<PAGE> 1
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 September 30, 1995
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
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification)
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
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
October 30, 1995 was 3,600.
<PAGE> 2
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
September 30, 1995 and March 31, 1995 4
Condensed Consolidated Statement of Loss
Three and Six Months Ended September 30, 1995 and 1994 6
Condensed Consolidated Statement of Cash Flows
Six Months Ended September 30, 1995 and 1994 7
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE> 4
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
9/30/95 3/31/95
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28,242 $ 21,014
Short-term investments 61,897 130,195
Accounts receivable-trade 275,840 233,005
Accounts receivable-other 59,981 54,655
Accounts receivable from affiliates 15,430 19,493
Insurance recoverable-current 114,600 111,188
Contracts in progress 222,833 223,262
Inventories 67,057 61,714
Deferred income taxes 62,504 74,643
Other current assets 6,531 6,840
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 914,915 936,009
- ---------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost: 702,298 705,489
Less accumulated depreciation 404,379 402,500
- ---------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 297,919 302,989
- ---------------------------------------------------------------------------------------------------------------
Investments - 231,701
- ---------------------------------------------------------------------------------------------------------------
Insurance Recoverable 680,916 750,219
- ---------------------------------------------------------------------------------------------------------------
Investment in McDermott International, Inc. 603,992 605,242
- ---------------------------------------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $94,300,000 at September 30, 1995
and $90,923,000 at March 31, 1995 132,934 136,311
- ---------------------------------------------------------------------------------------------------------------
Prepaid Pension Costs 265,508 248,718
- ---------------------------------------------------------------------------------------------------------------
Other Assets 194,475 175,240
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 3,090,659 $ 3,386,429
===============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
9/30/95 3/31/95
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 141,905 $ 296,718
Accounts payable 104,584 132,799
Accounts payable to affiliates 71,671 51,789
Environmental and products liabilities-current 156,264 133,280
Accrued employee benefits 75,140 83,078
Accrued interest payable 18,605 23,456
Accrued liabilities - other 89,418 105,304
Advanced billings on contracts 125,651 117,584
U.S. and foreign income taxes 1,181 13,581
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 784,419 957,589
- ---------------------------------------------------------------------------------------------------------------
Long-Term Debt 423,158 423,150
- ---------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 374,436 371,707
- ---------------------------------------------------------------------------------------------------------------
Environmental and Products Liabilities 810,138 913,939
- ---------------------------------------------------------------------------------------------------------------
Other Liabilities 111,701 128,258
- ---------------------------------------------------------------------------------------------------------------
Contingencies
- ---------------------------------------------------------------------------------------------------------------
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 91,162 91,162
- ---------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stocks 179,251 179,251
- ---------------------------------------------------------------------------------------------------------------
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 620,981 620,981
Deficit (205,124) (193,380)
Currency translation adjustments (8,305) (15,070)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 407,556 412,535
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 3,090,659 $ 3,386,429
===============================================================================================================
</TABLE>
5
<PAGE> 6
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF LOSS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/95 9/30/94 9/30/95 9/30/94
------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 456,129 $ 543,785 $ 961,739 $ 1,112,477
- ---------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 420,141 495,734 883,937 1,003,386
Depreciation and amortization 11,502 15,884 22,731 37,747
Selling, general and
administrative expenses 35,972 46,276 72,518 85,851
- ---------------------------------------------------------------------------------------------------------------
467,615 557,894 979,186 1,126,984
- ---------------------------------------------------------------------------------------------------------------
Operating Loss before Equity
in Income of Investees (11,486) (14,109) (17,447) (14,507)
Equity in Income of Investees 2,552 1,633 36,473 4,130
- ---------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (8,934) (12,476) 19,026 (10,377)
- ---------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 1,927 2,555 7,848 5,013
Interest expense (12,134) (11,440) (26,974) (20,788)
Other-net 4,594 (16,136) 1,464 (19,610)
- ---------------------------------------------------------------------------------------------------------------
(5,613) (25,021) (17,662) (35,385)
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) before Provision for
(Benefit from) Income Taxes and
Cumulative Effect of Accounting
