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 December 31, 1993
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 January 20, 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 - December 31, 1993
and March 31, 1993 4
Consolidated Statement of Loss and Retained Earnings
(Deficit)- Three Months Ended and Nine Months
Ended December 31, 1993 and December 31, 1992 6
Consolidated Statement of Cash Flows - Nine Months
Ended December 31, 1993 and December 31, 1992 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
Page 2
PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
----------------------
Item 1. Consolidated Financial Statements
Page 3
<TABLE>
<CAPTION>
McDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
ASSETS
12/31/93 3/31/93
-------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 34,509 $ 71,549
Investments in government obligations,
under reverse repurchase agreement
with an affiliate - 78,860
Accounts receivable-trade 301,103 210,395
Accounts receivable-other 77,488 79,748
Accounts receivable from
McDermott International, Inc. 15,754 9,980
Contracts in progress 235,794 220,866
Inventories 71,639 65,376
Deferred income taxes 87,458 97,813
Other current assets 11,469 7,586
- -----------------------------------------------------------------------------
Total Current Assets 835,214 842,173
- -----------------------------------------------------------------------------
Property, Plant and Equipment, at Cost 1,412,761 1,383,369
Less accumulated depreciation 936,180 911,019
- -----------------------------------------------------------------------------
Net Property, Plant and Equipment 476,581 472,350
- -----------------------------------------------------------------------------
Investments 129,948 -
- -----------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization
of $82,476,000 at December 31, 1993
and $77,828,000 at March 31, 1993 144,954 132,236
- -----------------------------------------------------------------------------
Investment in McDermott International, Inc. 611,067 615,742
- -----------------------------------------------------------------------------
Prepaid Pension Costs 218,531 215,425
- -----------------------------------------------------------------------------
Other Assets 117,503 67,732
- -----------------------------------------------------------------------------
Total $ 2,533,798 $ 2,345,658
=============================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
12/31/93 3/31/93
-------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current
maturities of long-term debt $ 56,005 $ 193,839
Note payable to an affiliate 38,400 -
Accounts payable 121,687 128,031
Accounts payable to McDermott International, Inc. 8,952 12,098
Accrued employee benefits 88,380 86,678
Accrued interest payable 50,548 52,288
Accrued liabilities - other 119,267 140,804
Advance billings on contracts 175,347 146,132
U.S. and foreign income taxes 8,289 41,088
- -----------------------------------------------------------------------------
Total Current Liabilities 666,875 800,958
- -----------------------------------------------------------------------------
Long-Term Debt 573,031 492,036
- -----------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 368,384 360,467
- -----------------------------------------------------------------------------
Reserve for Environmental and Products Liabilities 139,822 11,867
- -----------------------------------------------------------------------------
Other Liabilities 84,691 81,879
- -----------------------------------------------------------------------------
Contingencies
- -----------------------------------------------------------------------------
Minority Interest 16,702 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 112,807 116,393
- -----------------------------------------------------------------------------
Total Redeemable Preferred Stocks 200,896 204,482
- -----------------------------------------------------------------------------
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) (96,001) 37,926
Minimum pension liability (5) (5)
Cumulative foreign exchange
translation adjustments (9,686) (5,236)
- -----------------------------------------------------------------------------
Total Common Stock and Other
Stockholder's Equity 483,397 389,491
- -----------------------------------------------------------------------------
Total $ 2,533,798 $2,345,658
=============================================================================
</TABLE>
Page 5
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF LOSS AND RETAINED EARNINGS (DEFICIT)
DECEMBER 31, 1993
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/93 12/31/92 12/31/93 12/31/92
-------- -------- -------- --------
(Unaudited)
(In thousands)
[S] [C] [C] [C] [C]
Revenues $613,407 $515,567 $1,635,495 $1,464,564
- -----------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 550,564 439,077 1,441,878 1,274,261
Depreciation and amortization 14,550 22,905 50,823 62,184
Selling, general and
administrative expenses 40,359 38,898 122,148 114,081
- -----------------------------------------------------------------------------
