal year 1997, when the Delaware Company intends to
acquire the balance of DCC. DCC provides engineering, procurement,
construction and maintenance services to industries worldwide; including oil,
gas, marine construction and hydrocarbon processing.
FOREIGN OPERATIONS
The amounts of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income (loss) derived from operations outside
of the United States, and
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the approximate percentages of those revenues and segment operating income to
the Delaware Company's total revenues and total segment operating income,
respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1994 $ 238,663 11% $ 7,403 11%
1993 3,100 - % (745) - %
1992 850 - % (233) - %
</TABLE>
The majority of the Delaware Company's foreign operations are conducted in
Calgary, Alberta, Canada at DCC which was acquired in fiscal year 1994. See
Note 2 to the consolidated financial statements.
RAW MATERIALS
The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this segment is not dependent upon any single supplier or
source. Although shortages of certain of these raw materials and fuels have
existed from time to time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas companies (including foreign
government owned companies). Customers generally contract with this segment
for the design, construction and installation of specific platforms, pumping
stations, marine pipelines, and production networks and the construction of
marine vessels. Contracts are usually awarded on a competitive bid basis.
There are several companies which compete effectively with the Delaware Company
in each of the separate marine construction phases.
BACKLOG
As of March 31, 1994 and 1993, the Marine Construction Services' backlog
amounted to $430,338,000 (including $233,299,000 from DCC) and $305,390,000, or
approximately 15% and 10%, respectively, of the Delaware Company's total
backlog. Excluding DCC, backlog of $197,039,000 was down from the level of
backlog at March 31, 1993, but remains above the levels experienced during most
of the 1980s. The backlog continues to decline as oil companies cut domestic
capital expenditures on major projects. Of the March 31, 1994 backlog, it is
expected that approximately $356,664,000 will be recognized in revenues in
fiscal year 1995, $50,740,000 in fiscal year 1996 and $22,934,000 thereafter.
Work is performed on a fixed price, cost plus or day rate basis or combination
thereof. This segment attempts to cover increased costs of anticipated changes
in labor, material and
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service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses. Most long-term contracts have provisions for progress payments.
FACTORS AFFECTING DEMAND
The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies and foreign governments for
developmental construction. These expenditures are influenced by the selling
price of oil and gas along with the cost of production and delivery, the terms
and conditions of offshore leases, the discovery rates of new reserves
offshore, the ability of the oil and gas industry to raise capital, and local
and international political and economic conditions.
Oil company capital expenditure budgets in calendar year 1994 are moderately
higher than 1993 as expenditures in North America are expected to increase
while international expenditures are expected to decline slightly. World oil
prices in calendar year 1994 are generally expected to be below the average
price in 1993. If oil prices remain under pressure, this could have a further
negative impact on this segment's backlog. The composite spot price for
natural gas in the United States was higher in calendar year 1993 than in 1992
and is expected to be similar or higher in 1994.
This segment's markets are expected be at a low level in the U. S. during
fiscal year 1995. The overcapacity of marine equipment will continue to result
in a competitive environment and put pressure on profit margins.
D. PATENTS AND LICENSES
Many U. S. and foreign patents have been issued to the Delaware Company and it
has many pending patent applications. Patents and licenses have been acquired
and licenses have been granted to others when advantageous to the Delaware
Company. While the Delaware Company regards its patents and licenses to be of
value, no single patent or license or group of related patents or licenses is
believed to be material in relation to its business as a whole.
E. RESEARCH AND DEVELOPMENT ACTIVITIES
The Delaware Company conducts its principal research and development activities
at its research centers in Alliance, Ohio and Lynchburg, Virginia; and also
conducts development activities at its various manufacturing plants and
engineering and design offices. During the fiscal years ended March 31, 1994,
1993 and 1992, approximately $67,695,000, $60,996,000, and $88,000,000,
respectively, was spent by the Delaware Company on research and development
activities, of which approximately $48,112,000, $42,082,000, and $67,100,000,
respectively, was paid for by customers of the Delaware Company. Research and
development activities were related to development and improvement of new and
existing products and equipment and conceptual and engineering evaluation for
translation into practical applications. A new multi-million dollar clean
environment development facility is in progress at its Alliance, Ohio location
and is expected to be completed by March 31, 1995. The test facility is being
undertaken in response to present and future emission pollution standards in
the U.S. and worldwide. Approximately 241 employees were engaged full time
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in research and development activities at March 31, 1994.
F. INSURANCE
The Delaware Company maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available only at rates which the Delaware Company
considers uneconomical. Among such risks are war and confiscation of property
in certain areas of the world, pollution liability in excess of relatively low
limits and, in recent years, asbestos liability. Depending on competitive
conditions and other factors, the Delaware Company endeavors to obtain
contractual protection against uninsured risks from its customers.
The Delaware Company's insurance policies do not insure against liability and
property damage losses resulting from nuclear accidents at reactor facilities
of its utility customers. To protect against liability for damage to
customer's property, the Delaware Company has obtained waivers of subrogation
from the customer and its insurer and is generally named as an additional
insured under the utility customer's nuclear property policy. To protect
against liability from claims brought by third parties, the Delaware Company is
insured under the utility customer's nuclear liability policies and has the
benefit of the indemnity and limitation of any applicable liability provisions
of the Price-Anderson Act, as amended ("the Act"). The Act limits the public
liability of manufacturers and operators of licensed nuclear facilities and
other parties who may be liable in respect of, and indemnifies them against,
all claims in excess of an amount which is determined by the sum of
commercially available liability insurance plus certain retrospective premium
assessments payable by operators of commercial nuclear reactors. For those
sites where the Delaware Company provides environmental remediation services,
it seeks the same protection from its customers as it does for its other
nuclear activities.
Although the Delaware Company does not own or operate any nuclear reactors, it
has coverage under commercially available nuclear liability and property
insurance for four of its five facilities which are licensed to maintain
special nuclear materials. The fifth facility operates primarily as a
conventional research center. However, this facility is licensed to possess
special nuclear material and has a small and limited amount of special nuclear
material on the premises. Two of the four owned facilities are located at the
Delaware Company's Lynchburg, Virginia site. These facilities are insured
under a nuclear liability policy which also insures the facility of B&W Fuel
Company ("BWFC") that was sold during fiscal year 1993. All three facilities
share the same nuclear liability insurance limit as the commercial insurer
would not allow BWFC to obtain a separate nuclear liability insurance policy.
Due to the type or quantity of nuclear material present, two of the five
facilities have the benefit of the indemnity and limitation of liability
provisions of the Act, pursuant to agreements entered into with the U. S.
Government. In addition, contracts to manufacture and supply nuclear fuel or
nuclear components to the U. S. Government generally contain contractual
indemnity clauses,
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which become effective at the time of shipment, whereby the U. S. Government
has assumed the risks of public liability claims.
The Delaware Company's offshore construction business is subject to the usual
risks of operations at sea, with additional exposure due to the utilization of
expensive construction equipment, sometimes under extreme weather conditions.
In addition, the Delaware Company operates in many cases on or in proximity to
existing offshore facilities which are subject to damage by the Delaware
Company and such damage could result in the escape of oil and gas into the sea.
The insurance coverage of the Delaware Company for products liability and
employers' liability claims is subject to varying insurance limits which are
dependent upon the year involved. The Babcock & Wilcox Company has an
agreement with a majority of its principal insurers concerning the method of
allocation of products liability asbestos claim payments to the years of
coverage. Pursuant to the agreement, The Babcock & Wilcox Company negotiates
and settles these claims and bills these amounts to the appropriate insurers.
However, amounts allocable to policy year 1979 are excluded from this
agreement, and The Babcock & Wilcox Company's ability to recover these amounts,
and amounts allocable to certain insolvent insurers, is only reasonably
possible. Accordingly, a provision for these estimated future costs has been
recognized for financial reporting purposes. The Delaware Company's estimated
future costs relating to policy year 1979 and certain insolvent insurers are
derived from its loss history and constitute management's best estimate of such
future costs. Inherent in the estimate of such future costs are assumptions
which may vary significantly as claims are filed and settled. Accordingly, the
ultimate loss may differ materially from the amount provided in the
consolidated financial statements.
G. EMPLOYEES
At March 31, 1994, and 1993, the Delaware Company employed, under its direct
supervision in continuing operations, approximately 16,500 persons.
Approximately 4,900 employees were members of labor unions at March 31, 1994 as
compared with approximately 4,000 at March 31, 1993. The majority of B&W's
manufacturing facilities operate under union contracts which customarily are
renewed every two to three years. There are no major union contracts expiring
during the next year. The Delaware Company considers its relationships with
its employees to be satisfactory.
H. ENVIRONMENTAL REGULATIONS AND MATTERS
Like other companies, the Delaware Company is subject to the existing and
evolving standards relating to the environment. The Delaware Company's
compliance with U. S. federal, state and local environmental protection
regulations necessitated capital expenditures of $843,000 in fiscal year 1994,
and it expects to spend another $6,420,000 on capital expenditures over the
next five years. However, the Delaware Company cannot predict all of the
environmental requirements or circumstances which will exist in the future but
it anticipates that environmental standards will become increasingly stringent
and costly. Complying with existing environmental regulations resulted in a
charge against income before taxes of approximately $11,404,000 in fiscal year
1994.
The Delaware Company has been identified as a potentially responsible party at
various
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cleanup sites under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. The Delaware Company has not been determined to be
a major contributor of wastes to these sites. However, each potentially
responsible party or contributor may face assertions of joint and several
liability. Generally, however, a final allocation of costs is made based on
relative contributions of wastes to each site. Based on its relative
contribution of waste to each site, the Delaware Company's share of the
ultimate liability for the various sites is not expected to have a material
adverse effect on the Delaware Company's consolidated financial position.
Remediation projects have been or may be undertaken at certain of the Delaware
Company's current and former plant sites, and, during fiscal year 1994, B&W
completed, subject to Nuclear Regulatory Commission ("NRC") certification, the
decommissioning and decontamination of its former nuclear fuel processing plant
at Apollo, Pennsylvania. All fabrication and support buildings have been
removed, and virtually all contaminated soil has been shipped to authorized
disposal facilities. B&W is in the final stage of obtaining approval from the
NRC to have the site released for unrestricted use.
The Department of Environmental Resources of the Commonwealth of Pennsylvania
("PADER"), by letter dated March 19, 1994, advised B&W that it will seek
monetary sanctions, remedial and monitoring relief related to B&W's Parks
Facilities in Parks Township, Armstrong County, Pennsylvania. The relief
sought relates to potential groundwater contamination related to the previous
operations of the facilities. B&W is currently evaluating PADER's consent
order and expects to negotiate a settlement without having to resort to
litigation. Any sanctions ultimately assessed are not expected to have a
material adverse effect on the consolidated financial statements of the
Delaware Company.
The Delaware Company performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and operates certain
facilities that are licensed to possess and process special nuclear materials
and thus is subject to continuing reviews by governmental agencies, including
the Environmental Protection Agency and the Nuclear Regulatory Commission.
Decommissioning regulations promulgated by the U. S. Nuclear Regulatory
Commission require B&W to provide financial assurance that it will be able to
pay the expected cost of decommissioning its facilities at the end of their
service lives. B&W will provide financial assurance of approximately
$11,000,000 required by June 29, 1994 by issuing a surety bond, a letter of
credit or by funding a trust to provide for the ultimate decommissioning of all
its licensed facilities, except one. This facility, which represents the
largest portion of B&W's eventual decommissioning costs, has provisions in its
government contracts pursuant to which all of its decommissioning costs and
financial assurance obligations are covered by the U. S. Government.
Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material adverse effect upon the consolidated financial position of the
Delaware Company.
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<PAGE> 18
I. TRANSACTIONS WITH RELATED PARTIES
The Delaware Company has material transactions occurring during the normal
course of operations, including the leasing of equipment, the sale of
engineering and design services, fabrication services, and the performance of
certain general and administrative services, with International and other
affiliated companies. The Delaware Company has also entered into various
financial agreements with International and its subsidiaries, including a Stock
Purchase and Sale Agreement. (See Note 5 to the consolidated financial
statements.)
The Delaware Company leases major items of marine equipment to International.
All such leases now in force are terminable at will by either party on 30 days'
notice. The rents payable to the Delaware Company are designed to insure that
the Delaware Company will recover any cost incurred by it with respect to such
items of marine equipment.
The Delaware Company has charged International for engineering services by
reference to charges to unrelated parties for similar work and for general and
administrative activities based on an allocation of cost. The Delaware Company
intends to continue to provide various services to International and the
arrangements for pricing those services will be reviewed from time to time.
The casualty and marine insurance programs of the Delaware Company are placed
through commercial insurance carriers which in turn substantially reinsure
these exposures to a wholly-owned insurance subsidiary of International.
Management believes that this approach is more cost effective as there is no
commercial market on the same economic terms for these types of exposures.
J. DIVESTITURES AND DISCONTINUED OPERATIONS
During fiscal year 1993, the Delaware Company concluded the sale of its
remaining interests in the B&W Fuel Company ("BWFC") to a consortium of U.S.
subsidiaries of three French companies and its remaining interests in the B&W
Nuclear Service Company to a U.S. subsidiary of Framatome S.A., which is also
one of the French companies that participated in BWFC. These businesses
consisted of fuel assemblies for refueling, engineering, field repair and
refurbishment services, and computer services for existing nuclear reactors.
