<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 December 31, 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
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(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, 1995 was 3,600.
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M c D E R M O T T I N C O R P O R A T E D
I N D E X - F O R M 10 - Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
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Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet - December 31, 1994
and March 31, 1994 4
Consolidated Statement of Income (Loss) and Retained
Earnings (Deficit) - Three Months Ended and Nine Months
Ended December 31, 1994 and December 31, 1993 6
Consolidated Statement of Cash Flows - Nine Months
Ended December 31, 1994 and December 31, 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 23
SIGNATURES 24
</TABLE>
2
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PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
3
<PAGE> 4
McDERMOTT INCORPORATED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
ASSETS
<TABLE>
<CAPTION>
12/31/94 3/31/94
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28,776 $ 47,364
Short-term investments 128,833 989
Accounts receivable-trade 231,934 255,441
Accounts receivable-other 55,298 58,787
Insurance recoverable-current 112,341 110,200
Accounts receivable from affiliates 17,447 11,428
Contracts in progress 281,289 214,649
Inventories 69,979 66,214
Deferred income taxes 85,413 98,627
Other current assets 30,164 35,462
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Total Current Assets 1,041,474 899,161
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Property, Plant and Equipment, at Cost 1,450,736 1,415,605
Less accumulated depreciation 959,455 932,722
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Net Property, Plant and Equipment 491,281 482,883
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Investments - 130,121
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Insurance Recoverable 777,327 876,846
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Investment in McDermott International, Inc. 605,867 610,392
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Prepaid Pension Costs 239,498 225,239
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Excess of Cost Over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $89,222,000 at December 31, 1994
and $84,170,000 at March 31, 1994 138,012 143,064
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Other Assets 121,175 133,020
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TOTAL $ 3,414,634 $ 3,500,726
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
12/31/94 3/31/94
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 347,373 $ 21,528
Accounts payable 143,291 141,412
Accounts payable to affiliates 34,038 17,373
Environmental and products liabilities-current 129,320 122,361
Accrued employee benefits 90,610 93,487
Accrued interest payable 32,029 44,619
Accrued liabilities - other 97,929 109,844
Advance billings on contracts 89,104 135,505
U.S. and foreign income taxes 10,641 40,342
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Total Current Liabilities 974,335 726,471
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Long-Term Debt 423,226 584,532
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Accumulated Postretirement Benefit Obligation 380,726 370,828
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Environmental and Products Liabilities 907,884 1,013,251
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Other Liabilities 115,081 121,178
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Contingencies
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Minority Interest 14,128 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 91,162 108,583
- -------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stocks 179,251 196,672
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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 591,966 589,085
Deficit (156,900) (104,859)
Minimum pension liability (620) (620)
Net unrealized loss on investments (1,626) -
Cumulative foreign exchange translation adjustments (12,821) (11,507)
- -------------------------------------------------------------------------------------------------------------
Total Stockholder's Equity 420,003 472,103
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TOTAL $ 3,414,634 $ 3,500,726
=============================================================================================================
</TABLE>
5
<PAGE> 6
McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $ 560,994 $ 613,407 $ 1,673,471 $ 1,635,495
- ---------------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations 479,806 550,564 1,483,192 1,441,878
Depreciation and amortization 15,202 14,550 52,949 50,823
Selling, general and
administrative expenses 42,474 40,359 128,325 122,148
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537,482 605,473 1,664,466 1,614,849
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23,512 7,934 9,005 20,646
Equity in Income of Investees 4,800 1,194 8,930 7,179
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Operating Income 28,312 9,128 17,935 27,825
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Other Income (Expense):
Interest income 2,256 960 7,269 3,187
Interest expense (12,795) (14,452) (33,583) (45,983)
Other-net (4,877) 438 (24,487) (5,293)
- ---------------------------------------------------------------------------------------------------------------------
(15,416) (13,054) (50,801) (48,089)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) before Provision for Income
Taxes and Cumulative Effect of Accounting
Changes 12,896 (3,926) (32,866) (20,264)
Provision for (Benefit from) Income Taxes 3,937 (1,595) 7,968 1,090
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) before Cumulative Effect of
Accounting Changes 8,959 (2,331) (40,834) (21,354)
Cumulative Effect of Accounting Changes - - (512) (100,750)
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 8,959 (2,331) (41,346) (122,104)