Change (14,547) (37,497) 1,364 (45,762)
Provision for (Benefit from) Income
Taxes (3,416) 3,298 5,954 4,031
- ---------------------------------------------------------------------------------------------------------------
Loss before Cumulative Effect of
Accounting Change (11,131) (40,795) (4,590) (49,793)
Cumulative Effect of Accounting
Change - - - (512)
- ---------------------------------------------------------------------------------------------------------------
Net Loss $ (11,131) $ (40,795) $ (4,590) $ (50,305)
===============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/95 9/30/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,590) $ (50,305)
- ---------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 22,731 37,747
Provision for (benefit from) deferred taxes (4,755) 49,489
Gain on sale and disposal of assets (3,436) (250)
Equity in income of investees, less dividends 1,678 (1,381)
Other 1,277 3,658
Changes in assets and liabilities:
Accounts receivable (66,644) (18,713)
Net contracts in progress and advance billings 10,385 (36,824)
Accounts payable (9,782) (19,204)
Accrued interest (4,851) (8,038)
Accrued liabilities (16,294) 2,279
Income taxes (10,867) (32,470)
Other, net (6,485) (50,100)
Proceeds from insurance for products liabilities claims 49,305 53,823
Payments of products liabilities claims (74,112) (61,557)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (116,440) (131,846)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale and disposal of assets 8,044 1,430
Purchases of property, plant and equipment (17,292) (42,316)
Purchases of short and long-term investments (196,843) (5,000)
Sales of short and long-term investments 495,645 5,373
Other (3,023) 4,001
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 286,531 (36,512)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/95 9/30/94
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowing $ (4,861) $ 167,527
Payment of long-term debt (150,013) (275)
Repurchase of preferred stock - (16,753)
Dividends paid (6,893) (7,249)
Other (745) (1,366)
- --------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (162,512) 141,884
- --------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (351) 805
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,228 (25,669)
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,014 47,364
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,242 $ 21,695
==============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 31,826 $ 28,825
Income taxes (net of refunds) $ 25,696 $ 15,626
==============================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE> 9
McDERMOTT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statement information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Such adjustments are of
a normal recurring nature except for a gain resulting from the sale of two
power purchase contracts ($20,047,000, net of tax of $10,565,000) included in
the six months ended September 30, 1995; a loss relating to the reduction of
estimated products liability asbestos claims recoveries from insurers
($14,478,000) included in the three and six months ended September 30, 1994; a
reduction in accrued interest expense ($5,600,000 and $11,300,000,
respectively) due to the settlement of outstanding tax issues included in the
three and six months ended September 30, 1994; and the cumulative effect of the
accounting change for the adoption of Statement of Financial Standards No. 112,
"Employers' Accounting for Postemployment Benefits" included in the six months
ended September 30, 1994. Operating results for the three and six months ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in
McDermott Incorporated's Annual Report on Form 10-K for the year ended March
31, 1995.
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.
9
<PAGE> 10
NOTE 2 - PRODUCTS LIABILITY
At September 30, 1995, the estimated liability for pending and future
non-employee products liability asbestos claims was $921,836,000 (of which less
than $240,000,000 had been asserted) and estimated insurance recoveries were
$795,516,000. Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from the Delaware Company's
claims history and constitute management's best estimate of such future costs.
Estimated insurance recoveries are based upon analysis of insurers providing
coverage of the estimated liabilities. Inherent in the estimate of such
liabilities and recoveries 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 amounts provided in the consolidated financial
statements.
NOTE 3 - INVENTORIES
Consolidated inventories at September 30, 1995 and March 31, 1995 are
summarized below:
<TABLE>
<CAPTION>
September 30, March 31,
1995 1995
-------------- ---------
(In thousands)
<S> <C> <C>
Materials and Supplies $ 41,344 $ 36,579
Work in Progress 15,787 15,341
Finished Goods 9,926 9,794
- ------------------------------------------------------------------------------------------------------------
$ 67,057 $ 61,714
============================================================================================================
</TABLE>
NOTE 4 - SALE OF POWER PURCHASE CONTRACTS
During the June 1995 quarter, the Delaware Company's Babcock-Ultrapower West
Enfield and Babcock-Ultrapower Jonesboro 50% owned partnerships sold two power
purchase contracts back to a local utility which had previously entered into
agreements with the partnerships to purchase power, and recognized a gain of
$61,324,000. The Delaware Company's equity in the earnings of these
partnerships was $25,000 and $32,865,000 (including its share of the gain) for
the three and six months ended September 30, 1995.
10
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the three and six months ended September 30, 1995, the Delaware
Company's Canadian operations contributed 44% and 46%, respectively, to total
revenues and $4,799,000 and $15,908,000, respectively, to operating income.