During fiscal year 1992, the Delaware Company sold its Welded Tubular Products
Division in Alliance, Ohio to Alliance Tubular Products Co., a wholly-owned
subsidiary of J. H. Roberts Industries, Inc., of Des Plaines, Illinois. The
facility had previously produced specialty tubing for mechanical and pressure
applications.
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Item 3. LEGAL PROCEEDINGS
Due to the nature of its business, the Delaware Company is, from time to time,
involved in litigation. It is management's opinion that none of this
litigation will have a material adverse effect on the consolidated financial
position of the Delaware Company.
For a discussion of the Delaware Company's potential liability for non-employee
products liability asbestos claims, see Item 1F and Note 1 to the consolidated
financial statements.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
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<PAGE> 21
P A R T I I
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
As a result of the plan of reorganization announced by the Delaware Company on
October 28, 1982 and completed on March 15, 1983, all of the Delaware Company's
outstanding Common Stock is owned by International and, consequently, there is
no market for the Delaware Company's Common Stock. For restrictions on the
Delaware Company's present or future ability to pay dividends, see Note 6 to
notes to the consolidated financial statements.
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<PAGE> 22
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 2,243,366 $ 1,969,622 $ 2,309,408 $ 2,221,602 $ 2,084,089
Income (Loss)
From Continuing
Operations before
Extraordinary Items
and Cumulative
Effect of Accounting
Changes $ (26,316) $ (27,079) $ 29,857 $ (29,984) $ (53,766)
Net Income
(Loss) $ (127,066) $ (273,825) $ 26,489 $ (10,690) $ 35,800
Total Assets $ 2,486,105 $ 2,345,658 $ 2,464,818 $ 2,653,404 $ 2,732,388
Long-Term
Obligations $ 584,532 $ 492,036 $ 658,007 $ 516,221 $ 734,909
Redeemable
Preferred Stocks 196,672 204,482 204,482 204,482 204,487
--------------- --------------- --------------- -------------- --------------
Total $ 781,204 $ 696,518 $ 862,489 $ 720,703 $ 939,396
</TABLE>
In fiscal year 1994, Net Income (Loss) includes a cumulative effect of
accounting change of $100,750,000 due to the adoption of Emerging Issues Task
Force Issue No. 93-5 which resulted in a provision for estimated future costs
resulting from possible gaps in insurance coverage with respect to non-employee
products liability asbestos claims. Inherent in the estimate of such future
costs are assumptions which may vary significantly as claims are filed and
settled, and accordingly, the ultimate loss may differ materially from the
amount provided. In fiscal year 1993, Net Income (Loss) includes a cumulative
effect of an accounting change of $240,042,000 due to the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 106. See Note 1 to the
consolidated financial statements regarding the above and the adoption of SFAS
No. 109 in fiscal year 1993, Note 2 regarding the acquisition of Delta
Catalytic Corporation and Note 14 regarding discontinued operations.
In fiscal years 1993 and 1992, Income (Loss) from Continuing Operations before
Extraordinary Items and Cumulative Effect of Accounting Changes includes after
tax gains from the sale of the Delaware Company's interests in its two
commercial nuclear joint ventures of $15,667,000 and $35,436,000, respectively
(see Note 3 to the consolidated financial statements).
All of the Common Stock of the Delaware Company is owned by International and,
therefore, no per share data is shown above.
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<PAGE> 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
FISCAL YEAR 1994 VS FISCAL YEAR 1993
Power Generation Systems and Equipment's revenues increased $92,978,000 to
$1,613,954,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, replacement
nuclear steam generators, repair and alteration of existing fossil fuel steam
systems, and nuclear fuel assemblies and reactor components for the U.S.
Government. These increases were partially offset by lower revenues from
extended scope of supply and fabrication of industrial boilers, defense and
space-related products other than nuclear fuel assemblies and reactor
components, and air cooled heat exchangers.
Power Generation Systems and Equipment's segment operating income decreased
$11,018,000 to $57,527,000. The decrease was primarily due to lower volume and
margins from extended scope of supply and fabrication of industrial boilers as
well as defense and space- related products other than nuclear fuel assemblies
and reactor components. There were also lower margins on plant enhancements,
replacement parts, and repair and alteration of existing fossil fuel steam
systems, as well as higher royalty income recorded in the prior year. These
decreases were partially offset by higher volume and margins on replacement
nuclear steam generators, nuclear fuel assemblies and reactor components for
the U.S. Government and higher volume on fabrication and erection of fossil
fuel steam and environmental control systems. There were also lower general
and administrative expenses, and lower warranty expense, primarily due to net
favorable warranty reserve adjustments (See Note 16 to the consolidated
financial statements).
Power Generation Systems and Equipment's equity in income of investees
increased $2,457,000 to $8,635,000 due primarily to improved results in three
domestic joint ventures which own and operate a cogeneration plant and two
small power plants.
Backlog for this segment at March 31, 1994 was $2,398,285,000 compared to
$2,614,709,000 at March 31, 1993. At March 31, 1994, this segment's backlog
with the U. S. Government was $775,909,000 (of which $17,055,000 had not yet
been funded). These amounts reflect the impact of Congressional budget
reductions on the advanced solid rocket motor and super conducting super
collider projects. Also, additional U.S. Government budget reductions have
negatively affected this segment's other government operations. The current
competitive economic environment has also negatively affected demand for other
industrial related product lines and these markets are expected to remain very
competitive.
The current competitive economic environment and uncertainties created by
passage of the Energy Policy Act of 1992 and the Clean Air Act Amendments of
1990 have caused U.S. utilities to defer repairs and refurbishments on existing
plants. However, the Clean Air Act has created demand for environmental
control equipment and related plant enhancements. Most utilities have already
purchased equipment to comply with Phase I of the Clean Air Act,
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<PAGE> 24
and they will purchase equipment to comply with Phase II deadlines in a gradual
manner, spread out over the next several years as various deadlines approach.
Electric utilities in Asia are active purchasers of large, new baseload
generating units, due to the rapid growth of the Pacific Rim economies and to
the small existing stock of electrical generating capacity in most developing
countries.
Marine Construction Services' revenues increased $183,073,000 to $632,242,000
primarily due to the acquisition of DCC. This increase was partially offset by
lower volume in fabrication and engineering operations, and procured materials.
Marine Construction Services' segment operating income increased $5,029,000 to
$8,445,000, primarily due to the acquisition of DCC, improved margins on
fabrication operations, and the accelerated depreciation and write-off of
certain fabrication facilities and marine construction equipment in the prior
year. These increases were partially offset by lower volume in fabrication and
engineering operations.
Backlog for this segment at March 31, 1994 was $430,338,000 (including
$233,299,000 from DCC). Excluding DCC, this was down from backlog of
$305,390,000 at March 31, 1993. This segment's markets are expected to be at a
low level in the U.S. during 1995. The overcapacity of marine equipment will
continue to result in a competitive environment and put pressure on profit
margins.
Interest expense decreased $21,275,000 to $53,870,000, primarily due to changes
in debt obligations and interest rates prevailing thereon. The decrease
reflects the redemption of high coupon debt during April and June 1993, and a
reduction in accrued interest on proposed tax deficiencies.
Other-net expense increased $6,829,000 to $9,066,000. The increase was
primarily due to the inclusion of DCC's minority interest expense in the
current period and gains on the sale of interests in two commercial nuclear
joint ventures (See Note 3 to the consolidated financial statements), all in
the prior period.
Provision for (benefit from) income taxes increased $6,473,000 to a provision
of $915,000 from a benefit of $5,558,000 while loss before the provision for
(benefit from) income taxes, extraordinary items and cumulative effect of
accounting changes decreased $7,236,000 to $25,401,000. The increase in the
provision for income taxes is due primarily to the increase in income from
foreign operations.
Net loss decreased $146,759,000 to $127,066,000 reflecting the cumulative
effect of the change in accounting for non-employee products liability asbestos
claims of $100,750,000 in the current year and the cumulative effect of the
adoption of SFAS No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions," of $240,042,000 in the prior year, in addition to the
other items described above.
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FISCAL YEAR 1993 VS FISCAL YEAR 1992
Power Generation Systems and Equipment's revenues decreased $70,489,000 to
$1,520,976,000. This was primarily due to lower revenues from nuclear fuel
assemblies and reactor components for the U.S. Government and plant
enhancements. Additionally, the segment's controlling interest in its
commercial nuclear joint ventures was sold during December 1991, and revenue
from this activity is no longer included in this segment's revenues. These
decreases were partially offset by higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems and extended
scope of supply and fabrication of industrial boilers.
Power Generation Systems and Equipment's segment operating income decreased
$35,740,000 to $68,545,000. This was primarily due to non-recurring items
which benefitted 1992's results. These items included a Department of Energy
grant for decommissioning and restoration of an inactive nuclear facility, the
inclusion of the commercial nuclear fuel joint venture's results through
December 1991, and the reduction of a provision to relocate a manufacturing
plant. The decrease was also due to lower volume and margins on plant
enhancements and lower volume from nuclear fuel assemblies and reactor
components for the U.S. Government. This decrease was partially offset by
higher volume on fabrication and erection of fossil fuel steam and
environmental control systems and higher margins on defense and space-related
products other than nuclear fuel assemblies and reactor components.
Marine Construction Services' revenues decreased $274,243,000 to $449,169,000
due to lower volume in fabrication and offshore operations. Segment operating
income decreased $1,655,000 to $3,416,000 primarily due to the lower volume in
fabrication and offshore operations and lower margins on fabrication
operations. These were partially offset by improved margins on offshore
operations and reduced general and administrative expenses. There were also
higher equipment writedowns and a contract loss provision in 1992.
Equity in income of investees decreased $4,598,000 to $6,655,000. This
decrease principally resulted from equity income of $5,179,000 from the
commercial nuclear services joint venture in 1992.
Interest expense increased $1,389,000 to $75,145,000. This increase resulted
from changes in debt obligations and interest rates prevailing thereon, which
was partially offset by a reduction in the provision for interest on proposed
income tax deficiencies and lower interest expense resulting from interest rate
swap agreements.
Other-net decreased $48,256,000 to expense of $2,237,000 from income of
$46,019,000. The decrease was principally due to lower gains on the sale of
its interests in two commercial nuclear joint ventures (see Note 3 to the
consolidated financial statements.) In addition, income from management fees
and services applicable to the two commercial nuclear joint ventures of
$8,446,000 was recorded in 1992.
Provision for (benefit from) income taxes decreased $34,253,000 to a benefit of
$5,558,000 from a provision of $28,695,000, while income (loss) from continuing
operations before provision for (benefit from) income taxes, extraordinary
items and cumulative effect of
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<PAGE> 26
accounting changes decreased $91,189,000 to a loss of $32,637,000 from income
of $58,552,000. The decrease in the provision for income taxes is due
primarily to a decrease in income from continuing operations.
Net Income (Loss) decreased $300,314,000 to a loss of $273,825,000 from income
of $26,489,000, reflecting the cumulative effect of the adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
of $240,042,000, in addition to other items described above.
Effect of Inflation and Changing Prices
The Delaware Company's financial statements are prepared in accordance with
generally accepted accounting principles, using historical dollar accounting
(historical cost). Statements based on historical cost, however, do not
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.
The management of the Delaware Company is cognizant of the effects of inflation
and, in order to minimize the negative impact of inflation on its operations,
attempts to cover the increased cost of anticipated changes in labor, material
and service costs, either through an estimation of such changes, which is
reflected in the original fixed price, or through price escalation clauses in
its contracts.
Liquidity and Capital Resources
During 1994, the Delaware Company's cash and cash equivalents decreased
$24,185,000 to $47,364,000 and total debt decreased $79,815,000 to
$606,060,000. During the same period, the Delaware Company provided cash of
$21,020,000 from operating activities and used cash of $28,249,000 for the
acquisition of Delta Catalytic Corporation ("DCC"), $207,646,000 for repayment
of long-term debt, and $15,719,000 for cash dividends on the Delaware Company's
preferred stocks. The Delaware Company provided cash of $92,841,000 from the
issuance of long-term debt and received cash of $100,000,000 as a capital
contribution from International. Also, during the third quarter of fiscal year
1994, the Delaware Company received a capital contribution from International
of $132,283,000 comprised of long-term investments of $129,930,000 (market
value $130,214,000), primarily corporate bonds, and the accrued interest
thereon of $2,353,000. Lower net contracts in progress and advance billings
reflect the timing of billings on certain foreign Power Generation Systems and
Equipment segment contracts.
Pursuant to an agreement with the majority of its principal insurers, the
Delaware Company negotiates and settles products liability asbestos claims from
non-employees and bills these amounts to the appropriate insurers. As a result
of collection delays inherent in this process, reimbursement is usually delayed
for three months or more. The Delaware Company has outstanding receivables of
$29,079,000 at March 31, 1994 from its insurers for reimbursement of these
claims. The number of claims, which management believes peaked in fiscal year
1990, has declined moderately. However, the average amount of these claims
(historical average of less than $3,000 per claim) has continued to rise.