- ---------------------------------------------------------------------------------------------------------------------
Retained Earnings (Deficit) -
Beginning of Period (162,413) (89,772) (104,859) 37,926
Deduct Cash Dividends - Preferred Stocks 3,446 3,898 10,695 11,823
- ---------------------------------------------------------------------------------------------------------------------
Deficit - End of Period $ (156,900) (96,001) (156,900) $ (96,001)
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
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McDERMOTT INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/94 12/31/93
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (41,346) $ (122,104)
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 52,949 50,823
Provision for (benefit from) deferred taxes 45,863 (29,552)
Cumulative effect of accounting changes 512 100,750
Other 1,168 (85)
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable 14,146 (41,754)
Net contracts in progress and advance billings (115,762) 28,612
Accounts payable 20,067 (22,891)
Accrued interest (12,590) (1,737)
Accrued liabilities (10,436) (33,039)
Income taxes (26,379) 17,861
Other, net (18,896) (31,741)
Proceeds from insurance for products liabilities claims 80,550 76,638
Payments of products liabilities claims (94,213) (85,478)
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NET CASH USED IN OPERATING ACTIVITIES (104,367) (93,697)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Delta Catalytic Corporation - (28,249)
Purchases of property, plant and equipment (58,748) (39,039)
Purchases of government obligations, under
reverse repurchase agreement with an affiliate - (646,685)
Sales of government obligations, under
reverse repurchase agreement with an affiliate - 725,545
Other 4,531 3,297
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NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (54,217) 14,869
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
7
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CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
12/31/94 12/31/93
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings $ 164,992 $ 28,012
Short-term borrowing from an affiliate - 38,400
Payment of long-term debt (451) (200,838)
Issuance of long-term debt - 92,475
Capital contribution received from International - 100,000
Dividends paid (10,695) (11,823)
Repurchase of preferred stock (17,185) (3,586)
Other 3,026 (138)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 139,687 42,502
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EFFECTS OF EXCHANGE RATE CHANGES ON CASH 309 (714)
- ----------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,588) (37,040)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 47,364 71,549
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,776 $ 34,509
================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 46,172 $ 47,722
Income taxes $ 17,696 $ 4,883
================================================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Investments and accrued interest received as capital
contribution from McDermott International, Inc. $ - $ 132,283
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
McDERMOTT INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1993
AND AT DECEMBER 31 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 December 31, 1994.
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 ($5,000,000 and
$16,300,000, respectively) due to settlement of outstanding tax issues included
in the three and nine months ended December 31, 1994; a favorable worker's
compensation cost adjustment ($6,067,000) in the three and nine months ended
December 31, 1994; a loss related to the reduction of estimated products
liabilty asbestos claims recoveries from insurers ($14,478,000) included in the
nine months ended December 31, 1994; a favorable warranty reserve adjustment
($6,710,000, net of tax of $4,290,000) included in the nine months ended
December 31, 1993; and the cumulative effect of the accounting changes included
in the nine months ended December 31, 1994 and 1993. The results for interim
periods are not necessarily indicative of results to be expected for the year.
9
<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). The adoption of this provision of EITF Issue No. 93-5 resulted
in a decrease in Loss before Cumulative Effect of Accounting Change and an
increase in Net Loss of $10,560,000, and $90,190,000, respectively, for the
nine months ended December 30, 1993 and a decrease in Net Loss of $3,047,000
for the quarter ended December 31, 1993. In addition, the Delaware Company has
received notice that provisional liquidators have been appointed to a
London-based products liability asbestos insurer and certain of its
subsidiaries. As a result, a loss of $14,478,000 related to the reduction of
estimated products liability asbestos claims recoveries was recognized in the
September 30, 1994 quarter, and was included in Other-net expense. The Delaware
Company's estimated future costs relating to policy year 1979 and insolvent
insurers are derived from its loss history and constitute management's best
estimate of such future costs. At December 31, 1994, the estimated amount of
future costs allocable to insolvent insurers and the policy year 1979 was
$138,219,000. 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
10
<PAGE> 11
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 nine months ended December 31, 1993 have been restated to conform with
the December 31, 1994 presentation. Of the total estimated liability at
December 31, 1994, approximately $115,000,000 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 nine
months ended December 31, 1994. Prior to April 1, 1994, the Delaware Company
recognized the cost of providing most of these benefits on a cash basis. Under
this 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. In
accordance with the Statement, prior period financial statements have not been
restated to reflect this 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 this 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.