The operating income reflects activity on contracts performed at its Cambridge,
Ontario location (which is included in the B&W Operations business unit below),
principally for the supply of replacement recirculating steam generators to
domestic utilities and work for two government owned utilities located in the
Far East.
Beginning with the June 1995 quarter, management's discussion of revenues and
operating income is discussed on a business unit basis as follows: B&W
Operations business unit (includes the operations of the Babcock & Wilcox Power
Generation and Government Groups) and Engineering, Construction and Industrial
Operations business unit (includes the Delaware Company's Engineering and
Construction Group, and Shipbuilding and Industrial Group). Other business
unit revenues include eliminations between business units. Other business unit
income (loss) includes certain expenses, primarily employee benefit and
insurance programs, and marketing and legal costs, that are not allocated to
the business units. For the three and six months ended September 30, 1994,
Other revenues and business unit income (loss) includes the results of the
marine construction services business that was sold to International on
January 31, 1995 and other businesses disposed of during fiscal year 1995.
Prior year information has been reclassified to conform with the September 30,
1995 presentation.
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/95 9/30/94 9/30/95 9/30/94
------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
- ---------
B&W Operations $ 313,280 $ 320,012 $ 630,882 $ 610,637
Engineering, Construction and
Industrial Operations 161,208 165,808 360,390 378,116
Other (including Transfer Eliminations) (18,359) 57,965 (29,533) 123,724
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 456,129 $ 543,785 $ 961,739 $ 1,112,477
===============================================================================================================
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/95 9/30/94 9/30/95 9/30/94
------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME (LOSS)
Business Unit Income (Loss):
B&W Operations $ 7,419 $ 6,857 $ 12,087 $ 17,393
Engineering, Construction and
Industrial Operations (9,679) (10,397) (14,219) (14,129)
Other (4,004) (1,904) (3,333) (2,515)
- --------------------------------------------------------------------------------------------------------------
TOTAL BUSINESS UNIT
INCOME (LOSS) (6,264) (5,444) (5,465) 749
- --------------------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
B&W Operations 2,042 (43) 35,782 2,470
Engineering, Construction and
Industrial Operations 510 182 691 166
Other - 1,494 - 1,494
- --------------------------------------------------------------------------------------------------------------
TOTAL EQUITY IN INCOME
OF INVESTEES 2,552 1,633 36,473 4,130
- --------------------------------------------------------------------------------------------------------------
Corporate G&A Expense (5,222) (8,665) (11,982) (15,256)
- --------------------------------------------------------------------------------------------------------------
TOTAL OPERATING
INCOME (LOSS) $ (8,934) $ (12,476) $ 19,026 $ (10,377)
==============================================================================================================
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1994
B&W Operations' revenues decreased $6,732,000 to $313,280,000 primarily due to
lower revenues from the Power Generation Group's fabrication of fossil fuel
steam and environmental control systems, and industrial boilers in the U.S.
These decreases were partially offset by higher revenues from replacement
nuclear steam generators and Canadian nuclear services. In addition, the
Government Group's defense and space-related products (other than nuclear fuel
assemblies and reactor components) had higher revenues.
Engineering, Construction and Industrial Operations' revenues decreased
$4,600,000 to $161,208,000 primarily due to lower revenues from the Engineering
and Construction Group's construction, repair and alteration of utility and
industrial boilers in the U.S. and the Shipbuilding and Industrial Group's
shipyard operations. These decreases were partially offset
12
<PAGE> 13
by higher revenues from the Engineering and Construction Group's maintenance
and engineering activities in Canada.
Other revenues decreased $76,324,000 primarily due to the inclusion in the
prior year of revenues of $90,282,000 related to the marine construction
services business sold to International on January 31, 1995.
B&W Operations' business unit income increased $562,000 to $7,419,000.
Improved margins from the Power Generation Group's fabrication of fossil fuel
steam and environmental control systems were offset by lower volume and margins
from the fabrication of industrial boilers in the U.S. In addition, there were
higher volume and margins from the Government Group's defense and space-related
products (other than nuclear fuel and reactor components). These were partially
offset by lower volume and margins from nuclear fuel assemblies and reactor
components for the U.S. Government.