605,473 500,880 1,614,849 1,450,526
- -----------------------------------------------------------------------------
7,934 14,687 20,646 14,038
Equity in Income of Investees 1,194 1,057 7,179 4,106
- -----------------------------------------------------------------------------
Operating Income 9,128 15,744 27,825 18,144
- -----------------------------------------------------------------------------
Other Income (Expense):
Interest income 960 1,167 3,187 4,701
Interest expense (14,452) (19,903) (45,983) (56,528)
Other-net 438 (9,252) (5,293) (22,930)
- -----------------------------------------------------------------------------
(13,054) (27,988) (48,089) (74,757)
- -----------------------------------------------------------------------------
Loss before Provision for (Benefit from)
Income Taxes, Extraordinary Item and
Cumulative Effect of Accounting
Changes (3,926) (12,244) (20,264) (56,613)
Provision for (Benefit from) Income
Taxes (1,595) (3,820) 1,090 (14,913)
- -----------------------------------------------------------------------------
Loss before Extraordinary Item and
Cumulative Effect of Accounting
Changes (2,331) (8,424) (21,354) (41,700)
Extraordinary Item - (610) - (610)
Cumulative Effect of Accounting
Changes - - (100,750) (236,315)
- -----------------------------------------------------------------------------
Net Loss (2,331) (9,034) (122,104) (278,625)
- -----------------------------------------------------------------------------
Retained Earnings (Deficit) -
Beginning of Period (89,772) 50,102 37,926 327,636
Deduct Cash Dividends - Preferred
Stocks 3,898 3,971 11,823 11,914
- -----------------------------------------------------------------------------
Retained Earnings (Deficit) -
End of Period $ (96,001) $ 37,097 $ (96,001) $ 37,097
=============================================================================
See accompanying notes to consolidated financial statements
[/TABLE]
Page 6
<TABLE>
<CAPTION>
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1993
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/93 12/31/92
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (122,104) $ (278,625)
- -----------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 50,823 62,184
Gain (loss) on sale and disposal of assets (1,688) 2,934
Cumulative effect of accounting changes 100,750 236,315
Extraordinary item - 610
Provision for (benefit from) deferred taxes (29,552) 7,977
Other 1,603 3,515
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable (56,564) 48,816
Accounts payable (22,891) (39,657)
Inventories (3,405) 5,134
Net contracts in progress and advance
billings 28,612 74,801
Income taxes 17,861 (74,111)
Accrued interest (1,737) (57,550)
Accrued liabilities (33,039) (7,606)
Other, net (22,366) (18,935)
- -----------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (93,697) (34,198)
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Delta Catalytic Corporation (28,249) -
Purchases of property, plant and equipment (39,039) (39,461)
Proceeds from the sale and disposal of assets 3,643 11,080
Purchases of government obligations, under
reverse repurchase agreement with an affiliate (646,685) (4,959,052)
Sales of government obligations, under
reverse repurchase agreement with an affiliate 725,545 5,003,638
Other (346) (473)
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 14,869 15,732
- ----------------------------------------------------------------------------
</TABLE>
Page 7
<TABLE>
<CAPTION>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED
12/31/93 12/31/92
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (200,838) $ (17,304)
Issuance of long-term debt 92,475 75,000
Increase in short-term borrowings 28,012 -
Short-term borrowing from an affiliate 38,400 -
Dividends paid (11,823) (11,914)
Capital contribution received from International 100,000 -
Other (3,724) (624)
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,502 45,158
- ----------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (714) (596)
- ----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (37,040) 26,096
- ----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 71,549 31,423
- ----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,509 $ 57,519
============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 47,722 $ 114,084
Income taxes $ 4,883 $ 50,466
============================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Investments and accrued interest received as
a capital contribution from McDermott
International, Inc. $ 132,283 $ -
=============================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
Page 8
McDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1993 AND 1992
AND AT DECEMBER 31 AND MARCH 31, 1993
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. Investments in joint venture
and other entities in which the Delaware Company 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 December 31, 1993. Results for the three months and ended
December 31, 1992 have been restated to reflect the adoption of Statement of
Accounting Standards ("SFAS") No. 106 (see Note 6).
