UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - Q
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
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(State of Incorporation) (I.R.S. Employer Identification No.)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
Post Office Box 60035, New Orleans, Louisiana 70160-0035
- ------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-4411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, par value $1 per share, outstanding
as of July 22,1994 was 3,600.
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 - Q
--------------------------
PAGE
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet - June 30, 1994
and March 31, 1994 4
Consolidated Statement of Loss and Retained Earnings
(Deficit) - Three Months Ended June 30, 1994
and June 30, 1993 6
Consolidated Statement of Cash Flows - Three Months
Ended June 30, 1994 and June 30, 1993 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<page 2>
PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
- ---------------------
Item 1. Consolidated Financial Statements
<page 3>
McDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
JUNE 30, 1994
ASSETS
<TABLE>
<CAPTION>
6/30/94 3/31/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,110 $ 47,364
Short-term investments 129,176 989
Accounts receivable-trade 243,270 255,441
Accounts receivable-other 63,961 58,787
Insurance recoverable-current 114,647 110,200
Accounts receivable from affiliates 24,201 11,428
Contracts in progress 230,390 214,649
Inventories 67,597 66,214
Deferred income taxes 97,503 98,627
Other current assets 51,592 35,462
- ------------------------------------------------------------------------
Total Current Assets 1,046,447 899,161
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Property, Plant and Equipment, at Cost: 1,424,968 1,415,605
Less accumulated depreciation 948,150 932,722
- ------------------------------------------------------------------------
Net Property, Plant and Equipment 476,818 482,883
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Investments - 130,121
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Insurance Recoverable 843,930 876,846
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Investment in McDermott International, Inc. 609,717 610,392
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Prepaid Pension Costs 228,813 225,239
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Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $85,844,000 at June 30, 1994
and $84,170,000 at March 31, 1994 141,390 143,064
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Other Assets 112,431 133,020
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TOTAL $ 3,459,546 $ 3,500,726
========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<page 4>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
6/30/94 3/31/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of
long-term debt $ 240,426 $ 21,528
Note payable to affiliate 34,150 -
Accounts payable 106,793 141,412
Accounts payable to affiliates 19,202 17,373
Environmental and products liabilities-current 127,227 122,361
Accrued employee benefits 87,658 93,487
Accrued interest payable 38,480 44,619
Accrued liabilities - other 106,285 109,844
Advanced billings on contracts 121,483 135,505
U.S. and foreign income taxes 23,356 40,342
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Total Current Liabilities 905,060 726,471
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Long-Term Debt 434,785 584,532
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Accumulated Postretirement Benefit Obligation 374,454 370,828
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Environmental and Products Liabilities 975,122 1,013,251
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Other Liabilities 114,716 121,178
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Contingencies
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Minority Interest 15,900 15,691
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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 91,630 108,583
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Total Redeemable Preferred Stocks 179,719 196,672
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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 591,926 589,085
Deficit (118,161) (104,859)
Minimum pension liability (620) (620)
Net unrealized loss on investments (2,146) -
Cumulative foreign exchange translation
adjustments (11,213) (11,507)
- -------------------------------------------------------------------------
Total Stockholder's Equity 459,790 472,103
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TOTAL $ 3,459,546 $ 3,500,726
=========================================================================
</TABLE>
<page 5>
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF LOSS AND RETAINED EARNINGS (DEFICIT)
JUNE 30, 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $ 568,692 $446,073
- -------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 507,652 389,056
Depreciation and amortization 21,863 20,546
Selling, general and
administrative expenses 39,575 38,606
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569,090 448,208
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(398) (2,135)
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Equity in Income of Investees 2,497 3,081
Operating Income 2,099 946
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Other Income (Expense):
Interest income 2,458 1,547
Interest expense (9,348) (17,114)
Other-net (3,474) (4,104)
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(10,364) (19,671)
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Loss before Provision for Income Taxes and