Engineering, Construction and Industrial Operations' business unit loss
decreased $718,000 to $9,679,000 primarily due to improved margins from the
Engineering and Construction Group's engineering services in the U.S., and the
Shipbuilding and Industrial Group's shipyard operations. These decreases were
partially offset by lower volume and margins from the Engineering and
Construction Group's construction, repair and alteration of utility and
industrial boilers in the U.S., including cost overuns on the completion of a
contract for one U.S. customer.
Other business unit loss in the prior period includes income of $4,370,000
related to the marine construction services business sold to International on
January 31, 1995.
B&W Operations' equity in income of investees increased $2,085,000 to income of
$2,042,000 from a loss of $43,000 primarily due to the Power Generation Group's
provision for loss on discontinuing a domestic joint venture in the prior
period.
Other business unit equity in income of investees in the prior period includes
the results of the CMM Mexican joint venture which was not a part of the marine
construction services business sold to International on January 31, 1995.
13
<PAGE> 14
Interest income decreased $628,000 to $1,927,000 primarily due to decreases in
investments in government obligations and other investments.
Interest expense increased $694,000 to $12,134,000 primarily due to a reduction
in accrued interest on proposed tax deficiencies of $5,600,000 that was
recorded in the prior period and changes in debt obligations and interest
rates prevailing thereon.
Other-net increased $20,730,000 to income of $4,594,000 from expense of
$16,136,000. This increase was primarily due to a loss of $14,478,000 in the
prior period related to the reduction of estimated products liability asbestos
claim recoveries from insurers, and higher bank fees and discounts on the sale
of certain accounts receivable in the prior period and gains of $3,005,000 on
the disposal of assets in the current period.
The provision for (benefit from) income taxes decreased $6,714,000 to a benefit
$3,416,000 from a provision of $3,298,000, while loss before the provision for
(benefit from) income taxes decreased $22,950,000 to $14,547,000. The decrease
in the provision for income taxes is primarily due to the ability to recognize
income tax benefits on losses in the U.S. in the current period which was
limited in the prior period.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1995 VS. SIX MONTHS
ENDED SEPTEMBER 30, 1994
B&W Operations' revenues increased $20,245,000 to $630,882,000 primarily due to
higher revenues from the Power Generation Group's contracts on replacement
nuclear steam generators for domestic customers at its Cambridge, Ontario
location, and on plant enhancement projects. These increases were partially
offset by lower revenues from fabrication of fossil fuel steam and
environmental control systems in the U.S. In addition, the Government Group's
defense and space-related products (other than nuclear fuel assemblies and
reactor components) had higher revenues. These were partially offset by lower
revenues from nuclear fuel assemblies and reactor components for the U.S.
Government.
Engineering, Construction and Industrial Operations' revenues decreased
$17,726,000 to $360,390,000 primarily due to lower revenues the Engineering and
Construction Group's construction, repair and alteration of utility and
industrial boilers in the U.S., and from the Shipbuilding and Industrial
Group's shipyard operations. These decreases were partially offset
14
<PAGE> 15
by higher revenues from the Engineering and Construction Group's maintenance
and construction activities in Canada.
Other revenues decreased $153,257,000 primarily due to the inclusion in the
prior year of revenues of $151,902,000 related to the marine construction
services business sold to International on January 31, 1995.
B&W Operations' business unit income decreased $5,306,000 to $12,087,000
primarily due to lower margins from the Power Generation Group's fabrication of
industrial boilers in the U.S. This decrease was partially offset by higher
volume and margins from replacement nuclear steam generators and plant
enhancement projects. In addition, there was higher volume from the Government
Group's defense and space-related products (other than nuclear fuel assemblies
and reactor components). This was partially offset by lower volume and margins
from nuclear fuel assemblies and reactor components for the U.S. Government.
Engineering, Construction and Industrial Operations' business unit loss
increased $90,000 to $14,219,000 primarily due to lower volume and margins from
the Engineering and Construction Group's construction, repair and alteration of
utility and industrial boilers in the U.S., including cost overuns on the
completion of a contract for one U.S. customer, mostly offset by improved
margins from the Shipbuilding and Industrial Group's shipyard operations.
Other business unit loss in the prior period includes income of $3,716,000
related to the marine construction services business sold to International on
January 31, 1995.
B&W Operations' equity in income of investees increased $33,312,000 to
$35,782,000 primarily due to the sale of power purchase contracts back to a
local utility in the current period and a provision for a loss on discontinuing
a domestic joint venture in the prior period.
Other business unit equity in income of investees in the prior period includes
the results of the CMM Mexican joint venture which was not a part of the marine
construction business sold to International on January 31, 1995.