11
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NOTE 3 - INVENTORIES
Consolidated inventories at December 31, 1994 and March 31, 1994 are
summarized below:
<TABLE>
<CAPTION>
December 31, March 31,
1994 1994
------------- ------------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 41,208 $ 40,281
Work in Progress 19,828 17,566
Finished Goods 8,943 8,367
- ----------------------------------------------------------------------------------------------------------------
$ 69,979 $ 66,214
================================================================================================================
</TABLE>
NOTE 4 - SEGMENT REPORTING INFORMATION
<TABLE>
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
12/31/94 12/31/93 12/31/94 12/31/93
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Power Generation Systems and Equipment $ 419,946 $ 423,080 $ 1,203,644 $ 1,159,249
Marine Construction Services 141,234 191,909 470,407 478,227
Intersegment Transfer Eliminations (186) (1,582) (580) (1,981)
- ------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 560,994 $ 613,407 $ 1,673,471 $ 1,635,495
========================================================================================================================
OPERATING INCOME:
Segment Operating Income (Loss):
Power Generation Systems and Equipment $ 31,643 $ 10,860 $ 47,711 $ 34,311
Marine Construction Services 3,541 6,787 (6,532) 18,244
- ------------------------------------------------------------------------------------------------------------------------
Total Segment Operating Income 35,184 17,647 41,179 52,555
- ------------------------------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Investees:
Power Generation Systems and Equipment 2,536 1,373 5,005 5,932
Marine Construction Services 2,264 (179) 3,925 1,247
- ------------------------------------------------------------------------------------------------------------------------
Total Equity in Income of Investees 4,800 1,194 8,930 7,179
- ------------------------------------------------------------------------------------------------------------------------
General Corporate Expenses (11,672) (9,713) (32,174) (31,909)
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 28,312 $ 9,128 $ 17,935 $ 27,825
========================================================================================================================
</TABLE>
12
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NOTE 5 - PROPOSED SALE OF OPERATIONS
On June 2, 1994, International announced a plan to form a new company, J. Ray
McDermott, S.A. ("JRM"), that would combine the worldwide marine construction
businesses of McDermott International with those of Offshore Pipelines, Inc.
("OPI"). Under the terms of the agreement, International would contribute
substantially all of its marine construction services' assets and businesses,
including those of the Delaware Company, into JRM. The consummation of the
transaction is subject to various conditions, the most significant of which is
the approval of OPI common stockholders at a special meeting of such
stockholders on January 30, 1995. It is anticipated that the Delaware Company
will sell substantially all of its marine construction services' assets and
businesses to International for approximately $230,000,000 (subject to purchase
price adjustments), which will then make the contribution to JRM. As a result
of the sale, the marine construction services' businesses which have been sold
will be accounted for as a discontinued operation by the Delaware Company.
13
<PAGE> 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1994 VS. THREE MONTHS
ENDED DECEMBER 31, 1993
Power Generation Systems and Equipment's revenues decreased $3,134,000 to
$419,946,000. This was primarily due to lower revenues from replacement parts,
defense and space-related products (including nuclear fuel assemblies and
reactor components for the U.S. Government) and extended scope of supply and
fabrication of industrial boilers. These decreases were partially offset by
higher revenues from replacement nuclear steam generators and fabrication and
erection of fossil fuel steam and environmental control systems.