Cumulative Effect of Accounting Changes (8,265) (18,725)
Provision for Income Taxes 733 2,101
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Loss before Cumulative Effect of
Accounting Changes (8,998) (20,826)
- -------------------------------------------------------------------------
Cumulative Effect of Accounting Changes (512) (100,750)
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Net Loss (9,510) (121,576)
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Retained Earnings (Deficit) - Beginning of
Period (104,859) 37,926
Deduct Cash Dividends - Preferred Stocks 3,792 3,971
- -------------------------------------------------------------------------
Deficit - End of Period $ (118,161) $ (87,621)
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<page 6>
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
JUNE 30, 1994
DECREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (9,510) $(121,576)
- -------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 21,863 20,546
Provision for deferred taxes 20,766 9,270
Cumulative effect of accounting changes 512 100,750
Other 660 (987)
Changes in assets and liabilities, net
of effects from acquisition:
Accounts receivable (5,642) 39,433
Net contracts in progress and advance
billings (29,764) (13,019)
Accounts payable (32,824) (986)
Accrued interest (6,139) (4,973)
Accrued liabilities (3,580) (28,624)
Income taxes (31,963) 40,569
Other, net (13,593) (65,688)
Proceeds from insurance for products liabilities
claims 28,094 16,364
Payments of products liabilities claims (31,450) (30,332)
- -------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (92,570) (39,253)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Delta Catalytic Corporation - (28,249)
Purchases of property, plant and equipment (13,117) (11,815)
Purchases of government obligations, under
reverse purchase agreement with an affiliate - (646,685)
Sales of government obligations, under
reverse repurchase agreement with an
affiliate - 706,317
Other (123) 417
- -------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (13,240) 19,985
- -------------------------------------------------------------------------
</TABLE>
<page 7>
CONTINUED
DECREASE IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(Unaudited)
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Increase in short-term borrowing $ 69,027 $ 330
Short-term borrowing from an affiliate 34,150 -
Payment of long-term debt (34) (189,465)
Issuance of long-term debt - 87,000
Capital contribution received from International - 100,000
Repurchase of preferred stock (16,753) (259)
Dividends paid (3,792) (3,971)
Other (163) (119)
- ---------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 82,435 (6,484)
- ---------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 121 (394)
- ---------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,254) (26,146)
- ---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,364 71,549
- ---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,110 $ 45,403
===========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 15,487 $ 22,088
Income taxes $ 12,018 $ 2,350
===========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<page 8>
McDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1994 AND 1993
AND AT JUNE 30 AND MARCH 31, 1994
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of McDermott
Incorporated, a Delaware corporation which is a subsidiary of McDermott
International, Inc., and all subsidiaries and controlled joint ventures.
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 or
restated to conform with the presentation at June 30, 1994. Results for the
three months ended June 30, 1993 have been restated to reflect the adoption of
Emerging Issues Task Force ("EITF") Issue No. 93-5 (See Note 2).
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.
In the opinion of management, all adjustments necessary for a fair statement
of the results have been recorded. Such adjustments are of a normal,
recurring nature except for a reduction in accrued interest expense
($3,705,000, net of tax of $1,995,000) due to settlement of an outstanding tax
issue with the IRS during the three months ended June 30, 1994, the cumulative
effect of the accounting changes during the three months ended June 30, 1994
and 1993 and a favorable warranty reserve adjustment ($6,820,000, net of tax
of $4,180,000) during the three months ended June 30, 1993. The results for
interim periods are not necessarily indicative of results to be expected for
the year.
<page 10)
NOTE 2 - CHANGES IN ACCOUNTING POLICIES
Products Liabilities - 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 was recognized during the third quarter of fiscal
year 1994, effective April 1, 1993, as a change in accounting principle,
reflecting the Delaware Company's adoption of EITF Issue No. 93-5. EITF Issue
No. 93-5 no longer permits companies to offset, for recognition purposes,
reasonably possible recoveries against probable losses, which had been the
Delaware Company's prior practice. 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 the quarter ending June 30, 1993. The adoption of this
provision of EITF Issue No. 93-5 resulted in an increase in Loss before
Cumulative Effect of Accounting Change and Net Loss of $467,000 and
$101,217,000, respectively, for the three months ended June 30, 1993. 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. At June 30, 1994, the
estimated amount of future costs allocable to insolvent insurers and the
policy year 1979 was $132,074,000. Inherent in the estimate of such future
costs are expected trends in claim 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.