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 favorable warranty reserve adjustment
($6,710,000, net of tax of $4,290,000), included in the nine months ended
December 31, 1993; the cumulative effect of the accounting changes included
in the nine months ended December 31, 1993 and 1992 (See Notes 4 and 6);
and the accelerated depreciation and write-off of certain fabrication and
marine construction equipment ($4,598,000, net of tax of $2,368,000) and the
extraordinary item (See Note 7) included in the three a months ended
December 31, 1992. The results for interim periods are not necessarily
indicative of results to be expected for the year.
Page 9
<TABLE>
<CAPTION>
NOTE 2 - INVENTORIES
Consolidated inventories at December 31, 1993 and March 31, 1993 are
summarized below:
December 31, March 31,
1993 1993
------------ --------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 44,731 $ 36,320
Work in Progress 20,638 17,678
Finished Goods 6,270 11,378
- ---------------------------------------------------------------------------
$ 71,639 $ 65,376
===========================================================================
NOTE 3 - SEGMENT REPORTING INFORMATION
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/93 12/31/92 12/31/93 12/31/92
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Power Generation Systems and
Equipment $ 423,080 $ 397,459 $1,159,249 $1,104,146
Marine Construction Services 191,909 118,167 478,227 360,659
Intersegment Transfer Eliminations (1,582) (59) (1,981) (241)
- -----------------------------------------------------------------------------
Total Revenues $ 613,407 $ 515,567 $1,635,495 $1,464,564
=============================================================================
OPERATING INCOME:
Segment Operating Income:
Power Generation Systems and
Equipment $ 10,860 $ 16,971 $ 34,311 $ 30,569
Marine Construction Services 6,787 7,576 18,244 11,716
- ----------------------------------------------------------------------------
Total Segment Operating Income 17,647 24,547 52,555 42,285
- ----------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems and
Equipment 1,373 1,057 5,932 4,013
Marine Construction Services (179) - 1,247 93
- ----------------------------------------------------------------------------
Total Equity in Income of
Investees 1,194 1,057 7,179 4,106
- ----------------------------------------------------------------------------
General Corporate Expenses (9,713) (9,860) (31,909) (28,247)
- ----------------------------------------------------------------------------
Total Operating Income $ 9,128 $ 15,744 $ 27,825 $ 18,144
============================================================================
</TABLE>
Page 10
NOTE 4 - CHANGE OF ACCOUNTING PRINCIPLE
As a result of the issuance of 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
fiscal quarter of 1994, and effective April 1, 1993, the Delaware Company
adopted this provision of EITF Issue No. 93-5 as a change in accounting
principal and provided for estimated future costs to the extent that
recovery from its insurers is not determined to be probable. As previously
reported, the Delaware Company has an agreement with a majority of its
principal insurers concerning the method of allocation of these claims
against the years of coverage, which operates to reduce the Delaware
Company's liability for such claims. However, claims allocated to policy
year 1979 are excluded from this agreement, and the Delaware Company's
ability to recover these claims, and claims against 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. Inherent in the estimate of such future costs are
assumptions which may vary significantly as claims are settled. Accordingly,
the ultimate loss may differ materially from the amount provided in
consolidated financial statements.
The cumulative effect of the accounting change on prior years at
April 1, 1993 was a charge of $100,750,000 (net of income taxes of
$54,250,000) for the nine months ended December 31, 1993. Other than the
cumulative effect of the accounting change, the adoption of this provision
of EITF Issue No. 93-5 resulted in a decrease in Loss before Extraordinary
Item and Cumulative Effect of Accounting Change and Net Loss of $3,047,000 and
$10,560,000 for the three and nine months ended December 31, 1993,
respectively, 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.
Page 11
<TABLE>
<CAPTION>
The effect of the change on the first and second quarters of 1994 is as follows:
THREE THREE
MONTHS ENDED MONTHS ENDED
------------ ------------
6/30/93 9/30/93
<S> <C> <C>
Net loss as previously reported $ (20,359) $ (6,177)
Effect of change in method (467) 7,980
- ----------------------------------------------------------------------------
Income (loss) before cumulative effect
of a change in accounting principle (20,826) 1,803
Cumulative effect on prior years (to
March 31, 1993) of changing method (100,750) -
- ----------------------------------------------------------------------------
Net income (loss) as restated $ (121,576) $ 1,803
============================================================================
</TABLE>
NOTE 5 - INCOME TAXES
In the second quarter of fiscal 1994, the Delaware Company revised its
estimated annual effective tax rate to reflect a change in the federal
statutory rate from 34% to 35% and applied the newly enacted tax rate to
deferred tax balances as of April 1, 1993. This change had no material
effect on the results for the three and nine months ended December 31, 1993.