Claims paid in fiscal year 1994 were $112,271,000, including $7,810,000
applicable to insolvent insurers and $3,315,000 relating to the policy year
1979 (see Note 1 to consolidated financial statements). Settlement of the
estimated liability of $135,053,000 at March 31, 1994 for
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<PAGE> 27
future costs relating to insolvent insurers and policy year 1979 is expected to
occur over the next 30 years. The Delaware Company's estimated future costs
relating to policy year 1979 and certain insolvent insurers are derived from
its loss history and constitute management's best estimate of such future
costs. Inherent in the estimate of such future costs are assumptions which may
vary significantly as claims are filed and settled. Accordingly, the amount
ultimately paid may differ materially from the amount provided in the
consolidated financial statements. The collection delays and the amount of
claims paid that are related to insolvent insurance carriers and the policy
year 1979 have not had a material adverse effect upon the Delaware Company's
liquidity, and management believes, based on information currently available,
that they will not have a material adverse effect on liquidity in the future.
The Delaware Company's expenditures for property, plant and equipment increased
$4,983,000 to $62,650,000 in 1994. While the majority of these expenditures
were incurred to maintain and replace existing facilities and equipment,
$5,000,000 was expended in connection with the purchase of a fabrication yard
in Nueces County, Texas and $8,098,000 was expended on a new combustion and
emission test facility at its Alliance, Ohio research center. The Delaware
Company has committed to make capital expenditures of approximately $52,964,000
during fiscal year 1995. In addition to maintaining the Delaware Company's
existing facilities, these expenditures include $38,560,000 for a new concept
steam generator for the Naval Reactor Program in Lynchburg, Virginia, the
anticipated purchase of a barge currently leased and the completion of a new
combustion and emission facility in Alliance, Ohio.
During April and May 1993, the Delaware Company issued $87,000,000 of Series B
Medium Term Notes at maturities ranging from four to twenty-nine years and
interest rates ranging from 6.50% to 8.75%. These notes have an average
maturity of approximately twenty years and an average interest rate of
approximately 7.95%.
At March 31, 1994 and 1993, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of approximately $170,000,000 under an agreement with a certain U.S.
Bank. The maximum sales limit available under this agreement was $225,000,000
at March 31, 1994 (See Note 8 to the consolidated financial statements).
At March 31, 1994 and 1993, the Delaware Company had available to it various
uncommitted short-term lines of credit from banks totalling $204,699,000 and
$114,136,000, respectively. Borrowings outstanding against these facilities at
March 31, 1994 were $15,519,000. There were no borrowings against these
facilities at March 31, 1993. The Babcock & Wilcox Company has available to it
a $128,000,000 unsecured and committed revolving line of credit facility.
Loans outstanding under the revolving credit facility may not exceed the banks'
commitments thereunder, and it is a condition to borrowing under the revolving
credit facility that the borrower's consolidated net tangible assets exceed a
certain level. There were no borrowings against this facility at March 31, 1994
or 1993. DCC had available from a certain Canadian bank, an unsecured and
committed revolving credit facility of $14,493,000 which expires on May 31,
1997. No borrowings were outstanding against this facility at March 31, 1994.
The Delaware Company is restricted, as a result of covenants in certain
agreements, in its
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ability to transfer funds to International and its subsidiaries through cash
dividends or through unsecured loans or investments. At March 31, 1994,
substantially all of the net assets of the Delaware Company were subject to
such restrictions. At March 31, 1994, the most restrictive of these covenants
with respect to the payment of dividends by the Delaware Company would prohibit
the payment of dividends other than current dividends on existing preferred
stock.
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc. ("MIICO"),
entered into a reverse repurchase agreement whereby either party acting as a
"buyer" would purchase for cash certain U. S. Government obligations owned by
the other party acting as a "seller", and, at the date of purchase, the
"seller" would agree to repurchase the same securities at a set price
(including accrued interest) at a future specified date. At March 31, 1994,
MIICO had repurchased all government obligations purchased by the Delaware
Company under this agreement.
The Delaware Company and MIICO are parties to an agreement pursuant to which
the Delaware Company may borrow up to $150,000,000 from MIICO at interest rates
computed at the applicable federal rate determined by the IRS. There were no
borrowings against this agreement at March 31, 1994 or 1993.
Working capital increased to $146,797,000 at March 31, 1994 from $41,215,000 at
March 31, 1993. During 1995, the Delaware Company expects to obtain funds to
meet capital expenditure, working capital and debt maturity requirements from
operating activities, and additional borrowings. Leasing agreements for
equipment, which are short-term in nature, are not expected to impact the
Delaware Company's liquidity nor capital resources.
The Delaware Company's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series
B $2.60 Cumulative Preferred Stock were the same in 1994 and 1993.
The Delaware Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This standard requires, among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between the financial statement and income tax basis of assets and liabilities
and to tax net operating loss carryforwards, to the extent that realization of
such benefits is more likely than not.
The Delaware Company has provided a valuation allowance ($10,239,000 at March
31, 1994) primarily for certain state and local deferred tax assets which
cannot be realized through carrybacks and future reversals of existing taxable
temporary differences. Management believes that remaining deferred tax assets
($351,666,000 at March 31, 1994) in all other tax jurisdictions are realizable
through carrybacks and future reversals of existing taxable temporary
differences and, if necessary, the implementation of tax planning strategies
involving sales and sale/leasebacks of appreciated assets. Major uncertainties
that affect the ultimate realization of deferred tax assets include the risks
of incurring operating losses in the future and the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
These factors have been considered in determining the valuation allowance.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.
24
<PAGE> 29
New Accounting Standards
The Delaware Company adopted SFAS No. 106 effective April 1, 1992 for all
domestic plans. The Delaware Company plans to adopt SFAS No. 106 for foreign
plans during fiscal year 1996 and the adoption is not expected to have a
material effect on the consolidated financial statements of the Delaware
Company. The new standard does not have any impact on the cash requirements of
any domestic or foreign postretirement health and welfare plan.
In November 1992, the FInancial Accounting Standards Board ("FASB") issued SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," effective for
fiscal years beginning after December 15, 1993. SFAS No. 112 requires accrual
accounting, under certain conditions, for the estimated cost of benefits
provided by an employer to former or inactive employees after employment but
before retirement. The new standard will have no impact on the cash
requirements for any postemployment benefits, and will not have a material
effect on the consolidated financial statements of the Delaware Company.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective for fiscal years beginning after
December 15, 1993. SFAS No. 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Based on its current portfolio
management practices, the Delaware Company will report its investments at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of stockholder's equity. The initial impact of the new
standard will not have a material effect on the consolidated financial
statements of the Delaware Company.
25
<PAGE> 30
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
McDermott Incorporated
We have audited the accompanying consolidated balance sheet of McDermott
Incorporated as of March 31, 1994 and 1993, and the related consolidated
statements of income (loss) and retained earnings and cash flows for each of
the three years in the period ended March 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
Incorporated at March 31, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
has provided for estimated future costs for non- employee products liability
asbestos claims. Inherent in the estimate of such future costs are assumptions
which may vary significantly as claims are filed and settled. Accordingly, the
ultimate loss may differ materially from the amount provided in the
consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for recoveries of products liability claims
in 1994 and income taxes and postretirement benefits other than pensions in
1993.
ERNST & YOUNG
New Orleans, Louisiana
May 9, 1994
26
<PAGE> 31
MCDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
MARCH 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
---------------- ---------------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 47,364 $ 71,549
Investments in government obligations,
under reverse repurchase agreement
with an affiliate - 78,860
Accounts receivable - trade 255,441 221,042
Accounts receivable - other 58,787 69,101
Accounts receivable from McDermott
International, Inc. 11,428 9,980
Contracts in progress 214,649 220,866
Inventories 66,214 65,376
Deferred Income taxes 98,627 97,813
Other current assets 8,876 7,586
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 761,386 842,173
- -------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land 31,322 17,167
Buildings 193,588 202,177
Machinery and equipment 1,154,800 1,130,463
Property under construction 35,895 33,562
- -------------------------------------------------------------------------------------------------------------
1,415,605 1,383,369
Less accumulated depreciation 932,722 911,019
- -------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 482,883 472,350
- -------------------------------------------------------------------------------------------------------------
Investments 130,121 -
- -------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net
Assets of Purchased Businesses Less Accumulated
Amortization of $84,170,000 at March 31, 1994
and $77,828,000 at March 31, 1993 143,064 132,236
- -------------------------------------------------------------------------------------------------------------
Investment in McDermott International, Inc. 610,392 615,742
- -------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 225,239 215,425
- -------------------------------------------------------------------------------------------------------------
Other Assets 133,020 67,732
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 2,486,105 $ 2,345,658
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 32
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
---------------- ---------------
<S> <C> <C>
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 21,528 $ 193,839
Accounts payable 141,412 128,031
Accounts payable to McDermott
International, Inc. 17,373 12,098
Accrued employee benefits 93,487 86,678
Accrued interest 44,619 52,288
Accrued liabilities - other 122,005 140,804
Advance billings on contracts 135,505 146,132
U.S. and foreign income taxes 38,660 41,088
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 614,589 800,958
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt 584,532 492,036
- -------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 370,828 360,467
- -------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 136,405 11,867
- -------------------------------------------------------------------------------------------------------------
Other Liabilities 95,285 81,879
- -------------------------------------------------------------------------------------------------------------
Contingencies
- -------------------------------------------------------------------------------------------------------------
Minority Interest 15,691 4,478
- -------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible,
$1.00 par value; at redemption value 88,089 88,089
Series B $2.60 cumulative, $1.00 par value;
at redemption value 108,583 116,393
- -------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stocks 196,672 204,482
- -------------------------------------------------------------------------------------------------------------
Common Stock and Other Stockholder's Equity:
Common stock, par value $1.00 per share,
3,700 shares authorized and issued,
3,600 shares outstanding 4 4
Capital in excess of par value 589,085 356,802
Retained earnings (deficit) (104,859) 37,926
Minimum pension liability (620) (5
Cumulative foreign exchange translation
adjustments (11,507) (5,236
- -------------------------------------------------------------------------------------------------------------
Total Common Stock and Other
Stockholder's Equity 472,103 389,491
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 2,486,105 $ 2,345,658
=============================================================================================================
</TABLE>
28
<PAGE> 33
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Revenues $ 2,243,366 $ 1,969,622 $ 2,309,408
- ---------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 1,985,589 1,707,886 2,006,913
Depreciation and amortization 66,825 82,597 83,954
Selling, general and
administrative expenses 168,039 147,321 149,395
- ---------------------------------------------------------------------------------------------------------------
2,220,453 1,937,804 2,240,262
- ---------------------------------------------------------------------------------------------------------------
22,913 31,818 69,146
Equity in Income of Investees 9,080 6,655 11,253
- ---------------------------------------------------------------------------------------------------------------
Operating Income 31,993 38,473 80,399
- ---------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 5,542 6,272 5,890
Interest expense (53,870) (75,145) (73,756)
Other-net (9,066) (2,237) 46,019
- ---------------------------------------------------------------------------------------------------------------
(57,394) (71,110) (21,847)
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Provision for (Benefit from) Income
Taxes, Extraordinary Items and Cumulative
Effect of Accounting Changes (25,401) (32,637) 58,552
Provision for (Benefit from) Income Taxes 915 (5,558) 28,695
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
before Extraordinary Items and Cumulative
Effect of Accounting Changes (26,316) (27,079) 29,857
Loss from Discontinued Operations - - (3,368)
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) before Extraordinary Items and
Cumulative Effect of Accounting Changes (26,316) (27,079) 26,489
Extraordinary Items - (10,431) -
Cumulative Effect of Accounting Changes (100,750) (236,315) -
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) (127,066) (273,825) 26,489
- ---------------------------------------------------------------------------------------------------------------
Retained Earnings - Beginning of year 37,926 327,636 317,032
Deduct Cash Dividends - Preferred Stocks 15,719 15,885 15,885
- ---------------------------------------------------------------------------------------------------------------
Retained Earnings (Deficit) - End of Year $ (104,859) $ 37,926 $ 327,636
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements. Significant
related party transactions are disclosed in Note 5.
29
<PAGE> 34
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1994 1993 1992
--------------- -------------- ----------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (127,066) $ (273,825) $ 26,489
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 66,825 82,597 83,954
Gain on sale and disposal of assets (904) (24,452) (57,111)
Cumulative effect of accounting changes 100,750 236,315 -
Extraordinary items - 10,431 -
Provision for (benefit from) deferred taxes 746 1,379 (74,907)
Other (1,050) 1,837 250
Changes in assets and liabilities, net of effects
of acquisition and divestitures:
Accounts receivable 6,194 58,244 (51,812)
Accounts payable 8,361 5,369 (1,954)
Inventories 1,738 9,720 6,203
Net contracts in progress and advance billings 29,470 53,206 (31,560)
Income taxes (8,614) (75,355) 58,450
Accrued interest (7,666) (52,931) (9,761)
Accrued liabilities (29,469) 5,253 (21,361)
Other, net (18,295) (39,818) (32)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 21,020 (2,030) (73,152)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Delta Catalytic Corporation (28,249) - -
Proceeds from sale and disposal of assets 3,712 64,048 70,364
Proceeds from sale of discontinued operations - - 20,368
Purchases of property, plant and equipment (62,650) (57,667) (60,027)
Net (purchases) sales of short-term investments
and government obligations (497) (474) 56,746
Purchases of government obligations,
under reverse repurchase agreements
with affiliates (674,203) (6,033,975) (794,184)
Sales of government obligations, under reverse
repurchase agreements with affiliates 753,063 6,102,052 759,307
Proceeds from redemption of International stock 2,500 2,500 -
Collection of loan receivable from an affiliate - - 9,404
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (6,324) 76,484 61,978
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 35
Continued
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1994 1993 1992
-------------- --------------- ----------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (207,646) $ (105,463) $ (226,005)
Issuance of long-term debt 92,841 89,000 263,818
Decrease in short-term borrowing (4,580) - (67,539)
Dividends paid (15,719) (15,885) (15,885)
Capital contribution from International 100,000 - -
Other (2,776) (1,656) (1,750)
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (37,880) (34,004) (47,361)
- ----------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (1,001) (324) (705)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (24,185) 40,126 (59,240)
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 71,549 31,423 90,663
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 47,364 $ 71,549 $ 31,423
================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 61,539 $ 128,079 $ 64,285
Income taxes $ 11,398 $ 71,187 $ 50,241
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 36
MCDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of McDermott
Incorporated and all subsidiaries. Investments in joint venture and other
entities in which McDermott Incorporated has a 20% to 50% interest are
accounted for on the equity method. Differences between the cost of equity
method investments and the amount of underlying equity in net assets of the
investees are amortized systematically to income. All significant intercompany
transactions and accounts have been eliminated. Certain amounts previously
reported have been reclassified to conform with the presentation at March 31,
1994. The notes to consolidated financial statements are presented on the
basis of continuing operations, unless otherwise stated.
