<PAGE>
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 quarterly period ended September 30, 1996
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 28, 1996 was 3,600.
<PAGE>
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 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
September 30, 1996 and March 31, 1996 4
Condensed Consolidated Statement of Loss
Three and Six Months Ended September 30, 1996
and 1995 6
Condensed Consolidated Statement of Cash Flows
Six Months Ended September 30, 1996 and 1995 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 4 - Submission of Matters to a Vote of
Security Holders 21
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
Exhibit 27 - Financial Data Schedule 24
2
<PAGE>
PART I
McDERMOTT INCORPORATED
FINANCIAL INFORMATION
---------------------
Item 1. Condensed Consolidated Financial Statements
3
<PAGE>
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
9/30/96 3/31/96
------------ ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,735 $ 22,886
Accounts receivable-trade 232,960 257,094
Accounts receivable-other 120,099 82,145
Accounts receivable from affiliates 15,671 38,698
Insurance recoverable-current 199,489 116,280
Contracts in progress 301,793 275,488
Inventories 69,635 69,739
Deferred income taxes 67,917 82,381
Other current assets 17,542 8,355
---------- ---------
Total Current Assets 1,048,841 953,066
---------- ---------
Property, Plant and Equipment, at Cost: 597,015 667,156
Less accumulated depreciation 349,284 388,111
---------- ---------
Net Property, Plant and Equipment 247,731 279,045
---------- ---------
Insurance Recoverable 451,114 606,963
---------- ---------
Investment in McDermott International, Inc. 599,142 600,292
---------- ---------
Excess of Cost Over Fair Value of Net
Assets of Purchased Businesses Less
Accumulated Amortization of
$101,373,000 at September 30, 1996
and $97,814,000 at March 31, 1996 126,701 135,877
---------- ---------
Prepaid Pension Costs 262,345 256,802
---------- ---------
Other Assets 201,135 187,735
---------- ---------
TOTAL $2,937,009 $3,019,780
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
9/30/96 3/31/96
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $237,702 $ 109,626
Note payable to International - 65,363
Accounts payable 113,420 145,779
Accounts payable to affiliates 20,282 4,410
Environmental and products liabilities-current 259,954 159,824
Accrued employee benefits 69,471 72,173
Advance billings on contracts 153,248 149,245
Other current liabilities 126,560 154,560
---------- ----------
Total Current Liabilities 980,637 860,980
---------- ----------
Long-Term Debt 388,735 423,882
---------- ----------
Accumulated Postretirement Benefit Obligation 376,468 377,457
---------- ----------
Environmental and Products Liabilities 538,864 721,740
---------- ----------
Other Liabilities 92,802 89,501
---------- ----------
Contingencies
Redeemable Preferred Stocks:
Series A $2.20 cumulative convertible, $1.00 par value;
at redemption value 88,087 88,087
Series B $2.60 cumulative, $1.00 par value;
at redemption value 85,214 85,214
---------- ----------
Total Redeemable Preferred Stocks 173,301 173,301
---------- ----------
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 680,496 625,841
Deficit (276,287) (234,838)
Currency translation adjustments (18,011) (18,088)
---------- ----------
Total Stockholder's Equity 386,202 372,919
---------- ----------
TOTAL $2,937,009 $3,019,780
========== ==========
</TABLE>
5
<PAGE>
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF LOSS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
----------------- -----------------
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $459,247 $459,134 $942,678 $965,174
-------- -------- -------- --------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization) 426,652 420,141 875,017 883,937
Depreciation and amortization 11,587 11,502 23,240 22,731
Selling, general and
administrative expenses 34,656 35,972 67,572 72,518
-------- -------- -------- --------
472,895 467,615 965,829 979,186
-------- -------- -------- --------
Operating Loss before Equity
in Income of Investees (13,648) (8,481) (23,151) (14,012)
Equity in Income of Investees 1,623 2,552 5,963 36,473
-------- -------- -------- --------
Operating Income (Loss) (12,025) (5,929) (17,188) 22,461
-------- -------- -------- --------
Other Income (Expense):
Interest expense (12,974) (12,134) (26,090) (26,974)
Other-net (329) 3,516 (1,046) 5,877
-------- -------- -------- --------
(13,303) (8,618) (27,136) (21,097)
-------- -------- -------- --------
Income (Loss) before Provision for
(Benefit from) Income Taxes (25,328) (14,547) (44,324) 1,364
Provision for (Benefit from) Income
Taxes (6,848) (3,416) (9,521) 5,954
-------- -------- -------- --------
Net Loss $(18,480) $(11,131) $(34,803) $ (4,590)
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
McDERMOTT INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/96 9/30/95
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(34,803) $ (4,590)
-------- ---------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 23,240 22,731
Provision for (benefit from) deferred taxes 4,496 (4,755)
Equity in income of investees, less dividends 326 1,678