During the first quarter of fiscal year 1995, the Delaware Company adopted the
provisions of the Financial Accounting Standards Board ("FASB") Interpretation
No. 39 which requires the Delaware Company to present separately in the
balance sheet its estimated liabilities for pending and future non-employee
products liability asbestos claims and related estimated insurance recoveries.
Accordingly, the accompanying consolidated balance sheet at March 31, 1994 and
the consolidated statement of cash flows for the three months ended June 30,
1993 have been restated to conform with the June 30, 1994 presentation. Of
<page 10>
the total estimated liability at June 30, 1994, less than $100,000,000 has
been asserted. The adoption of FASB Interpretation No. 39 did not have any
effect on earnings.
Postemployment Benefits - Effective April 1, 1994, the Delaware Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits," in accounting for
disability benefits and other types of benefits paid to employees, their
beneficiaries and covered dependents after active employment, but before
retirement. The cumulative effect as of April 1, 1994 of this change in
accounting was to increase net loss by $512,000 (net of income taxes of
$287,000). Other than the cumulative effect, the accounting change had no
material effect on the results of the June 30, 1994 quarter. Prior to April
1, 1994, the Delaware Company recognized the cost of providing most of these
benefits on a cash basis. Under the new principle of accounting, the cost of
these benefits is accrued when it becomes probable that such benefits will be
paid and when sufficient information exists to make reasonable estimates of
the amounts to be paid. As required by the Statement, prior period financial
statements have not been restated to reflect the change in accounting
principle.
Investments - In May 1993, the FASB issued SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Delaware Company
adopted the provisions of the new standard for investments held as of or
acquired after April 1, 1994. Based on current portfolio management
practices, the Delaware Company's investments are classified as available for
sale and are reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholder's equity.
The opening balance of stockholder's equity was decreased by $1,480,000 to
reflect the net unrealized holding losses on the Delaware Company's investment
securities which were previously carried at amortized cost. In accordance
with the Statement, prior period financial statements have not been restated
to reflect this change in accounting principle.
<page 11>
NOTE 3 - INVENTORIES
Consolidated inventories at June 30, 1994 and March 31, 1993 are summarized
below:
<TABLE>
<CAPTION>
June 30, March 31,
1994 1994
-------- --------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 39,591 $ 40,281
Work in Progress 18,694 17,566
Finished Goods 9,312 8,367
- --------------------------------------------------------------------------
$ 67,597 $ 66,214
=========================================================================
</TABLE>
NOTE 4 - SEGMENT REPORTING INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/94 6/30/93
------- -------
(In thousands)
<S> <C> <C>
REVENUES:
Power Generation Systems and Equipment $ 404,463 $ 344,437
Marine Construction Services 164,388 101,917
Intersegment Transfer Eliminations (159) (281)
- ---------------------------------------------------------------------------
Total Revenues $ 568,692 $ 446,073
===========================================================================
OPERATING INCOME:
Segment Operating Income (Loss):
Power Generation Systems and Equipment $ 13,483 $ 8,883
Marine Construction Services (4,576) 981
- ---------------------------------------------------------------------------
Total Segment Operating Income 8,907 9,864
- ---------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems and Equipment 2,513 2,059
Marine Construction Services (16) 1,022
- --------------------------------------------------------------------------
Total Equity in Income of Investees 2,497 3,081
- --------------------------------------------------------------------------
General Corporate Expenses (9,305) (11,999)
- --------------------------------------------------------------------------
Total Operating Income $ 2,099 $ 946
==========================================================================
</TABLE>
<page 12)
NOTE 5 - PROPOSED SALE OF OPERATIONS
On June 2, 1994, International announced a plan to form a new company, J. Ray
McDermott, S.A., that would combine the worldwide marine construction
businesses of International with those of Offshore Pipelines, Inc. ("OPI").