Unless the context otherwise requires, hereinafter, the "Delaware Company" will
be used to mean McDermott Incorporated and its consolidated subsidiaries
(including Babcock & Wilcox Investment Company and its principal subsidiary,
The Babcock & Wilcox Company), and "International" will be used to mean
McDermott International, Inc., a Panamanian corporation. International is the
parent company of the Delaware Company.
Changes in Accounting Policies
Products Liabilities - As a result of the consensus reached on Emerging Issues
Task Force ("EITF") Issue No. 93-5, a company is no longer permitted to offset,
for recognition purposes, reasonably possible recoveries against probable
losses which had been the Delaware Company's practice with respect to estimated
future costs for non-employee products liability asbestos claims. During the
third quarter of fiscal year 1994, and effective April 1, 1993, the Delaware
Company adopted this provision of EITF Issue No. 93-5 as a change in accounting
principle and provided for estimated future costs to the extent that recovery
from its insurers is not determined to be probable. The Delaware Company has
an agreement with a majority of its principal insurers concerning the method of
allocation of products liability asbestos claim payments to the years of
coverage. However, amounts allocable to policy year 1979 are excluded from this
agreement, and the Delaware Company's ability to recover these amounts, and
amounts allocable to certain insolvent insurers, is only reasonably possible,
thus a provision for these estimated future costs has been recognized. The
Delaware Company's estimated future costs relating to policy year 1979 and
certain insolvent insurers are derived from its loss history and constitute
management's best estimate of such future costs. As of March 31, 1994, the
estimated amount of liabilities arising from all pending and future asbestos
claims for non-employees was in excess of $1,100,000,000, of which less than
$100,000,000 has been asserted. The estimated amount of future liabilities and
costs allocable to insolvent insurers and the policy year 1979 was
$135,053,000. Inherent in the estimate of such future costs are expected
trends in claim
32
<PAGE> 37
severity and frequency and other factors, including recoverability from
insurers, which may vary significantly as claims are filed and settled.
Accordingly, the ultimate loss may differ materially from the amount provided
in the consolidated financial statements.
The cumulative effect of the accounting change at April 1, 1993 was a charge
of $100,750,000 (net of income taxes of $54,250,000) in fiscal year 1994. The
adoption of this provision of EITF Issue No. 93-5 resulted in a decrease in
Loss before Cumulative Effect of Accounting Change of $19,947,000 in fiscal
year 1994, as costs that would have been recognized under the Delaware
Company's prior practice are included in the cumulative effect of the
accounting change. Pro forma amounts reflecting the effect of retroactive
application of the accounting change to prior periods are not presented because
the amounts are not determinable.
Postretirement Health Care Benefits - During the fourth quarter of 1993 and
effective April 1, 1992, the Delaware Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Statement requires the
accrual method of accounting for the cost of providing health and welfare
benefits and expanded postretirement health and welfare plan disclosures. In
accordance with the Statement, the Delaware Company elected immediate
recognition of its transition obligation and recorded $240,042,000 (net of
income tax benefit of $136,228,000) as the cumulative effect of an accounting
change. In fiscal year 1993, other than the cumulative effect of the
accounting change, the adoption of SFAS No. 106 resulted in a decrease in
Income before Extraordinary Items and Cumulative Effect of Accounting Changes
of $4,460,000. Postretirement benefit cost for prior years has not been
restated and was recognized by expensing the insurance programs' premiums, the
self-insured program's claims paid, and the estimated unpaid liability for
claims incurred by plan participants. The aggregate cost, including
discontinued operations, was $24,696,000 in fiscal year 1992.
Income Taxes - Effective April 1, 1992, the Delaware Company adopted SFAS No.
109, "Accounting for Income Taxes". This statement establishes new accounting
and reporting standards for the effects of income taxes. It continues the
liability approach provided by its predecessor standard, SFAS No. 96, which was
adopted by the Delaware Company in fiscal year 1989, but contains new
requirements for asset recognition. It also contains new requirements
regarding balance sheet classification and prior business combinations. The
cumulative effect of the accounting change reflects the impact of the net
reduction in enacted tax rates on temporary differences resulting from
adjustments of remaining assets and liabilities acquired in the acquisition of
The Babcock & Wilcox Company in 1978 from net of tax to pre-tax amounts. The
cumulative effect of the accounting change on prior years at April 1, 1992 was
$3,727,000. Other than the cumulative effect, the accounting change had no
material effect on fiscal year 1993.
Foreign Currency Translation
Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U. S. Dollars at current exchange
rates and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded in a separate component of equity; an
analysis of these adjustments follows:
33
<PAGE> 38
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance March 31, 1991 $ 1,772
Translation adjustments for fiscal year 1992 (1,481)
- -----------------------------------------------------------------------------------------------------------
Balance March 31, 1992 291
Translation adjustments for fiscal year 1993 (5,527)
- -----------------------------------------------------------------------------------------------------------
Balance March 31, 1993 (5,236)
Translation adjustments for fiscal year 1994 (6,271)
- -----------------------------------------------------------------------------------------------------------
Balance March 31, 1994 $ (11,507)
===========================================================================================================
</TABLE>
Foreign currency transaction adjustments are reported in income. Included in
Other Income (Expense) are transaction gains (losses) of $1,695,000, ($47,000),
and ($411,000) for fiscal years 1994, 1993 and 1992, respectively.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or components thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. Revenues and related costs so recorded, plus accumulated
contract costs that exceed amounts invoiced to customers under the terms of the
contracts, are included in Contracts in Progress. Billings that exceed
accumulated contract costs and revenues and costs recognized under percentage
of completion are included in Advance Billings on Contracts. Most long-term
contracts have provisions for progress payments. Contract price and cost
estimates are reviewed periodically as the work progresses and adjustments
proportionate to the percentage of completion are reflected in income in the
period when such estimates are revised. There are no unbilled revenues which
will not be billed. Provisions are made currently for all known or anticipated
losses. Claims for extra work or changes in scope of work are included in
contract revenues when collection is probable. Included in Accounts Receivable
and Contracts in Progress are approximately $51,337,000 and $41,658,000
relating to commercial and U. S. Government contracts claims whose final
settlement is subject to future determination through negotiations or other
procedures which had not been completed at March 31, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
1994 1993
-------------- -------------
(In thousands)
<S> <C> <C>
Included in Contracts in Progress are:
Costs Incurred less costs of revenue recognized $ 85,411 $ 79,089
Revenues recognized less billings to customers 129,238 141,777
- -------------------------------------------------------------------------------------------------------------
Contracts in Progress $ 214,649 $ 220,866
=============================================================================================================
Included in Advance Billings on Contracts are:
Billings to customer less revenues recognized $ 148,430 $ 153,752
Costs incurred less cost of revenue recognized (12,925) (7,620)
- -------------------------------------------------------------------------------------------------------------
Advance Billings on Contracts $ 135,505 $ 146,132
=============================================================================================================
</TABLE>
34
<PAGE> 39
The Delaware Company is usually entitled to financial settlements relative to
the individual circumstances of deferrals or cancellations of Power Generation
Systems and Equipment contracts. The Delaware Company does not recognize such
settlements or claims for additional compensation until final settlement is
reached.
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
<TABLE>
<CAPTION>
1994 1993
-------------- ------------
(In thousands)
<S> <C> <C>
Retainages $ 103,402 $ 139,491
=============================================================================================================
Retainages expected to be collected after one year $ 39,370 $ 56,250
=============================================================================================================
</TABLE>
Of its long-term retainages at March 31, 1994, the Delaware Company anticipates
collection as follows: $18,704,000 in fiscal year 1996, $17,452,000 in fiscal
year 1997, and $3,214,000 in fiscal year 1998.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on
an average cost basis except for certain materials inventories, for which the
last-in-first-out (LIFO) method is used. The cost of approximately 22% and 18%
of total inventories was determined using the LIFO method at March 31, 1994 and
1993, respectively. Consolidated inventories at March 31, 1994 and 1993 are
summarized as follows:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 40,281 $ 36,320
Work in Progress 17,566 17,678
Finished Goods 8,367 11,378
- --------------------------------------------------------------------------------------------------------------
$ 66,214 $ 65,376
==============================================================================================================
</TABLE>
Warranty Expense
- ----------------
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems and Equipment segment,
is accrued relative to revenue recognition on the respective contracts. In
addition, specific provisions are made where the costs of warranty are expected
to significantly exceed such accruals.
Environmental Clean-up Costs
The Delaware Company accrues for future decommissioning and decontamination of
its nuclear facilities that will permit the release of these facilities to
unrestricted use at the end of each facility's life, which is a condition of
its licenses from the Nuclear Regulatory Commission. Such accruals are based
on the estimated cost of those activities over the economic useful life of each
facility, which is estimated at 40 years. During fiscal year 1992, the
provision was reduced $14,900,000 as a result of a Department of Energy grant
for one facility.
35
<PAGE> 40
Research and Development
The cost of research and development which is not performed on specific
contracts is charged to operations as incurred. Such expense was approximately
$19,583,000, $18,914,000 and $20,900,000 in fiscal years 1994, 1993 and 1992,
respectively. In addition, expenditures on research and development activities
of approximately $48,112,000, $42,082,000 and $67,100,000 in fiscal years 1994,
1993 and 1992, respectively, were paid for by customers of the Delaware
Company.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is depreciated
on the straight-line method, using estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment.
Major marine vessels are depreciated on the units-of-production method based on
the utilization of each vessel. Depreciation expense calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation, or 50% of
cumulative straight-line depreciation.
Maintenance, repairs and renewals which do not materially prolong the useful
life of an asset are expensed as incurred except for drydocking costs for the
marine fleet, which are estimated and accrued over the period of time between
drydockings, and such accruals are charged to operations currently.
Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of the cost over fair value of net assets of purchased businesses
primarily pertains to The Babcock & Wilcox Company, which is being amortized on
a straight-line basis over forty years.
Capitalization of Interest Cost
In fiscal years 1994, 1993 and 1992, total interest cost incurred was
$55,187,000, $76,808,000 and $76,286,000, respectively, of which $1,317,000,
$1,663,000 and $2,530,000, respectively, was capitalized.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased, which are not held as part of the long-term investment
portfolio.
Investments
Investments held as long term investments (primarily corporate bonds) are
carried at amortized cost. At March 31, 1994, the market and face values of
the investments (including $989,000 of short-term investments carried at
amortized cost) were $129,630,000 and $131,110,000, respectively. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding the future adoption of FASB Statement No. 115, "Accounting
for Investments in Debt and Equity Securities."
36
<PAGE> 41
Forward Exchange Contracts
The Delaware Company enters into forward exchange contracts primarily as hedges
relating to identifiable currency positions. These financial instruments are
designed to minimize exposure and reduce risk from exchange rate fluctuations
in the regular course of business. Gains and losses on forward exchange
contracts which hedge exposures on firm foreign currency commitments are
deferred and recognized as adjustments to the bases of those assets. Gains and
losses on forward exchange contracts which hedge foreign currency assets or
liabilities are recognized in income as incurred. Such amounts effectively
offset gains and losses on the foreign currency assets or liabilities that are
hedged.
At March 31, 1994, the Delaware Company has forward exchange contracts to
purchase $300,302,000 in foreign currencies (primarily Canadian Dollars), and
to sell $233,425,000 in foreign currencies (primarily Canadian dollars and
Japanese Yen), at varying maturities from fiscal year 1995 through 1998.
NOTE 2 - ACQUISITION OF DELTA CATALYTIC CORPORATION
During June 1993, the Delaware Company acquired a controlling interest in Delta
Catalytic Corporation ("DCC") of Calgary, Alberta, Canada for $28,249,000.