Other (3,237) (2,159)
Changes in assets and liabilities:
Accounts receivable 15,152 (66,644)
Net contracts in progress and advance billings (26,963) 10,385
Accounts payable (13,974) (9,782)
Accrued and other current liabilities (31,568) (32,012)
Other, net 19,386 (6,485)
Proceeds from insurance for products
liabilities claims 55,395 49,305
Payments of products liabilities claims (79,859) (74,112)
-------- ---------
NET CASH USED IN OPERATING ACTIVITIES (72,409) (116,440)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and disposal of assets 14,863 8,044
Purchases of property, plant and equipment (12,809) (17,292)
Purchases of investments - (196,843)
Sales and maturities of investments - 495,645
Other 223 (3,023)
-------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,277 286,531
-------- ---------
</TABLE>
7
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/96 9/30/95
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowing $ 92,948 $ (4,861)
Payment of note payable to International (65,363) -
Payment of long-term debt (12) (150,013)
Dividends paid (6,646) (6,893)
Capital contribution from International 50,000 -
Other (30) (745)
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 70,897 (162,512)
-------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 84 (351)
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 849 7,228
-------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,886 21,014
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,735 $ 28,242
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 25,451 $ 31,826
Income taxes (net of refunds) $ 3,240 $ 25,696
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
McDERMOTT INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
McDermott Incorporated is a majority owned subsidiary of McDermott
International, Inc. ("International").
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 an asset impairment loss ($4,742,000, net of
tax of $2,553,000) included in the three and six months ended September 30, 1996
and 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.
Certain amounts previously reported have been reclassified to conform with the
presentation at September 30, 1996. Operating results for the three and six
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending March 31, 1997. 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, 1996.
NOTE 2 - PRODUCTS LIABILITY
- ----------------------------
At September 30, 1996, the estimated liability for pending and future non-
employee products liability asbestos claims was $764,127,000 (of which
approximately $220,000,000 had been asserted) and estimated insurance recoveries
were $650,603,000. Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from McDermott Incorporated'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
9
<PAGE>
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, changes in estimates could result in a material
adjustment to operating results for any fiscal quarter or year and the ultimate
loss may differ materially from amounts provided in the consolidated financial
statements.
NOTE 3 - INVENTORIES
Consolidated inventories at September 30, 1996 and March 31, 1996 are summarized
below:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
-------------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $44,387 $39,604
Work in Progress 18,432 17,305
Finished Goods 6,816 12,830
------- -------
$69,635 $69,739
======= =======
</TABLE>
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
McDermott Incorporated is a majority owned subsidiary of McDermott
International, Inc. ("International"). A significant portion of McDermott
Incorporated's revenues and operating results are derived from its foreign
operations, which are primarily located in Canada. As a result, McDermott
Incorporated's operations and financial results are affected by international
factors, such as changes in foreign currency exchange rates. McDermott
Incorporated attempts to minimize its exposure to changes in foreign currency
exchange rates by attempting to match foreign currency contract receipts with
like foreign currency disbursements. To the extent that McDermott Incorporated
is unable to match the foreign currency receipts and disbursements related to
its contracts, it enters into forward exchange contracts to hedge foreign
currency transactions, which reduce the impact of foreign exchange rate
movements on operating results.
During the three and six months ended September 30, 1996, McDermott
Incorporated's Canadian operations contributed $151,180,000 and $324,050,000,
respectively, to total revenues and $657,000 and $4,685,000, respectively to
operating loss. During the three and six months ended September 30, 1995, the
Canadian operations contributed $435,990,000 and $200,070,000, respectively, to
total revenues and $4,799,000 and $15,908,000, respectively, to operating
income. These results reflect activity on contracts performed at B&W's
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 government owned utilities located
in the Middle and Far East, and contracts performed by McDermott Engineers &
Constructors (Canada) Ltd. which is based in Calgary, Alberta, Canada.