Power Generation Systems and Equipment's segment operating income increased
$20,783,000 to $31,643,000. The increase was primarily due to higher margins
on repair and alteration of existing fossil fuel steam systems, higher volume
on replacement nuclear steam generators, lower administrative expenses, and
favorable workers' compensation cost adjustments. These increases were
partially offset by lower volume on replacement parts.
Power Generation Systems and Equipment's equity in income of investees
increased $1,163,000 to $2,536,000 primarily due to improved results in
domestic joint ventures.
Backlog for this segment at December 31, 1994 was $2,148,925,000 compared to
$2,547,666,000 at December 31, 1993. At December 31, 1994, this segment's
backlog with the U. S. Government was $686,862,000 (of which $20,619,000 had
not been funded). U.S. Government budget reductions have negatively affected
this segment's government operations, and backlog at December 31, 1994 and 1993
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.
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
14
<PAGE> 15
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 decreased $50,675,000 to $141,234,000
primarily due to lower volume at Delta Catalytic Corporation ("DCC") and in
fabrication and marine operations. These decreases were partially offset by
higher volume of procured materials.
Marine Construction Services' segment operating income decreased $3,246,000 to
$3,541,000 primarily due to lower margins in fabrication operations and lower
operating results from DCC's operations. These decreases were partially offset
by higher margins in marine operations.
Marine Construction Services' equity in income (loss) of investees increased
$2,443,000 to income of $2,264,000 from a loss of $179,000 primarily due to
improved operating results of a Mexican joint venture. These increases were
partially offset by losses in Canadian joint ventures.
Backlog for this segment at December 31, 1994 was $479,473,000 as compared to
$401,246,000 at December 31, 1993. This segment's markets are expected to
remain at a low level in the U.S. during fiscal year 1995. The overcapacity of
marine equipment and constraints on customer capital expenditure programs will
continue to result in an increasingly competitive environment and put pressure
on profit margins.
Interest income increased $1,296,000 to $2,256,000 primarily due to higher
average investments during the period.
Interest expense decreased $1,657,000 to $12,795,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies, partially offset by
changes in debt obligations and interest rates prevailing thereon.
15
<PAGE> 16
Other-net decreased $5,315,000 to expense of $4,877,000 from income of $438,000
primarily due higher bank fees and higher discounts on the sale of certain
accounts receivable in the current period.
The provision for (benefit from) income taxes increased $5,532,000 to a
provision of $3,937,000 from a benefit of $1,595,000 while the income (loss)
before the provIsion for income taxes increased by $16,822,000 to income of
$12,896,000 from a loss of $3,926,000. The increase in income tax is primarily
due to the increase in income.
16
<PAGE> 17
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1994 VS. NINE MONTHS
ENDED DECEMBER 31, 1993
Power Generation Systems and Equipment's revenues increased $44,395,000 to
$1,203,644,000. 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 replacement nuclear steam
generators. 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), replacement parts and plant enhancement projects.
Power Generation Systems and Equipment's segment operating income increased
$13,400,000 to $47,711,000. The increase was primarily due to higher volume
and margins on repair and alteration of existing fossil fuel steam systems,
higher volume on fabrication and erection of fossil fuel steam and
environmental control systems, lower administrative expenses, and favorable
workers' compensation cost adjustments. These increases were partially offset
by lower volume and margins on extended scope of supply and fabrication of
industrial boilers and defense and space-related products (other than nuclear
fuel assemblies and reactor components). These increases were also offset by
lower volume on replacement parts, and a favorable warranty reserve adjustment
recorded in the prior year.
Power Generation Systems and Equipment's equity in income of investees
decreased $927,000 to $5,005,000 primarily due to a provision for loss on
discontinuing a domestic joint venture, partially offset by improved results in
a domestic joint venture.
Marine Construction Services' revenues decreased $7,820,000 to $470,407,000
primarily due to lower volume in fabrication and engineering operations. These
decreases were partially offset by the inclusion of revenues resulting from the
acquisition of DCC in June 1993 ($177,040,000 and $152,468,000 for the nine
months ended December 31, 1994 and 1993, respectively) and higher volume in
marine operations.