This was the first step in a two-step transaction which will be completed
during fiscal year 1997, when the Delaware Company intends to acquire the
balance of DCC. The purchase price for the second step in fiscal 1997 will be
determined based upon DCC's earnings for the period from November 1992 to
October 1996. DCC provides engineering, procurement, construction, and
maintenance services to industries worldwide; including oil, gas, marine
construction and hydrocarbon processing. The purchase has been reflected in
the consolidated balance sheet of the Delaware Company. Results of DCC's
operations from the date of acquisition to March 31, 1994 are included in the
Delaware Company's consolidated results and are included in the Marine
Construction Services' segment. Revenues, segment operating income and net
income were $228,822,000, $7,207,000, and $182,000, respectively, for the ten
months ended March 31, 1994. The following pro forma income statement
information for the Delaware Company is presented as though the acquisition of
DCC had occurred on April 1, 1992:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
3/31/94 3/31/93
---------------- ----------------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 2,312,853 $ 2,470,392
Loss before Extraordinary Items and Cumulative
Effect of Accounting Changes $ (25,989) $ (26,635)
Net Loss $ (126,739) $ (273,381)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition of DCC been consummated as of the above dates, nor
are they necessarily indicative of future operating results.
The acquisition was accounted for under the purchase method and the excess of
cost over fair value of net assets of the purchased business is being amortized
over a period of 10 years. The
37
<PAGE> 42
purchase price has been allocated to the underlying assets and liabilities
based on fair values at the date of acquisition. A summary of the purchase
price allocation is as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net Working Capital $ 10,531
Excess of Cost Over Fair Value of Net Assets
of Purchased Business 17,170
Net Property, Plant and Equipment 14,887
Other Non-Current Liabilities, Net (14,339)
- ---------------------------------------------------------------------------------------------------
Total $ 28,249
===================================================================================================
</TABLE>
NOTE 3 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES
During December 1991, the Delaware Company reduced its participation in the
nuclear fuel assembly and commercial nuclear services business by selling a
portion of its interests in B&W Fuel Company ("BWFC") and B&W Nuclear Service
Company ("BWNSC") to a consortium of U. S. subsidiaries of three French
companies and the U.S. subsidiary of Framatome S.A. ("Framatome"),
respectively. The Delaware Company retained a 25% interest in BWFC and BWNSC.
Both joint ventures were accounted for on a cost basis after the sale as the
Delaware Company no longer exercised significant influence over these joint
ventures. Prior to the sale BWFC was part of the Delaware Company's
consolidated financial statements and BWNSC was accounted for as an equity
investment. Under the terms of the December 1991 sales agreements, Framatome
purchased a 25% interest in BWNSC for $45,000,000 and the three French
companies, which included Framatome, purchased a 26% interest in BWFC for
$13,800,000. In addition, the Delaware Company was paid $17,000,000 relating
to fees earned from, and the termination of, a management services agreement
and received $33,820,000 in loan proceeds. On March 30, 1993, the Delaware
Company sold its remaining interests in BWFC and BWNSC to the same parties for
$10,150,000 and $32,440,000, respectively, and the loans of $33,820,000 were
repaid.
Included in the Consolidated Statement of Income (Loss) and Retained Earnings
(Deficit) were revenues of $44,639,000 and a loss of $419,000 applicable to
BWFC operations, for the fiscal year ended March 31, 1992. Included in Equity
in Income of Investees was income applicable to BWNSC of $5,179,000 for the
fiscal year ended March 31, 1992. Included in Other-net were gains on the
sales of $23,968,000 and $57,397,000 for the fiscal years ended March 31, 1993
and 1992, respectively, and income from management fees and services applicable
to these operations of $8,446,000 for the fiscal year ended March 31, 1992.
The Delaware Company's investments in entities which are accounted for on the
equity method were $27,695,000 and $21,703,000 at March 31, 1994 and 1993,
respectively. Transactions with entities for which investments are accounted
for on the equity method included sales to ($5,443,000, $5,909,000 and
$8,368,000 in fiscal years 1994, 1993 and 1992, respectively) and purchases
from ($3,510,000, $330,000 and $11,452,000 in fiscal years 1994, 1993 and 1992,
respectively) these entities.
38
<PAGE> 43
Summarized combined balance sheet and income statement information based on the
most recent financial information for the Delaware Company's equity investments
in joint ventures and other entities are presented below:
<TABLE>
<CAPTION>
1994 1993
------------- -------------
(In thousands)
<S> <C> <C>
Current Assets $ 70,342 $ 30,942
Non-Current Assets 254,386 217,044
-------------------------------------------------------------------------------------------
Total Assets $ 324,728 $ 247,986
===========================================================================================
Current Liabilities $ 69,373 $ 26,740
Non-Current Liabilities 165,885 170,187
Owners' Equity 89,470 51,059
-------------------------------------------------------------------------------------------
Total Liabilities and Owners'
Equity $ 324,728 $ 247,986
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
Revenues $ 147,394 $ 60,519 $ 156,870
Gross Profit $ 23,253 $ 39,473 $ 62,842
Income (Loss) before Provision
for Income Taxes $ 13,117 $ 14,094 $ (1,613)
Provision for Income Taxes 2,672 410 344
--------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 10,445 $ 13,684 $ (1,957)
========================================================================================================
</TABLE>
39
<PAGE> 44
NOTE 4 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1994 and 1993
were as follows:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued warranty expense $ 11,745 $ 13,968
Accrued provisions for facility closings and dispositions 2,647 4,360
Accrued vacation pay 9,726 9,680
Accrued liabilities for self-insurance (including
postretirement health care benefits) 188,278 187,090
Accrued liabilities for executive and
employee incentive compensation 14,145 14,007
Accrued pension liability 7,260 5,260
Accrued interest on proposed tax deficiencies 11,874 12,710
Allowance for doubtful accounts 1,402 6,566
Long-term contracts 29,957 6,530
Inventory valuation allowances 2,990 2,983
Investments in joint ventures 7,111 6,799
Loss on extinguishment of debt - 5,060
Environmental and products liabilities 57,293 6,388
Other 17,477 13,442
- ------------------------------------------------------------------------------------------------------------
Total deferred tax assets 361,905 294,843
Valuation allowance for deferred
tax assets (10,239) (3,149)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets 351,666 291,694
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property. plant and equipment 79,779 81,979
Long-term contracts 1,156 3,174
Prepaid pension costs 89,215 81,792
Investments in joint ventures 28,056 27,463
Other 1,041 1,147
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 199,247 195,555
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 152,419 $ 96,139
============================================================================================================
</TABLE>
40
<PAGE> 45
Income (loss) from continuing operations before provision for (benefit from)
income taxes, extraordinary items and cumulative effect of accounting changes
was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
U. S. $ (57,555) $ (40,004) $ 53,830
Other than U. S. 32,154 7,367 4,722
- ------------------------------------------------------------------------------------------------------------
$ (25,401) $ (32,637) $ 58,552
============================================================================================================
</TABLE>
The provision for (benefit from) income taxes consists of:
<TABLE>
1994 1993 1992
------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ (15,083) $ (9,636) $ 85,899
State and local 1,804 630 15,939
Foreign 13,448 2,069 1,764
- ------------------------------------------------------------------------------------------------------------
Total current 169 (6,937) 103,602
- ------------------------------------------------------------------------------------------------------------
Deferred:
Federal 1,268 (289) (67,386)
State and local (4,392) 1,115 (7,374)
Foreign 3,870 553 (147)
- ------------------------------------------------------------------------------------------------------------
Total deferred 746 1,379 (74,907)
- ------------------------------------------------------------------------------------------------------------
Provision for (Benefit from) Income Taxes $ 915 $ (5,558) $ 28,695
============================================================================================================
</TABLE>
The effective income tax rate on continuing operations is reconciled to the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1994 1993 1992
PERCENT PERCENT PERCENT
------- ------- -------
<S> <C> <C> <C>
Statutory federal tax rate (35.0) (34.0) 34.0
State and local income tax effect 0.8 3.5 9.6
Foreign operations 15.3 2.8 0.9
Excess of cost over fair value of net assets
of The Babcock & Wilcox Company 8.7 5.3 2.9
Non-deductible business expenses 3.0 2.5 1.5
Dividends from affiliates 7.4 5.8 1.8
Tax benefit of NOL utilization - (4.6) (2.6)
Minority interest income 3.3 1.0 (0.3)
Other .1 0.7 1.2
- ------------------------------------------------------------------------------------------------------------
Effective Income Tax Rate 3.6 (17.0) 49.0
============================================================================================================
</TABLE>
41
<PAGE> 46
Undistributed earnings of consolidated foreign subsidiaries amounted to
approximately $40,700,000 at March 31, 1994. These earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state and local income taxes has been provided. Upon distribution of those
earnings, the Delaware Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes
payable to the foreign jurisdictions. The unrecognized deferred income tax
liability is estimated to be approximately $15,800,000. Withholding taxes of
$3,700,000 would be payable upon remittance of all previously unremitted
earnings at March 31, 1994.
During fiscal year 1992, a decision was entered in the United States Tax Court
concerning the Delaware Company's U.S. income tax liability for the fiscal year
ended March 31, 1983 disposing of all significant U.S. federal income tax
issues for that year. The IRS has issued notices for fiscal years 1984 through
1988 asserting deficiencies in the amount of net operating losses and taxes
reported. The deficiencies are based on issues substantially similar to those
of earlier years. The Delaware Company believes that any income taxes
ultimately assessed will not exceed amounts already provided.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Delaware Company has material transactions with International and its other
subsidiaries occurring in the normal course of operations. Transactions which
are included in the Delaware Company's revenues include the sales of
engineering and design services and fabrication services ($7,415,000,
$45,832,000, and $106,492,000 in fiscal years 1994, 1993 and 1992 respectively)
and the leasing of equipment ($16,107,000, $25,195,000 and $23,343,000, in
fiscal years 1994, 1993 and 1992, respectively). Other transactions include
the allocation of general and administrative and other costs to International
($8,491,000, $8,304,000 and $6,458,000 in fiscal years 1994, 1993 and 1992,
respectively), placing certain insurance coverage (at prices determined on an
annual basis of $24,582,000, $18,096,000, and $47,478,000 in fiscal years 1994,
1993 and 1992, respectively, including discontinued operations) through
commercial insurance carriers which in turn substantially reinsure such
exposure to a wholly-owned subsidiary of International, and the management of
certain of the investments of the Delaware Company and its pension plans by a
wholly-owned subsidiary of International for which the Delaware Company paid
fees of $2,528,000, $2,451,000 and $2,220,000 in fiscal years 1994, 1993 and
1992, respectively.
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc., ("MIICO"),
entered into a reverse repurchase agreement whereby either party acting as a
"buyer" would purchase for cash certain U. S. Government obligations owned by
the other party acting as a "seller", and, at the date of purchase, the
"seller" would agree to repurchase the same securities at a set price
(including accrued interest) at a future specified date. At March 31, 1993,
the Delaware Company held securities which it had purchased with aggregate
principal amounts of $78,860,000 under this agreement. At March 31, 1994,
MIICO had repurchased all government obligations purchased by the Delaware
Company under the agreement. Included in Interest income is interest resulting
from these reverse repurchase agreements of $560,000, $3,545,000 and $1,161,000
for fiscal years 1994, 1993 and 1992, respectively.
42
<PAGE> 47
The Delaware Company and MIICO are parties to an agreement pursuant to which
the Delaware Company may borrow up to $150,000,000. There were no borrowings
against this agreement at March 31, 1994 or 1993.
At March 31, 1994, property, plant and equipment and accumulated depreciation
included $376,266,000 ($397,002,000 at March 31, 1993) and $270,813,000
($275,923,000 at March 31, 1993), respectively, of marine equipment which is
leased by the Delaware Company to International.
Under a reorganization during the fiscal year ended March 31, 1983,
International became the parent of the McDermott group of companies, which
includes the Delaware Company which prior to the reorganization was the parent
company. The Delaware Company's investment in International represents its
right to the undistributed earnings of International existing at the time of
the reorganization less subsequent distributions by International to the
Delaware Company. In order to preserve the Delaware Company's right to the
undistributed earnings and provide for the distribution of such earnings to the
Delaware Company should either the Delaware Company or International elect not
to keep these earnings invested with International, the Delaware Company
retained its ownership of 100,000 shares of International Common Stock,
received 100,000 shares of International Series A Participating Preferred Stock
and 100,000 shares of International Series B Non-Voting Preferred Stock, and
entered into a stock purchase and sale agreement with International (the
"Intercompany Agreement"). Both Series A and Series B Preferred Stocks have
certain rights in the event of liquidation of International. Series B
Preferred Stock is currently callable by International at $275 per share and
10,000 shares are to be redeemed by International each year at $250. Such
redemption began in November 1992. The Series A and Series B Preferred Stocks
are entitled to annual per share dividends of $10 (but no more than ten times
the amount of per share dividends paid by International on its Common Stock)
and $20, respectively, and such dividends are cumulative to the extent not
paid. Shares of Series A Preferred Stock are also entitled to additional
dividends whenever dividends in excess of $3 per International Common Share are
declared in any fiscal year. Dividends and proceeds from redemption of Series
B Preferred Stock received from International have been accounted for as a
reduction of the Delaware Company's investment in International.