Management's discussion of revenues and operating income is discussed on a
business unit basis as follows: the B&W Operations business unit (includes the
operations of the Babcock & Wilcox Power Generation and Government Groups) and
the Industrial Operations business unit (includes McDermott Incorporated's
Engineering and Construction operations, barge construction, ship repair and
other industrial operations). Other business unit revenues include combining
adjustments and eliminations resulting from inter-business unit contracts.
Other
11
<PAGE>
business unit income (loss) includes certain adjustments which are not
allocated to the business units, including retiree benefit and legal costs, as
well as the impact of combining adjustments on margins of inter-business unit
contracts. Business unit revenues and income (loss) for the three and six
months ended September 30, 1995 have been restated to reflect the
reclassification of certain operations to B&W Operations from the Industrial
Operations business unit; the allocation of certain expenses to the B&W
Operations and the Industrial Operations business units from Other; and to
include gains and losses on asset sales and disposals to conform with the
presentation at September 30, 1996.
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
------------------- --------------------
9/30/96 9/30/95 9/30/96 9/30/95
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
- -----------------------------------------
B&W Operations $350,577 $333,591 $696,121 $711,551
Industrial Operations 111,767 127,255 259,169 257,455
Other (including Transfer Eliminations) (3,097) (1,712) (12,612) (3,832)
-------- -------- -------- --------
TOTAL REVENUES $459,247 $459,134 $942,678 $965,174
-------- -------- -------- --------
OPERATING INCOME (LOSS)
- ---------------------------------------
Business Unit Income (Loss):
B&W Operations $ 11,673 $ 92 $ 13,669 $ 3,952
Industrial Operations (9,073) (1,995) (14,791) (6,035)
Other (9,665) (1,356) (8,889) 53
-------- ------- -------- --------
TOTAL BUSINESS UNIT
INCOME (LOSS) (7,065) (3,259) (10,011) (2,030)
-------- ------- -------- --------
Equity in Income (Loss) of Investees:
B&W Operations 837 1,967 4,302 35,782
Industrial Operations 786 585 1,661 691
-------- ------- -------- --------
TOTAL EQUITY IN INCOME
OF INVESTEES 1,623 2,552 5,963 36,473
-------- ------- -------- --------
Corporate General & Administrative
Expense (6,583) (5,222) (13,140) (11,982)
-------- ------- -------- --------
TOTAL OPERATING
INCOME (LOSS) $(12,025) $(5,929) $(17,188) $ 22,461
======== ======= ======== ========
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1995
B&W Operations' revenues increased $16,986,000 to $350,577,000, primarily due to
higher revenues from the Power Generation Group's repair and alteration of
existing fossil fuel steam systems, plant enhancement projects, and replacement
nuclear steam generators for domestic customers manufactured at B&W's Cambridge,
Ontario location. In addition, the Government Group's commercial nuclear
environmental services had higher revenues. These increases were partially
offset by lower volume from fabrication and erection of fossil fuel steam and
environmental control systems and Canadian nuclear services.
Industrial Operations' revenues decreased $15,488,000 to $111,767,000, primarily
due to lower revenues from engineering and construction activities from this
business unit's Canadian and domestic operations. These decreases were
partially offset by higher barge construction activities.
B&W Operations' business unit income increased $11,581,000 to $11,673,000,
primarily due to the Power Generation Group's higher volume and margins on
industrial boilers and replacement nuclear steam generators and improved margins
on repair and alteration of existing fossil fuel steam systems. These increases
were partially offset by lower volume and margins on fabrication and erection of
fossil fuel steam and environmental control systems. In addition, there were
higher volume and margins from the Government Group's nuclear fuel assemblies
and reactor components for the U. S. Government and from commercial nuclear
environmental services. These increases were partially offset by lower volume
and margins on other defense and space-related projects (other than nuclear fuel
assemblies and reactor components).
Industrial Operations' business unit loss increased $7,078,000 to $9,073,000,
primarily due to cost overruns on the engineering, procurement and construction
contract for a cogeneration plant and cost overruns on barge construction
operations.
Other business unit loss increased $8,309,000 to $9,665,000, primarily due to an
asset impairment loss of $7,295,000.