Interest income increased $2,835,000 to $7,848,000 primarily due to increased
investments in government obligations and other investments.
15
<PAGE> 16
Interest expense increased $6,186,000 to $26,974,000 primarily due to changes
in debt obligations and interest rates prevailing thereon, and to a reduction
in accrued interest on proposed tax deficiencies of $11,300,000 that was
recorded in the prior period.
Other-net increased $21,074,000 to income of $1,464,000 from expense of
$19,610,000. This increase was primarily due to a loss of $14,478,000 related
to the reduction of estimated products liability asbestos claim recoveries from
insurers in the prior period and gains of $3,435,000 on the disposal of assets
in the current period.
The provision for income taxes increased $1,923,000 to $5,954,000, while income
(loss) before the provision for income taxes and cumulative effect of
accounting change increased $47,126,000 to income of $1,364,000 from a loss of
$45,762,000. The increase in the provision for income taxes is primarily due
to an increase in non U.S. income, partially offset due to the ability to
recognize income tax benefits on losses in the U.S. in the current period which
was limited in the prior period.
Net loss decreased $45,715,000 to $4,590,000 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
prior year, in addition to the other items mentioned above.
Backlog
<TABLE>
<CAPTION>
9/30/95 3/31/95
--------- ---------
(In thousands)
<S> <C> <C>
Business Unit Backlog:
B&W Operations $ 1,890,932 $ 1,947,226
Engineering, Construction and
Industrial Operations 514,905 619,973
Other (including Transfer Eliminations) (51,999) (102,533)
- ------------------------------------------------------------------------------------------------------------
Total Backlog $ 2,353,838 $ 2,464,666
============================================================================================================
</TABLE>
B&W Operations' backlog at September 30, 1995 was $1,890,932,000 compared to
$1,947,226,000 at March 31, 1995. B&W Operations' foreign markets for
industrial and utility boilers are expected to remain strong as well as the
U.S. market for replacement nuclear steam generators. Domestic utility markets
remain weak. At September 30, 1995, this
16
<PAGE> 17
business unit's backlog with the U.S. Government was $703,943,000 (of which
$105,876,000 had not been funded). U.S. Government budget reductions have
negatively affected this business unit's government operations.
Engineering, Construction and Industrial Operations' backlog at September 30,
1995 was $514,905,000 compared to $619,973,000 at March 31, 1995. The current
competitive economic environment in the U.S. has negatively affected demand for
its construction activities. At September 30, 1995, this business unit's
backlog with the U.S. Government was $60,074,000 (of which $54,357,000 had not
been funded).
Liquidity and Capital Resources
During the six months ended September 30, 1995, the Delaware Company's cash and
cash equivalents increased $7,228,000 to $28,242,000 and total debt decreased
$154,805,000 to $565,063,000 primarily through net sales of investments of
$298,802,000. During this period, the Delaware Company used cash of
$116,440,000 in operating activities, $150,013,000 for the repayment of
long-term debt, $17,292,000 for additions to property, plant and equipment, and
$6,893,000 for cash dividends on the Delaware Company's preferred stocks. The
increase in accounts receivable is primarily due to a decrease of approximately
$53,000,000 in the amount of qualified accounts receivable sold under the terms
of an agreement with a U.S. bank.
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 delayed
for three months or more. The number of claims had declined moderately since
fiscal year 1990, but have increased during the second half of fiscal year 1995
and the first half of fiscal year 1996. Management believes, based on
information currently available, that the recent increase represents an
acceleration in the timing of the receipt of these claims, but does not
represent an increase in its total estimated liability. The average amount of
these claims (historical average of approximately $5,000 per claim over the
last three years) has continued to rise. Claims paid during the six months
ended September 30, 1995 were $74,112,000, of which $65,891,000 has been
recovered or is due from insurers. At September 30, 1995, receivables of
17
<PAGE> 18
$51,511,000 were due from insurers for reimbursement of settled claims.
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from the Delaware Company's claims history and
constitute management's best estimate of such future costs. Estimated
insurance recoveries are based upon analysis of insurers providing coverage of
the estimated liabilities. Inherent in the estimate of such liabilities and
recoveries 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 amounts provided in the consolidated financial statements.