Pursuant to the Intercompany Agreement, the Delaware Company has the right to
sell to International and International has the right to buy from the Delaware
Company, 100,000 units, each unit consisting of one share of International
Common Stock and one share of International Series A Participating Stock, at a
price based primarily upon the stockholders' equity of McDermott International
at the close of the fiscal year preceding the date at which the right to sell
or buy, as the case may be, is exercised, and, to a limited extent, upon the
price-to-book value of the Dow Jones Industrial Average. If a unit is sold to
International upon the Delaware Company's exercise of its right to sell under
the Intercompany Agreement, the purchase price of such unit will be 90% of the
then current value of the unit (the "current unit value"). If a unit is sold
to International pursuant to an exercise by International of its right to
purchase under the Intercompany Agreement, the purchase price of such unit will
be 110% of the current unit value. At April 1, 1994, the current unit value
was $2,039 and the aggregate current unit value for the Delaware Company's
100,000 units was $203,943,000. Both parties intend to preserve the Delaware
Company's right to the undistributed earnings by not exercising any rights
under the Intercompany Agreement that would result in a loss to the Delaware
Company. The net proceeds to the Delaware Company from the exercise of any
rights under the Intercompany Agreement
43
<PAGE> 48
would be subject to U.S. federal, state and other applicable taxes. No tax
provisions have been established, since there is no present intention by either
party to exercise such rights.
The Delaware Company maintains the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift
Plan"), which is a defined contribution plan that includes a cash or deferred
arrangement. Monthly employer contributions are equal to 50% of the first 6%
of compensation (as defined in the plan) contributed by participants, and may
be made, at the discretion of the Delaware Company, in cash or in common stock
of International. When monthly employer contributions are made in stock, the
Delaware Company pays cash to International and shares of common stock are
issued to the Thrift Plan from the authorized but unissued share capital of
International. The number of such shares is determined based on the closing
price on the last business day of the month as reported on the New York Stock
Exchange Composite Tape with fractional shares paid in cash. During fiscal
years 1994, 1993 and 1992, respectively, 300,391, 347,054 and 115,787 shares
were purchased by the Delaware Company for $7,984,000, $7,989,000 and
$2,347,000.
Certain officers and employees of the Delaware Company participate in certain
benefit plans which involve the issuance of International Common Stock.
NOTE 6 - LONG-TERM DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
Long-term debt consists of: 1994 1993
------------- ------------
Unsecured Debt: (In thousands)
<S> <C> <C>
Series A Medium-Term Notes (maturities ranging
from 3 to 9 years; interest at various
rates ranging from 7.92% to 9.00%) $ 75,000 $ 75,000
Series B Medium-Term Notes (maturities ranging
from 4 to 29 years; interest at various
rates ranging from 6.50% to 8.75%) 101,000 14,000
9.375% Notes due 2002 ($225,000,000 face value) 224,432 224,386
10.25% Notes due June 1995 150,000 150,000
12.25% Senior subordinated notes due 1998 - 189,400
Other notes payable through 2009 (interest at
various rates ranging to 6.80%) 17,840 26,187
Secured Debt:
Other notes payable through 2012 and
capitalized lease obligations 22,269 6,902
- ------------------------------------------------------------------------------------------------------------
590,541 685,875
Less: Amounts due within one year 6,009 193,839
- ------------------------------------------------------------------------------------------------------------
$ 584,532 $ 492,036
============================================================================================================
</TABLE>
44
<PAGE> 49
As defined in the Indenture, the 10.25% Notes due 1995 may be redeemed at the
option of the holders upon a change of control of International. The
Indenture, and the Indenture for the 9.375% Notes due 2002 and the Series A and
B Medium Term Notes, contain certain covenants which restrict the amount of
funded indebtedness that the Delaware Company may incur, and place limitations
on certain restricted payments, certain transactions between affiliates, the
creation of certain liens and the amendment of the Intercompany Agreement.
Pursuant to its right of redemption, on March 31, 1993, the Delaware Company
deposited cash into trusts for the purpose of redeeming its 9.625% Sinking Fund
Debentures, 10% Subordinated Debentures, and 10.20% Sinking Fund Debentures.
These redemptions resulted in an extraordinary loss of $2,429,000 (net of
income tax benefit of $1,252,000) in fiscal year 1993. Also on March 31, 1993,
pursuant to its redemption option, the Delaware Company provided for the loss
associated with the redemption and subsequent extinguishment of its 12.25%
Senior Subordinated Notes due 1998 resulting in an extraordinary loss of
$7,392,000 (net of income tax benefit of $3,808,000). Additionally, during
October 1992, the Delaware Company repurchased $10,600,000 aggregate principal
amount of its 12.25% Senior Subordinated Notes due 1998 resulting in an
extraordinary loss of $610,000 (net of income tax benefit of $314,000).
In management of its net interest costs, the Delaware Company has entered into
interest rate swap agreements with certain banks which effectively change the
fixed interest rates on certain long-term notes payable. Net amounts to be
paid or received as a result of these agreements are accrued as adjustments to
interest expense over the terms of these agreements. Gains realized as a
result of terminating agreements in fiscal year 1993 were deferred and were
recognized as reductions of interest expense over the original terms of the
agreements. Interest rate swaps resulted in a reduction in interest expense of
$4,435,000 and $6,961,000 in fiscal years 1994 and 1993, respectively.
The Delaware Company is restricted, as a result of covenants in certain credit
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
At March 31, 1994, substantially all of the net assets of the Delaware Company
were subject to such restrictions. At March 31, 1994, the most restrictive of
these covenants with respect to the payment of dividends by the Delaware
Company would prohibit the payment of dividends other than the current
dividends on existing preferred stock.
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1994 are as follows: 1995 - $6,009,000; 1996 - $155,426,000; 1997 -
$5,173,000; 1998 - $46,418,000; 1999 - $27,165,000.
At March 31, 1994 and 1993, the Delaware Company had available to it various
uncommitted short-term lines of credit from banks totalling $204,699,000 and
$114,136,000, respectively. Borrowings outstanding against these facilities at
March 31, 1994 were $15,519,000. There were no borrowings against these
facilities at March 31, 1993. The Babcock & Wilcox Company had available to it
a $128,000,000 unsecured and committed revolving line of credit facility.
Loans outstanding under the revolving credit facility may not exceed the banks'
commitments thereunder, and it is a condition to borrowing under the revolving
credit facility
45
<PAGE> 50
that the borrower's consolidated net tangible assets exceed a certain level.
There were no borrowings against this facility at March 31, 1994 or 1993. DCC
had available from a certain Canadian bank, an unsecured and committed
revolving credit facility of $14,493,000 which expires on May 31, 1997. No
borrowings were outstanding against this facility at March 31, 1994.
NOTE 7 - PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans - The Delaware Company provides retirement benefits, primarily
through non-contributory pension plans, for substantially all of its regular
full-time employees, except certain non-resident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada, or the United Kingdom. Salaried plan
benefits are based on final average compensation and years of service, while
hourly plan benefits are based on a flat benefit rate and years of service.
The Delaware Company's funding policy is to fund applicable pension plans to
meet the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and, generally, to fund other pension plans as
recommended by the respective plan actuary and in accordance with applicable
law. At January 1, 1994 and 1993, approximately one- half of total plan assets
were invested in listed stocks and bonds. The remaining assets were held in
foreign equity funds, U.S. Government securities and investments of a
short-term nature.
U.S. Pension Plans
Net periodic pension benefit for fiscal years 1994, 1993 and 1992 included the
following components:
<TABLE>
<CAPTION>
1994 1993 1992
--------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 20,268 $ 19,910 $ 17,963
Interest cost on projected benefit obligation 60,610 55,262 50,457
Actual return on plan assets (162,021) (58,901) (161,466)
Net amortization and deferral 78,928 (26,201) 93,005
- -------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ (2,215) $ (9,930) $ (41)
=============================================================================================================
</TABLE>
Due to the sale of its welded tubular line of business, the loss from
discontinued operations in fiscal year 1992 included a net after-tax gain of
$1,659,000 resulting from the recognition of a curtailment and settlement of a
related hourly pension plan.
Due to the sale of interests in its two nuclear joint ventures, income from
continuing operations in fiscal year 1992 includes a net after-tax gain of
$1,615,000 resulting from the curtailment and settlement of a related salaried
pension plan. The reameasurement of net periodic pension cost increased
pre-tax income from continuing operations by $2,074,000.
46
<PAGE> 51
The following table sets forth the plans' funded status and amounts recognized
in the Delaware Company's consolidated financial statements:
<TABLE>
<CAPTION>
Plans for Which Plans For Which
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
------------------------------- -----------------------------
1994 1993 1994 1993
------------- -------------- ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 532,205 $ 453,129 $ 127,717 $ 97,615
=============================================================================================================
Accumulated benefit obligation $ 596,595 $ 500,753 $ 158,830 $ 118,907
=============================================================================================================
Projected benefit obligation $ 690,970 $ 608,901 $ 162,624 $ 124,125
Plan assets at fair value 964,646 871,476 119,493 81,829
- -------------------------------------------------------------------------------------------------------------
Projected benefit obligation
(in excess of) or less
than plan assets 273,676 262,575 (43,131) (42,296)
Unrecognized net gain (1,464) (12,986) (4,529) (225)
Unrecognized prior service cost (14,462) 5,372 18,199 15,718
Unrecognized transition asset (45,157) (53,722) (2,446) (392)
Adjustment required
to recognize minimum
liability - - (7,669) (10,810)
- -------------------------------------------------------------------------------------------------------------
Prepaid pension cost (pension
liability) $ 212,593 $ 201,239 $ (39,576) $ (38,005)
=============================================================================================================
</TABLE>
The assumptions used in determining the funded status of the U.S. plans were:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate 7.5% 8.5% 8.5%
- --------------------------------------------------------------------------------------------------------------
Rate of increase in future
compensation levels 4.5% 5.0% 5.0%
- --------------------------------------------------------------------------------------------------------------
Expected long-term rate of
return on plan assets 8.5% 8.5% 8.5%
==============================================================================================================
</TABLE>
The changes in the discount rate and the rate of increase in future
compensation levels for the U.S. plans increased the projected benefit
obligation at March 31, 1994. This net increase includes an increase of
$101,681,000 due to the change in discount rate and a decrease of $15,076,000
due to the change in the rate of increase in future compensation levels.
47
<PAGE> 52
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," the Delaware Company recorded, during fiscal years 1994 and 1993, an
additional minimum liability for certain of its plans of $7,669,000 and
$10,810,000 respectively. These liabilities resulted in recognition of
intangible assets of $7,022,000 and $10,803,000 and reductions in stockholder's
equity of $620,000 and $5,000, respectively, in fiscal years 1994 and 1993.
The two principal U.S. ERISA pension plans provide that, subject to certain
limitations, any excess assets in such plans would be used to increase pension
benefits if certain events occurred within a 60-month period following a change
in control of International.
Non-U.S Pension Plans
The net periodic pension cost for fiscal years 1994, 1993, and 1992 included
the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ----------- -------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 1,846 $ 1,790 $ 1,767
Interest cost on projected benefit obligation 5,117 5,095 5,012
Actual return on plan assets (14,328) (4,918) (5,275)
Net amortization and deferral 7,851 (2,528) (1,861)
- -------------------------------------------------------------------------------------------------------------
Net periodic pension benefit $ 486 $ (561) $ (357)
=============================================================================================================
</TABLE>
The following table sets forth the plans' funded status (assets exceed
accumulated benefits) and amounts recognized in the Delaware Company's
consolidated financial statements:
<TABLE>
<CAPTION>
1994 1993
------------ -------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested Benefit Obligation $ 53,195 $ 44,074
=============================================================================================================
Accumulated Benefit Obligation 59,369 49,879
=============================================================================================================
Projected Benefit Obligation 68,107 57,923
Plan assets at fair value 75,867 70,772
- -------------------------------------------------------------------------------------------------------------
Excess of assets over projected benefit obligation 7,760 12,849
Unrecognized net gain 12,347 11,501
Unrecognized prior service cost 3,080 3,548
Unrecognized transition asset (10,843) (13,712)
- -------------------------------------------------------------------------------------------------------------
Net prepaid pension cost $ 12,344 $ 14,186
=============================================================================================================
</TABLE>
48
<PAGE> 53
The assumptions used in determining the funded status of the non-U.S. plans
were:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate 7.5-8.0% 9.0-9.5% 9.0-9.5%
- --------------------------------------------------------------------------------------------------------------
Rate of increase in future compensation levels 5.0-6.0% 5.5-7.5% 5.5-7.5%
- --------------------------------------------------------------------------------------------------------------
Expected long-term rate of return on plan assets 8.0-9.0% 9.0% 9.0%
==============================================================================================================
</TABLE>
The changes in the discount rate and the rate of increase in future
compensation levels for the non-U.S. plans increased the projected benefit
obligation at March 31, 1994. This net increase includes an increase of
$12,727,000 due to the change in discount rate and a decrease of $4,307,000 due
to the change in the rate of increase in future compensation levels.
Multiemployer Plans - One of the Delaware Company's subsidiaries contributes to
various multiemployer plans. The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $8,367,000, $4,687,000, and
$4,886,000 in fiscal years 1994, 1993 and 1992, respectively.
Postretirement Health Care and Life Insurance Benefits - The Delaware Company
offers postretirement health care and life insurance benefits to substantially
all of its retired regular full-time employees, including those associated with
discontinued operations, except certain non-resident alien retirees who are not
citizens of a European Community country or who, while employed, did not earn
income in the United States, Canada or the United Kingdom. The Delaware
Company shares the cost of providing these benefits with all affected retirees,
except for certain life insurance plans. Postretirement health care and life
insurance benefits are offered under separate defined benefit postretirement
plans to union and non-union employees. The health care plans are contributory
and contain cost-sharing provisions such as deductibles and coinsurance; the
life insurance plans are contributory and non-contributory. The Delaware
Company does not fund any of its plans.