13
<PAGE>
B&W Operations' equity in income of investees decreased $1,130,000 to $837,000,
primarily due to lower operating results of a Canadian joint venture.
Interest expense increased $840,000 to $12,974,000, primarily due to changes in
debt obligations and interest rates prevailing thereon.
Other-net decreased $3,845,000 to expense of $329,000 from income of $3,516,000,
primarily due to decreases in interest income on investments in government
obligations and other investments and higher bank fees and discounts on the
sales of certain receivables.
The benefit from income taxes increased $3,432,000 to $6,848,000, while loss
before the benefit from income taxes increased $10,781,000 to $25,328,000. The
increase in the benefit from income taxes is primarily due to the increase in
loss.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1996 VS. SIX MONTHS ENDED
SEPTEMBER 30, 1995
B&W Operations' revenues decreased $15,430,000 to $696,121,000, primarily due to
lower revenues from the Power Generation Group's fabrication and erection of
fossil fuel steam and environmental control systems, from Canadian nuclear
services and from replacement nuclear steam generators for domestic customers
manufactured at B&W's Cambridge, Ontario location. These decreases were
partially offset by higher revenues from the repair and alteration of existing
fossil fuel steam systems and plant enhancement projects. In addition, the
Government Group's commercial nuclear environmental services had higher
revenues. These were partially offset by lower revenues from defense and space-
related products (other than nuclear fuel assemblies and reactor components).
Industrial Operations' revenues increased $1,714,000 to $259,169,000, primarily
due to higher volume from engineering and construction activities in this
business unit's Canadian operations and higher barge construction activities.
These increases were partially offset by lower revenues from engineering and
construction activities in this business unit's domestic operations.
B&W Operations' business unit income increased $9,717,000 to $13,669,000,
primarily due to improved margins on the repair and alteration of existing
fossil fuel steam systems and
14
<PAGE>
higher volume and margins on industrial boilers. These increases were offset by
lower volume and margins on the fabrication and erection of fossil fuel steam
and environmental control systems, lower volume on replacement nuclear steam
generators for domestic customers and lower margins on plant enhancement
projects. In addition, there were higher volume and margins from the Government
Group's nuclear fuel assemblies and reactor components for the U. S. Government
and from commercial nuclear environmental services and lower sales and marketing
expenses. These increases were partially offset by lower volume and margins
from defense and space-related products (other than nuclear fuel assemblies and
reactor components).
Industrial Operations' business unit loss increased $8,756,000 to $14,791,000,
primarily due to cost overruns on the engineering, procurement and construction
contract for a cogeneration plant and cost overruns on barge construction
operations.
Other business unit income (loss) decreased $8,942,000 from income of $53,000 to
a loss of $8,889,000, primarily due to an asset impairment loss of $7,295,000.
B&W Operations' equity in income of investees decreased $31,480,000 to
$4,302,000. This represents the results of approximately ten active joint
ventures. The decrease is almost entirely due to a nonrecurring equity income
gain of $30,612,000 resulting from the sale of power purchase contracts back to
a local utility in June 1995.
Interest expense decreased $844,000 to $26,090,000, primarily due to changes in
debt obligations and interest rates prevailing thereon.
Other-net decreased $6,923,000 to expense of $1,046,000 from income of
$5,877,000, primarily due to decreases in interest income on investments in
government obligations and other investments.
The provision for (benefit from) income taxes decreased $15,475,000 to a benefit
of $9,521,000 from a provision of $5,954,000, while income (loss) before the
provision for (benefit from) income taxes decreased $45,688,000 to a loss of
$44,324,000 from income of $1,364,000. The decrease in the provision for
(benefit from) income taxes is primarily due to the decrease in income.
15
<PAGE>
Backlog
- ------------------------------------------
<TABLE>
<CAPTION>
9/30/96 3/31/96
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Business Unit Backlog:
- ------------------------------------------
B&W Operations $ 2,131,288 $2,164,507
Industrial Operations 321,118 315,669
Other (including Transfer Eliminations) (8,589) (15,915)
------------ ----------
Total Backlog $ 2,443,817 $2,464,261
============ ==========
</TABLE>
In general, McDermott Incorporated's business units are capital intensive and
rely on large contracts for a substantial amount of their revenues.