Settlement of the liability is expected to occur over approximately the next 25
years. The collection delays, and the amount of claims paid for which
insurance recovery is not probable, 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 decreased
$25,024,000 to $17,292,000 for the six months ended September 30, 1995 as
compared with the same period last year (which included expenditures of
approximately $18,496,000 related to the portion of its marine construction
business sold to International), the majority of which were incurred to
maintain existing facilities.
At September 30 and March 31, 1995, The Babcock & Wilcox Company ("B&W") had
sold, with limited recourse, an undivided interest in a designated pool of
qualified accounts receivable of approximately $122,000,000 and $175,000,000,
respectively, under the terms of an agreement with a U.S. Bank. The maximum
sales limit available under the agreement was reduced during July 1995 to
$175,000,000. During November 1995, B&W and the bank amended the agreement to
provide for an annual renewal of the program.
At September 30 and March 31, 1995, the Delaware Company had available to it
various uncommitted short-term lines of credit from banks totalling
$267,010,000 and $227,903,000, respectively. Borrowings by the Delaware Company
against these lines of credit at September 30 and March 31, 1995 were
$120,892,000 and $33,220,000, respectively. In addition, The Babcock & Wilcox
Company has available to it an unsecured and committed revolving line of credit
facility. During the quarter ended September 30,
18
<PAGE> 19
1995, the facility was amended to increase the commitment to $150,000,000 and
to extend the agreement to March 31, 1999. It is a condition to borrowing
under this revolving credit facility that the borrower's tangible net worth,
debt to capitalization, and interest coverage as defined in the agreement meet
or exceed certain covenant requirements. There were no borrowings against this
facility at September 30 or March 31, 1995. Delta Catalytic Corporation had
available from a certain Canadian bank, an unsecured and committed revolving
credit facility of $14,925,000 which expires on May 31, 1997. At September 30
and March 31, 1995 borrowings outstanding against this facility were
$14,925,000 and $7,420,000, respectively. In October 1995, Delta Catalytic
Corporation repaid and cancelled this facility and replaced it with two
unsecured and uncommitted short-term line of credit facitlities aggregating
$29,851,000, which are subject to annual renewal.
The Delaware Company maintains an investment portfolio of government
obligations and other investments which is classified as available for sale
under SFAS No. 115. The fair value of short-term investments at September 30,
1995 was $61,897,000 (amortized cost $62,225,000).
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 September 30, 1995, substantially all of the net assets of the Delaware
Company were subject to such restrictions. 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 September 30 or March 31, 1995.
19
<PAGE> 20
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 September 30 or March 31, 1995.
Working capital increased $152,076,000 from a deficit of $21,580,000 at March
31, 1995 to $130,496,000 at September 30, 1995. During the remainder of fiscal
1996, the Delaware Company expects to obtain funds to meet capital expenditure,
working capital and debt maturity requirements from operating activities, its
short-term investment portfolio, and additional borrowings from existing 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 in September 1995 and 1994.
The Delaware Company has provided a valuation allowance 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 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. A major uncertainty that affects the
ultimate realization of deferred tax assets is the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
This factor has been considered in determining the valuation allowance.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
20
<PAGE> 21
be recoverable. SFAS No. 121 also applies to similar assets that are held for
disposal, except for the assets of a discontinued operation. The Delaware
Company has not yet finalized its review of the impact of this statement, but
it is not expected to have a material impact on the consolidated financial
statements.
21
<PAGE> 22
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 September 30, 1995.
Signatures
22
<PAGE> 23
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: 11/10/95 By: s/Daniel R. Gaubert
-------- ------------------------------------------
(SIGNATURE)
Daniel R. Gaubert
Vice President, Finance
and Controller
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INCORPORATED'S SEPTEMBER 30, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 28,242
<SECURITIES> 61,897
<RECEIVABLES> 284,190
<ALLOWANCES> 8,350
<INVENTORY> 289,890
<CURRENT-ASSETS> 910,211
<PP&E> 702,298
<DEPRECIATION> 404,379
<TOTAL-ASSETS> 3,090,659
<CURRENT-LIABILITIES> 784,419
<BONDS> 423,158
<COMMON> 4
179,251
0
<OTHER-SE> 407,552
<TOTAL-LIABILITY-AND-EQUITY> 3,090,659
<SALES> 961,739
<TOTAL-REVENUES> 961,739
<CGS> 979,186
<TOTAL-COSTS> 979,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,974
<INCOME-PRETAX> 1,364
<INCOME-TAX> 5,954
<INCOME-CONTINUING> (4,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,590)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