Effective April 1, 1992 the Delaware Company adopted SFAS No. 109,"Accounting
for Income Taxes". The cumulative effect of the accounting
change on prior years at April 1, 1992 of $3,727,000 is included in the
accompanying Consolidated Statement of Loss and Retained Earnings (Deficit)
for the nine months ended December 31, 1992. Other than the cumulative
effect, the accounting change had no material effect on the results for the
three and nine months ended December 31, 1992.
NOTE 6 - POSTRETIREMENT HEALTH CARE BENEFITS
During the fourth quarter of fiscal 1993, and effective April 1, 1992, the
Delaware Company adopted SFAS No. 106, "Employers' Accounting for Postre-
tirement Benefits Other Than Pensions." In accordance with the Statement,
the Delaware Company elected immediate recognition of its transition
liability and recorded $240,042,000 (net of income tax benefit of
$136,228,000) as the cumulative effect of an accounting change. In the
three and nine months ended December 31, 1992, other than the cumulative
effect, the adoption of SFAS No. 106 resulted in an increase before
Extraordinary Item and Cumulative Effect of Accounting Changes an of
$1,263,000 and $2,688,000, respectively.
Page 12
NOTE 7 - EXTRAORDINARY ITEM
During the three months ended December 31, 1992, the Delaware Company
purchased $10,600,000 par value of its 12.25% Senior Subordinated Notes due
June 1, 1998 for $11,366,000 in cash. This transaction resulted in an
extraordinary loss of $610,000 (net of income tax benefit of $314,000).
NOTE 8 - 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 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 by DCC's future earnings. DCC provides
engineering, procurement, construction, industrial maintenance and specialty
services to industries worldwide, including oil and gas generation;
industrial, civil, and marine construction; petrochemical; and petrochemical;
and pulp and paper. 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 November 30, 1993 are included in the Delaware
Company's consolidated results and are included in the Marine Construction
Services' segment. Revenues, segment operating income and net loss were
$78,455,000, $3,346,000 and $696,000, respectively, for the three months
ended December 31, 1993 and $152,468,000, $5,743,000, and $899,000,
respectively, for the nine months ended December 31, 1993. The following pro
forma income statement information for the Delaware Company is presented as
though the purchase of DCC had occurred on April 1, 1992:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/93 12/31/92
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Revenues $1,738,986 $1,877,626
Loss before Extraordinary Item and
Cumulative Effect of Accounting
Changes $ (20,879) $ (40,381)
Net Loss $ (121,629) $(277,306)
</TABLE>
Page 13
The acquisition was accounted for under the purchase method and goodwill is
being amortized over a period of 10 years. The purchase price has been
allocated to the underlying assets and liabilities based on estimated fair
values, which approximate book value, at the date of acquisition. Such
estimates may be revised at a later date. A summary of the purchase price
allocation is as follows:
<TABLE>
<CAPTION>
(Unaudited)
(In thousands)
<S> <C>
Net Working Capital $ 10,139
Excess of Cost Over Fair Value of Net Assets
of Purchased Business 17,366
Net Property, Plant and Equipment 14,870
Other Non-Current Liabilities, Net (14,126)
- ----------------------------------------------------------------------------
Total $ 28,249
============================================================================
</TABLE>
Page 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1993 VS. THREE MONTHS
ENDED DECEMBER 31, 1992
Power Generation Systems and Equipment's revenues increased $25,621,000 to
$423,080,000. This was primarily due to higher revenues from fabrication and
erection of fossil fuel steam and environmental control systems, replacement
nuclear steam generators, nuclear fuel assemblies and reactor components for
the U.S. Government, and repair and alteration of existing fossil fuel steam
systems. These increases were partially offset by lower revenues 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.