Under the terms of the proposed agreement, International would contribute
substantially all of its marine construction assets and businesses to the new
company, including those of the Delaware Company. It is anticipated that the
Delaware Company will sell substantially all of its marine construction assets
and businesses to International, which will then make the contribution to J.
Ray McDermott, S.A. Terms of the transaction are still being negotiated, and
are subject to the approval of the Boards of Directors of both companies, as
well as the shareholders of OPI and of certain regulatory bodies.
<page 13)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1994 VS. THREE MONTHS
ENDED JUNE 30, 1993
Power Generation Systems and Equipment's revenues increased $60,026,000 to
$404,463,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, 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 replacement parts.
Power Generation Systems and Equipment's segment operating income increased
$4,600,000 to $13,483,000. The increase was primarily due to higher volume
and margins on fabrication and erection of fossil fuel steam and environmental
control systems and nuclear fuel assemblies and reactor components for the
U.S. Government. These increases were partially offset by a favorable
warranty reserve adjustment recorded in the prior year and lower volume and
margins on extended scope of supply and fabrication of industrial boilers.
Power Generation Systems and Equipment's equity in income of investees
increased $454,000 to $2,513,000 due to higher operating results in a domestic
joint venture which owns and operates a material recovery facility.
Backlog for this segment at June 30, 1994 was $2,202,350,000 compared to
$3,057,831,000 at June 30, 1993. At June 30, 1994, this segment's backlog
with the U.S. Government was $714,698,000 (of which $17,055,000 had not been
funded). U.S. Government budget reductions have negatively affected this
segment's government operations and backlog at June 30, 1994 reflects the
impact of Congressional budget reductions on the advanced solid rocket motor
and super conducting super collider projects. 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.
<page 14>
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, 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 $62,471,000 to $164,388,000,
primarily due to the inclusion of revenues resulting from the acquisition of
Delta Catalytic Corporation during June 1993. These were partially offset by
lower volume in fabrication operations. Segment operating income (loss)
decreased $5,557,000 to a loss of $4,576,000 from income of $981,000,
primarily due to lower volume in fabrication operations.
Marine Constructions Services' equity in income (loss) of investees decreased
$1,038,000 to a loss of $16,000 from income of $1,022,000, primarily due to
losses in a Canadian joint venture this year and lower operating results of a
Mexican joint venture.
Backlog for this segment at June 30, 1994 was $388,181,000 as compared to
$413,766,000 at June 30, 1993. This segment's markets are expected to 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.
General corporate expenses decreased $2,694,000 to $9,305,000, primarily due
to timing of expenses, and non-recurring charges related to certain cost
reduction initiatives in the June 1993 quarter.
Interest income increased $911,000 to $2,458,000, primarily due to increased
investments in government securities and other investments.
<page 15>
Interest expense decreased $7,766,000 to $9,348,000, primarily due to a
reduction in accrued interest on proposed tax deficiencies.
Other-net expense decreased $630,000 to $3,474,000. This decrease was
primarily due to lower bank fees and discounts on the sale of certain accounts
receivable, partially offset by losses on the sale of investments.
The provision for income taxes decreased $1,368,000 to $733,000 while loss
before the provision for income taxes and cumulative effect of accounting
change decreased $10,460,000 to $8,265,000. The decrease in the provision for
income taxes is primarily due to a tax provision related to a favorable
warranty reserve adjustment during the three months ended June 30, 1993.
Net loss decreased $112,066,000 to $9,510,000 reflecting the cumulative effect
of the adoption of Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits," of $512,000 in the
current year and the cumulative effect of the accounting change for non-
employee products liability asbestos claims of $100,750,000 in the prior year,
in addition to the other items mentioned above.