Marine Construction Services' segment operating income (loss) decreased
$24,776,000 to a loss of $6,532,000 from income of $18,244,000. The decrease
was primarily due to higher operating expenses, lower volume and margins in
fabrication operations, and lower operating
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<PAGE> 18
results from DCC's operations. These decreases were partially offset by higher
volume and margins in marine operations.
Marine Construction Services' equity in income of investees increased
$2,678,000 to $3,925,000 primarily due to improved operating results of a
Mexican joint venture. These increases were partially offset by losses in
Canadian joint ventures.
Interest income increased $4,082,000 to $7,269,000 primarily due to higher
average investments during the period.
Interest expense decreased $12,400,000 to $33,583,000 primarily due to a
reduction in accrued interest on proposed tax deficiencies, partially offset by
changes in debt obligations and interest rates prevailing thereon.
Other-net expense increased $19,194,000 to $24,487,000 primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries from insurers and higher bank fees and higher discounts on the sale
of accounts receivable in the current period.
The provision for income taxes increased by $6,878,000 to $7,968,000 while the
loss before the provision for income taxes and cumulative effect of accounting
changes increased by $12,602,000 to $32,866,000. The increase in income taxes
is primarily due to a limitation on the recognition of income tax benefits on
losses in the U.S.
Net loss decreased $80,758,000 to $41,346,000 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 nine months ended December 31, 1994, the Delaware Company's cash and
cash quivalents decreased $18,588,000 to $28,776,000 and total debt increased
$164,539,000 to $770,599,000, primarily from short-term borrowings of
$164,992,000. During this period, the Delaware Company used cash of
$104,367,000 in operating activities, $17,185,000 for the repurchase of Series
B Preferred Stock to satisfy future sinking fund requirements,
18
<PAGE> 19
$10,695,000 for cash dividends on the Delaware Company's preferred stocks and
$58,748,000 for additions to property, plant and equipment. On January 26,
1995, the Delaware Company elected to pay in advance a note payable of
$16,250,000. Increases in net contracts in progress and advance billings
resulted primarily from the timing of billings and costs incurred on Power
Generation Systems and Equipment segment contracts, both foreign and domestic.
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, which management believes
peaked in fiscal year 1990, has declined moderately. However, the average
amount of these claims (historical average of approximately $3,000 per claim)
has continued to rise. Claims paid during the three and nine months ended
December 31, 1994 were $32,656,000 and $94,213,000, respectively, including
$2,765,000 and $7,672,000, respectively, applicable to insolvent insurers and
$1,320,000 and $3,640,000, respectively, 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 December 31, 1994, Accounts receivable-other includes
receivables of $31,431,000 that are due from insurers for reimbursement of
settled claims. In addition, the Delaware Company has received notice that
provisional liquidators have been appointed to a London-based products
liability asbestos insurer and certain of its subsidiaries. As a result, a
loss of $14,478,000 related to the reduction of estimated product liability
asbestos claim recoveries was recognized in the September 30, 1994 quarter, and
was included in Other-net expense. The Delaware Company's estimated future
costs relating to policy year 1979 and insolvent insurers are derived from its
loss history and constitute management's best estimate of such future costs.
At December 31, 1994, the estimated amount of future costs allocable to
insolvent insurers and the policy year 1979 was $138,219,000. 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.
19
<PAGE> 20
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 were
$58,748,000 for the nine months ended December 31, 1994 compared with
$39,039,000 for the prior year and were incurred primarily to maintain existing
facilities and to purchase a barge, which was formerly leased, for $15,010,000.
At December 31 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 $200,000,000 and $170,000,000,
respectively, under the terms of its agreement with a U.S. bank. The maximum
sales limit available under the agreement, which expires on December 31, 1997
is $225,000,000.
At December 31 and March 31, 1994, the Delaware Company had available to it
various uncommitted short-term lines of credit from banks totalling
$204,486,000 and $204,699,000, respectively. Borrowings outstanding against
these facilities at December 31 and March 31, 1994 were $135,289,000 and
$15,519,000, respectively. In addition, The Babcock & Wilcox Company has
available to it a $128,000,000 unsecured and committed revolving 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. At December 31, 1994, The Babcock &
Wilcox Company had borrowings against this line of credit of $40,000,000.