Power Generation Systems and Equipment's segment operating income decreased
$6,111,000 to $10,860,000. 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
repair and alteration of existing fossil fuel steam systems, a lower
favorable workers' compensation adjustment, and higher royalty income
recorded in the prior year. These decreases were partially offset by higher
volume and margins on fabrication and erection of fossil fuel steam and
environmental control systems, replacement nuclear steam generators, and
nuclear fuel assemblies and reactor components for the U.S. Government.
Power Generation Systems and Equipment's equity in income of investees
increased $316,000 to $1,373,000 due primarily to improved results in two
domestic joint ventures which own and operate two small power plants.
Backlog for this segment at December 31, 1993 was $2,547,666,000 compared to
$2,790,983,000 at December 31, 1992. At December 31, 1993, this segment's
backlog with the U. S. Government was $850,600,000 (of which $27,723,000 had
not been funded). These amounts reflect the Delaware Company's estimate of
the impact of Congressional budget reductions on the Advanced Solid Rocket
Motor and Super Conducting Super Collider projects. Demand for supply of
new base load electric power plants is not expected to increase before the
mid-1990's in the U.S. The current economic environment and uncertainties
Page 15
created by passage of the Clean Air Act have caused utilities to defer repair
and refurbishments on existing plants. However, the Clean Air Act is
creating significant demand for pollution control equipment and related
plant enhancements. In order to comply with Phase I of the Clean Air Act, many
utilities are purchasing wet scrubbers to reduce emissions of sulphur oxides
and replacement burners to reduce emissions of nitrous oxides. Conversely,
the economic environment has negatively affected demand for other industrial
related product lines and these markets are expected to competitive. Also,
additional U.S. Government budget reductions have negatively affected this
segment's other government operations.
Marine Construction Services' revenues increased $73,742,000 to $191,909,000
primarily due to the acquisition of Delta Catalytic Corporation ("DCC") (see
Note 8 to consolidated financial statements) and increased volume on marine
operations. These were partially offset by lower volume on fabrication
operations. Segment operating income decreased $789,000 to $6,787,000
primarily due to decreased margins on marine operations and lower volume on
fabrication operations. These were partially offset by the accelerated
depreciation and write-off of certain fabrication and marine construction
equipment in the prior year and the inclusion of DCC.
Marine Construction Services' equity in loss of investees of $179,000 was
primarily due to losses in a Mexican joint venture partially offset by the
inclusion of the results of joint ventures formed in November 1992 to
operate a fabrication yard in New Iberia, Louisiana and in April 1993 to
operate and manage the Strategic Petroleum Reserve for the Department of
Energy.
Backlog for this segment at December 31, 1993 was $401,246,000 (including
$156,725,000 from DCC) as compared to $248,638,000 at December 31, 1992.
Excluding DCC, the backlog continues to decline as oil companies cut
domestic capital expenditures on major projects. This segment's markets are
expected to be at a low level in the U.S. during the remainder of fiscal
1994. If oil prices remain under pressure for the next six to twelve months,
this could have a further negative effect on this segment's fiscal 1995
results. The overcapacity of marine equipment will continue to result in a
competitive environment.
Page 16
Interest income decreased $207,000 to $960,000 primarily due to lower
investments in reverse repurchase agreements with an affiliate.
Interest expense decreased $5,451,000 to $14,452,000 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.
Other-net increased $9,690,000 to income of $438,000 from expense of
$9,252,000. This increase was primarily due to a loss on the sale of an
office building in the prior period.
The benefit from income taxes decreased by $2,225,000 to $1,595,000 while
the loss before the benefit from income taxes decreased by $8,318,000 to
$3,926,000. The decrease in the benefit from income taxes is due primarily
to the decrease in loss from operations.
Page 17
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1993 VS. NINE MONTHS
ENDED DECEMBER 31, 1992
Power Generation Systems and Equipment's revenues increased $55,103,000 to
$1,159,249,000. This was primarily due to higher revenues from fabrication
and erection of fossil fuel steam and environmental control systems,
replacement nuclear steam generators, nuclear fuel assemblies and reactor
components for the U.S. Government, and repair and alteration of existing
fossil fuel systems. 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 increased
$3,742,000 to $34,311,000. The increase was primarily due to higher volume
and margins on fabrication and erection of fossil fuel steam and environ-
mental control systems, replacement nuclear steam generators, and higher
volume on nuclear fuel assemblies and reactor components for the U.S.