Liquidity and Capital Resources
- -------------------------------
During the three months ended June 30, 1994, the Delaware Company's cash and
cash equivalents decreased $23,254,000 to $24,110,000 and total debt increased
$103,301,000 to $709,361,000, primarily from short-term borrowings of
$103,177,000. During this period, the Delaware Company used cash of
$92,570,000 in operating activities, $16,753,000 for the repurchase of Series
B Preferred Stock to satisfy future sinking fund requirements, and $3,792,000
for cash dividends on the Delaware Company's preferred stocks. Decreases in
net contracts in progress and advance billings, and accounts payable are
primarily due to lower volume in the Power Generation Systems and Equipment
segment.
Pursuant to an agreement with a 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
<page 16>
delayed for three months or more. 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 the quarter ending June 30, 1994
were $31,450,000, including $1,894,000 applicable to insolvent insurers and
$1,085,000 relating to the policy year 1979. As a result of the adoption of
FASB Interpretation No. 39 (see Note 2 to consolidated financial statements),
the Delaware Company has presented separately in the balance sheet its
estimated liabilities for pending and future non-employee products liability
asbestos claims and related estimated insurance recoveries. At June 30, 1994,
Accounts receivable - other includes receivables of $29,455,000 that have been
billed to insurers for reimbursement of settled claims. 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. At June 30, 1994, the
estimated amount of future costs allocable to insolvent insurers and the
policy year 1979 was $132,074,000. 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. Settlement of
the liability is expected to occur over the next 30 years. 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 $1,302,000 to $13,117,000 for the three months ended June 30, 1994
as compared with the same period last year, the majority of which were
incurred to maintain existing facilities. During July 1994, the Delaware
Company purchased a barge which was formerly leased for approximately
$15,000,000.
At June 30 and March 31, 1994, 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 the terms of an
agreement with a certain U.S. Bank. The maximum sales limit available under
this agreement, which expires on December 31, 1995 is $225,000,000.
<page 17>
At June 30 and March 31, 1994 the Delaware Company had available to it
various uncommitted short-term lines of credit from banks totalling
$206,671,000 and $204,699,000, respectively. Borrowings outstanding against
these facilities at June 30 and March 31, 1994 were $81,285,000 and
$15,519,000, respectively. In addition, 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. In addition, 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 June 30 or March 31, 1994. 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. At June 30,
1994 borrowings outstanding against this facility were $3,261,000. There were
no borrowings outstanding against this facility at March 31, 1994.
The Delaware Company is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or
investments. At June 30, 1994, substantially all of the net assets of the
Delaware Company were subject to such restrictions. At June 30, 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. No amounts were
outstanding under this agreement at June 30 or March 31, 1994.
<page 18>
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.
Borrowings against this facility at June 30, 1994 were $34,150,000, all of
which was repaid in July 1994. There were no borrowings against this
agreement at March 31, 1994.
Working capital decreased to $141,387,000 at June 30, 1994 from $172,690,000
at March 31, 1994. During the remainder of fiscal 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 June 1994 and
1993.
The Delaware Company has provided a valuation allowance ($12,387,000 at June
30, 1994) for deferred tax assets which cannot be realized through carrybacks
and future reversals of existing taxable temporary differences. Management
believes that remaining deferred tax assets ($559,421,000 at June 30, 1994)
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.
The Delaware Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective April 1, 1992 for all
domestic plans. The Delaware Company plans to adopt SFAS No. 106 for foreign
<page 19>
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.
<page 20>
PART II
McDERMOTT INCORPORATED
OTHER INFORMATION
- -----------------
No information is applicable to Part II for the current quarter, except as
noted below:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There were no current reports on Form 8-K filed during the three
months ended June 30, 1994.
Signatures
<page 21>
SIGNATURES
Pursuant to the requirements 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.
McDERMOTT INCORPORATED
----------------------
(REGISTRANT)
Date: 8/02/94 By: s/Brock A. Hattox
---------------------
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
<page 22>