49
<PAGE> 54
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
<TABLE>
<CAPTION>
1994 1993
------------- ------------
(In thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $ 351,317 $ 319,019
Fully eligible active participants 19,952 17,841
Other active plan participants 70,766 51,404
--------------------------------------------------------------------------------------
442,035 388,264
Unrecognized net loss (43,729) (317)
--------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 398,306 $ 387,947
======================================================================================
Weighted-average discount rate 7.5% 8.5%
======================================================================================
</TABLE>
The accumulated postretirement benefit obligation in the above table includes
$400,698,000 and $354,743,000 for the Delaware Company's health care plans and
$41,337,000 and $33,791,000 for the Delaware Company's life insurance plans at
March 31, 1994 and 1993, respectively. The increase in the unrecognized net
loss at March 31, 1994 was primarily attributable to the change in the discount
rate.
Net periodic postretirement benefit cost for fiscal years 1994 and 1993
included the following components:
<TABLE>
<CAPTION>
1994 1993
------------- ------------
(In thousands)
<S> <C> <C>
Service cost $ 3,489 $ 3,217
Interest cost 31,721 31,226
Net amortization and deferral 19 -
--------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 35,229 $ 34,443
======================================================================================
</TABLE>
For measurement purposes, a weighted-average annual assumed rate of increase in
the per capita cost of covered health care claims of 12-1/2% was assumed for
1994 and 13-1/2% for 1993. In both years, the rate was assumed to decrease
gradually to 5% in 2005 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of March 31, 1994 by $26,370,000 and the aggregate of the
service cost and interest cost components of net periodic postretirement
benefit costs for fiscal years 1994 by $2,335,000.
Employees of the Delaware Company who are not U. S. citizens and located in
certain foreign countries are covered by various foreign postretirement benefit
arrangements. The Delaware Company has not yet adopted SFAS No. 106 for these
foreign plans. The effect of initial adoption will be reported as the
cumulative effect of an accounting change and is not expected to have a
material effect on the consolidated financial statements of the Delaware
Company.
50
<PAGE> 55
Postemployment Benefits - See Management's Discussion and Analysis of Financial
Condition and Results of Operations regarding future adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits."
NOTE 8 - SALE OF ACCOUNTS RECEIVABLE
In December 1992, The Babcock & Wilcox Company renewed an agreement for an
additional period of three years with a certain U. S. bank, whereby it can
sell, up to a maximum limit of $225,000,000, with limited recourse, an
undivided interest in a designated pool of qualified accounts receivable.
Under the terms of the agreement, new receivables are added to the pool as
collections reduce previously sold accounts receivable. At March 31, 1994,
approximately $170,000,000 of receivables had been sold for cash under this
agreement. Included in Other-net income were expenses recorded on the sale of
receivables which represent bank fees and discounts of $8,699,000, $7,851,000
and $12,564,000 for the fiscal years ended March 31, 1994, 1993 and 1992,
respectively.
NOTE 9 - REDEEMABLE PREFERRED STOCKS
At March 31, 1994 and 1993, 13,000,000 shares of Delaware Company Preferred
Stock, with a par value of $1 per share, were authorized. Of the authorized
shares, 2,818,780 shares of Series A Preferred Stock, and 3,474,652 and
3,724,629 shares, respectively, of Series B Preferred Stock were outstanding
(in each case, exclusive of shares owned by the Delaware Company) at March 31,
1994 and 1993. The outstanding shares are entitled to $31.25 per share in
liquidation. Both series of Preferred Stock are entitled to general voting
rights of one-half vote for each share. The Board of Directors of the Delaware
Company may authorize additional series of Preferred Stock, and may set terms
of each new series except that the Delaware Company cannot create any series of
stock senior to the existing Series A and Series B Preferred Stock without the
consent of the holders of at least 50% of the shares of such Preferred Stock.
Each share of the outstanding Series A Preferred Stock is convertible into one
share of Common Stock of International plus $0.10 cash. Series A and Series B
Preferred Stock are redeemable at the option of the Delaware Company at $31.25
per share, plus accrued dividends. On March 31, 1995 and each subsequent year
through March 31, 2008, the Delaware Company is obligated to redeem, at a
redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A
Preferred Stock. On March 31, 1995, March 31 of the fiscal years 1996 through
2006, and March 31 of the fiscal years 2007 and 2008, the Delaware Company is
obligated to redeem 315,877, 252,702 and 189,526 shares of Series B Preferred
Stock, respectively. For the five fiscal years subsequent to March 31, 1994,
the obligation to redeem the Series A and B Preferred Stock is $19,680,000 for
fiscal year 1995, and $17,706,000 for each of the fiscal years 1996 through
1999. The Delaware Company may apply to the mandatory sinking fund obligations
any Series A or B Preferred Stock it has reacquired, redeemed or surrendered
for conversion which have not been previously credited against the mandatory
sinking fund obligations. The Delaware Company applied 313,878 shares of
Series A Preferred Stock and 180,700 shares of Series B Preferred Stock that it
owned and redeemed 135,177 shares of Series B Preferred Stock to satisfy the
March 31, 1994 mandatory sinking fund obligations. During fiscal year 1994,
114,800 shares of Series B Preferred Stock were purchased on the open market.
At March 31, 1994, 49,637 shares
51
<PAGE> 56
of Series A Preferred Stock have been converted to date and the Delaware
Company owned 1,575,505 shares of Series A Preferred Stock.
NOTE 10 - CAPITAL STOCK
Changes in Common Stock during the three years ended March 31, 1994 are
summarized as follows:
<TABLE>
<CAPTION>
CAPITAL IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
------ --------- ----------
(In thousands except for share data)
<S> <C> <C> <C>
Balance, March 31, 1991 3,600 $ 4 $ 356,781
Deferred Career Executive Stock
Plan Expense - - 21
- ------------------------------------------------------------------------------------------------------------
Balance, March 31, 1992 3,600 4 356,802
- ------------------------------------------------------------------------------------------------------------
Balance, March 31, 1993 3,600 4 356,802
- ------------------------------------------------------------------------------------------------------------
Capital Contributions from
McDermott International, Inc.
Cash - - 100,000
Investments, including accrued
interest - - 132,283
- ------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 3,600 $ 4 $ 589,085
============================================================================================================
</TABLE>
Common shares outstanding at March 31, 1994 consisted of 3,000 voting shares
entitled to 12,000 votes per share and 600 non-voting shares.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Litigation - The Delaware Company and certain of its officers, directors and
subsidiaries are defendants in numerous legal proceedings. Management believes
that the outcome of these proceedings will not have a material adverse effect
upon the consolidated financial position of the Delaware Company.
Products Liabilities - See Note 1 regarding products liabilities.
Operating Leases - Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
March 31, 1994 are as follows: 1995 - $17,688,000; 1996 - $13,804,000; 1997 -
$12,842,000; 1998 - $12,049,000; 1999 - $11,758,000; and thereafter -
$34,590,000. Future minimum lease payments and leased property under capital
leases are not material. Total rental expense for fiscal years 1994, 1993 and
1992 was $64,515,000, $62,959,000 and $66,314,000, respectively. These expense
figures include contingent rentals and are net of sublease income, both of
which are not material.
52
<PAGE> 57
Other - The Delaware Company performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and thus is subject to
continuing reviews by governmental agencies.
The Delaware Company maintains liability and property insurance that it
considers normal in the industry. However, certain risks are either not
insurable or insurance is available at rates which the Delaware Company
considers uneconomical.
The Delaware Company has been identified as a potentially responsible party at
various cleanup sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended. Whereas, the Delaware Company has
not been determined to be a major contributor of wastes to these sites, each
potentially responsible party or contributor of may face assertions of joint
and several liability. Based on its relative contribution of wastes to the
various sites, of which a determination has not yet been made, the Delaware
Company's share of the ultimate liability is not expected to have a material
adverse effect on its consolidated financial position.
In addition, remediation projects have been or may be undertaken at certain of
the Delaware Company's current and former plant sites, and B&W is currently
evaluating a consent order issued by the Department of Environmental Resources
of the Commonwealth of Pennsylvania seeking monetary sanctions, and remedial
and monitoring relief, relating to B&W's Parks Facilities in Parks Township,
Pennsylvania. Any sanctions ultimately assessed, and any costs ultimately
incurred on other remediation projects, are not expected to have a material
adverse effect on the consolidated financial position of the Delaware Company.
Commitments for capital expenditures amounted to approximately $53,121,000
(including $38,560,000 for a new concept steam generator facility for the Naval
Reactor Program in Lynchburg, Virginia, the anticipated purchase of a barge
currently leased and the completion of a new combustion and emission facility
in Alliance, Ohio) at March 31, 1994, of which approximately $52,964,000
relates to fiscal year 1995.
The Delaware Company is contingently liable under standby letters of credit
totaling $197,413,000 at March 31, 1994, issued in the normal course of
business.
NOTE 12 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The Delaware Company's Power Generation Systems and Equipment customers are
principally the electric utility industry (including government-owned utilities
and independent power producers), the U. S. Government (including its
contractors), and the pulp and paper and other process industries. The
principal customers of the Marine Construction Services segment are the large
oil and gas companies and the U. S. and other governments. These
concentrations of customers may impact the Delaware Company's overall exposure
to credit risk, either positively or negatively, in that the customers may be
similarly affected by changes in economic or other conditions. However, the
Delaware Company's management believes that the portfolio of receivables is
well diversified and that such diversification minimizes any potential credit
risk. Receivables are generally not collateralized.
53
<PAGE> 58
The Delaware Company believes that its provision for possible losses on
uncollectible accounts receivable is adequate for its credit loss exposure. At
March 31, 1994 and 1993, the allowance for possible losses deducted from
Accounts receivable-trade on the balance sheet was $6,427 000 and $3,713,000,
respectively.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Delaware Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Investments under reverse repurchase agreement: The fair value of investments
in government obligations under reverse repurchase agreement with an affiliate
was estimated based on quoted market prices (including accrued interest) of the
securities underlying the agreement.
Investment securities: The fair value of investments are estimated based on
quoted market prices. For investments for which there are no quoted market
prices, fair values are derived from available yield curves for investments of
similar quality and terms.
Long and short-term debt: The fair value of the Delaware Company's debt
instruments are based on quoted market prices or, where quoted prices are not
available, on estimated prices based on current yields for debt issues of
similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred
stocks are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency
forward exchange contracts are estimated by obtaining quotes from brokers. At
March 31, 1994 and 1993, the Delaware Company had forward exchange contracts
outstanding to purchase and sell foreign currencies with a net notional value
of $66,877,000 and $253,996,000 and a fair value of $55,202,000 and
$250,549,000, respectively.
The estimated fair values of the Delaware Company's financial instruments at
March 31, 1994 and 1993 follow:
<TABLE>
<CAPTION>
March 31, 1994 March 31, 1993
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Instruments
- -------------------------
Cash and cash equivalents $ 47,364 $ 47,364 $ 71,549 $ 71,549
Investments under reverse
repurchase agreement
with an affiliate - - 78,860 79,052
Investment securities 131,110 129,630 - -
Debt excluding capital leases 605,235 644,898 684,312 737,431
Redeemable preferred stocks 196,672 193,064 204,482 206,042
</TABLE>
54
<PAGE> 59
NOTE 14 - DISCONTINUED OPERATIONS
Welded Tubular Line of Business
In fiscal year 1992, the Delaware Company sold its welded tubular line of
business ("Welded") for $30,217,000, consisting of $20,368,000 in cash and
receivables of $9,849,000. Revenues applicable to Welded operations were
$57,428,000 in fiscal year 1992. Loss from discontinued operations in fiscal
year 1992 included income from operations of $182,000 (net of income tax
benefit of $114,000) and loss on disposal of $4,790,000 (net of income tax
benefit of $2,936,000) including loss from operations of $1,159,000 during the
phase out period.
Seamless Tubular Line of Business
During fiscal year 1991, the Delaware Company sold its previously discontinued
seamless tubular line of business. A gain of $1,240,000 (net of income taxes of
$760,000) resulting from price adjustments is included in Loss from
Discontinued Operations in fiscal year 1992.
NOTE 15 - SEGMENT REPORTING
The Delaware Company operates in two industry segments - Power Generation
Systems and Equipment, and Marine Construction Services.
Power Generation Systems and Equipment's principal businesses are the supply of
fossil-fuel and nuclear steam generating systems and equipment to the electric
power generation industry, and nuclear reactor components to the U.S. Navy.
Marine Construction Services supplies services for the offshore oil, natural
gas and hydrocarbon processing industries, and to other marine construction
companies. These services, which are supplied primarily in North America,
include the design, engineering, fabrication and installation of marine
pipelines and offshore structures and subsea production systems for development
drilling and production, and onshore construction and maintenance services.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Identifiable
assets by industry segment are those assets that are used in the Delaware
Company's operations in each segment. Corporate assets are principally cash
and cash equivalents, short-term investments, marketable securities and prepaid
pension costs.
In fiscal years 1994, 1993 and 1992, the U. S. Government accounted for
approximately 17%, 21%, and 23%, respectively, of the Delaware Company's total
revenues. These revenues are principally included in the Power Generation
Systems and Equipment segment.