There were no borrowings against this facility at March 31, 1994. DCC had
available from a certain Canadian bank an unsecured and committed revolving
credit facility of $14,184,000 which expires on May 31, 1997. At December 31,
1994, borrowings outstanding against this facility were $5,223,000. There were
no borrowings outstanding against this facility at March 31, 1994.
The Delaware Company maintains an investment portfolio, consisting primarily of
corporate bonds, which is classified as available for sale under SFAS No. 115
(See Note 2 to the consolidated financial statements). The fair value of
short- term investments at December 31,
20
<PAGE> 21
1994 was $128,833,000 (amortized cost $131,335,000). The net unrealized loss
on the current investment portfolio, net of income tax effect, was $1,626,000
at December 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 December 31, 1994, substantially all of the net assets of the Delaware
Company were subject to such restrictions. At December 31, 1994, the most
restrictive of these covenants with respect to the payment of dividends by the
Delaware Company would prohibit the payment of dividends other than current
dividends on existing preferred stock.
Effective February 1, 1989, the Delaware Company and a subsidiary of
International, McDermott International Investments Co., Inc. ("MIICO"), entered
into a reverse repurchase agreement whereby either party acting as a "buyer"
would purchase for cash certain U. S. Government obligations owned by the other
party acting as a "seller", and, at the date of purchase, the "seller" would
agree to repurchase the same securities at a set price (including accrued
interest) at a future specified date. No amounts were outstanding under this
agreement at December 31 or March 31, 1994.
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 December 31 or March 31, 1994.
As described in Note 5 to the consolidated financial statements, International
plans to contribute substantially all of its marine construction services'
assets and businesses (including those currently held by the Delaware Company)
to a newly-formed company, J. Ray McDermott, S.A. ("JRM"), in connection with
the combination of McDermott International's marine construction services'
businesses with those of Offshore Pipelines, Inc. When this transaction is
completed, JRM will be a subsidiary of International. In order to consummate
the transaction, the Delaware Company will sell marine construction services'
assets to International for approximately $230,000,000 (subject to purchase
price adjustments) of marketable securities. The Delaware Company intends to
use these securities to secure the
21
<PAGE> 22
refinancing of existing short-term notes payable to banks. After the sale, the
securities will be held by the Delaware Company and will only be available to
International subject to the covenant restrictions described above.
Working capital decreased to $67,139,000 at December 31, 1994 from $172,690,000
at March 31, 1994. During the remainder of fiscal year 1995, the Delaware
Company expects to obtain funds to meet working capital and capital expenditure
requirements from the sale of its marine construction assets and businesses to
International referred to above and additional borrowings, if needed. 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, 1994 and 1993.
The Delaware Company has provided a valuation allowance ($24,348,000 at
December 31, 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 ($759,629,000 at
December 31, 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.
22
<PAGE> 23
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, 1994.
Signatures
23
<PAGE> 24
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: 1/27/95 By: /s/ Brock A. Hattox
(SIGNATURE)
Brock A. Hattox
Senior Vice President and
Chief Financial Officer
24
<PAGE> 25
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INCORPORATED'S DECEMBER 31, 1994 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-31-1994
<CASH> 28,776
<SECURITIES> 128,833
<RECEIVABLES> 240,776
<ALLOWANCES> 8,843
<INVENTORY> 351,268
<CURRENT-ASSETS> 1,041,474
<PP&E> 1,450,736
<DEPRECIATION> 959,455
<TOTAL-ASSETS> 3,414,634
<CURRENT-LIABILITIES> 974,335
<BONDS> 423,226
<COMMON> 4
0
179,251
<OTHER-SE> 419,999
<TOTAL-LIABILITY-AND-EQUITY> 3,414,634
<SALES> 1,673,471
<TOTAL-REVENUES> 1,673,471
<CGS> 1,664,466
<TOTAL-COSTS> 1,664,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,583
<INCOME-PRETAX> (32,866)
<INCOME-TAX> 7,968
<INCOME-CONTINUING> (40,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (512)
<NET-INCOME> (41,346)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