B&W Operations' backlog at September 30, 1996 was $2,131,288,000 compared to
$2,164,507,000 at March 31, 1996. At September 30, 1996, this business unit's
backlog with the U.S. Government was $678,141,000 (of which $45,913,000 had not
been funded) and included orders for nuclear fuel assemblies and reactor
components for the U.S. Navy. This business unit's foreign markets for
industrial and utility boilers remain strong and the U.S. market for replacement
nuclear steam generators is expected to continue to make significant
contributions to operating income in the foreseeable future. However, domestic
utility markets remain weak.
Industrial Operations' backlog at September 30, 1996 was $321,118,000, compared
to $315,669,000 at March 31, 1996, and included a four year backlog for the
construction of hopper barges at its domestic shipyard. At September 30, 1996,
this business unit's backlog with the U.S. Government was $45,979,000 (of which
$3,094,000 had not been funded).
Liquidity and Capital Resources
- -------------------------------
During the six months ended September 30, 1996, McDermott Incorporated's cash
and cash equivalents increased $849,000 to $23,735,000 and total debt increased
$27,566,000 to $626,437,000 primarily due to short-term borrowings of
$92,948,000. During this period, McDermott Incorporated used cash of
$72,409,000 in operating activities, $65,363,000 for the repayment of a short-
term borrowing from International, $12,809,000 for additions to property, plant
and equipment, and $6,646,000 for cash dividends on McDermott
16
<PAGE>
Incorporated's preferred stocks. Also during the quarter ended September 30,
1996, McDermott Incorporated received a cash capital contribution from
International of $50,000,000 and cash proceeds of $14,863,000 from the sale and
disposal of assets.
Pursuant to an agreement with a majority of its principal insurers, McDermott
Incorporated 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. While the number of claims received had declined during
the last six months of fiscal year 1996, they have increased during the first
six months of fiscal year 1997, but not to the levels experienced from October
1994 to September 1995. Management is currently investigating and evaluating
the basis for this increase in the number of claims. The average amount of
these claims (historical average of approximately $5,500 per claim over the last
three years) has continued to rise. Claims paid during the six months ended
September 30, 1996 were $79,861,000, of which $71,790,000 has been recovered or
is due from insurers. At September 30, 1996, receivables of $79,618,000 were
due from insurers for reimbursement of settled claims including $17,059,000 due
from certain insurers which have refused to reimburse B&W for amounts paid by
B&W to settle claims under applicable policies. B&W has filed a lawsuit against
these insurers seeking reimbursement of these claims and expects to prevail in
this litigation which may continue beyond fiscal year 1997 unless a settlement
is reached. B&W will require that any settlement reimburse B&W for all amounts
billed to date and future payments up to full policy limits. The increase in
amounts classified current for products liability asbestos claims and insurance
recoverable at September 30, 1996 reflects management's intention to reduce the
level of unpaid asserted claims over the next several quarters subject to
insurers' concurrence. Estimated liabilities for pending and future non-
employee products liability asbestos claims are derived from McDermott
Incorporated'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
17
<PAGE>
liability is expected to occur over approximately the next 25 years. The
collection delays (including the lawsuit mentioned above), and the amount of
claims paid for which insurance recovery is not probable, have not had a
material adverse effect upon McDermott Incorporated's liquidity, and management
believes, based on information currently available, that they will not have a
material adverse effect on liquidity in the future.
Expenditures for property, plant and equipment decreased $4,483,000 to
$12,809,000 for the six months ended September 30, 1996 as compared with the
same period last year. The majority of expenditures were incurred to maintain
existing facilities.
At September 30 and March 31, 1996, B&W had sold, with limited recourse, an
undivided interest in a designated pool of qualified accounts receivable of
approximately $87,000,000 and $107,000,000, respectively, under the terms of an
agreement with a U.S. Bank. The maximum sales limit available under the
agreement, which is renewed annually, is $140,000,000. Depending on the amount
of qualified accounts receivable available for the pool, the amount sold to the
bank can vary (but not greater than the maximum sales limit available) from time
to time.
At September 30 and March 31, 1996, McDermott Incorporated had available to it
various uncommitted short-term lines of credit from banks totalling $260,959,000
and $285,859,000, respectively. Borrowings by McDermott Incorporated against
these lines of credit at September 30 and March 31, 1996 were $128,080,000 and
$58,314,000, respectively. In addition, B&W had available to it an unsecured
and committed revolving line of credit facility of $150,000,000. Borrowings
against this facility at September 30 and March 31, 1996 were $75,000,000 and
$50,000,000, respectively. 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.