The adoption of EITF Issue No. 93-5 in fiscal year 1994 resulted in an increase
in the Power Generation Systems and Equipment segment operating income of
$19,947,000. The adoption of SFAS No. 106 in fiscal year 1993 resulted in a
net decrease in segment operating income of $6,549,000. This included a
decrease of $3,753,000 in the Power Generation Systems and Equipment segment
and a decrease of $2,796,000 in the Marine Construction Services segment.
55
<PAGE> 60
Segment Information For the Three Fiscal Years Ended March 31, 1994.
1. Information about the Delaware Company's Operations in Different Industry
Segments.
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
REVENUES (1)
- --------
Power Generation Systems
and Equipment (2) $ 1,613,954 $ 1,520,976 $ 1,591,465
Marine Construction Services (3) 632,242 449,169 723,412
Intersegment Transfer Eliminations (2,830) (523) (5,469)
- -------------------------------------------------------------------------------------------------------------
Total Revenues $ 2,243,366 $ 1,969,622 $ 2,309,408
=============================================================================================================
OPERATING INCOME
- ----------------
Segment Operating Income:
Power Generation Systems
and Equipment(2) $ 57,527 $ 68,545 $ 104,285
Marine Construction Services(3) 8,445 3,416 5,071
- -------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 65,972 71,961 109,356
- -------------------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems
and Equipment(2) 8,635 6,178 11,287
Marine Construction Services 445 477 (34)
- -------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 9,080 6,655 11,253
- -------------------------------------------------------------------------------------------------------------
General Corporate Expenses (43,059) (40,143) (40,210)
- -------------------------------------------------------------------------------------------------------------
Total Operating Income $ 31,993 $ 38,473 $ 80,399
=============================================================================================================
(1) Segment revenues include intersegment transfers as follows:
Power Generation Systems
and Equipment $ 2,439 $ 363 $ 4,636
Marine Construction Services 391 160 833
- -------------------------------------------------------------------------------------------------------------
Total $ 2,830 $ 523 $ 5,469
=============================================================================================================
</TABLE>
(2) See Note 3 regarding the deconsolidation of BWFC to a cost method
investment and the change of BWNSC from an equity method to a cost method
investment during fiscal year 1992.
(3) See Note 2 regarding the acquisition of DCC during fiscal year 1994.
56
<PAGE> 61
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
- --------------------
Power Generation Systems and Equipment $ 47,898 $ 45,086 $ 52,559
Marine Construction Services(1) 45,038 11,927 6,184
Corporate 851 2,517 724
Discontinued Operations - - 560
- --------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 93,787 $ 59,530 $ 60,027
==============================================================================================================
DEPRECIATION AND AMORTIZATION
- -----------------------------
Power Generation Systems and Equipment $ 36,567 $ 36,786 $ 31,981
Marine Construction Services 29,256 44,828 50,894
Corporate 1,002 983 1,079
Discontinued Operations - - 3,248
- --------------------------------------------------------------------------------------------------------------
Total Depreciation and
Amortization $ 66,825 $ 82,597 $ 87,202
==============================================================================================================
IDENTIFIABLE ASSETS
- -------------------
Power Generation Systems and Equipment $ 1,193,312 $ 1,135,555 $ 1,172,694
Marine Construction Services 440,546 368,602 390,301
Corporate 852,247 841,501 901,823
- --------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $ 2,486,105 $ 2,345,658 $ 2,464,818
==============================================================================================================
</TABLE>
2. Information about the Delaware Company's Operations in Different Geographic
Areas.
<TABLE>
<S> <C> <C> <C> <C>
Revenues(2) - United States $ 1,632,236 $ 1,723,128 $ 2,115,434
- Canada 588,728 227,066 178,069
- Other Foreign 22,402 19,428 15,905
- ---------------------------------------------------------------------------------------------------------------
Total $ 2,243,366 $ 1,969,622 $ 2,309,408
===============================================================================================================
</TABLE>
(1) Includes property, plant and equipment of $14,887,000 of DCC in fiscal year
1994 (See Note 2) and the purchase of a fabrication yard in Nueces County,
Texas financed by a note payable of $16,250,000.
(2) Net of inter-geographic area revenues in fiscal year 1994 as follows:
United States -$20,702,000, Canada - $8,167,000, and Other Foreign -
$281,000. Inter-geographic eliminations for fiscal years 1993 and 1992 are
immaterial.
57
<PAGE> 62
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- -----------------
(In thousands)
<S> <C> <C> <C>
Segment Operating Income
- United States $ 26,992 $ 61,150 $ 103,006
- Canada 37,190 9,391 5,689
- Other Foreign 1,790 1,420 661
- ---------------------------------------------------------------------------------------------------------------
Total $ 65,972 $ 71,961 $ 109,356
===============================================================================================================
Identifiable
Assets - United States $ 1,345,637 $ 1,344,548 $ 1,403,652
- Canada 267,803 145,021 143,390
- Other Foreign 20,418 14,588 15,953
- Corporate 852,247 841,501 901,823
- ---------------------------------------------------------------------------------------------------------------
Total $ 2,486,105 $ 2,345,658 $ 2,464,818
===============================================================================================================
</TABLE>
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994
----
Q U A R T E R E N D E D
-----------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1993 1993 1993 1994
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 446,073 $ 576,015 $ 613,407 $ 607,871
Operating income 946 17,751 9,128 4,168
Income (loss) before
cumulative effect of
accounting change (20,826) 1,803 (2,331) (4,962)
Net income (loss) (121,576) 1,803 (2,331) (4,962)
</TABLE>
Quarterly results for June and September 1993 have been restated to reflect the
adoption of EITF Issue No. 93-5 (See Note 1). The restatement decreased income
before cumulative effect of accounting changes and net income by $467,000 and
$101,217,000, respectively for the quarter ending June 30, 1993; and increased
operating income by $10,367,000 and income before cumulative effect of
accounting change and net income by $7,980,000 for the quarter ending September
30, 1993.
Pretax results for the quarter ended June 30, 1993 include a favorable warranty
reserve adjustment of $11,000,000. Results for the March 1994 quarter include
a provision of approximately $8,807,000, including interest, resulting from an
unfavorable ruling on a lawsuit relating to a warranty issue and a reduction in
accrued interest on proposed tax deficiencies of $9,400,000.
58
<PAGE> 63
<TABLE>
<CAPTION>
1993
----
Q U A R T E R E N D E D
-----------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1992 1992 1992 1993
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 477,985 $ 471,012 $ 515,567 $ 505,058
Operating income (loss) 8,870 (6,470) 15,744 20,329
Income (loss) before
extraordinary items and
cumulative effect of
accounting changes (6,870) (26,406) (8,424) 14,621
Net income (loss) (243,185) (26,406) (9,034) 4,800
</TABLE>
Pretax results for the December 1992 quarter include charges for accelerated
depreciation and the write-off of certain fabrication facilities and marine
construction equipment due to diminished cost-effectiveness and technical
obsolescence of $6,966,000. Results for the March 31, 1993 quarter include a
gain on the sale of the remaining interests in two commercial nuclear joint
ventures of $23,968,000.
59
<PAGE> 64
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
60
<PAGE> 65
P A R T I I I
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between any of the executive officers,
directors or persons nominated to be such, and no executive officer was elected
to his position pursuant to any arrangement or understanding between himself
and any other person.
Information required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Information
Statement for action to be taken without a meeting of shareholders on August 9,
1994.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Cash Compensation of Executive Officers and
Certain Relationships and Related Transactions" in the Information Statement
for action to be taken without a meeting of shareholders on August 9, 1994.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the heading "Election of Directors" in the Information
Statement for action to be taken without a meeting of shareholders on August 9,
1994.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material
appearing under the heading "Cash Compensation of Executive Officers and
Certain Relationships and Related Transactions" in the Information Statement
for action to be taken without a meeting of shareholders on August 9, 1994.
61
<PAGE> 66
P A R T I V
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 26
Consolidated Balance Sheet March 31, 1994 and 1993 27
Consolidated Statement of Income (Loss) and Retained Earnings (Deficit)
For the Three Fiscal Years Ended March 31, 1994 29
Consolidated Statement of Cash Flows For the Three Fiscal
Years Ended March 31, 1994 30
Notes to Consolidated Financial Statements For the Three Fiscal
Years Ended March 31, 1994 32
CONSOLIDATED FINANCIAL SCHEDULES
All required schedules will be filed by amendment to this Form 10-K on Form 10-K/A.
EXHIBIT INDEX
3 Articles of Incorporation and By-Laws (Item 3(a) is
incorporated by reference to Exhibit 3 to the Delaware
Company's annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1983; Item 3(b) is incorporated
by reference to Exhibit 3 to the Company's annual report on
Form 10-K for the fiscal year ended March 31, 1981).
(a) The Delaware Company's Restated Articles of
Incorporation
(b) The Delaware Company's By-Laws
4 Indentures with respect to certain of the Delaware Company's
long-term debt are not filed as exhibits hereto inasmuch as the
securities authorized under any such Indenture do not exceed
10% of the Delaware Company's total assets. The Delaware
Company agrees to furnish a copy of each such Indenture to
the Securities and Exchange Commission upon request.
</TABLE>
62
<PAGE> 67
<TABLE>
<CAPTION>
PAGE
<S> <C>
10 Material Contracts (Exhibit 10(b) is incorporated
by reference to Exhibit 10 to the Delaware Company's
annual report on Form 10-K for the fiscal year ended
March 31, 1981; Exhibit 10(c) is incorporated by
reference to Exhibit 10 to the Delaware Company's
annual report on Form 10-K, as amended, for the
fiscal year ended March 31, 1983; and Exhibit 10(d) is
incorporated by reference to Exhibit 10 to the
Delaware Company's annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1987;
Exhibit 10(e) is incorporated by reference to Exhibit 10
to the Delaware Company's annual report on Form 10-K
for the fiscal year ended March 31, 1990).
(a) Supplemental Executive Retirement Plan
(b) Restoration of Retirement Income Plan for Certain
Participants in the Retirement Plan for Employees
of McDermott Incorporated
(c) Intercompany Agreement
(d) Trust for Supplemental Executive Retirement Plan
(e) Variable Supplemental Compensation Plan
22 Significant Subsidiaries of the Registrant 64
24 Consent of Independent Auditors 65
</TABLE>
FORM 8-K REPORTS
There were no current reports on Form 8-K filed during the three months ended
March 31, 1994.
63
<PAGE> 68
EXHIBIT 22
MCDERMOTT INCORPORATED
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
PERCENTAGE
ORGANIZED OF VOTING
UNDER THE SHARES
NAME OF COMPANY LAWS OF OWNED
<S> <C> <C>
Hudson Engineering Corporation Texas 100
Babcock & Wilcox Investment Company Delaware 100
The Babcock & Wilcox Company Delaware 100
Americon, Inc. Delaware 100
Babcock & Wilcox Equity Investments, Inc. Delaware 100
Babcock & Wilcox Industries Ltd. Delaware 100
Power Systems Operations, Inc. Delaware 100
Hudson Products Corporation Texas 100
</TABLE>
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate, constitute a significant subsidiary.
64
<PAGE> 69
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectus
of our report dated May 9, 1994 with respect to the consolidated financial
statements of McDermott Incorporated, included in this Annual Report (Form
10-K) for the year ended March 31, 1994.
ERNST & YOUNG
New Orleans, Louisiana
May 12, 1994
65
<PAGE> 70
SIGNATURES OF THE REGISTRANT
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on May 10, 1994.
McDERMOTT INCORPORATED
(REGISTRANT)
By: /s/ Robert E. Howson
Robert E. Howson
Chairman of the Board and
Chief Executive Officer
/s/ Brock A. Hattox
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
/s/ Daniel R. Gaubert
Daniel R. Gaubert
Vice President and Controller
66
<PAGE> 71
SIGNATURES OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on May 10, 1994.
/s/ Robert E. Howson
Robert E. Howson
Chairman of the Board and
Chief Executive Officer, and
Director
/s/ Brock A. Hattox
Brock A. Hattox
Senior Vice President and
Chief Financial Officer, and
Director
/s/ Lawrence R. Purtell
Lawrence R. Purtell
Senior Vice President and
General Counsel and
Corporate Secretary, and
Director
67
<PAGE> 1
EXHIBIT 22
MCDERMOTT INCORPORATED
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
PERCENTAGE
ORGANIZED OF VOTING
UNDER THE SHARES
NAME OF COMPANY LAWS OF OWNED
<S> <C> <C>
Hudson Engineering Corporation Texas 100
Babcock & Wilcox Investment Company Delaware 100
The Babcock & Wilcox Company Delaware 100
Americon, Inc. Delaware 100
Babcock & Wilcox Equity Investments, Inc. Delaware 100
Babcock & Wilcox Industries Ltd. Delaware 100
Power Systems Operations, Inc. Delaware 100
Hudson Products Corporation Texas 100
</TABLE>
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate, constitute a significant subsidiary.
64
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-54940) of McDermott Incorporated and in the related Prospectus
of our report dated May 9, 1994 with respect to the consolidated financial
statements of McDermott Incorporated, included in this Annual Report (Form
10-K) for the year ended March 31, 1994.
ERNST & YOUNG
New Orleans, Louisiana
May 12, 1994
65