Government. There was also a favorable warranty reserve adjustment. These
increases were partially offset by lower volume and margins on 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 and repair and alteration
of existing fossil fuel steam systems, as well as higher royalty income
recorded in the prior year.
Power Generation Systems and Equipment's equity in income of investees
increased $1,919,000 to $5,932,000 primarily due to improved results in three
domestic joint ventures which own and operate a cogeneration facility and
two small power plants.
Marine Construction Services' revenues increased $117,568,000 to $478,227,000
primarily due to the acquisition of DCC and improved price levels in fabrica-
tion operations, partially offset by lower volume in engineering operations.
Segment operating income increased $6,528,000 to $18,244,000 primarily due to
the acquisition of DCC, the accelerated depreciation and write-off of certain
fabrication and marine construction equipment in the prior year, and improved
margins on fabrication operations. These were partially offset by lower
volume in engineering operations.
Page 18
Marine Construction Services' equity in income of investees increased
$1,154,000 to $1,247,000 primarily due to the inclusion of the results of
joint ventures formed in November 1992 to operate a fabrication yard in New
Iberia, Louisiana and in April 1993 to operate the Strategic Petroleum
Reserve for the Department of Energy.
General corporate expenses increased $3,662,000 to $31,909,000 primarily due
to non-recurring charges related to certain cost reduction initiatives.
Interest income decreased $1,514,000 to $3,187,000 primarily due to lower
investments in reverse repurchase agreements with an affiliate.
Interest expense decreased $10,545,000 to $45,983,000 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.
Other-net expense decreased $17,637,000 to $5,293,000 primarily due to
provisions for an uncollectible non-trade receivable, a settlement of a
lawsuit and a loss on the sale of an office building, all in the prior
period. The decrease was partially offset by minority shareholder participa-
tion in the results of DCC since its acquisition in June 1993.
The provision for (benefit from) income taxes increased by $16,003,000 to a
provision of $1,090,000 from a benefit of $14,913,000 while the loss before
the provision for (benefit from) income taxes decreased by $36,349,000 to
$20,264,000. The increase in the provision for income taxes is due primarily
to the decrease in loss from operations.
Net loss decreased $156,521,000 to $122,104,000 reflecting the cumulative
effect of the change in accounting for non-employee products liability
asbestos claims of $100,750,000 in the current period and the cumulative
effect of the adoption of SFAS No. 106, "Employers Accounting for Postretire-
ment Benefits Other Than Pensions," of $240,042,000 in the prior year, in
addition to the other items described above.
Page 19
Liquidity and Capital Resources
During the nine months ended December 31, 1993, the Delaware Company's cash
and cash equivalents decreased $37,040,000 to $34,509,000 and total debt
decreased $18,439,000 to $667,436,000. During the same period, the Delaware
Company used cash of $93,697,000 in operating activities, $28,249,000 for the
acquisition of DCC (see Note 8 to consolidated financial statements),
$200,838,000 for the repayment of long-term debt, and $11,823,000 for cash
dividends on the Delaware Company's preferred stocks. The Delaware Company
provided cash of $92,475,000 from the issuance of long-term debt, and
$38,400,000 from the issuance of a note payable to an affiliate and received
cash of $100,000,000 as capital contribution from International. Also, during
December 1993, 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, accrued
interest thereon of $2,353,000. Higher accounts receivable reflect
collection delays on a certain foreign Power Generation Systems and Equipment
segment contract and an outstanding billing relating to the termination
Advanced Solid Rocket Motor contract (both billings are also reflected in low
contracts in progress and advance billings). This increase was partially of
the acceleration of collections of retainage billings on the Naval Reactors
program.