McDermott Incorporated 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, 1996, substantially all of the net assets of McDermott
Incorporated were subject to such restrictions. The most restrictive of these
18
<PAGE>
covenants with respect to the payment of dividends by McDermott Incorporated
would prohibit the payment of dividends other than current dividends on existing
preferred stock.
McDermott Incorporated and a subsidiary of International, McDermott
International Investments Co., Inc. ("MIICO"), are parties to an agreement
pursuant to which McDermott Incorporated 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, 1996.
At March 31, 1996, McDermott Incorporated had borrowed $65,363,000 against this
agreement.
Working capital decreased $23,882,000 from $92,086,000 at March 31, 1996 to
$68,204,000 at September 30, 1996. During the remainder of fiscal 1997,
McDermott Incorporated expects to obtain funds to meet capital expenditure,
working capital and debt maturity requirements from operating activities and
additional borrowings from existing lines of credit. Leasing agreements for
equipment, which are short-term in nature, are not expected to impact McDermott
Incorporated's liquidity or capital resources.
McDermott Incorporated'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 1996 and 1995.
McDermott Incorporated 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 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.
On October 7, 1996, International announced that its Board of Directors has
directed management to begin to implement a series of steps to improve
International's financial
19
<PAGE>
operating performance. Management has been directed to focus International on
its core business lines and dispose of non-core businesses and underperforming
assets. These core business lines include McDermott Incorporated's B&W power
generation and government operations. Management was also directed to realign
the operations of B&W's Power Generation Group consistent with the current
demands of the worldwide power generation market. This is expected to include
the rationalization of manufacturing overcapacity and continued reduction in
personnel. Finally, management was directed to continue efforts to reduce
personnel and other costs at the operating and corporate headquarters of
McDermott Incorporated. Although business and asset disposals associated with
this directive have not been finalized, it is anticipated that these disposals
will negatively impact near term operating results, while having a positive
long-term impact on operations. It is also anticipated that these disposals
will have a positive impact on liquidity, both upon disposition and long-term.
New Accounting Standard
- -----------------------
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective for
transactions occurring after December 31, 1996. SFAS No. 125 established
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. McDermott Incorporated 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.
20
<PAGE>
PART II
McDERMOTT INCORPORATED
OTHER INFORMATION
-------------------
No information is applicable to Part II for the current quarter, except as noted
below:
Item 4. Submission of Matters to a Vote of Security Holders
On August 6, 1996, McDermott International, Inc., as holder of all of
the outstanding 3,000 shares of the Voting Common Stock of McDermott
Incorporated, which shares represented approximately 93% of the voting
power of the outstanding capital stock of McDermott Incorporated,
elected Brock A. Hattox and Robert E. Howson as directors of the
company for a one year term. See pages 1 and 2 of McDermott
Incorporated's Information Statement dated July 12, 1996. Subsequent
thereto, the Board of Directors appointed Messrs. James L. Dutt,
Richard E. Woolbert and S. Wayne Murphy directors of the company,
effective September 1, 1996, and Messrs. Howson and Hattox resigned
effective as of such date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed during the three months
ended September 30, 1996.
Signatures
21
<PAGE>
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
November 11, 1996 By: /s/Daniel R. Gaubert
---------------------------
Daniel R. Gaubert
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
22
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM MCDERMOTT
INCORPORTED'S SEPTEMBER 30, 1996 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-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 23,735
<SECURITIES> 570
<RECEIVABLES> 274,114
<ALLOWANCES> 41,154
<INVENTORY> 371,428
<CURRENT-ASSETS> 1,048,841
<PP&E> 597,015
<DEPRECIATION> 349,284
<TOTAL-ASSETS> 2,937,009
<CURRENT-LIABILITIES> 980,637
<BONDS> 388,735
173,301
0
<COMMON> 4
<OTHER-SE> 386,198
<TOTAL-LIABILITY-AND-EQUITY> 2,937,009
<SALES> 942,678
<TOTAL-REVENUES> 942,678
<CGS> 965,829
<TOTAL-COSTS> 965,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,090
<INCOME-PRETAX> (44,324)
<INCOME-TAX> (9,521)
<INCOME-CONTINUING> (34,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,803)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