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. The
Delaware Company has outstanding receivables of $32,276,000 at
December 31, 1993 from its insurers for reimbursement of these claims. As a
result of collection delays inherent in the process, reimbursement is usually
delayed for three months or more. The number of claims, which management
believes peaked in fiscal year 1990, has declined moderately. However, the
average settlement amount of these claims has continued to rise. Claims paid
in the nine months ended December 31, 1993 were $85,475,000, including
$5,970,000 applicable to insolvent insurers and $2,533,000 relating to the
policy year 1979 (see Note 4 to consolidated financial statements). Settle-
ment of the estimated liability of $138,378,000 at December 31, 1993 for
future cost 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
Page 20
costs. Inherent in the estimate of such future costs are assumptions
which may vary significantly as claims are settled. Accordingly, the amounts
ultimately paid may differ materially from the amount provided in
consolidated financial statements. The collection delays and the amount of
claims paid 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, base 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 were
$39,039,000 for the nine months ended December 31, 1993 compared with
$39,461,000 for the prior year and were incurred principally to maintain
existing facilities.
During April and May 1993, the Delaware Company issued $87,000,000 of Series
B Medium Term Notes at maturities and interest rates ranging from five to
thirty years, and 6.50% to 8.75%, respectively. These notes have an average
maturity of approximately twenty years and an average interest rate of
approximately 7.95%.
Pursuant to its right of redemption, the Delaware Company redeemed its 9.625%
Sinking Fund Debentures, 10% Subordinated Debentures and 10.20% Sinking Fund
Debentures on April 19, 1993. Additionally on June 1, 1993 and pursuant to
its redemption option, the Delaware Company redeemed its 12.25% Senior
Subordinated Notes due 1998. The total redemption price including accrued
interest and redemption premium was $209,694,000.
At December 31, and March 31, 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 the
terms of its agreement with a certain U. S. bank. The maximum sales limit
available under the agreement, which expires on December 31, 1995, is
$225,000,000.
At December 31, and March 31, 1993, the Delaware Company had available to it
various unsecured and uncommitted short-term lines of credit totalling
$135,000,000 and $74,000,000, respectively. The Babcock & Wilcox Company
also had available to it an unsecured and committed revolving line of credit
facility which is restricted when The Babcock & Wilcox Company's net tangible
Page 21
assets do not reach a certain level. There were no borrowings against these
facilities at December 31, 1993 or March 31, 1993. A Canadian subsidiary of
The Babcock & Wilcox Company had available to it unsecured and uncommitted
lines of credit totaling approximately $43,000,000, of which $26,015,000 was
outstanding at December 31, 1993. These facilities are to meet temporary
working capital needs. Additionally, DCC had available to it from a certain
Canadian bank a short-term line of credit of approximately $23,000,000, of
which $18,559,000 was outstanding. DCC also had available from the same bank a
revolving credit facility of approximately $15,000,000 which expires on
May 31, 1997. No borrowings were outstanding against this facility at
December 31, 1993.
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 invest-
ments. At December 31, 1993, substantially all of the net assets of the
Delaware Company were subject to such restrictions. At December 31, 1993,
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 Inter-
national, 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 December 31, 1993, 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.
Borrowings against this agreement of $38,400,000 at December 31, 1993 were
repaid on January 5, 1994. There were no borrowings against this agreement at
March 31, 1993.
Page 22
Working capital increased to $168,339,000 at December 31, 1993 from
$41,215,000 at March 31, 1993. During the remainder of fiscal 1994, the
Delaware Company expects to obtain funds to meet capital expenditure and
working capital requirements from operating activities and borrowings from
short-term lines of credit. 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 for the three and
nine months ended December 31, 1993 and 1992.
The Delaware Company has provided a valuation allowance ($9,349,000 at
December 31, 1993) 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 ($330,000,000 at December 31, 1993) in all other tax jurisdic-
tions are realizable through carrybacks and future reversals of existing
taxable temporary differences, future taxable income arising primarily as the
result of improved pre-tax earnings and, if necessary, 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 effective April 1, 1992 for all
domestic plans. The Delaware Company plans to adopt SFAS No. 106 for
foreign plans during fiscal 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
Page 23
employment but before retirement. The Delaware Company has not yet finalized
its review of the impact of this statement, but the new standard will have no
impact on the cash requirements for any postemployment benefits, and is not
expected to 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 Invest-
ments 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. The Delaware Company has
not finalized its review of the new standard, but based on its current port-
folio management practices, would 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 new standard is not expected
to have a material effect on the consolidated financial statements of the
Delaware Company.
Page 24
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 December 31, 1993.
Signatures
Page 25
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: 1/26/94 By: s/Brock A. Hattox
------- -------------------
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
Page 26
